CIRON DRUGS AND PHARMACEUTICALS PVT. LTD. v. THE STATE OF KERALA AND THE KERALA MEDICAL SERVICES CORPORATION LIMITED

## **IN THE HIGH COURT OF KERALA AT ERNAKULAM** ## **PRESENT** **THE HONOURABLE THE CHIEF JUSTICE MR.HRISHIKESH ROY** **&** **THE HONOURABLE MR. JUSTICE A.K.JAYASANKARAN NAMBIAR** **WEDNESDAY, THE 13TH DAY OF FEBRUARY 2019 / 24TH MAGHA, 1940** **WA.No. 266 of 2019** **AGAINST THE JUDGMENT IN WP(C) 40645/2018 of HIGH COURT OF KERALA DATED 24.1.2019** ## **APPELLANT/PETITIONER IN THE WPC:** **CIRON DRUGS AND PHARMACEUTICALS PVT. LTD., 1-PRABHAT NAGAR, GROUND FLOOR, JOGESHWARI (WEST), MUMBAI 400 104, REPRESENTED BY ITS DIRECTOR, SRI DHAVAL K SHAH.** **BY ADVS.SRI.P.CHANDRASEKHAR SMT.V.A.HARITHA SRI.D.SREEKANTH SRI.K.ARJUN VENUGOPAL SRI.R.NANDAGOPAL SRI.SIDHARTH B PRASAD** ## **RESPONDENTS/RESPONDENTS IN THE WPC:** **1 THE STATE OF KERALA, REPRESENTED BY ADDITIONAL CHIEF SECRETARY TO GOVERNMENT OF KERALA, DEPARTMENT OF HEALTH AND FAMILY WELFARE, SECRETARIAT, THIRUVANANTHAPURAM - 695 001.** **2 THE KERALA MEDICAL SERVICES CORPORATION LIMITED, THYCAUD P.O., THIRUVANANTHAPURAM, PIN - 695 014, REPRESENTED BY ITS MANAGING DIRECTOR.** **R1 BY SR.GOVERNMENT PLEADER SRI.V.TEKCHAND R2 BY ADV.SRI.M.AJAY** **THIS WRIT APPEAL HAVING COME UP FOR ADMISSION ON 13.02.2019, THE COURT ON THE SAME DAY PASSED THE FOLLOWING:** **WA.No. 266 of 2019** **2** ## **JUDGMENT** ## **A.K.Jayasankaran Nambiar, J.** The petitioner in W.P.(C)No.40645 of 2018 is the appellant before us, aggrieved by the judgment dated 24.1.2019 of the learned single Judge. In the writ petition, the petitioner impugned Exts.P6, P13, P18 and P28 proceedings, whereby the petitioner, who is a supplier of pharmaceutical products to the 2[nd] respondent, the Kerala Medical Services Corporation Limited ('the Corporation' for short), was blacklisted by the latter in respect of three products namely, Glimepiride Tablet IP 1mg, Glimepiride Tablet IP 2 mg and Declofenac Sodium Tablet 50mg. It would appear that, pursuant to a tender proceedings for supply of drugs to the respondent Corporation, the petitioner had been awarded the contract (Ext.P1), the express terms of which indicated that the drugs supplied had to be of standard quality. Clause 6.29 of the contract deals with the aspect of quality testing, quality control deduction and penalties. Clauses 6.29.1 to 6.29.3 deal with the laboratories where the quality of drugs supplied would be tested and the provisions indicate that the decisions of the Tender Inviting Authority, based on the reports of the Drugs Control Department of the State on the quality of the drugs, is to be treated as conclusive. The terms of the contract also indicate that the testing can be done in Government Drugs Testing Laboratory and if, for any reason, the testing cannot be done in the Government Drugs Testing Laboratory, then the testing can also be done at the Drugs Testing Laboratories empanelled by the Corporation. In either event, the test reports obtained from the laboratories are to be treated as final and conclusive for the purposes of the contract. Clauses 6.29.4 to 6.29.7 deal with the specific instances where the test results obtained from the laboratories aforementioned **WA.No. 266 of 2019** **3** would be deemed as conclusive for various purposes under the contract. Clauses 6.29.8 and 6.29.9, however, deal specifically with the aspect of blacklisting and mandate that, if any two batches of the particular item supplied by the firm during the contract period fail in any of the quality tests conducted by the Tender Inviting Authority and/or by the Drugs Control Department, then that particular product of that firm will be blacklisted for a period upto three years in terms of Clause 6.39. The last mentioned clause deals with procedure for blacklisting and in essence it contemplates affording of an opportunity to the bidder/supplier to show cause in writing as to why the proposal for blacklisting should not be gone ahead with. Clause 6.40 of the contract provides for an appeal against an order of blacklisting before the Appellate Authority, which is the State Government. 2. It would appear from the facts in the instant case that, the respondent Corporation, after serving a notice proposing blacklisting of the products of the appellant company, and after hearing the appellant, proceeded to pass Ext.P5, P13 and P18 orders dated 30.1.2017, 17.03.2017 and 15.03.2017 respectively blacklisting the three products manufactured and supplied by the appellant for a period of three years from the date of the order and also declaring the appellant company to be ineligible to participate in any of the tender floated by the respondent Corporation for the particular products during the aforesaid period. It would be apparent from a reading of the said orders that, while considering the objections of the appellant to the proposed blacklisting, the respondent Corporation relied solely on the conclusiveness of the test report obtained from the Drugs Testing Laboratory of the Drugs Control Department, Kerala, as also on the inaction on the part of the appellant to resort to the remedies provided under the Drugs and Cosmetics Act, 1940 for challenging the said report, to **WA.No. 266 of 2019** **4** hold that the conclusiveness of the report of the Drugs Testing Laboratory of the Drugs Control Department could not be questioned by the appellant. It is under those circumstances that the test reports that were relied upon by the appellant, in support of its contention that there was a possibility of the report of the Drugs Control Department being flawed, were not considered by the respondent Corporation. 3. The appellant preferred appeals against the orders passed by the Managing Director of the respondent Corporation before the State Government, which was the Appellate Authority. The documents produced in the writ petition would indicate that, while the Appellate Authority had first considered the appeals and passed an order rejecting the same, the said appellate orders came to be set aside in writ petitions that were preferred before this court on the ground that the appellant had not been heard by the Appellate Authority. Pursuant to the judgment of this court in the said writ petitions, the Appellate Authority once again considered the appeals of the appellant and Ext.P28 order dated 3.12.2018 was passed, rejecting the appeals preferred by the appellant. It is necessary to note at this stage that, the findings of the Appellate Authority in Ext.P28 order are on lines similar to that taken by the respondent Corporation in Exts.P5, P13 and P18 orders in that, the contention of the appellant, based on the laboratory reports relied upon by it to suggest that the products in question were of standard quality, were not even considered by the Appellate Authority. 4. The learned single Judge, who considered the writ petition, found force in the contention of the respondents that the show cause notices that were issued to the appellant were on the basis of the letters from the Office of the Drugs Controller, Trivandrum and test reports and laboratory reports forwarded by the said Authority. The **WA.No. 266 of 2019** **5** contention of the appellant that proper procedures had not been followed by the Drugs Inspectors in question were taken note of, but it was found that the said contentions of the appellant had already been answered in the orders of the respondent Corporation that were impugned in the writ petition. It was also noted that the Drugs Inspector/Drug Controller or the Officers of the said Department, whose reports were called in question in the writ petition, were not parties to the writ petition. Thereafter, finding that what was impugned was essentially a finding of fact by the State Government, the learned Judge felt it unnecessary to interfere with the impugned orders and the conclusions reached therein. The writ petition was accordingly dismissed while leaving open the right of the appellant to resort to arbitration proceedings for resolving the differences amicably. 5. Before us, it is the contention of the learned counsel for the appellant Sri.P.Chandrasekhar that Ext.P25 argument note had been submitted before the Appellate Authority (State Government) and therein the details with regard to the testing of the product samples, done in the appellant's laboratory as well as other accredited laboratories, had been furnished to suggest that there could be an error in the report relied upon by the respondent Corporation for the purposes of blacklisting. It is his case that although this aspect was projected before the appellate authority, the said aspect was not considered while passing the Ext.P28 order. It is the further contention of the learned counsel Sri.P.Chandrasekhar that while the test reports of the Drugs Control Laboratory of the State of Kerala may be deemed as conclusive for the purposes of the Drugs and Cosmetics Act, 1940 as also for certain Clauses in Ext.P1 contract governing the parties, the very provisions of the contract which dealt with the procedure to be followed for blacklisting (Clause 6.39), indicated that the test reports **WA.No. 266 of 2019** **6** relied upon by the respondent Corporation were not to be treated as conclusive for the purposes of the blacklisting contemplated under the contract. 6. Countering the said submissions, Sri.M.Ajay, the learned counsel for the respondent Corporation would place reliance on the decisions in **Wockhardt Limited v. Senior Chief Medical Officer (2011 SCC OnLine Cal 5320)** , **K.Guruswami and Another v. State of Maharashtra [2001 (1) Mh. L.J. 84]** , **State of Haryana v. Brij Lal Mittal and Others [(1998) 5 SCC 343]** , **Ram Shankar Misra v. State of U.P. [(1980) 1 SCC 255)** and **Zim Laboratories Ltd. and Others v. State of Maharashtra [1993 (3) Mh.L.J. 132]** to contend that, for the purposes of the Drugs and Cosmetics Act and Rules, the non compliance by the manufacturer, with the procedure prescribed therein for challenging the veracity of the test reports obtained by the department against him, would be fatal and, therefore, it was not open to him to challenge the correctness of the reports for the purposes of the contract either. It is further pointed out that even as per the contract, Clauses 2.1.25 and 2.1.26, which speak of empanelled laboratories as also the appellate laboratory, clearly indicate that the report of the appellate laboratory, the Drugs Testing Laboratory of the Drugs Control Department, will be final and conclusive for the purposes of the contract. It is contended, therefore, that notwithstanding the conclusive nature of the test reports obtained from the Drugs Control Department for the purposes of the Drugs and Cosmetics Act, 1940, the said report would also have to be treated as conclusive for resolving the differences between the parties under the contract. It is pointed out that this aspect is further reiterated in Clause 6.29.2 of the contract where again it is stated that the test results of the Drugs Testing Laboratories empanelled by the Corporation will be final and conclusive. **WA.No. 266 of 2019** **7** 7. On a consideration of the rival contentions, we are of the view that, while it is not in dispute that in respect of any rights that are claimed by the appellant under the provisions of the Drugs and Cosmetics Act, 1940, the inaction on the part of the appellant to follow the procedure contemplated therein for challenging the correctness of any report that is relied upon against it under the Act, would be determinative of his liability to the penalties/prosecution contemplated under that Act, we find that blacklisting is not a penalty that is contemplated under the Act. The blacklisting of a product/manufacturer is a penalty that is contemplated under the contract entered into between the appellant and the respondent Corporation. No doubt, as pointed out by the learned counsel Sri.M.Ajay for the respondent Corporation, the contract stipulates that the test reports of the Drugs Control Department of the Government of Kerala shall be treated as conclusive for the purposes of contract. We note however, that there is a difference in the phraseology used in the various clauses in the contract, with some of them indicating that the test reports relied upon by the Corporation are conclusive for the purposes of further action contemplated under the contract, and others such as the clause relating to blacklisting (Clause 6.39) which contemplates a procedure to be followed prior to blacklisting, suggesting that the conclusiveness attached to the test reports of the Drugs control department is only in connection with the initiation of steps for blacklisting. A close reading of the latter Clause suggests that a person, against whom blacklisting is proposed, is given an opportunity to rebut the report relied upon by the Corporation for the purposes of blacklisting. We say so because, if the report was to be treated as conclusive for all purposes, then the very procedure which contemplates an opportunity of hearing to the person/product proposed to be blacklisted would be rendered meaningless. We are therefore, persuaded to hold that the procedure **WA.No. 266 of 2019** **8** contemplated prior to blacklisting, if intended to provide a meaningful opportunity to the person sought to be blacklisted, to defend himself, then the procedure contemplated should be seen as one granting an opportunity to show cause against reliance on any report otherwise deemed as conclusive for the purposes of contract. Viewed in this sense, when we analyse the impugned order of the Appellate Authority/State Government (Ext.P28), we find that the Appellate Authority has not even adverted to the contentions of the appellant, based on the independent reports produced by it, that there was a possibility that the report of the Drugs Control Laboratory of the Government of Kerala was flawed and hence ought not to be relied upon to blacklist the products in question. We might hasten to add that we are not for a moment suggesting that the inaction on the part of the appellant in challenging the report of the Drugs Control Laboratory for the purposes of the Drugs and Cosmetics Act, 1940, will not be one of the factors operating against it in the appeals before the appellate authority. We are only saying that the reports relied upon by the appellant, and produced before the Appellate Authority, should also be considered by the Appellate Authority while deciding upon the correctness of Exts.P5, P13 and P18 orders passed by the respondent Corporation. The appellate authority cannot ignore the reports relied upon by the appellant by mechanically treating the reports of the drugs control authority as conclusive and the findings therein as irrebuttable. In as much as in Ext.P28 order of the Appellate Authority, we do not find a consideration of the appeal in the manner indicated in this judgment, we deem it appropriate to allow this Writ Appeal by setting aside the judgment of the learned Single Judge, as also Ext.P28 order of the Appellate Authority, and directing the first respondent Appellate Authority to pass fresh orders in the mater after taking note of the contentions in the appeals preferred by the appellant, Ext.P25 argument note, as also the test reports produced by the appellant along with **WA.No. 266 of 2019** **9** the reply to the show cause notice as also before this Court in I.A.No.1 of 2019, within a period of two months from the date of receipt of a copy of the judgment, after hearing the appellant and the 2[nd] respondent Corporation. The order passed by the Appellate Authority shall specifically deal with the aspects mentioned in this judgment and the order to be passed shall be a reasoned one. The appellant shall produce copies of the documents relied upon by it, and produced before this court, before the 1[st] respondent Appellate Authority, for further action. We make it clear that the observations and directions in this judgment, are confined to the aspect of blacklisting, which alone was the subject matter of the writ petition, and nothing in this judgment is to be seen as affecting any proceedings for penalties/prosecutions under the Drugs and Cosmetics Act, 1940, or other actions/penalties under the contract. Sd/- **Hrishikesh Roy, Chief Justice** Sd/- **A.K.Jayasankaran Nambiar, Judge** /true copy/ P.A. To Judge ## **vpv**