Tony,
Thanks for the clarification, and I agree that the company should abide by it's policies and procedures, or failing that, change them so that they reflect what is actually happening in "the real world." In this case it certainly doesn't show an honest approach to hiring internals, but it would at least allow future employees to know what the rules are. That said, one can certainly understand why someone with sounder credentials would be seen as more desirable than someone with lesser ones. However, it would be indeed a difficult decision for an employee to grieve the company's decision to not interview him or her, because in my opinion, after doing so, would almost certainly assure that the employee would not be offered the job, either now or in the future.
JJ