2023 LiveLaw (SC) 6

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION
DR. DHANANJAYA Y. CHANDRACHUD; CJI., HIMA KOHLI; J.
Civil Appeal No 6693 & 6694 of 2022; January 03, 2023
M/S Indian Medicines Pharmaceuticals Corporation Ltd. versus Kerala Ayurvedic Co
Operative Society Ltd. & Ors.
Government Contracts - Government action must be just, fair and reasonable
and in accordance with the principles of Article 14; and (ii) 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 - 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. (Para 21-22)
Operating Guidelines of the National AYSUH Mission - Paragraph 4(vi)(b) - Order
for the purchase of Ayurvedic medicines issued by the State of Uttar Pradesh
in favour of Indian Medicines Pharmaceutical Corporation Limited (IMPCL) -
Inviting tenders from the entities is the most transparent and non-arbitrary
method of allocation that can be undertaken - The State must henceforth
purchase Ayurvedic medicines only through a free and transparent procedure
such as tenders. The State may deviate from this rule and procure medicines
by nomination only if exceptional circumstances exist. In such a situation, the
State must demonstrate the existence of exceptional circumstances on the
basis of cogent material. (Para 31)
Tenders - The process of inviting tenders ensures a level playing field for
competing entities. While there may be situations which warrant a departure
from the precept of inviting tenders or conducting public auctions, the
departure must not be unreasonable or discriminatory. (Para 16)
Words and Phrases - Largesse - Government actions aimed at ensuring the well-
being of citizens cannot be perceived through the lens of a ‘largess’. The use of
such terminology belittles the sanctity of the social contract that the ‘people of
India’ entered into with the State to protect and safeguard their interests -
Terming all actions of government, ranging from social security benefits, jobs,
occupational licenses, contracts and use of public resources – as government
largesse results in doctrinal misconceptions. The reason is that this conflates
the State’s power with duty. (Para 11)
(Arising out of impugned final judgment and order dated 18-10-2019 in MB No.1364/2019 passed by
the High Court of Judicature at Allahabad, Lucknow Bench)
For Petitioner(s) Mr. Naresh Kaushik, Adv. Mr. Vardhman Kaushik , AOR Mr. Manoj Joshi, Adv. Mr.
Yogesh Yadav, Adv. Ms. Garima Prasad, Sr. Adv., AAG Mr. Vishnu Shankar Jain, AOR
For Respondent(s) Mr. Kaleeswaram Raj, Adv. Ms. Thulasi K. Raj, Adv. Mrs. Anu K. Joy, Adv. Mr.
Alim Anvar, Adv. Mr. Nishe Rajen Shonker, AOR Ms. Garima Prasad, Sr. Adv., AAG Mr. Vishnu
Shankar Jain, AOR Mr. Siddhant Kohli, Adv. Ms. Suhasini Sen, Adv. Ms. Swarupama Chaturvedi,
Adv. Mr. Udai Khanna, Adv. Mr. Anmol Chandan, Adv. Mr. Gurmeet Singh Makker, AOR Mr. Siddharth
Bhatnagar, Sr. Adv. Ms. Pallavi Pratap, AOR Ms. Pracheta Kar, Adv. Mr. Nadeem Afroz, Adv. Mr.
Aditya Sidhra, Adv.

1
 JUDGMENT
Dr. Dhananjaya Y. Chandrachud, CJI;
This judgment has been divided into the following sections to facilitate analysis:
1.0 Facts ............................................................................................................... 2
2.0 Submissions .................................................................................................. 4
3.0 Analysis .......................................................................................................... 5
3.1 State Largesse: conflation of power and duty......................................... 6
3.2 Judicial review of government contracts: extent and ambit .................. 6
3.2.1 Tender: a constitutional requirement? .................................................. 7
3.3 Interpretation of paragraph 4(vi)(b) of the Operational Guidelines ..... 10
3.4 Validity of award of government contract to IMPCL ............................. 11
1 The first respondent, Kerala Ayurvedic Co-operative Society Limited, instituted
proceedings before the Lucknow Bench of the High Court of Judicature at Allahabad
under Article 226 of the Constitution to challenge an order for the purchase of
Ayurvedic medicines issued by the State of Uttar Pradesh in favour of Indian
Medicines Pharmaceutical Corporation Limited 1 . By a judgment dated 18 October
2019, a Division Bench of the High Court allowed the petition and directed that the
State of Uttar Pradesh must purchase Ayurvedic medicines by adopting a transparent
process after inviting tenders. The State of Uttar Pradesh and IMPCL instituted
proceedings under Article 136 of the Constitution against the judgment of the High
Court. The principle issue is whether, in view of paragraph 4(vi)(b) of the Operating
Guidelines of the National AYSUH Mission 2 , the appellant could have procured
Ayurvedic drugs solely from IMPCL without inviting tenders.
1.0 Facts
2 In September 2014, the Department of AYUSH, Ministry of Health and Family
Welfare, Government of India launched NAM, inter alia, to promote the AYUSH
medical system and provide cost-effective AYUSH Services. Paragraph 3(ii) of the
Operational Guidelines of NAM provides that 75 percent of the admissible assistance
will be provided as grant-in-aid by the Central Government while the remaining 25
percent must be met by the States, except in the NorthEastern States where the
assistance by the Centre and the States shall be in the ratio of 90:10.
3 Paragraph 4(vi) provides guidelines for the procurement of Ayurvedic
medicines. 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 3 ,
pharmacies under State Governments and co-operatives. Paragraph 4(vi) of the
Operational Guidelines is extracted below:
“(vi) (a) Essential drugs and medicines required for implementation of the Mission will have
to be procured from Essential Drugs List (EDL) for Ayurveda, Unani, Siddha and Homeopathy
published by Department of AYUSH, Government of India.
(b) At least 50% of the Grant-in-aid provided should be used for procuring medicines from
M/s Indian Medicine Pharmaceutical Corporation Limited (a Central Public Sector
Undertaking) or from Public Sector undertaking, pharmacies under State Governments and

1 “IMPCL”
2 “NAM”
3
“PSU”

2
Co-operatives manufacturing units and having Good Manufacturing Practices (GMP)
compliance, keeping in view the need for ensuring quality of AYUSH drugs and medicines.
(c) The remaining Grant-in-aid provided under the Mission for purchase of medicines may
be use for procuring medicines as per Essential Drugs List (EDL) of Ayurveda, Unani, Siddha
and Homeopathy published by Department of AYUSH, Government of India, from other Good
Manufacturing Practices (GMP) compliant units having valid manufacturing licenses.
(d) Essential non drug items like dressing items for first aid etc. may be provided out of
the amount sanctioned for medicine/essential drugs under different components required for
achieving the desired objectives subject to a ceiling of five percent of the total amount
sanctioned for the purpose.”
4 The Uttar Pradesh State AYUSH Society has been purchasing Ayurvedic
medicines from a single vendor, namely IMPCL who is the appellant. The purchase
order was given to IMPCL on a nomination basis without conducting a tendering
process. The first respondent is a registered co-operative society under the Kerala
Co-operative Societies Act 1969. On 2 March 1985, the first respondent was granted
a licence to manufacture Ayurvedic and Unani drugs for sale under the provisions of
the Drugs and Cosmetics Rules 1945. On 31 August 2016, the first respondent was
also certified as a Good Manufacturing Practice4 unit.
5 On 30 October 2017, the first respondent made a representation to the Principal
Secretary to either place direct purchase orders for the supply of Ayurvedic medicines
to it according to the existing government policy or to initiate a tender process for the
purchase. The first respondent stated that it is eligible to supply Ayurvedic medicines
under NAM and that as an MSME registered unit, it is eligible under the policy
framework for preferential purchase. A similar representation was made on 21
December 2018 to the Mission Director.
6 The first respondent instituted a petition under Article 226 of the Constitution
apprehending that a purchase order for 2019-20 was going to be issued to IMPCL.
The first respondent challenged the purchase order in favour of IMPCL and sought a
direction for the procurement of Ayurvedic medicines under the National AYUSH
Mission Programme by a tender process.
7 The High Court held that the ‘practice adopted by the respondents, to purchase
Ayurvedic drugs, only from IMPCL’ is illegal. The High Court held that under paragraph
4 of the Operational Guidelines, the appellant must invite tenders from prescribed
establishments to purchase Ayurvedic medicines. The appellant was allowed to
purchase drugs from IMPCL to the extent of the payment already made since for the
year 2019-20, the purchase order for medicines to the extent of 50 percent had already
been given to IMPCL and a full payment of Rupees 11 crores was made. The appellant
was directed to invite tenders for competitive rates and quality of drugs for the
remaining supplies. The High Court held that:
(i) Paragraph 4 of the Operational Guidelines provides the ‘sources’ for the procurement
of Ayurvedic drugs and medicines;
(ii) Paragraph 4(vi)(b) provides that 50 percent of the grant-in-aid shall be used to
purchase Ayurvedic medicines from IMPCL or other PSUs and pharmacies under the State
Governments and cooperative societies;

4
“GMP”

3
(iii) Invitation from pharmacies and PSUs under the State Governments or cooperative
societies will foster competition on rates and quality of medicines;
(iv) The Memorandum issued by the Government of India on 8 May 2008 stipulates that
in the absence of “fully developed Pharmaceutical standards for Ayurvedic and Unani
medicines in the country, the Central Government Health Scheme Research Councils is/are
not fully equipped to ensure that the purchased medicines are of right quality.” Paragraph
4(vi)(b) emphasises the quality of medicines. There is nothing on the record to show that
IMPCL is the only entity producing quality drugs;
(v) No comparison on the quality of medicines can be made unless tenders are invited
from IMPCL and other PSU Pharmacies under the State Governments and co-operative
societies; and
(vi) At least 50 percent of the grant-in-aid for the procurement of Ayurvedic medicines must
be used only after tenders are invited amongst the establishments referred to in paragraph
4(vi)( b) of the Operational Guidelines. The remaining grant-in-aid, if any, shall be used to
procure drugs in the manner specified in paragraph 4(vi)(c).
2.0 Submissions
8 Mr Naresh Kaushik, counsel appearing for IMPCL urged the following
submissions:
(i) The Government of India holds 98.11 percent of the shares of IMPCL and 1.89 percent
of the shares are held by the Government of Uttarakhand through Kumaon Mandal Vikas
Nigam Limited. IMPCL has been established to cater to the needs of the Central Government
Health Programs and for ensuring the quality of AYUSH medicines;
(ii) Due to the unique organizational set-up of IMPCL, it is most suited to supply quality
medicines at an affordable price. The prices of the medicines manufactured by IMPCL are
vetted by the Union Ministry of Finance from time to time. The procurement of medicines from
other organizations is also at the rates of IMPCL as these rates are considered the best
possible rates. Further, IMPCL is the only government manufacturing company for Ayurvedic
medicines with its own certified drug testing laboratory;
(iii) On 16 July 1994, the Government of India issued an order where it had resolved that
Ayurvedic medicines cannot be purchased through tenders because (a) there is a wide
variation in the prices of raw materials required for making drugs and the cost of the drug will
vary based on the quality of the raw material used; and (b) it is not possible to test the exact
composition of drugs in terms of the raw materials and their quality;
(iv) The Ministry of AYUSH, Government of India has on various occasions recommended
purchasing Ayurvedic medicines directly from IMPCL;
(v) Procurement may be through tender only where the state proposes to dispose of
property. Since in this case, there is no disposal of state property, the High Court should have
only looked at the relevant material to determine whether an oblique motive is involved in
purchasing medicines from IMPCL;
(vi) IMPCL is not a private enterprise. There is no scope for monopoly when the sale is
not in an open market, where the prices of the medicines are vetted by the Department of
Expenditure, Ministry of Finance, and the establishment is managed by the officials of the
Ministry of AYUSH;
(vii) Paragraph 4(vi)(b) of the Operational Guidelines distinguishes IMPCL from other
PSUs, pharmacies under the State Government, and cooperative societies by the use of the
term “or”. Paragraph 4(vi)(b) emphasises ensuring the quality of AYUSH drugs and
medicines. The phrase ‘atleast’ in paragraph 4(vi)(b) only provides a minimum benchmark for
procurement and does not prescribe an upper limit; and

4
(viii) A combined reading of paragraphs 4(vi)(b) and 4(vi)(c) elucidates that the states have
the discretion to procure medicines from IMPCL or any other PSUs, and pharmacies under
the State Government and cooperatives. The budget, if any, that is remaining after
purchasing medicines from the establishments mentioned in paragraph 4(vi)(b) may be
utilized for purchasing medicines from other GMP-compliant establishments.
9 Mr Kaleeswaram Raj, counsel appearing for the first respondent urged the
following submissions:
(i) Paragraph 4(vi) only depicts the establishments from which the medicines can be
procured- i.e the whom question and not the how question:
(a) Paragraph 4(vi)(b) of the Operational Guidelines stipulates the establishments from
which at least 50 percent of the medicines must be procured. The usage of the term ‘or’
indicates that all establishments mentioned in the paragraph are equally eligible to supply
medicines as much as IMPCL; and
(b) While paragraph 4(vi)(b) does not stipulate that the procurement must be through a
tender process, it does not mean that the process of tender cannot be read into the provision.
If paragraph 4(vi)(b) is interpreted to allow procurement from any of the establishments
mentioned without a tendering process, the same interpretation would also be applicable to
paragraph 4(vi)(c). Also, this would mean that even for procurement from private entities,
there is no requirement of conducting a tender process.
(ii) The State of UP cannot arbitrarily prefer one of the eligible entities for the procurement
of medicines. All the establishments mentioned in paragraph 4(vi)(b) are recognised to be on
an equal footing. Therefore, procurement must be by a fair process in which all the eligible
establishments are granted an opportunity to secure the procurement order;
(iii) It is an established principle that state largesse must be distributed by public auction
save in exceptional situations having regard to the nature of the trade or where no reasonable
substitute exists. There are no exceptional circumstances in the instant case that warrant the
procurement of medicines only from IMPCL; and
(iv) The price of medicines procured from IMPCL is vetted by the Department od
Expenditure, Ministry of Finance for the limited purpose of undertaking an audit. It is the
National Pharmaceutical Pricing Authority that approves the prices of medicines. The Ministry
of Finance does not have the power or the expertise to determine the prices of Ayurvedic
medicines.
3.0 Analysis
10 Paragraph 4(vi)(b) of the Operational Guidelines prescribes that at least 50
percent of the grant-in-aid shall be used to procure medicines from (i) IMPCL, or (ii)
PSUs and pharmacies under the State Governments and cooperatives. The provision
further indicates that to ensure the quality of AYUSH drugs and medicines, the
medicines must be manufactured in their manufacturing units which comply with Good
Manufacturing Practices (GMP). Paragraph 4(vi)(c) states that the remaining grant-in-
aid may be used for procuring medicines from other Good Manufacturing Practices
(GMP) compliant units having valid manufacturing licenses. The appellant had granted
the contract for the purchase of Ayurvedic medicines to IMPCL under paragraph
4(vi)(b) of the Operational Guidelines through nomination, thereby eliminating the
other units mentioned in the paragraph. This action of the appellant is challenged as
arbitrary and violative of Article 14. Before interpreting paragraph 4(vi)(b) to determine
if the action of the appellant is permissible under the law, the law relating to the extent
of judicial review of government contracts must be discussed.

5
3.1 State Largesse: conflation of power and duty
11 The welfare State plays a crucial role in aiding the realisation of the
socioeconomic rights which are recognised by the Constitution. Social welfare benefits
provided by the State under the rubric of its constitutional obligations are commonly
understood in the language of ‘largesse’, a term used to describe a generous
donation. Terming all actions of government, ranging from social security benefits,
jobs, occupational licenses, contracts and use of public resources – as government
largesse results in doctrinal misconceptions. The reason is that this conflates the
State’s power with duty. The Constitution recognises the pursuit of the well-being of
citizens as a desirable goal. In doing this the Constitution entrusts the State with a
duty to ensure the well-being of citizens. Government actions aimed at ensuring the
well-being of citizens cannot be perceived through the lens of a ‘largess’. The use of
such terminology belittles the sanctity of the social contract that the ‘people of India’
entered into with the State to protect and safeguard their interests.
3.2 Judicial review of government contracts: extent and ambit
12 Paragraph 4(vi)(b) prescribes entities from which Ayurvedic medicines may be
procured. The paragraph does not prescribe the method through which they may be
procured. The appellant contends that the since the method of procurement is not
prescribed, it has the discretion to purchase drugs through ‘nomination’. On the other
hand, the respondent contends that merely because the Operational Guidelines do
not prescribe the method of procurement, unbridled discretion cannot be given to the
executive to procure drugs through ‘nomination’.
13 In the early 1950s’, judicial review of the process of concluding contracts by
government was limited. The courts allowed the State due deference on the ground
of governmental policy. In C.K Achuthan v. State of Kerala5, a Constitution Bench of
this Court held that it is open to the Government ‘to choose a person to their liking, to
fulfil contracts which they wish to be performed.’ The Court observed that when one
party is chosen over another, the aggrieved party cannot claim the protection of Article
14 since the government has the discretion to choose with whom it will contract.
14 Over the years, this Court has applied the non-arbitrariness standard under
Article 14 to test the validity of government action. In Ramana Dayaram Shetty v.
International Airport Authority of India 6 , a three-Judge Bench of this Court
observed that the government does not have unlimited discretion in granting State
largesse and it must act in fairness. In New Horizons Limited v. Union of India7, the
Department of Telecommunications, invited sealed tenders for printing, binding, and
supply of telephone directories. While determining the validity of the eligibility criteria
prescribed for tenderers, the Court observed that the State when entering into a
contract does not stand on the same footing as a private person. The Court held that
the government cannot act arbitrarily while dealing with the public, whether it is while
giving jobs or entering into contracts. The relevant observations are extracted below:
17. At the outset, we may indicate that in the matter of entering into a contract, the State does
not stand on the same footing as a private person who is free to enter into a contract with any
person he likes. The State, in exercise of its various functions, is governed by the

5 AIR 1959 SC 490

6 1979 (3) SCC 489; Also see Sterling Computers Ltd. v M/s M& Publications Limited, (1993) 1 SCC 445; Jesper I. Slong
v. State of Meghalaya, (2004) 11 SCC 485; Also see Association of Registration Plates v. Union of India, (2005) 1 SCC
679
7
(1995) 1 SCC 478

6
mandate of Article 14 of the Constitution which excludes arbitrariness in State action
and requires the State to act fairly and reasonably. The action of the State in the matter
of award of a contract has to satisfy this criterion. Moreover a contract would either
involve expenditure from the State exchequer or augmentation of public revenue and
consequently the discretion in the matter of selection of the person for award of the
contract has to be exercised keeping in view the public interest involved in such
selection. The decisions of this Court, therefore, insist that while dealing with the public,
whether by way of giving jobs or entering into contracts or issuing quotas or licences or
granting other forms of largesse, the Government cannot act arbitrarily at its sweet will and
like a private individual, deal with any person it pleases, but its action must be in conformity
with the standards or norms which are not arbitrary, irrational or irrelevant. It is, however,
recognised that certain measure of “free play in the joints” is necessary for an administrative
body functioning in an administrative sphere.”
(emphasis supplied)
15 In Food Corporation of India v. M/s Kamdhenu Cattle Feed Industries8, this
Court held that ‘in the contractual sphere […] the State and all its instrumentalities
have to conform to Article 14 of the Constitution.’ The respondent filed a writ petition
before the High Court challenging the appellant’s refusal to accept the highest tender
submitted by it for a stock of damaged rice. This Court held:
“7. In contractual sphere as in all other State actions, the State and all its instrumentalities
have to conform to Article 14 of the Constitution of which non-arbitrariness is a significant
facet. There is no unfettered discretion in public law: A public authority possesses powers
only to use them for public good. This imposes the duty to act fairly and to adopt a procedure
which is ‘fairplay in action’. Due observance of this obligation as a part of good administration
raises a reasonable or legitimate expectation in every citizen to be treated fairly in his
interaction with the State and its instrumentalities, with this element forming a necessary
component of the decisionmaking process in all State actions. To satisfy this requirement of
non-arbitrariness in a State action, it is, therefore, necessary to consider and give due weight
to the reasonable or legitimate expectations of the persons likely to be affected by the
decision or else that unfairness in the exercise of the power may amount to an abuse or
excess of power apart from affecting the bona fides of the decision in a given case. The
decision so made would be exposed to challenge on the ground of arbitrariness. Rule of law
does not completely eliminate discretion in the exercise of power, as it is unrealistic, but
provides for control of its exercise by judicial review.”
3.2.1 Tender: a constitutional requirement?
16 This Court has consistently held that government contracts must be awarded
by a transparent process. The process of inviting tenders ensures a level playing field
for competing entities. While there may be situations which warrant a departure from
the precept of inviting tenders or conducting public auctions, the departure must not
be unreasonable or discriminatory.9 In Centre for Public Interest Litigation v. Union
of India 10 the ‘first-cum-first serve’ policy was held to be arbitrary while alienating
natural resources. However, the Court observed that though auction is a ‘preferred’
method of allocation, it cannot be construed to be a constitutional requirement.
17 In Natural Resources Allocation, in re Special Reference No. 1 of 201211, a
Presidential Reference was made in the backdrop of the decision in Centre for Public
8(1993) 1 SCC 71
9M/s Kasturi Lal Lakshmi Reddy v. State of Jammu and Kashmir, (1980) 4 SCC 1; Sachidanand Pandey v. State of West
Bengal, (1980) 4 SCC 1; Haji T.M Hassam Rawther v. Kerala Financial Corporation (1988) 1 SCC 166
10 (2012) 3 SCC 1
11
(2012) 10 SCC 1

7
Interest Litigation (supra) where this Court had held that the method of first-cum-first
serve used to allocate 2G radio spectrum was arbitrary and illegal. The reference was
on whether the ‘only permissible method for disposal of all natural resources across
all sectors and in all circumstances is by the conduct of auctions’. Justice Khehar in
his concurring opinion in Natural Resources Allocation (supra) held that while there
is no constitutional mandate in favour of auction under Article 14, deviation from the
rule of allocation through auction must be tested on grounds of arbitrariness and
fairness. In this context, it was observed as follows:
“148. In our opinion, auction despite being a more preferable method of alienation/allotment
of natural resources, cannot be held to be a constitutional requirement or limitation for
alienation of all natural resources and therefore, every method other than auction cannot be
struck down as ultra vires the constitutional mandate.
149. Regard being had to the aforesaid precepts, we have opined that auction as a mode
cannot be conferred the status of a constitutional principle. Alienation of natural resources is
a policy decision, and the means adopted for the same are thus, executive prerogatives.
However, when such a policy decision is not backed by a social or welfare purpose, and
precious and scarce natural resources are alienated for commercial pursuits of profit
maximising private entrepreneurs, adoption of means other than those that are competitive
and maximise revenue may be arbitrary and face the wrath of Article 14 of the Constitution.
Hence, rather than prescribing or proscribing a method, we believe, a judicial scrutiny of
methods of disposal of natural resources should depend on the facts and circumstances of
each case, in consonance with the principles which we have culled out above. Failing which,
the Court, in exercise of power of judicial review, shall term the executive action as arbitrary,
unfair, unreasonable and capricious due to its antimony with Article 14 of the Constitution.”
18 In Vallianur Iyarkkai Padukappu Maiyam v. Union of India12, a threejudge
Bench of this Court held that the State is not bound to allot resources such as water,
power, and raw materials through tender and is free to negotiate with a private
entrepreneur. In that case, the Government of Pondicherry entered into an agreement
for the development of Pondicherry Port without issuing an advertisement or inviting
tenders. This Court held that the action of the Government of Pondicherry was justified
because on account of historical, political and other reasons, the Union Territory is not
yet industrially developed and thus, entrepreneurs have to be offered attractive terms
to persuade them to set up industries. The relevant observations are extracted below:
“171. In a case like this where the State is allocating resources such as water, power, raw
materials, etc. for the purpose of encouraging development of the port, this Court does not
think that the State is bound to advertise and tell the people that it wants development of the
port in a particular manner and invite those interested to come up with proposals for the
purpose. The State may choose to do so if it thinks fit and in a given situation it may turn out
to be advantageous for the State to do so, but if any private party comes before the State
and offers to develop the port, the State would not be committing breach of any constitutional
obligation if it negotiates with such a party and agrees to provide resources and other facilities
for the purpose of development of the port.
172. The State is not obliged to tell Respondent 11 “please wait I will first advertise, see
whether any other offers are forthcoming and then after considering all offers, decide whether
I should get the Port developed through you”. It would be most unrealistic to insist on such a
procedure, particularly, in an area like Pondicherry, which on account of historical, political
and other reasons, is not yet industrially developed and where entrepreneurs have to be
offered attractive terms in order to persuade them to set up industries. The State must be

12
(2009) 7 SCC 561

8
free in such a case to negotiate with a private entrepreneur with a view to inducing him to
develop the Port and if the State enters into a contract with such an entrepreneur for providing
resources and other facilities for developing the Port, the contract cannot be assailed as
invalid because the State has acted bona fide, reasonably and in public interest.”
19 In Nagar Nigam v. Al Farheem Meat Exporters (P) Ltd.13, the respondent was
granted a license for a year to run a slaughterhouse owned by the
appellantcorporation. On the completion of the term of the license, the appellant
issued an advertisement inviting applications for granting a fresh contract. The
respondent challenged the advertisement. The Court observed that it is the
requirement of the principle of non-arbitrariness postulated in Article 14 that contracts
by the State, its corporations, instrumentalities, and agencies should as a general rule
be granted through public tender. Noting that it is necessary to maintain transparency
in the grant of public contracts, the Court ruled that the State must give contracts only
by tender and not through private negotiations. This Court held that a contract can be
granted by private negotiation only in exceptional circumstances having regard to the
‘nature of the trade or largesse or for some other good reason’. Some of the
exceptional circumstances that were listed were: (a) award of contracts in the event
of natural calamities and emergencies; (b) situations where the supplier has exclusive
rights over goods and there is no reasonable alternative; and (c) there are no bidders
or where the bid offered is too low. The Court has upheld the award of contracts
without holding a public auction in situations where conducting a public auction is
impossible given the surrounding circumstances. When the government deviates from
the general rule of allotting a contract without following a transparent process such as
inviting tenders, it has to justify its actions on the touchstone of the principles
postulated in Article 14:
13. This Court time and again has emphasised the need to maintain transparency in grant
of public contracts. Ordinarily, maintenance of transparency as also compliance with Article
14 of the Constitution would inter alia be ensured by holding public auction upon issuance of
advertisement in the well-known newspapers. That has not been done in this case. Although
the Nagar Nigam had advertised the contract, the High Court has directed that it should be
given for 10 years to a particular party (Respondent 1). This was clearly illegal.
14. It is well settled that ordinarily the State or its instrumentalities should not give
contracts by private negotiation but by open public auction/tender after wide publicity. In this
case the contract has not only been given by way of private negotiation, but the negotiation
has been carried out by the High Court itself, which is impermissible.
15. We have no doubt that in rare and exceptional cases, having regard to the nature of
the trade or largesse or for some other good reason, a contract may have to be granted by
private negotiation, but normally that should not be done as it shakes the public confidence.
16. The law is well settled that contracts by the State, its corporations, instrumentalities and
agencies must be normally granted through public auction/public tender by inviting tenders
from eligible persons and the notification of the public auction or inviting tenders should be
advertised in well-known dailies having wide circulation in the locality with all relevant details
such as date, time and place of auction, subject-matter of auction, technical specifications,
estimated cost, earnest money deposit, etc. The award of government contracts through
public auction/public tender is to ensure transparency in the public procurement, to maximise
economy and efficiency in government procurement, to promote healthy competition among
the tenderers, to provide for fair and equitable treatment of all tenderers, and to eliminate
irregularities, interference and corrupt practices by the authorities concerned. This is required

13
(2006) 13 SCC 382

9
by Article 14 of the Constitution. However, in rare and exceptional cases, for instance during
natural calamities and emergencies declared by the Government; where the procurement is
possible from a single source only; where the supplier or contractor has exclusive rights in
respect of the goods or services and no reasonable alternative or substitute exists; where the
auction was held on several dates but there were no bidders or the bids offered were too low,
etc., this normal rule may be departed from and such contracts may be awarded through
“private negotiations”. (See Ram and Shyam Co. v. State of Haryana [(1985) 3 SCC 267 :
AIR 1985 SC 1147] .”
20 Inviting tenders and conducting public auctions are considered to be preferred
methods of allocation for two reasons: firstly procurement can be made at the best
price; and secondly, allocation is through a transparent process. However, 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.
21 The appellant-State contends that since in the present case, there is no
involvement of ‘State largesse’ and no disposal of State property, it was not bound to
grant the contract to IMPCL through tender. It is argued that in such a situation, the
High Court on a perusal of the relevant material, ought to have only scrutinised if there
was an oblique motive involved in purchasing medicines from IMPCL. 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.
22 The following principles emerge from the discussion above:
(i) Government action must be just, fair and reasonable and in accordance with the
principles of Article 14; and
(ii) 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.
3.3 Interpretation of paragraph 4(vi)(b) of the Operational Guidelines
23 Before interpreting paragraph 4(vi)(b) of the Operational Guidelines, it is
necessary that we refer to the circulars on the procurement of Ayurvedic drugs. In
1994, the Ministry of Health and Family Welfare issued a communication stating that
Ayurvedic medicines are to be procured only from IMPCL because it is the only entity
which manufactures quality medicines. On 8 May 2008, the Government of India
issued another memorandum on similar lines. On 9 August 2016, the Ministry of
AYUSH issued a circular responding to the clarification sought by the States on the
procurement of AYUSH medicines from IMPCL. The circular stipulates that the States
‘may’ procure Ayurvedic and Unani Medicines from IMPCL. On 7 December 2016, the
Ministry of AYUSH issued a circular stating that the procurement guidelines under
NAM also allow for the purchase of medicines from PSUs and pharmacies of the State
Governments and co-operatives that have their own manufacturing units and are GMP
compliant. It was thus stated that the States may also procure Essential Ayurvedic
Medicines directly from Oushadhi (A Kerala Government owned Ayurvedic medicine
manufacturing unit) subject to the condition that medicines have to be provided within
the rates of IMPCL.
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24 On 2 January 2019, the Ministry of AYUSH issued a notification 14 in
supersession of the notification dated 7 December 2016. While stipulating that the
procurement of medicines is the ‘prerogative’ of the State Government, the notification
stated that the following guidelines have to be observed:
(i) Essential drugs have to be procured from the Essential Drugs List (EDL) published by
the Ministry of AYUSH;
(ii) At least 50 percent of the grant-in-aid has to be used to procure medicines from IMPCL
or other Central/State PSUs’ or pharmacies under the State-Governments and Co-
operatives;
(iii) The remaining grant-in-aid may be used for procuring the medicines from other units
that have valid manufacturing licenses; and
(iv) The medicines have to be manufactured in their own manufacturing units and must be
GMP compliant.
25 Thus, the letter which was issued by the Union Ministry of Health and Family
Welfare in 1994 stating that Ayurvedic medicines must be procured only from IMPCL
is superseded by the latest notification issued by the Ministry of AYUSH in 2019 which
stipulates that paragraph 4(vi)(b) of the Operational Guidelines does not differentiate
between the units mentioned in the provision. Paragraph 4(vi)(b) does not stipulate
that IMPCL will have a higher standing as compared to other manufacturing units of
the State Governments and cooperatives mentioned in the paragraph. The position of
the Ministry of AYUSH as evidenced by the 2019 notification is that 50 percent of the
grant-in-aid shall be used to procure medicines from any of the establishments
specified in the paragraph. This conclusion is substantiated by the use of the phrase
‘or’ in paragraph 4(vi)(b) - IMPCL ‘or’ from PSUs’, pharmacies under State
Governments and co-operatives. Thus, on a plain reading of paragraph 4(vi)(b), it is
evident that all the units mentioned in the paragraph are placed at an equal footing.
The provision does not create a gradation amongst the manufacturing units mentioned
in the paragraph. Nor does it evince an intent to create a monopoly.
3.4 Validity of award of government contract to IMPCL
26 The appellant flags the insurmountable difficulties in awarding contracts for the
purchase of Ayurvedic drugs because of peculiar problems in the process of
manufacture. Reference was made to the letter dated 16 July 1994 issued by the
Ministry of Health and Family Welfare stating that purchase through tender would be
‘inadequate’ for the procurement of Ayurveda, Siddha, and Unani medicines because
(i) there is a wide variation in the prices of the raw materials as a result of which the
cost of the same drug using the ‘best raw materials’ maybe ten times the cost if the
‘poorest’ quality of raw materials is used; and (ii) it is impossible to test the composition
and the quality of raw materials used in the drugs. The letter of the Ministry of Health
and Family Welfare dated 16 July 1994 is extracted below:
“You may perhaps be aware that Government of India has set up in collaboration with
Government of Uttar Pradesh, Indian Medicines Pharmaceutical Corporation ltd. for
manufacture of high quality drugs of the Indian Systems of Medicine. The drugs are prepared
strictly in accordance with the classical texts and genuine raw materials are used to prepare
these drugs.

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“2019 Notification”

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2. It is our experience that the ordinary financial procedures such as tendering are inadequate
in relation to the purchase of Ayurveda, Siddha and Unani medicines. This is because:-
1. Of the very wide variation in prices of raw materials required for making the drugs. The
cost of the same drug using the best raw materials may be 10 times the cost if the poorest
quality raw materials are used.
2. The impossibility of testing the exact composition of drugs of its raw materials and their
quality.
3. Pharmacopeial work in these systems of medicines is at a very initial stages. Tests
presently available can reveal the presence of harmful ingredients/adulterants and could
indicate the presence of certain compounds at best. However, since the basic
components of ISM medicines are herbs which are themselves composed of many
organic compounds, its well nigh impossible with the present state of technology to
test and check whether the ingredients claimed are actually present in the proportion
claimed and whether they are of the right quality and whether the proper process
prescribed in the classical texts have been used to prepare the medicines. Thus
purchases purely on the basis of tendering are likely to lead to purchase medicines which are
inefficacious.
4. The only alternative available at present to ensure quality drugs is to have inspectors
at the manufacturing site when the manufacturing process is going on. This also is not a
practical alternative since drug control organisations do not have the man power for close
supervision. This situation is responsible for the reported malpractices with regard to such
medicines. It is under these circumstances that a decision has been taken in the Ministry of
Health and Family Welfare to purchase the requirements of the CGHS only from IMPCL at
process which are been [] as fair and have been scrutinised by a representative of the Cost
Accounts Branch of the Finance Ministry.
5. Despite ensuring preparation of drugs strictly according to the classical texts, the
prices charged by IMPCL compare favourably with competing brands in most cases, for a
few cases the process may be a little higher but as already pointed out there is more reliability
in terms of quality assurance because IMPCL does not allow commercial interests over the
mandate for preparing medicines strictly according to the classical texts using genuine raw
materials. For instance IMPCL does not use extra sugar or other taste enhancers mainly to
make its medicines more popular.
6. In view of the above, you may like to consider meeting the requirements of State
Government Dispensaries and Hospitals for medicines manufactured by IMPCL at the rates
fixed for CGHS supplies but subject to the local variation in transport costs. In that case you
may like to contact Chairman cum Managing Director, Indian Medicines Pharmaceutical
Corporation ltd., (IMPCL), Mohan Distt, Almora, U.P”
(emphasis supplied)
27 On 8 May 2008, the Government of India issued another memorandum
stipulating that the medicines produced by IMPCL are according to classical texts and
of assured quality. The memorandum mentioned that there is an absence of fully
developed pharmaceutical standards to test the quality of Ayurvedic and Unani
medicines. The relevant paragraph of the memorandum indicates that:
“(i) The medicines produced by IMPCL are strictly as per classical texts and hence prove
quality.
(ii) The rates of the medicines produced by the company are reasonable as the same are
fixed by the Cost Accounts Branch of the Ministry of Finance;

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(iii) In the absence of fully developed pharmaceutical standards for Ayurvedic and Unani
Medicines in the country, the CGHS Research Councils is/are not fully equipped to ensure
that the purchased medicines are of right quality.”
28 The letter indicates that there is no method to determine the ingredients and
quality of Ayurvedic drugs. This would mean that there was no method to determine
the quality of the medicines produced by IMPCL as well. The Ministry of Health and
Family Welfare noted that it has decided to purchase Ayurvedic drugs only from
IMPCL because the process is fair and is scrutinised by a representative of the
Ministry of Finance. However, the first respondent contends that the medicines
procured from IMPCL are vetted by the Ministry of Finance for the limited purpose of
undertaking an audit. At this juncture, it is necessary to note that IMPCL has been set
up by the Government of India in collaboration with the Government of Uttarakhand.
The Government of India holds 98.11 percent of the shares of IMPCL and 1.89 percent
of the shares are held by the State Government. The letter issued by the Ministry of
Health and Family Welfare indicates that merely because IMPCL is an establishment
in which the Central Government has a major stake, it is assumed that there is no
‘commercial interference’ and the medicines are prepared according to classical texts
using ‘genuine raw materials’.
29 There is no material on record to support the submission that IMPCL is the only
establishment among the establishments mentioned in paragraph 4(vi)(a) that
manufacture good quality Ayurvedic drugs. In fact, paragraph 4(vi)(b) states that 50
percent of the grant-in-aid shall be used to purchase medicines from the units
mentioned in the paragraph “keeping in view the need for ensuring quality of AYUSH
drugs and medicines.” This would indicate that the need for ensuring quality is
subserved by all the sources mentioned there. Besides IMPCL, which is an
establishment of the Government of India, paragraph 4(vi)(b) includes other
establishments of the State Governments or co-operative societies. The contention
that IMPCL does not have any commercial interest because it is an establishment
developed by the Government of India is then equally applicable to other
establishments prescribed in paragraph 4(vi)(b).
30 The argument that the procurement of Ayurvedic drugs from IMPCL would fall
within the exceptional circumstances (assurance of quality medicines) is erroneous.
The submission of the appellant that IMPCL is the sole producer of quality Ayurvedic
medicines is based on surmises and conjectures without any cogent material to
support the claim.15 In fact, the notification of 2 January 2019 issued by the Ministry
of AYUSH stipulates that 50 percent of the grant-in-aid has to be used to procure
medicines from IMPCL or other Central/State PSUs’ or pharmacies under the State-
Governments and co-operatives. It is open to the appellant to procure medicines using
any method other than tender, so long as it is not arbitrary. The claim of the appellant
is that it deviated from the rule of tender because IMPCL is the only establishment
that produces quality medicines. However, there is no material to substantiate the
claim that IMPCL is the only establishment which manufactures ‘quality’ medicines to
the exclusion of other establishments mentioned in paragraph 4(vi)(b). 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

15
See State of Tamil Nadu v. National South Indian River Interlinking Agriculturist Association, Civil Appeal 6764 of 2021.

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of the other establishments mentioned in paragraph 4(vi)(c) is arbitrary and violative
of Article 14 of the Constitution.
31 In the given circumstances, inviting tenders from the entities mentioned in
paragraph 4(vi)(b) is the most transparent and non-arbitrary method of allocation that
can be undertaken. Hence, the appellant must henceforth purchase Ayurvedic
medicines only through a free and transparent procedure such as tenders. The
appellant may deviate from this rule and procure medicines by nomination only if
exceptional circumstances exist. In such a situation, the appellant must demonstrate
the existence of exceptional circumstances on the basis of cogent material.
32 For the reasons indicated above, the appeals against the judgment of the
Lucknow Bench of the High Court of Judicature at Allahabad dated 18 October 2019
are dismissed.
33 Applications for intervention 16 were filed by the Federation of AYUSH drugs
Manufacturers 17 , the President and Secretary of the Federation, the investor of
“Scompound”18, and a small-scale manufacturing unit engaged in the production of
Ayurvedic Medicines. The Federation consists of nine members who are registered
under the Micro, Small and Medium Enterprises Development Act 2006 and are
engaged in the manufacture and sale of Ayurvedic drugs. The following arguments
were made in the application:
(i) This Court in Caterpillar India Pvt. Ltd. v. Western Coal Fields 19 observed that
purchase preference creates a monopoly. In view of the judgment in Caterpillar India
(supra), the Union Cabinet by an order dated 21 November 2007 adopted a policy whereby
purchase preference to Central Public Sector Enterprises was terminated from 31 March
2008; and
(ii) The Director, Central Vigilance Commission issued a circular on 9 November 200920
to review the Purchase Preference Policy for the products and services of Central Public
Sector Enterprises in view of the judgment in Caterpillar India Pvt. Ltd. (supra). On 23 March
2012, the Ministry of MSME framed a policy titled “Public Procurement Policy for Micro and
Small Enterprises (MSEs) Order 2012” which stipulates that every Central Ministry or
Department of PSU shall procure a minimum of 20 percent of the total annual purchases from
micro and small enterprises.
34 The intervention applicant submitted as follows:
(i) Policies of the Central and State government stipulate that 25 percent of the medicines
shall be procured from MSMEs. Thus, the term ‘at least 50%’ in paragraph 4(vi)(b) of the
Operational Guidelines must be read as limiting the procurement from establishments in
paragraph 4(vi)(b) to 50 percent and giving other manufacturers a level playing field under
paragraph 4(vi)(c);
(ii) The Central and the State Governments have notified procurement policies directing
that a certain percent of the procurement must be from the MSMEs’. The procurement of
medicines from IMPCL on nomination is contrary to the procurement policies notified by the
Government;

16 IA 9631 of 2020; IA No. 46786 of 2022

17 “Federation”
18 S-Compound is a recognised herbal ayurvedic drug used in the treatment of ‘rheumatoid arthritis’ and ‘osteo arthritis’.

19 (2007) 11 SCC 32
20
Circular No. 31/10/09

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(iii) IMPCL also sells products in the open market. Thus, the argument that IMPCL is
established solely to supply medicines to the Government is misleading; and
(iv) IMPCL has not submitted records to show that the other manufacturers cannot supply
equivalent or better-quality drugs.
35 The intervention applications seek to enlarge the scope of the Special Leave
Petition. The issue before this Court falls squarely on the interpretation of paragraph
4(vi)(b). However, the intervention applicant has prayed that in accordance with the
policies of the State and the Central Government, a minimum percent of Ayurvedic
drugs must be procured from MSMEs under paragraph 4(vi)(c). This is beyond the
scope of the instant Special Leave Petition.
36 For the reasons indicated above, IA 9631 of 2020 and IA No. 46786 of 2022 are
dismissed. The interveners would have to follow their own independent remedies in
accordance with law.
37 Pending application(s), if any, stand disposed of.

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