Synbiotics Ltd. And Anr. vs Union Of India (Uoi)
2002 Latest Caselaw 1815 Del

JUDGMENT

Vijender Jain, J.

1. Petitioner is manufacturer of various drugs and pharmaceutical products including streptomycin. The controversy which is the subject matter of this writ petition is whether a manufacturer of bulk drug can be compelled to sell his product only at the pooled price and not at a lower price and whether the manufacturer of bulk drug can be compelled to deposit into the Drugs Prices Equalisation Account excess of the pooled price over the retention price though such excess amount has not been realised as the manufacturer has sold the bulk drug at retention price.

2. It was contended before me by Mr. S. Ganesh, learned senior counsel for the petitioner that by notification issued under and in pursuance of Drugs (Prices Control) Order, 1970 which has been issued pursuant to Section 3(1) of the Essential Commodities Act, Central Government fixed from time to time the pooled price as well as retention price at which imported and indigenous streptomycin were to be sold. Some of the provisions of the said order which are relevant and material are reproduced below :

"2 (a) "bulk drug" means any substance Including pharmaceutical, Chemical, biological or plant product or medicinal gas conforming to pharmaceutical 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 formulation;

(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;

(t) "retention price" In relation to a bulk drug, means the price fixed under paragraph 4 and 7 for Individual manufacturers, or importers, or distributors, of such bulk drugs;

3. Power 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 networth.

4. Power 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 fix :-

(a) a retention price of such bulk drug;

(b) a common sale price for such bulk drug, taking into account the weighted average of the retention price fixed under Clause (a).

7. Power 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. -- (1) 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 prices 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 drug;

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

(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.

17. Drug Prices Equalisation Account.--

(1) the Government shall maintain an Account to be known as the Drugs Prices Equalisation Account to which shall be credit --

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

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

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

(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 Drug Prices Equalisation Account and such other reports and returns as it may consider necessary relating to the said account."

3. The Central Government issued on 2.4.1979 an order fixing the pooled price for streptomycin and also the retention price for petitioner and other manufacturers. The pooled price for streptomycin was fixed at Rs. 475 per k.g. and retention price was fixed at Rs. 449.71 per k.g. for petitioner No. 1 and Rs. 498 for other manufacturers.

4. Thereafter the Bureau of Industrial Cost and Prices, Govt. of India after having necessary information with regard to cost of production of streptomycin vide their circular dated 19.11.1979 required further information in view of the representation from the manufacturers of drugs and pharmaceuticals for granting an immediate price increase for bulk drug and formulation in order to compensate for the rapid increase in the price of input materials particularly petroleum based products,

5. It is the case of the petitioner that from 1.7.1979 petitioner had started selling all the streptomycin manufactured by it to Sarabhai Chemicals a division of Ambalal Sarabhai at the rate of Rs. 449.71 per k.g. which was retention price allowed to petitioner No. 1 by the said order dated 2,4,1979. Said Sarabhai Chemicals manufactured formulations out of the said streptomycin supplied by the petitioner.

6. The respondent vide their letter dated 10.6.1980 called upon petitioner No. 1 to pay Into Drugs Prices Equalisation Account an amount calculated at Rs. 25.29 per k.g. on the entire produce of streptomycin sold by petitioner No. 1 after commencement of the said order. Arguing on behalf of the petitioner, learned counsel for the petitioner has contended that as no excess amount was collected by the petitioner, nothing was to be paid to the Drugs Prices Equalisation Account. On 6.10.1980 in exercise of the power conferred by paragraph 7 (1) of the said order, the Central Government revised the petitioner No. 1's retention price from Rs. 449.71 per k.g. downward to Rs. 429.00 per k.g. The pooled price of streptomycin was on the other hand raised from Rs. 475.00 per k.g. to Rs. 660 per k.g. At the same time retention price of streptomycin for other manufacturers were raised from Rs. 498 to Rs. 660.75, so that it was equal to the pooled price.

7. On 29th November, 1980, the Ministry of Petroleum, Chemicals & Fertilizers addressed two letters/orders to petitioner No. 1 stating that In October, 1980 petitioner No. 1 had been required to sell streptomycin at the pooled price of Rs. 475/- per k.g, for the period 1.7.1979 to 6.10.1980 when the pooled price was revised to Rs. 660.75. It was stated that petitioner No. 1's action in resorting to selling streptomycin at the retention price of Rs. 449.71 per k.g.

was without justification.

8. It was, therefore, contended before me that the petitioner was not bound to pay or deposit any amount Into the Drugs Prices Equalisation Account as petitioner No. 1 has not realised any amount in excess of petitioner's retention price of Rs. 449.71 per k.g. It was contended before me that the demand of the respondent to deposit a sum of Rs. 25.29 per k.g. on the entire quantity of the streptomycin sold by petitioner No. 1 from the commencement of the said order up to 6.10.1930 was bad and illegal . Similarly, the demand raised on the petitioner No. 1 to pay into the Drugs Prices Equalisation Account at the rate of Rs. 231.75 per k.g. on their production of streptomycin from and after 6,10.1980 the difference between the pooled price of streptomycin of Rs. 660.75 per k.g. and the retention price of the petitioner Rs. 449.71 was also illegal.

9. It was contended before me by counsel for the petitioner that there was no legal obligation to sell the bulk drug at pooled price. It was also contended that in similar circumstances in a matter pertaining to Jute Licensing and Control Order the Delhi High Court has held such kind of a levy as tax and in this connection learned counsel for the petitioner has referred to R.D. Aggarwala and Anr. v. Union of India and Anr. 2nd (1974) II Delhi 520, Union of India and Ors. v. Hindustan Aluminium Corporation Ltd. and Anr. and The State of Kerala etc. v. K.P. Govindan Tapioca Exporter etc. etc. .

10. Another submission of learned counsel for the petitioner was that even if this Court comes to a conclusion that the supplies were made to a sister concern of the petitioner and the action in supplying the bulk drug at retention price was mala fide, still the respondent cannot charge any amount which had no authority of law on grounds of equity and in this connection he cited A. Venkata Subbaro and Ors. v. The State of Andhra Pradesh etc. .

11. On the other hand, Mr.Bhushan, counsel for the respondent, has contended that since the demand was more than the indigenous production, streptomycin was canalised for imports through the state Chemicals & Pharmaceuticals Corporation of India Ltd. (CPC). The drug was also distributed by the CPC at the pooled price fixed from time to time. It was contended that the provision of Drugs (Prices Control) Order, 1979 was consistent with the objective laid down in Section 3 of the Essential Commodities Act, 1955. It was contended that it was open for the Government to fix a retention price for individual indigenous manufacturers for imports and a pool price with such adjustment as may be necessary for centralised distribution through a canalising agency.

The indigenous production/imports both were to be sold at a pooled price and the extent of difference between the pooled price and the retention price has to be paid to the concerned manufacturer/importer with the approval of the Government from the Drugs Prices Equalisation Account which is provided in para 17 of the Drugs (Prices Control ) Order, 1979. It was contended that the realisation of the excess amount was not in the nature of a tax. The manufacturer was entitled to its retention price fixed on the basis of its cost of production allowing reasonable return but since uniformity in selling price was to be maintained a common selling price/pooled price was necessary and the difference between the common selling price/pooled price and the retention price cannot be enjoyed by the manufacturer. That difference is not the legitimate earning of the manufacturer. It does not belong to the manufacturer for whose cost of production and reasonable return a retention price has been fixed.

12. It was further contended that petitioner has been selling almost their entire production at the retention price to their sister companies. On the other hand, these sister companies were engaged in the manufacture of formulations and have been selling their formulations at prices fixed at the pooled price of the bulk drug streptomycin which was higher then the retention price for the manufacturer. In the process the sister' concern of the petitioner had been enjoying extra unintended benefit in the sense that while they have been getting bulk drug streptomycin at the retention price from the petitioner and they had been selling their formulations at prices which were worked out on the basis of the pooled price of the bulk drug, which was higher then the price they paid for the bulk drug. It was contended that the Drugs Prices Equalisation Account was a self-balancing account and balance has to be struck on an overall basis and not drugwise.

13. It was contended that the petitioner between the period 22.1.1976 to 23.4.1976 when price fixed for them was Rs. 415.71 per k.g. and the pooled price was Rs. 343/- per k.g. effected sales to their sister concerns only at the pooled price and realised an amount of Rs. 72.71 per k.g. from M/s. IDPL, a public sector unit, who were then distributing streptomycin. It was contended by Mr. Bhushan that petitioners have not come to this Court after following consistent procedure. It was contended that the petitioner have been mischievously acting in connivance with their sister company in effecting sales to them at retention price and the latter selling their formulations at the prices fixed by the Government based on a higher price for the bulk drug.

14. I have heard the arguments advanced by counsel for the petitioner as well as respondents. However, it was noticed by this Court that an application (CM 4021/81) was filed by M/s Ambalal Sarabhai Enterprises Ltd. for impleadment. On 21.9.1981 Mr. Anil Dewan, Senior Advocate appeared for the applicant. At that stage, counsel for the non-applicant/petitioner had prayed for some time to file reply affidavit. As no reply was filed, the matter was again listed for further hearing. Pursuant to that direction, the petitioner has filed an affidavit and has taken the stand that the petitioner was incorporated on 25.10.1960. At that time 52% of its share capital was held by a company called Karamchand Premchand Pvt. Ltd.(KPPL Group) and the balance 48% of the share capital was held by an American Pharmaceutical Company called E.R. Squibb and Sons Inc. formerly known as Olin Mathison Chemicals Corporation, USA (OMCC Group). It was contended that the petitioner was a joint venture company floated by these two groups.

In 1977 Ambalal Sarabhai Enterprises Ltd. was incorporated. In 1978 KPPL transferred 52% shareholding held by it in Synbiotics Ltd. to the subsidiary of Ambalal Sarabhai Enterprises and it was only during 1990 that Ambalal Sarabhai acquired the said shares in the equity capital of the petitioner from the said subsidiary and on the basis of these facts it was contended before me that the petitioner is a distinct and separate corporate entity as compared to KPPL or Ambalal Sarabhai Enterprises. It was also contended that the petitioner has a distinct and separate Board of Directors as compared to the Board of Directors of Ambalal Sarabhai.

It was further contended that the product line of Ambalal Sarabhai Enterprises and Synbiotics Ltd. were also different. During the relevant period 1979-80, petitioner was engaged entirely in the manufacture of bulk drugs such as Streptomycin, Tetracycline etc. On the other hand, Ambalal Sarabhai product line consisted largely of formulations with only one important bulk drug, i.e. Vitamin-C and Vitamin-C was never manufactured by petitioner company.

15. The grievance of the petitioner is that the retention price for streptomycin which has been fixed under Clause 3 having regard to all relevant factors including the estimated cost of production was the price at which he was, in law, entitled to sell the bulk drug.

The Government cannot ask the petitioner to sell the bulk drug at a pooled price which was higher for the relevant period than the retention price. It was contended before me that if the drug was sold by the petitioner at the retention price, the government was free to take the difference by invoking para 7(2) and direct the manufacturer of all formulations when such manufacturer utilised in his formulation bulk drug, the price of such bulk drug which he has received in excess of the difference between retention price and pool price allowed to him in the price of his formulations. What was contended before me was that if any profit has been made, the same has been made by the formulator of the bulk drug and the Central Government could have asked the manufacturer of the formulation to deposit with the Drugs Prices Equalisation Account excess amount as determined by the Government.

16. It was contended by the learned counsel for the petitioner that once in the scheme of the Drugs (Prices Control) Order no amount could be directed to be paid by the petitioner into Drugs Prices Equalisation Account and if same Is also to be done, that would amount to taxing the petitioner without the authority of law.

17. The scheme for issuance of Drug (Prices Control) Order was to balance the prices of drugs in the country. Para 3 of the said order envisages that with a view to regulate the equitable distribution of an indigenously manufactured bulk drug and making it available at a fair price, the Central government may fix the maximum price at which such bulk drug can be sold.

Para 4 provides that the Central Government was authorised to fix not withstanding anything contained in para 3 of the order if it is expedient to do so for increasing the production, of indigenously manufactured bulk drug a retention price of such bulk drug or a common sale price for such bulk drug taking into account the weighted average of the retention price fixed under clause (a).

18. In para 7, the power is given to the Central Government taking into consideration the sale price prevailing from time to time in respect of indigenously manufactured bulk drug and those of imported bulk drugs to fix with such adjustments as the Government may consider necessary retention price for individual manufacturers, importers or distributors of such bulk drug and pooled price for the sale of such bulk drug.

19. Much emphasis was laid in interpretation of sub-para (2) of paragraph 7 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 to deposit into the Drug Prices Equalisation Account amount determined by the government or to sell the formulations at such prices as may be fixed by the Government.

20. From the aforesaid paragraphs, it seems that the objective is that having regard to the sale price prevailing from time to time in respect of indigenously manufactured bulk drug the Government may fix a retention price for an individual manufacturer as well as a pooled price for the sale of such bulk drugs. Sub-para (2) of para 7 deals with the manufacture of formulations of manufacturers who utilise any bulk drug and if price of such bulk drugs are lower than the price allowed to him to be charged for his formulation, the Govt. will direct such manufacturers to deposit into the Drug Prices Equalisation Account, as referred to in para 17, the excess amount to be determined by the Government. The idea was that such manufacturer who has earned higher profit should deposit the amount with the Drug Prices Equalisation Account but if the prices of the drug obtained by him Is higher than the pooled price then such manufacturer should be compensated by giving difference from the Drug Prices Equalisation Account so that he may not stop either manufacture of the drug or should not stop supply of such drug in the market.

21. The question for determination is as to whether under the scheme of para 7(2)(a) of the DPCO, 1979, can a manufacturer of bulk drug be asked to deposit the difference between the pooled price and the retention price. Para 7(2)(a ) expressly applies to the formulator of drugs who manufactures such formulation from receiving the supply from the manufacturer of bulk drug and the demand can only be raised on the formulator and not the manufacturer of bulk drug. Affidavit has been filed by the petitioner as discussed above that they are not the sister concern of Ambalal Sarabhal Enterprises. In spite of various opportunities no reply to that affidavit was filed on behalf of the respondent. It cannot be said that Ambalal Sarabhal was a sister concern of the petitioner. In Freewheels (India) Ltd. v. Dr. Veda Mitra and Anr. the Court observed as under :

"For instance, in Apthorpe v. Peter Schoenhoien Brewery Co., (1899) 4 Tax Case 41 the finding of fact arrived at by the Commissioners that the property ostensibly in the name of the New York Company was, in fact, that of the English Company liable to English income-tax on the ground that the business was being carried on partly in London was upheld. Again in some cases the Courts have come to the conclusion that the subsidiary company was merely an agent of the holding company. It may not be possible to put in a strait-jacket of judicial definition as to when the subsidiary Company can really be treated as a branch, or an agent, or a trustee of the holding company. Each case must necessarily turn on its own facts. Circumstances, such as, the profits of the subsidiary company being treated as those of the parent company, the control and conduct of business of the subsidiary company resting completing In the nominees of the holding company, and the brain behind the trade of the subsidiary company being really the holding company, may indicate that, in fact, the subsidiary company is only a branch of the holding company. Basically, however, the fundamental concept must always be kept in view that each company is a distinct legal entity. Again, the purpose for which the veil has to be rent must be kept in view, and the doctrine of the tearing of the veil cannot be blindly extended to each and every purpose."

22. In State of Kerala (supra), some administrative surcharge was levied by the State. Court observed that in exercise of the powers conferred by Sub-section (1) and Sub-section (2) of Sections 3 of Essential Commodities Act, Kerala Tapioca Manufacture and Export (Control) Order, 1966 was made, wherein under Clause 5 of the said order, no person could export tapioca except under and in accordance with a permit issued by the Commissioner or any officer authorised by him in this behalf. The Court held that the administrative surcharge levied by the State Government on the export of tapioca was bad and the realisation was without the authority of law .

23. The Drug Prices Control Order, 1979 has been issued pursuant to Section 3(1) of the Essential Commodities Act. The Government in terms of para 7 of the said order can fix the pool price as well as retention price. There cannot be any doubt about it.

Para 17 of the Drug Prices Control Order, 1979, makes it abundantly clear that in case a manufacturer has sold the bulk drug not at the pool price but at the retention price, the manufacturer has to recover the difference between the pool price and the retention price from the Drug Prices Equalisation Account. Selling of the bulk drug at retention price to Ambalal Sarabhai Enterprises who was the formulator of the said bulk drug in no case can be termed as unfair or clandestine sale.

24. There is force in the arguments of petitioner that there was no duty or obligation cast on the petitioner to sell streptomycin at the pool price fixed in para 7 of the said order. Streptomycin was canalised for import and distribution through CPC. The petitioner has been selling the bulk drug to Ambalal Sarabhai at retention price who was selling their formulation at the pool price fixed by the Government based on a higher price for the bulk drug. Therefore, the respondent could not compel the petitioner to sell its product only at pool price and not at a lower price, which was the retention price- In order to maintain balance in the Drug Prices Equalisation Fund, the respondent could have invoked the scheme of the Drug Control Order and could have charged Ambalal Sarabhai who was the recipient of bulk drug at a lower price, i.e. the retention price but selling the same at pool price which was higher price after making formulations from the bulk drug. There was no excess amount which was realised by the manufacturer of the bulk drug, i.e. the petitioner. The respondent could have invoked para 7 (2) of the Drug Control Order and could have directed the manufacturer of formulations as the said manufacturer of formulation has realised the bulk drug and sold the said formulation at. pool price, thereby making extra profit, to deposit extra recovery into the Drug Prices Equalisation. Fund. Therefore, the impugned action of the respondent directing the petitioner to deposit the amount into the Drug Prices Equalisation Fund would amount to exaction of money. Union of India and Ors. v. Hindustan Aluminium Corporation Ltd. and Anr. .

25. Therefore, I quash the impugned letters directing the petitioner to deposit the difference into Drug Prices Equalisation Fund.

26. Writ petition is allowed. Rule is made absolute. Application also stand disposed of.