UOI v. M/S Synbiotics Ltd. & Anr

Order, unless the context otherwise requires-

(a) "bulk drug" means any substance including pharmaceutical, chemical, biological or plant product or medicinal gas conforming to pharmacopoeial or other standards accepted under the Drugs and Cosmetics Act, 1940 (23 of 1940), which is used as such or as an ingredient in any formulations; XXXXXX XXXXXX XXXXXX Page 9

(c) "distributor" means a distributor of drugs or his agent or a stockist appointed by a manufacturer or an importer for stocking his drugs for resale to a dealer; XXXXXX XXXXXX XXXXXX

(t) "retention price" in relation to a bulk drug means the price fixed under paras. 4 and 71a[which shall be the maximum retention price] for individual manufacturers, or importers, or distributors, of such bulk drugs; XXXXXX XXXXXX XXXXXX

¶3Power to fix the maximum sale price of indigenously manufactured bulk drugs specified in First Schedule or Second Schedule:-

(1) The Government may, with a view to regulating the equitable distribution of an indigenously manufactured bulk drug specified in the First Schedule or the Second Schedule and making it available at a fair price and subject to the provisions contained in sub-paragraph (2) and after making such inquiry as it deems fit, fix from time to time, by notification in the Official Gazette, the maximum price at which such bulk drug shall be sold.

(2) While fixing the price of a bulk drug under sub-paragraph (1), the Government may take into account the average cost of production of such bulk drug manufactured by an efficient manufacturer and allow a reasonable return on net-worth. XXXXXX XXXXXX XXXXXX

¶4Power to fix retention price and common sale price.-Notwithstanding anything contained in paragraph 3 the Government may, if it considers necessary or expedient so to do for increasing the production of an indigenously manufactured bulk drug specified in the First Schedule or the Second Schedule, [by order published in the Official Gazette], fix:-

(a) a retention price of such bulk drug; Page 10

(b) a common sale price for such bulk drug taking into account the weighted average of the retention price fixed under clause(a) : XXXXXX XXXXXX XXXXXX

¶7Power to fix retention price and pooled price for the sale of bulk drugs specified in First Schedule or Second Schedule indigenously manufactured as well as imported.-(l) Where a bulk drug specified in the First Schedule or the Second Schedule is manufactured indigenously and is also imported, the Government may, having regard to the sale price prevailing from time to time in respect of indigenously manufactured bulk drugs and those of imported bulk drugs, by order, fix, with such adjustments as the Government may consider necessary,-

(a) retention prices for individual manufacturers, importers, or distributors of such bulk drugs;

(b) a pooled price for the sale of such bulk drugs.

(2) Where a manufacturer of formulation utilizes in his formulations and bulk drug, either from his own production or procured by him from any other source, the price of such bulk drug being lower than the price alIowed to him in the price of his formulations, the Government may require such manufacturer-

(a) to deposit into the Drug Prices Equalization Account referred to in paragraph 17 the excess amount to be determined by the Government ; or

(b) to sell the formulations at such prices as may be fixed by the Government. XXXXXX XXXXXX XXXXXX Page 11

¶17Drug Prices Equalization Account.-(1) The Government shall maintain an Account to be known as the Drugs Prices Equalization Account to which shall be credited-

(a) by the manufacturer, importer or distributor, as the case may be-

(i) the amount determined under sub-paragraph (2) of para. 7 ;

(ii)the excess of the common selling price or, as the case may be, pooled price over his retention price; and

(b) such other sums of money as the Central Government may, after due appropriation made by Parliament by law in this behalf, grant from time to time.

(2) The amount credited under sub-paragraph (1) shall be spent only:-

(a) for paying to the manufacturer, importer or distributor, as the case may be, the short-fall between his retention price and the common selling price or, as the case may be, the pooled price for the purpose of increasing the production, or securing the equitable distribution and availability at fair prices, of drugs;

(b) for expenses incurred by the Government in discharging the functions under this paragraph.

(3) Every manufacturer, importer or distributor may, if he has any claim under clause (a) of sub-paragraph

(2), make an application to the Government and the Government may, in settling the claim, require the manufacturer, importer or distributor, as the case may be, to furnish such details as may be specified by it in this behalf.

(4) The Government shall maintain account of all moneys credited to, and expended from out of, the Drugs Prices Equalization Account and such other Page 12 reports and returns as it may consider necessary relating to the said account. XXXXXX XXXXXX XXXXXX"

¶13The Central Government on 02.04.1979 fixed the Pooled Price for Streptomycin at `475 per k.g. Simultaneously, the Retention Price in the case of respondents was fixed at `449.71/- per kg. For other manufacturers, it was fixed at `498/-. The respondents' claim that it had started selling all the Streptomycin with effect from 01.07.1979 to M/s. Sarabhai Chemicals, a division of Ambalal Sarabhai at the Retention Price levels fixed by the Government. The sole purchaser manufactured the formulation and sold them. On 10.06.1980 the Central Government called upon the respondent to pay into the Equalisation Fund the amount calculated at the rate of `25.29/- per kg. on the entire produce of Streptomycin sold by the respondent after the Retention Price fixation. The respondents contended that in effect they had not recovered any amount in excess of price and seeking to extract the difference is arbitrary and unjustified. With effect from

06.10.1980, the Central Government revised the respondents' Retention Price downward to `429/- per kg. for Streptomycin and at the same time increased the Pooled Price to `660 per kg. Likewise the Retention Price for the product for the other manufacturers was increased to `660.75/- per kg. The Central Government urged that the respondents had to sell Streptomycin at the Pooled Price for the period upto 06.10.1980 at `475/- per kg. and thereafter at `660.75/- and that having not done so and having sold it at lower price, was obliged to Page 13 pay the difference.

¶14The finding of the learned Single Judge on one aspect, which has a bearing on the discussion on merits of this case, is that the respondents disclosed that 52% of its share capital was held by Karamchand Premchand Pvt. Ltd. (KPPL) and balance by E.R. Squibb and Sons Inc., an American company. The respondent, therefore, was a joint-venture of those two groups. In 1978, the KPPL sold its shareholdings to M/s. Ambalal Sarabhai Enterprises. Learned Judge, on the basis of these materials – in the form of affidavits and documentary evidence alluded by the respondents held that it was a distinct and separate corporate entity, and therefore, could not be said to have connection with M/s. Ambalal Sarabhai Group of Companies.

¶15The Learned Single Judge, after noticing the scheme of the DPCO held that there was merit in the respondents' contentions that no obligation was cast upon it to make good the difference between the Retention Price and the Pooled Price. Once it was established that it had not sold the drug above the Retention Price, the Single Judge also held that the Central Government could have invoked the aid of DPCO and charged M/s. Ambalal Sarabhai, the formulator, the difference in terms of Clause 7(2). Not having done so, the deficiency could not have been recovered by default as it were, from the respondents.

¶16The plain language of Clause 7 (2) casts the obligation on the formulator to make good the difference between the pooled price and the price of the bulk drug, wherever it procures it at a rate lower than the pooled price (which is what is meant by the expression "the price Page 14 alIowed to him in the price of his formulations"), an obvious allusion to the price of the principal input, i.e. the bulk drug, which the formulator might have procured at less than pooled price – either at or below retention price (fixed for the bulk drug manufacturer) . This is evident from the terms "Where a manufacturer of formulation utilizes in his formulations and bulk drug", either from his own production or procured by him from any other source, when the price of the bulk drug is lower than "the price alIowed to him in the price of his formulations" that formulation manufacturer, or formulator has to "to deposit into the Drug Prices Equalization Account referred to in paragraph 17 the excess amount to be determined by the Government" (Clause 7 (2) (a)). The other contingency (Clause 7 (2)

(b)) is where the formulator has, "to sell the formulations at such prices as may be fixed by the Government." This was precisely what the Single judge stated, in the impugned order, when he found that the obligation or duty, if any, was cast upon the formulator to deposit or pay into the Drug Prices Equalisation Account the difference between the two prices, so as to offset any advantage it might have enjoyed. This Court holds that the conclusions of the learned Single Judge on this score are justified.

¶17As regards Clause 17, this Court is of opinion that it does not independently locate or create any liability. It can be said to be descriptive of what the fund is made up, when it refers to the two sources - Sub clause (1). The reference to Clause 7 (2) clarifies that it is the formulator's liability – because that class of manufacturer, who uses bulk drugs alone has been saddled with the liability to pay into Page 15 the fund amounts, to offset any advantage secured by him, on account of procurement of bulk drugs, on account of their prices being lower than the determined pooled price. As far as Clause 17

(1) (b) goes, this Court is not persuaded by the Central Government's submission that this reinforces any obligation cast upon the bulk drug manufacturer. The reason for this is obvious. There is no primary duty on the bulk drug manufacturer to pay into the Fund, any amounts. Under Clause 7 (2), it is the advantage presumably secured by the formulator which is sought to be offset by obliging it to deposit the difference determined, into the Fund. If that obligation is fulfilled, the question of asking even the bulk drug manufacturer, who has not realized any excess amounts, to pay into the Fund, any amounts, cannot arise at all. It was not, and cannot be, in the circumstances of the present case at least, that the DPCO contains any taxing provision which casts general liability. If such is the case, there is no obligation in law cast upon bulk drug manufacturers to pay any amounts over incomes or advantages which they have not secured. On account of efficiencies in their production processes, they were able to sell bulk drugs at the prices fixed in respect of their units (retention price). What the Central Government is asking the Court to uphold is its action in demanding a penalty, as it were, for selling at prices fixed or determined by it. It would be useful to recollect in this context that what Clause 3 of the DCPO empowers the Central Government to do is to fix "…………….the maximum price at which such bulk drug shall be sold". The Court also holds that there is no infirmity with the finding of the learned Single Judge Page 16 that the formulator in this case was a different entity from the respondents.

¶18For the foregoing reasons, this Court is of opinion that the appeal is without merit. LPA No.976/2002 is consequently dismissed, without any order on costs. S. RAVINDRA BHAT (JUDGE) SUDERSHAN KUMAR MISRA (JUDGE) NOVEMBER 7, 2013

Page 1 * IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on: 26.02.2013 Decided on: 07.11.2013 + UNION OF INDIA ..... Appellant Through : Sh. B.V. Niren, CGSC with Sh. Prasouk Jain, Advocate. Versus M/S. SYNBIOTICS LIMITED AND ANR. ..... Respondents Through : Sh. Vibhu Bakhru, Sr. Advocate with Sh. Pravin Bahadur, Ms. Mallika Joshi, Sh. Mohit Mudgal, Sh. Amit Agarwal and Sh. Rajan Narain, Advocates. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE SUDERSHAN KUMAR MISRA MR. JUSTICE S. RAVINDRA BHAT % 1. The present appeal by the Central Government (described as such, or as the "Union Government") impugns a judgment and order of a learned Single Judge by which the respondents' writ petition challenging a demand made in terms of the Drugs (Prices Control) Order (DPCO) of 1979 was allowed. 2. The Respondent No.1 is a manufacturer of various drugs and pharmaceutical products, including streptomycin and Respondent No.2 is its Director. The respondents herein, contended before the Page 2 learned Single Judge that a manufacturer of a bulk drug like it cannot be compelled to sell its product only at the pooled price and not for lower price. It also argued that as manufacturer of bulk drugs it could not be compelled to deposit into the Drug Prices Equalisation Account excess amounts constituting the difference between the pooled price and the retention price particularly when such excess amount is not realized if the manufacturer sells the bulk drug at retention price. 3. Clause 3 of the DPCO empowered the Central Government to, with a view to regulating the equitable distribution of an indigenously manufactured bulk drug specified in the First Schedule or the Second Schedule and making it available at a fair price subject to Rule 3(2) and after making such inquiry as is deemed fit, "………….fix, from time to time, by notification in the Official Gazette, the maximum price at which such bulk drug shall be sold…………….." Rule 3 (2) states that while fixing bulk drug prices, the Government "may" take into account the "………………..average cost of production of such bulk drug manufactured by an efficient manufacturer and allow a reasonable return on networth." Clause 4 empowered the Central Government to, notwithstanding Clause 3, if it felt it necessary to increase production of indigenously manufactured bulk drugs under the First or Second Schedule, fix (a) a retention price for the bulk drug and (b) a common sale price for such bulk drug, taking into account the weighted average of the retention price fixed under Clause (a). Clause 7 states that where a bulk drug is indigenously manufactured as well as imported, the Central Government can, after making Page 3 necessary adjustments, fix "(a) retention prices for individual manufacturers, importers or distributors of such bulk drugs" or (b) "a pooled price for the sale of such bulk drugs." Clause 7 (2) read as follows: "(2) Where a manufacturer of formulations utilises in his formulations any bulk drug, either from his own production or procured by him from any other source, the price of such bulk drug being lower than the price allowed to him in the price of his formulations, the Government may require such manufacturer -- (a) to deposit into the Drug Prices Equalisation Account referred to in paragraph 17 the excess amount to be determined by the Government; or (b) to sell the formulations at such prices as may be fixed by the Government.." 4. On 02.04.1979 the Central Government issued an order fixing the pooled price for streptomycin and also the retention price for the writ petitioners (respondents herein) and other manufacturers. The pooled price for streptomycin was fixed at `475 per k.g. and retention price was fixed at `449.71 per k.g. for first respondent and `498 for other manufacturers. The Central Government by circular dated 19.11.1979 required further information in view of the representation from the manufacturers of drugs and pharmaceuticals for granting an immediat