Ranbaxy Laboratories Ltd. & Anr. vs Union Of India & Anr.
2010 Latest Caselaw 2487 Del

       IN THE HIGH COURT OF DELHI AT NEW DELHI

                           W.P.(C) 9699-9700/2004

                                         Reserved on: 17th February 2010
                                         Decision on: 10th May 2010

      RANBAXY LABORATORIES LTD. & ANR. .... PETITIONERS
                  Through: Mr. S. Ganesh, Sr. Advocate with
                  Ms. Malini Sud and
                  Mr. Deepak Khurana, Advocates

                        versus

       UNION OF INDIA & ANR.                ..... RESPONDENTS
                    Through: Mr. Neeraj Chaudhari, CGSC with
                    Mr. Akshay Chandra and Mr. Khalid Arshad,
                    Advocates for UOI.


      CORAM:          JUSTICE S. MURALIDHAR

          1. Whether Reporters of local papers may be
             allowed to see the judgment?                             No

          2. To be referred to the Reporter or not?                   No

          3. Whether the judgment should be reported in Digest? No

                               JUDGEMENT

10.05.2010

1. The challenge in this petition is to a communication dated 15 th April

2004 addressed to the Petitioners by the Department of Chemicals and

Petrochemicals, Ministry of Chemicals and Fertilisers, Government of

India assessing its liability under Para 7 (2) read with Para 17 (1) (a) (i) of

the Drug Price Control Order 1979 (DPCO 1979) in respect of the dug

Ampicillin Trihydrate (ATH) at Rs.4,16,84,678/- of which the liability

towards the Drug Price Equalization Account (DPEA) was

Rs.2,89,09,672/- and the interest was Rs.1,27,74,996/-. After adjusting the

sum of Rs.2,44,19,500/- already deposited by the petitioner the balance

amount to be paid within thirty days thereof was Rs.1,72,65,178/- failing

which action would be initiated against the Petitioner under the relevant

provisions of the law. The challenge in the petition is also to the reports

dated 24th May, 2001 and 14th January, 2004 of the Drug Prices Liability

Review Committee (DPLRC) on the basis of which the said demand was

raised against the petitioner.

2. The background to the raising of the above demand is that in exercise of

the powers conferred on it under Section 3 of the Essential Commodities

Act, 1954 (ECA), the Central Government issued the DPCO 1979 with

effect from 1st April, 1979. It remained in force till 25th August, 1987

when it was repealed by DPCO, 1987. The DPCO, 1987 continued in

force till 6th January, 1995 when it was repealed by DPCO, 1995.

3. It is stated that in order to promote self-sufficiency and increased

production of bulk drugs in the country, the Central Government

introduced a system of „retention price‟ and „pooled selling price‟ under

the DPCO, 1979. Under Para 3 of the DPCO, 1979 the Central

Government had the power to fix, by Notification in the Official Gazette,

the maximum price at which bulk drugs could be sold. While fixing such

cost of bulk drugs, the Central Government was to take into account the

average cost of production of such bulk drug and also to allow a

reasonable return on net worth in terms of Para 3(2) of the DPCO, 1979.

4. Para 4 of the DPCO, 1979 provided that notwithstanding anything

contained in Para 3, the Government may fix a „retention price‟ as well as

a „common sale price‟ for such bulk drugs. Under Para 2(t) of the DPCO,

1979 „retention price‟ has been defined to mean the price fixed under

Paras 4 and 7 for individual manufacturers or importers or distributors of

such bulk drugs. Para 7 (1) (a) of the DPCO, 1979 provided that the

central government shall fix by Notification a retention price for an

individual manufacturers of such bulk drugs. Para 7 (1) (b) provides for

fixing of the „pooled price‟ by the central government for the sale of such

bulk drugs. Para 7(2) of the DPCO, 1979 provided that where a

manufacturer of formulations utilizes in his formulation any bulk drugs

either from his own production or from any other source, the price of such

bulk drugs being lower than the price allowed to him in the price of such

formulation then the central government may require such manufacturer to

deposit into the DPEA the excess amount as determined by the central

government or to sell the formulations at such prices as may be fixed by

the central government . Under Para 17(2), the manufacturer or importer,

as the case may be, is entitled to 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 or availability at fair prices, of drugs.

5. The petitioner states that in 1983, the retention/pooled price system was

unworkable. Subsequently in December 1986, the government announced

a Drug Policy (referred to as the 1986 Drug Policy). Para 5.4 of the 1986

Drug Policy acknowledged that the operation of bulk drugs pricing of the

DPEA was in actual practice giving rise to intractable administrative

problems. Consequently, the system of retention and pooled price was

discontinued. It was further decided that the protection of indigenous

production of bulk drugs, whichever necessary, would be provided

through the tariff mechanism. It is stated that with the discontinuation of

the retention/pooled price system, the need for maintaining the DPEA also

disappeared.

6. The petitioner received a letter dated 21st April 1995 i.e. nearly eight

years after repeal of the DPCO, 1979 computing the „unintended benefits‟

enjoyed by the Petitioner for the period 1979 to August, 1987. It was

observed that the petitioner had enjoyed an unintended benefit on account

of difference between the price of the bulk drug ATH allowed in

formulation prices and the actual procurement price by the petitioners.

The petitioners were called upon to deposit a sum of Rs.4,88,38,997/-

along with interest in the DPEA.

7. In its reply dated 22nd June 1995 the petitioner pointed out that the

reference in the letter dated 21st April, 1995 to the petitioners purchasing

the bulk drug ATH was obviously a mistake, since the petitioner never

procured/purchased ATH. The petitioners had produced ATH for captive

use and it was so used between 1979 and August 1987. The price of ATH

as notified on 30th April, 1977 was Rs.1,475/- per kg and together with 8%

incidental charges it worked out to Rs.1,593/- per kg. It is submitted that

the price of ATH was revised by Notification dated 2nd September, 1983 to

Rs.1,677/- per kg which together with 8% incidental charges worked out

to Rs.1,811.16 per kg. It is submitted that the price of ATH given by the

petitioner in its formulation was in fact the notified price of the said drug.

There was no question of there being any difference between the so-called

procurement price and the price allowed in the formulations creating any

liability for paying any amount into the DPEA.

8. However, the reply dated 22nd June 1995 given by the petitioner was not

responded to and a notice dated 13th December 1995 was sent by the

DPLRC stating that the Petitioner‟s liability was quantified at

Rs.4,88,38,997/-. The Petitioner replied on 30th January 1996 denying any

liability. In a subsequent notice dated 25th July 1996, the Department of

Chemicals and Petrochemicals determined the liability incurred by the

petitioner as Rs.12,37,26,920/- . The petitioner replied on 8th August 1996

denying the liability. The petitioner received another notice dated 8th

January 1997 demanding a sum of Rs.12,37,26,920.09/- failing which

arrest warrants would be issued under Section 69 of the Punjab Land

Revenue Act, 1887.

9. Aggrieved by the aforementioned demand, the petitioner filed Writ

Petition (Civil) No. 106 of 1997. By an order dated 10th January 1997 this

Court stayed the recovery of the aforementioned amount subject to the

petitioner depositing 50% of the assessed liability of Rs.4,88,38,997/-

within a period of eight weeks. Time for making the deposit was extended

till 11th March, 1997. The petitioner thereafter deposited Rs.2,44,19,500/-.

10. The aforementioned W.P. (C) No.106 of 1997 was disposed of by an

order dated 28th October 1998 whereby the Petitioner was directed to make

a representation before the DPLRC. The Petitioners made the said

representation to the DPLRC on 1st December 1998. This was followed

by another letter dated 2nd November 2000 following which a reference for

hearing was held on 17th October 2000. It was pointed out in the said

reference that in the counter affidavit filed by the Respondents in W.P.(C)

No. 106 of 1997, a stand had been taken that since the cost of production

was lower than the notified price of the bulk drugs, on that ground alone

the petitioner was liable to pay the amount towards the DPEA. The

petitioner protested saying that the Department was seeking to advance a

new plea not taken by it in the writ petition. The petitioner sent a letter

dated 3rd January 2001 with which the details of production, gross sales

and captive consumption of the bulk drug for the years 1979 to 1987 were

enclosed. A further representation was filed by the Petitioner on 18th

January 2001.

11. After about three years, the Central Government sent the impugned

communication dated 15th April, 2004 to the Petitioners stating that the

DPLRC in its report dated 14th January 2004 had assessed the liability of

the Petitioner as Rs.4,16,84,678/-. The liability towards the DPEA was

Rs.2,89,09,672/- and the interest was Rs.1,27,74,996/-. It was stated that

the Petitioner had already deposited Rs.2,44,19,500/-. The petitioner was

called upon to pay the balance amount of Rs.1,72,65,178/- within 30 days

failing which action would be commenced against it. The DPLRC‟s

reports dated 24th May 2001 and 14th January 2004 were sent to the

petitioner thereafter. These have also been challenged in the present

petition.

12. In their counter affidavit dated 6th October 2004 the Respondents

stated that the Supreme Court upheld the validity of the DPCO, 1979 in

Union of India v. Cyanamid India Ltd. AIR 1987 SC 1802. The purport

of the aforementioned judgment, according to the Respondents, was that

the manufacturers of bulk drugs and formulations should not be allowed to

retain the unintended benefits arising out of (i) overcharging and (ii)

unauthorized retention of the overcharged amount. The counter affidavit

stated that the DPLRC was constituted by a resolution dated 21 st March,

1994 by the Central Government under the Chairmanship of a retired

judge of the High Court to review the entire matter relating to liability of

the drug manufacturers to pay amounts into the DPEA. It was claimed that

despite repeated reminders to the petitioner to furnish the requisite details

it failed to do so and, therefore the central government had to work out the

petitioner‟s liability "from whatever data became available with the

Government from whatever sources". Thereafter the case was referred to

the DPLRC for consideration. Even before the DPLRC, despite notice the

Petitioner did not appear and it was accordingly presumed that it was not

interested in making submissions. It is claimed that on the basis of the ex

parte report of the DPLRC, the liability of Petitioner No.1 was computed

and communicated to it. However, since the petitioner failed to deposit the

amount of liability in terms of the DPCO, 1979 the Collector at Punjab

was requested to take appropriate action. Pursuant to the remand by this

Court a further hearing was given to the petitioner by the DPLRC.

13. The Respondents state that the DPLRC formulated the following

issues for consideration:

"1. Keeping in view the fact that the Petitioners did not procure any quantity of bulk drug used in the formulations from outside sources, but on the other hand utilized the entire quantity of the bulk drug in the formulations from their own production, are they exempt from liability under provisions of para 7(2) of DPCO 1979?

2. Can the allowed price of the bulk drug in the formulations manufactured by the Petitioners as indicated by the Department and the price of the bulk drug for the Petitioners fro the basis of computation of the liability of the Petitioners or not? If not, how should these two sets of prices be determined?

3. How should the quantities of the bulk drug consumed in the manufacture of formulations of Ampicillin Trihydrate be computed?"

14. Later the terms of the DPLRC were revised on 10th October 2002. The

petitioner‟s case was referred to the newly constituted DPLRC. By its

report dated 14th January 2004 the DPLRC quantified the petitioner‟s

liability based on which the impugned demand by the letter dated 15th

April, 2004 was raised on the petitioner.

15. Mr. S. Ganesh, learned Senior Counsel appearing for the Petitioners

referred to Para 14 of the DPCO, 1987 and submitted that no action had

been taken by the Respondents during the period when DPCO, 1979 was

in force i.e. till 25th August 1987. It is submitted that earlier letters dated

10th May 1984, 29th December 1986 and 17th June 1987 did not mention

any "accrued amount" due from the petitioner. The first time a demand

was raised was on 21st April 1995, eight years after the repeal of the

DPCO 1979. Therefore the demand was time barred. He pointed out that

for the DPEA liability under Para 17 of the DPCA 1979 to accrue, the

government has to first `determine‟ the excess amount in terms of Para 7

(2). He states that there was no such „determination‟ by the government

during the time the DPCO 1979 was operational. As regards the interest

component, it is submitted that in the first place it is not leviable at all.

Even otherwise, it was excessive. Interest could not be greater than 6% per

annum simple interest.

16. In reply Mr. Neeraj Chaudhari, learned counsel appearing for the

Respondents, refers to the findings made in the reports of the DPLRC

which show the basis for the determination of the liability. He submits that

the question whether the petitioner is at all liable under the DPCO 1979

since it did not procure ATH but manufactured it for captive consumption

has been answered by the DPLRC in its report dated 24 th May 2001. Since

the petitioner refused to provide the necessary data despite several letters

written to it, the government and later the DPLRC were justified in

proceeding on whatever information was available.

17. The first issue that arises for consideration is whether the government

could invoke Para 14 of the DPCO 1987 to raise a demand on the

petitioner for its DPEA liability in respect of ATH even eight years after

the repeal of DPCO 1979? The relevant clause enabling recovery of dues

accrued under the DPCO 1979 even after the expiry of the period it

remained in force is Para 14 of the DPCO 1987 which reads as under:

"Power to recover dues accrued under the Drugs (Prices Control) Order 1979 into the Drug Prices Equalization Account -

(1) Notwithstanding anything contained in this order, the Government may, by notice, require the manufacturer, importer or distributor, as the case may be, to deposit the amount which has accrued on account of the actions under the Drugs (Prices Control) Order 1979 on or before the commencement of this order, into the Drugs Price Equalization Account and the manufacturer, importer or distributor, as the case may be, shall deposit the said amount into the said account within such time as the Government may specify in the said notice.

(2) The existing amount if any, in the Drugs Prices Equalization Account on or before the date of commencement of this Order, and the amount deposited under sub-paragraph (1) shall be used for the purpose stipulated in the Drugs (Prices Control) Order 1979."

18. The language of Para 14 of the DPCO 1987 is clear. It unambiguously

states that the liability under DPCO 1979 should have been in the form of

an "amount" accrued on account of "the actions" under the DPCO 1979.

There is merit in the contention that the word "amount" obviously

connotes a computed amount that has already accrued. Again the "actions"

under the DPCO 1979 "on or before the commencement" of the DPCO

1987 refers to both the actions of the drug manufacturer that has led to the

accrual of the amount as well as the actions initiated by the Respondents in

terms of Para 7 (2) of the DPCO 1979 to "determine" the amounts

accrued. The word "actions" cannot mean the mere soliciting of

information. It has to be such "actions" taken "before the commencement"

of the DPCO 1987 that results in the determination of the DPEA liability

even if such determination is tentative. Viewed in this light the letters

dated 10th May 1984, 29th December 1986 and 17th June 1987 sent by the

Respondents to the petitioner were not letters communicating any

"amount" quantified by the government as having "accrued." The

particulars sought from the Petitioners by the letter dated 10 th May 1984

related to the quantity of ATH procured by the petitioner and not the

quantity manufactured and consumed. This obviously did not have any

nexus to the demand finally raised. Likewise, the letter dated 15 th October

1986 asks the petitioner to furnish the details of "procurement and

utilization" of ATH. The letters dated 22nd/29th December, 1996 and 17th

June 1987 were reminders in relation to the earlier letters. The

Respondents‟ letter dated 10th August 1987/16th August 1989 to the

petitioner also only "requested that the full details of procurement of

various bulk drugs both imported and indigenous during the period from

1.4.1979 to 25.8.1987 may please be furnished."

19. Given the fact that the case of the petitioners throughout has been that

it never "procured" ATH but manufactured it for captive consumption, the

government did not and could not have the details on the basis of which it

could have "determined" the petitioner‟s liability to pay into DPEA in

terms of Para 7 (2) of the DPCO 1979 the "amount" that was "accrued"

thereunder. Even assuming that the government could have estimated such

amount on the basis of whatever information was available with it, the

letters referred to hereinbefore written by the Respondents to the petitioner

during the time the DPCO 1979 was operational did not raise any demand

of any "amount" that was "accrued" even on a guesstimate. In the absence

of such determination of the accrued amount during the period that DPCO

1979 was in force, the government could not have invoked Para 14 of the

DPCO 1987. Under Para 14 of the DPCO 1987, which is an enabling

provision, the government can seek to recover an already quantified

amount that has accrued under the DPCO 1979, even if it is a tentative

quantification that requires to be finalized. Para 14 of the DPCO 1987

does not enable the government to start proceedings to determine liability

under the DPCO 1979 even if it had not undertaken such exercise during

the time DPCO 1979 was operational. As far as the present case is

concerned the government appears not to have taken the first step to

recover any amount from the petitioner in terms of its liability under the

DPCO 1979 till it raised a demand by its letter dated 21st April 1995.

Clearly as far as the petitioner‟s DPEA liability under the DPCO 1979 was

concerned, the government had missed the bus.

20. One of the first questions that the DPCLR was required to address was

whether the claim in terms of the DPCO 1979 was time barred. This it

plainly did not. In neither of its two reports dated 24 th May 2001 and 14th

January 2004 did it even notice Para 14 of DPCO 1987. Both its reports

that proceed to determine the DPEA liability of the petitioner without

addressing this basic issue are therefore vitiated and are held to be legally

unsustainable.

21. Consequently, this Court is of the view that no demand could have

been raised against the petitioner in respect of its DPEA liability in respect

of ATH under the DPCO 1979. Once the demand for DPEA liability is

held to be legally untenable the demand for interest thereon also goes. The

impugned demand by the Respondents‟ letter 15th April 2004 is hereby

quashed.

22. In view of the above conclusion, this Court does not consider it

necessary to decide the other issues that have been raised. In particular the

issue whether Para 7 (2) of the DPCO 1979 applies to captive

consumption of a bulk drug is left open for decision in an appropriate case.

23. The entire amount deposited by the Petitioners will be refunded to it

by the Respondents within a period of eight weeks from today together

with interest at 6% simple interest per annum from the date of the deposit

till the date of payment. If the said amount is not deposited within the

aforementioned period, the Respondents will pay simple penal interest at

12% per annum for the period of delay.

24. The writ petition is accordingly allowed in the above terms with costs

of Rs.10,000/- which will be paid by the Respondents to the Petitioner

within four weeks.

S. MURALIDHAR, J.

MAY 10, 2010 bs