B.P.DAS, J & B.N.MAHAPATRA, J. W.P.(C ) NO.18496 OF 2009 (Decided on 20.12.2010) UTKAL PHARMACEUTICALS ………. Petitioners. MANUFACTURERS ASSOCIATION & ANR. .Vrs. STATE OF ORISSA & ORS. ………. Opp.Parties. For Petitioner - Mr. Sanjit Mohanty, Sr.Advocate M/s.S.P.Panda, S.Nanda, A.Mohapatra, A.Meher & A.Mohanty. For Opp.Parties –Govt. Advocate & M/s. Yuvraj Parekh, B.B.Jaysingh, S.Mukherjee, S.K.Behera & K.Ghadei. B. P. DAS, J. This writ petition has been filed by Utkal Pharmaceuticals Manufacturers Association, petitioner no.1, which is an association of twenty small scale pharmaceutical industries and registered under the Societies Registration Act, 1860, and its Joint Secretary (Executive), petitioner no.2, assailing Clause 2.1 of the Tender Conditions in respect of Tender Call Notice No.SDMU/2009-2010-DMC-11- 009 issued by O. P. No.2-the Director of Health Services, State Drug Management Unit, Orissa, vide letter no.11128 dated 29.10.2009 under Annexure-9, fixing Rs.10 crores or more as the annual turnover of the principal manufacturing units/the tendering firms for pharmaceutical products of each year of last three financial years, as being illegal, arbitrary, discriminatory and contrary to the Industrial Policy Resolution, 2007 (IPR, 2007) as well as the Orissa Micro, Small and Medium Enterprise Development Policy, 2009 (shortly called ‘the MSME Policy 2009’), which has been declared under the notification dated 17.2.2009 published in the Orissa Gazette on 9.3.2009, vide Annexure-6. The petitioners have prayed to relax/reduce/ modify the minimum annual turnover fixed in Clause 2.1 of the Tender Conditions to Rs.10 lakhs with a direction to the opposite parties to allow the local SSI units/MSME units to participate in the tender pursuant to the Tender Call Notice, Annexure-9. 2. O.P. no.2-the Director of Health Services, State Drug Management Unit, (DHS in short), by the aforesaid Tender Call Notice, Annexure-9, invited tenders in sealed cover from reputed manufacturing firms having valid manufacturing licence and GMP (Good Manufacturing Practice) as per a revised schedule, i.e. Schedule-M, for supply of drugs and medical consumables for a period of one year from the date of approval of tender on rate contract basis. According to the petitioners, the State Govt. in order to ensure that store items for Government Departments and agencies under its control are procured from industries located within the State and further those local units get price preference for the aforesaid purpose and simultaneously to ensure that local products are cost- effective meeting overall quality requirement for competitiveness, efforts are to be made to distribute purchase orders equitably among the participating industries. It is stated that to prevent monopoly, the rate contract system in Orissa was introduced at the behest of the erstwhile Health Department of the Govt. of Orissa. The rate contract system for drugs of Small Scale Pharmaceutical Industries has been in force since last twenty years. The rate contract system is now within the domain of the Directorate of Export Promotion and Marketing (DEPM). Keeping in view the above objectives, certain items of drugs and medical consumables are earmarked by the State Govt. for purchase from approved local Small Scale Industrial Units (S.S.I. Units) and those products to be purchased only from the DEPM approved SSI Units taking their past performance and capacity of production into consideration. For this, the local SSI units were to have (a) valid drug manufacturing licence and (b) valid Export Promotion and Marketing (EPM) rate contract. The basic features of rate contract system for drugs and medicines formulated by the State Govt. are : (i) The prices of the drugs and medicines under the rate contract are to be finalized by the Drugs Committee of EPM in which the Health Secretary shall be the Chairman on cost plus basis and the rates so finalized by the DEPM Drugs Committee shall be subject to audit by the Comptroller and Auditor General (CAG); (ii) The rate contract system is a unique system which shall provide market support to MSMEs (Mirco, Small and Medium Enterprises) as per the provisions of the Industrial Policy Resolution (IPR) and (iii) The rate contract in respect of specific store items not in the exclusive list and manufactured by the local small scale industrial units is to be finalized by the DEPM. This was done on the basis of competitive offers received from local units, cost structure obtained from these offers, market price of similar items valid DGS & D rate, if any, and other relevant consideration. The objective of adopting the aforesaid policy was that the Departments and Agencies under the control of the State Govt. may purchase rate contract items from the rate contract holder/small scale industries at the price fixed, without inviting tenders. DEPM vide Circular nos.2106(200) and 2113(200) dated 8.3.1999 issued fresh rate contracts in respect of drugs and medicines with SSI units in the State for supply of store items. Phase-I of the said rate contract included 31 items and Phase- II contained 44 items. When the matter stood thus, the State Govt. in Industries Department vide circular No.XIV-HI-9/04-3042/I dated 17.2.2004 framed the Purchase Policy as envisaged under the IPR, 2001. Clause 3 of the said Purchase Policy provides : “3) Rate Contract :- i. Rate contract in respect of specific store items not in the exclusive list and manufactured by the local small scale industrial units will be finalized by the Director of Export Promotion & Marketing. This will be done on the basis of 2 competitive offers received from local units, cost structure obtained from these offers, market price of similar items valid DGS&D rate (if any) and other considerations relevant to fixing the price of the product. Besides, in respect of bulk items a representative of the purchasing Department would be actively associated at the time of rate contract finalization. ii. State Government Departments and Agencies under the control of the State Government will purchase rate contract items from the rate contract holder/Small Scale industry at the price fixed, without inviting tenders.” According to the petitioners, periodic extensions were granted by the DEPM as to validity of rate contract with MSMEs. In 2003 the State Govt. with the financial assistance of the Central Govt. under the schemes like Small Industry Cluster Development Programme (SICDP) formulated a special package for self- employment with the prime objective to promote small scale industries through development of industrial clusters, ancillary and downstream industries, all eligible new SSI units and existing SSI units taking up expansion/modernization/diversification located in industrially backward areas which started commercial production between 1.4.2003 and 31.3.2007 to be eligible for sales tax reimbursement for a period of 5 years limited to 100% Fixed Capital Investment. The Director of Industries, O.P. no.3, taking into account the views of the Director, SISI and other concerned organizations by order dated 7.7.2005 identified various clusters for different kinds of product/process SSI units including pharmaceuticals. In a meeting held on 2.9.2006 under the chairmanship of the Commissioner-cum-Secretary, Industries Department, regarding Cluster Development, after discussing various action points, it was resolved under paragraph 2 that Utkal Pharmaceuticals Manufacturers’ Association (UPMA) should register the SPV for implementation of the cluster development programme. The representative of UPMA was asked to furnish proposal under SICDP at the earliest. Under paragraph 3, it was further resolved that UPMA should prepare a report on quantum of generic drug purchase of the State Government and submit proposal to the Industries Department for improving the share of local industries in the government purchases. The proposal was to be submitted quickly under SICDP. While the matter stood thus, IPR 2007 came into force with effect from 2.3.2007, inter alia, laying down marketing support to Micro and Small Scale Enterprise in Government Procurement. The relevant clauses of the IPR 2007, i.e., Clauses 13.3, 13.6 and 30, on which the petitioners have placed reliance, are extracted hereunder : “13. MARKETING SUPPORT TO MICRO AND SMALL SCALE ENTERPRISEIN GOVERNMENT PROCUREMENT xxx xxx xxx 13.3 The State Government Departments and agencies will have to purchase their requirements of these items only from local industries with ISO/ ISI/EPM certification for the items, by involving competitive quotations from such industries. Efforts will be made to distribute the purchase 3 order equitably among the participating industries, prepared to accept the lowest negotiated rate keeping in view their production capacity. xxx xxx xxx 13.6 For facilitating government purchase of MSE products, an ‘MSE Exclusive List’ shall be prepared by Director of Industries, taking the items generally manufactured by the MSE units of the State. The items so listed shall be reserved for the MSE units of the State for Government procurement through limited tender system. xxx xxx xxx 30. MISCELLANEOUS (a) The policy shall remain in force until substituted by another policy. The State Government may at any time amend any provision of this policy. (b) A special package of incentives over and above what has been enumerated in this Policy document may be considered for new industrial projects on case to case basis taking into account the benefits to the State. The Cabinet on the recommendations of the SLSWCA and the HLCA and concurrence of Finance Department may consider such proposal. xxx xxx xxx” The State Govt. in Industries Department accordingly issued notification dated 21.6.2007 under Clause 13.1 of the IPR 2007 constituting a Committee under the chairmanship of the Commissioner-cum-Secretary, Industries Department, to make a comprehensive review of the rate contract, purchase list, exclusive purchase list and open tender purchase list with a view to extend marketing support to SSI units in alignment with the newly enacted Micro, Small and Medium Enterprises Development Act, 2006 and the corresponding Rules framed there under and the same was published in the extra-ordinary issue of the Orissa Gazette on 28.9.2007, Annexure-16 to the rejoinder filed by the petitioners. The State Govt. in Industries Department by notification dated 17.2.2009 formulated the Orissa MSME Development Policy, 2009 in conjunction with IPR 2007 and in consonance with section 11 of the MSME Act, 2006 for promoting the MSMEs in the State and published the same in the extraordinary issue of the Orissa Gazette dated 9.3.2009, vide Annexure-6. Thereafter the DHS, State Drug Management Unit, by letter dated 22.6.2009 in Annexure-7 intimated all the MSME units, which were formerly known as SSI units, to continue to supply drugs at the previous contract rate having valid GMP and manufacturing licence since the Govt. by letter dated 18.6.2009 had allowed procurement of drugs covered under the EPM rate contract from the local MSME units having valid GMP and manufacturing licence. One such letter addressed to a local SSI unit is annexed as Annexure-7. According to the petitioners, the local SSI units like petitioner no.1 having valid manufacturing licence, certificates of GMP and ISO certifications as required 4 under the Drugs and Cosmetics Act, 1940 have been catering to the need of the State Govt. for last more than twenty years. The DHS, State Drug Management Unit, floated the tender as per Tender Call Notice dated 29.10.2009, vide Annexure-9, for supply of 259 items of drug and medical consumable for a period of one year on rate contract basis. Four rate contract items and 93 items of drug in respect of which the local SSI units/MSMEs have manufacturing licence, as per the lists, Annexure-11 and 13 respectively to the rejoinder, have been put to tender in the Tender Call Notice, Annexure-9. The petitioners have challenged the legality and validity of the eligibility criteria in Clause 2.1 of the Tender Conditions stipulating that the minimum annual turnovers of pharmaceutical products of the principal manufacturing unit/the tendering firm of each year of last three financial years shall be Rs.10 crores for being eligible to participate in the tender as arbitrary and unreasonable because the said minimum annual turnover has been introduced with a view to help large manufacturers belonging to other States to participate in the tender while denying the opportunity to the SSI units and the MSMEs of the State to participate in the tender because they can never meet the annual turnover of Rs.10 crores as fixed in the eligibility clause. According to the petitioners, this is an attempt to keep the SSI units and the MSMEs of the State out of the tender process, which will ultimately lead to denying the SSI units and the MSMEs to participate in the tender. That apart, the local SSI units/MSMEs have been meeting the Govt. requirements for more than twenty years without fail and, therefore, the allegation that small manufacturing units are not able to supply in time due to less manufacturing capacity and are not able to maintain the stringent quality control is incorrect. In this regard the petitioners made a representation to the Minister of Health and Family Welfare Department of the Govt. of Orissa, vide Annexure-15 to the rejoinder, with a request to reduce the quantum of annual turnover pursuant to which a meeting was convened by the Industries Department on 17.6.2009 wherein decision was taken, vide Annexure-8, to reduce the turnover of the MSMEs from Rs.10 crores to Rs.10 lakhs and this decision was taken keeping in view the provisions of the MSME Act, 2006 and in consonance with the IPR 2007 and the Orissa MSME Policy, 2009. Paragraphs II and III of the minutes of the meeting relevant for the purpose are extracted hereunder : “II. The turnover condition of Rs.10.00 crore may continue for purchase of drugs through open tender but for local MSMEs the turnover condition may be relaxed to 10.00 lakhs. III. The inspection of units who have gone for GMP takes lot of time due to shortage of staff in Drugs Controller’s Office. The units who have applied for inspection should not be denied orders pending inspection by office of Drugs Controller.” According to the petitioners, O.P. no.2-DHS and O.P. no.6-the Commissioner- cum-Secretary, Health and Family Welfare Department, being the functionaries of the State Govt. and bound by the decision taken as per Annexure-8, can neither 5 resile from such decision nor can act contrary to the same. Opposite party nos.2 and 6 having acted contrary to the aforesaid decision in inviting the tender as per Annexure-9, the tender process was illegal, arbitrary, discriminatory and that contravenes the MSME Act, 2006 and violates the IPR 2007 and the MSME Policy, 2009. 3. Opposite party nos.2 and 6 have jointly filed a counter affidavit through the Joint Director of Health Services (State Drug Management Unit), Orissa, taking several stands, inter alia, that the eligibility criteria stipulating the annual turnover of Rs.10 crores or more is neither illegal nor arbitrary for those pharmaceutical units, which have already manufactured and supplied drugs for the last three years with their annual turnover of Rs.10 crores or more as they can maintain the standards laid down and have the financial strength to supply huge quantity of essential medicines at the time of emergency and by this way the State can get better quality products with minimum chance of “Not of Standard Quality” (NSQ) drugs and thereby most of the non-serious players can be restricted. The opposite parties in this regard have annexed a chart showing position of part-supply and non-supply of drugs by local SSI units for more than 60 days from the date of purchase order during the year 2009-10, vide Annexure-F/2. In support of their stand, the said opposite parties have annexed copies of tender call notices issued by the Health Departments of various other States/Union Territories/important Governmental organizations for supply of drugs and medical consumables by pharmaceutical manufacturing units, vide Annexure-A/2, wherein turnover had been fixed at Rs.10 crores or more with a view to ensure timely as well as supply of better quality of drugs with less chance of NSQ drugs. The opposite parties have further contended that the Technical Committee/Sub-Committee consisting of DHS, DMET, D.C., Joint Director, SDMU, M.O., SDMU and SMO Central Drug Stores, and others in the meeting held on 7.4.2009 recommended, as per the minutes in Annexure-M/2 that fixing the turnover at Rs.10 crores or more would ensure that pharmaceutical units, which were financially sound with better technology, would participate in the tender and patients would get better quality of medicines at the right time and at the time of epidemic, natural calamities, flood and that many lives can be saved if essential medicines are supplied in time. Price preference and exemptions have been given to local SSI units/MSMEs as per the IPR 2007 and MSME 2009, vide Annexure-C/2. Learned counsel for the State contended that the action taken by the authorities in fixing the annual turnover at Rs.10 crores and more as the eligibility criteria is not at all arbitrary and the same has been included in the tender conditions to ensure better quality products. 4. Question that arises for consideration is whether a conscientious decision taken in the meeting held on 17.6.2009 under the chairmanship of the Commissioner-cum-Secretary, Industries Department, vide Annexure-8, has binding effect on the State Govt. in any manner and whether Annexure-9, the Tender Call Notice, is in any manner contrary to the Public Policy declared by the State Govt. to ensure that the SSI units/MSMEs survived in the State. 5. At the outset, we may make it clear that there is no allegation in the counter affidavit against the SSI units/MSMEs of the petitioner association that it has ever 6 supplied drugs and medicines not of standard or at any point of time caused any delay in supply of drugs. It is also a fact that by fixing the minimum annual turnover at Rs.10 crores, the petitioner-association was kept outside the purview of the tender process. 6. We have also heard Mr.Yuvraj Parekh, learned counsel appearing for the intervenor-O.P. no.7, who submitted that O.P. no.7-firm is an intending bidder and has no objection if the minimum annual turnover of Rs.10 crores is reduced to Rs.10 lakhs so far as MSMEs are concerned. Apart from the items under the EPM rate contract, other items of drug included in the tender notice are to be taken as valid. 7. On the aforesaid background, and the points raised, we may refer to the minutes of the meeting held on 23.7.2010 under the chairmanship of the Chief Secretary, Orissa, with reference to the present writ petition and another writ petition being W.P. (C) No.18494 of 2009 filed by the present petitioners. The aforesaid minutes has been filed by the learned counsel for the State along with the memo. dated 29.7.2010. In the aforesaid minutes under the heading “Benefits being given to SSI Units of the State”, it has been stated that in both the tenders the following preferences/exemptions have been extended to the local MSEs in the terms and conditions and subsequent pre-bid meetings as per IPR, 2007 and MSME, 2009 : (1) The local MSEs registered with respective DICs, Khadi, Village, Cottage & Handicraft Industries, SIC and NSIC shall be exempted from payment of earnest money and shall pay 25% of the prescribed security deposit while participating in tenders of Govt. (2) Local Micro & Small Enterprises and Khadi and Village Industrial Units including Coir, Handloom and Handicrafts, competing in the open tender shall be entitled to price preference of 10% vis-à-vis local, medium and large industries as well as outside industries. Local MSEs having ISO or ISI certification for their product shall get an additional price preference of 3% as per provisions of IPR, 2007. (3) While preparing comparative price statement for evaluation of tender papers, the VAT payable in Orissa shall be excluded and price comparison shall be made only on the basic price. However, any tax payable outside Orissa shall be added to the basic price for such price comparison.” 8. In our considered opinion, the petitioners’ contention is that the aforesaid benefits can only be extended to the local SSI units/MSMEs of Orissa if they come within the zone of consideration, i.e., only when they are entitled to participate in the tender process. If the local SSI units/MSMEs cannot satisfy the turnover criteria, the question of their getting the benefits as indicated above will not arise. So, the aforesaid benefits will not be made available to the local SSI units/MSMEs and the declaration made by the State Govt. to that effect will be frustrated because of the stipulation in the eligibility clause that the minimum annual turnover of the bidder shall be Rs.10 crores in each of last three financial years. The tender so floated by the opposite parties as per Annexure-9 is definitely against the interest of the local SSI units and the MSMEs for development of which the MSME Act has been enacted by the Central Govt. with the following objects and reasons : 7 “………… The world over, the emphasis has now been shifted from ‘industries’ to ‘enterprises’. Added to this, a growing need is being felt to extend policy support for the small enterprises so that they are enabled to grow into medium ones, adopt better and higher levels of technology and achieve higher productivity to remain competitive in a fast globalization area. …..” 9. A bare analysis of the statement of objects and reasons makes it clear that emphasis has been given to enterprises, a growing need being felt to extend policy support for the small enterprises to enable them to grow into medium ones, adopt better and higher levels of technology and achieve higher productivity in the fast global competition. With this aim and object, the MSME Policy so also IPR 2007 have been formulated. Now by an executive fiat and in an indirect manner, the benefits intended to be given by policies of the Govt. like the MSME Act, IPR 2007 and MSME Policy, as indicated above, are going to be snatched away from the petitioner-association. 10. The members of the petitioner-Association and the local SSI units and MSMEs have been kept out of the tender process despite the fact that a conscientious decision has been taken in a meeting held on 17.6.2009 under the chairmanship of the Commissioner-cum-Secretary, Industries Department, to reduce/relax the turnover condition from Rs.10 crores to Rs.10 lakhs for the local MSMEs and the resolution adopted in such meeting was forwarded to the Health Department, the Director of Export Promotion & Marketing, and others including the petitioner-Association, vide letter dated 23.6.2009, Annexure-8 and the tenders as per the tender call notice, Annexure-9, was floated on 29.10.2009. No decision has also been taken on the recommendation of the Industries Department. 11. As to the allegation that small manufacturing units are not able to maintain the stringent quality control, the plea taken by O.P. nos.2 and 6 that by enhancing the minimum annual turnover to Rs.10 crores, there will be no chance of supply of drugs of “Not of Standard Quality” (NSQ) is not acceptable as there is no allegation against the units of the petitioner-Association regarding supply of drugs of NSQ. 12. Law is fairly well settled that while the discretion to change a policy in exercise of the executive power, when not trammelled by any statute or rule, is wide enough, what is imperative and implicit in terms of Article 14 is that a change in policy must be made fairly and should not give the impression that it was so done arbitrarily or by any ulterior criteria. The basic requirement of Article 14 is fairness in action by the State, and non-arbitrariness in essence and substance is the heartbeat of fair play. (See Union of India and another v. International Trading Co. and another, (2003) 5 SCC 437 ). At the cost of repetition, we may say that the benefits given to the SSI units and MSMEs by the State Govt. in the Industries Department under the MSME Act, 2006 and the IPR 2007 and Orissa MSME Policy, 2009 in one hand have been snatched away by another Department of the State Govt. In State of Bihar v. M/s.Suprabhat Steel Ltd., AIR 1999 SC 303, the Supreme Court held that the incentives given under the Industrial Incentive Policy by the State Govt. on the basis 8 of the resolutions of the State Cabinet cannot be denied. In the case at hand also, the action of