No Substantive Grounds For Audit Objections: Andhra Pradesh HC Directs DoIMS To Release Pending Payments To Pharmaceutical Distributor

The Andhra Pradesh High Court recently directed the Director of Insurance Medical Services (DoIMS) to release payments withheld under invoices issued between 2017-2019 to Medihauxce Pharma Private Lmt. Holding under the capacity of distributer for rate contract firms.

Justice Ravi Cheemalapati clarified that the memo issued on the basis of Audit Inspections is not sustainable.

“Audit Inspection Report is only a intermittent document of the purpose of including findings in the audit report, which can only be considered as a final document of the department and the said audit report will then be laid before the Legislature of the State in terms of the procedure laid down under Article 151 of the Constitution of India is the final document.Thus, issuing the impugned memo based on such an intermittent document is per se illegal and the respondent No.2 cannot deny payment to the petitioner under the garb of the impugned memo, so far as they relate to Rate Contract purchase orders”

The petitioner, an authorised distributor of pharmaceutical firms, had moved the High Court contesting the legality of a memorandum issued in 2021 by the DoIMS. As per the memo, the invoices issued between 2017-2019 were held to be irregular and the corresponding payments were withheld.

The impugned memo directed that payments should solely be made to firms mentioned in the purchase orders and not to distributors, as per the Employees' State Insurance Corporation Rate Contract. It also stated that for payments to go through, invoices need to be resubmitted by the firm registered under the Rate Control Contract.

The petitioner contended that the memo was not issued in accordance with the ESIC Central Rate Contract Guidelines and that it was vague and did not apply to invoices issued in 2017-2019 but only from November 2019. It was argued that in 2016-2019, the petitioner had supplied 49 purchase orders in its own name, and 42 purchase orders were supplied on behalf of pharma companies registered under the Rate Contract, to a tune of over two crores.

Despite the petitioner sending repeated and periodic reminders for payments, it was argued that the DoIMS deliberately issued the memos to conceal their wrongdoings. As such, the petitioner contended that the audit objections lack substantiation through established protocols or regulations.

On the other hand, DoIMS contended that the cause of action arose out of a contractual obligation, and the same would need adjudication upon factual grounds and could not be decided in a writ petition. It was the further contention of DoIMS that an audit was conducted by the Principal Accountant General (Audits) in March 2021 and certain irregularities came out in the Audit, and it was on the basis of this report that the memos were issued to the petitioner. Further that the memo was issued in accordance with ESI RC guidelines, more specifically guideline no. 20, that states that all payments for procurement should be made only to Rate Controlled firms, and not the authorized distributors.

DoIMS also bought to the notice of the Court, that the Direct Demanding Officer who had placed the purchase order, was arrested by the Anti Corruption Bureau under allegations of financial fraud in DoIMS and investigation was underway. The F.I.R further disclosed that procurement of Drugs, Surgical, Lab equipment etc made to non-Rate Controlled companies, was part of a “massive scam” and contended that the payment in relation to those purchase orders cannot be released till the conclusion of the investigation.

The Principal Accountant General (Audit) contended that as per the controller and Audit Comptroller and Audit General’s prescribed procedures, the Indian Audit & Accounts Department, the audit objections, contained a list of discrepancies and all authorities, as per the audit objects were given a chance to explain their position before the final audit findings were submitted before the C&AG of India. It was stated that many documents were created for this purpose, and none of them could be concluded as final. 

Justice Cheemalapati first confirmed the maintainability of the writ petition, recognising that it not only seeks to compel the 2nd respondent to clear the outstanding amount specified in the withheld invoices but also questions the legality of the impugned memo issued in response to the audit objections, as it seems to run counter to established rules and procedures. 

"Regarding maintainability of the writ petition, the same having not only been filed for a direction to the respondent No.2 to clear of the amount covered under the withheld invoices, but also been filed questioning the impugned memo issued by respondent No.2 contrary to the Rules based on the audit objections, the same is maintainable."  

The Court then found that the impugned memo was issued after considering 4 documents. A joint reading of ESIC Central Rate Contract No.139A and Contract No.144 and 144(A) made it clear that all payments are to be cleared within 4-6 weeks and that they may be made directly to the firm but not necessarily.

“Thus there is no such condition in the above contracts that payments should not be released to distributor firms nor the distributor firms cannot be engaged by Rate Contract Firms.”

The second document was the memo issued in 2020, which stipulated that all invoices raised shall be resubmitted from 1^st November 2019. However, since the payments in question relate to the 2016-2019 years, the Court found that the memo would not be applicable.

The third document referred to by the DoIMS was the audit inspection report, which was held to be issued without following due procedure, and relied on at an intermediate stage. It was also observed by the Court that DoIMS had validated the letter of authorisation submitted by the petitioner/distributor.

Thus, the Court directed the DoIMS to release payments that were due to the petitioner under the capacity of distributer for rate contract firms.

The Court also observed, and in relation to non-rate contract invoices, although there was an FIR booked alleging scam, the petitioner was not named in the FIR; nonetheless held that since the investigation was underway, payments in relation to non-rate contract invoices would be released would be subject to the outcome of the criminal case.

"However, since a case has been booked and being investigated into, it is not desirable to order payment of the non-Rate Contract Purchase orders and payment under non-RC purchase orders would only be subject to the outcome of the investigation in that criminal case."  

Accordingly, the 2nd respondent was directed to release pending payment in respect of the Rate Contract Purchase orders within a period of three weeks and the impugned memo was set aside.

As such, the petition was allowed in part. 

Counsel for Petitioner: Advocate Thakur Poornima

Counsel for Respondents: Government Pleader K.Sangan Naidu, Standing Counsel for IA & AD K.Swarna Seshu

Case Title: Medihauxe Pharma Pvt. Lmt vs. State of AP and Ors

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