Case: Reliance Energy Limited  Vs. Maharashtra State Road Devt.Corp.Ld.&amp;Ors

Reliance Energy Limited is a company registered under the Companies Act, 1956. It is engaged in generation, transmission and disbursement of power in Maharashtra, Delhi etc.3. Hyundai Engineering and Construction Company Ltd. (for short,is a company incorporated in Korea. It is specialized in construction of bridges.4. At this stage, it may be noted that the above Project is to be at the cost of Rs. 26000 million (Rs. 2600 crores). The bidders were required to submit RFQ Document by 10.1.2005. Under the PQ Document, M/s. Jean Muller, France was appointed as consultant by MSRDC. Under the PQ Document, the bidders were required to submit financial statements of three financial years subject to the condition that the latest should not be earlier than the financial year ending 31.12.2002. REL/HDEC formed a consortium. As a consortium they were required to comply with Clause 7.2.2 which stipulated net cash profit at Rs. 200 crores. The said consortium has been excluded from the second stage of bidding on the ground that it has not fulfilled the said criteria mentioned in Clause 7.2.2. The consortium had submitted their RFQ Document on 9.1.2005. The said consortium had submitted three audited accounts for the financial years ending 31.12.2001, 31.12.2002 and 31.12.2003. At this stage it may be noted that the financial year for REL ended on 31st March whereas the financial year for HDEC, Korea ended on 31st December.5. At this stage, we may quote the relevant provisions of the PQ Document which read as5.1 in the PQ document—The objective of the Pre-Qualification is to qualify the applicants that have the necessary experience and financial and technical capabilities to undertake the work for which the Request for Proposal is to be invited.Section 5.3.7 of the PQ document inter alia, provides:No change in, or supplementary information to an application shall be accepted after its submission. However, MSRDC reserves a right to seek additional information from the applicants, if found necessary during the course of evaluation of the applicants.Section 7.2.2 For Application by a Consortium—In case of a Consortium, the entity declared as the Lead Member would be required to• hold a minimum of 26% of paid up and subscribed equity capital in the Project Company (MSRDC is of the view that a minimum paid up and subscribed capital of Rs.5000 million may be required for implementing the project.] until completion of construction and thereafter for a period of two years from the date of commencement of operations and• meet the financial eligibility criteria of Lead Member as detailed belowIn case of a Consortium, the following members taken together shall commit to hold majority (minimum of 51%) of the total paid up and subscribed equity capital in the Project Company until completion of construction and thereafter for a period of two years from the date of commencement of operations.• Lead Member of the consortium committing to hold a minimum of 26% of the paid up and subscribed equity capital of the Project Company, until completion of construction and thereafter for a period of two years from the date of commencement of operations and meet the financial eligibility criteria of Lead Member as given below.• Those members of the Consortium committing to hold a minimum of 5% of the paid up and subscribed equity capital of the Project Company until completion of construction and thereafter for a period of two years from the date of commencement of operations.The aggregate (taken as the arithmetic sum) of Net Cash Profit and Net Worth as explained above) of all subsidiary companies in which the respective entities hold a minimum of 51% of total paid up and subscribed equity capital would also taken into consideration. In the case of financials of subsidiary companies being considered as above, the dividend paid by these subsidiary companies to the parent company will be deducted from the Net Profit of the parent company for the purpose of evaluation. The financial evaluation criteria to be satisfied by a Consortium are detailed below.CriteriaTo be satisfied byAmountNet worth1 (as per the latest audited balance sheet not earlier than the FY ended December 31, 2002)Lead Member (Holding a minimum of 26% equity in the project company) Total Consortium (to be satisfied together by the Lead member and those Consortium members committing to hold a minimum of 5% equity in the project company)Rs. 2,000 million (or equivalent foreign currency) Rs. 10,000 million (or equivalent foreign currency)ANDCriteriaTo be satisfied byAmountNet cash profit2 (simple average of the audited financial figures over the last3 financial years of 2 calendar months each, with the latest not earlier than the FY ended December31, 2002, will be considered for this assessment).Lead Member (Holding a minimum of 26% equity in the project company) Total Consortium (to be satisfied jointly by the Lead member and those Consortium members committing to hold a minimum of 5% equity in the project company)Rs. 500 million (or equivalent foreign currency) Rs. 2,000 million(or equivalent foreign currency)1. Net Worth means the sum total of the paid up share capital and reserves as reduced by accumulated losses, revaluation reserves and deferred revenue expenditure to the extent not written off, if any. In the case ofg Finance Companies, Tier II Capital as defined by the Reserve Bank of India. In the prudential norms on Capital Adequacy would also be considered as a part of the Net Worth.2. Net cash profit means the profit after tax as stated in audited financial statements plus depreciation and amortisation not in the form of a cash transaction.All figures quoted in a currency other than Indian National Rupees (INR) would be converted into Indian National Rupees (INR) at an exchange rate, which is the Telegraphic Transfer (ASSESSEE-COMPANY) buying rate of State Bank of India as on the Due Date. In the event of non-availability of exchange rate for any currency from the above source, MSRDC reserves the right to use available from any other source.7.4 Basis of EvaluationThe information to be provided by the applicant must be in conformation with the following:• The information provided by the applicant should be based on the latest available audited accounting statements.• The latest audited accounting statements should not be dated earlier than 31st December, 2002.• The Request for Qualification (RFQ) must be accompanied by the last three audited annual reports/accounts statements of the applicant and should include the financial statements of all subsidiary companies of the Applicant for the last three financial years. In case of a Consortium audited annual reports/account statements of each member of the Consortium for the last three financial years should be provided and should include the financial statement of all subsidiary companies of the entities forming the Consortium.• The applicant (all members of Consortium) must submit information on all pending litigations or proceeding regarding liquidation, winding up, Court receivership or other similar proceedings that should have been initiated or pending against the Applicant (or any member of Consortium). In addition to the above, information must also be provided of all pending litigations against the Applicant (or any member of Consortium) in which the maximum value of liability that may arise in the event of adverse judgment exceeds Rs.100 million (or equivalent foreign currency). A consistent history of litigation/arbitration awards against the applicant or any member of the consortium.Briefly the criteria and conditions were asIn a consortium, the entity declared asas required to hold the minimum of 26 per cent of paid-up and subscribed equity capital in the project company until completion of construction.(b) The aggregate of net cash profit and net worth of the consortium was to be considered for evaluation of financial criteria of the consortium.(c) Two criteria were required to be satisfied by the lead member (REL) as also the total consortium (REL/HDEC), namely, net worth and net cash profit.(d) Net worth is defined as total paid-up share capital + reserves — accumulated losses, revaluation of reserves and deferred revenue expenditure only to the extent of it being not written-off. Net worth was to be calculated as per the latest audited balance sheet not earlier than F.Y. ending 31st December, 2002.(e) The leading member (REL) was required to have a net worth of Rs. 200 crores and the total of Consortium (REL/HDEC) was required to have a net worth of Rs.1,000 crores. At this stage, we may clarify that this last criterion stands satisfied.(f) As stated above, net cash profit of the lead member under the PQ document was stipulated at Rs. 50 crores whereas for the Consortium it was Rs. 200 crores.(g) For the sake of convenience we quote the definition of NCP given in the PQ document which reads as= PAT (profit after tax)+ depreciation + amortization, not in the form of cashTherefore, the bidding process for selecting the BOT Concessionaire was in two stages. In the first stage MSRDC had to issue the Pre-Qualification (PQ) document with an invitation to prospective Applicants to submit their Request for Qualification (RFQ) for the Project. The prospective Applicants were required to submit their RFQ document on or before 10.1.2005. It was to be evaluated on technical and financial capability. Under Clause 7.2.2 one of the criteria laid down was that the Consortium should have net cash profit (NCP) of Rs. 2,000 million (Rs.200 crores). As per tender condition 7.2.2 the bidders were required to submit financial statement of three financial years subject to the condition that the latest should not be earlier than the financial year ending 31.12.2002. The choice of three years was left to the bidders. REL/HDEC exercised their option by submitting the financial statements of HDEC for three years, namely, 2001, 2002 and 2003.8. HDEC had undertaken construction contracts in Iraq. On account of war in Iraq their annual report for the year 2001 showed negative income. However, the said Company achieved net profit of US $ 16 million in 2002, US $ 66 million in 2003 and US $ 164 million 2004. These figures have been taken from the letter of KPMG, Korea, dated 12.8.2005 giving a schedule of net income after adjusting expenses and income not in form of cash transaction. We quote hereinbelow the entire letter dated 12.8.2005 along with the schedule of net income which reads asFloor, Star Tower,Tel +82 (2) 21120100737 Yeoksam-dong,Fax +82(2) 21120101Gangnam-gu,www.kr.kpmg.comSeoul 135-984Republic of KoreaThe Board of Directors and ManagementHyundai Engineering & Construction Co.,Ltd.140-2 Kye-dong, Chongro-guSeoul, 110-793, KoreaAugust 12, 2005Dear Sir,We have performed the procedures described below, which were agreed by Hyundai Engineering & Construction Co., Ltd. (theThe sufficiency of the procedures is solely the responsibility of the Company. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose.The procedures that we performed are as follows:We compared the statements of cash flows for years ended December 31, 2001, 2002, 2003 and 2004 prepared by the Company to the accompanying schedule of net income after adjusting expenses and income not in form of cash transaction which the company prepared according to the Pre-Qualification criteria for Mumbai Trans Harbour Link(MTHL) project in India. The financial statements of the company for years ended December 31, 2001, 2002, 2003 and 2004 were audited by us and we expressed an opinion that the financial statements of the Company for years ended December 31, 2001, 2002, 2003 and 2004 were presented fairly, in all material respects, in conformity with accounting standards generally accepted in the Republic of Korea.We audited the statements of cash flows for years ended December 31, 2001, 2002, 2003 and 2004 that under the indirect method of presenting the statements of cash flows, net income is adjusted to arrive at net cash flows from operating activities. The adjustments to net income I performed by removing the effects on net income of all items that included in net income that do not affect cash receipts and disbursements. (e.g., those that should be omitted altogether or categorized as investing or financing activities, such as adding depreciation and amortization).We found no exceptions as a result of the above agreed-upon procedures.We were not engaged to, and did not perform an audit, the objective of which would be the expression of an opinion on the specified elements, accounts, or items. Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you.Accounting principles and auditing standards and their application in practice vary among countries. The financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by those knowledgeable about Korean accounting procedures and auditing standards and their application in practice.This report is intended solely for the use of the Board of Directors and Management of Hyundai Engineering & Construction Co. Ltd., and should not be used by those who have not agreed to the procedures and taken responsibility for the sufficiency of the procedures for their purposes.Very truly yoursSd/-S.H. Goo,.Partner(Attached: Cash flows from operating activities)(Attached)Schedule of net income after adjusting expenses and income not in form of cash transaction.DescriptionDec 31st, 2001Dec 31st, 2002Dec 31st, 2003Dec 31st, 2004(1)Net Income(610,507)15,96365,546164,248(2)Expenses not in form of a cash transaction686,310200,753199,084285,039—Provision for retirement and severance benefit27,00939,17332,70639,541—Depreciation49,47536,22131,27927,699—Stock compensation expense-8910730—Bad debt expense183,1927,3578,480-—Other bad debts expense199,186-39,147171,080—Interest expense48,80323,89920,68318,723—Loss on valuation of foreign currence1071,9863699—Loss on disposal of trade note and accounts receivables2,77017,77210,844-—Loss on valuation of inventories39,76220,4855,36420,308—Loss on disposal of Investmentsecurities42-30943—Loss on investment securities impairment61,10429,90012,8452,348—Loss on disposal of investment in affiliates using equity method--1,286-—Loss on disposal of investment assets9,1201,248--—Loss on valuation of investment in affiliates5,805---using equity method (*)—Loss on disposal of property, plant and equipment (*)7,8884,1213,9331,591—Loss on impairment of property, plant and equipment--29,5842,977—Miscellaneous losses (including other extraordinary loss)-13,8022,513-—Loss on prior year adjustment42,0474,700--(3) Income not in form of a cash transaction337,98276,28444,48655,723—Interest income642,8602,117705—Gain on valuation of foreign currency-105 71,891—Gain on disposal of investment assets2,3784,349172——Gain on disposal of property, plant and equipment (*)27,84647,5895,7407,982—Gain on disposal of investment securities498---—Reversal of loss on investmentsecurities impairment1,879-1,1672,386—Gain on valuation of investment in affiliates using equity method (*)-2,7224,9414,771—Gain on Debt exemption (*)305,3176,98730,34218,164—Gain on redemption of debentures-1,933-95—Miscellaneous gains (Including other extraordinary gain)---19,729—Gain on prior year adjustment-9,739--(4) Net income after adjusting expenses and(262,179)140,432220,143393,564income not in form of cash transaction[(1) + (2) (3) ](*) Gain on Debt exemption, Loss(gain) on valuation of investment affiliates using equity method. (Loss(gain) on disposal property, plant and equipment are included for calculation of net income after adjusting expenses and income not in form of cash transaction(Note)We translated Korean Won into U.S. dollars at the basic exchange rates on December 31, 2001, 2002, 2003 and 2004 to US$. The corresponding rates are as follows:Dec 31, 2001Dec 31, 2002Dec 31, 2003Dec 31, 2004W 1,326.1 to US$1 W 1,200.4 to US$ 1W 1,197.8 to US$ 1W 1,043.8 to US$ 1"(emphasisAt this stage, we need to clarify that HDEC had undertaken construction contracts in Iraq. That, large receivables had arisen prior to 1999 on account of war in Iraq. The Iraq contract receivables had nothing whatsoever to do with the three accounting years 2001, 2002 and 2003, therefore, there were no Iraq contract receivables nor was there any write-off as and by way of bad debt in any of the above three accounting years. Further, according to REL/HDEC, HDEC had incurredng to US $ 686.310 million in 2001, US $ 200.753 million in 2002 and US $ 199.084 million in 2003 which did not involve direct cash outflow and, therefore, the saidht to have been added back to NCP and if so added then the Consortium had NCP of Rs.2,000 million (Rs.200 crores) as mentioned in Clause 7.2.2.10. The aforestated contention advanced by the Consortium was rejected by M/s. Jean Muller Consultant of MSRDC in followingfor bad debts even though they are justbut not athe same is treated as cash expense because once ahas been made, thedoes not get routed through the profit and loss account. Moreover, thefor bad debt relates to a revenue item that has already been treated as cash inflow on accrual basis.In view of the position taken byConsultants, REL/HDEC stood excluded from the second stage of the bidding process.12. To complete the chronology of events, by letter dated 22.6.2005, MSRDC informed REL/HDEC that their RFQ document was under scrutiny and accordingly REL/HDEC were requested to extend the validity of their Offer up to 6.10.2005. By letter dated 24.6.2005, MSRDC requested REL/HDEC to submit further details and clarifications and accordingly the Consortium of REL/HDEC was once again requested to extend the validity of their Offer till 6.10.2005. Accordingly, by letter dated 18.7.2005, REL/HDEC extended the validity of their Offer up to 6.10.2005 (90 days). By another letter dated 6.8.2005, MSRDC sought clarifications from REL/HDEC in respect of certain financial aspects and the said Consortium was given time up to 19.8.2005 to furnish such clarifications. By the said letter, MSRDC stated that there were no queries in respect of REL, but there were queries in respect of HDEC. By the said letter, MSRDC referred to the break-up of net cash profit submitted by REL/HDEC and asked for the basis for classifying certain heads of expenditure under the heading. By reply dated 18.8.2005, REL/HDEC submitted its clarification by pointing out that as on 10.1.2005 when RFQ document was submitted the audited accounts for FY ending 31.12.2004 were not ready, so far as HDEC was concerned and, therefore, it had submitted the audited accounts of HDEC for the years 2001, 2002 and 2003. By the said letter dated 18.8.2005, the REL/HDEC also submitted audited accounts of HDEC for FY ending 31.12.2004. In other words, by 18.8.2005 (i.e. before 6.10.2005 which was date up to which REL/HDEC had kept its Offer open) the said Consortium had submitted the audited accounts for the financial years ending 31st December 2002, 2003 and 2004. Therefore, according to REL/HDEC, they had also complied with the conditions mentioned in the PQ document by supplying audited account for the reference years, namely, 2002, 2003 and 2004.13. Since REL/HDEC did not submit audited accounts concerning HDEC for the financial year ending 31.12.2004 by 10.1.2005, the Consultants of MSRDC took the position that REL/HDEC were not entitled to bid in the second stage of the bidding process. According to the said Consultants, the audited accounts of HDEC for the FY 31.12.2004 constituted subsequent information (i.e. information supplied after the cut-off date of 10.1.2005) and, therefore, REL/HDEC stood excluded from the second stage of the bidding process.14. On 22.8.2005, a committee by the nameas constituted by MSRDC to review the draft evaluation report submitted by the consultants, M/s. Jean Muller Consortium, relating to pre-qualification of bidders to suggest process of evaluation and to provide recommendations to MSRDC. The said Committee met on 21.9.2005. The consultants M/s. Jean Muller Consortium and M/s. Crisil were both called to give clarifications. The said Committee was headed by Mr. Justice R.J. Kochar, Judge of Bombay High Court (retired), Shri A.K. Banerjee (Technical Member) in NHAI, Mr. R.S. Agarwal, Executive Director of IDBI (retired), Mr. V. Giriraj, Joint Managing Director of MSRDC etc. The Committee noted that pre-qualifications bids were received only from six Applicants, one of them was REL/HDEC. The Committee noted that while Indian companies could submit their audited accounts up to 31.3.2004 as their FY ended on 31st March the foreign companies could submit their audited accounts only up to 31.12.2003 as their FY ended on 31st December. The Committee further observed that although the cut-off date was 10.1.2005, clarifications on break-up of non-cash expenses were sought from REL/HDEC up to 22.8.2005 and since in the mean time audited accounting statements were furnished by HDEC up to 31.12.2004, the same could be considered for evaluation. The Peer Committee did not agree with the opinion expressed byConsultants that the loss incurred by HDEC for the financial year ending 31.12.2001 would have a cash impact in future. At this stage, we may reiterate that even according to the Consultants of MSRDC, provision for bad debt may not involve cash outflow in the year of incidence but it would have cash impact at a future date and, therefore, out of abundant caution they decided to exclude REL/HDEC. However, the Peer Committee did not concur with this accounting interpretation. According to the Peer Committee the major provision for bad debt was in the accounts for the year 2001 and it related to receivables from their contract in Iraq affected by war and since it was only a provision for bad debt and not a write-off, the Committee came to the conclusion that there would be no cash impact in future. The Committee took the view that even without taking into account the audited accounts for the year 2004, REL/HDEC fulfilled the financial criteria in Clause 7.2.2. Accordingly, the Peer Committee opined that REL/HDEC should not be excluded from the second stage of the bidding process. At this stage, it may be noted that after receipt of the said report, made by the Peer Committee dated 1.10.2005, MSRDC placed the report of the Peer Committee before their Consultants. Needless to add that the Consultants of MSRDC retained their original position, namely, that since the audited accounts for the year ending 31.12.2004 could not have been submitted after 10.1.2005, the said accounts of HDEC could not have been taken into account as it would violate the tender conditions and, therefore, REL/HDEC should be excluded from the second stage of the bidding process.15. By letter dated 28.9.2005, in view of the position taken by their Consultants, MSRDC requested REL/HDEC to extend the validity of their Offer for further six months as they wanted to study the implications arising from the audited accounts submitted by HDEC for the year ending 31.12.2004. MSRDC basically wanted to know as to what would be cash impact of the provision for bad debts in the accounts of HDEC for the year 2001. Accordingly by letter dated 6.10.2005, REL/HDEC extended the validity of their Offer up to 6.4.2006. Ultimately, by letter dated 7.11.2006, MSRDC informed REL/HDEC that they stood disqualified as they had failed to meet the qualification criteria.16. In the circumstances, REL/HDEC moved the Bombay High Courtvide Writ Petition No. 39 of 2007 in which they alleged that a decision to disqualify, taken by MSRDC, was arbitrary, unjustified and contrary to the terms of the tender documents; that REL/HDEC met the financial criteria specified by MSRDC both in terms of the original submission of RFQ document made on 9.1.2005 and further information given to MSRDC; that in the alternative the decision of MSRDC was unjustified and incorrect, particularly when the Consortium had given audited accounts of HDEC for the FY ending 31.12.2004 and, therefore, on the said basis it was not open to MSRDC to exclude REL/HDEC from the second stage of the bidding process. It was further submitted in the said writ petition that the PQ document did not specify any accounting standard (AS) and in the circumstances it was not open to MSRDC to exclude REL/HDEC by applying AS No. 26; that the accounts of HDEC indicatedor the FY ending December 31 2002, 2003 and 2004 and on that basis it had calculated NCP in accordance with internationally accepted ASs (GAPP) which has been certified by KPMG, Chartered Accountants in Korea. According to REL/HDEC, no particular AS was mentioned in the PQ document and, therefore, it was implied that the Consortium were free to adopt GAAP. That, in the circumstances, the impugned decision taken by MSRDC was arbitrary, unjust and wrongful and contrary to the tender document (PQ document) issued by MSRDC.17. By the impugned judgment dated 4.6.2007, the High Court ruled that admittedly HDEC had suffered net loss of approximately US $ 610 million in 2001; that they had earned net profits in 2002, 2003 and 2004; that audited accounts for 2004 were made available only after 10.1.2005 and, therefore, could not have been taken into account by the Peer Committee and, therefore, MSRDC was right in excluding REL/HDEC from the second stage of the bidding process. According to the impugned judgment, the basic debate was about accounting treatment to be given to. The High Court was of the view that it had no jurisdiction under Article 226 of the Constitution to interfere with the decision of MSRDC, particularly, when there were two different opinions regarding adjustment to net income. According to the High Court, the decision of MSRDC on the future cash impact ofprovision for badmade by HDEC in its accounts for 2001 cannot be said to be arbitrary or unreasonable. For the aforestated reasons, without going into the question whetherprovision for baddebts is or is not ale to be added back to arrive at net cash profit, the High Court dismissed the writ petition, hence this civil appeal.

Court's reasoning:
At this stage, we need to clarify that HDEC had undertaken construction contracts in Iraq. That, large receivables had arisen prior to 1999 on account of war in Iraq. The Iraq contract receivables had nothing whatsoever to do with the three accounting years 2001, 2002 and 2003, therefore, there were no Iraq contract receivables nor was there anyas and by way of bad debt in any of the above three accounting years. Further, according to REL/HDEC, HDEC had incurredng to US $ 686.310 million in 2001, US $ 200.753 million in 2002 and US $ 199.084 million in 2003 which did not involve direct cash outflow and, therefore, the saidht to have been added back to NCP and if so added then the Consortium had NCP of Rs.2,000 million (Rs.200 crores) as mentioned in Clause 7.2.2.On 22.8.2005, a committee by the nameas constituted by MSRDC to review the draft evaluation report submitted by the consultants, M/s. Jean Muller Consortium, relating toof bidders to suggest process of evaluation and to provide recommendations to MSRDC. The said Committee met on 21.9.2005. The consultants M/s. Jean Muller Consortium and M/s. Crisil were both called to give clarifications. The said Committee was headed by Mr. Justice R.J. Kochar, Judge of Bombay High Court (retired), Shri A.K. Banerjee (Technical Member) in NHAI, Mr. R.S. Agarwal, Executive Director of IDBI (retired), Mr. V. Giriraj, Joint Managing Director of MSRDC etc. The Committee noted thatbids were received only from six Applicants, one of them was REL/HDEC. The Committee noted that while Indian companies could submit their audited accounts up to 31.3.2004 as their FY ended on 31st March the foreign companies could submit their audited accounts only up to 31.12.2003 as their FY ended on 31st December. The Committee further observed that although thedate was 10.1.2005, clarifications onsh expenses were sought from REL/HDEC up to 22.8.2005 and since in the mean time audited accounting statements were furnished by HDEC up to 31.12.2004, the same could be considered for evaluation. The Peer Committee did not agree with the opinion expressed bys that the loss incurred by HDEC for the financial year ending 31.12.2001 would have a cash impact in future. At this stage, we may reiterate that even according to the Consultants of MSRDC,provision for baddebt may not involve cash outflow in the year of incidence but it would have cash impact at a future date and, therefore, out of abundant caution they decided to exclude REL/HDEC. However, the Peer Committee did not concur with this accounting interpretation. According to the Peer Committee the majorprovision for baddebt was in the accounts for the year 2001 and it related to receivables from their contract in Iraq affected by war and since it was only aprovision for baddebt and not athe Committee came to the conclusion that there would be no cash impact in future. The Committee took the view that even without taking into account the audited accounts for the year 2004, REL/HDEC fulfilled the financial criteria in Clause 7.2.2. Accordingly, the Peer Committee opined that REL/HDEC should not be excluded from the second stage of the bidding process. At this stage, it may be noted that after receipt of the said report, made by the Peer Committee dated 1.10.2005, MSRDC placed the report of the Peer Committee before their Consultants. Needless to add that the Consultants of MSRDC retained their original position, namely, that since the audited accounts for the year ending 31.12.2004 could not have been submitted after 10.1.2005, the said accounts of HDEC could not have been taken into account as it would violate the tender conditions and, therefore, REL/HDEC should be excluded from the second stage of the bidding process.We find merit in this civil appeal. Standards applied by Courts in judicial review must be justified by constitutional principles which govern the proper exercise of public power in a democracy. Article 14 of the Constitution embodies the principle ofHowever, it is not aprovision. It has to be read in conjunction with rights conferred by other Articles like Article 21 of the Constitution. The said Article 21 refers toIt includesIn our view, as held in the latest judgment of the Constitution Bench ofin the case of I.R. Coelho (Dead) by Lrs. v. State of Tamil Nadu & Ors., I (2007) SLT 696=(2007) 2 SCC 1 , Article 21/14 is the heart of the chapter on fundamental rights. It covers various aspects of life.is an important concept while construing Article 19(1)(g) of the Constitution. It is this doctrine which is invoked by REL/HDEC in the present case. When Article 19(1)(g) confers fundamental right to carry on business to a company, it is entitled to invoke the said doctrine ofWe may clarify that this doctrine is, however, subject to public interest. In the world of globalization, competition is an important factor to be kept in mind. The doctrine ofis an important doctrine which is embodied in Article 19(1)(g) of the Constitution. This is because the said doctrine provides space within whichcompetitors are allowed to bid so as to subserve the larger public interest.in essence, is liberalization of trade. Today India has dismantledThe economic reforms introduced after 1992 have brought in the concept ofDecisions or acts which results in unequal and discriminatory treatment, would violate the doctrine ofembodied in Article 19(1)(g). Time has come, therefore, to say that Article 14 which refers to the principle ofshould not be read as a stand alone item but it should be read in conjunction with Article 21 which embodies several aspects of life. There is one more aspect which needs to be mentioned in the matter of implementation of the aforestated doctrine ofAccording to Lord Goldsmith — commitment tois the heart of parliamentary democracy. One of the important elements of theis legal certainty. Article 14 applies to Government policies and if the policy or act of the Government, even in contractual matters, fails to satisfy the test ofthen such an act or decision would be unconstitutional.is a matter of estimation. ASs are policy documents. Accounting interpretation depends on application of several ASs simultaneously. The concept ofis not restricted only to AS 26. Similarly, the concept ofis not restricted to AS 3. Therefore, different methods are prescribed for estimating net profits and/or net cash profits. There are no two views on this point. Provisioning for doubtful debts cannot be equated toIn the case of provisioning there is no. This proposition is undisputed. What is being argued is that once there isdoes not get routed through the P&L account and, therefore, there will be cash impact in future. This argument amounts to begging the question. If this argument is to be accepted then we are obliterating the difference betweenThe question ofin future is a separate question. It has to be answered in terms ofwhich falls in AS 3 which has been invoked by the chartered accountants of REL/HDEC.Applying the tests laid down in the aforesaid two judgments [Jwala Prasad (supra) and Metal Box (supra)] it is clear that the concept ofis different from the concept ofThe effect of the two is quite different. Provisions made against anticipated losses are charges against profits and, therefore, to be taken into account against gross receipts in the P&L account and there usually shown in theby way of deduction from the assets whereasare shown as part of the interest of the proprietor. In the present case, there is no dispute regarding the aforestated concepts. However, according to the consultants for MSRDC though provision for doubtful debt is aexpense it has to be treated as a cash expense because once a provisionhas been made, thecannot be routed through P&L account and, therefore, what is conceptually aexpense is being treated as a cash expense. As stated above, this is begging the question. If the aforestated argument is to be accepted it would obliterate the conceptual difference betweenThe above reasoning shows that the only reason for excluding REL/HDEC is the future cash impact of the provision made in the accounts of HDEC for the FY 2001. This aspect has been discussed by us in the following paragraphs.32.On the second question of future cash impact it may be reiterated that KPMG, the chartered accountants for REL/HDEC has invoked the principle ofwhich also finds place in AS 3.According to the said principle ofwhen P&L accounts andare prepared on accrual basis, revenues and expenses are recognized on accrual basis, i.e., when the transaction or event occurs. However, timing of cash flow is not reckoned in such system of accounting. Similarly, in cases where accounts are based on accrual system of accounting, recognition of assets and liabilities is not dependent on the actual timing of cash spent on capital expenditure and cash inflow on account of capital receipt. Thus the financial statements prepared on accrual basis do not reflect the timing of the cash flow and amount of cash flow. The object of the cash flow statement is to assess theability to generate the cash flow in future and to assess reasons for difference betweent cashing cashcan be derived by eitherin which cash items of cash inflow are listed like cash received from customers, payment of interest etc. asws like payment to supplier, payment for taxes etc. or bych is also known asin which theis derived by adding to the net profititems like provision for taxes, provision for doubtful debts, loss on sale of fixed assets and investments, depreciation, amortization of intangibles etc. because these items do not. Similarly, profit on the sale of fixed assets and investments are deducted from the net income figure as these items also do not. Similarly, adjustments in respect of current assets and liabilities are also required to make to net income (loss) figure to arrives. Both the methods give the same results in respect of the finalof the major items of information in the cash flow statement is theow provided by (or used in) operating activities. In fact it is the regular source of cash in any enterprise that determines whether or not an enterprise will continue to exist in the long run. The logic for determining theflow from operating activities is to understand why net profit (loss) as reported in the profit and loss account must be converted. As we know that financial statements are generally prepared on accrual basis of accounting which requires that revenues be recorded when earned and the expenses be recorded when incurred. Earned revenues more often include credit sales that have not been collected in cash and expenses incurred that may not have been paid in cash during the accounting period. Thus under accrual basis of accounting net income will not indicate thecash provided byoperating activities or net loss will not indicate theed in operating activities. In order to calculate thecash provided by(or used in) operating activities, it is necessary to replace revenues and expenses on accrual basis with actual receipts and actual payments in cash. This is done by eliminating theash expenses from the given earned revenues and incurred expenses in the profit and loss account. In addition to regularash expense items, the profit and loss account is also debited and credited with purelyitems which reduce and increase the profits respectively but do not affect the cash at all e.g. depreciation, loss (or profit) on the sale of fixed assets, amortization of intangible assets like goodwill, patents trademarks etc. deferred revenue expenditures like preliminary expenses, discount on the issue of shares and debentures and so on. Sincecash provided byoperations is to be calculated, certainitems like rent income, interest income, dividend income, refund of tax etc. should also be adjusted although these items may have been recorded on cash basis. Such items are analysed separately in the cash flow statement as operating, investing and investing activities.Taking into account the above principles, it is clear that there are two methods ofi.e. direct and indirect. Both give identical results in the matter of the final total. They differ only in presentation of the data. They differ only in presentation of the data contained in the cash flows from operational activities. No reason has been given by the Consultants of MSRDC for rejecting the indirect method invoked by KPMG, Chartered Accountants of REL/HDEC in their letter dated 12.8.2005. The said method is known as. In this case, as stated above, the only reason given by the Consultants of MSRDC to exclude REL/HDEC was the negative impact on the future cash flows on account of the provisioning for doubtful debts in the accounts of HDEC for the FY 2001. If future cash impact was the basis to exclude REL/HDEC, then the Consultants for MSRDC should have considered cash flow reporting methods, which includes Reconciliation Method. There is no question of difference of opinion or different views as far as the application of cash flow reporting, which also falls in AS 3. There is nothing to show whether indirect method has at all been considered by Crisil, particularly when KPMG had invoked that method. There is no reason given for rejecting it. Lastly, in the PQ document, the referral years were three years. The criteria was that there should be NCP of not less than Rs.200 crores. However, the opinion of the Consultants proceeds on the basis that ifis allowed it may have future cash impact. In the evaluation process, the Consultants were entitled to take into account future cash impact but in order to do so they had to say why the indirect method ofshould not be accepted and if at all the impact of the provisioning was to be seen then there was no reason for not examining the audited accounts of 2004. There is aof two concepts here. The concept ofof financial criteria and the impact in future years on cash flow. As stated above, the very purpose ofis to find out the ability of HDEC to generate cash flow in future and if an important method of cash flow reporting is kept out, without any reason, then the decision to exclude REL/HDEC, is arbitrary, whimsical and unreasonable. In our view, forof the Reconciliation Method, under cash flow reporting system, the impugnedprocess stood vitiated.