http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 12

CASE NO.:

Appeal (civil) 6324 of 2005

PETITIONER:

Assam Small Scale Ind. Dev. Corp. Ltd. & Ors.

RESPONDENT:

M/s. J.D. Pharmaceuticals & Anr.

DATE OF JUDGMENT: 07/10/2005

BENCH:

S.B. Sinha & R.V. Raveendran

JUDGMENT:

JUDGMENT

[Arising out of S.L.P. (C) No. 3950 of 2005]

S.B. Sinha, J :

Leave granted.

The Legislature of State of Assam and the Parliament took legislative

measures to allay the difficulties faced by the small scale industries. The

State of Assam made rules known as The Assam Preferential Stores

Purchase Rules in the year 1972. The said rules having not served its

purpose, the Assam Preferential Stores Purchase Act, 1989 (for short "the

1989 Act") was enacted which received the assent of the Governor on 14th

July, 1989. The said Act was enacted for encouraging growth of industries

in the State of Assam specially small scale and cottage industries and for

taking measures ancillary thereto. The State intended to patronize the

products of the small scale and cottage industries on preferential basis and to

rationalize the procedure for purchase of stores required by the State

Government Institutions, Government companies and State Government

undertakings, as would appear from the preamble thereof.

Section 2(d) of the 1989 Act defines "State Board" to mean the Assam

State Stores Purchase Board constituted under Section 3 of the 1989 Act.

"Small Scale Industry" has been defined in Section 2(f) to mean 'an

industrial unit in which the capital investment for plant and machinery does

not exceed thirty five lakhs of rupees or any other amount as may be decided

by the Central Government from time to time and located in the State of

Assam'. "Registered Industry" has been defined in Section 2(l) to mean an

industrial unit registered under the Directorate of Industries in accordance

with provisions thereof. "Requiring Authority" has been defined in Section

2(r) to mean the State Governments Departments and their subordinate

authorities, State Government Undertaking/ Corporation/ Statutory Bodies/

Autonomous Bodies. Section 2(s) defines "ASIDC" to mean the Assam

Small Industries Development Corporation Limited (for short "the

Corporation", the Appellant herein).

Section 3 of the 1989 Act provides for constitution of the State Store

Purchase Board on such term as may be specified in Schedule \026 1.

Preference to the small scale industries is provided in Section 7. Clause (c)

of sub-section (1) of Section 7 reads as under:

"(c) Items of stores mentioned in Schedule III shall be

purchased by requiring authorities from ASIDC, ASIDC

shall follow the guideline regarding fixation of price,

commission, etc. as laid down in office memorandum

issued by Notification No. PE-61/88/1, dated 28th March,

1988 as in Schedule IV."

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 12

The Purchase Committee is required to be constituted in terms of

Section 8 of the 1989 Act consisting of the Head of Department, Director of

Industries, a representative of the Department not below the rank of Under

Secretary, Financial Adviser of the Department and Finance and Accounts

Officer of the concerned Directorate.

Section 9 postulates that the Purchase Committee shall include two

representatives from the State Government, one of which shall be the

Director of Industries or his representative not below the rank of Deputy

Director and the other representative of the Finance Department in respect of

each Government Corporation, Government Undertaking, Assam Electricity

Board.

In the State Board, amongst others, the Managing Director of the

Appellant Corporation is a member. Schedule \026 III provides for the

preferences to be given as required under Section 7(c). Item 4 of the said

Schedule is 'drugs and pharmaceuticals and clinical equipments'.

An office memorandum dated 28th March, 1988 referred to in Section

7(1)(c) of the 1989 Act is based on a cabinet decision and issued in the name

of the Governor of Assam laid down guidelines for strict adherence thereof

by all government departments, their subordinate authorities, governments

organizations and public sector undertakings while making their purchases

of any SSI products which are dealt in or manufactured by the Corporation.

The said office memorandum satisfies the requirements of Article 166 of the

Constitution of India and has been made a part of the 1989 Act. In terms of

the said guidelines, the Corporation is required to publish a list of items/

materials/products to be dealt in or manufactured by it as detailed in

Annexure \026 1 thereof. The price of such SSI products is to be fixed by any

Technical Committee constituted by the Corporation with members from

neutral organization and concerned departments. As per the said OM,

purchasing authorities shall pay to the Corporation upto 5% as commission

over the price fixed by the Corporation. The purchasing authorities shall pay

advance to the extent of 90% of the value of the orders placed with the

Corporation. Annexure \026 A to the said guidelines is the marketing

assistance scheme wherein 'drugs and pharmaceuticals and clinical

equipments' had been identified as one of the items, supply of which to the

Government departments is to be taken over by the Corporation. The said

scheme provides for quality control, pricing, registration of units as also

indenting by the Corporation. The clause relating to indenting of the goods

reads as under:

"The purchasing authorities will issue indent to the

Corporation for the required products with 90% advance.

The Corporation will immediately allot the work to the

most suitable unit or units to complete supply within

stipulated time. If the supply could not be completed in

due to time by the Corporation, the purchasing authorities

will deduct 1 = p.m. from bills.

The stores will be dispatched by the units only

after they are given dispatch instruction by the ASIDC.

Normally the dispatch will have to commence within the

third day from the date of dispatch instruction, failing

which the unit may be penalized the extent of bank

interest on the amount. The stores will be received by

the purchasing authority and the acceptance or rejection

notes will be issued on the challans.

The Corporation will release payment upto 90% of

the bills to the units on completion of supply. Any

advance or advances will be deducted fully. The

remaining 10% will be released on receipt of full

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 12

payment of the bills from the purchasing authority."

Only if the Corporation is unable to supply some items and such

inability is communicated to it in writing, the purchasing authority can

purchase them from alternative sources.

It is not in dispute that the plaintiff is a SSI unit registered with the

Corporation and fulfills all the criteria laid down in the 1989 Act and the

Scheme framed thereunder. It entered into an agreement with the

Corporation on or about 19th October, 1990 wherein the plaintiff

(Respondent herein) was termed as a principal and the Corporation as an

agent. The said agreement was entered into in terms of the marketing

support scheme formulated by the Corporation under the 1989 Act. Para 3

of the preamble and Clauses 1, 4, 6, 7 and 8 of the said agreement read as

under:

"And whereas the Corporation has agreed to act as an

Agent to market the goods manufactured by the Principal

as specified in the schedule appended to this agreement,

under the marking support scheme formulated by the

Corporation under the AP SP Act, 1989\005\005..The

principal hereby covenants with the Corporation as

hereinafter provided :

"1. The Principal shall quote lowest rates in respect of

"Scheduled Goods" to the Corporation and shall not

quote to any party mentioned above directly or indirectly,

rate lower than those quoted to the Corporation in respect

of the goods for which competitive rates are being quoted

by them. The rates so quoted to the Corporation by the

Principal shall be valid for a period of one year from the

date of submission of the quotation.

4. The Principal shall, when advised to do so, supply the

goods wherever required within the stipulated time at his

cost. In event of failure to comply with aforesaid clause,

if any penalty is imposed by the actual buyer of the goods

in the event of the Principal failing to comply the above

provision of conditions, or if any losses are otherwise

incurred, the said penalty or loss is to be borne by the

Principal by reimbursing the said amount to the

Corporation within 15 days from the date of demand.

The Principal shall also be responsible for losses by way

of breakages, theft or pilferage etc. during the transit of

goods.

6. The Principal authorizes the Corporation to raise bills

of sale on their behalf, disclosing or without disclosing

the name of the principal, and to collect payment thereon

from the buyer(s). On collection of payment from the

buyer(s). Payment to the principal will be effected by the

Corporation deduction the service charges. Penalty due

to delayed supplies, or other dues/advance, if any. The

Corporation may release 90% value of the materials on

delivery and acceptance of the material by the buyer after

deduction of dues/advance payment if any subject to

receipt of payment from buyer(s). The balance 10% less

penalty due to the delayed supplies etc. or any other dues

will be paid to the Principal on receipt of full payment

from the Purchasing Department.

7. The Principal hereby agrees to the terms and condition

in the Marketing Support Scheme of the Corporation as

amended from time to time and agrees to comply with

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 12

general specific instructions as might be issued by the

Corporation regarding the Marketing of "Scheduled

goods".

8. That in case of any shortage, leakage, damage,

breakage, late supplies, late submission of R/R/Motor

Transport Receipt, delivery challans, inadequate packing

etc. or any losses in transit for whatever circumstance or

reasons, it shall be on the account of the principal and the

amount thus involved, shall be deducted from his bills."

A specimen copy of the orders placed by the Corporation on the

Respondent from time to time is extracted below :

"DATED 16.6.1992

To

M/s. J.D. Pharmaceuticals Limited

M.C. Road

Guwahati \026 3

SUB: ORDER FOR SUPPLY OF STORES:

Dear Sir,

With reference to above, we have the pleasure to

order with you for supply of the under noted articles to

the Sub Divisional Medical and Health Officer, I/C.

D.M.S. Dibrugarh, as per terms and conditions shown

over overlead.

S.No. Name of Item Quantity Price

1. Tab Trimetoprim 80 mg 75,000 Rs. 559.35 /

with sulphamethoxagole thousand tab

400 mg.

Delivery period: within 30.6.1992"

Some of the terms and conditions attached to the supply orders are as

under:

"4. The Stores must be supplied through your challan

issued in favour of indenting department and should be

properly a/c Assam Small Industries Development

Corporation Limited, marketing Division and will be

submitted to this office after duly receipted by the

department and stamped.

5. The above prices are inclusive of packing/ forwarding/

transportation charge, but exclusive of 5% commission

and tax as admissible.

8. After execution of the order your bill should be

submitted for payment. Payment will be made subject to

receipt of the fund from the indenting department. No

interest/ compensation can be claimed for delay in

payment.

10. Terms and conditions other than the above, will be as

per the deed of agreement executed by you, red with

other tenders/quotations."

The Parliament also enacted 'Interest on Delayed payments to Small

Scale and Ancillary Industrial Undertakings Act, 1993' (for short "the 1993

Act") being Act No. 32 of 1993 which came into force with effect from 23rd

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 12

September, 1992. "Appointed day" has been defined in Section 2(b) to

mean the day following immediately after the expiry of the period of thirty

days from the day of acceptance or the day of deemed acceptance of any

goods or any services by a buyer from a supplier. Section 3 provides for the

liability of buyer to make payment. Sections 4 and 5 thereof read as under:

"4. Date from which and rate at which interest is

payable.--Where any buyer fails to make payment of the

amount to the supplier, as required under section 3, the

buyer shall, notwithstanding anything contained in any

agreement between the buyer and the supplier or in any

law for the time being in force, be liable to pay interest to

the supplier on that amount from the appointed day or, as

the case may be, from the date immediately following the

date agreed upon, at such rate which is five per cent

points above the floor rate for comparable lending.

5. Liability of buyer to pay compound interest.--

Notwithstanding anything contained in any agreement

between a supplier and a buyer or in any law for the lime

being in force, the buyer shall be liable to pay compound

interest (with monthly rests) at the rate mentioned in

section 4 on the amount due to the supplier."

It is not in dispute that pursuant to the said agreement, the Corporation

placed orders for supply of medicines manufactured by the Respondent

herein for the period June, 1991 to June, 1993. The total price of the

medicines supplied by the Respondent in pursuance of the supply orders of

the Corporation stood at Rs. 20,56,654.13 out of which only a sum of Rs.

46,512.80 was paid to the Respondent.

It stands admitted that the payments have not been made in relation to

the supplies made for the said indents. A suit was filed by the Respondent

herein on 7.9.1993 claiming the aforementioned amount (Rs.20,56,654.13)

together with the interest payable thereon in terms of the 1993 Act

(Rs.675,881/45). In the said suit, the Corporation in its written statement

inter alia raised the following plea:

"4. That the suit is bad for non-joinder of necessary party

and on the score alone the suit is liable to be dismissed.

10. That with regard the statements made in Para 16 to 46

of the plaint, the defendants do not admit anything

contrary to the relevant records of the case. The

defendants submit that the supply order placed by the

defendants does not relate to a single transaction and as

such, the plaintiffs cannot claim for recovery of its dues,

if any, in one suit. The defendants have placed orders

with the plaintiff firm as per the APSP Act, 1989 and as

per the indent of the Govt. department. It was agreed in

the terms and conditions of the order that the payment of

the bills would be released to the plaintiffs on receipt of

payment by the defendants from the concerned

Government Department. This condition of payment has

also been agreed to by the plaintiff and as per the terms

and conditions of the agreement executed by the parties.

The defendants submit that it has not received payment

against the value of the medicines supplied by the

plaintiff to the Government department and as such, the

bill amount could not be released due to the aforesaid

factor. The Drug Association, Assam where the plaintiff

firm is also a Member, has informed the defendants by

letter that the firm registered under them, are agreeable to

accept orders without 90 percent advance payment at the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 12

time of placement of the order and accordingly orders

were placed and as per the terms and conditions of the

agreement, the defendants were to release payment on

receipt of the same from the concerned Government

department. As stated earlier since the defendants has

not received any payment from the Government

Department against the value of the medicines supplied

by the plaintiff firm, the required payment could not be

released to the plaintiff firm."

The Trial Judge by a judgment dated 1st August, 1998 passed a decree

in favour of the Respondent herein in the following terms:

"In the light of the above discussion and the decisions

made therein, the plaintiffs suit is decreed for Rs.

2010141.33 on contest with cost. The plaintiffs shall be

entitled to realize compound interest @ 23% with

monthly rest in respect of the concerned bill amounts till

the month of June, 1991 and at the rate of Rs. 23.5% with

monthly rest w.e.f. 1.7.1991 till filing of the suit. The

plaintiff shall be entitled to realize compound interest at

the rate of Rs. 23.5% at monthly rest on the decretal

amount from the date of filing the suit till the date of the

decree and further interest at the said rate from the date

of decree till realization."

An appeal preferred thereagainst, by the Corporation before the High

Court was dismissed. The Corporation is, thus, in appeal before us.

Mr. R.F. Nariman, learned senior counsel appearing on behalf of the

Corporation would raise the following contentions in support of the said

appeal:

(i) Having regard to the terms and conditions of supply, the

Corporation was to pay unto the Respondent the price for the

goods supplied only as and when the same was received from the

respective departments of the State Government. The Corporation

is an agent of the Respondent and not the buyer of the goods; and

as per clause 6 of the agreement until payments are received from

the buyers (Departments of the State), no liability could have been

fastened upon the Corporation to pay the said amount. Clause 8 of

the terms and conditions of the orders for supply also make it clear

that payment will be made subject only to receipt of funds from the

indenting department.

(ii) The different departments of the State and other government

corporations and undertakings being the buyers and the

beneficiaries of the supplies only, they were liable to pay the price

of the goods supplied over which the Corporation had no control

and in that view of the matter the State of Assam was a necessary

party. In any event, the recipient of goods, namely, the buyer

being disclosed principal of the Corporation, the Respondent as a

principal of the Corporation could maintain a suit as against the

actual buyer only.

(iii) The provisions of the 1993 Act for payment of interest, are not

applicable in view of the fact that the same applies only to a buyer

of any goods or recipient of a service from a supplier for a

consideration. Further clause 8 of the terms and conditions of the

orders for supply provide that no interest can be claimed for delay

in payment.

(iv) In the entire plaint, the Respondent has admitted that it is bound by

the terms and conditions of supply and in particular clause 8 therof

and, thus, it does not lie in its mouth now to contend, as has been

done in the counter-affidavit filed before this Court, that the said

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 12

clause is illegal and of no effect being opposed to public policy.

Mr. Pravir Choudhary, learned counsel appearing on behalf of the

Respondent, on the other hand, would submit that both the 1989 Act and the

1993 Act are beneficial legislations. The 1989 Act having been enacted by

the State of Assam for granting certain reliefs to the SSI units as a part of its

industrial policy, the terms and conditions of the agreement as also the

conditions of supply shall be subservient thereto and, thus, to the extent the

same is inconsistent with the Scheme, the later will prevail. In view of the

provisions contained in the 1989 Act and the scheme, it will appear that the

Corporation exercises a total control - from quality to pricing to indenting

and, thus, the expressions used in the agreement as principal and agent will

have no bearing. An agent as is commonly understood cannot have a control

over the principal. As its agreement was with the Corporation, and the

orders were all placed by the Corporation and as it had no privity with the

departments of the State who received delivery of the goods, the Corporation

is liable to pay the price with interest.

In view of the fact that the Respondent had no privity of contract with

different departments of the government, they were not necessary parties.

Reliance in this behalf has been placed on Balvant N. Viswamitra and

Others Vs. Yadav Sadashiv Mule (Dead) Through LRS. And Others [(2004)

8 SCC 706]. In view of the statute and the scheme as also the guidelines

issued, the question of the Respondent waiving its right thereunder does not

arise. The 1993 Act, it was submitted, being also a beneficient statute, the

same should be construed liberally. The Act, Mr. Choudhary would argue,

will thus, have a retrospective effect.

THE EFFECT OF THE 1989 ACT

The 1989 Act indisputably is a beneficient legislation. There was a

purpose behind enacting it. It was primarily enacted so as to enable the State

to effectively perform a sovereign function namely health care. The

Marketing Assistance Scheme being appended to the provisions of the Act

and marked as Annexure \026A thereto forms a part of the Act. The scheme

envisages pervasive control over the manufacturers including quality control

of the production. Guidelines which were to be strictly adhered to by the

authorities, as noticed hereinbefore, had also been issued by the State. Such

guidelines having fulfilled the requirements of Article 166 of the

Constitution of India were required to be followed by the Corporation.

The order for supply of stores, the provisions of the agreement and the

terms and conditions of supply, therefore, cannot be read in isolation. They

must be read in conjunction with the provisions of the Act, the scheme and

the guidelines issued thereunder. The provision in the scheme relating to

indenting envisages that the purchasing authorities will issue indent to the

Corporation for the required products with 90% advance whereupon the

Corporation would immediately allot the work to the most suitable unit or

units to complete supply within the stipulated time. In the event, such

supplies are not made within the specified time, the supplier would be

subjected to penalty. In view of the fact that the supplying authority will

have to send advance of 90%, the Corporation owes a duty to release

payment upto 90% on completion of supply. If the Corporation had not

taken the advance in terms of the provisions of the scheme, it acted at its

own peril.

It is not disputed that the Respondent did not commit any breach or

any irregularity in regard to the supplies. Once the supply of the goods was

completed, having regard to the clause aforementioned, the Corporation was

bound to release the payment upto 90% in view of the fact that the

purchasing authorities were also obligated to issue indent to the Corporation

with 90% advance. If such advance had not been given, the Corporation in

terms of the scheme should not have issued the indent. It may be true that

the terms and conditions appended with each order of supply stipulate that

payment would be made subject to receipt of the fund from the indenting

department. But, the scheme, guidelines, the agreement as also the terms

and conditions for supply of stores, if read as a whole, the only meaning

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 12

which can be attributed thereto would be in relation to the 10% of the

amount which the Corporation was to realize from the supplying authorities

upon submission of bill by the manufacturer. The said term has nothing to

do with payment of 90% advance in accordance with the provision of the

Scheme.

Clause 8 of the terms and conditions of order of supply refers to a

stage when after execution of the order a bill is submitted and payment

thereof, i.e., 10% of the balance amount only would be subject to the receipt

of the fund from the indenting department.

So read, Clause 8 may not be held to be opposed to public policy but

it cannot be read in isolation. It cannot be read in such a manner so as to

destroy or defeat the very purpose for which the Act or the Scheme was

enacted. It cannot be read as laying down a term which would run contrary

to the guidelines.

The expressions 'principal' and 'agent' used in a document are not

decisive. The nature of transaction is required to be determined on the basis

of the substance there and not by the nomenclature used. Documents are to

be construed having regard to the contexts thereof wherefor 'labels' may not

be of much relevance. The 1989 Act, the scheme and the guidelines

postulate constitution of a State Board for the purpose of monitoring

supplies to various departments of the State, the government corporations

and the companies. The Managing Director of the Corporation is a member

of the board in terms of the provisions of the 1989 Act. The Corporation

was created for the purpose of giving effect to the provisions of the Act and

the scheme framed thereunder. It is a statutory body and is a 'State' within

the meaning of Article 12 of the Constitution of India. The contract by and

between the parties being a statutory one, the Corporation was required to

act fairly and reasonably. The principal purpose of the Act was to give

encouragement to the growth of industries in the State of Assam and

patronizing the products of small scale and cottage industries on preferential

basis. The 1989 Act contemplates acts which would be for the betterment of

the SSI units and not acts which would be detrimental to their interest. The

terms used in the agreement must, therefore, be understood in that

perspective.

In Chairman, Life Insurance Corporation and others Vs. Rajiv Kumar

Bhasker [2005 AIR SCW 3636], a bench of this Court opined:

"39. Agency as is well-settled, is a legal concept which is

employed by the Court when it becomes necessary to

explain and resolve the problems created by certain fact

situation. In other words, when the existence of an

agency relationship would help to decide an individual

problem, and the facts permits a court to conclude that

such a relationship existed at a material time, then

whether or not any express or implied consent to the

creation of an agency may have been given by one party

to another, the court is entitled to conclude that such

relationship was in existence at the time, and for the

purpose in question. [See "Establishing Agency" by GHL

Fridman - 1968 (84) Law Quarterly Review 224 at p

231]."

It is no longer in doubt or dispute that while interpreting the terms of

agreement, it is necessary to look to the substance of the matter rather than

its form. Use of a terminology may not be sufficient to lead to a conclusion

that the parties to the contract in fact intended that the said status would be

conferred.

In The Bhopal Sugar Industries Ltd. Vs. Sales Tax Officer, Bhopal

[(1977) 3 SCC 147], a 3-Judge Bench of this Court referred to the dicta laid

down by this Court in Sri Tirumala Venkateswara Timber and Bamboo Firm

Vs. Commercial Tax Officer, Rajahmundry [(1968) 2 SCR 476] wherein the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 12

law has been laid down in the following terms:

"As a matter of law there is a distinction between a

contract of sale and a contract of agency by which the

agent is authorised to sell or buy on behalf of the

principal. The essence of a contract of sale is the transfer

of title to the goods for a price paid or promised to be

paid. The transferee in such a case is liable to the

transferor as a debtor for the price to be paid and not as

agent for the proceeds of the sale. The essence of agency

to sell is the delivery of the goods to a person who is to

sell them, not as his own property but as the property of

the principal who continues to be the owner of the goods

and will therefore be liable to account for the sale

proceeds."

It was opined:

"It is clear from the observations made by this Court that

the true relationship of the parties in such a case has to be

gathered from the nature of the contract, its terms and

conditions, and the terminology used by the parties is not

decisive of the said relationship. This Court relied on a

decision in W.T. Lamb and Sons v. Goring Brick

Company Ltd. where despite the fact that the buyer was

designated as sole selling agent, the Court held that it was

a contract of sale."

In certain circumstances, even an agent can become a purchaser where

an agent pays to the principal on its own responsibility. [See Gordon

Woodroffe and Co. (Madras) Ltd. Vs. Shaik M.A. Majid and Co. [AIR 1967

SC 181]

Law contemplates different types of agency. Under the Contract Act,

the concept of del credere agent is well-known. A del credere agent assumes

responsibility for the solvency and performance of their contract by the

vendees and, thus, indemnifies his employer against loss. He gives an

additional security to the seller. [See Bowstead & Reynolds on Agency, 17th

Edition, para 1-038]. However, it is not necessary to dilate thereupon as the

status of the parties herein must be determined in terms of the provisons of

the 1989 Act.

The 1989 Act makes a statutory provision beyond the concept of

agency as contained in the Contract Act. It is a special statute. In terms

thereof the Respondent was not required to pay any commission to the

Corporation, though the Corporation was described as 'agent' of the

Respondent under the agreement. 5% commission was to be paid to the

Corporation by the purchasing authorities. The provisions of the 1989 Act,

thus, should be given full effect. The status of the parties must not, thus, be

determined as to how they have described themselves but having regard to

the substance of the transaction as envisaged under the Act and the scheme

framed, which as noticed hereinbefore, is as a part of the Act.

As a statutory agency came into being by and between the purchasing

authorities and the Corporation in terms whereof the Corporation not only

exercised the control in relation to the entire supply of materials, as a part of

the statutory scheme, it also undertook to collect the price of the goods

supplied from the purchasing authorities and pay the same to the

manufacturers subject, of course, to the payment of its commission which

would be a substantial amount. Under the scheme, the purchasing

authorities had a duty to pay 90% of the price before the Corporation makes

an indent and, thus, the latter had a statutory duty to realize the same before

an indent is made, as also the remaining 10% when supplies are completed.

If the payment was to be made by the Corporation to the Respondent both

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 12

under the contract as also in terms of the statutory provision, it cannot now

turn round and contend that it was not part of its duty and leave the matter at

that. It was obligated having regard to the statutory scheme on the part of

the Corporation to realize the price for the consideration of the goods

supplied. It was not constituted merely to act as a conduit pipe. It was

bound to perform its statutory duties envisaged under the 1989 Act.

Furthermore, it is one thing to say that the Respondent delivered

goods without receiving 90% of the indented amount but it is another thing

to say that it has waived its right. No case of waiver of statutory duty has

been made out. Nothing has been pointed before us that the Respondent

gave up its claim to receive the amount directly from the Corporation. Its

conduct suggests contra. The Respondent for a period of about two years

made those supplies and had been asking the Corporation to make its

payment and, as noticed hereinbefore, the Respondent filed a suit at the

earliest possible opportunity. Even during last 12 years, the Corporation

made no effort to realize the amount from the State and pay the same to a

small scale industry for whose benefit the 1989 Act was enacted. It had

shown utter despondency and behaved in a cavalier manner taking umbrage

under specious plea that the State was a necessary party. There was no

privity of contract between the Corporation and the purchasing authorities.

All payment of the purchasing authorities were to be channelised through the

Corporation. Having regard to the transactions between the parties as also

the Scheme and the Act, we are of the opinion that the State of Assam was

not a necessary party.

In terms of the agreement between the parties hereto, the State of

Assam would not be a necessary party but merely be a proper party.

In Balvant N. Viswamitra (supra) a distinction has been made

between a proper party and a necessary party in the following terms:

"25. It was contended by learned counsel for the

respondents that the respondents were not made the

party-defendants in the suit and hence no decree could

have been passed nor could be executed against them.

We are afraid we cannot uphold the contention. It is the

case of the plaintiffs that the property was let to

Papamiya. It is not even the case of the respondents that

they were the tenants of the plaintiffs. They are claiming

through Papamiya. At the most, therefore, they can be

said to be sub-tenants i.e. tenants of Papamiya. There was

no privity of contract between the landlord and the

respondents. In our opinion, therefore, it was not

necessary for the plaintiffs to join the respondents as

defendants in the suit nor to give notice to them before

initiation of the proceedings. The respondents cannot be

said to be "necessary party" to the proceedings.

26. As held by this Court in Udit Narain Singh

Malpaharia v. Addl. Member, Board of Revenue, Bihar 8

there is a distinction between "necessary party" and

"proper party". In that case, the Court said: (SCR p.

681)

"The law on the subject is well settled: it is enough

if we state the principle. A necessary party is one

without whom no order can be made effectively; a

proper party is one in whose absence an effective

order can be made but whose presence is necessary

for a complete and final decision on the question

involved in the proceeding." (emphasis supplied)"

We respectfully adopt the same.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 12

The Corporation for all intent and purport having undertaken the

liability of the purchasing authorities would also be liable for all

consequences arising from non-payment of the price of the goods supplied.

We may summarise the effect of the 1989 Act, the marketing support

scheme of the Corporation, the O.M. dated 28.3.1988 referred to in Section

7(1)(iii) of the 1989 Act, and the agreement between the Corporation and the

respondent, as follows :

i) The Corporation had to collect 90% of the value of the orders

placed by the purchasing departments, in advance, and release the

said 90% to the respondent on supply. This obligation is a statutory

obligation having regard to the provisions of Section 7(1)(c) of the

1989 Act read with Clause 4 of the O.M. dated 28.3.1988 and the

clause relating to 'indenting' contained in the Marketing

Assistance Scheme. This would mean that if the Corporation

accepts indents from Government departments without 90%

advance and chooses to place corresponding supply orders on the

respondent, it (the Corporation) is liable to pay the said 90% to the

respondent on supply whether the Corporation chose to receive

payment from the indenting departments or not.

ii) Though the respondent is described as the 'principal' and the

Corporation is described as the 'agent' in the agreement dated

19.10.1990 between the respondent and the Corporation, the

Corporation was not entitled to receive any commission or

remuneration or consideration from the respondent for the orders

procured/placed. It is entitled to receive the commission (at the rate

of 5% of the price) only from the indenting departments. The

Corporation, thus, acted as the 'agent' of both the respondent-

supplier and the Indenting Government departments and took the

responsibility of paying the price to the respondent. In fact, under

clause 6 of the agreement, the respondent specifically authorized

the Corporation to raise bills of sale on behalf of the respondent,

either disclosing or without disclosing the name of the respondent,

and collect the payment from the buyer department. The said

clause also specifically contemplates the Corporation releasing

90% of the value of the material on delivery and acceptance, and

payment of balance of 10% after receipt of full payment from the

purchasing department. As noticed above, the statutory scheme

and the O.M. required the Corporation to receive the 90% payment

in advance along with the indents from the purchasing departments

and any relaxation by the Corporation of that provision was done

at its own risk.

APPLICABILITY OF THE 1993 ACT:

We have held hereinbefore that Clause 8 of the terms and conditions

relate to the payments of balance 10%. It is not in dispute that the plaintiff

had demanded both the principal amount as also the interest from the

Corporation. Section 3 of the 1993 Act imposes a statutory liability upon

the buyer to make payment for the supplies of any goods either on or before

the agreed date or where there is no agreement before the appointed day.

Only when payments are not made in terms of Section 3, Section 4 would

apply. The 1993 Act came into effect with effect from 23.9.1992 and will

not apply to transactions which took place prior to that date. We find that

out of the 71 suit transactions, sl. Nos.1 to 26 (referred to in penultimate

para of the Trial Court Judgment), that is supply orders between 5.6.1991 to

28.7.1992, were prior to the date of 1993 Act coming into force. Only the

transactions at sl. no. 27 to 71 (that is supply orders between 22.10.1992 to

19.6.1993). will attract the provisions of the 1993 Act.

The 1993 Act, thus, will have no application in relation to the

transactions entered into between June, 1991 and 23.9.1992. The Trial

Court as also the High Court, therefore, committed a manifest error in

directing payment of interest at the rate of 23% upto June, 1991 and 23.5%

thereafter..

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 12

Mr. Choudhary has placed reliance upon a Full Bench decision of

Guwahati High Court in Assam State Electricity Board & Ors. Vs. M/s.

Shanti Conductors (P) Ltd. & Anr. [2002 (1) GLT 547] which having regard

to the non-obstane clause contained in Sections 4, 5 and 10 of the 1993 Act

opined that interest payable thereunder shall embrace within its fold even the

contracts which might have been entered into prior to the enforcement of the

Act stating:

"However, in such a case interest on the delayed payment

which is made after the coming into force of the Act of

1993 would be calculated under the Act from the date of

the enforcement of the Act and not from the date of

payment prescribed under the agreement."

With respect, we do not subscribe to the said view as payment of

interest at an enhanced rate cannot be made in relation to the transactions

where Section 3 will have no role to play.

We, therefore, are of the opinion that in relation to the transactions

made prior to coming into force of the said Act, simple interest at the rate of

9% per annum, which was the bank rate at the relevant time, shall be

payable both prior to date of filing of the suit and pendente lite and as future

interest in terms of Section 34 of the Code of Civil Procedure. Interest,

however, will be payable in terms of the provisions of the 1993 Act

(compound interest at the rate of 23.5.% per annum) in relation to the

transactions made after coming into force of the Act, both in respect of

interest payable upto the date of institution of the suit and pendente lite and

till realisation. The judgment and decree to that extent requires to be

modified. It is directed accordingly.

The appeal is, therefore, allowed in part in regard to interest and to the

extent mentioned hereinbefore. The Corporation shall bear the costs of the

Respondent in this appeal. Counsel's fee is assessed at Rs. 25,000/-.