A mandatory, uniform purchase preference policy for public sector enterprises is arbitrary if it removes discretion and creates a monopoly. Such preferences must be based on individual, industry-wise assessments of necessity to ensure a level playing field and maintain market competitiveness.

Headnote:(A) Administrative Law - Procurement Policy - Price preference to public sector enterprises - Shift from discretionary language "may" to mandatory language "will" in official memorandums - Whether such a shift is arbitrary and creates a monopoly - Effectiveness of public enterprises cannot be improved through a uniform policy without examining whether such protection is necessary for a particular entity - Preference must be examined individually and margins must be rational to ensure a level playing field.

(B) Public Tenders - Monopoly and Competition - Impact of price preference on foreign direct investment - Necessity of industry-wise assessment to determine if preference is called for and the appropriate margin - Rigid and inflexible policies in procurement are contrary to the objective of maintaining a competitive market.

Facts of the case:
A policy providing price preference to public sector enterprises in the procurement of earth-moving machinery was extended multiple times through various office memorandums. The petitioners challenged the legality of these extensions, specifically the substitution of the word "may" with "will", contending that the policy had become mandatory and rigid. It was argued that this created a monopoly, violated legitimate expectations, and involved the practice of splitting tenders to favor certain parties.

Findings of Court:
The court found that a uniform policy for purchase preference is inadequate because the need for protection varies across different enterprises. The substitution of "may" by "will" constitutes a reversal of policy, replacing discretion with a rigid requirement. The court observed that for a level playing field, an industry-wise assessment is necessary to determine if preference is required and what the rational margin should be.

Issues: Whether the mandatory nature of the purchase preference policy is arbitrary and whether it creates an illegal monopoly by removing the discretionary element previously available to the authorities.

Ratio Decidendi: The court ruled that purchase preference should not be applied uniformly but should be based on an individual assessment of each enterprise's need for protection. The government must conduct an industry-wise review to fix specific norms and margins that ensure competition and consider factors such as delivery capacity and the impact on foreign investment to avoid an inflexible policy.

Result: Applications disposed of with directions to the concerned Ministry to undertake the assessment within four months, while interim arrangements continue until reconsideration.

Legal Category Hierarchy

JUDGMENT:

Dr. ARIJIT PASAYAT, J.

Leave granted in SLP (C) No. 24219/2003.

The point involved in these cases essentially is the purchase preference given to Public Sector Enterprises (in short the PSEs). The petitioners have made a grievance that

the key players in the market are petitioners-Caterpillar and Bharat Earth Movers Ltd. Most important purchaser for all these are coal fields, for example Western Coalfield and its subsidiaries-Coal India Ltd. They are invariably the purchasers in respect of earth moving machines. Prior to 1992 price preference was given to PSEs. Post 1992 purchase preference was given and the lowest and the second lowest bidders were being described as L-1 and L-2. Purchase orders were issued by the Coal India Ltd., broadly in the ratio of

60/40 and the L-2 was required to match the L-1 price. The language used earlier was "may" as indicated by Circular dated 13.1.1992. The purchase preference policy was extended by office memorandum dated 15.3.1995 for a further period of two years. It was further extended till 21.3.2000 by office memorandum dated 31.10.1997, subject to purchase being in excess of Rs.5 crores. By office memorandum dated 14.9.2000, the policy was extended till 31.3.2002. However, the minimum value of purchase was brought down to rupees one crore. By office memorandum dated 14.6.2002, the policy was extended till 31.3.2004 and the scheme was made valid for purchase of rupees five crores and above. By office memorandum dated 26.10.2004, which extended the policy for one year upto 31.3.2005 retrospectively from 1.4.2004. By office memorandum the policy was extended for a period of three years retrospectively with effect from 18.7.2005. The word may was substituted by the word will by this office memorandum. According to the petitioners the intention was to give somewhat longer period for stabilizing all PSEs. It never intended to create any monopoly. Grievance is made that by substitution of the word may by the word will is arbitrary. The word may gives a wider

option to the tenderers and all the tenderers were on a level playground without any unnecessary protection to any of the parties. It is pointed out that on 15.3.1995 office memorandum was issued extending the time to purchase preference upto 31st March, 1997. It was further re-introduced for a period of three years upto 31st March, 2000. Again, it was extended upto 31st March, 2002. By further office memorandum dated 14th June, 2002 the existing purchase preference is for products and services to central public sector enterprise was extended by two years upto 31st March, 2004. The legality of the office memorandum dated 14th June, 2002 is challenged contending that it is arbitrary and affects the legitimate expectation of the various parties. In fact it creates a monopoly and the policy without any sanctity of law. The respondents opposed the petition primarily on the ground that there is no substance in the allegations. Benefit is not given only in respect of the parties covered by these petitions. The office memorandum dated 13.1.1992 was issued by the Department of Public Enterprises, Ministry of Industry, Government of India stating that in respect of granting price preference to PSEs, Government may grant purchase preference to PSEs by price quoted by them which is less than 10% of the lowest price other conditions being equivalent. It was stated that the policy was valid for three years period as transaction within which PSEs were to adjust to the global new business environment and improve competitiveness efficiency.

The above purchase preference policy was extended on 15.3.1995 for a further period of 2 years and it was stated that the said extension was final and the earlier policy would automatically lapse. During 1997 the purchase preference was further extended upto 31.3.2000. This was in relation to purchases in excess of Rs.5 crores. By the office memorandum dated 14.9.2000 the policy was extended till 31.3.2002 and th

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Judicial Analysis