Energy Limited & Another Vs. Maharashtra State Road Development Corporation
Ltd. & Othe  Insc 910 (11 September 2007)
Arijit Pasayat & S. H. Kapadia
APPEAL NO.3526 OF 2007 KAPADIA, J.
State of Maharashtra through Maharashtra State Road
Development Corporation Ltd. (for short, "MSRDC") floated Global
Tender for completing Mumbai Trans Harbour Link ("MTHL") between
Mumbai and Navi Mumbai on BOT basis.
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.
Hyundai Engineering and Construction Company Ltd. (for short, "HDEC")
is a company incorporated in Korea. It is
specialized in construction of bridges.
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.
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 & 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.
this stage, we may quote the relevant provisions of the PQ Document which read
5.1 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
5.3.7 of the PQ document inter alia, provides:
change in, or supplementary information to an application shall be accepted
after its submission.
MSRDC reserves a right to seek additional information from the applicants, if
found necessary during the course of evaluation of the applicants.
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 below In 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.
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.
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.
To be satisfied by Amount Net worth (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) AND Criteria To be
satisfied by Amount Net cash profit (simple average of the audited financial
figures over the last 3 financial years of 2 calendar months each, with the
latest not earlier than the FY ended December 31, 2002, will be considered for
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) 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.
Basis of Evaluation The information to be provided by the Applicant must be in
conformation with the following:
information provided by the applicant should be based on the latest available
audited accounting statements.
latest audited accounting statements should not be dated earlier than 31st December, 2002.
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.
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 "
supplied) 6. Briefly the criteria and conditions were as follows:
In a consortium, the entity declared as "lead member" was required to
hold the minimum of 26 per cent of paid-up and subscribed equity capital in the
project company until completion of construction.
The aggregate of net cash profit and net worth of the consortium was to be
considered for evaluation of financial criteria of the consortium.
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.
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.
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
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.
For the sake of convenience we quote the definition of NCP given in the PQ
document which reads as follows:
= PAT (profit after tax) + depreciation + amortization, not in the form of cash
Therefore, 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.
exercised their option by submitting the financial statements of HDEC for three
years, namely, 2001, 2002 and 2003.
HDEC had undertaken construction contracts in Iraq.
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 as under:
Floor, Star Tower, Tel +82 (2) 21120100 737 Yeoksam-dong, Fax +82(2) 21120101 Gangnam-gu,
Seoul 135-984 www.kr.kpmg.com Republic of Korea The Board of Directors and
Management Hyundai Engineering & Construction Co.,Ltd. 140-2 Kye-dong, Chongro-gu
Seoul, 110-793, Korea August 12, 2005 Dear Sir, We have performed the
procedures described below, which were agreed by Hyundai Engineering &
Construction Co., Ltd. (the 'Company'). The 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
procedures that we performed are as follows:
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.
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).
found no exceptions as a result of the above agreed-upon procedures.
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.
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
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.
truly yours Sd/- 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.
Dec 31st, 2001 Dec 31st, 2002 Dec 31st, 2003 Dec 31st, 2004 (1) Net Income
(610,507) 15,963 65,546 164,248 (2) Expenses not in form of a cash transaction
686,310 200,753 199,084 285,039 - Provision for retirement and severance
benefit 27,009 39,173 32,706 39,541 - Depreciation 49,475 36,221 31,279 27,699
- Stock compensation expense - 89 107 30 - Bad debt expense 183,192 7,357 8,480
- - Other bad debts expense 199,186 - 39,147 171,080 - Interest expense 48,803
23,899 20,683 18,723 - Loss on valuation of foreign currence 107 1,986 3 699 -
Loss on disposal of trade note and accounts receivables 2,770 17,772 10,844 - -
Loss on valuation of inventories 39,762 20,485 5,364 20,308 - Loss on disposal
of Investment securities 42 - 309 43 - Loss on investment securities impairment
61,104 29,900 12,845 2,348 - Loss on disposal of investment in affiliates using
equity method - - 1,286 - - Loss on disposal of investment assets 9,120 1,248 -
- - Loss on valuation of investment in affiliates using equity method (*) 5,805
- - - - Loss on disposal of property, plant and equipment (*) 7,888 4,121 3,933
1,591 - Loss on impairment of property, plant and equipment - - 29,584 2,977 -
Miscellaneous losses (including other extraordinary loss) - 13,802 2,513 - -
Loss on prior year adjustment 42,047 4,700 - - (3) Income not in form of a cash
transaction 337,982 76,284 44,486 55,723 - Interest income 64 2,860 2,117 705 -
Gain on valuation of foreign currency - 105 7 1,891 - Gain on disposal of
investment assets 2,378 4,349 172 - - Gain on disposal of property, plant and
equipment (*) 27,846 47,589 5,740 7,982 - Gain on disposal of investment
securities 498 - - - - Reversal of loss on investment securities impairment
1,879 - 1,167 2,386 - Gain on valuation of investment in affiliates using
equity method (*) - 2,722 4,941 4,771 - Gain on Debt exemption (*) 305,317
6,987 30,342 18,164 - 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
income not in form of cash transaction [(1) + (2) (3) ] (262,179) 140,432
220,143 393,564 (*) 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$. The corresponding rates are as follows:
31, 2001 Dec 31, 2002 Dec 31, 2003 Dec
31, 2004 W 1,326.1 to
US$ 1 W 1,200.4 to US$ 1 W 1,197.8 to US$ 1 W 1,043.8 to US$ 1"
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.
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 incurred
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
said "non- cash expenses" ought 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.
The aforestated contention advanced by the Consortium was rejected by M/s. Jean
Muller Consultant of MSRDC in following words:
case of 'Provision' for bad debts even though they are just 'Provision' but not
a 'write-off', the same is treated as cash expense because once a 'Provision'
has been made, the 'write-off' does not get routed through the profit and loss
the 'Provision' for bad debt relates to a revenue item that has already been
treated as cash inflow on accrual basis."
view of the position taken by MSRDC's Consultants, REL/HDEC stood excluded from
the second stage of the bidding process.
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.
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
"non-cash expenditure". 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.
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.
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.
22.8.2005, a committee by the name "Peer Committee" was 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 by MSRDC's Consultants 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.
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.
by letter dated 7.11.2006, MSRDC informed REL/HDEC that they stood disqualified
as they had failed to meet the qualification criteria.
the circumstances, REL/HDEC moved the Bombay High Court vide 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;
the accounts of HDEC indicated "net profits" for 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.
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 "non-cash expenses". 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 of "the provision for bad debts"
made by HDEC in its accounts for 2001 cannot be said to be arbitrary or
unreasonable. For the aforestated reasons, without going into the question whether
provision for bad debts is or is not a "non-cash expense" liable to
be added back to arrive at net cash profit, the High Court dismissed the writ
petition, hence this civil appeal.
Mr. K.K. Venugopal, learned senior counsel appearing on behalf of REL/HDEC
(Consortium), submitted that the decision-making process stood vitiated for the
reason that the report of the Peer Committee, which disagreed with the
Consultants of MSRDC, was not referred to an independent firm of chartered
accountants. That, Crisil was rating agency and not chartered accountants. He
submitted, in this connection, that it was obvious to MSRDC that Crisil had
already taken a position in its first report that REL/HDEC were disqualified
and, therefore, fairness and transparency which are important aspects of
Article 14 of the Constitution required MSRDC to have placed both the reports
of Crisil and the Peer Committee, before any independent firm of chartered
accountants. Learned counsel submitted that by not doing so the decision-making
process itself stood vitiated. In any event, learned counsel urged that Crisil
was wrong if one looks at the audited balance sheet of HDEC for the accounting
year ending 31.12.2004. Learned counsel urged that even according to Crisil the
provisioning for bad debts was "non-cash expense", however, according
to Crisil, such provisioning could have a cash impact in future years. Learned
counsel submitted that the conclusion of Crisil, namely, that such provisioning
could have a cash impact in future years was unjustified if one takes into
account the audited balance sheet for the year ending 31.12.2004. Therefore,
according to the learned counsel, the decision of Crisil was arbitrary, since,
its conclusion was not based on application of proper AS. Learned counsel
further submitted that when the entire basis of Crisil's report against HDEC
was on the issue of future cash impact, the decision to exclude the audited
accounts for the FY 2004, clearly vitiated the decision-making process. In the
alternative, learned counsel submitted that in any case where two views are
possible, the view holding that the person/party concerned should not be
disqualified, should be accepted as disqualification prevents the applicant
from participating in the bidding process, it affects its fundamental rights
under Article 19(1)(g) of the Constitution as also larger public interest
including State finances which ultimately makes MSRDC a loser.
Mr. S. Ganesh, learned senior counsel appearing on behalf of REL/HDEC,
submitted that provision for doubtful debts in the present case has not been
written-off till 31.12.2004; that by adding back provision for doubtful debts
made by HDEC in 2001, the Consortium had met the requirement of NCP for the
years 2001, 2002 and 2003; that the said provision was made only in the
accounts of 2001; that Iraq contract receivables had nothing to do with the
years 2001, 2002 and 2003 (reference years); that provision for doubtful debts
is only appropriation of profits and not a charge on profits and that in fact
regarded as "Reserve" for purpose of "sur-tax" and since it
is only appropriation the amount under it has to be added back to determine the
NCP in terms of the definition in the PQ document. Learned counsel further
urged that provision for doubtful debts ought to be included in the net profit;
that since NCP is always more than the net profit it is obvious that the said
provision for doubtful debt has to be included in the NCP. Learned counsel
further urged that there was no "write-off" during 2001, 2002 and
2003 and, therefore, during those years there was no cash impact on the cash
profit of REL/HDEC or on the net profit of the said Consortium.
Mr. Altaf Ahmed, learned senior counsel appearing on behalf of the MSRDC
submitted that REL/HDEC had failed to satisfy clause 7.2.2 of the PQ document
and, therefore, they were disqualified rightly. It was urged that the
evaluation of prequalification criteria was done by reputed international
consultants, namely, M/s. Jean Muller which in turn took opinion from Crisil.
The entire exercise was carried out by experts and according to the
recommendations of Crisil, duly accepted by the consultants, the impugned
decision was taken and, therefore, the High Court was right in refusing to
intervene under Article 226 to the Constitution. Learned counsel submitted that
the failure to satisfy the financial criteria laid down in clause 7.2.2 was the
decision of the consultants and not the decision of MSRDC which had merely
acted on the basis of evaluation done by the consultants and, therefore, it
cannot be said that the impugned decision taken by MSRDC was arbitrary or
unjustified. Learned counsel submitted that according to the opinion expressed
by the consultants, the financial position of HDEC for the year ending 31st December 2001 was poor and the provisioning made
by HDEC for the years 1999, 2000 and 2001 would have future cash impact. This
was the view of the experts which MSRDC accepted. That, the entire process was
transparent and every aspect was considered. There were detailed discussions
during the decision-making process. Queries were raised from time to time.
Explanations and clarifications were sought from time to time. Full opportunity
was given to the Consortium to put forth their case. In the circumstances,
learned counsel submitted it cannot be said that the decision- making process
was faulty, arbitrary, unjust or wrongful.
counsel next contended that the cut-off date was 10.1.2005. That cut-off date,
according to the learned counsel, was applicable in the case of all the six
it was not possible to look into the audited balance sheet for the year 2004
which was placed by the Consortium only in August 2005. In other words, learned
counsel submitted that the audited balance sheet for the year 31st December, 2004 could not have been taken into
account after the cut-off date. This was the view of the Consultants for MSRDC
and that view has been accepted by MSRDC.
Learned counsel submitted that Mumbai Trans Harbour Link (MTHL) Project is
based on BOT, therefore, global tenders were invited. It is an important
project which is required to be given to the bidder who qualifies and goes
successfully through both the stages of the bidding process; that REL had
entered into an agreement with HDEC; that it was a consortium; that the said
Consortium did not fulfill the financial criteria of Rs.200 crores (NCP); that
according to the annual accounts of HDEC there was a loss of US$ 610 million in
the year 2001; that in Form F-S submitted by the appellant's Consortium,
non-cash expenses for financial years ending December 31 - 2001, 2002 and 2003
in respect of HDEC were US$ 686 million, US$ 201 million and US$ 199 million
respectively which cannot be added back to net profit/loss. Learned counsel
further contended that according to the Consultants of MSRDC "adding
back" was not permissible and even if it is held to be permissible it is
not advisable as it would result in future cash impact on the net profits of
HDEC. Learned counsel submitted that provision for bad debts were examined by
the consultants and upon examination of bad debts expenses, the consultants
opined that the said expenses may not involve a direct cash outflow in the year
of incidence but they may have a cash impact at a future date and hence they
cannot be treated as non-cash expenses. Learned counsel submitted that there is
a difference between "cash expense" and "non-cash expense".
distinction lies in the answer to the question as to whether there is a cash
impact in the current year or future years and if it has cash impact at a
future date then it would constitute an item of cash expense, even though in
the year of incidence the item may be non-cash expense. Therefore, the impugned
decision, namely, that REL/HDEC did not satisfy the financial criteria under
clause 7.2.2, was right. Learned counsel lastly submitted that bad debt
expenses did not qualify as "amortization" and, therefore, such
provision cannot be added back to net profits of HDEC. Learned counsel lastly
submitted that in the present case that Consultants of MSRDC had rightly relied
on AS 26 under which the terms "amortization" and
"write-off" are interchangeable and, therefore, provisioning for
doubtful debts did not constitute "amortization" and, therefore, it
could not have been added back to the net profits, particularly when the
definition of NCP in the tender document defined NCP to mean "PAT +
depreciation + amortization, not in the form of cash transaction".
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 of "non-discrimination". However, it is not a free-
standing provision. It has to be read in conjunction with rights conferred by
other articles like Article 21 of the Constitution. The said Article 21 refers
to "right to life". In includes "opportunity". In our view,
as held in the latest judgment of the Constitution Bench of nine-Judges in the
case of I.R. Coelho vs. State of Tamil Nadu (2007) 2 SCC 1, Article 21/14 is
the heart of the chapter on fundamental rights. It covers various aspects of
life. "Level playing field" 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
of "level playing field". We 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 of "level playing
field" is an important doctrine which is embodied in Article 19(1)(g) of
the Constitution. This is because the said doctrine provides space within which
equally-placed competitors are allowed to bid so as to subserve the larger
public interest. "Globalization", in essence, is liberalization of
trade. Today India has dismantled licence-raj. The
economic reforms introduced after 1992 have brought in the concept of
"globalization". Decisions or acts which results in unequal and
discriminatory treatment, would violate the doctrine of "level playing
field" embodied in Article 19(1)(g). Time has come, therefore, to say that
Article 14 which refers to the principle of "equality" should 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 of
"level playing field". According to Lord Goldsmith - commitment to
"rule of law" is the heart of parliamentary democracy. One of the
important elements of the "rule of law" is 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 of
"reasonableness", then such an act or decision would be
the case of Union of India and another vs. International Trading Co. and
another - (2003) 5 SCC 437, the Division Bench of this Court speaking through Pasayat,
J. had held :
It is trite law that Article 14 of the Constitution applies also to matters of
governmental policy and if the policy or any action of the Government, even in
contractual matters, fails to satisfy the test of reasonableness, it would be
While the discretion to change the policy in exercise of the executive power,
when not trammelled by any statute or rule is wide enough, what is imperative
and implicit in terms of Article 14 is that a change in policy must be made
fairly and should not give impression that it was so done arbitrarily or by any
ulterior criteria. The wide sweep of Article 14 and the requirement of every
State action qualifying for its validity on this touchstone irrespective of the
field of activity of the State is an accepted tenet. The basic requirement of
Article 14 is fairness in action by the state, and non-arbitrariness in essence
and substance is the heart beat of fair play. Actions are amenable, in the
panorama of judicial review only to the extent that the State must act validly for
a discernible reasons, not whimsically for any ulterior purpose. The meaning
and true import and concept of arbitrariness is more easily visualized than
precisely defined. A question whether the impugned action is arbitrary or not
is to be ultimately answered on the facts and circumstances of a given case. A
basic and obvious test to apply in such cases is to see whether there is any
discernible principle emerging from the impugned action and if so, does it
really satisfy the test of reasonableness."
When tenders are invited, the terms and conditions must indicate with legal
certainty, norms and benchmarks. This "legal certainty" is an
important aspect of the rule of law. If there is vagueness or subjectivity in
the said norms it may result in unequal and discriminatory treatment. It may
violate doctrine of "level playing field".
the case of Reliance Airport Developers (P) Ltd. v. Airports Authority of India
and others -(2006) 10 SCC 1, the Division Bench of this Court has held that in
matters of judicial review the basic test is to see whether there is any
infirmity in the decision-making process and not in the decision itself. This
means that the decision-maker must understand correctly the law that regulates
his decision- making power and he must give effect to it otherwise it may
result in illegality. The principle of "judicial review" cannot be
denied even in contractual matters or matters in which the Government exercises
its contractual powers, but judicial review is intended to prevent
arbitrariness and it must be exercised in larger public interest. Expression of
different views and opinions in exercise of contractual powers may be there,
however, such difference of opinion must be based on specified norms. Those
norms may be legal norms or accounting norms. As long as the norms are clear
and properly understood by the decision-maker and the bidders and other
stakeholders, uncertainty and thereby breach of rule of law will not arise. The
grounds upon which administrative action is subjected to control by judicial
review are classifiable broadly under three heads, namely, illegality,
irrationality and procedural impropriety. In the said judgment it has been held
that all errors of law are jurisdictional errors.
the important principles laid down in the aforesaid judgment is that whenever a
norm/benchmark is prescribed in the tender process in order to provide
certainty that norm/standard should be clear. As stated above
"certainty" is an important aspect of rule of law. In the case of
Reliance Airport Developers (supra), the scoring system formed part of the
evaluation process. The object of that system was to provide identification of
factors, allocation of marks of each of the said factors and giving of marks
had different stages.
was thus provided.
One of the points which arise for determination in this case is whether the
criteria of objectivity stand satisfied in the present case. "Profit/net
income" and "cash" are concepts.
there is a difference. "Profit" is based on "value judgment"
whereas "cash" is "fact-specific". In the PQ document,
"net cash profit" has been defined to mean - "PAT + depreciation
+ amortization, not arising from cash transaction". The last five words
which have underlined are descriptive. They merely indicate the meaning of
"amortization". It is not in dispute that depreciation and
amortization are "non-cash expenses".
the present case, REL/HDEC claims adding back of the non-cash expenses of US$
686,310 million for the year 2001, of US$ 200,753 million for the year 2002 and
of US$ 199,084 million in the year 2003, to the net loss of US$ 610,507
million; net profit of US$ 15,963 million and US$ 65,545 million during the
years 2001, 2002 and 2003.
according to the Consultants of MSRDC, such "add back" was not
possible because even though provisions are not "write-offs" the
former should be treated as cash expense because once a provision is made, the
"write-off" does not get routed through the P&L account and that
in any event if such add back is allowed then it would result in "cash
impact" in future.
answer the first point we need to know what is "provision" and how it
"Provisioning" is a matter of estimation. ASs are policy documents.
Accounting interpretation depends on application of several ASs simultaneously.
The concept of "amortization" is not restricted only to AS 26.
Similarly, the concept of "cash flow analysis" is 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.
for doubtful debts cannot be equated to "write- off". In the case of
provisioning there is no "cash outflow".
proposition is undisputed. What is being argued is that once there is
"provisioning", the "write-off" does 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 between "provisioning" and
"write- offs". The question of "cash impact" in future is a
separate question. It has to be answered in terms of "cash flow
reporting" which falls in AS 3 which has been invoked by the chartered
accountants of REL/HDEC. In the case of Commissioner of Income-tax and Excess
Profits Tax, Central, Bombay v. Jwala Prasad Tiwari 1953 (24) ITR 537, the
Division Bench of the Bombay High Court speaking through Chagla, C.J. has held
Off' is a technical term used by financiers and auditors. There are two methods
of dealing with a debt which has been written off in the books of account, (1)
by giving the corresponding credit to the debtor's account, and (2) by giving
the corresponding credit to the bad and doubtful debts account. The first
method is only employed where it is desired to close the account of the debtor.
The second method is employed where there are some chances of recovery,
howsoever remote they may be.
we talk of 'writing off' we are not concerned with the credit to be given to an
off' means the raising of a debit entry. This can only be to the debit of the
profit and loss account. This is the only debit which can possibly be raised as
a result of writing off a bad debt."
the case of Metal Box Company of India Ltd. v. Their Workmen 1969 (73) ITR 53,
this Court has brought out succinctly difference between "provision"
and "reserve" as follows:
next question is whether the amount so provided is a provision or a reserve.
The distinction between a provision and a reserve is in commercial accountancy
fairly well known. Provisions made against anticipated losses and contingencies
are charges against profits and, therefore, to be taken into account against
gross receipts in the P. & L. account and the balance sheet. On the other
hand, reserves are appropriations of profits, the assets by which they are
represented being retained to form part of the capital employed in the
are usually shown in the balance-sheet by way of deductions from the assets in
respect of which they are made whereas general reserves and reserve funds are
shown as part of the proprietor's interest (see Spicer and Pegler's
Book-keeping and Accounts, 15th edition, page 42). An amount set aside out of
profits and other surpluses, not designed to meet a liability, contingency,
commitment or diminution in value of assets known to exist at the date of the
balance-sheet is a reserve but an amount set aside out of profits and other
surpluses to provide for any known liability of which the amount cannot be
determined with substantial accuracy is a provision: (see William Pickles
Accountancy, second edition, p. 192 ; Part III, clause 7, Schedule VI to the
Companies Act, 1956, which defines provision and reserve)."
Applying the tests laid down in the aforesaid two judgments [Jwala Prasad
(supra) and Metal Box (supra)] it is clear that the concept of "provision
for doubtful debts" is different from the concept of
"write-off". The 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 the
balance-sheet. "Provisions" are usually shown in the balance- sheet
by way of deduction from the assets whereas "reserves" are 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 a non-cash expense
it has to be treated as a cash expense because once a provision has been made,
the write-offs cannot be routed through P&L account and, therefore, what is
conceptually a non-cash expense 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 between
"provision" and "write-off". The 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.
the second question of future cash impact it may be reiterated that KPMG, the
chartered accountants for REL/HDEC has invoked the principle of "cash flow
also finds place in AS 3. According to the said principle of "cash flow
reporting", when P&L accounts and balance- sheets are 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 the company's
ability to generate the cash flow in future and to assess reasons for
difference between "net profit" and "net cash flow" from
"Operating cash profit" can be derived by either "Direct Method"
in which cash items of cash inflow are listed like cash received from
customers, payment of interest etc. as against cash outflows like payment to
supplier, payment for taxes etc.
"Indirect Method" which is also known as "Reconciliation Method"
in which the "operating cash profit" is derived by adding to the net
profit non-cash items 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 affect cash. Similarly, profit on
the sale of fixed assets and investments are deducted from the net income
figure as these items also do not affect cash. Similarly, adjustments in
respect of current assets and liabilities are also required to make to net
income (loss) figure to arrive at cash profits. Both the methods give the same
results in respect of the final total.
quote hereinbelow some of the illustrations of "Indirect Method"
which shows that provision for bad debts can be added back to "net
profit" in order to arrive at "net cash" from operating
"Advance Accounts" by Shukla, Grewal and Gupta, Vol.II, Edition 2008,
pages 23.20 - 23.21, which read as under:
Indirect Method: Zed Ltd.
Flow Statement for the year ended 31st March, 2001 Rs. Rs.
Flows from Operating Activities Net profit before income tax and extra-
ordinary item: Adjustments for:
Provision for bad debts Underwriting commission amortised Profit on sale of
investments Income from investments Interest on debentures Operating profit
before working capital changes Adjustments for:
in inventory Increase in trade debtors Increase in trade creditors Increase in
outstanding expenses Cash inflow from operations Income tax paid Cash flow from
recd. in lawsuit Net cash from operating activities Cash Flows from Investing
Activities Purchase of fixed assets Sale proceeds of investments Interest recd.
on investments* Net cash used in investing activities Cash Flows from Financing
Activities Redemption of debentures at par* Interest on debentures paid
Dividends and corporate dividend tax paid Net cash used in financing activities
Net increase in cash and cash equivalents Cash and cash equivalents as on 31st
March,2000 (Opening Balance) Cash and cash equivalents as on 31st
March,2001(Closing Balance) 7,77,000 1,80,000 1,000 1,200 (7,500) (21,000)
_____66,000 9,96,700 (93,800) (20,000) 19,200 ______5,600 9,07,700
___(4,16,000) 4,91,700 _____55,000 (2,00,000) 1,57,500 _____21,000 (1,00,000)
(66,000) ___(3,30,000) 5,46,700 (21,500) ____(4,96,000) 29,200 _____1,64,200
_____1,93,400 *Alternatively, interest received on investments and interest
paid on debentures may be treated as flows from operating activities.
Net profit before income-tax and extraordinary item: Rs.
profit before income tax 8,32,000 Less: Compensation received in lawsuit 55,000
7,77,000 Working notes (iii), (iv) and (v) as prepared under the direct method
are also relevant under the indirect method."
supplied) (2) "Fundamentals of Corporate Accounting" by J.R. Monga,
11 Edition 2005-06, pages 12.15, 12.16, 12.17, 12.20, which read as under:
CASH FLOWS FROM PERATING ACTIVITIES [CASH PROVIDED BY (OR USED IN) OPERATING
the major items of information in the cash flow statement is the net cash flow
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 the net cash flow
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 the net cash provided by operating activities or net loss
will not indicate the net cash used in operating activities. In order to
calculate the net cash 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.
is done by eliminating the non-cash revenues and non-cash expenses from the
given earned revenues and incurred expenses in the profit and loss account. In
addition to regular non-cash revenue and non-cash expense items, the profit and
loss account is also debited and credited with purely non-cash items which
reduce and increase the profits respectively but do not affect the cash at al
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. Since cash provided by operations is to be calculated,
certain non-operating items like rent income, interest income, dividend income,
refund of tax etc.
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.
term 'operating activities' means business transactions pertaining to regular
business activities, e.g., purchase and sale of goods and services.
VS. INDIRECT METHOD
are two method of preparing the Cash Flow Statement. Both methods give the
identical or same results in respect of the final total as well as the
sub-totals of the three sections operating, investing and the financing. They
differ only in the manner the data or information is presented in Cash Flows
from Operating Activities section.
direct method lists separately each significant cash inflows and outflows from
operating activities, e.g., Cash inflows :
Cash received from customers
Receipts of interest payments
Receipts of cash dividends on investment in the shares of other companies Cash outflows
Payments to suppliers for goods purchased
Payments for operating expenses
Payments for interest
outflows (payments) are subtracted forms the inflows (receipts) to determine
the net cash provided (or used) by operating activities."
The indirect method provides less information because it does not disclose the
individual cash inflows and cash outflows from the operating activities.
Instead under this method we start with net profit (or loss) and adjusts this
figure to obtain net cash flows from operating activities. The indirect method
is also known as 'Reconciliation Method' because it involves reconciliation
between net profit (or loss) as given in the profit and loss account and the
net cash flow from operating activities as calculated on the cash flow
VS. INDIRECT METHODS
Method Cash Flows from operating Activities
Cash receipts from customers.
Cash paid to suppliers and employees.
Cash generated from operations.
Interest and tax.
Cash before extraordinary items.
for extraordinary items to get:
Net cash from operations.
Net cash from (used on) investing activities.
Net cash from (used on) financing activities.
Net increase (decrease) in cash and cash equivalents (1+2+3) Opening balance of
cash and cash equivalents.
balance of cash and cash equivalents.
Method Net Profit as per Profit and Loss Account Adjusted for:
for tax Provision for doubtful debts.
(Loss) on sale of fixed assets.
Profit (loss) on sale of investments.
rate effect Dividend income.
salary provision (earlier year) Operating profit before working capital change.
and other receivable.
and other current assets.
payables and other current liabilities.
generated from operations.
tax paid (Net of refunds) The above provides:
flow before extraordinary items.
for extraordinary items to get.
cash from operating Activities.
are two stages for achieving the net cash flows from operating activities:
Calculation of operating (cash) profit before working capital changes, by adding
to net profit as reported in the profit and loss account, non-cash charges:
depreciation, amortization of intangible assets, loss on the sale of fixed
assets and long term investments, provision for tax and dividends and the like
because these items do not affect cash. Similarly profit on the sale of fixed
assets and long term investments are deducted from the net income figure as
these items also do not affect cash. In fact, it is a partial conversion of
accrual basis profit to cash basis profit. Such adjustments are made by
analyzing individual non cash items in journal to find out the absence of cash
in these items. Moreover, non-operating items (also known as extraordinary
items) like rental income, interest income, dividend income are deducted from
the reported net income figure because these items are disclosed separately on
the cash flow statement. The net result of these adjustments is operating
(cash) profit before working capital changes.
of the significant non-cash items are explained in the following paragraphs
followed by adjustment of current operating assets and liabilities. (See Stage
This item of expense reduces the profit since it is a charge made against
revenue for the use of tangible fixed assets. The likely journal entry to
record the depreciation expense is:
(i) Depreciation Account Dr.
Provision for Depreciation Account (or Accumulated Depreciation) Alternatively Depreciation Account Dr.
Fixed Asset Account In either case the depreciation account would be closed be
transfer to Profit and Loss Account. The net affect would be:
Profit and Loss Account Dr.
Provision for Depreciation Account Or Profit and Loss Account Dr.
Fixed Asset Account It is clear that cash is not affected in the above journal
entries. The depreciation does not require any expenditure in cash. Thus, the
amount of depreciation charge must be added to be reported net income in order
to arrive at the total increase in cash provided from the operations.
of intangibles-goodwill, patents, etc.: The amortization of (i.e., writing off)
goodwill, trade marks, patents copyrights, etc., has the same effect as the
depreciation expense. The amount of amortization reduces the profit but does
not involve any flow of cash as is evident from the following entry:
and Loss Account Dr.
Goodwill etc. Account There is no change in cash. Thus amount of intangibles so
written off must also be added back to the reported net profit (income)."
: Adjustments in respect of current assets and current liabilities : The
adjustments made in the net profit (income) figure as per profit and loss
account as outlined in Stage-I above, gives As Operating Profit before Working
Capital Changes. Several other adjustments are made in respect of current
(Operating) assets (e.g., debtors, bills receivable, inventories, prepayments
etc.) and current (Operating) liabilities (e.g., creditors bills payable,
outstanding liabilities etc.) to obtain the final net cash from operating
activities. There is an intimate relationship between the revenue and expense
items of income statement and current assets and current liabilities items of
the balance sheet. Since the income statement is prepared on the accrual basis,
the resultant net income figure is affected by cash and non-cash items. But the
net income on a cash basis considers only cash receipts as revenue and
subtracts from cash receipts only cash spent for purchase of goods or raw
materials) and expenses.
following general rules, as an aid to analysis of current assets and current
liabilities affecting cash, may be noted :
increase in an item of current asset causes a decrease in cash inflow because
cash is blocked in current assets.
decrease in an item of current asset causes an increase in cash inflow because
cash is released from the sale or recovery from current asset.
An increase in an item of current liability causes a decrease in cash outflow
because cash is saved.
decrease in an item of current liability causes increases in cash outflow
because of payment of liability.
of the adjustments are discussed below :
Debtors and Bills Receivable (Credit Sales) : It needs no explanation that the
major source of cash from operations is cash sales. But it is not uncommon to
find a significant amount of credit sales in the form of debtors and bills
receivable representing current assets. This indicates that the sales were made
both for cash and credit. Consequently the net income (or profit) figure does
not disclose the cash from operations. The following adjustment, however,
enables to overcome this difficulty :
from Operations = Operating Profit before Working Capital Changes + Net
Decrease in Debtors and Bills Receivable."
Taking into account the above principles, it is clear that there are two
methods of "cash flow reporting" i.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 "reconciliation method". 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 if "add
back" is 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 of "cash
flow reporting" should 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 a mix- up of two concepts here. The concept
of non-compliance of financial criteria and the impact in future years on cash
stated above, the very purpose of "cash flow reporting" is 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, for non- consideration of the Reconciliation Method, under cash flow
reporting system, the impugned decision-making process stood vitiated.
the result, we set aside the impugned judgment of the High Court; we hold that
REL/HDEC (Consortium) was erroneously excluded from the second stage of bidding
process. Accordingly, we allow this civil appeal with no order as to costs.
Since we have allowed this civil appeal, we extend the period for presenting
financial bids by REL/HDEC up to 15.12.2007.