2016 (3) TMI 792 - HC - Indian Laws

Court interprets pricing clause in drug supply tender notice for CGHS, rules in favor of petitioner

RAVANI MEDICAL STORE Versus UNION OF INDIA AND 3

The court interpreted a pricing clause in a tender notice for supplying drugs to the CGHS. The dispute centered on whether the entire VAT should be ... Correct interpretation of pricing clause contained in the tender notice and validity of recovery raised for the past bills - - Whether while calculating the net payable by the CGHS to the petitioner entire Value Added Tax (VAT for short) payable on the product in question should be reduced from the MRP and then the discounted rates offered by the petitioner could be applied or whether the VAT component to be reduced from MRP would be that relatable to only that is borne by the petitioner - Petitioner awarded a new contract for supply of drugs and medicines to CGHS but CGHS started making deductions from the current bills of the petitioner towards the alleged over-payments for the supplies of drugs and medicines under the old contract - Held that:- pricing clause in the old contract refers to the liability of paying all taxes being on the supplier. It is clarified that the CGHS will pay the labelled MRP minus local taxes less as reduced by tendered discount and such quoted offer would remain constant during the entire duration of the contract. The pricing clause provides for three parameters (i) the MRP, (ii) the local taxes which would be the responsibility of the petitioner and (iii) the discount offered by the tenderer. It provides that the CGHS would pay the labelled MRP minus local taxes less the discount offered. Such formula would remain constant during the entire period of the contract. This clause is open to two interpretations. One approach could be that the literal language used in the clause refers to the liability of CGHS to pay MRP minus local taxes less discount. There is no distinction between the local tax to be borne by the suppliers and the rest. However, the other interpretation equally possible is that the CGHS would pay the MRP less the tax component of the supplier reduced by the offered discount. We are inclined to accept the later interpretation. Thus the final formula which the pricing clause provides is that the CGHS will pay the labelled MRP minus local taxes less tendered discount. The clause in the new contract provides that the bidder would have to offer uniform discount in percentage terms on the MRP (inclusive of all taxes). This clause also provides that such offer shall remain constant during the entire duration of the contract. This pricing clause now thus simplifies the computation of the net payable by the CGHS to the supplier. A simple formula of MRP (inclusive of taxes) less discount to be applied. This is not to suggest that the new clause would govern the interpretation of the old clause. This is only to suggest that the formula that works out the net payable by the CGHS to the supplier after discount has been rationalised and simplified in the new pricing clause. By comparing the Pricing clause in the old contract with the new contract, it is seen that the formula that works out the net payable by the CGHS to the supplier after discount has been rationalised and simplified in the new pricing clause. Therefore, as long as in the earlier bills raised by the petitioner and cleared and paid by the CGHS, the formula of MRP minus the petitioner’s VAT liability less the offered discount on MRP is applied and no error or irregularity is seen. The interpretation now adopted by the CGHS in the formula reproduced hereinabove would not flow from the pricing policy. Also the recoveries raised by the respondents for the past bills already paid are quashed. - Decided in favour of petitioner Issues: Interpretation of pricing clause in the tender notice for supplying drugs and medicines to the Central Government Health Scheme (CGHS).Analysis:Issue 1: Background and Contract DetailsThe petitioner, a proprietary concern, was awarded a contract for supplying drugs and medicines to the CGHS. After exhausting the initial contract, the petitioner applied for and was awarded a new contract for supplying drugs and medicines for a specific area. Disputes arose when the CGHS started making deductions from the current bills of the petitioner towards alleged over-payments for supplies under the old contract.Issue 2: Interpretation of Pricing ClauseThe key issue revolved around the correct interpretation of the pricing clause in the tender notice. The pricing clause stated that the bidder should quote a uniform discount on the retail price, and the liability to pay taxes, VAT, levy, etc., would be that of the supplier. The CGHS would pay the labeled MRP minus local taxes less the tendered discount. The dispute centered on whether the entire VAT payable on the product should be reduced from the MRP before applying the discount or only the VAT borne by the petitioner.Issue 3: Judicial InterpretationThe court analyzed the pricing clause and observed that the clause indicated the supplier's liability to bear all taxes, with the CGHS paying the MRP minus local taxes less the discount. The court reasoned that the intention was for the supplier to specify the discount on their margin. The court further explained that the VAT mechanism works in stages, and deducting the entire VAT from the MRP for payment after discount would be harsh and unreasonable, contrary to the pricing clause's intent.Issue 4: Comparison with New Pricing ClauseThe court compared the disputed pricing clause with a newer clause introduced by the CGHS in subsequent contracts. The new clause simplified the computation by requiring a uniform discount on the MRP inclusive of all taxes. While noting that the new clause did not govern the interpretation of the old clause, the court highlighted the rationalization and simplification of the payment formula in the new pricing clause.Issue 5: Judgment and ReliefThe court held in favor of the petitioner, allowing the petitions and quashing the recoveries raised by the CGHS for past bills. Any recovered amounts were to be refunded. The CGHS was permitted to verify the VAT paid by the petitioner on supplies to ensure compliance with the court's interpretation. If any over-payment was identified after verification, the CGHS could recover or adjust the same accordingly.