# M.P. OIL EXTRACTION AND ANR. ETC v. STATE OF MADHYA PRADESH AND ORS

- **Citation:** [1997] Supp. 1 S.C.R. 671
- **Court:** Supreme Court of India
- **Decided:** 1997-07-09
- **Case number:** Civil Appeal Nos. 4312, A 4314 of 1997
- **Bench:** G.N. Ray, G.T. Nanavati
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/m-p-oil-extraction-and-anr-etc-v-state-of-madhya-pradesh-and-ors-16087
- **Pages:** 27

## Headnote

Industrial Policy 1979-Supply of Sal seeds to Industrial units-Special
treatment to certain class of industries set up at the instance of State Govt.
A
B
in backward and tribal areas-Agreement by State Govt. with respondent inC
dustries for reservation and supply of sal seeds on payment of detem1ined
royalty-Renewal of lease in favour of respondent-industries-Validity
of-Held, industrial policy of 1979 not arbitrary-No illegality or arbitrariness
in the agreement giving special treatment to certain class of industries-Renewal clause and [1.Xation of royalty just and proper-Constitution
of India: Article 14.
D
The appellants filed writ petitions in the High Court challenging the
agreement entered into by the State Government with Baster Oil Mills and
Sal Udyog (Pvt.) Ltd. for distribution of specified amount of sat seeds
annually. The said writ petitions were dismissed. Special Leave Petitions E
were filed before this Co1,1rt and by way of interim order, this Court
direi:tcrl the State to supply 5000 M.T. of sal seeds in favour of each of the
appellants. The said appeals stood disposed of and the order of High
Court became final.
The appellants under two separate agreements with the Govt. got F
reservation of 13 to 17 units of sal seeds producing forest in their favour.
Such reservation of forest was challenged before the High Court and the
agreement for reservation of forest was set aside. In the year 1983, the
appellants again managed to get reservation and allotment of 7500 M.T.
of sat seeds per annum under two separate agreements from the State
Govt. On challenge, the High Court quashed the said agreements. Special G
Leave Petitions were filed by the appellants against the above order. This
Court disposed of the petitions upholding the allotment and reservation
of sal seeds iii favour of Baster Oil Mills and M/s. Sal Udyog (Pvt.) Ltd.
and two other units selected by the State Govt. under the 1979 Industrial
Policy. The appellants again filed two separate but identical writ petitions H
671
672
SUPREME COURT REPORTS [1997] SUPP. 1 S.C.R.
A challenging the reservation and allotment of 10,000 M.T. of sat seeds in
favour of M/s. M.P. Glychem Industries. The said writ petitions were also
dismissed by the High Court. Thereafter, writ petitions were filed by
appellants challenging the renewal of lease in favour of respondents and
also challenging the determination of royalty to he paid. The writ petitions
B were again dismissed. Hence the present appeals.
The contention of the appellants inter a/ia was that the action of
State Govt. treating only a few of the industrial units of the State in a very
favoured manner by entering into fresh agreements for supply of sat seeds
has amounted to deliberate discrimination against them which was
C violative of Articles 14 and 19 of the Constitution; the royalty paid by the
respondents for supply of sat seeds under the impugned agreements was
absolutely minimal and much less than the auction price for sat seeds and
thus they were facing unjust competition from the favoured child of the
State Government.
D
The contention of the respondents was that there was a fundamental
difference between the two categories of industries operating in the State
using sal seeds for production i.e. those new units with specific agreements
with State Govt. under the industrial policy and those units existing prior
to the policy not selected by the Government. The Courts having upheld
E the said agreement for reservation of sat see~s in favour of respondents
the renewal clause being part of the agreement to give protection cannot
be held to be arbitrary and violative of Article 14 of the Constitution.
Dismissing the appeals, this Court
F
HELD : 1.1. The industrial policy of 1979 which was subsequently
revised from time to time cannot he held arbitrary and based on no reason
whatsoever hut founded on mere ipsi dixit of the State Government of M.P.
The executive authority of the State must he within its competence

## Text

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-
M.P. OIL EXTRACTION AND ANR. ETC.
v.
STATE OF MADHYA PRADESH AND ORS.
JULY 9, 1997
[G.N. RAY AND G.T. NANAVATI, JJ.]
Industrial Policy 1979-Supply of Sal seeds to Industrial units-Special
treatment to certain class of industries set up at the instance of State Govt.
A
B
in backward and tribal areas-Agreement by State Govt. with respondent inC
dustries for reservation and supply of sal seeds on payment of detem1ined
royalty-Renewal of lease in favour of respondent-industries-Validity
of-Held, industrial policy of 1979 not arbitrary-No illegality or arbitrariness
in the agreement giving special treatment to certain class of industries-Renewal clause and [1.Xation of royalty just and proper-Constitution
of India: Article 14.
D
The appellants filed writ petitions in the High Court challenging the
agreement entered into by the State Government with Baster Oil Mills and
Sal Udyog (Pvt.) Ltd. for distribution of specified amount of sat seeds
annually. The said writ petitions were dismissed. Special Leave Petitions E
were filed before this Co1,1rt and by way of interim order, this Court
direi:tcrl the State to supply 5000 M.T. of sal seeds in favour of each of the
appellants. The said appeals stood disposed of and the order of High
Court became final.
The appellants under two separate agreements with the Govt. got F
reservation of 13 to 17 units of sal seeds producing forest in their favour.
Such reservation of forest was challenged before the High Court and the
agreement for reservation of forest was set aside. In the year 1983, the
appellants again managed to get reservation and allotment of 7500 M.T.
of sat seeds per annum under two separate agreements from the State
Govt. On challenge, the High Court quashed the said agreements. Special G
Leave Petitions were filed by the appellants against the above order. This
Court disposed of the petitions upholding the allotment and reservation
of sal seeds iii favour of Baster Oil Mills and M/s. Sal Udyog (Pvt.) Ltd.
and two other units selected by the State Govt. under the 1979 Industrial
Policy. The appellants again filed two separate but identical writ petitions H
671
672
SUPREME COURT REPORTS [1997] SUPP. 1 S.C.R.
A challenging the reservation and allotment of 10,000 M.T. of sat seeds in
favour of M/s. M.P. Glychem Industries. The said writ petitions were also
dismissed by the High Court. Thereafter, writ petitions were filed by
appellants challenging the renewal of lease in favour of respondents and
also challenging the determination of royalty to he paid. The writ petitions
B were again dismissed. Hence the present appeals.
The contention of the appellants inter a/ia was that the action of
State Govt. treating only a few of the industrial units of the State in a very
favoured manner by entering into fresh agreements for supply of sat seeds
has amounted to deliberate discrimination against them which was
C violative of Articles 14 and 19 of the Constitution; the royalty paid by the
respondents for supply of sat seeds under the impugned agreements was
absolutely minimal and much less than the auction price for sat seeds and
thus they were facing unjust competition from the favoured child of the
State Government.
D
The contention of the respondents was that there was a fundamental
difference between the two categories of industries operating in the State
using sal seeds for production i.e. those new units with specific agreements
with State Govt. under the industrial policy and those units existing prior
to the policy not selected by the Government. The Courts having upheld
E the said agreement for reservation of sat see~s in favour of respondents
the renewal clause being part of the agreement to give protection cannot
be held to be arbitrary and violative of Article 14 of the Constitution.
Dismissing the appeals, this Court
F
HELD : 1.1. The industrial policy of 1979 which was subsequently
revised from time to time cannot he held arbitrary and based on no reason
whatsoever hut founded on mere ipsi dixit of the State Government of M.P.
The executive authority of the State must he within its competence to frame
policy for the administration of the State. Unless the policy framed is
G absolutely capricious and, not being informed by any reason whatsoever,
can he clearly held to he arbitrary and founded on mere ipsi dixit of the
executive functionaries thereby offending Article 14 of the Constitution or
any other constitutional provision or comes in conflict with any statutory
provision, the Court cannot and should not outstep its limit and tinker with
the policy decision of the executive functionary of the State. This Court, in
H no uncertain terms, has sounded a note of caution by indicating that policy
--
-
..
..
.J
M.P. OIL EXTRACTION v. STATE
673
decision is in the domain of the executive authority of the State and the A
Court should not embark on the unchartered ocean of public policy and
should not question the efficacy or otherwise of such policy so long as the
same does not offend any provision of the statute or the Constitution of
India. [692,H; 693-A-D]
1.2. The State Government framed industrrial policy in 1979 and B
thereafter revised the same from time to time according to felt need. There
is no material on record from which it can he reasonably found that the
same was not informrd by any reason whatsoever. That apart such policy
has been taken into consideration by the High Court and also by this Court
in the earlier proceedings and the industrial policy has not been found to C
be arbitrary or capricious. On the contrary, the agreement made in favour
of the appellants was struck down by the High Court by indicating that
unlike other class of industrial units like the respondents Bastar Oil Mills
and Sal Udyog (Pvt.) Ltd. which were entitled to special treatment under
the industrial policy, the appellants were not entitled to any special treatment which was not given to other existing old industrial units in the State, D
similarly circumstanced. [693-F-H; 694-A]
2. The special treatment given to Baster Oil Mill by assuring supply
of 20,000 M.T. of sal seeds under the impugned agreement cannot be held
to be per se illegal and arbitrary. The distinctive features between the E
industrial units set up at the instance of the State Government and old
existing units are based 011 objective criteria. Therefore, the said two
classes of industries are not similarly circumstanced. Article 14 prohibits
discrimination amongst the equals but it should be appreciated that
Article 14 has inbuilt flexibility and it also permits different treatment to
unequals. The Bastar Oil Mills is situated at Jagdalpur which is F
admittedly a backward and tribal area. Classification on the basis of
geographical situation has a rational basis and has been recognised by this
Court. (694-B-D]
3. The renewal clause in the impugned agreements executed in favour G
of the respondents does not also appear to be unjust or improper. Whether
protection by way of supply of sal seeds under the terms of agreement
requires to be continued for a further period, is a matter for decision by
the State Government and unless such decision is patently arbitrary, interference by the Court is not called for. In the facts of the case, the decision
of the State Government to extend the protection for a further period H
674
SUPREME COURT REPORTS (1997] SUPP. 1 S.C.R.
A cannot be held to be per se irrational, arbitrary or capricious warranting .
judicial review of such policy decision. Therefore, the High Court has
rightly rejected the appellants contention about the invalidity of the
renewal clause. [694-H; 695-A-B]
B
4. It cannot be held that the fixation of royalty in the impugned
agreements is without any basis and wholly arbitrary and designed only to
ensure favouritism, as alleged. If there is an objective and rational founda·
tion for the fixation of royalty, the Court will not interfere with the exercise
of governmental decision by itself undertaking an exercise to find out as to
whether better fixation was possible or not. The fixation of rate of royalty
C
on the basis of weighted average formula has a rational basis and is also a
known method and modality for determing market price. It also appears
that the price per M. T. of sal seed has different components of which
collection charges is the principal factor. [696-D; Al
D
M.P. Oil Extraction Pvt. Ltd., Raipur andAnr. v.State of M.P. and Ors.,
AIR (1982) M.P. 1; M/s. K N. Oil Industries etc. v. Secretary to Ministry of
Forest, Bhopal and Ors., AIR (1986) SC 1927; Mis. KN. Oil Industries and
Anr. etc. v. State of M.P. and Ors. etc., AIR (1986) SC 1929; Smt. Somawanti
& Ors. etc. v. State of Punjab and Ors. etc., AIR (1963) SC 151; State of U.P.
v. Nawab Hussain, AIR (1977) SC 1680; Mohd. Ayub Khan v. Commissioner
E of Police, Madras & Ors., AIR (1965) SC 1623; Narayanrao v. State, AIR
(1981) Born. 271 = (1973) SC 973; Bw1um Chemicals Ltd. and Anr. v.
Company Law Board and Ors., AIR (1967) SC 295; C.l. T. Bombay v.
Mahindra and Mahindra, AIR (1984) SC 1182; State of U.P. v. Renu Sagar,
AIR (1988) SC 1737; Kasturi Lal v. J.K, AIR (1980) SC 1992; State of M.P.
F and Ors. v. Nandlal Jaiswal & Ors., [1986) 4 SCC 566; Sachindanand Pandey
and Anr. v. State of West Bengal & Ors., [1987) 2 SCC 295; Brij Bhushan v.
JK, [1986) 2 SCC 354; G.B. Mahajan v. Jalgaon, [1991) 3 SCC 91; FCI v.
Kwnadhenu, JT (1992) Vol. 6 SC 259; Nav Jyoti Cooperative Society, JT
(1992) 5 SC 621; Union of India v. Hindustan Development Corporation, JT
(1993) Vol. 3 SC 15; State of M.P. v. Vijay Bahadur Singh, [1982) 2 SCC
G 365; India Cement v. Union of India, [1990) 4 SCC 356; Sitaram Sugar
Company Ltd. and Anr. v. Union of India and Ors., [1990) 3 SCC 223;
Budhan Choudhary and Ors. v. State of Bihar, AIR (1955) SC 191; Video
Electronics Pvt. Ltd. v. State of Punjab, AIR (1990) SC 820 and Goodwill
Paint and Chemical Industry v. Union of India and Anr., [1992) Suppl. 1
H sec 16, cited.
c
M.P. OIL EXTRACTION v. STATE (G.N. RAY, J.]
675
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 4312, A
4314 of 1997 Etc.
From the Judgment and Order dated 9.5.95 of the Madhya Pradesh
High Court in M.P. No. 1371/92 and 1980 of 1992.
G.L. Sanghi, N.S. Kale and K.J. John for the Appellants.
Dr. A.M. Singhvi, C. Mukhopadhayaya, Manish Kumar, A.N. Ray
and Rakesh K. Sharma for the Respondents.
S.K. Agnihotri and S. Bishwajit for the State of M.P.
Ashok K. Gupta for Impleading Party.
The Judgment of the Court was delivered by
G.N. RAY, J, Leave granted. Heard learned counsel for the parties.
All the three special leave petitions namely S.L.P. (Civil) No. 19729
B
c
D
of 1995, S.L.P. (Civil) No. 20137 of 1995 and S.L.P. (Civil) No. 19796 of
1995 are directed against common judgment datC<d 9.5.1995 passed by the
Madhya Pradesh High Court respectively in Misc. Petitions No. 1371 of
1992, M.P. No. 1980 of 1992 and M.P. No. 2315 of 1992. All the said Misc. E
Petitions were filed before the Madhya Pradesh High Court under Article
226 of the Constitution challenging the legality and validity of agreements
made by the State Government of Madhya Pradesh with M/s. Bastar Oil
Mills and Industiries Ltd. and M/s. Sal Udyog (Pvt.) Ltd. for supply of sal
seeds grown in the State of Madhya Pradesh on payment of determined F
royalty by alleging inter alia that the writ petitioners namely K.N. Oil
Industries and M.P. Oil Extraction Ltd. have been subjected to hostile
discrimination in the matter of grant of largesse so far as sal distribution
of sa! seeds is concerned by favourably treating the said Baster Oil Mills
and Industries Ltd. and M/s. Sal Udyog (Pvt.) Ltd. thereby affecting the
economic viability of the writ petitioners. It may be indicated here that G
before the said wric petitions were filed in the Madhya Pradesh High Court,
a series of litigations were fought between the parties to these appeals both
in the Madhya Pradesh High Court and in this Court. In 1981, the
appellants M.P. Oil Extraction Limited and K.N. Oil Industries filed writ
petitions numbered as M.P. No. 559 and 1404 of 1981, in the Madhya H
676
SUPREME COURT REPORTS [1997] SUPP. 1 S.C.R.
A Pradesh High Court challenging the agreements between Bastar Oil Mills
and Industries Ltd. and Sal Udyog (Pvt.) Ltd. and State government of .·
Madhya Pradesh for distribution of specified amount of Sal seeds to the
said concerns annually by alleging hostile discri!Ilination against the said
writ petitioners in the matter of distribution of sal seeds. Such writ petitions
B were dismissed by the Division Bench of the High Court by order dated
21.8.1981. The said decision has been reported in AIR 1982 M .P. 1. Against
the said decision, both the writ petitoners filed special leave petitions
before this Court in which leave was granted in C.A. No. 2994 and 2295 of
1982. In terms of the interim orders dated 5.5.1982 and 6.5.1983, the State
C of Madhya Pradesh had to supply 5000 M.T. of sal seeds in favour of each
of the said appellants namely M.P. Oil Extraction Limited and K.N. Oil
Industries in 1982 and 1983. M/s. Bastar Oil Mills and Sal Udyog (Pvt.)
Ltd. did not receive the contractual quality. of sal seeds in the said years.
It, however, appears that after obtaining the said interim orders on two
D occasions, both the appellants withdraw C.A. Nos. 2994 and 2995 of 1982
and thi.; said appeals stood disposed of and the imugned judgment of the
High Court became final. It may be stated here that under two separate
agreements by the M.P. State Government, both the appellants namely
M.P. Oil Extraction and K.N. Oil Industries got reservation of 13 to 17 sal
E seeds producing forest units in their favour. Such reservation of forests was
challenged before the High Court in M.P. No. 261 and 266 of 1980 and by
judgment dated 25.9.1980 the Division Bench of M.P. High Court allowed
the writ petitions and set aside the said agre.ement for reservation of forests
in favour of the appellants. During the year 1983, both the appellants again
managed to get reservation and allotment of 7500 M.T. of sa~ seeds per
F annum under two separate but identical agreements dated 12.12.1983 from
the State Government for a term of 12 years. Such agreements were
challenged by M/s. General Foods Private Limited in M.P. No. 1364 of
1964 before the M.P. High Court. A Division Bench of the High Court by
order dated 11.6.1985 quashed the said agreements executed in favour of .
G both the appellants. It may be indicated here that before the said
agreements were annulled by the High Court, the appellants got 7500 M.T.
of Sal seeds per annum for the years 1984 and 1985 in terms of the said
invalid agreements. The respondents Bastar Oil Mills and M/s. Sal Udyog
(Pvt.) Ltd. had to receive much lesser quantity of sal seeds which were due
H to them in terms of the agreements made in their favour.
M.P. OIL EXTRACTION v. STATE(G.N. RAY,J.]
677
Both the appellants moved special leave petitions before this Court A
assailing the said judgment dated 11.6.1985 of the High Court. Such leave
petitions were disposed of by this Court by order dated 10.4.1986 reported
in AIR (1986) SC 1927. By the said order, this Court upheld allotment and
reservation of sal seeds in favour of Bastar Oil Mills and M/s. Sal Udyog
(Pvt.) Ltd. and M/s. Allied Oil Industries (Pvt.) Ltd. and M/s. M.P.
Glychem Industries being the four units selected by the State Government B
of Madhya Pradesh under the 1977 Industrial Policy. It appears that after
all such futile attempts, the appellants did not give up their pursuits to get
allotment of sal seeds from the Government. In 1986; both the appellants
filed two separate but identical writ petitions being M.P. No. 645 and 644
of 1996 challenging the reservation and allotment of 10,000 M.T. of sal C
seeds in favour of M/s. M.P. Glychem Industries which was also selected
unde1 1977 Industrial Policy. Such writ petitions were also dismissed by the
High Court by order dated 6.5.1986. Thereafter, the writ petitions were
again filed by both the appellants challenging the renewal of lease in
favour of the respondents M/s. Bastar Oil Mills and M/s. Sal Udyog Pvt.
Ltd. by treating such renewals as new leases and also challenging the D
determination of royalty to be paid for the sal seeds to be supplied to the
respondents. Such writ petitions have also been dismissed by the Division
Bench of Madhya Pradesh High Court and the present appeals are
directed against the decision of the High Court passed in the said writ
petitions.
E
Mr. Sanghi, the learned Senior counsel appearing for the appellants
K.N. Oil Industries has submitted that the appellant had set up their first
solvent extraction plant in 1966 using bran rice as raw material. The
appellant made suitable modification in their plant for processing of sal
seeds and also set up a new plant for extraction of sal seeds on the basis F
of an assurance of availability of sal seeds vide letter dated 24.1.1970 of the
State Government to the effect :
"Since sal seeds are available in huge quantity in nearby area, spare
capacity of your plant, if any, be utilised after modification in the existing G
plant."
The appeallants have been using sal seeds and rice bran as raw
material, alternatively in their solvent extration plant from 1973 onwards.
As the availability of sal seeds was seasonal and limited, no solvent plant
could exclusively depend on sal seed for running its business.
H
678
SUPREME COURT REPORTS (1997] SUPP. 1 S.C.R.
A
Mr. Sanghi has contended that the Industrial Policy laid down by the
M.P. Government in 1977 envisaged supply of sal seeds to the new units
as welJ as to the existing old units. Such position has been noticed by the
High Court in its decision reported in AIR (1982) MP 1 at page 3. The
said Industrial Policy also laid down that new units should be encouraged
B to set up their plants with concessions during the initial period for a period
of 5 to 10 years. Such fact has also been noticed by the High Court in its
decision reported in AIR (1982) MP 1 page 2. Mr. Sanghi has submitted
that the said Industrial Policy was framed on the basis of expert
committee's finding that the estimated annual sal seed potential is over 10
C lacs M.T. The said Industrial Policy was modified in 1981 by making
reservation for sal U dyog and Bastar Oil Mills as new units and the surplus
to be sold in auction.
Mr. Sanghi has further contended that the agreements in favour of
Baster Oil and Sal Udyog for supply of 10,000 M.T. of Sal Seeds were
D entered in the year 1979 on the premise of the expert committee's findings
as already indicated. Both the agreements were to subsist for a period of
12 years. Mr. Sanghi has submitted that average yield per year as per the
State Government's estimate is around 60,000 M.T. After meeting the
commitments of the State Government, the available surplus was only in
E the region of 37,000 M.T. of sal seeds. Inspite of the fact that annual yield
of sal seeds in the State of M.P. for the year 1990 and 1991 was 4768 M.T.
and 190809 M.T. respectively, the State Government treated Bastar Oil
Mills and Sal Udyog (Pvt.) Limited as most favoured industrial concerns
and executed fresh agreements for a further period of 12 years with effect
F
from 1991. The agreements contain provisions for further renewal. In the
case of Baster Oil Mills the quantity was increased to 20,000 M.T. while in
the case of Sal Udyog (Pvt.) Ltd. the quantity was fixed at 10,000 M.T.
Mr. Sanghi has contended that as a result of such fresh agreements
with Bastar Oil Mills and Sal Udyog, the State Government is now
G committed to supply annually sal seeds grown in the State of M.P. in the
folJowing manner :
(i) Baster Oil Mills
20,000 M.T.
H
(ii) Sal Udyog
10,000 M.T.'
M.P. OIL EXTRACTION v. STATE [G.N. RAY, J.)
679
(iii) Allied Oil Mills
10,000 M.T.
(iv) M.P. Glychem
10,000 M.T.
Total
50,000 M.T.
Mr. Sanghi has contended that the State Government being fully
aware of the availability of sal seeds in 1991 which was a meagre 19809
M.T. acted malafide in treating only few of the industrial units of the State
in a very favoured manner by entering into fresh agreements for supply of
50,000 M.T. of sal seeds to the new units. Such action has amounted to
deliberate hostile action in ensuring non availability of sal seeds for
distribution, to other units operating in the State of Madhya Pradesh
including the appellants. Such hostile discrimination is clearly violative of
Articles 14 and 19 of the Constitution of India.
A
B
c
Mr. Sanghi has further contended that there is no earthly reason to D
be completely oblivious of the needs of other industrial units operating in
the State which also require sal seeds for their units. The need of old units
was recognised by this Hon'ble Court when it directed the State
Government to allot 5000 MT to both the appellants by interim order dated
6.5.1982. The appeals were disposed of by this Court on 10.4.1986 and the E
matters were remanded to M.P. High Court for determining the basis of
distribution of sal seeds among the old units. On remand, the High Court
by order dated 18.10.89 held that the surplus would be distributed among
old units on the basis of their capacity. In order to perpetuate the hostile
discrimination, the State Government entered into fresh agreements
thereby ensuring that there would be no surplus to be distributed to old
units like the appellants.
F
Mr. Sanghi has also contended that the State Government was fully
aware of the need of sal seeds for thi:: old units like the appellants. As a
matter of fact, considering the hardship of the appellants in not getting G
·regular supply of sal seeds from the Government, the State Government
entered into agreement.s \vith the appellants in 1983 for supply of 7500 M.T.
of sal seeds per year for 12 years. Unfortunately such agreements were
.cancelled by the High Court on a finding that there was no justification for
any concessions to the old units.
H
680
SUPREME COURT REPORTS [1997] SUPP. 1 S.C.R.
A
Mr. Sanghi has submitted that even in the Industrial Policy of 1977,
the State Government recognised the need of sal seeds by the old units like
--
the appellants and it was clearly stipulated in the Industrial Policy that sal
seeds should be made available to both old and new units. Even in 1981
when the old policy of 1981 was revised it was indicated that after meeting
B the annual allotments of 10,000 M.T. of sal seeds to Bastar Oil Mills and
Sal Udyog (Pvt.) Ltd., the surplus should be allotted to the old units. On
the face of actual availability of sal seeds in the State, and after recognition
of the need of sal seeds by old units and accepting such need in the
industrial policy of 1981, fresh agreements in favour of Bastar Oil Mills and
Sal Udyog (P) Ltd. in 1991 are wholly unjustified and ma/a fide and illegal
c being vitiated with arbitrariness and abuse of power by discriminatory
action in the matter of distribution of sal seeds to other industrial units
operating in the State.
Mr. Sanghi has further submitted that Bastar Oil Mills and Sal Udyog
D (P) Ltd. got preferential treatment ever since 1979 onwards for a period
of 12 years by way of assured supply of sal seeds by the State Government
on the footing that the said concerns were new units and deserved special
protection by the State for some time. But after 12 years, both the said
units can no longer be treated as new units for the purpose of receiving
E preferential treatment. Hence, at the present moment, all the units in the
State must be treated at par and the agreements in 1991 in favour of the
said units must be held as wholly unjustified and illegal and should be
struck down.
F
Mr. Sanghi has contended that the agreements in 1979 with the said
units for 12 years had a clause for renewal. In the new agreements of 1991
there is also clause for renewal. The result is that there has been assured
supply of sal seeds in favour of the said units in perpetuity to the total
exclusion of the other units. Mr. Sanghi has submitted that the State
G
Goverment cannot be permitted to treat some units in the State more
favourably than others in the absence of any strong and valid reason for
such discriminatory treatment. Law is well settled that in the matter of
distribution of largesse, the State Government is bound to act fairly and
{
reasonably and cannot resort to hostile discrimination against some units
and treat some other units with undue favour when all the units must be
H treated as old units and therefore similarly circumstanced.
-
M.P. OIL EXTRACTION v. STATE [G.N. RAY,J.]
681
Mr. Sanghi has also contended that even in the matter of royalty to
be paid by the said respondents, there has been naked favouritism. The
royalty to be paid by the said respondents for the sal seeds to be supplied
A,
by the State government under the impugned agreement is absolutely
minimal and much less than the auction price for sal seeds. In view of such
paltry royalty payable by the said respondents, the respondents are not only
getting assured supply of sal seeds from the State Government but they are B
getting such supply almost at a throw away price. As a result, the appellants
are facing unjust competition from the said favoured child of the State
Government. Mr. Sanghi has, therefore, submitted that the appeals should
be allowed and the impugned agreements in favour of the said respondents
should be set aside. This Court should also direct the State Government C
of Madhya Pradesh to distribute sal seeds to all the existing units which
require sal seeds for their units on the pro rata basis with reference to their
productive capacity and actual annual requirement.
Mr. Kale, the learned senior counsel appearing for the appellant
M.P. Oil Extraction Limited has supported Mr. Sanghi in his submissions. D
Mr. Kale, has contended that by the impugned agreements, the State
Government has given largesse to the said respondents without inviting any
tender and excluding the appellant from obtaining any allotment of sal
seeds from the government even though the appellant badly requires sal
seeds for its productive activity and it had set up extraction plant long back
after examining economic viability with reference to availability of sal seeds E
in the State of Madhya Pradesh as assured by the State Government. Mr.
Kale has submitted that the appellant has been using sal seeds ever since
the extraction plant of the appellant was commissioned in 1974.
Mr. Kale has submitted that sal seeds is a seasonal natural forest F
produce grown in the Government forests in M.P. The production of sal
. seeds varies from year to year. According to the Government's calculation,
the average yield of sal seeds for the last seven years from 1985 to 1991 is
36950 M.T.
If the average production of sal seeds from 1974 to 1990 i.e. a period G
of 18 years is taken into consideration, it works out to be 40600 M.T. Sal
seeds as a forest produce was brought under the monopoly of the State
Government with effect from May 5, 1975 udner M.P. Vanopaj (Vyapar
Viniyaman) Adhiniyam;1969. After 1.975, the plant of the appellant and
other existing plants were totally dependent on the State Government of H
682
SUPREME COURT REPORTS [1997) SUPP. 1 S.C.R.
A M.P. for supply for sal seeds as a raw material. Sal seeds used to be sold
'.
by auction or by invitation of tenders. The oil content of sal seeds was being
used as a raw material for extraction of oil. The collection of sal seeds is
made by tribals residing in forest area and collection season is from 3rd
week of May upto onslaught of monsoon.
E
Mr. Kale has also submitted that the State Government of M.P.
formulated a detailed policy in 1978 known as "Raw material policy for
forest based industries". The basic object of inoustrial policy was to provide
for assured supply of raw material to such industries as are employment
oriented. The said policy envisaged asssured supply to the industrial units
c established within the State and to prevent its drain outside the State. The
policy of 1978 wa~ made for the maximum utilisation of the forest resources
within the State and did not speak of industrialisation of any particular area
whether backward or otherwise.
Mr. Kale has further contended that the State Government invited
D applications for setting up extraction plants on the assurance for supply of
10000 M.Ts. of sal seeds annually for a period of 12 years. Pursuant to such
invitation, the following two agreements were executed in 1979:
(i)
Agreement in favour of M/s Bastar Oil Industries Ltd. whose
E
plant is situated in Jagdalpur on 5.10.1979.
(ii) Agreement dated August 30, 1979 in favour bf M/s Sal Udyog
Pvt. Ltd. Its plant was situated in the Industrial Estate,
Raipur.
F
The rate of royalty was fixed at Rs. 300 and the rate was fixed Rs. 312.50
per mt. respectively.
The State Government invited appiications from entrepreneurs for
establishing three extraction plants on the basis of similar assurance for
supply of 10000 MTs. of sal seeds annually for a period of 12 years.
G
Mr. Kale has contended that the two agreements with the M/s. Sal
Seeds Udyog Pvt. Ltd. and Bastar Oil Mills were challenged by contending
that the two agreements had resulted in discrimination against the
"
appellant because no sal seeds would be left for the existing plants
including that of the appellant as the average annual yield of sal seeds was
H only 54000 M.T. Such Writ Petitions were, however, dismissed by the High
M.P. OIL EXTRACTION v. STATE [G.N. RAY, J.]
683
Court inter alia on the finding that classification between the old plants A
(existing plants) and the new plants was justified. The contention of the
appellant that no sal seeds would be left for allotment to the other existing
plants was repelled on the ground that the estimated production of sal
seeds in the State was to the tune of one lac M.T. according to the report
of the committee on the Industrial Policy. The appellant filed special leave B
petition against the said decision of the High Court before this Court and
obtained interim orders from this Court to get supply of
5000 M.Ts. of
~al seeds in May, 1982 at the royalty rate of Rs. 630 per mt. During the
pendency of the proceedings, the State Government of M.P. formulated
another policy on May 9, 1983. Under the said policy, the estimated surplus
of 20000 M.T. of sal seeds was to be distributed among the existing plants C
in proportion of their consumption of sal seeds during the last five years.
In accordance with the said policy, an agreement was entered between the
State Government and the appellant in December, 1983 for supply of 7500
M.T. of sal seeds to the appellant at the royalty rate of Rs. 750 per M.T.
for a period of 12 years. Such agreement was, however, challenged by M/s. D
General Foods Pvt. Ltd. of Indore on the ground of discrimination between
the existing plants. The High Court quashed the said agreement. The High
Court gave the direction for distribution of surplus quantity of sal seeds to
the existing units in proportion to their capacity. The High Court also held
that the rate of royalty of Rs. 750 per M.T. was a concessional rate. Such
decision of the High Court was challenged by the appellant before this E
Court and the matter was remanded to the High Court and was finally
disposed of by the High Court on October 18, 1989. The High Court
directed for making equal distribution of sal seeds to the existing plants. It
was noted by the High Court that the tremendous increase in demand of
sal seeds coupled with short supply and non-availability in the open market F
due to the State monopoly, had resulted in heated rivalry among the
industrial units.
Mr. Kale has submitted that the market price of sal seeds has two
components, namely, royalty and collection charges. In 1979, royalty rate G
was Rs. 300 per M.T. and such rate was concessional. In 1983, the rate of
royalty was Rs. 750 per M.T. and in the agreement dated September 12,
1983 in favour of the appellant, the rate of royalty was fixed at Rs. 750 per
M.T. In the agreement in favour of the appellant Allied Oil Industries in
1983, the rate of royalty was fixed by the State Government at Rs. 1030 for
the block period of two years from November, 1987 and November, 1989. H
684
SUPREME COURT REPORTS [1997] SUPP. 1 S.C.R.
A Such fixation, however, was set aside because the price was not fixed in
accordance with the clause 7 of the agreement in favour of Mis. Allied Oil
Industries by the High Court in Misc. Petition No. 1653 of 1988. The
appellant had offered to purchase sal seeds in 1988 on August 27, 1988 at
the total rate of Rs. 2250 per M.T. The rate of royalty works out to be Rs.
B 700 per M.T. For the year 1991 the appellant offered to purchase sal seeds
at the royal rate of Rs. 1200 per M.T. The appellant also offered to
purchase sal seeds at a royalty of Rs. 1225 per M.T. Mr. Kale has submitted
that fixation of the rate of royalty in favour of M/s. Bastar Oil Industries
at a ridiculously low rate of Rs. 400 for the period of two years and with
a stipulation for increase at the rate of 5% thereafter is wholly arbitrary,
C unjustified and discriminatory. Such agreement is also against the interest
of the revenue of the State. Mr. Kale has contended that by fixing such a ·
low rate of royalty, the State Exchequer has incurred a loss of crores of
rupees .. Such fixation of rate of royalty itself is arbitrary as the rate of
royalty will depend on the rate of demand and supply in the market of sal
D seeds. Mr. Kale has also submitted that the impugned agreement dated
September 7, 1991 has resulted in a hostile discrimination against the
existing plants. The State Government has raised the quantity of sal seeds
from 10000 M.T. to 20000 M.T. in favour of Bastar Oil Mills and by similar
agreement the State Government has agreed to supply sal seeds of 10000
M.T. to Sal Udyog. The said Sal Udyog is .not situated in any backward
E area. It is situated in the industri'al estate at Raipur and the unit of the
appellant is also situated very close to that of Sal U dyog.
Mr. Kale has supported the contention made by Mr. Sanghi that after
meeting the demands ii;t favour of Baster Oil Industries, M/s. Allied Oil
F
Industries, M/s. M.P. Glychem, no sal seeds would be left for being sold
to the existing plants. Mr. Kale has submitted that therefore the impugned
agreements have resulted in monopoly of getting sal seeds by the said
respondents. Mr. Kale has contended that the executive action in 1991 in
entering into fresh agreements after being fully aware of the supply position
of sal seeds, in favour of the respondents with a further renewal clause, is
G patently unjust and has resulted in monopoly without any just cause and
reasonable basis. Mr. Kale has contended that the appellant and other
existing units in the State have a right to be considered fairly and
reasonably for the distribution of sal seeds by the State Government in a
reasonable and unbiased manner. He has, therefore, submitted that the
H . impugned agreements should be cancelled by this Court and the State
M.P. OIL EXTRACTION v. STATE (G.N. RAY, J.)
685
Government should be directed to distribute sal seeds to all the existing A
units on a pro rata basis.
Dr. A.M. Singhvi, learned senior counsel appearing for the
respondent M/s. Sal Udyog Pvt. Ltd., has disputed the contentions of the
appellants. Dr. Singhvi has contended that there is a fundamental B
difference between the two categories of industries operating in the State
of Madhya Pradesh using sal seeds for production i.e. those which have a
specific agreement with the State of Madhya Pradesh entered into under
the mandate of the specific policy inviting new entrepreneurs to the State
and execution of special agreement with them after selection as opposed
to the second category which consists of together units existing prior to the C
policy not selected by the government of Madhya Pradesh and having no
privity of agreement or contract with the State of M.P. Such specific dual
classification of users of sal seed for productive activity has been repeatedly
recognised and judicially upheld as valid in a number of decisions rendered
between the same parties. In support of this contention, Dr. Singhvi has D
drawn the attention of this Court to the decisions in M.P. Oil Extractio11
Pvt. Ltd. Raipur a11dA11r. v. State of M.P. a11d Ors., AIR (1982) M.P. 1; M/s.
KN. Oil llldustlies Etc. v. Secretary to Mi11istry of Forest, Bhopal a11d Ors.,.
AIR (1986) SC 1927 para 4 and Mis. KN. Oil I11dustlies a11d A11r. Etc. v.
State of M.P. a11d Ors. Etc., AIR (1986) SC 1929. The said judicial E
pronouncements categorically upheld the classification of users of sal seed
into two categories. The Courts have also upheld the agreement in favour
of the respondents as well as the reservation of specific quantity of sal seeds
in favour of those units having agreements and the provision of
concessional rate for such units during the first four years of agreement.
Dr. Singhvi has also contended that since such agreements in question in
the present case were also the subject matter of challenge in the earlier
proceedings and fell for scrutiny and adjudication by the Courts in the
earlier proceedings which ultimately upheld the entire contract including
F
the renewal clauses, there is no occasion for the appellants to challenge
the said contract and the renewal clauses collaterally. By the impugned G
decision, such challenge has been rightly rejected by the High Court.
Dr. Singhvi has also contended that all contentions regarding the
impugned agreement and the clauses in the agreement have been upheld. •
Therefore repeated challenges to different clauses of the agreement are H
686
SUPREME COURT REPORTS [1997] SUPP. l S.C.R.
A precluded. Dr. Singhvi has also submitted that even if it is assumed that
particular argument regarding the validity of any clause of the agreement
was not specifically raised or specifically considered, such a plea at a
subsequent stage is precluded and barred by principles akin to res judicata
and constructive res judicata. In support of such contention, reliance has
B been placed on the decisions of this Court in Smt. Somawanti & Ors. Etc.
v. State of Punjab and Ors. Etc., AIR (1963) SC 151 para 22; State of U.P.
v. Nawab Hussain, AIR (1977) SC 1680 para 8; Mohd. Ayub Khan v.
Commissioner of Police, Madras & Ors., AIR (1965) SC 1623 and Narayanrco v. State, AIR (1981) Bombay 271 para 13, 15 = (1973) SC 973 para 10.
C
Dr. Singhvi has also submitted that since the renewal clause was
'f'
necessarily upheld being part of the agreement and the agreement was
L
upheld in successive proceedings, the present case does not per se raise any
issue of Article 14 relating to the validity of the renewal clause. Dr. Singhvi
has submitted that at the highest, the case of the appellants cannot be said
D to be higher than a challenge under Article 14 or under common law
principles of judicial review of administrative action, namely, to the actual
discretionary act of renewal in September, 1991.
Dr. Singhvi has submitted that such challenge should be considered
in the context of fundamental difference in the two categories of units
E consuming sal seed in their plants and the differences haye already been
recognised. Since the validity-of the contract including the renewal clause
itself is upheld as binding by judicial verdict, the actual exercise of power
of renewal cannot be held to be arbitrary because such renewal clause was
essentially necessary and inevitable to give effect to the protection for
F which agreement has been made. Dr.