REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 8257 OF 2019 (ARISING OUT OF SLP (CIVIL) NO. 25746 OF 2018)

INDIAN OIL CORPORATION LTD. & ORS. .....APPELLANT(S)

VERSUS

M/S. R.M. SERVICE CENTRE & ANR. .....RESPONDENT(S)

J U D G M E N T

HEMANT GUPTA, J.

1) The challenge in the present appeal is to an order of the Division

Bench of  the  Gauhati  High  Court  passed  in  writ  appeal  on  20th

February,  2018 maintaining an order of  the Single Bench of the

High Court whereby termination of dealership of respondent No. 11

for  violation  of  Marketing  Discipline  Guidelines,  20122 was  set

aside.  

2) The dealer was granted retail  dealership for sale of motor spirit

(petrol),  High Speed Diesel,  motor  oil  and  grease as  a  physical

1  for short, ‘dealer’ 2  for short, ‘Guidelines’

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disabled  person  on  a  depot  located  at  Ghograpar,  National

Highway -31 in the District of Nalbari, Assam.  The sale and supply

from  the  retail  outlet  of  the  dealer  was  suspended  by  the

appellants on         6th May, 2013 when it was found, on the joint

inspection,  variation  of  stock  of  High  Speed  Diesel  beyond

permissible limit; density of Tank No. 2 was not available and that

tanker truck retention of the corresponding tank was not available

at the time of inspection.  The appellant had drawn three samples

from Tank No. 2.  One sample was sent for testing, another sample

was retained by the Field Survey Officer and the third sample was

handed over to the dealer.  A show cause notice was issued to the

dealer  on 6th May,  2013,  alleging violation of  Clauses 5.1.9 and

5.1.11 of the Guidelines.  The dealer submitted his explanation on

21st May,  2013,  inter  alia,  stating  that  dispensing  unit  was  not

working properly and, therefore, wrong readings were shown.  

3) The  dealer  was  informed on 27th June,  2013 that  test  report  of

High-Speed Diesel samples drawn from the tank on 6th May, 2013

had been received.  The report was that the samples failed to meet

the specifications.  Thereafter, in response to a show cause notice

dated 27th June, 2013 to explain the non-conformities detected, the

dealer vide letter dated 17th July, 2013 requested to seek retesting

of the umpire sample which was drawn on the same day, sealed,

and certified by the appellants.  The stand of the dealer was that

the  dispensing  unit  was  20  years  old  and  due  to  lack  of

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maintenance on account of the road-widening project, the totalizer

had been showing wrong readings.   

4) The request of the dealer for retest was accepted on 6th August,

2013.   The  retest  was  carried  out  in  the  Laboratory  of  the

appellants on two sets of samples including the one retained by the

Field Survey Officer of the appellants.  The report of the aforesaid

two sets of samples was issued on 19th August, 2013.  The report of

the  sample  which  was  retained  by  Field  Survey  Officer  of  the

appellants  was  that  it  did  not  meet  the  BIS  III  specifications

whereas, the sample of the dealer was not fit for testing due to

presence of sludge.   

5) On the basis  of  the test  reports  dated 29th May,  2013 and 19th

August, 2013, the dealership was terminated on 25th April,  2014

after  serving  another  show  cause  notice  dated  10th December,

2013  wherein,  it  has  been  stated  that  deviation  was  observed

during inspection pertaining to stock variation and non-availability

of reference density.   The appellants have mentioned details of

non-conformity  and the  violation  of  the  Clauses  in  the  letter  of

termination dated 25th April, 2014, which read as under:

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SN NON CONFORMITY VIOLATION OF CLAUSE REF NO MDG 2012

1. Stock  Variation  (Positive)  of HSD beyond permissible

Clause No. 5.1.11

2. Non-availability  of  reference density (Tank-2) at the time of inspection.

Clause No. 5.1.9

6) It was also pointed out that out of three samples drawn from Tank

No. 2 on 6th May, 2013, one sample was sent to the Laboratory,

another  was  retained  by  the  Field  Survey  Officer  and  the  third

sample was handed over to the dealer.   The result  of  the three

samples is as under:

SN Test  report number

Test  report date

Status Details of sample

1. NERL/MDG/HS- 62/2013

29.05.2013 Does  not meet specificatio n

Nozzle  sample collected  on 06.05.2013  and sent  to  Betkuchi for testing

2. NERL/MDG/HS- 77/2013

19.08.2013 Does  not meet specification

Nozzle  sample collected  on 06.05.2013  and retained with Field Officer  till subsequent  test on 19.08.2013.

3. NERL/MDG/HS- 77/2013

19.08.2013 Test  not conducted

Nozzle  sample collected  on 06.05.2013  and retained with you till  19.08.2013 could  not  be tested  due  to presence  of sludge.

7) In view of the above, the following violations were detected and the

penal action was taken:

“In  view  of  the  above  the  cumulative  MDG  violations detected  and  established  in  the  Retail  Outlet  are  as follows:

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a.  Stock variation beyond permissible limit (Violation of MDG-2012 Clause no. 5.1.11)

b.  Nozzle Sample failure of HSD. (Violation of MDG 2012 Clause no. 5.1.1)

c.  Non availability of reference density (Violation of MDG- 2012 Clause no. 5.1.9)

d.   Non availability  of  TT retention sample (Violation  of MDG-2012 Chapter 5 notes-i)

The penal action for the irregularity mentioned in point no (a) & (b) is termination in the first instance as per Clause no 8.2 of MDG-2012.  The penal action for the irregularity mentioned in point no (c) & (d) is Warning cum Guidance letter in the first instance as per Clause no 8.4 of MDG- 2012.

The above stated irregularities are also in violation of the provisions made under clause no. 27 and clause no. 40 of the dealership agreement executed by and between you and the corporation on 20.12.1995.”

8) The dealer challenged the termination of the dealership before the

Gauhati  High  Court.   The learned  Single  Judge allowed the  writ

petition on 13th October, 2015 holding that as per the Guidelines,

the  samples  were  required  to  reach  the  Laboratory  preferably

within ten days whereas, the first sample was tested on 29th May,

2013 that is after ten days and the umpire sample given to the

dealer was tested on 19th August, 2013.  It was held that there is

non-compliance of the time line fixed.  The learned Single Judge

held as under:

“27.  Turning to the provisions under Clause 2.4.4 Notes (2),  Clause  2.5  and  Clause  2.10  of  the  Guidelines,  the time-limits  prescribed  for  sending  the  samples  to  the laboratory from the date of collection as well as the time

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within which the sample should be tested from the date when  it  reached  the  laboratory,  are  provisions  that requires strict adherence. If a contrary view is adopted to allow the respondent Corporation to take as much time at its discretion for sending the sample to the laboratory and thereafter to get it tested, the said provisions prescribing time-limits would be rendered otiose and redundant. On that  account,  the  time-limits  ought  not  to  have  been prescribed/mentioned in the said Clauses in the first place. Surely, this cannot be the intention of IOCL being full well aware  that  time  gap  between  the  sample  taken  and laboratory  test  is  essentially  to  be maintained so  as to avert any variations in the density test of the sample so collected.  The  argument  of  Mr.  MK  Choudhury  that  the word “preferably” occurring in the said clauses cannot be construed  as  “mandatory”,  this  Court  rejects  the  said contention and holds that the adherence of the time-limits prescribed under the Guidelines is directly proportionate to the ultimate decision that would be reached. The time- limits  and adherence thereof  is  a  contractual  obligation that has to be discharged by the Oil Corporation in letter and spirit.”

9) The learned Single Judge also found that the stock variation is not a

critical  irregularity  within  the  meaning  of  Clause  8.2  of  the

Guidelines and cannot entail termination of dealership.  

10) The Division Bench of the High Court, in appeal, agreed with the

finding recorded by the learned Single  Bench.   The Court  relied

upon  judgments  of  this  Court  in  Hindustan  Petroleum

Corporation  Limited  &  Ors.  v.  Super  Highway  Services  &

Anr.3  and  Bharat  Petroleum  Corporation  Limited  v.

Jagannath And Company & Ors.4.  It was held by the Division

Bench of the High Court that the finding recorded by the learned

Single  Judge  is  a  plausible  finding,  therefore,  does  not  warrant

3  (2010) 3 SCC 321 4  (2013) 12 SCC 278

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interference in an intra-court appeal.

11) Learned  counsel  for  the  appellants  argued  that  the  findings

recorded  by  the  High  Court  that  the  Guidelines  require  strict

adherence is  a total  misreading of  the Guidelines.   For  such an

argument,  reference  is  made  to  Note  2  of  Clause  2.4.4;  Sub-

Clauses  A  and  I  of  Clause  2.5;  Clause  8.2  classifying  critical

irregularities; Clause 8.3 classifying major irregularities as well as

Clause  5.1.1  of  what  is  meant  by  the  adulteration  and  Clause

5.1.11 providing for  consequences of  stock  variation  to  contend

that in the event of failure of sample in the cases of positive stock

variation  beyond  permissible  limit,  action  in  line  with  that  of

adulteration is to be initiated.  Thus, apart from the adulteration,

even the stock variation in the event of failure of sample leads to

critical  irregularity.   It  is  contended that the High Court erred in

allowing the writ petition and setting aside the termination of the

dealership.   The  relevant  Clauses  from  the  Guidelines  read  as

under:

“1.5  Observance of statutory and other regulations

(i)  All  statutory rules and regulations in connection with storage and sale of petroleum products must be followed and  implemented,  such  as  maintaining  stock/sales  & density records, display of daily stock, price board etc.

xx xx xx

(v)  The provisions contained in the Motor Spirit and High Speed  Diesel  (Prevention  of  Malpractices  in  Supply  & Distribution) Order issued by the Government of India (or any  amendment  or  revision  thereof)  and  instructions

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issued  by  the  Oil  Company/State  Govt.  authorities  etc. from  time  to  time  shall  be  strictly  adhered  to  and  all concerned records shall  be maintained and produced to Inspecting officials on demand.

2.4.4  Drawal of samples by mobile laboratories

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Notes:

(1) xx xx xx

(2)  All the above samples should reach the laboratories for testing preferably within 10 days of the collection of the samples.

xx xx xx

2.5  General procedure for drawal of samples

(A)  All samples should preferably be suitably coded before sending  to  lab  for  testing  preferably  within  10  days  of drawal.

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(I)   The  purpose  of  mentioning  time  frame  for  various activities e.g. sending samples to lab preferably within 10 days etc. is to streamline the system and is no way related to quality/result of the product.

xx xx xx

5.1  MS/HSD

5.1.1.  Adulteration of product

Definition: “Adulteration”  means  the  introduction  of  any  foreign substance into Motor Spirit/High Speed Diesel illegally or unauthorizedly with the result that the product does not conform  to  the  requirements  of  Bureau  of  Indian Standards specification  number IS:2796 and IS:1460 for Motor  Spirit  and  High  Speed  Diesel  respectively  and amendments thereon, and/or

If the observations on the sample under scrutiny and the

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reference  sample  do  not  fall  within reproducibility/permissible  limits  of  the  test  method  for which the samples are examined, and/or

Any  other  requirement  for  the  purpose  to  identify adulteration, issued by the Competent Authority from time to time.

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5.1.11   Stock  variation  of  MS/HSD  (Beyond  permissible limits) Fuel

Stock reconciliation should be carried out and variation, if any,  established  after  taking  into  account  the  normal operational  variation  of  4%  of  tank  stock  and  after considering the following factors:

xx xx xx

In  case  of  positive  stock  variation  beyond  permissible limits,  samples will  be drawn and sent to laboratory for testing.    Sales  and  supplies  of  all  products  to  be suspended  immediately.   Study  to  be  carried  out  to identify  the  reasons  for  stock  variation.   If  the  sample passes  but  some  other  irregularity  like  unauthorized purchase etc. is established action to be taken accordingly. However,  if  the sample fails,  action in  line with  that  of adulteration will be initiated.

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8.  Action  to  be  taken  by  OMC  under  the  Marketing Discipline Guidelines

8.1   All  irregularities  (mentioned  in  chapter-5)  are classified  into  three  categories,  i.e.  Critical,  Major  and Minor.

8.2  Critical Irregularities: The following irregularities are classified as critical irregularities:

i.  Adulteration of MS/HSD (5.1.1)

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Action:

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Termination at the First instance will be imposed for the above irregularities.

8.3   Major  Irregularities:  The  following  irregularities  are classified as major irregularities:

i. xx xx xx

ii.   Non  availability  of  reference  density  at  the  time  of inspection. (5.1.9)

iii. xx xx xx

iv.  Stock variation beyond permissible limits but sample passing quality tests. (5.1.11)

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Action: Except in case of (iii), (vii), (viii), (ix) and (x) above:

First instance: Suspension of sales and supplies for 15 days.

Second instance: Suspension of sales and supplies for 30 days.

Third instance: Termination of the dealership.

xx xx xx

8.5.1  The above are general guidelines and the actions prescribed in MDG 2012 are minimum.  The competent Authority of the concerned Oil Company can however take appropriate  higher  action  against  the  erring  dealer,  if deemed necessary including termination in the first or any instance in line with the provisions of the Agreement.”

12) On the other hand, Mr.  Goswami,  learned counsel for the dealer

argued that if three samples were drawn at the same time, it is not

believable that the sample with the dealer alone has been found to

be containing sludge.  If the samples were taken at the same time,

finding of sludge from the umpire sample completely knocks down

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the stand of the appellants that the samples have failed in the test,

as the authenticity of the samples taking process is doubtful.  It is

further contended that in terms of Clause 1.5 (v) of the Guidelines,

the Motor Spirit and High Speed Diesel (Prevention of Malpractices

in Supply & Distribution) Order, 20055 issued by the Government of

India  is  applicable.   The  said  order  provides  for  a  procedure  of

search and seizure.  The search and seizure in terms of Clause 7 of

the  Control  Order  issued  under  Section  3  of  the  Essential

Commodities Act, 19556 can be effected only in the presence of two

independent  witnesses  as  is  required  under  Section  100  of  the

Code of Criminal Procedure, 19737.  Since, the sample has not been

taken in the manner prescribed in the order read with Section 100

of the Code, therefore, the termination of the dealership is wholly

illegal.   It  is  argued  that  such  argument  was  raised  before  the

learned Single Judge but the same was not examined in view of the

fact that the Guidelines were found to be mandatory in nature.  It is

contended that the findings recorded by the High Court, that the

time limit in the Guidelines is mandatory, owing to the larger public

interest  to  serve  and  the  appellants  cannot  take  benefit  of  its

delay, in sending samples for testing to lead a penal consequence

of termination of the dealership is the correct enunciation of law.  It

is  contended  that  termination  of  dealership  is  a  serious

consequence affecting right of a dealership under Articles 21 and

14 of  the  Constitution  of  India.   Learned counsel  for  the dealer

5  for short, ‘Control Order’ 6  for short, ‘Act’ 7  for short, ‘Code’

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relied upon the judgments referred to by the Division Bench of the

High Court.   

13) The first issue required to be examined is whether the appellants

were required to follow the procedure under the Control Order read

with Section 100 of the Code.  The Control Order has been issued

under Section 3 of the Act.  Such Act has been enacted for control

of the production, supply and distribution and trade and commerce,

of certain commodities.  In respect of High Speed Diesel and Motor

Spirit,  the  Control  Order  is  issued  for  regulation  of  supply  and

distribution and prevention of the malpractices.  Section 6A of the

Act provides for confiscation of the essential commodity whereas,

Section 7 of the Act makes any person who contravenes any order

made under Section 3 liable for criminal prosecution.  Therefore,

we find that the effect of issuance of the Control Order is that in the

event  of  violation  of  such  Control  Order,  any  person  who

contravenes any order made under Section 3 of the Act i.e.  the

Control Order, he is liable to be punished by a Court.  Therefore,

the violation of the Control Order has penal consequences leading

to conviction.  The provisions of search and seizure contained in

Clause 7 read with Section 100 of the Code will come into play only

in the event a person is sought to be prosecuted for violation of the

provisions of the Control Order.  Admittedly, in the present case,

the dealer is not sought to be prosecuted for the violation of the

Guidelines, therefore, the procedure for drawing of samples which

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is  a  necessary  pre-condition  under  the  Control  Order  for

prosecuting an offender does not arise for consideration.  

14) The dealer has entered into an agreement on 20th December, 1995.

It is not disputed that the dealer is bound by the Guidelines issued

by the Public Sector Oil Marketing Companies.  Clause 2.4.4 of the

Guidelines provides for procedure for drawing of samples.  Note 2

provides that the samples drawn should reach the laboratory for

testing  “preferably  within  ten  days  of  the  collection  of  the

samples”.  Similarly, sub-clause A of Clause 2.5 of the Guidelines

provides that all samples should be suitably coded before sending

them to the laboratory for testing ‘preferably’ within ten days of

drawing the samples.  Sub-clause I of Clause 2.5 of the Guidelines

is that the purpose of mentioning time frame for various activities

such as sending samples to the laboratory preferably within ten

days  is  to  streamline  the  system  and  is  in  no  way  related  to

quality/result  of  the  product.   In  view  of  the  language  of  the

Guidelines, the findings recorded by the High Court that the time

line is to be strictly adhered to cannot be sustained.   

15) The Guidelines as mentioned in sub-clause I of Clause 2.5 of the

Guidelines is to streamline the functioning i.e. the oil  companies

should not arbitrarily or without any justification send the sample

for testing at their sweet will.  The sample in this case was drawn

on 6th May, 2013 and was sent for testing on 22nd May, 2013 i.e.

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there was a delay of 5 days.  Since the Guidelines use the time line

as  a  preferred  time  line,  it  cannot  be  said  that  the  time  line

mentioned has to be strictly adhered to and is mandatory.  The

language, the purport and the effect of testing do not warrant to

read the word ‘preferably’ as mandatory time line.  It is not the

case of the dealer that the sample sent after five days will lose its

efficacy as the umpire sample would be sent only after the first

report is confronted to the dealer.  Still further, the dealer has not

raised any objections regarding delay in sending the sample in the

two replies submitted by him on 17th July, 2013 and 2nd January,

2014.  The argument that the umpire sample in the hands of the

dealer  could  not  be tested because of  sludge and to doubt  the

other two samples is totally untenable.  Such argument is based

upon conjectures as the other two samples collected and sealed

cannot be permitted to be disputed only because one sample was

found with sludge. There is no material to doubt the correctness of

the samples taken.

16) The first test report dated 29th May, 2013 was found deficient in the

density as also in K.V. @40 degree celsius, sulphur and distillation

recovery.  Even the report dated 19th August, 2013 is found to be

deficient  in  density,  K.V.,  distillation  recovery  and  sulphur.   The

result of the second report is almost the same as the sample tested

on 29th May, 2013.  Thus, the appellant has rightly terminated the

dealership for adulteration of the High Speed Diesel.   

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17) There was variation in stock beyond permissible limits.  In case of

positive stock variation beyond permissible limits and on account

of failure of sample, action in line with that of adulteration is to be

initiated.   The  adulteration  in  these  circumstances  is  a  critical

irregularity falling in Clause 8.2 of the Guidelines and the action

required to be taken is termination of the dealership.  However, in

case of stock variation beyond permissible limits and the sample

passing the quality test, it leads to suspension of sale and supply

for fifteen days in the first instance, suspension of sale and supply

for thirty days in the second instance and termination of dealership

in the third instance.  In this case, since the stock variation was

beyond  permissible  limits  and  the  sample  failed,  therefore,  the

action  was  rightly  taken  under  Clause  5.1.11  of  the  Guidelines

which  is  a  critical  irregularity  when  read  with  sub-clause  (i)  of

Clause 8.2 and sub-clause (iv) of Clause 8.3 of the Guidelines.

18) The judgments referred to by the learned counsel for the dealer are

not applicable to the facts of the present case as in both the cases,

the action taken by the oil company was found to be in violation of

the principle of natural justice as no notice was served upon the

dealer but, in the present case, after failure of the first sample in

the test report dated 29th May, 2013, the dealer was informed, who

opted for  testing of  umpire sample in  his  possession.   The said

sample along with the sample in  possession of  the Field Survey

Officer was sent for testing and in the report dated 19th August,

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2013, the sample was found to have the same deviations as in the

first sample tested on 29th May, 2013.  The dealer was informed of

the result  of  the second test  and was also given a  show cause

notice  as  to  why  the  dealership  should  not  be  terminated.

Therefore, the action taken against the dealer is in terms of the

Guidelines,  as  a  consequence  of  contractual  obligations  by  the

dealer.   

19) Consequently, we find that order passed by the High Court is not

legal and sustainable and, thus, the same is set aside.  The writ

petition is dismissed and the termination of dealership is held to be

valid and legal.  Civil Appeal is allowed.

.............................................J. (L. NAGESWARA RAO)

.............................................J. (HEMANT GUPTA)

NEW DELHI; NOVEMBER 07, 2019.

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