Full Ford Indian Ltd. & Anr. vs Union Of India & Anr.
2011 Latest Caselaw 3826 Del

*      IN THE HIGH COURT OF DELHI AT NEW DELHI

                                           Order Reserved on: 27th July, 2011

%                                          Order Pronounced on:9th August, 2011

+      WP(C) No. 1095/1985

       FULL FORD INDIAN LTD. & ANR.              ..... Appellants
                     Through: Mr.S. Ganesh, Sr.Advocate with
                               Mr.Pravin   Bahadur,       Ms.Kanika
                               Gomber,    Ms.Mallika       Joshi  &
                               Mr.Rajan Narain, Advs.

                                  Versus

       UNION OF INDIA & ANR.                                 ..... Respondents

                     Through:                Mr.A.S. Chandhiok, ASG with
                                             Mr.B.V. Niren, Mr.Sandeep Bajaj,
                                             Mr.Udit Gupta & Ms.Neha Rastogi,
                                             Advs.

                                           WITH

+      WP(C) No. 1680/1988

       FULL FORD INDIAN LTD. & ANR.              ..... Appellants
                     Through: Mr.S. Ganesh, Sr.Advocate with
                               Mr.Pravin   Bahadur,       Ms.Kanika
                               Gomber,    Ms.Mallika       Joshi  &
                               Mr.Rajan Narain, Advs.
                     Versus

       UNION OF INDIA & ORS.                                 ..... Respondents
                     Through:                Mr.A.S. Chandhiok, ASG with
                                             Mr.B.V. Niren, Mr.Sandeep Bajaj,
                                             Mr.Udit Gupta & Ms.Neha Rastogi,
                                             Advs.

WP(C) Nos.1095/1985 & 1680/1988                                      page 1 of 19
         CORAM:
        HON'BLE THE CHIEF JUSTICE
        HON'BLE MR. JUSTICE SANJIV KHANNA

1    Whether reporters of the local papers be allowed to see the judgment?      Yes
2    To be referred to the Reporter or not?                                     No
3    Whether the judgment should be reported in the Digest?                     No

DIPAK MISRA, CJ

The two writ petitions, being inter-linked and inter-connected, were

heard together and are disposed of by a common order. WP (C) No.

1095/1985 was preferred with the prayer for declaring paragraph 7 of the

Drug (Prices Control) Order, 1979 (for short „DPCO, 1979‟) as ultra vires

Articles 14 and 300A of the Constitution of India and to issue a writ of

certiorari for quashing the impugned order dated 1st February, 1985 and

further to prohibit the respondents from initiating any action against the

petitioner in implementation of the said impugned order and to pass

appropriate orders as may be deemed fit and proper in the facts of the

case.

2. In the said petition, it has been stated that the petitioner No.1 is the

company and the petitioner No.2 is the Director and the company carries

on the business of manufacture, production and sale of drugs and

pharmaceuticals including the production, manufacture and sale of

WP(C) Nos.1095/1985 & 1680/1988 page 2 of 19 various formulations containing the bulk drug Gentamycin Sulphate. The

respondent No.2, the Director (Drugs), Government of India in the

Ministry of Chemicals and Fertilizers who has the authority to exercise the

power under the provisions of the Drugs and Cosmetics Act, 1940 as also

DPCO, 1979, on the basis of paragraph 7(2) of the DPCO, 1979, imposed

the demand for a sum of Rs.194.62 lakhs on the petitioners to be paid and

deposited in the drug prices equalization account. It was contended that

the said order has purportedly been based on account of alleged difference

between the price of Gentamycin Sulphate that has been allegedly allowed

to the petitioner-company in their retail prices fixed for the sale of the

formulations containing the said drug and the actual purchase prices of

imported/indigenously manufactured Gentamycin Sulphate paid by the

petitioner.

3. It was contended that prior to 1978, there was no notified/published

price for Gentamycin Sulphate and at that time, the petitioners were

marketing their various formulations containing the said Gentamycin

Sulphate at certain prices. The price chart is given below: -

WP(C) Nos.1095/1985 & 1680/1988                                 page 3 of 19
                "Name of the formulations.            M.R.Price including E.D.

               Garamycin 80 Mg.
               (2 ml vial 40 Mg. per ML.)                  Rs.28.89

               Garamycin 60 Mg.
               (1.5 ML - 40 Mg. per ML.)                   Rs.21.30

               Garanmycin 20 Mg.
               (2 ML. vial 10 kg. per ML.)                 Rs.8.52

               Garanmycin Opthalmic Solution
               (3 ML. vial)                                Rs.5.22

               Garanmycin Opthalmic Ointment
               (3 gm. tube)                                Rs.4.10

               Quadriderm. (5 gm. tube)                    Rs.5.52"

4. In 1978, for the first time, the price of the said drug was fixed under

paragraph 5 of the DPCO. In the said order, the price of Gentamycin

Sulphate was fixed at Rs.61.21 p/gm. The formulation prices have been

reproduced in the petition, which is as follows: -

"Name of the formulation M.R.Price including C-D

Garamycin 80 mg. Rs.17.23

-do- 60 mg. Rs.12.63

-do- 20 mg. Rs.6.51

Garamycin Opthalmic Solution Rs.4.26

WP(C) Nos.1095/1985 & 1680/1988 page 4 of 19

-do- -do- Ointment Rs.3.08

Quadriderm. Rs.5.01"

5. It is urged by the petitioner that the price of Rs.61.21 p/gm was

fixed as the maximum selling price of imported Gentamycin Sulphate,

when imported and distributed into India by the State Chemical and

Pharmaceutical Corporation of India (for short „SPC‟) and the said price

was fixed having regard to all relevant factors including the data supplied

to the Ministry of Petroleum, Chemicals and Fertilizers by SPC itself.

Thereafter, by Circular dated 16th January, 1979, the price was revised from

Rs.61.21 p/gm. to Rs.35.67 p/gm. The said price was fixed keeping in

view the selling price of imported Gentamycin Sulphate, which was

imported by SPC. On 2nd April, 1997, the Drugs (Prices Control) Order,

1979 was brought into effect, which repealed the 1970 order in respect to

things done or omitted before the repeal of the DPCO, 1979. The said

paragraph 7 of the DPCO, 1979 empowers the Central Government to fix a

retention price as well as the pooled price for the sale of bulk drugs

specified in the first schedule and the second schedule. The said order was

applicable to bulk drugs, which were indigenously manufactured and

WP(C) Nos.1095/1985 & 1680/1988 page 5 of 19 imported. Placing reliance on sub-para (2) of paragraph 7, the respondent

No.2 imposed the demand. It is contended that paragraph 7(2) applied

only if the price of the bulk drug had been fixed under paragraph 7(1) or

paragraphs 3, 4, 5 or 6. DPCO, 1979, as pleaded, refers to the bulk drug

price but in the case at hand, during the relevant period, the price of the

bulk drug Gentamycin Sulphate had never been fixed under paragraph

7(1) of the DPCO, 1979. It is the stand in the petition that the power to

raise a demand under paragraph 7(2)(a) was in the alternative to the

power under paragraph 7(2)(b) to direct the manufacturer to sell the

formulations at prices which were fixed by the government but if the

power under paragraph 7(2)(b) was not exercised, then recourse to make a

demand under paragraph 7(2)(a) was not permissible. It was put forth

that raising a demand under paragraph 7(2)(a) was discretionary. It was

also urged that the object was to prevent unjust enrichment of the

manufacturer and such a demand does come into existence only if the

manufacturer had earned a return higher than that which was allowed to

him by the 5th Schedule to the DPCO, 1979. But in the case of the

petitioner-company, returns were significantly less than allowed and,

therefore, if the demand is raised, its return would be further reduced,

WP(C) Nos.1095/1985 & 1680/1988 page 6 of 19 which is impermissible. In essence, it is put forth by the petitioner that if

the demand raised under paragraph 7(2)(a) is sustained, he has to pay the

money which belongs to him inasmuch as he had never collected the said

amount. It was also asserted that paragraph 7(2)(a) had no application at

all to bulk drugs consumed in the manufacture and formulation for which

leader prices were fixed. In this kind of a situation, the formulation price

was fixed in generic terms in the entire industry and hence, there was

neither any formulation price fixed in respect of a particular

manufacturer‟s formulation nor was there any particular price of the bulk

drug allowed to him in the price of his formulation. The petitioner-

company was not a leader or a major manufacturer of the formulations

based on the bulk drug Gentamycin Sulphate and, therefore, the cost of

production was to be taken into consideration while fixing the leader price

of the formulation in question, which had not been done in the case at

hand. It was asseverated that when a leader price was fixed, a particular

manufacturer cannot be heard to complain about the higher cost and on

that basis, the price should be available to him and similarly, it was not

open to the respondent No.2 to make a claim on a manufacturer on the

footing that his production cost was less. Additionally, it is put forth that

WP(C) Nos.1095/1985 & 1680/1988 page 7 of 19 the demand has to be on consumption/utilization and not on cross-

purchases.

6. Be it noted, the order that was assailed before this Court in WP (C)

No. 1095/1985 reads as follows: -

"I am directed to refer to the correspondence resting with your letters dated 16th July, 1984 and 6th August, 1984 and to say that in terms of paragraph 7(2) of Drugs (Prices Control) Order, 1979 Government is empowered to recover into the Drugs Prices Equalisation Account the difference between the price allowed for a bulk drug in the formulations and the actual import/procurement price. In your case it has been noticed that while the price of Gentamycin allowed to you in the formulations is Rs.35.67 per gram, you have imported/procured this drug at a price which is lower than the price of Rs.35.67 per gram. The amount payable into the Drugs Price Equalisation Account have been calculated based on data submitted by you and as shown in the attached Statement. The said amount is without prejudice to Government‟s right to verify your records under para 25(3) of Drugs (Prices Control) Order, 1979 and also further recoveries on this drug that might be due from your Company.

2. Please deposit a sum of Rs.194.62 lakhs into the Drugs Prices Equalisation Account by sending Draft in the name of Pay & Accounts Officer, Ministry of Chemicals and Fertilizers by or before 15th February 1985 and in case you have any representation to submit against the recovery of the above amount, kindly do so before the said date. Please also come

WP(C) Nos.1095/1985 & 1680/1988 page 8 of 19 for personal hearing on 15th February 1985 at 2.30 P.M. with Dr. R.V.Vaidyanatha Ayyar and also bring along all the relevant details and records in support of your representation based on which you have relied in your representation, if any."

7. During the pendency of the first writ petition, this Court passed an

order on 24th October, 1985 directing the appropriate authority to

determine the liability of the petitioner under paragraph 7(2) of the DPCO,

1979 after giving him reasonable opportunity of being heard. Thereafter,

the Development Commission (Drugs) issued a show-cause notice to the

petitioner dated 6th November, 1985 calling upon the petitioner to show-

cause why the amount of Rs.194.62 lakhs should not be recovered from the

petitioner for deposit in the Drug Prices Equalization Account under

paragraph 7(2) of the DPCO, 1979. On receipt of the said show-cause

notice, the petitioner requested to provide certain details. Communications

continued between the petitioner and the competent authorities of the

respondents and eventually, an order came to be passed on 3rd January,

1986. It is appropriate to reproduce the said order: -

"2. On the due date of hearing, i.e., 18.12.1985 Shri M.V. Patwardhan, Director and Shri R.K. Rastogi appeared before

WP(C) Nos.1095/1985 & 1680/1988 page 9 of 19 me. They pleaded for adjournment of the hearing on the pretext that their lawyers were not available. I made it clear to them that in terms of the Hon‟ble High Court judgment, I had given an opportunity of being heard. Had they sought for an adjournment earlier, a convenient date could have been fixed, such that final orders were passed before 6.1.1986, the date on which the case stands posted in the Hon‟ble Delhi High Court. Notwithstanding this, time was granted upto 26.12.1985 to submit written submissions and arguments.

3. I have gone through all the details submitted by the Company and find that for the period 1979-80 to 1st March, 1984 the amount of Rs.194.62 lakhs has been claimed, the price of formulations was based on Gentamycin Sulphate price of Rs.35.67 per gram which was fixed on 16th January, 1979. In fact, on the excess amount calculated based on the details submitted by the Company, the Company have also enjoyed mark-up and, therefore, the total benefit that accrued to the Company would be roundly Rs.375.00 lakhs i.e. Rs.194.62 lakhs on account of the difference between the price of the bulk drug Gentamycin allowed in the formulations and the actual procurement price of Gentamycin and Rs.180.00 lakhs approximately as a mark-up on this excess amount. In view of the limitations imposed under para 7(2) claim has been raised for deposit into the Drug Prices Equalisation Account for a sum of Rs.194.62 lakhs.

4. Far from giving any details for refuting the claim pressed forward by Government, the Company in its submissions of 24th December, 1985 have virtually challenged the vires of para 7(2) arguing its inoperationability in respect of formulations for which price has been fixed by the Government. It may be mentioned that I am not an appropriate authority to arbitrate upon the legality of the DPCO 1979 in general and that of para 7(2) in particular. Suffice it to say that the main object of para 7(2) of Drugs (Prices Control) Order, 1979 is to protect the interest of the consumers by recovering the difference between the price of

WP(C) Nos.1095/1985 & 1680/1988 page 10 of 19 bulk drugs allowed in the formulations and actual procurement price from those formulators who do not come forward for getting their formulation prices reduced even when they are procuring the bulk drug at a price lower than the price allowed in the formulations. The amount so recovered are utilized to pay the difference to the producers/importers in accordance with para 17(2)(a) of the Drugs (Prices Control) Order, 1979. It, therefore, becomes possible to make available medicines for treatment of diseases like Leprosy, Malaria etc. at cheap prices.

5. I have also examined the contention raised by M/s. Fulford (India) Ltd. that para 7(2) cannot apply from retrospective effect and that since prices have been fixed by the Government, para 7(2) does not apply at all. I do not find any substance in both these arguments. In fact, para 7(2) only comes into operation for recoveries of the amount which become due after bulk drug has been converted into formulations. Similarly, paragraph 7(2)(b) gives the option to the Government to reduce the prices of formulations below the normally fixed prices under Drugs (Prices Control) Order, 1979 in such a way that the excess amount that accrued to a formulator in the past is passed on to the consumer through such reduction in prices of formulations."

8. After the said order came to be passed, the petitioner has challenged

the same by preferring WP (C) No. 1680/1988.

9. Be it noted, the petitioners has challenged the constitutional validity

of paragraph 7(2)(a) of DPCO, 1979. When the matter was called on 27th

July, 2011, this Court, after hearing the learned counsel for the parties,

passed the following order: -

WP(C) Nos.1095/1985 & 1680/1988 page 11 of 19 "Heard Mr.S.Ganesh, learned senior counsel along with Mr.Pravin Bahadur for the petitioners and Mr.A.S.Chandhiok, learned ASG along with Mr.B.V.Niren, learned counsel for the Union of India.

In the course of hearing Mr.S.Ganesh, learned senior counsel for the petitioners, submitted that he does not intend to press the constitutional validity of para 7(2)(a) of DPCO 1979 at present and, accordingly, the said issue be kept open.

Learned senior counsel would submit that in pursuance of the order passed by this Court on 24.10.1985 in WP(C) No.1095/1985 and CM No.3125/1985, the show cause notice was issued and after receipt of the notice to show cause, the petitioner filed his explanation/show cause raising many a contention but without dealing with the matter has been adjudicated as the demand has been confirmed. It is his submission that the matter deserves to be remitted to the competent authority for dealing with the said issues.

Mr.A.S.Chandhiok, learned ASG appearing for the respondent would submit that as per the information sought by the petitioner in the show cause every detail was supplied and the order passed by the adjudicating authority cannot be treated as laconic or cryptic. Learned ASG has also drawn our attention to the order of remit passed by this court on earlier occasion to highlight that there was an observation to determine the price in para 7(2)(a). Learned ASG has produced the file as directed on earlier occasion."

10. Mr.S. Ganesh, learned senior counsel for the petitioner, submitted

that the respondent No.2 has not applied paragraph 7(2)(a) in proper

perspective and hence, the demand has come into existence. It is urged

that the computations have not been done on the basis of difference in the

WP(C) Nos.1095/1985 & 1680/1988 page 12 of 19 prices of bulk drugs but on the difference between the prices of bulk drugs

and the prices of the formulations which the company had used in those

bulk drugs. It is also highlighted by him that it is the obligation of the

competent authority to follow the norms stipulated in the DPCO, 1979,

rather the same not being reflectible from the order, the matter deserves to

be remitted.

11. It is argued by Mr.S. Ganesh that the respondent No.2 has raised the

demand in a mechanical manner without specifically dealing with the

contentions of the petitioner which have been referred to in para 5 above.

In particular it is emphasized that para 7(2)(a) postulates two pre-

conditions (a) price of a particular formulation of a manufacturer should

be fixed on the basis of a particular bulk drug price fixed/modified; and

(b) the manufacturer should have obtained the bulk drug at the lower

price than the price allowed while fixing the price of the formulation.

Thus, complete cost sheet on the basis of which price of formulation is

fixed is relevant and material and not merely the price of the bulk drug. It

is submitted that in the present case the petitioner‟s return is significantly

less than the returns allowed by the Sixth Schedule; and there are patent

and arithmetical mistakes as the demand has been calculated on the basis

WP(C) Nos.1095/1985 & 1680/1988 page 13 of 19 of consumption and utilization and not gross purchases including losses

and wastages. The whole calculation has to be revisited.

12. Mr.A.S. Chandhiok, learned Additional Solicitor General, per contra,

would contend that the prices have been fixed on the basis of information

supplied by the petitioner and hence, no fault can be found with the

adjudicating authority. It is his further submission that the petitioner is

trying to procrastinate the proceeding and retain the money and, therefore,

there should not be a remand.

13. To appreciate the submissions raised at the Bar, it is appropriate to

reproduce paragraphs 3, 4, 5, 6 and 7 of the DPCO, 1979. They read as

follows: -

"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

WP(C) Nos.1095/1985 & 1680/1988 page 14 of 19 the average cost of production of such bulk drug manufactured by an efficient manufacturer and allow a reasonable return on net-worth.

4. Power to fix retention price and common sale price.-

Notwithstanding anything contained in para 3 of 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 Cl. (a).

5. Power to fix maximum sale price of new bulk drug.-

(1) Every manufacturer of new bulk drug shall, within fourteen days of the commencement of production of such new bulk drug, make an application to the Government in Form 1, and the Government may, after making such inquiry as it deems fit, decide to include such new bulk drug in this Order and by order, fix a provisional price at which such new bulk drug shall be sold.

(2)(a) In every case where a provisional price has been fixed for a new bulk drug, every manufacturer of such new bulk drug shall on completion of six months of production of such new bulk drug, make a further application to the Government in Form 1.

(b) On receipt of an application under Cl. (c), the Government may, after making such inquiry as it deems fit, by notification in the official Gazette, fix the price of such bulk drug.

(c) The price fixed under Cl. (b) shall be the maximum selling price of such new bulk drug and no person

WP(C) Nos.1095/1985 & 1680/1988 page 15 of 19 (including a person manufacturing such bulk drug thereafter) shall sell such new bulk drug at a price exceeding the price so notified.

6. Power to fix the maximum sale price of imported bulk drug specified in First or Second Schedule.-(1) Every importer of a bulk drug specified in the First Schedule or the Second Schedule shall, within fourteen days of the import of such bulk drug, make an application to the Government in Form 2.

(2)(a) The Government may, after taking into consideration the information furnished in Form 2, by order, fix the price of such drug.

(b) The price fixed under Cl. (a) shall be the maximum sale price of such bulk drug and no person shall sell such bulk drug and no person shall sell such bulk drug at a price exceeding the price so fixed.

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 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 drug;

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

(2) Where a manufacturer of formulations 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

WP(C) Nos.1095/1985 & 1680/1988 page 16 of 19 allowed 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 para 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."

14. On a perusal of the order impugned and the aforequoted

paragraphs, we are of the considered opinion that the points urged by the

petitioners have really not been dealt with. The plea raised the concept of

bulk drug „price of formulations / drug prices equalization‟ which has not

been adverted to. What is submitted by Mr.A.S. Chandhiok, learned

Additional Solicitor General, is that the price was determined on the basis

of the rate reflected by the petitioner. What is canvassed by Mr.S. Ganesh,

learned senior counsel for the petitioner-company, is that the bifurcation

was not done by the petitioner at the time of submission of the data and if

paragraph 7(2) is appositely appreciated, bifurcation with regard to the

formulations and the essential bulk drug are to be taken into

consideration. We are disposed to think that these aspects are required to

be gone into by the authorities by giving adequate opportunity of hearing

to the petitioner indicating the basis on which it was done and also

WP(C) Nos.1095/1985 & 1680/1988 page 17 of 19 considering his plea. If some details are required by the petitioner to know

the foundation of the determination, the same is required to be shown.

15. At this juncture, we may note with profit that during the pendency

of the writ petition, initially there was an interim order of stay. Thereafter,

the order of stay of the demand was vacated, which was challenged before

the Apex Court in the Special Leave Petition wherein their Lordships have

directed the petitioner to pay Rs.50 lakhs in two installments and directed

stay of the realization of the rest of the amount. As we are remitting the

matter, we would like to strike the balance. Therefore, we would direct

the petitioner-company to deposit a further sum of Rs.50 lakhs within a

period of six weeks. Thereafter, the adjudicating authority shall fix a date

and proceed with the hearing of the matter and decide the same as

expeditiously as possible. The petitioners should cooperate in the fullest

manner with the authority and the authority must follow the mandate of

paragraph 7(2) of the DPCO, 1979 in a proper manner and adjudicate by

ascribing cogent and germane reasons. As we have not adverted to the

constitutional validity of paragraph 7 of the DPCO, 1979, the said issue is

kept open. At this juncture, we think it seemly to put on record that we

have been constrained to remand the matter as the concerned competent

WP(C) Nos.1095/1985 & 1680/1988 page 18 of 19 authority has not appositely addressed himself to the core issues that have

been raised by the petitioner. The old saying that over simplification of

law is neither an art nor craft comes to the mind. Ergo, the remit.

16. The writ petitions are, accordingly, disposed of without any order as

to costs.

                                                   CHIEF JUSTICE



AUGUST 9, 2011                                     SANJIV KHANNA, J.
kapil




WP(C) Nos.1095/1985 & 1680/1988                                 page 19 of 19