TaxTMI 
TaxTMI 
2023 (1) TMI 685
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.............................................................. 14 3.3 Interpretation of Paragraph 4(vi)(b) of the Operational Guidelines ...................... 19 3.4 Validity of award of Government 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 fr....
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....m a single vendor, namely IMPCL who is the appellant. The purchase order was given to IMPCL on a nomination basis without conducting a tendering process. The first respondent is a registered co-operative 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 orde....
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....ning grant-in-aid, if any, shall be used to procure drugs in the manner specified in paragraph 4(vi)(c). 2.0 Submissions 8 Mr Naresh Kaushik, counsel appearing for IMPCL urged the following submissions: (i) The Government 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 purchase....
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....graph are equally eligible to supply medicines as much as IMPCL; and (b) While paragraph 4(vi)(b) does not stipulate that the procurement must be through a tender process, it does not mean that the process of tender cannot be read into the provision. If paragraph 4(vi)(b) is interpreted 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 circ....
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....he Constitution entrusts the State with a duty to ensure the well-being of citizens. Government actions aimed at ensuring the well-being of citizens cannot be perceived through the lens of a 'largess'. The use of such terminology belittles the sanctity of the social contract that the 'people of India' entered 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....
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....s of this Court, therefore, insist that while dealing with the public, whether by way of giving jobs or entering into contracts or issuing quotas or licences or granting other forms of largesse, the Government cannot act arbitrarily at its sweet will and like a private individual, deal with any person it pleases, 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....
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.... method of first-cum-first serve used to allocate 2G radio spectrum was arbitrary and illegal. The reference was on whether the 'only permissible method for disposal of all natural resources across all sectors and in all circumstances is by the conduct of auctions'. Justice Khehar in his concurring opinion 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....
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....lopment of the port. 172. The State is not obliged to tell Respondent 11 "please wait I will first advertise, see whether any other offers are forthcoming and then after considering all offers, decide whether I should get the Port developed through you". It would be most unrealistic to insist on such a procedure, 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 iss....
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....bt that in rare and exceptional cases, having regard to the nature of the trade or largesse or for some other good reason, a contract may have to be granted by private negotiation, but normally that should not be done as it shakes the public confidence. 16. The law is well settled that contracts by the State, its corporations, 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....
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....ph 4(vi)(b) of the Operational Guidelines 23 Before interpreting paragraph 4(vi)(b) of the Operational Guidelines, it is necessary that we refer to the circulars on the procurement of Ayurvedic drugs. In 1994, the Ministry of Health and Family Welfare issued a communication stating that Ayurvedic medicines are to be procured only from IMPCL 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....
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....se of peculiar problems in the process of manufacture. Reference was made to the letter dated 16 July 1994 issued by the Ministry of Health and Family Welfare stating that purchase through tender would be 'inadequate' for the procurement of Ayurveda, Siddha, and Unani medicines because (i) there is a wide variation in the prices of the raw materials as a result of 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....
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....enhancers mainly to make its medicines more popular. 6. In view of the above, you may like to consider meeting the requirements of State Government Dispensaries and Hospitals for medicines manufactured by IMPCL at the rates fixed for CGHS supplies but subject to the local variation in transport costs. In that case you may like to contact Chairman cum Managing Director, Indian Medicines 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 pharmaceu....
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....circumstances (assurance of quality medicines) is erroneous. The submission of the appellant that IMPCL is the sole producer of quality Ayurvedic medicines is based on surmises and conjectures without any cogent material to support the claim. See State of Tamil Nadu v. National South Indian River Interlinking Agriculturist Association, Civil Appeal 6764 of 2021 In fact, the notification of 2 January 2019 issued 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....