IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE P.N.RAVINDRAN WEDNESDAY, THE 23RD JUNE 2010 / 2ND ASHADHA 1932 WP(C).No. 5512 of 2010(L) ------------------------- PETITIONER(S): --------------- 1. M/S.RKG PHARMA PVT.LTD, 12TH MILE STONE, MATHURA ROAD, FARIDABAD, PIN-121003,REPRESENTED BY THE AUTHORIZED SIGNATORY RAMANLAL JAIN. 2. M/S.UNICURE (INDIA)PVT.LTD,C-22&23, SECTOR -3, NOIDA, UTTAR PRADESH,PIN-201301, REPRESENTED BY THE AUTHORIZED SIGNATORY RAMESH BHANDARI. 3. M/S.VIVEK PHARMACHEM (INDIA)LTD., A1-SETHI COLONY, JAIPUR, RAJASTAN, PIN-302004,REPRESENTED BY THE AUTHORIZED SIGNATORY RAMESH BHANDARI. BY ADV. SRI.M.RAMESH CHANDER SMT.K.A.SANJEETHA RESPONDENT(S): --------------- 1. STATE OF KERALA, REPRESENTED BY THE SECRETARY TO GOVERNMENT, HEALTH AND FAMILY WELFARE (J) DEPARTMENT, SECRETARIAT,TRIVANDRUM. 2. THE KERALA MEDICAL SERVICES CORPORATION LIMITED, TRIVANDRUM,REPRESENTED BY ITS MANAGING DIRECTOR. ADDL. 3. M/S.SANSE LABORATORIES PRIVATE LTD.P.B.NO.2, ELAPPUNKAL JUNCTION, KOZHUVANAL-686 523, REPRESENTED BY ITS MANAGING DIRECTOR SRI.MANOJ JOSEPH. 4. HANS SYRINGES PRIVATE LTD., NAMBIKODE ELAPPULLY, PALAKKAD - 678 622, REPRESENTD BY ITS MANAGING DIRECTOR MR.M.C.ANIL KUMAR. 5. IVE LINKS, MANUFACTURERS OF MEDICAL DISPOSABLES, KEZHUVAMKULAM P.O., CHERPUMKAL, PALA, REPRESENTD BY ITS MANAGING PARTNER MR.GEORGE PAUL T.P. WP(C).No. 5512 of 2010(L) 2 6. MR.C.ARUNACHALAM, PARTNER, TEE CEE PHARMA, 22/24, INDUSTRIAL ESTATE, PAPPANAMKODE, TRIVANDRUM - 695 019. 7. MR.K.PREM, PROPRIETOR, MURUGHAN PHARMA, PUNALUR - 691 305, KOLLAM. 8. MR.P.J.PONNAPPAN, MANAGING DIRECTOR, SOUTHERN UNION PHARMACEUTICALS - KERALA (P) LTD., XXVI/65 & 66, MUSEUM ROAD, P.B.NO.504, CHEMBUKKAVU, THRISSUR - 680 020. 9. THE PHARMACEUTICALS & CHEMICALS TRAVANCORE PVT. LTD. VANCHIYOOR, THIRUVANANTHAPURAM-35, REPRESENTD BY ITS EXECUTIV DIRECTOR SRI.SYAM J. 10. KERALA PHARMACEUTICALS MANUFACTURERS' ASSOCIATION C/O.CHETHANA PHARMACEUTICALS, PERINTALMANNA. (ADDL. RESPONDENTS 3 TO 10 ARE IMPLEADED AS PER ORDER DATED 16.3.10 IN IA.3614/10) BY GOVERNMENT PLEADER SMT.SMITHA SUKUMARAN FOR R1 ADV. SRI.M.AJAY,SC,KERALA MEDICAL SERV.CORPN FOR R2 SRI.ANIL D. NAIR FOR ADDL.R 3 TO 10 SMT.NIVEDITA A.KAMATH FOR ADDL.R3 TO 10 THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 23/06/2010, ALONG WITH WP(C) NO. 5606 OF 2010, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: WP(C).No. 5512 of 2010 APPENDIX PETITIONERS' EXHIBITS: EXT.P1: PHOTOSTAT COPY OF ORDER G.O.(P)NO.448/2007/H&FWD ISSUED BY THE FIRST RESPONDENT DATED 1.11.2007. EXT.P2: PHOTOSTAT COPY OF THE INVITATION FOR BID ISSUED BY THE 2ND RESPONDENT DATED 6.1.2010. EXT.P3: PHOTOSTAT COPY OF ORDER G.O.(MS) NO.112 /2009/H & FWD DATED 13.5.2009. EXT.P4: PHOTOSTAT COPY OF ORDER G.O.(RT)NO.416/2010/H&FWD DATED 2.2.2010. EXT.P5: PHOTOSTAT COPY OF CORRIGENDUM NO.3 (NO.6737/PUR/KMSCL/2009) ISSUED BY THE 2ND RESPONDENT DATED 3.2.2010. EXT.P6: PHOTOSTAT COPY OF THE REPRESENTATION BEFORE THE 2ND RESPONDENT FILED BY UNICURE (INDIA) LTD. DATED 4.2.2010. EXT.P7: PHOTOSTAT COPY OF THE REPRESENTATION BEFORE THE 2ND RESPONDENT FILED BY VEVEK PHARMACHEM (INDIA) LTD. DATED 5.2.2010. RESPONDENTS' EXHIBITS: EXT.R3(1): TRUE COPY OF THE ORDER DATED 12.10.1976 ISSUED BY THE GOVERNMENT. EXT.R3(2): TRUE COPY OF THE ORDER DATED 11.11.1986 ISSUED BY THE GOVERNMENT. EXT.R3(3): TRUE COPY OF THE ORDER DATED 13.10.2005 ISSUED BY THE GOVERNMENT. EXT.R3(4): TRUE COPY OF THE ORDER DATED 27.8.2008 ISSUED BY THE GOVERNMENT. EXT.R3(5): TRUE COPY OF THE CLARIFICATION DATED 23.1.2009 ISSUED BY THE GOVERNMENT. // TRUE COPY // TKS P.N.RAVINDRAN, J. ------------------------------------- W.P.(C)Nos.5512 & 5606 of 2010 -------------------------------------- Dated 23rd June, 2010 JUDGMENT The petitioners in these writ petition are manufacturers of drugs. They have filed these writ petitions challenging Ext.P4 Government order and Ext.P5 corrigendum issued by the second respondent Corporation. The brief facts of the case are as follows. W.P.(C)No.5512 of 2010 2. The second respondent, the Kerala Medical Services Corporation Limited (hereinafter referred to as `the Corporation' for short), is a Government company incorporated under the Companies Act, 1956. The Corporation was formed to harness resources for the timely procurement and prompt distribution of medicines in health care institutions in an efficient, transparent and cost effective way thereby ensuring full utilization of funds. The purpose for which the Corporation was established is set out in Ext.P1 Government order dated 1.11.2007 by which, the Government approved the Memorandum and Articles of Association of the Corporation. 3. After the Corporation was established, during the year 2009, it invited tenders for supply of medicines. As per the tender conditions, small scale industrial units were exempted from WP(C).Nos.5512 & 5606/2010 2 furnishing earnest money deposit. Later, after the tender was awarded to them, the Corporation insisted that they should furnish security deposit. The small scale industrial units thereupon filed W.P. (C)Nos.8915 and 8940 of 2009 in this Court challenging the direction issued by the Corporation to furnish security deposit. Referring to G.O.(P)No.385/2008/Fin. dated 27.8.2008, a copy of which was produced and marked as Ext.P6 in W.P.(C)No.8915 of 2009, it was contended that the stipulation in clause (c) thereof does not apply to the Corporation for the reason that it is not a public sector undertaking working on a competitive basis but a service organization. A copy of Ext.P6 is on record as Ext.R3(4). Reliance was placed on Ext.R3(5) letter dated 23.1.2009 sent by the Principal Secretary to Government, Finance Department to a small scale industrial unit wherein it was stated that the Corporation is a service organization of the Government of Kerala and that it does not undertake sales or compete in open market and therefore it is not a competitive public sector undertaking. When W.P.(C)Nos.8915 and 8940 of 2009 came up for hearing on 23.3.2009, a learned single Judge of this Court after considering the rival contentions passed the following interim order: “Although this is a common order in the two writ petitions, Exhibits referred to in this order are as obtaining in W.P.(C)No.8915 of 2009. The petitioners in these two WP(C).Nos.5512 & 5606/2010 3 writ petitions are S.S.I.Units, who have submitted tenders for supply of medicines pursuant to notification inviting tenders floated by the 1st respondent Public Sector Undertaking. They have been exempted from the condition of submitting Earnest Money Deposit for the tender. They have been awarded the tender. Now they have been directed to furnish security deposit as provided under the conditions of tender and to execute an agreement. According to the petitioners, by virtue of Ext.p6 Government Order, they are exempted from furnishing security deposit and Earnest Money Deposit. The petitioners, therefore, seek an interim order directing the 1st respondent to permit the petitioners to execute the agreement without insisting on furnishing security deposit. 2. Sri.M.Ajay takes notice on behalf of the 1st respondent. The learned Government Pleader takes notice on behalf of the other respondents. The learned counsel for the 1st respondent submits that Clause (c) of Ext.P6 is not applicable to Public Sector Undertakings that are working on competitive basis and since the 1st respondent is a Public Sector Undertaking working on a competitive basis, the conditions of Ext.P6 are not applicable to the notification inviting tenders floated by the 1st respondent. He would further contend that the Earnest Money Deposit has been waived not as per Ext.P6, but in accordance with the tender conditions. 3. In answer to the same, the petitioners point out that the very question as to whether the 1st respondent is a Public Sector Undertaking working on a competitive basis was the subject matter of a clarification pursuant to Ext.p12 letter addressed by one of the petitioners to the Government, to which the Government replied by Ext.p13 that the 1st respondent is a service organization of Government of Kerala, which does not undertake any sales or compete in open market and therefore is not a competitive Public Sector Undertaking. 4. The learned counsel for the 1st respondent submits that in view of Ext.P13, the 1st respondent has taken up the matter with the Government and the Government is yet to give reply to the same. 5. I have heard both sides. In the facts and WP(C).Nos.5512 & 5606/2010 4 circumstances of the case, I pass the following interim order: The 1st respondent shall permit the petitioners to execute the agreement provisionally without insisting on furnishing of security deposit, which shall be subject to further orders of this Court. In the meanwhile, the 2nd respondent shall take a final decision in the matter, as to whether the 1st respondent is a competitive Public Sector Undertaking, within a period of two weeks from the date of receipt of a copy of this order. This order shall be served by the 1st respondent before the 2nd respondent for compliance.” Pursuant to the said direction, the State Government heard the parties to the aforesaid writ petitions, the representative of the Corporation and the representatives of the Industries and Finance Departments and passed Ext.P3 order dated 13.5.2009 holding that the Corporation is a competitive public sector undertaking and not a service organization and therefore it is not liable to grant the benefits contemplated in Ext.R3(4) Government order dated 27.8.2008 which was produced and marked as Ext.P6 in W.P.(C)No.8915 of 2009 referred to above. 4. After Ext.P3 order was passed, the Corporation issued Ext.P2 tender notice inviting tenders for the supply of drugs and supplies to the Corporation for the period from 1.4.2010 to 31.3.2011. The sale of the tender documents was to commence on 7.1.2010 and to close at 5 p.m. on 3.2.2010. The last date stipulated for submission of tenders was 11 a.m. on 4.2.2010 and WP(C).Nos.5512 & 5606/2010 5 the tenders were to be opened at 11.30 a.m. on 4.2.2010 in the head office of the Corporation. In Ext.P2 tender notice, in paragraph 3(i) it was provided that price preference not exceeding 5% for Domestic Micro, Small and Medium Enterprises and for State/Central Public Sector Undertakings shall be available only for products manufactured by them within the State of Kerala. In the note to paragraph 3(i) it was stipulated that `Domestic, Micro, Small and Medium Enterprises' means industrial units as classified in clause 7 (1) of chapter III of the Micro, Small and Medium Enterprises Development Act, 2006 which manufactures the goods within the State and are registered with the competent authority of the Industries and Commerce Department of Government of Kerala. In paragraph 7 of Ext.P2 it was stipulated that State micro, small and medium enterprises registered with Government of Kerala are exempted from remittance of Earnest Money Deposit. In paragraph 10 of Ext.P2 tender notice it was stipulated that tenders will be evaluated with reference to various criteria and that the rate per unit (landed price) will be the criteria for determining the L1 rate (Lowest rate). It was also stipulated that the evaluation and comparison shall include 5% price preference for domestic small scale industrial units and State/Central public sector undertakings for WP(C).Nos.5512 & 5606/2010 6 products manufactured by them within the State of Kerala. In paragraph 3(vi)(a) it was stipulated that at any time prior to the date of submission of tender, the tender inviting authority (the Corporation) may, for any reason, or as per directions of the Government, modify the condition in the tender documents by an amendment and that such amendment will be binding on all prospective tenderers. 5. Pursuant to Ext.P2 tender notice, the petitioners, additional respondents 3 to 10 and others submitted tenders. However, before the last date stipulated for sale of tender documents, the Government issued Ext.P4 order dated 2.2.2010 directing that 10% price preference will be extended to small scale industries in Kerala as ordered in Ext.R3(4) Government order dated 27.8.2008 in the tenders floated by the Corporation for procurement of drugs and supplies including the tender due for opening on 4.2.2010, as a special case. The Managing Director of the Corporation thereupon issued Ext.P5 corrigendum dated 3.2.2010 amending clause 3(i) of Ext.P2 and sub clause 2 to clause 10 of Ext.P2 wherein it was stipulated that Domestic Micro, Small and Medium Enterprises and State/Central Public Sector Undertakings shall be entitled to 10% price preference for drugs manufactured by WP(C).Nos.5512 & 5606/2010 7 them within the State of Kerala. In view of the said amendment, the last date for sale of tender documents was postponed to 19.2.2010 and the last date for receipt of tenders and opening of tenders was postponed to 20.2.2010. It was ordered that all other conditions in the tender notification shall stand unaltered. This writ petition was thereupon filed challenging Exts.P4 and P5 and seeking a direction to the Corporation to proceed with the tender on the basis of the conditions incorporated in Ext.P2. It is contended that Ext.P4 is a non-speaking order, that it does not give any reason for deviating from Ext.P3 and that it is arbitrary and illegal. The petitioners have also prayed for a direction to the respondents to consider whether only 20 to 25% of the order could be granted to small scale industrial units/public sector undertakings and to award the rest of the orders to the lowest bidders in order to save public money. 6. A counter affidavit dated 25.3.2010 has been sworn to by the Under Secretary to Government, Health and Family Welfare Department on behalf of the first respondent. Paragraphs 6 to 10 thereof are extracted below for easy reference: “6. Subsequently, Kerala Pharmaceutical Manufacturer's Association represented by its Secretary submitted a representation to Government stating that as per G.O.(P)No.385/08/Fin. Dated 27/08/08, price preference of 5% that was admissible to Small Scale Units has been increased to 10% and all Small Scale Units registered with store Purchase Department of Kerala have WP(C).Nos.5512 & 5606/2010 8 been exempted by EMD bid security and security deposit. The Association further represented that this benefits was not extended by Kerala Medical Services Corporation Limited in the tender for 2009-2010 and that the authorities promised to give them the above benefits from the tender for the year 2010-11 onwards. The association has also stated that if the above concessions are extended the total amount involved would be very meager as total business done by the Small Sale Units is less than 10% of the total purchase done by the Kerala Medical Services Corporation Limited in a year and further that these concessions are a great help to their units to become more competitive. 7. It is submitted that Government had re- examined the matter in detail and come to the conclusion that the Kerala Medical Services Corporation Limited is now in a better position financially to comply with Government Order dated 27/08/08 and hence Government as per Ext.P4, ordered to extend 10% price preference to Small Scale Units in Kerala in line with G.O. (P)No.385/08/Fin. dated 27/08/08, in the tenders floated by the Kerala Medical Services Corporation Limited for the procurement of Drugs and Supplies for the year 2010- 2011 including in the tender which was due for opening on 04/02/2010. 8. The above order was issued after considering the fact that Small Scale Units in the State have to be provided price preference since they are competing with the medium and large scale industries with large infrastructure facilities, capacity to mobilize funds and manpower. Originally the proposal of industries Department in Government was for restoration of the benefit of 15% price preference to the Small Scale Units within the State and to exempt these Units from remitting of EMD, bid security and security deposit. However, after thorough consideration of all aspects, Government in G.O. (P)No.385/08/Fin. Dated 27/08/08 ordered to enhance the price preference from 5% to 10% till 31/03/12. 9. The Kerala Medical Services Corporation Limited is provided Rs.130 crore in the year 2009-10 as grant by Government of Kerala for purchase of drugs and supplies for Government Hospitals. In the year 2010-11, WP(C).Nos.5512 & 5606/2010 9 Government of Kerala has budgeted Rs.145 crore to be given to Kerala Medical Services Corporation Limited for procurement of drugs. Kerala Medical Services Corporation Limited after procuring drugs and supplies through open tender supplies them free of cost to Government Hospitals, based on their requirement. Kerala Medical Services Corporation Limited thus acts as a procurement arm of Government of Kerala, registered as a wholly owned company of Government of Kerala under the Companies Act. Kerala Medical Services Corporation Limited is performing a role similar to that was being performed by the Central Purchase Committee (CPC) for purchase of drugs and supplies for Government Hospitals, before Kerala Medical Services Corporation Limited was incorporated. Thus, it is apparent that it will be incorrect to assert that now KMSCL is running as a competitive Public Sector Undertaking. Earlier, when Kerala Medical Services Corporation Limited was incorporated, it was envisaged that Kerala Medical Services Corporation Limited would work as a Competitive Public Sector Undertaking. However, as far as procurement of drugs and supplies using Government grant and distributing them to Government Hospitals is concerned, operation of Kerala Medical Services Corporation Limited cannot be termed, as being run as competitive Public Sector Undertaking. Thus, on re-examination Government came to the view that Government Order No.385/08/Fin. dated 27/08/08 should apply to Kerala Medical Services Corporation Limited and that 10% price preference to SSI's decided in the said Government Order should be extended by Kerala Medical Services Corporation Limited. 10. Government reviewed the clarification issued in G.O.(Ms)No.112/09/H & FWD dated 13/05/09 and came to the conclusion that the Kerala Medical Services Corporation Limited, is not a Public Sector Undertaking working on competitive basis at present and hence Kerala Medical Services Corporation Limited has to comply with the Government Orders from time to time. The matter cannot be left in a state of uncertainty since it will lead to a crisis in the hospitals once the present stocks of medicines are consumed. What is ordered in Ext.P4 Government Order is that Kerala Medical Services Corporation Limited will extend 10% price preference to Small Scale Units for the tender which was due for WP(C).Nos.5512 & 5606/2010 10 opening on 4th February, 2010.” The substance of the contention raised by the first respondent is that Ext.P4 was issued with a view to promote small scale industrial units, that the Government have allocated Rs.145 crores to the Corporation for procurement of drugs which is Rs.15 lakhs more than the allocation made during the previous year 2009-2010 and that adequate funds are available at the disposal of the Corporation to procure drugs even if 10% price preference is given to small scale industrial units manufacturing drugs within the limits of Kerala. It is also contended that the Government have reviewed Ext.P3 and come to the conclusion that the Corporation is not a public sector undertaking working on a competitive basis at present and therefore the Corporation has to comply with the Government orders issued from time to time. 7. Additional respondents 3 to 10 have in their application for impleadment justified the stand taken by the Government in Ext.P4. Relying on Ext.R3(3) order dated 13.10.2005, Ext.R3(4) order dated 27.08.2008 and Ext.R3(5) letter dated 23.1.2009, it is contended that the price preference given to small scale industrial units which was originally fixed at 5% in Ext.R3(3) order dated 13.10.2005 was raised to 10% by Ext.R3(4) dated 27.08.2008 and WP(C).Nos.5512 & 5606/2010 11 that the said concession is available to small scale industrial units even in respect of the tenders invited by the Corporation for the reason that it is not a public sector undertaking working on a competitive basis. 8. I heard Sri.M.Ramesh Chander, learned counsel appearing for the petitioners, Smt.Smitha Sukumaran, learned Government Pleader appearing for the first respondent, Sri.M.Ajay, learned standing counsel appearing for the second respondent Corporation and Sri.Anil D Nair, learned counsel appearing for additional respondents 3 to 10. I have also considered the pleadings and the materials on record. Sri.M.Ramesh Chander, learned counsel for the petitioners contended that the Government have not given any reason in Ext.P4 when it directed the Corporation to give 10% price preference to small scale industrial units manufacturing drugs within the State of Kerala. The learned counsel contended that the Government have in Ext.P3, after an elaborate consideration of various aspects of the matter, held in categorical terms that the Corporation is a competitive public sector undertaking and not a service organization and that in the absence of any reason justifying the change in the opinion of the Government, Ext.P4 is liable to be struck down as an arbitrary exercise of power. The learned counsel WP(C).Nos.5512 & 5606/2010 12 contended that small scale industrial units had been given 5% price preference even in Ext.P2 and that certain other benefits like dispensing with earnest money deposit had also been extended to them. The learned counsel also contended that if 10% price preference is extended to small scale industrial units, it will adversely affect public interest. The learned counsel submitted that if for example the petitioners are able to supply 10 strips of Crocin tablets for Rs.100/-, the Corporation will have to spend Rs.110/- to buy it from a small scale industrial unit and that for the said amount, persons like the petitioners will be able to supply 11 strips in the place of 10. Relying on Ext.P1 the learned counsel for the petitioners contended that the Corporation was established to harness resources for timely procurement and prompt distribution of medicines in health care institutions in an efficient, transparent and cost effective way thereby ensuring full utilization of the funds. He submitted that if the stand of the Government is accepted, it will defeat the very purpose for which the Corporation was established. Per contra, learned counsel for the respondents contended that small scale industrial units were given 10% price preference with a view to promote small scale industrial units and that the Government have a social obligation to promote the welfare of workers employed in such small scale WP(C).Nos.5512 & 5606/2010 13 industrial units. The learned counsel went to the extent of stating that the Corporation is flush with funds and therefore it does'nt matter if additional expenditure of 10% is incurred by the Corporation for purchasing medicines which are to be distributed to patients availing the services of Government hospitals and dispensaries. 9. Ext.P1 discloses that the Corporation was established with a view to harness resources for the timely procurement and prompt distribution of medicines in health care institutions in an efficient, transparent and cost effective way thereby ensuring full utilization of the funds. Paragraph 3 thereof reads as follows: “3. Government are spending roughly an amount of Rs.120 crores annually for purchase of medicines and other medical items excluding diet for health care institutions under Directorate of Health Services and Directorate of Medical Education. For the current year (2007-08), the allotment for purchase of medicines is roughly Rs.120 crores under various heads of accounts. Apart from the budgetary allocation, funds available from Hospital Development Committees (HDCs). LSGIs and emergency allotments are used for purchase of medicines and medical items in hospitals. Harnessing these resources for timely procurement and prompt distribution of all these items in a most efficient, transparent and cost effective way through an effective computerized system ensuring full utilization of funds, will be the main objective of the new Corporation.” It is evident from Ext.P1 that the Corporation was established to WP(C).Nos.5512 & 5606/2010 14 ensure procurement and distribution of medicines and supplies in a cost effective way. The Government have in Ext.P3 considered the purpose for which the Corporation was established and after ascertaining the views of the Industries and Finance Departments and after hearing the writ petitioners in W.P.(C)Nos.8915 and 8940 of 2009 who are party respondents herein, held in categorical terms as follows: “7. The objectives of the Kerala Medical Services Corporation Limited are enumerated in G.O.(P) No.448/07/H&FWD dated 1/11/07, read as 1st paper above, by which the Corporation was set up. One of the main objectives of the Kerala Medical Services Corporation Limited is to procure and stock quality drugs and medicines at competitive prices. The Corporation has been set up as a company under the Companies Act, 1956 and not as a society under the Charitable Societies Act. Based on the mandates given in the Memorandum of Association, the Corporation can sell, supply, distribute or deliver all kinds and varieties of generic and patented medicines, medical supplies, surgical accessories etc. to Government Hospitals and institutions in the private sector. The objects incidental or ancillary to attainment of the main objects permits the Corporation to enter into partnership joint venture, reciprocal concessions or other ways with any person, firm association or body corporate. Kerala Medical Services Corporation Limited is procuring