Awarding government contracts through public auction/tenders preferable; deviations should comply with Article 14: Supreme Court

The Supreme Court on Tuesday reiterated that inviting tenders and conducting public auctions are preferred methods for awarding government contracts [M/S Indian Medicines Pharmaceuticals Corporation Ltd. v Kerala Ayurvedic Co-operative Society Ltd. & Ors.]

A bench of Chief Justice of India (CJI) DY Chandrachud and Justice Hima Kohli, however observed that 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.

"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. All government actions including government contracts awarded by the  State must be tested on the touchstone of Article 14," the Court said in its judgment.

The bench further explained that the preference for public auctions and tenders exists so that procurement can be made at the best price and to ensure transparency in the allocation process. 

The judgment summed up the discussion of the bench as follows:

• "Government action must be just, fair and reasonable and in accordance  with the principles of Article 14; and 

• 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 judgment was passed on a case dealing with an order of the Uttar Pradesh government to purchase Ayurvedic medicines from the petitioner, Indian Medicines Pharmaceuticals Corporation Limited (IMPCL), on a nomination basis without a tender process.

The respondent in the present case was the Kerala Ayurvedic Co-operative Society Limited that had previously moved the Allahabad High Court challenging the said order. The High Court had allowed the plea and directed the State government to purchase Ayurvedic medicines by adopting a transparent process after inviting tenders.

The State government and IMPCL then approached the Supreme Court by way of the present appeal challenging the High Court's order.

The primary ground was that in view of paragraph 4(vi)(b) of the Operating Guidelines of the National AYSUH Mission2, the State government could have procured Ayurvedic drugs solely from IMPCL without inviting tenders. 

Paragraph 4(vi)(b) states that ‘at least’ 50 percent of the grant-in-aid must be used for procuring medicines from IMPCL or Public Sector Undertakings, pharmacies under State governments, and co-operatives, the Court further noted.

Since this paragraph only prescribes from whom the medicines can be procured and not how, the State government contended that it has the discretion in this regard. The respondent, on the other hand, contended that unbridled discretion cannot be given to the executive to procure drugs through ‘nomination’.

The Court observed that it has already held in a host of previous judgments that government contracts must be awarded by a transparent process, and the process of inviting tenders ensures a level playing field for competing entities. Moreover, any departure from the tender process must not be unreasonable or discriminatory.

The Court also failed to find merit in the appellants' submission that IMPCL is the only one among the establishments mentioned in paragraph 4(vi)(a) that manufacture good quality Ayurvedic drugs. The same was based only on surmises and conjectures without any cogent material to support the claim, the Court opined.

"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 judgment stated.

Therefore, the Court said that from now on, the State government must purchase Ayurvedic medicines only through a free and transparent procedure such as tenders.

The appeals were, therefore, dismissed.

Advocate Kaleeswaram Raj appeared for Kerala Ayurvedic Co Operative Society. Advocate Naresh Kaushik appeared for IMPCL.

[Read Judgment]