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* IN THE HIGH COURT OF DELHI AT NEW DELHI

Date of decision: 2

nd

NOVEMBER, 2022

IN THE MATTER OF:

+ W.P.(C) 1236/2020

JMC PROJECTS (INDIA) LIMITED ..... Petitioner

Through: Mr. Akhil Sibal, Senior Advocate

with Mr.Vikas Mishra, Mr.Sancht

Gawri, Mr.Krishna Dev Yadav,

Ms.Anu Tiwari, Mr.Sudher Kumar,

Advocates

versus

UNION OF INDIA AND ANR ...... Respondents

Through: Mr. Chetan Sharma, ASG with

Mr.Ripudaman Bhardwaj, CGSC

along with Mr.Amit Gupta,

Mr.Rishav Dubey, Mr. Saurabh

Tripathi, Mr.Kushagra, Mr.Sahaj

Garg, Advocates

CORAM:

HON'BLE THE CHIEF JUSTICE

HON'BLE MR. JUSTICE SUBRAMONIUM PRASAD

JUDGMENT

SUBRAMONIUM PRASAD, J

1. The instant writ petition has been filed seeking the quashing and

setting aside of Office Memorandum No. DG/SOP/5 dated 10.01.2020

issued by Respondent No.2, i.e. the Central Public Works Department

(CPWD) pertaining to “Modification in initial criteria for eligibility in SOP

Annexure-24, Para 7.3 (CPWD Works Manual 2019)”.

2. The facts leading to the instant petition are that vide Office

Memorandum No. DG/SOP/5 dated 10.01.2020 (hereinafter referred to as

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“Impugned OM”), the CPWD allegedly amended and modified the

eligibility criteria set out in Paragraph 7.3 in Section-II of Annexure-24 of

the CPWD Works Manual as well as in Form „A‟ in Section-III of

Annexure-24. By way of the supposed amendment, CPWD stated that the

balance sheet furnished by a Public/Private Ltd. Company would entail both

its standalone financial statement as well as its consolidated financial

statement, and that the same would stand true for the calculation of

Profit/Loss. The impugned OM has been reproduced as follows for ease of

comprehension:

Rule Existing Provision Modified Provision

7.3 The bidder should

not have incurred

any loss (profit after

tax should be

positive) in more

than two years

during available

last five consecutive

balance sheets, duly

certified and

audited by the

Chartered

Accountant.

The bidder should not

have incurred any loss

(profit after tax should be

positive) in more than two

years during available last

five consecutive balance

sheets, duly certified and

audited by the Chartered

Accountant. (The balance

sheet in case of Pvt./

Public Ltd. company

means its standalone

finance statement and

consolidated financial

statement both)

SECTION III

INFORMATION

REGARDING

ELIGIBILITY

FINANCIAL

INFORMATION

(FORM 'A')

(ii) Profit/Loss.

FINANCIAL

INFORMATION (FORM

'A')

(ii) Profit/ Loss

(standalone finance

statement and

consolidated financial

statement both)

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3. Aggrieved by the impugned OM, the Petitioner herein submitted a

representation dated 14.01.2020 to the Respondents, enumerating its

concerns pertaining to the modification of the financial eligibility criteria of

the bidders and requested for the withdrawal of the said modification with

immediate effect. In view of the lack of response to the said representation,

the Petitioner has approached this Court by way of the instant petition,

seeking quashing and setting aside of the impugned OM.

4. Mr. Akhil Sibal, learned Senior Counsel appearing for the Petitioner,

at the outset, submits that the impugned OM is bad in law as it violates

Article 14 and Article 19(1)(g) of the Constitution of India, 1950, and

should be set aside for the reason that it is discriminatory, manifestly

arbitrary and has no basis in law. He has advanced the following arguments

to support the relief that is being sought in the instant petition:

a) The impugned OM has been issued without the sanction of the

competent authority and is, therefore, void ab initio. Reliance is

placed on Para 1.6 of the CPWD Works Manual as per which the

Director General of CPWD is the Competent Authority for

revision of any provisions in the Manual. However, with regard

to provisions relating to financial policy, the Ministry of

Housing and Urban Affairs, i.e. Respondent No.1 is the

designated authority to deal with the same. As the amendments

stipulated in the impugned OM do not deal with “engineering or

technical matters”, but come within the domain of financial

policy, the fact that the impugned OM has been issued by one

Mr. V.P. Sahu, the Superintending Engineer (C&M) with the

approval of the DG, CPWD. However, the approval or sanction

of Respondent No.1 has not been sought.

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b) The impugned OM is violative of Articles 14 and 19(1)(g) of the

Constitution of India as, by conflating the financial statements of

the bidder along with its subsidiaries, there is a violation of the

level-playing field that must be guaranteed to all bidders under

Article 19(1)(g). In this regard, reliance has been placed on

Reliance Energy Ltd. and Ors. v. Maharashtra State Road

Development Corporation Ltd., (2007) 8 SCC 1, to submit that

the principle of non-discrimination under Article 14 must be

read in conjunction with Article 21 which includes the “right to

opportunity”. By modifying the eligibility criteria, the impugned

OM virtually places certain bidders, who may or may not have

subsidiaries, in a more advantageous position, thereby treating

unequals equally as it potentially favours large entities whose

subsidiaries would not be posting losses in the preceding give

years. Further, the amendment of the eligibility criteria has no

rational nexus with the object sought to be achieved by the

CPWD Works Manual. With regard to violation of Article 14, it

is contended that the impugned OM creates a “class within a

class” and fails to provide any reasonable classification for doing

so.

c) The impugned OM violates the principle of maximum

participation by effectively disqualifying prospective bidders

like the Petitioner herein from even participating in a bid floated

by Respondent No.2. Bidders whose consolidated financial

statements, as against their standalone financial statements,

reflect losses are prohibited from even participating in the bid. If

the purpose of the CPWD Works Manual was to evaluate the

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consolidated financial strength of the bidder, then the same could

have been achieved at the bid evaluation stage by scoring in

accordance with the existing marks-based evaluation criteria

which is set out in Clause 8.0 of Section-II of Annexure-24 of the

Manual. The impugned OM, therefore, reduces competition and

is not in public interest as it unreasonably and unfairly excludes

bidders who have the technical and financial capabilities to

execute the projects. Accordingly, In Re: Special Reference No.

1 of 2012, (2012) 10 SCC 1, has been cited to submit that action

of the State has to be tested on the touchstone of Article 14 and

that the State‟s endeavour must be towards maximization of

revenue returns which stands defeated if bidders are hindered

from participating.

d) The impugned OM is contrary to the provisions of the CPWD

Works Manual as Paragraph 2.3 in Section-II of the

Annexure-24 of the Manual defines “Bidder” as an “individual,

proprietary firm, firm in partnership, limited company private or

public or corporation”. As the clear intention of CPWD is to

ensure that the term “Bidder” denotes a single entity, then the

impugned OM is inconsistent with this intention. Further, the

term “Bidder” does not feature any usage of the term

“subsidiary”. Consequently, seeking the consolidated financial

statement of the bidder, which includes the financial statements

of the bidder‟s subsidiaries, rather than seeking the standalone

financial statement of the bidder, is impermissible in law.

Additionally, Annexure-23 of the CPWD stipulates a bar on the

acceptance of bids submitted by Joint Ventures (JVs) which only

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fortifies the submission that the term “Bidder” is meant to denote

a single entity. The impugned OM is further inconsistent with

the provisions of the CPWD Works Manual to the extent that the

minimum solvency that the bidder is required to possess refers to

the solvency of the bidder only, and not the subsidiary

companies. Reference has been made to M/s Pratap Technocrats

Pvt. Ltd. v. M/s Bharat Sanchar Nigam Limited, 2017 SCC

OnLine Del 8747, to argue that it is the bidder, and the bidder

alone, that should fulfil the eligibility criteria.

e) The impugned OM is contrary to the settled legal position that a

subsidiary is a separate legal entity and is different from its

holding/parent company. Relying upon Sections 19, 135, 198 of

the Companies Act, 2013, and Vodafone International Holdings

BV v. Union of India and Anr., (2012) 6 SCC 613, it is noted

that every company is a separate legal persona and that if the

owned company is wound up, it is the liquidator and not the

parent company that would get a hold of the assets of the

subsidiary. This is enumerated in Section 36 of The Insolvency

and Bankruptcy Code, 2016, which states that the assets of any

Indian or foreign subsidiary of the corporate debtor shall not be

included in the liquidation estate. Calculation of profit and

payment of income tax as per the Income Tax Act, 1961, is

determined on the basis of its standalone financial statements

and not consolidated financial statements.

f) The impugned OM is an attempt to “lift/pierce the corporate

veil” of the subsidiaries and that there is no justification to

consider the financial strength/performance of a subsidiary of

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the bidder to evaluate the eligibility of the said bidder under the

CPWD Works Manual and SOP.

g) The impugned OM is irrational, illogical, perverse, manifestly

arbitrary and has no nexus with the ultimate objective that is

sought to be achieved by the CPWD Works Manual and SOP.

Reliance has been placed on Sumitomo Chemical India Pvt. Ltd.

v. HLL Lifecare Ltd. and Ors., 2012 SCC OnLine Del 5000, to

submit that though Courts should refrain from interfering with

matters of administrative action or changes made therein,

however, in cases where the government‟s action is arbitrary or

discriminatory or the policy adopted has no nexus with the

object it seeks to achieve or is mala fide, then the Courts may

exercise judicial review. The impugned OM fails to take into

consideration the aspect that the subsidiaries in question may not

be engaged in businesses which are analogous to that of the

bidder, and that there is no rationale behind considering the

financial credentials of the subsidiaries of the bidder if the bidder

is financially sound.

h) Retrospective operation of the impugned OM is illegal and

violative of accrued right of participation. As executive

authorities such as CPWD are not competent to enact provisions

with retrospective effect, unless there exists the sanction under a

statutory enactment or delegated legislation, the

amendment/modification made to the eligibility criteria could

not have been done.

5. Mr. Akhil Sibal, learned Senior Counsel for the Petitioner, submits

that the Petitioner has executed multiple projects awarded by CPWD, worth

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a cumulative sum of Rs. 577.52 crores, between the years 2010 to 2019. He

states that this includes a construction project of an Additional Office

Complex for the Supreme Court of India worth Rs. 440 crores and that this

was regardless of the fact that the subsidiaries of the Petitioner had posted

losses. He further submits that this demonstrates that the financial capacity

and the capability of the Petitioner to execute projects/works successfully

does not have any relation with the profits and losses of the subsidiaries. Mr.

Sibal states that the modified eligibility criteria has the effect of penalising a

bidder for merely having subsidiaries.

6. Per contra, Mr. Chetan Sharma, learned ASG appearing for the

Respondents, submits that the impugned OM is merely a clarification which

was added to avoid confusion in interpretation of the eligibility criteria. He

states that there has been no material change to the eligibility criteria and as

the impugned OM is merely a clarification of the provisions of the CPWD

Works Manual, the Director General of CPWD would be the Competent

Authority to issue the same. He further submits that the clarification issued

is in consonance with Section 129 of the Companies Act, 2013, as per which

the financial statement of a company/companies shall give a true and fair

view of its state of affairs, and where a company has one or more

subsidiaries, it shall, in addition to the financial statements provided under

Section 129(2), prepare a consolidated financial statement of the company

and of all its subsidiaries.

7. The learned ASG further submits that consolidated financial

statements are also necessary to assess the true and accurate position of the

financial health of a company as per Regulation 33 of the SEBI (Listing

Obligations and Disclosure Requirement) Regulations, 2015, and

Accounting Standards Ind AS 110. He submits that as most projects involve

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huge amounts of expenditure and a long gestation period, it becomes

imperative to prescribe a financial eligibility criteria so as to ascertain the

capability of the bidder. He states that the prescription of a financial

eligibility criteria and the clarification issued thereafter by way of the

impugned OM is not an alien concept and is routinely undertaken by the

Respondents and other government undertakings. Relying upon Paragraph

9.0 in Section II of Annexure-24 to the SOP, Mr. Sharma submits that the

SOP requires the bidder to furnish an annual financial statement for the last

five years as well as a solvency certificate.

8. Mr. Chetan Sharma, the learned ASG, refers to an Order of this Court

dated 24.02.2020 wherein this Court had made an observation that the

impugned OM does bear a rational nexus to the purpose of obtaining a fair,

true and correct state of the financial health of a bidder. He states that the

assessment of the financial strength of the bidder has always been a

precondition for the qualification to bid. Mr. Sharma argues that the

rationale behind assigning a financial criteria is to ensure maintenance of

market competition so that the contract/tender may be awarded to a

responsible bidder, thereby keeping in mind the larger public interest.

Further, as the impugned OM applies to all bidders, there is no question of

discrimination.

9. The learned ASG argues that the impugned OM cannot be said to be

either arbitrary or mala fide, or violative of Articles 14 and 19(1)(g) as the

sole purpose of the clarification was to minimise confusion with regard to

furnishing of financial statements which was meant to demonstrate a greater

transparency in the selection procedure. He states that the reliance of the

Petitioner on provisions of the Companies Act, 2013, to demonstrate that for

the purposes enumerated in the said provisions only a standalone financial

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statement is required, is misplaced. Mr. Sharma concludes his submissions

on the note that the impugned OM forms a rational nexus with the object

sought to be achieved and is also in consonance with various statutory

provisions, and thus, should not be set aside.

10. Heard Mr. Akhil Sibal, learned Senior Counsel appearing for the

Petitioner, Mr. Chetan Sharma, learned ASG, and perused the material on

record.

11. The challenge to the impugned OM by the Petitioner herein is

premised on the contention that the said OM is violative of Article 14 of the

Constitution of India by way of being unreasonable, irrational, manifestly

arbitrary and intending to create a “class within a class”. It has further been

submitted that the impugned OM does not bear any rational nexus with the

object sought to be achieved as stated in the CPWD Works Manual and

SOP. In this context, it becomes imperative for this Court to delineate the

perception and interpretation of Article 14 as has been propounded by the

Supreme Court.

12. Article 14 of the Constitution of India secures for all persons within

the territories of India protection against arbitrary laws as well as arbitrary

application of laws. It is thus meant to prevent the State from devising

provisions/policies that, though are fair and impartial on the face of it, rear

their ugly heads of discrimination when administered. Further, it does not

allow any kind of arbitrariness, and ensures fairness and equality of

treatment on the part of the State. In fact, as observed as by the Supreme

Court in E.P. Royappa v. State of Tamil Nadu and Anr., (1974) 4 SCC 3, it

can be stated that equality is antithetical to arbitrariness, for equality and

arbitrariness are sworn enemies; one belongs to the rule of law in republic

while the other, to the whim and caprice of an absolute monarch. When a

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law is challenged as violative of Article 14, it thus becomes necessary to

first ascertain the policy and the object intended to be achieved by it. Having

ascertained the same, the Court has to apply a dual test in examining its

validity [Refer to State of West Bengal v. Anwar Ali Sarkar, 1952 SCR

284]:-

i. Whether the classification perpetuated by the policy is

rational and based upon intelligible differentia?

ii. Whether the basis of discrimination has any rational nexus or

relation with the object sought to be achieved?

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, non-

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discriminatory, 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:

"5. The provisions of Article 14 of the Constitution

have come up for discussion before this Court in a

number of cases, namely, Chiranjit Lal Chowdhuri v.

Union of India [(1950) 1 SCR 869] , State of Bombay

v. F.N. Balsara [(1951) 2 SCR 682] , State of West

Bengal v. Anwar Ali Sarkar [(1952) 3 SCR 284] ,

Kathi Raning Rawat v. State of Saurashtra [(1952) 3

SCR 435] , Lachmandas Kewalram Ahuja v. State of

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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

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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:

"22. Article 14 forbids class legislation but permits

reasonable classification provided that it is founded on

an intelligible differentia which distinguishes persons

or things that are grouped together from those that are

left out of the group and the differentia has a rational

nexus to the object sought to be achieved by the

legislation in question. In Special Courts Bill, 1978, In

re [(1979) 1 SCC 380] Chandrachud, C.J., speaking

for majority of the Court, adverted to large number of

judicial precedents involving interpretation of Article

14 and culled out several propositions including the

following: (SCC pp. 424-25, para 72)

“72. (2) The State, in the exercise of its

governmental power, has of necessity to make laws

operating differently on different groups or classes

of persons within its territory to attain particular

ends in giving effect to its policies, and it must

possess for that purpose large powers of

distinguishing and classifying persons or things to

be subjected to such laws.

(3) The constitutional command to the State to

afford equal protection of its laws sets a goal not

attainable by the invention and application of a

precise formula. Therefore, classification need not

be constituted by an exact or scientific exclusion or

inclusion of persons or things. The courts should not

insist on delusive exactness or apply doctrinaire

tests for determining the validity of classification in

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any given case. Classification is justified if it is not

palpably arbitrary.

(4) The principle underlying the guarantee of Article

14 is not that the same rules of law should be

applicable to all persons within the Indian territory

or that the same remedies should be made available

to them irrespective of differences of circumstances.

It only means that all persons similarly

circumstanced shall be treated alike both in

privileges conferred and liabilities imposed. Equal

laws would have to be applied to all in the same

situation, and there should be no discrimination

between one person and another if as regards the

subject-matter of the legislation their position is

substantially the same.

(5) By the process of classification, the State has the

power of determining who should be regarded as a

class for purposes of legislation and in relation to a

law enacted on a particular subject. This power, no

doubt, in some degree is likely to produce some

inequality; but if a law deals with the liberties of a

number of well-defined classes, it is not open to the

charge of denial of equal protection on the ground

that it has no application to other persons.

Classification thus means segregation in classes

which have a systematic relation, usually found in

common properties and characteristics. It postulates

a rational basis and does not mean herding together

of certain persons and classes arbitrarily.

(6) The law can make and set apart the classes

according to the needs and exigencies of the society

and as suggested by experience. It can recognise

even degree of evil, but the classification should

never be arbitrary, artificial or evasive.

(7) The classification must not be arbitrary but must

be rational, that is to say, it must not only be based

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on some qualities or characteristics which are to be

found in all the persons grouped together and not in

others who are left out but those qualities or

characteristics must have a reasonable relation to

the object of the legislation. In order to pass the test,

two conditions must be fulfilled, namely, (1) that the

classification must be founded on an intelligible

differentia which distinguishes those that are

grouped together from others; and (2) that that

differentia must have a rational relation to the

object sought to be achieved by the Act.”

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:

"85. The last two grounds of challenge may be taken

up together for consideration. Though we have

formulated the third ground of challenge as a distinct

and separate ground, it is really in substance and effect

merely an aspect of the second ground based on

violation of Articles 14 and 16. Article 16 embodies the

fundamental guarantee that there shall be equality of

opportunity for all citizens in matters relating to

employment or appointment to any office under the

State. Though enacted as a distinct and independent

fundamental right because of its great importance as a

principle ensuring equality of opportunity in public

employment which is so vital to the building up of the

new classless egalitarian society envisaged in the

Constitution, Article 16 is only an instance of the

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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

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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

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W.P.(C) 1236/2020 Page 19 of 32

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:

"19. Subsidiary company not to hold shares in its

holding company.— (1) No company shall, either by

itself or through its nominees, hold any shares in its

holding company and no holding company shall allot

or transfer its shares to any of its subsidiary companies

and any such allotment or transfer of shares of a

company to its subsidiary company shall be void:

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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

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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

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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:

"256. Subsidiary companies are, therefore, the integral

part of corporate structure. Activities of the companies

over the years have grown enormously of its

incorporation and outside and their structures have

become more complex. Multinational companies

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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

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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

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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 company-

subsidiary 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

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(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

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into account the principles regarding judicial intervention that have been

established over the years, the Supreme Court observed as under:

"21. In Tata Cellular v. Union of India [Tata Cellular

v. Union of India, (1994) 6 SCC 651] it was held that

judicial review of government contracts is permissible

in order to prevent arbitrariness or favouritism. It was

fearlessly opined in this case as under : (SCC pp. 687-

88, para 94)

“94. The principles deducible from the above are:

(1) The modern trend points to judicial restraint in

administrative action.

(2) The court does not sit as a court of appeal but

merely reviews the manner in which the decision

was made.

(3) The court does not have the expertise to correct

the administrative decision. If a review of the

administrative decision is permitted it will be

substituting its own decision, without the necessary

expertise which itself may be fallible.

(4) The terms of the invitation to tender cannot be

open to judicial scrutiny because the invitation to

tender is in the realm of contract.

Normally speaking, the decision to accept the tender

or award the contract is reached by process of

negotiations through several tiers. More often than

not, such decisions are made qualitatively by

experts.

(5) The Government must have freedom of contract.

In other words, a fair play in the joints is a

necessary concomitant for an administrative body

functioning in an administrative sphere or quasi-

administrative sphere. However, the decision must

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not only be tested by the application of Wednesbury

principle of reasonableness (including its other facts

pointed out above) but must be free from

arbitrariness not affected by bias or actuated by

mala fides.

(6) Quashing decisions may impose heavy

administrative burden on the administration and

lead to increased and unbudgeted expenditure.”

(emphasis in original)

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)

“22. Judicial review of administrative action is

intended to prevent arbitrariness, irrationality,

unreasonableness, bias and mala fides. Its purpose

is to check whether choice or decision is made

“lawfully” and not to check whether choice or

decision is “sound”. When the power of judicial

review is invoked in matters relating to tenders or

award of contracts, certain special features should

be borne in mind. A contract is a commercial

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transaction. Evaluating tenders and awarding

contracts are essentially commercial functions.

Principles of equity and natural justice stay at a

distance. If the decision relating to award of

contract is bona fide and is in public interest, courts

will not, in exercise of power of judicial review,

interfere even if a procedural aberration or error in

assessment or prejudice to a tenderer, is made out.

The power of judicial review will not be permitted to

be invoked to protect private interest at the cost of

public interest, or to decide contractual disputes.

The tenderer or contractor with a grievance can

always seek damages in a civil court. Attempts by

unsuccessful tenderers with imaginary grievances,

wounded pride and business rivalry, to make

mountains out of mo lehills of some

technical/procedural violation or some prejudice to

self, and persuade courts to interfere by exercising

power of judicial review, should be resisted. Such

interferences, either interim or final, may hold up

public works for years, or delay relief and succour

to thousands and millions and may increase the

project cost manifold.”

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)

“20. The essence of the law laid down in the

judgments referred to above is the exercise of

restraint and caution; the need for overwhelming

public interest to justify judicial intervention in

matters of contract involving the State

instrumentalities; the courts should give way to the

opinion of the experts unless the decision is totally

arbitrary or unreasonable; the court does not sit like

a court of appeal over the appropriate authority; the

court must realise that the authority floating the

tender is the best judge of its requirements and,

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therefore, the court's interference should be

minimal. The authority which floats the contract or

tender, and has authored the tender documents is the

best judge as to how the documents have to be

interpreted. If two interpretations are possible then

the interpretation of the author must be accepted.

The courts will only interfere to prevent

arbitrariness, irrationality, bias, mala fides or

perversity. With this approach in mind we shall deal

with the present case.”

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

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the test of reasonableness. The relevant paragraphs stating the same have

been reproduced as follows:

"14. It is trite law that Article 14 of the Constitution

applies also to matters of governmental policy and if

the policy or any action of the Government, even in

contractual matters, fails to satisfy the test of

reasonableness, it would be unconstitutional.

15. While the discretion to change the policy in

exercise of the executive power, when not trammelled

by any statute or rule is wide enough, what is

imperative and implicit in terms of Article 14 is that a

change in policy must be made fairly and should not

give the impression that it was so done arbitrarily or

by any ulterior criteria. The wide sweep of Article 14

and the requirement of every State action qualifying for

its validity on this touchstone irrespective of the field of

activity of the State is an accepted tenet. The basic

requirement of Article 14 is fairness in action by the

State, and non-arbitrariness in essence and substance

is the heartbeat of fair play. Actions are amenable, in

the panorama of judicial review only to the extent that

the State must act validly for a discernible reason, not

whimsically for any ulterior purpose. The meaning and

true import and concept of arbitrariness is more easily

visualized than precisely defined. A question whether

the impugned action is arbitrary or not is to be

ultimately answered on the facts and circumstances of

a given case. A basic and obvious test to apply in such

cases is to see whether there is any discernible

principle emerging from the impugned action and if so,

does it really satisfy the test of reasonableness.

16. Where a particular mode is prescribed for doing

an act and there is no impediment in adopting the

procedure, the deviation to act in a different manner

which does not disclose any discernible principle

which is reasonable itself shall be labelled as

arbitrary. Every State action must be informed by

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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..