UTKAL PHARMACEUTICALS MANUFACTURERS ASSOCIATION Vs. STATE OF ORISSA

JUDGEMENT

(1.) 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-9/043042/ 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 : 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 :