JMC Projects (India) Limited v. Union of India and Anr.

13. Dealing with a reference by the President of India under Article 143 of the Constitution of India, the Supreme Court considered the validity of the policy of holding auctions as the sole permissible method for disposal of all natural resources across all sectors and in all circumstances in Natural Resources Allocation, In Re: Special Reference No. 1 of 2012, (2012) 10 SCC 1. Therein, the Supreme Court discussed the mandate of Article 14, including the test of reasonable classification. The relevant paragraph has been reiterated as follows: " 183. The parameters laid down by this Court on the scope of applicability of Article 14 of the Constitution of India, in matters where the State, its instrumentalities, and their functionaries, are engaged in contractual obligations (as they emerge from the judgments extracted in paras 159 to 182, above) are being briefly paraphrased. For an action to be able to withstand the test of Article 14 of the Constitution of India, it has already been expressed in the main opinion that it has to be fair, reasonable, nondiscriminatory, transparent, non-capricious, unbiased, without favouritism or nepotism, in pursuit of promotion of healthy competition and equitable treatment. The judgments referred to, endorse all those requirements where the State, its instrumentalities, and their functionaries, are engaged in contractual transactions. Therefore, all “governmental policy” drawn with reference to contractual matters, it has been held, must conform to the aforesaid parameters. While Article 14 of the Constitution of India permits a reasonable classification having a rational nexus to the object sought to be achieved, it does not permit the power of pick and choose arbitrarily out of several persons falling in the same category. Therefore, criteria or procedure have to be adopted so that the choice among those falling in the same category is based on reason, fair play and non-arbitrariness. Even if there are only two contenders falling in the zone of consideration, there should be a clear, transparent and objective criteria or procedure to indicate which out of the two is to be preferred. It is this, which would ensure transparency."

14. Delineating the concept of reasonable classification, the Supreme Court in Budhan Choudhry v. State of Bihar, (1955) 1 SCR 1045, while considering the constitutionality of Section 30 of the Code of Criminal Procedure as it stood then, observed as follows:

Bombay [(1952) 3 SCR 710] and Qasim Razvi v. State of Hyderabad [AIR 1953 SC 156: (1953) 4 SCR 581] and Habeeb Mohamad v. State of Hyderabad [(1953) 4 SCR 661]. It is, therefore, not necessary to enter upon any lengthy discussion as to the meaning, scope and effect of the article in question. It is now well established that while Article 14 forbids class legislation, it does not forbid reasonable classification for the purposes of legislation. In order, however, to pass the test of permissible classification two conditions must be fulfilled, namely, (i) that the classification must be founded on an intelligible differentia which distinguishes persons or things that are grouped together from others left out of the group and (ii) that differentia must have a rational relation to the object sought to be achieved by the statute in question. The classification may be founded on different bases; namely, geographical, or according to objects or occupations or the like. What is necessary is that there must be a nexus between the basis of classification and the object of the Act under consideration. It is also well established by the decisions of this Court that Article 14 condemns discrimination not only by a substantive law but also by a law of procedure. The contention now put forward as to the invalidity of the trial of the appellants has, therefore to be tested in the light of the principles so laid down in the decisions of this Court."

15. In State of Tamil Nadu and Anr. v. National South Indian River Interlinking Agriculturist Association, 2021 SCC OnLine SC 1114, while deliberating upon any classification perpetuated by a provision/policy, the Supreme Court noted that the same was closely related to the test that determined the relationship of the “means to the end”. It was observed that arbitrariness in classification was to be tested on the anvil of the rational nexus test. Thus, though reasonable classification is permitted, it should be based on intelligible differentia and must have a rational nexus with the object sought to be achieved. This was observed by the Supreme Court in National Council for Teacher Education and Ors. v. Shri Shyam Shiksha PrashikshanSansthan and Ors., (2011) 3 SCC 238, and the relevant portion stating the same has been reproduced as under:

16. As early as 1974, the Supreme Court had discussed the principle of equality and inhibition against discrimination enshrined in both Article 14 and Article 16 in E.P. Royappa v. State of Tamil Nadu and Anr. (1974) 4 SCC 3, and had observed that Article 14 strikes at arbitrariness in State action and requires for State action to be based on valid relevant principles applicable alike to all similarly situate. The relevant paragraph of the said Judgement has been reproduced as follows:

application of the concept of equality enshrined in Article 14. In other words, Article 14 is the genus while Article 16 is a species. Article 16 gives effect to the doctrine of equality in all matters relating to public employment. The basic principle which, therefore, informs both Articles 14 and 16 is equality and inhibition against discrimination. Now, what is the content and reach of this great equalising principle? It is a founding faith, to use the words of Bose. J., “a way of life”, and it must not be subjected to a narrow pedantic or lexicographic approach. We cannot countenance any attempt to truncate its all-embracing scope and meaning, for to do so would be to violate its activist magnitude. Equality is a dynamic concept with many aspects and dimensions and it cannot be “cribbed, cabined and confined” within traditional and doctrinaire limits. From a positivistic point of view, equality is antithetic to arbitrariness. In fact equality and arbitrariness are sworn enemies; one belongs to the rule of law in a republic while the other, to the whim and caprice of an absolute monarch. Where an act is arbitrary, it is implicit in it that it is unequal both according to political logic and constitutional law and is therefore violative of Article 14, and if it effects any matter relating to public employment, it is also violative of Article 16. Articles 14 and 16 strike at arbitrariness in State action and ensure fairness and equality of treatment. They require that State action must be based on valid relevant principles applicable alike to all similarly situate and it must not be guided by any extraneous or irrelevant considerations because that would be denial of equality. Where the operative reason for State action, as distinguished from motive inducing from the antechamber of the mind, is not legitimate and relevant but is extraneous and outside the area of permissible considerations, it would amount to mala fide exercise of power and that is hit by Articles 14 and 16. Mala fide exercise of power and arbitrariness are different lethal radiations emanating from the same vice: in fact the latter comprehends the former. Both are inhibited by Articles 14 and 16."

17. With reference to invalidation of legislation as well as subordinate legislation under Article 14, the Supreme Court has also discussed the test of manifest arbitrariness by stating that the same should be something done by the legislature irrationally and/or without adequate determining principle. A policy/legislation could also be manifestly arbitrary if it is done in an excessive and disproportionate manner. In this sense, the test would be apply to negate any provision or policy under Article 14 [Refer toNavtej Singh Johar and Ors. v. Union of India,(2018) 10 SCC 1 andJoseph Shine v. Union of India,(2019) 3 SCC 39].

18. A perusal of the foregoing judicial precedents demonstrates that any action of the State does not violate the equality clause in Article 14 of the Constitution if such action operates equally on all persons who are roped in that group. Classification will also not suffer the bias of arbitrariness or caprice if it bears a reasonable nexus to the object sought to be achieved. The State is given the utmost latitude in making the classification and it is only when the classification made has no rational relation to the objectives sought to be achieved, that necessity of judicial interference arises [Refer to Kathi Raning Rawat v. State of Saurashtra,1952 SCR 435].

19. Having discussed the aforesaid legal principles concerning the mandate of Article 14, this Court shall now delve into whether the purported classification advanced by the impugned OM is reasonable in nature. In the instant case, vide the impugned OM, the CPWD has stated that the eligibility criteria for participating in the securing of projects/works of CPWD, a private/public limited company must provide its balance sheet. The balance sheet in question means the standalone finance statement of the bidder as well as its consolidated financial statement. This consolidated financial statement includes the balance sheets of the subsidiaries of the bidder. It is the contention of the Respondents that the rationale behind seeking the consolidated financial statement is to ensure that the bidder is competent enough to undertake and oversee the projects/works, which involve the dispensation of a huge amount of money, if awarded the same.

20. This reasoning provided by the Respondents does not hold much water and there is strength in the contention of the Petitioner that the impugned OM discriminates between those entities who have subsidiaries and those who do not. In the event that a bidder, despite showing profits, has subsidiaries, which are unconnected with the work sought to be executed, that show losses, it would place such a bidder at a disadvantageous position as compared to a bidder which does not have any subsidiaries or does not have loss-making subsidiaries. The applicability of the impugned OM to all bidders does not do away with the semblance of discrimination if the application itself propagates the treatment of unequals as equals. Consequently, the impugned OM creates a class within a class by creating an artificial distinction between those bidders who have subsidiaries and those bidders that do not.

21. Section 19 of the Companies Act, 2013 reads as under:

Provided that nothing in this sub-section shall apply to a case— (a) where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company; or (b) where the subsidiary company holds such shares as a trustee; or

(c) where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company: Provided further that the subsidiary company referred to in the preceding proviso shall have a right to vote at a meeting of the holding company only in respect of the shares held by it as a legal representative or as a trustee, as referred to in clause (a) or clause (b) of the said proviso. (2) The reference in this section to the shares of a holding company which is a company limited by guarantee or an unlimited company, not having a share capital, shall be construed as a reference to the interest of its members, whatever be the form of interest."

22. Section 19 of the Companies Act, 2013 bars a subsidiary company from holding shares in its holding company either by itself or through its nominees, and also bars a holding company from allotting or transferring shares to any of its subsidiary companies. Such transfers by a holding company to a subsidiary company or vice versa is void. The legislative intent is, therefore, to maintain a separate identity for the holding company and the subsidiary company. In light of the above, this Court fails to understand the raison d'etre for preparing a consolidated financial balance sheet of the holding company in addition to its standalone financial statement. The provisions of Section 129 (3) of the Companies Act, the Accounting Standards and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) cannot be made applicable while granting tenders simply for the reason that the bidder is a single entity and status of the bidder cannot be combined with the credentials of its subsidiary companies, if any.

23. The impugned OM, therefore, does not create a classification that is reasonable and its application reveals discrimination, and this classification bears no rational nexus with the object sought to be achieved. It has been argued by the learned ASG that, at the outset, the impugned OM is merely clarificatory in nature and it is not an amendment/modification, and that the object of the clarification was to enable Respondent No.2 to assess a true and fair view of the state of financial affairs of the bidder. It has further been submitted that this clarification was issued keeping in mind larger public interest, and after giving due consideration to the current economic set of circumstances and serious nature of financial irregularities that have been cropping up. Furthermore, the prescription of a certain financial eligibility criteria is necessary so as to allow for the selection of competent contractors who have the requisite technical and financial capability, and it is not a concept which is alien to the domain of government-issued tenders. Therefore, for the purposes of assessing the financial strength of the bidder that can guarantee ease in execution of the project/works, the consolidated financial statement of the bidder is essential.

24. This Court finds no merit in the submission of the learned ASG for the simple reason that it is trite law that a subsidiary is a separate legal entity from its holding/parent company, and that the finances of the subsidiary will have no bearing upon the financial capabilities of the main bidder itself. As stated above, there is a prohibition of a subsidiary company in holding shares of its holding company and vice versa. When the bidder is a separate legal entity, the financial strength of the subsidiary company when the holding company is the bidder or the financial strength of the holding company when the subsidiary company is the bidder is of no consideration. The bidder has to be evaluated on its own financial strength, past experience and the performance of the bidder alone. The financial strength of the other holding companies/subsidiary companies can never be a criteria to assess the capacity of the bidder while awarding a contract.

25. The reliance placed by the Petitioner upon Vodafone International Holdings BV v. Union of India and Anr. (2012) 6 SCC 613, is meritorious as the said Judgment aptly cements how not just India, but jurisdictions all over the world have statutorily recognised a subsidiary company as a separate legal entity. There is also strength in the contention of the Petitioner that, until and unless there is some form of fraud or sham devised to defeat the interests of the shareholders, investors, parties to the contract, or to propagate tax evasion, revealing the finances of the subsidiaries of the bidder would amount to lifting the corporate veil of the same, which can only be done by the Courts in these limited circumstances. The relevant paragraphs of the Judgement stating the same have been reproduced as under:

having large volume of business nationally or internationally will have to depend upon their subsidiary companies in the national and international level for better returns for the investors and for the growth of the company. When a holding company owns all of the voting stock of another company, the company is said to be a WOS of the parent company. Holding companies and their subsidiaries can create pyramids, whereby a subsidiary owns a controlling interest in another company, thus becoming its parent company.

257. The legal relationship between a holding company and WOS is that they are two distinct legal persons and the holding company does not own the assets of the subsidiary and, in law, the management of the business of the subsidiary also vests in its Board of Directors. In Bacha F. Guzdar v. CIT [AIR 1955 SC 74], this Court held that shareholders' only right is to get dividend if and when the company declares it, to participate in the liquidation proceeds and to vote at the shareholders' meeting. Refer also to Carew and Co. Ltd. v. Union of India [(1975) 2 SCC 791] and Carrasco Investments Ltd. v. Directorate of Enforcement [(1994) 79 Comp Cas 631 (Del)].

258. Holding company, of course, if the subsidiary is a WOS, may appoint or remove any Director if it so desires by a resolution in the general body meeting of the subsidiary. Holding companies and subsidiaries can be considered as single economic entity and consolidated balance sheet is the accounting relationship between the holding company and subsidiary company, which shows the status of the entire business enterprises. Shares of stock in the subsidiary company are held as assets on the books of the parent company and can be issued as collateral for additional debt financing. Holding company and subsidiary company are, however, considered as separate legal entities, and subsidiary is allowed decentralised management. Each subsidiary can reform its own management personnel and holding company may also provide expert, efficient and competent services for the benefit of the subsidiaries. xxx

277. Lifting the corporate veil doctrine is readily applied in the cases coming within the company law, law of contract, law of taxation. Once the transaction is shown to be fraudulent, sham, circuitous or a device designed to defeat the interests of the shareholders, investors, parties to the contract and also for tax evasion, the court can always lift the corporate veil and examine the substance of the transaction.

278. This Court in CIT v. Sri Meenakshi Mills Ltd. [AIR 1967 SC 819] held that the court is entitled to lift the veil of the corporate entity and pay regard to the economic realities behind the legal facade meaning that the court has the power to disregard the corporate entity if it is used for tax evasion. In LIC v. Escorts Ltd. [(1986) 1 SCC 264] this Court held that: (SCC p. 336, para 90)

90. … the corporate veil may be lifted where a statute itself contemplates lifting [of] the veil, or fraud or improper conduct is intended to be prevented, or a taxing statute or a [beneficial] statute is sought to be evaded or where associated companies are inextricably connected as to be, in reality, part of one concern.

279. Lifting the corporate veil doctrine was also applied in Juggilal Kamlapat v. CIT [AIR 1969 SC 932: (1969) 1 SCR 988], wherein this Court noticed that the assessee firm sought to avoid tax on the amount of compensation received for the loss of office by claiming that it was capital gain and it was found that the termination of the contract of managing agency was a collusive transaction. The Court held that it was a collusive device, practised by the managed company and the assessee firm for the purpose of evading income tax, both at the hands of the payer and the payee.

280. Lifting the corporate veil doctrine can, therefore, be applied in tax matters even in the absence of any statutory authorisation to that effect. The principle is also being applied in cases of holding companysubsidiary relationship, where in spite of being separate legal personalities, if the facts reveal that they indulge in dubious methods for tax evasion."

26. Further, Paragraph 2.[3] in Section-II of Annexure-24 to the SOP itself defines “Bidder” as “individual, proprietary firm, firm in partnership, limited company, private or public corporation” and this definition can be construed as the bidder being a single entity without the addition of its subsidiaries. This interpretation of the “bidder” is in consonance with other statutory provisions, including Section 36 of the Insolvency and Bankruptcy Code, 2016, which considers the assets of a subsidiary to be distinct and separate from the assets of its holding company. There is also discernible inconsistency with the CPWD Works Manual itself with Paragraph 74 in Section-II of Annexure-24 to the SOP and Form „B‟ in Section-III of Annexure-24 to the SOP stipulating the minimum solvency that the bidder is required to possess being confined to the bidder and not its subsidiaries.

27. This Court is inclined to agree with the Petitioner on the aspect that a holistic reading of the CPWD Works Manual does not envisage a “bidder” to include its subsidiary companies, but is only limited to itself being a single entity liable for the project/works. Moreover, reliance of CPWD placed on Section 129 of the Companies Act and Regulation 33 of the SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015, is misplaced as the same cannot be read in isolation or stretched to infer that a consolidated financial statement would be necessary to ascertain the eligibility of the bidder. As already established in Vodafone International Holdings BV v. Union of India and Anr. (supra), calculation of income tax that a company is liable to pay is also determined on the basis of standalone financial statements, and the financial statements of the subsidiary companies are not to be considered. In view of the foregoing reasoning, this Court is of the opinion that the Respondents have failed to justify or substantiate a rational nexus between the amendment/modification made vide the impugned OM and the object that it seeks to achieve. The impugned OM has the effect of not only discriminating against bidders who have subsidiaries that, though unconnected, are showing losses, but it virtually reduces the competition amongst bidders seeking to bid for the projects/works, thereby violating the principle of maximum participation. In lieu of being for the benefit of the public, the impugned OM impedes public interest and is devoid of application of mind. It is evident that there is no adequate determining principle underlying the impugned OM and it is clearly a violation of Article 14 of the Constitution of India.

28. Having arrived at the conclusion that the impugned OM contravenes the fundamental right to equality under Article 14, this Court deems it necessary to embark upon the scope of judicial review in matters of tenders/public auction. This scope has been explored in depth by the Supreme Court in a catena of judgements wherein it has been observed that allegations of illegality, irrationality and procedural impropriety would be sufficient for Courts to assume jurisdiction and remedy such ills. Recently, in State of Punjab and Ors. v. Mehar Din, (2022) 5 SCC 648, while taking into account the principles regarding judicial intervention that have been established over the years, the Supreme Court observed as under:

22. The exposition of law on the subject has been consistently followed by this Court even in the later decisions holding that superior courts should not interfere in the matters of tenders, unless substantial public interest was involved or the transaction was mala fide. It was consistently stressed by this Court that the need for overwhelming public interest should always be kept in mind to justify judicial intervention in contracts involving the State and its instrumentalities and while exercising power of judicial review in relation to contracts, the courts should consider primarily the question whether there has been any infirmity in the decision-making process.

23. This view has been further considered by this Court in Jagdish Mandal v. State of Orissa [Jagdish Mandal v. State of Orissa, (2007) 14 SCC 517], wherein it was observed as under: (SCC p. 531, para 22)

24. This Court in a recent judgment in Silppi Constructions Contractors v. Union of India [Silppi Constructions Contractors v. Union of India, (2020) 16 SCC 489] held as under: (SCC pp. 501-02, para 20)

25. The law on the subject is settled that the courts being the custodian of fundamental rights are under an obligation to interfere where there is arbitrariness, irrationality, unreasonableness, mala fides and bias, if any, but at the same time, the courts should exercise the power of judicial review with a lot of restraint, particularly in contractual and commercial matters." (emphasis supplied)

29. Therefore, there has to be a finding of irregularity or illegality which would justify the interference of a Court exercising its writ jurisdiction in contractual matters. In fact, in such circumstances, it becomes the duty of the Court to intervene and ensure that arbitrariness, irrationality, bias, mala fide or perversity is prevented in administrative decision-making. The exercise of judicial review is not excluded at any juncture and the caveat for the same is that every State action must be informed by reason, and an act uninformed by reason would be per se arbitrary. This line of thought was propounded by the Supreme Court in Union of India and Anr. v. International Trading Co. and Anr., (2003) 5 SCC 437, wherein the principle of how Article 14 applies to matters of governmental policy was observed, and how the said policy or any action of the government, even in contractual matters, would be held as unconstitutional if it failed to satisfy the test of reasonableness. The relevant paragraphs stating the same have been reproduced as follows:

reason and it follows that an act uninformed by reason is per se arbitrary." (emphasis supplied)

30. As has been established above, the impugned OM does not satisfy the test of reasonableness and contravenes every dimension of Article 14 of the Constitution of India. In view of this, this Court deems it fit to exercise its writ jurisdiction under Article 226 to quash and set aside the impugned OM. The Respondents are consequently directed to issue a clarification noting that solely the standalone financial statement of the bidder, and not its consolidated financial statement, shall be required to ascertain the eligibility of the bidder in participating in the tender for a certain project/work.

31. Accordingly, the instant writ petition is allowed, along with the pending application(s), if any.

SATISH CHANDRA SHARMA, CJ SUBRAMONIUM PRASAD, J NOVEMBER 02, 2022 hsk..