TMI Blog2023 (1) TMI 685X X X X Extracts X X X X X X X X Extracts X X X X ..... usion is substantiated by the use of the phrase or in paragraph 4(vi)(b) - IMPCL or from PSUs , pharmacies under State Governments and co-operatives. Thus, on a plain reading of paragraph 4(vi)(b), it is evident that all the units mentioned in the paragraph are placed at an equal footing. The provision does not create a gradation amongst the manufacturing units mentioned in the paragraph. Nor does it evince an intent to create a monopoly. Validity of award of government contract to IMPCL - HELD THAT:- There is no material on record to support the submission that IMPCL is the only establishment among the establishments mentioned in paragraph 4(vi)(a) that manufacture good quality Ayurvedic drugs. In fact, paragraph 4(vi)(b) states that 50 percent of the grant-in-aid shall be used to purchase medicines from the units mentioned in the paragraph keeping in view the need for ensuring quality of AYUSH drugs and medicines. This would indicate that the need for ensuring quality is subserved by all the sources mentioned there. Besides IMPCL, which is an establishment of the Government of India, paragraph 4(vi)(b) includes other establishments of the State Governments or co-operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment contract to IMPCL ............................................. 21 1 The first respondent, Kerala Ayurvedic Co-operative Society Limited, instituted proceedings before the Lucknow Bench of the High Court of Judicature at Allahabad under Article 226 of the Constitution to challenge an order for the purchase of Ayurvedic medicines issued by the State of Uttar Pradesh in favour of Indian Medicines Pharmaceutical Corporation Limited IMPCL . By a judgment dated 18 October 2019, a Division Bench of the High Court allowed the petition and directed that the State of Uttar Pradesh must purchase Ayurvedic medicines by adopting a transparent process after inviting tenders. The State of Uttar Pradesh and IMPCL instituted proceedings under Article 136 of the Constitution against the judgment of the High Court. The principle issue is whether, in view of paragraph 4(vi)(b) of the Operating Guidelines of the National AYSUH Mission NAM , the appellant could have procured Ayurvedic drugs solely from IMPCL without inviting tenders. 1.0 Facts 2 In September 2014, the Department of AYUSH, Ministry of Health and Family Welfare, Government of India launched NAM, inter alia, to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive society under the Kerala Co-operative Societies Act 1969. On 2 March 1985, the first respondent was granted a licence to manufacture Ayurvedic and Unani drugs for sale under the provisions of the Drugs and Cosmetics Rules 1945. On 31 August 2016, the first respondent was also certified as a Good Manufacturing Practice GMP unit. 5 On 30 October 2017, the first respondent made a representation to the Principal Secretary to either place direct purchase orders for the supply of Ayurvedic medicines to it according to the existing government policy or to initiate a tender process for the purchase. The first respondent stated that it is eligible to supply Ayurvedic medicines under NAM and that as an MSME registered unit, it is eligible under the policy framework for preferential purchase. A similar representation was made on 21 December 2018 to the Mission Director. 6 The first respondent instituted a petition under Article 226 of the Constitution apprehending that a purchase order for 2019-20 was going to be issued to IMPCL. The first respondent challenged the purchase order in favour of IMPCL and sought a direction for the procurement of Ayurvedic medicines under the Nati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of India holds 98.11 percent of the shares of IMPCL and 1.89 percent of the shares are held by the Government of Uttarakhand through Kumaon Mandal Vikas Nigam Limited. IMPCL has been established to cater to the needs of the Central Government Health Programs and for ensuring the quality of AYUSH medicines; (ii) Due to the unique organizational set-up of IMPCL, it is most suited to supply quality medicines at an affordable price. The prices of the medicines manufactured by IMPCL are vetted by the Union Ministry of Finance from time to time. The procurement of medicines from other organizations is also at the rates of IMPCL as these rates are considered the best possible rates. Further, IMPCL is the only government manufacturing company for Ayurvedic medicines with its own certified drug testing laboratory; (iii) On 16 July 1994, the Government of India issued an order where it had resolved that Ayurvedic medicines cannot be purchased through tenders because (a) there is a wide variation in the prices of raw materials required for making drugs and the cost of the drug will vary based on the quality of the raw material used; and (b) it is not possible to test the exact compositi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to allow procurement from any of the establishments mentioned without a tendering process, the same interpretation would also be applicable to paragraph 4(vi)(c). Also, this would mean that even for procurement from private entities, there is no requirement of conducting a tender process. (ii) The State of UP cannot arbitrarily prefer one of the eligible entities for the procurement of medicines. All the establishments mentioned in paragraph 4(vi)(b) are recognised to be on an equal footing. Therefore, procurement must be by a fair process in which all the eligible establishments are granted an opportunity to secure the procurement order; (iii) It is an established principle that state largesse must be distributed by public auction save in exceptional situations having regard to the nature of the trade or where no reasonable substitute exists. There are no exceptional circumstances in the instant case that warrant the procurement of medicines only from IMPCL; and (iv) The price of medicines procured from IMPCL is vetted by the Department od Expenditure, Ministry of Finance for the limited purpose of undertaking an audit. It is the National Pharmaceutical Pricing Authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into with the State to protect and safeguard their interests. 3.2 Judicial review of government contracts: extent and ambit 12 Paragraph 4(vi)(b) prescribes entities from which Ayurvedic medicines may be procured. The paragraph does not prescribe the method through which they may be procured. The appellant contends that the since the method of procurement is not prescribed, it has the discretion to purchase drugs through nomination . On the other hand, the respondent contends that merely because the Operational Guidelines do not prescribe the method of procurement, unbridled discretion cannot be given to the executive to procure drugs through nomination . 13 In the early 1950s , judicial review of the process of concluding contracts by government was limited. The courts allowed the State due deference on the ground of governmental policy. In C.K Achuthan v. State of Kerala AIR 1959 SC 490 , a Constitution Bench of this Court held that it is open to the Government to choose a person to their liking, to fulfil contracts which they wish to be performed. The Court observed that when one party is chosen over another, the aggrieved party cannot claim the protection of Art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eases, but its action must be in conformity with the standards or norms which are not arbitrary, irrational or irrelevant. It is, however, recognised that certain measure of free play in the joints is necessary for an administrative body functioning in an administrative sphere. (emphasis supplied) 15 In Food Corporation of India v. M/s Kamdhenu Cattle Feed Industries (1993) 1 SCC 71 , this Court held that in the contractual sphere [ ] the State and all its instrumentalities have to conform to Article 14 of the Constitution. The respondent filed a writ petition before the High Court challenging the appellant s refusal to accept the highest tender submitted by it for a stock of damaged rice. This Court held: 7. In contractual sphere as in all other State actions, the State and all its instrumentalities have to conform to Article 14 of the Constitution of which non-arbitrariness is a significant facet. There is no unfettered discretion in public law: A public authority possesses powers only to use them for public good. This imposes the duty to act fairly and to adopt a procedure which is fairplay in action . Due observance of this obligation as a part of good admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in Natural Resources Allocation (supra) held that while there is no constitutional mandate in favour of auction under Article 14, deviation from the rule of allocation through auction must be tested on grounds of arbitrariness and fairness. In this context, it was observed as follows: 148. In our opinion, auction despite being a more preferable method of alienation/allotment of natural resources, cannot be held to be a constitutional requirement or limitation for alienation of all natural resources and therefore, every method other than auction cannot be struck down as ultra vires the constitutional mandate. 149. Regard being had to the aforesaid precepts, we have opined that auction as a mode cannot be conferred the status of a constitutional principle. Alienation of natural resources is a policy decision, and the means adopted for the same are thus, executive prerogatives. However, when such a policy decision is not backed by a social or welfare purpose, and precious and scarce natural resources are alienated for commercial pursuits of profit maximising private entrepreneurs, adoption of means other than those that are competitive and maximise revenue may be arbitrar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , particularly, in an area like Pondicherry, which on account of historical, political and other reasons, is not yet industrially developed and where entrepreneurs have to be offered attractive terms in order to persuade them to set up industries. The State must be free in such a case to negotiate with a private entrepreneur with a view to inducing him to develop the Port and if the State enters into a contract with such an entrepreneur for providing resources and other facilities for developing the Port, the contract cannot be assailed as invalid because the State has acted bona fide, reasonably and in public interest. 19 In Nagar Nigam v. Al Farheem Meat Exporters (P) Ltd. (2006) 13 SCC 382 , the respondent was granted a license for a year to run a slaughterhouse owned by the appellant-corporation. On the completion of the term of the license, the appellant issued an advertisement inviting applications for granting a fresh contract. The respondent challenged the advertisement. The Court observed that it is the requirement of the principle of non-arbitrariness postulated in Article 14 that contracts by the State, its corporations, instrumentalities, and agencies should as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , instrumentalities and agencies must be normally granted through public auction/public tender by inviting tenders from eligible persons and the notification of the public auction or inviting tenders should be advertised in well-known dailies having wide circulation in the locality with all relevant details such as date, time and place of auction, subject-matter of auction, technical specifications, estimated cost, earnest money deposit, etc. The award of government contracts through public auction/public tender is to ensure transparency in the public procurement, to maximise economy and efficiency in government procurement, to promote healthy competition among the tenderers, to provide for fair and equitable treatment of all tenderers, and to eliminate irregularities, interference and corrupt practices by the authorities concerned. This is required by Article 14 of the Constitution. However, in rare and exceptional cases, for instance during natural calamities and emergencies declared by the Government; where the procurement is possible from a single source only; where the supplier or contractor has exclusive rights in respect of the goods or services and no reasonable alternative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because it is the only entity which manufactures quality medicines. On 8 May 2008, the Government of India issued another memorandum on similar lines. On 9 August 2016, the Ministry of AYUSH issued a circular responding to the clarification sought by the States on the procurement of AYUSH medicines from IMPCL. The circular stipulates that the States may procure Ayurvedic and Unani Medicines from IMPCL. On 7 December 2016, the Ministry of AYUSH issued a circular stating that the procurement guidelines under NAM also allow for the purchase of medicines from PSUs and pharmacies of the State Governments and co-operatives that have their own manufacturing units and are GMP compliant. It was thus stated that the States may also procure Essential Ayurvedic Medicines directly from Oushadhi (A Kerala Government owned Ayurvedic medicine manufacturing unit) subject to the condition that medicines have to be provided within the rates of IMPCL. 24 On 2 January 2019, the Ministry of AYUSH issued a notification 2019 Notification in supersession of the notification dated 7 December 2016. While stipulating that the procurement of medicines is the prerogative of the State Government, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f which the cost of the same drug using the best raw materials maybe ten times the cost if the poorest quality of raw materials is used; and (ii) it is impossible to test the composition and the quality of raw materials used in the drugs. The letter of the Ministry of Health and Family Welfare dated 16 July 1994 is extracted below: You may perhaps be aware that Government of India has set up in collaboration with Government of Uttar Pradesh, Indian Medicines Pharmaceutical Corporation ltd. for manufacture of high quality drugs of the Indian Systems of Medicine. The drugs are prepared strictly in accordance with the classical texts and genuine raw materials are used to prepare these drugs. 2. It is our experience that the ordinary financial procedures such as tendering are inadequate in relation to the purchase of Ayurveda, Siddha and Unani medicines. This is because:- 1. Of the very wide variation in prices of raw materials required for making the drugs. The cost of the same drug using the best raw materials may be 10 times the cost if the poorest quality raw materials are used. 2. The impossibility of testing the exact composition of drugs of its raw materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pharmaceutical Corporation ltd., (IMPCL), Mohan Distt, Almora, U.P (emphasis supplied) 27 On 8 May 2008, the Government of India issued another memorandum stipulating that the medicines produced by IMPCL are according to classical texts and of assured quality. The memorandum mentioned that there is an absence of fully developed pharmaceutical standards to test the quality of Ayurvedic and Unani medicines. The relevant paragraph of the memorandum indicates that: (i) The medicines produced by IMPCL are strictly as per classical texts and hence prove quality. (ii) The rates of the medicines produced by the company are reasonable as the same are fixed by the Cost Accounts Branch of the Ministry of Finance; (iii) In the absence of fully developed pharmaceutical standards for Ayurvedic and Unani Medicines in the country, the CGHS Research Councils is/are not fully equipped to ensure that the purchased medicines are of right quality. 28 The letter indicates that there is no method to determine the ingredients and quality of Ayurvedic drugs. This would mean that there was no method to determine the quality of the medicines produced by IMPCL as well. The Minist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued by the Ministry of AYUSH stipulates that 50 percent of the grant-in-aid has to be used to procure medicines from IMPCL or other Central/State PSUs or pharmacies under the State-Governments and co-operatives. It is open to the appellant to procure medicines using any method other than tender, so long as it is not arbitrary. The claim of the appellant is that it deviated from the rule of tender because IMPCL is the only establishment that produces quality medicines. However, there is no material to substantiate the claim that IMPCL is the only establishment which manufactures quality medicines to the exclusion of other establishments mentioned in paragraph 4(vi)(b). The appellant has been unable to discharge the burden placed on it by producing cogent material demonstrating that the procurement of medicines through nomination is warranted because of the existence of exceptional circumstances bearing on need for quality. The action of the appellants of procuring medicines only from IMPCL to the exclusion of the other establishments mentioned in paragraph 4(vi)(c) is arbitrary and violative of Article 14 of the Constitution. 31 In the given circumstances, inviting tenders fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Central and State government stipulate that 25 percent of the medicines shall be procured from MSMEs. Thus, the term at least 50% in paragraph 4(vi)(b) of the Operational Guidelines must be read as limiting the procurement from establishments in paragraph 4(vi)(b) to 50 percent and giving other manufacturers a level playing field under paragraph 4(vi)(c); (ii) The Central and the State Governments have notified procurement policies directing that a certain percent of the procurement must be from the MSMEs . The procurement of medicines from IMPCL on nomination is contrary to the procurement policies notified by the Government; (iii) IMPCL also sells products in the open market. Thus, the argument that IMPCL is established solely to supply medicines to the Government is misleading; and (iv) IMPCL has not submitted records to show that the other manufacturers cannot supply equivalent or better-quality drugs. 35 The intervention applications seek to enlarge the scope of the Special Leave Petition. The issue before this Court falls squarely on the interpretation of paragraph 4(vi)(b). However, the intervention applicant has prayed that in accordance with the policie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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