B.P.DAS, J & B.N.MAHAPATRA, J. W.P.(C) NO.18494 OF 2009 (Decided on 03.03.2011) UTKAL PHARMACEUTICALS MANUFACTURERS ASSOCIATION & ANR. ………Petitioners. .Vrs. STATE OF ORISSA & ORS. ………. Opp.Parties. For Petitioners - M/s. J.Patnaik, & S.Mohanty Sr.Advocates with M/s. S.P.Panda, S.Nanda, A.Mohapatra, A.Meher & A.Mohanty. For Opp.Parties - Mr. Ashok Mohanty, Advocate General & Mr. J.P.Patnaik, Addl. Govt. Advocate For Intervenor - M/s. Yuvraj Parekh, B.B.Jaysingh, S.Mukherjee, S.K.Behera & K.Ghadei. B.P.DAS, J. Utkal Pharmaceuticals Manufacturers Association, an association of twenty Small Scale Pharmaceutical Industries registered under the Societies Registration Act, 1860, and its Joint Secretary (Executive) have filed this writ petition under Article 226 of the Constitution of India challenging Tender Call Notice No.SDMU/2009-2010-DMC-1-008 issued by the Director of Health Services, State Drug Management Unit, Orissa, vide letter No.11106/SDMU-1-05/09 dated 28.10.2009, under Annexure-7, as illegal, arbitrary, discriminatory and contrary to the policy decisions of the Govt. of Orissa, i.e., the Industrial Policy Resolution, 2007 (IPR 2007) as well as the Orissa Micro, Small and Medium Enterprise Development Policy, 2009 (‘Orissa MSME Development Policy 2009’) and have prayed for quashing the said Tender Call Notice. The Director of Health Services, State Drug Management Unit, O.P. no.2, floated the tender in Annexure-7 for supply of drugs and medical consumables for a period of one year from the date of approval of the tender on rate contract basis. The petitioners contended that the inclusion of 31 rate contract items, which are procured from the local Small Scale Industrial (SSI) Units/Micro, Small and Medium Enterprises (MSMEs), in the Tender Call Notice has contravened the IPR 2007 as well as the Orissa MSME Development Policy 2009. 2. The further contention of the petitioners is that all the members of petitioner no.1-Utkal Pharmaceuticals Manufacturers Association are engaged in manufacture and supply of drugs and pharmaceuticals to the Govt. of Orissa for the last twenty years having valid manufacturing licence, certificate of Good Manufacturing Practice (GMP) and ISO certifications, as required under the Drugs and Cosmetics Act, 1940. The State Govt. in order to ensure that store items for Govt. Departments and agencies under its control are procured from industries located within the State and those local units get price preference for the aforesaid purpose and simultaneously to ensure that local products are cost-effective and meet overall quality requirement for competitiveness, the State made efforts to distribute purchase orders equitably among the participating industries prepared to accept the lowest negotiated rate keeping in view their production capacity. According to the petitioners, to prevent monopoly, the rate contract system in Orissa was introduced at the behest of the 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 SSI units and those products are 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 should 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 : (a) The rates of rate-contract items 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); (b) The rate contract system is a unique system to provide market support to MSMEs as per the provisions of the Industrial Policy Resolution (IPR) since the Govt. of Orissa due to paucity of fund is unable to provide much subsidy, tax and excise exemption and other incentives as in other States; (c) by procuring drugs from outside, the Govt. of Orissa does not earn any revenue, nor does it address its objects of providing employment (direct/indirect),Development of the State by value addition by promoting MSMEs being vice versa as these MSMEs have investment limit of Rs.1 crore and (d) The rate contract in respect of specific store items not in the exclusive list and manufactured by the local SSI units are finalized by the DEPM 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 considerations, A decision was thus taken that the Departments and Agencies under the control of the Govt. of Orissa would only purchase rate contract items from the rate contract holders/small scale industries at the price fixed, without inviting tenders. Accordingly, the DEPM by Circular nos.2106(200) and 2003(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 44 items. The aforesaid identified drugs and medical consumables are purchased by the Director of Export Promotion and Marketing (DEPM) only from the approved local pharmaceutical enterprises taking their past performance, i.e., quality, timely supply, and capacity of production into consideration. For this, the local SSI units should have (a) valid drug manufacturing licence and (b) valid Export Promotion and Marketing (EPM) rate contract. The State Govt. in Industries Department by circular No.XIV-HI-9/04-3042/1 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 :- 2 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 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 he control of the State Government will purchase rate contract items from the rate contract item from the rate contract holder/Small Scale Industry at the price fixed, without inviting tenders.” Periodic extensions were granted by the DEPM as to validity of rate contract with the local SSI units. In the meantime, in the year 2003 the State Govt. with the financial assistance of the Central Govt. as per 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 and all new SSI units and existing SSI units taking up expansion/modernized/diversification located in industrially backward areas which started commercial production between 1,4,2003 and 31.3.2007 were stated 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/processing 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), petitioner no.1 herein, would registered the SPV (Special Purpose Vehicle) for implementation of the cluster development programme. The representative of UPMA was asked to furnish proposal under SICDP at the earliest. It was further resolved that UPMA would prepare a report on quantum of generic drug purchases 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 at the earliest 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 MSME (Micro, Small and Medium Enterprises) in Government procurement. The relevant clauses of the IPR 2007, i.e. Clauses 4, 4,1, 13,1 and 30, on which the petitioners placed reliance, are extracted here under : “4. GENERAL POLICY FRAMEWORK The Industrial Policy 2007 shall pursue a multi-pronged approach for industrial promotion by providing infrastructure support, institutional support and pre and post-production incentives. While the IPR shall support industrialization in general, directed efforts shall be made to incentives investment in thrust and 3 priority sectors with a view to maximizing the triple objectives of value addition, employment generation and revenue augmentation. 4.1 Micro Enterprises : The focus shall be on 4.1.1 Promoting linkages with micro finance institutions 4.1.2 Product development through design and technology support. 4.1.3 Provision of raw material linkages. Orissa Small Industries Corporation (OSIC) shall set up raw material banks to provide such support. 4.1.4 Market development through focused market access initiatives. 4.1.5. Intensification of cluster development project with special emphasis on promotion of Common Facility Centers (CFC) through community based Public Private Partnership (PPP) initiatives.” “13.MARKETING SUPPORT TO MICRO AND SMALL SCALE ENTERPRISE IN GOVERNMENT PROCUREMENT 13.1 The existing rules for extending marketing support to Small Scale Industries shall be brought in alignment with the newly enacted Micro, Small and Medium Enterprises Act, 2006 and corresponding Rules. The following measures shall be undertaken : (a) Comprehensive review of the rate contract purchase list, exclusive purchase list and open tender purchase list shall be undertaken by a Committee consisting of Secretary, Industries Department, Director, Export Promotion and Marketing (EP&M), Director, Industries and representatives of Industries Associations, which shall submit their recommendations for Government approval in Industries Department. (b) With a view to encouraging large and medium industries, including those in private sector, in the State to meet their store purchase requirements from the local MSEs, institutional mechanism in the line of Plant Level Advisory Committee existing in respect of central public Sector Undertakings (CPSUs) shall be devised and implemented. (c) Specific efforts shall be made to increase awareness amongst local MSMEs regarding export opportunities and export procedures. The Export Promotion Cell in the Orissa Small Industries Corporation Limited shall be strengthened to assist local small scale enterprise to access export market. 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. xxx xxx xxx According to the petitioners, “Priority Sectors” has been defined in the IPR 2007 to mean new industrial units where fixed capital investment commences on or after the effective date and which fall within the categories indicated therein including Pharmaceuticals. 4 Thereafter, the Industries Department in order to further the objective, i.e. to support to SSI units, formulated Orissa MSME Development Policy, 2009 by notification dated 17.2.2009 in conjunction with the IPR 2007 and in consonance with Section 11 of the MSME Act, 2006 for promoting the MSMEs in the State and the same was published in the extraordinary issue of the Orissa Gazette dated 9.3.2009 under Annexure-5. The Orissa MSMEs in the State and the same was published in the extraordinary issue of the Orissa Gazette dated 9..3.2009 under Annexure-5. The Orissa MSME Development Policy, 2009 was approved by the State Cabinet in their 44th meeting held on 1..2.2009, which aimed at broad-basing the growth of MSMEs of the State in all potential sectors of economy thereby widening opportunities for employment generation, revenue augmentation, exports and realizing the full potential of Micro, Small & Medium Enterprise Sector of the State. In the meanwhile, in a meeting held on 11.7.2008 between the Health and Family Welfare Department of the State Govt. and the members of the petitioner- association, the Secretary, Health and Family Welfare, explained that a decision had been taken by the Govt. regarding floating of National Tender for 31 items, which were being earlier purchased through EPM rate contract. Certain Enterpreneur Associations submitted representation to the Chief Secretary requesting to review the aforesaid decision of the Govt. to do away with the rate contract system for drugs and to allow the rate contract system to continue and to include more items in the rate contract list for which offer had also been invited by the DEPM. According to the petitioners, the aforesaid MSME Development Policy, 2009, which was approved by the State Cabinet in their 44th meeting held on 1.2.2009, was formulated after an elaborate consultative process involving all stake-holders including the Industries Associations, Financial Institutions, Experts and Government Departments concerned. Thereafter the Directorate of Health Services, State Drug Management Unit, by letter dated 22.6.2009 intimated all the SSI units including the petitioner-association vide Annexure-6 to continue supply of drugs at the previous contract rate as the Govt. vide letter dated 18.6.2009 have allowed the procurement of drugs covered previously under EPM rate contract from the local SSI units having valid GMP and manufacturing licence and would agree to supply the drugs at the previous rate. Despite the aforesaid policy decision of the State Govt. in Annexure-5 and despite the fact that the members of petitioner-association are enjoying the benefit of rate contract in terms of the IPR 2007 and the Orissa MSME Development Policy, 2009 and such practice is in vogue and, as would appear from Annexure-6, the local SSI units have been intimated to continue supply of drugs at the previous contract rate, the Director of Health Services, State Drug Management Unit, O.P. no.2, and the Commissioner-cum-Secretary, Health and Family Welfare Department of the State Govt., O.P. no.6, included 31 rate contract items in the impugned tender call notice in Annexure-7, which, according to the petitioners, is illegal, arbitrary and has no sanction and approval of the State Govt. and without any authority of law and contrary to the IPR 2007 and the Orissa MSME Development Policy, 2009. In other words, when the list of rate contract items manufactured by the local SSI units/MSMEs already exists, the decision to change the mode of purchase, i.e., switching over to procure the rate contract items through open tender by O.P. nos.2 and 6, is against the policy decision of the State Govt. and is clearly contrary to the IPR 2007 and the Orissa MSME Development Policy, 2009. 5 Learned counsel for the petitioners on the basis of the aforesaid facts submitted that effectiveness of the Orissa MSME Development Policy, 2009, which is a policy decision of the State Govt., can not be taken away by an executive fiat and the benefits granted under the aforesaid policy can not be denied or curtailed by the decision of O.P. Nos.2 and 6. According to him, the decision of the Director of Health Services to invite tender in Annexure-7 for supply of drugs and medical consumables, which have been included in the list of rate contract items, is unsustainable in law and contrary to the policy decision of the State Govt. 3. O.P. Nos.2 and 6 have jointly filed a counter affidavit mainly taking the stand that the tender has been floated after the decision was taken by the committee chaired by the Chief Secretary in consultation with the DEPM, Secretary, Health and Family & Welfare Department, Director of Health Services, Financial Advisor, Health & F.W. Department and others to procure 31 items of drugs and medical consumables through open tender and approved by the Hon’ble Chief Minister. This has been done in order to ensure better quality of essential drugs which can be procured at the right time at a competitive price for the benefit of the patients. It has been stated that, as per the available information, in States like Kerala, Tamil Nadu, West Bengal, Andhra Pradesh, Madhya Pradesh, Gujarat and Karnataka there is no EPM rate contract like system for drugs. A further ground has been taken that there is every chance of formation of cartel and hiking of price of the items if tender is restricted to one group of firms. Our attention was drawn to the proceedings of the meeting held on 11.2.2007 under the chairmanship of the Chief Secretary regarding procurement of drugs on EPM rate contract from SSI units of Orissa, under Annexure-E/2, wherein decision has been taken to abolish the present system of reservation through EPM rate contract availed by the SSI units for procurement of drugs and medical consumables and to adopt open national bidding for procurement of drugs and medical consumables of the items under EPM. The compelling reasons for taking the aforesaid decision, according to the learned Advocate General, were that the costing done by the EPM for those 31 items were much higher than the price of the same drugs prevalent in other States; the drugs supplied by the SSI units were found more to be “Not of Standard Quality” (NSQ) compared to drugs supplied by outside firms selected through tender; one item was supplied by 8-10 firms and each firm supplies in many batches, making the quality testing a very difficult task; and the Health Secretary emphasized that the Health Department had to provide good quality drugs within the available resources to all Govt. Health Institutions of the State. Our attention was further drawn to the copy of the note sheet of the relevant file, which is annexed under Annexure-E/2. The relevant part of the minutes of the Principal Secretary to Govt., Health & F.W. Department is extracted herein below : “xxx xxx xxx In the last meeting it was presented that none of the states have rate contract and the decision that was taken in the meeting chaired by Chief Secretary was also agreed to by the Director, E.P.M. and according to his insistence for the interest of local SSI Unit last three paras was agreed to by which a fair chance will be given to the SSI Unit of the state, as is done by Tamilnadu which is the best possible available. In the year 2000, saline was supplied on EPM rate contract; four persons died. Recently Director, EPM and Drugs Controller personally attended High court on this issue. Thereafter saline is no longer procured from EPM rate contract. 6 At the time of untoward incident that took place in July, August when a fake medicine manufacturing unit was detected at Bolangir, news also surfaced about medicine-less strips and foreign material mixed in medicine which were supplied to the government health centers and both the cases relate to the local SSI Units. In a sensitive sector like health for giving protection only to 17 enterprises who supply medicines to more than 1700 health institutions at a very high cost than is available in market is more than a protection – It is rather promoting few business interest. I feel this is against the public interest. In the name of protection to a handful of industries state can not take risk. I feel decision taken in the meeting chaired by Chief Secretary was very sympathetic to local SSI units compared to many other states. I therefore do not agree with the proposition of Industries Department and request to approve the minutes as has been decided in the same meeting. This may be implemented during the year quickly as medicine availability is being affected.” The Chief Secretary agreed with the views of the Health Secretary and ultimately the Hon’ble Chief Minister has approved the decision. 4. A rejoinder affidavit has been filed by the petitioners rebutting the averments made in the counter affidavit. 5. On the facts stated and the submissions made by Shri J. Patnaik, learned Senior Advocate for the petitioners, and learned Advocate General for the State, the questions that fall for consideration and decision of this Court are as follows : (1) Whether the benefits granted to the SSI units/MSMEs by the State Govt. under the IPR 2007 and the Orissa MSME Development Policy, 2009 can be taken away by a Department of the said Govt. on the ground of irregularity in supply of drugs ? (2) Whether the case of the State that the decision to abolish the present system of procurement of drugs through EPM rate contract availed by the SSI units to adopt open national bidding in public interest, is correct and sustainable ? 6. Let us first see whether any cogent reason has been assigned for the decision taken in the meeting held under the chairmanship of the Chief Secretary to abolish the practice of procurement of drugs on EPM rate contract from SSI units of Orissa and whether the comments made by the Principal Secretary, Health & F.W., which led to the aforesaid decision is correct ? The reasons assigned for taking the decision to abolish the procurement of drugs through EPM rate contract are that the standard of quality of the drugs was not maintained and the price fixed by the EPM for the drugs in question was higher than the price of such drugs prevalent in other States. The Health Secretary indicated that four persons died due to administration of the Saline supplied in the year 2000 on EPM rate contract and that a fake medicine manufacturing unit was detected at Bolangir and news also surfaced that medicine-strips were found without any medicine and foreign material was mixed with the medicines which were supplied to Govt. health centers and both the cases related to the local SSI units. In this regard our attention was drawn to the representation dated 11.1.2008 submitted to the Hon’ble Chief Minister, under Annexure-12 series to the rejoinder affidavit, wherein the petitioners have vehemently denied the aforesaid allegation. The reasons assigned in the minutes of the Health Secretary tear open the administrative 7 failure rather than failure on the part of the EPM rate contract holders. There is no allegation against any of the units of the petitioner-association regarding supply of drugs not of standard quality (NSQ). That apart, there are different wings under O.P. nos.2 and 6, which are entrusted with the work of inspection of the drug manufacturing units and penal provisions have been made in the Drugs and Cosmetics Act and Drug Management Policy to punish the spurious drug suppliers. Apart from that, manufacturing licences are granted after thorough scrutiny of the products of the manufacturers of drugs so also Certificate of Good Manufacturing Practice (GMP) and ISO/ISI certificates are granted after quality testing of the products thoroughly and all those certificates are necessary for the purpose of registering a unit under the EPM rate contract. Therefore, if the aforesaid certificates are granted without thorough quality testing of drugs, then it is the Department of Health which is blame-worthy. That apart, there is nothing in the counter affidavit to show that any of the units of the petitioner- association has supplied at any time fake drugs. There is some force in the argument of the learned counsel for the petitioners that if the process of inspection and testing of the quality of the drugs manufactured is not continued and not done stringently or strictly, and regularly, there can be no guarantee that outside drug suppliers will not supply the drugs of NSQ. The argument advanced on behalf of the State and the apprehension expressed have no basis. 7. Law is now fairly well settled that while the discretion to change a policy in exercise of the executive power, when not trammeled by any statute or rule, is wide enough, what is imperative and implicit in terms of Article 14 of the Constitution of India 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 heart-beat of fair