Supreme Court: In an appeal against the order of Allahabad High Court, wherein the Court had directed that the State must purchase Ayurvedic medicines by adopting a transparent process after inviting tenders, division bench of Dr Dhananjaya Y Chandrachud*, C.J. and Hima Kohli, J. upheld the High Court's order and said that the action of the appellants of procuring medicines only from Indian Medicines Pharmaceutical Corporation Limited (‘IMPCL') to the exclusion of the other establishments mentioned in paragraph 4(vi)(c) of the operational guidelines of the National AYUSH Mission(‘NAM') is arbitrary and violative of Article 14 of the Constitution.
The issue in this case was, whether in view of paragraph 4(vi)(b) of the operational guidelines of the NAM, the appellant could have procured Ayurvedic drugs solely from IMPCL without inviting tenders?
Paragraph 4(vi)(b) of the operational guidelines prescribes that at least 50 percent of the grant-in-aid shall be used to procure medicines from IMPCL, or PSUs and pharmacies under the State Governments and cooperatives. The appellant had granted the contract for the purchase of Ayurvedic medicines to IMPCL under paragraph 4(vi)(b) of the operational guidelines through nomination, thereby eliminating the other units. This action of the appellant is challenged as arbitrary and violative of Article 14.
The Court before interpreting paragraph 4(vi)(b), to determine if the action of the appellant is permissible under the law, discussed the law relating to the extent of judicial review of government contracts.
Judicial Review of Government Contracts: Extent and Ambit
The Court noted that 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 Court said that 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. It placed reliance on C.K. Achuthan v. State of Kerala, 1959 Supp (1) SCR 787, wherein it was held that it is open to the Government ‘to choose a person to their liking, to fulfil contracts which they wish to be performed. Further, when one party is chosen over another, the aggrieved party cannot claim the protection of Article 14, since the government has the discretion to choose with whom it will contract.
Moreover, the Court said that over the years, it has applied the non-arbitrariness standard under Article 14 to test the validity of government action and referred to Ramana Dayaram Shetty v. International Airport Authority of India, (1979) 3 SCC 489 , wherein it was observed that the government does not have unlimited discretion in granting State largesse and it must act in fairness.
Tender: A Constitutional Requirement?
The Court placed reliance on Kasturi Lal Lakshmi Reddy v. State of J&K, (1980) 4 SCC 1 wherein it was held that government contracts must be awarded by a transparent process. The process of inviting tenders ensures a level playing field for competing entities. While there may be situations which warrant a departure from the precept of inviting tenders or conducting public auctions, the departure must not be unreasonable or discriminatory.
The Court said that inviting tenders and conducting public auctions are preferred methods of allocation for two reasons:
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Procurement can be made at the best price.
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Allocation is through a transparent process.
However, if the purpose of allocation by the State is not revenue maximization, the State could award contracts through other methods, provided it is non-arbitrary and meets the requirements of Article 14.
The Court emerged at the following principles:
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Government action must be just, fair and reasonable and in accordance with the principles of Article 14.
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While government can deviate from the route of tenders or public auctions for the grant of contracts, the deviation must not be discriminatory or arbitrary. The deviation from the tender route must be justified and such a justification must comply with the requirements of Article 14.
Interpretation of Paragraph 4(vi)(b) of the Operational Guidelines
The Court while interpreting paragraph 4(vi)(b) of the operational guidelines, referred to the circulars on the procurement of Ayurvedic drugs, and said that 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. However, the Ministry of AYUSH(‘Ministry') issued a circular stating that the states may also procure essential Ayurvedic medicines directly from Oushadhi, subject to the condition that medicines must be provided within the rates of IMPCL. Further, in 2019 the Ministry issued a notification in supersession of the earlier notification stipulating that the procurement of medicines is the ‘prerogative' of the State Government.
Thus, the Court observed that the letter which was issued by the Union Ministry of Health and Family Welfare in 1994 stating that Ayurvedic medicines must be procured only from IMPCL is superseded by the latest notification issued by the Ministry in 2019 which stipulates that paragraph 4(vi)(b) of the operational guidelines does not differentiate between the units mentioned in the provision.
The Court said that paragraph 4(vi)(b) does not stipulate that IMPCL will have a higher standing as compared to other manufacturing units of the State Governments and cooperatives mentioned in the paragraph. The position of the Ministry is that 50 percent of the grant-in-aid shall be used to procure medicines from any of the establishments specified in the paragraph. This conclusion is substantiated using 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 show an intent to create a monopoly.
Validity of Award of Government Contract to IMPCL
The Court noted that the Government has 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 letter indicates that there is no method to determine the ingredients and quality of Ayurvedic drugs. Thus, it said that there was no method to determine the quality of the medicines produced by IMPCL as well.
The Court said 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. The contention that IMPCL does not have any commercial interest because it is an establishment developed by the Government of India is then equally applicable to other establishments prescribed in paragraph 4(vi)(b). Further, the argument that the procurement of Ayurvedic drugs from IMPCL would fall within the exceptional circumstances (assurance of quality medicines) is erroneous.
[Indian Medicines Pharmaceuticals Corpn. Ltd. v. Kerala Ayurvedic Coop. Society Ltd., 2023 SCC OnLine SC 5, decided on 03-01-2023]
Judgment by: Chief Justice of India Dr Dhananjaya Y Chandrachud
*Apoorva Goel, Editorial Assistant has reported this brief.
