Awarding Govt Contracts Through Public Tenders Preferable; Departure From Tender Route Must Be Reasonable : Supreme Court

Observing that the State does not have absolute discretion while spending public money, the Supreme Court reiterated that government contracts must be ordinarily awarded through tender process. As the process of inviting tenders ensures a level playing field for competing entities, the departure from the tender route "must not be unreasonable or discriminatory", the Court said, while finding fault with the State of Uttar Pradesh for giving a purchase order for Ayurvedic medicines without inviting tender.

"Government contracts involve expenditure out of the public exchequer. Since they involve payment out of the public exchequer, the moneys expended must not be spent arbitrarily", the bench of CJI D Y  Chandrachud and Justice Hima Kohli observed.

"Inviting tenders and conducting public auctions are considered to be preferred methods of allocation for two reasons: firstly procurement can be made at the best price; and secondly, 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 stated after referring to precedents.

In this case, the Kerala Ayurvedic Co-operative Society Limited, filed a writ petition the Allahabad High Court challenging an order for the purchase of Ayurvedic medicines issued by the State of Uttar Pradesh in favour of Indian Medicines Pharmaceutical Corporation Limited (IMPCL). 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 therefore approached the Apex Court.

The issue raised in this appeal was whether, in view of paragraph 4(vi)(b) of the Operating Guidelines of the National AYSUH Mission , the State could have procured Ayurvedic drugs solely from IMPCL without inviting tenders ?

The court noted that the following principles govern the Government contracts.

(i) Government action must be just, fair and reasonable and in accordance with the principles of Article 14; and (ii) 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 has to be justified and such a justification must comply with the requirements of Article 14.

The State, in this case contended 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 that the procurement of medicines through nomination is warranted because of the existence of exceptional circumstances bearing on need for quality. The action of the appellants of procuring medicines only from IMPCL to the exclusion of the other establishments mentioned in paragraph 4(vi)(c) is arbitrary and violative of Article 14 of the Constitution.", the bench said while upholding the High Court judgment.

Case details

Indian Medicines Pharmaceuticals Corporation Ltd vs Kerala Ayurvedic Co Operative Society Ltd. | 2023 LiveLaw (SC) 6 | CA 6693 of 2022 | 3 Jan 2023 | CJI DY Chandrachud and Justice Hima Kohli

For Petitioner(s) Mr. Naresh Kaushik, Adv. Mr. Vardhman Kaushik , AOR Mr. Manoj Joshi, Adv. Mr. Yogesh Yadav, Adv. Ms. Garima Prasad, Sr. Adv., AAG Mr. Vishnu Shankar Jain, AOR

For Respondent(s) Mr. Kaleeswaram Raj, Adv. Ms. Thulasi K. Raj, Adv. Mrs. Anu K. Joy, Adv. Mr. Alim Anvar, Adv. Mr. Nishe Rajen Shonker, AOR Ms. Garima Prasad, Sr. Adv., AAG Mr. Vishnu Shankar Jain, AOR Mr. Siddhant Kohli, Adv. Ms. Suhasini Sen, Adv. Ms. Swarupama Chaturvedi, Adv. Mr. Udai Khanna, Adv. Mr. Anmol Chandan, Adv. Mr. Gurmeet Singh Makker, AOR Mr. Siddharth Bhatnagar, Sr. Adv. Ms. Pallavi Pratap, AOR Ms. Pracheta Kar, Adv. Mr. Nadeem Afroz, Adv. Mr. Aditya Sidhra, Adv.

Headnotes

Government Contracts - Government action must be just, fair and reasonable and in accordance with the principles of Article 14; and (ii) 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 has to be justified and such a justification must comply with the requirements of Article 14 - Government contracts involve expenditure out of the public exchequer. Since they involve payment out of the public exchequer, the moneys expended must not be spent arbitrarily. The State does not have absolute discretion while spending public money. (Para 21-22)

Operating Guidelines of the National AYSUH Mission - Paragraph 4(vi)(b) - Order for the purchase of Ayurvedic medicines issued by the State of Uttar Pradesh in favour of Indian Medicines Pharmaceutical Corporation Limited (IMPCL) - Inviting tenders from the entities is the most transparent and non-arbitrary method of allocation that can be undertaken - The State must henceforth purchase Ayurvedic medicines only through a free and transparent procedure such as tenders. The State may deviate from this rule and procure medicines by nomination only if exceptional circumstances exist. In such a situation, the State must demonstrate the existence of exceptional circumstances on the basis of cogent material. (Para 31)

Tenders - 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. (Para 16)

Words and Phrases - Largesse - 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 - Terming all actions of government, ranging from social security benefits, jobs, occupational licenses, contracts and use of public resources – as government largesse results in doctrinal misconceptions. The reason is that this conflates the State’s power with duty. (Para 11)

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