2025 (3) TMI 372 - SC - Indian Laws

Public Procurement Policy for MSEs has force of law under MSMED Act Section 11, government must procure 25% from MSEs

LIFECARE INNOVATIONS PVT. LTD. & ANR. Versus UNION OF INDIA & ORS.

SC held that the Public Procurement Policy for Micro and Small Enterprises Order 2012 has force of law under Section 11 of the MSMED Act, 2006. While ... Right of Micro and Small Enterprises to supply 25% of goods and services to be procured by the Government and its instrumentalities under its Procurement Policy - legality of minimum turnover clauses prescribed in the Notice Inviting Tenders issued by the Government and its instrumentalities - rights and duties flowing out of Section 11 of the Micro, Small and Medium Enterprises Development Act, 2006, prescribing a Public Procurement Policy for Micro and Small Enterprises (MSEs) Order 2012. Right of Micro and Small Enterprises to supply 25% of goods and services to be procured by the Government and its instrumentalities under its Procurement Policy - HELD THAT:- The first statutory recognition of MSMEs, measures for their protection, promotion and grant of special benefits was through the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993. The 1993 Act was repealed by the comprehensive and promising regime under the present Micro, Small and Medium Enterprises Development Act in 2006, which not only created different classes of enterprises under Section 7, but also established an Advisory Committee to advise the Central government regarding the classification of enterprises, a National Board for MSMEs under Section 3, the functions of which are provided in Sections 5 and 6, inter alia to deal with, “factors affecting the promotion and development of micro, small and medium enterprises and review the policies and programmes of the Central Government” and to “make recommendations on matters referred to it by the Central Government which are necessary or expedient for facilitating the promotion and development and enhancing the competitiveness of the micro, small and medium enterprises”. Clause 3 of the policy sets annual goals of procurement from MSEs from the financial year 2012-13 itself. The object of the said clause is to achieve an overall procurement of a minimum of 25 percent of total annual purchases of products and services from MSEs within a period of 3 years. Sub-clause (3) clarifies that after a period of 3 years, commencing from 2015, the overall procurement goal “shall be made mandatory”. The consequence of non-compliance with the mandate is contemplated under sub-clause (4), where the ministries, departments and public sector undertakings that fail to meet the annual goal are obligated to justify with reasons and are made answerable to the Review Committee. Having considered the provisions of the Act and the MSE Procurement Preference Policy, 2012, it is opined that there is no mandatory minimum procurement ‘right’ of an individual MSE. However, there is certainly a statutory foundation for the Procurement Preference Policy, 2012, having force of law as it ‘encapsulates a mandate and discloses a specific purpose’. Clause 3 of the policy mandating procurement of 25 per cent of supply from MSEs is simply the statutory duty of the bodies constituted under the Act and the Policy - It is, therefore, necessary to ensure that in the functioning of these bodies, there is efficiency in administration, expertise through composition, integrity through human resources, transparency and accountability, and response-ability through regular review, audits and assessments. Shifting the focus of judicial review to functional capability of these bodies is not to be understood as an argument for alternative remedy, much less as a suggestion for judicial restraint. In fact, this shift is in recognition of an important feature of judicial review, which performs the vital role of institutionalizing authorities and bodies impressed with statutory duties, ensuring they function effectively and efficiently. The power of judicial review in matters concerning implementation of policy objectives should transcend the standard power of judicial review to issue writs to perform statutory duty and proceed to examine whether the duty bearers, the authorities and bodies constituted properly and also whether they are functioning effectively and efficiently. By ensuring institutional integrity institutional objectives are achieved. Further, effective and efficient performance of the institutes can reduce unnecessary litigation. The Review Committee, specifically entrusted with this duty, should resolve this issue. Under sub-clause (2) of clause 12, the Review Committee is specifically entrusted with the twin duties of (i) reviewing the 358 items exclusively reserved for MSEs and (ii) considering the request of the ministries, departments and public sector undertakings for exemption from 25% on a case-to-case basis. The Review Committee also has the obligation to ‘‘monitor the achievements of the policy’’. As the Review Committee is entrusted with reviewing and monitoring the performance of the sector, we are of the opinion that this body, comprising domain experts, must examine this issue, take an appropriate decision and ensure its implementation. The respondents, in particular the Review Committee constituted under clause 12 of the Procurement Preference Policy 2012 are directed to examine this issue of mandatory procurement of 25 per cent of goods and services by the Government, its departments and instrumentalities from the MSEs under clause 3 of the Policy and notify whether the said procurement would be independent of the 358 items reserved for procuring from MSEs and take such action as is necessary for compliance of the Procurement Order 2012 and upload its decisions for the purpose of clause 5 of the Policy. The necessary action shall be taken within 60 days from the order. Is the prescription of mandatory minimum turnover clause in NITs violative of articles 14 and 19 of the Constitution, provisions of the MSMED Act and the Procurement Preference Policy, 2012? - HELD THAT:- The two most relevant criteria for framing suitable conditions in NIT relate to the ‘capacity’ and ‘capability’ of the bidder. In Association of Registration Plates v. Union of India, [2004 (11) TMI 600 - SUPREME COURT]; Krishnan Kakkanth v. Govt. of Kerala, [1996 (10) TMI 478 - SUPREME COURT], Ugar Sugar Works Ltd. v. Delhi Administration [2001 (3) TMI 1008 - SUPREME COURT]; M.R.F. Ltd. v. Inspector Kerala Govt., [1998 (11) TMI 674 - SUPREME COURT] this Court had an occasion to examine a tender clause which read, “The tenderers/bidders of the joint-venture partners together must have had a minimum annual turnover equivalent to INR 30 crores in the immediately preceding last year. At least 25% of this turnover must be from the licence plate business. Certificate confirming and the certification of this minimum 25% turnover being from licence plate business will have to be provided duly attested by a chartered accountant/any bank to be attached in support of fulfilment of this condition”. The law as applicable for procurement through MSEs stands on a different footing. This is for the reason that there is a statutory prescription for notifying a procurement preference policy (Section 11), and in furtherance of such a statutory prescription, the Preference Policy 2012 has been notified mandating procurement of a minimum of 25 per cent from the Micro and Small enterprises. Although it is generally permissible for the government, and its instrumentalities to provide minimum turnover criteria wherever “public safety, health, critical security equipment, etc.”,26 are involved, it must be ensured that such prescriptions do not defeat the Procurement Order 2012 - The Procurement Order 2012 declares the procurement preference obligations of the State and therefore statutory and executive authorities are bound to implement the same. Minimum turnover clauses cannot undermine or override the Procurement Preference Policy 2012. Apart from the earlier direction relating to mandatory procurement, we also direct the authorities under the Act, including the Review Committee and in particular the Grievance Cell, which is specifically entrusted with the obligation to redress “imposition of unreasonable conditions in tenders floated by Government Departments or agencies that put Micro and Small Enterprises at a disadvantage” to examine limits of minimum turnover clauses and issue necessary and appropriate policy guidelines. Conclusion - i) The Public Procurement Policy for Micro and Small Enterprises (MSEs) Order 2012 has force of law as it is formulated in exercise of power under Section 11 of the Act and also encapsulates the purpose and object of the Act. ii) Though there is no mandatory minimum procurement ‘right’ for an individual MSE there is certainly a statutorily recognized obligation on the authorities and the bodies under the Act and the Procurement Order 2012 to implement the mandate which is subject to judicial review. iii) The judicial review will primarily ensure proper constitution and effective functioning of the authorities the National Board for MSMEs, the Advisory Committee, the Facilitation Council, the Review Committee and the Grievance Cell and leave the policy and decision making to them. iv) The respondents, and in particular, the Review Committee constituted under clause 12 of the Procurement Preference Policy 2012 to examine the issue of mandatory procurement of 25 per cent of goods and services by the Government, and its instrumentalities from MSEs under clause 3 of the Policy in the context of clause 11 providing for reservation of specific items for procurement and take such action as is necessary for effective implementation of the Policy within a period of 60 days from the date of the order. v) The respondents, including the Review Committee and in particular the Grievance Cell, shall examine and declare limits of the minimum turnover clauses with respect to MSEs and issue appropriate policy guidelines within a period of 60 days from the date of our order. Petition disposed off. ISSUES PRESENTED and CONSIDEREDThe judgment addresses two primary legal questions:1. Whether the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), along with the Procurement Preference Policy, 2012, mandates the procurement of 25% of goods and services by the government and its instrumentalities from Micro and Small Enterprises (MSEs).2. Whether the prescription of mandatory minimum turnover clauses in Notices Inviting Tenders (NITs) violates Articles 14 and 19 of the Constitution, the provisions of the MSMED Act, and the Procurement Preference Policy, 2012.ISSUE-WISE DETAILED ANALYSIS1. Mandate for Procurement from MSEsRelevant Legal Framework and Precedents: The MSMED Act, 2006, particularly Section 11, empowers the Central and State Governments to notify preference policies for the procurement of goods and services from MSEs. The Public Procurement Policy for Micro and Small Enterprises (MSEs) Order 2012 was notified under this provision, mandating a minimum of 25% procurement from MSEs.Court's Interpretation and Reasoning: The Court recognized that while there is no enforceable right for an individual MSE to demand procurement, the Procurement Preference Policy, 2012, has the force of law, encapsulating a mandate and specific purpose. The statutory bodies created under the Act and the Policy have enforceable duties, and their functioning is subject to judicial review.Key Evidence and Findings: The Court examined the legal regime concerning the promotion and development of MSEs and the establishment of various statutory and administrative bodies under the Act and the Procurement Order 2012.Application of Law to Facts: The Court concluded that the Procurement Order 2012 mandates procurement of 25% from MSEs as a statutory duty of the bodies constituted under the Act and the Policy. The Court emphasized the importance of ensuring the effective functioning of these bodies to achieve the legislative purpose.Treatment of Competing Arguments: The Court noted the statistics provided by the Union of India demonstrating compliance with the policy requirement of procuring from MSEs. However, it was unclear whether this included procurement of items reserved exclusively for MSEs. The Court directed the Review Committee to examine this issue.Conclusions: The Court directed the respondents, particularly the Review Committee, to examine the issue of mandatory procurement of 25% of goods and services by the Government from MSEs and take necessary action for compliance with the Procurement Order 2012.2. Legality of Minimum Turnover ClausesRelevant Legal Framework and Precedents: Articles 14 and 19 of the Constitution ensure equality and freedom of trade and business. The Court referred to precedents where tender conditions were examined for arbitrariness and reasonableness.Court's Interpretation and Reasoning: The Court acknowledged that while the government has the latitude to prescribe eligibility requirements, such as minimum turnover clauses, these should not undermine the Procurement Order 2012. The Court emphasized that the Procurement Preference Policy 2012 is a statutory obligation, and minimum turnover clauses should not override it.Key Evidence and Findings: The Court considered the Grievance Cell's mandate to address unreasonable conditions in tenders that disadvantage MSEs. The Comptroller and Auditor General of India's report highlighted deficiencies in the Grievance Cell's functioning.Application of Law to Facts: The Court directed the Grievance Cell to examine the limits of minimum turnover clauses and issue appropriate policy guidelines. The Court stressed that these clauses should not defeat the purpose of the Procurement Order 2012.Treatment of Competing Arguments: The Court noted the government's position that turnover criteria are necessary to assess the capability of suppliers, especially for critical procurements. However, the Court emphasized the need to balance these criteria with the statutory obligations under the Procurement Order 2012.Conclusions: The Court directed the Grievance Cell to examine and declare limits of minimum turnover clauses concerning MSEs and issue policy guidelines within 60 days.SIGNIFICANT HOLDINGSCore Principles Established: The judgment established that the Procurement Preference Policy, 2012, has the force of law and mandates procurement of 25% from MSEs as a statutory duty. It also highlighted the importance of ensuring the effective functioning of statutory and administrative bodies under the Act and the Policy.Final Determinations on Each Issue:(a) The Public Procurement Policy for MSEs Order 2012 has the force of law and encapsulates the purpose and object of the Act.(b) There is no mandatory minimum procurement right for an individual MSE, but there is a statutorily recognized obligation on authorities to implement the mandate, subject to judicial review.(c) Judicial review will ensure the proper constitution and effective functioning of the relevant authorities and bodies.(d) The Review Committee is directed to examine the issue of mandatory procurement of 25% from MSEs and take necessary action for effective implementation within 60 days.(e) The Grievance Cell is directed to examine the limits of minimum turnover clauses and issue appropriate policy guidelines within 60 days.