CASE NO.: Appeal (civil) 3375-3384 of 2002 PETITIONER: Secretary, Ministry of Chemicals & Fertilizers Government of India RESPONDENT: Vs. M/s. Cipla Ltd. & Ors. DATE OF JUDGMENT: 01/08/2003 BENCH: S. RAJENDRA BABU, P.VENKATARAMA REDDI & ARUN KUMAR. JUDGMENT:
JUDGMENT
P. Venkatarama Reddi, J.
1.1 These appeals by special leave preferred by the Union of
India are directed against the common judgment of the Bombay
High Court in a batch of writ petitions filed under Article 226 of the
Constitution by the manufacturers/importers of certain bulk drugs
and their formulations. The bulk drugs concerned are seven in
number. They are: Salbutamol, Theophylline, Cyproflaxacin,
Norfloxacin, Cloxacillin, Doxycycline and Glipizide. These bulk
drugs and the formulations made out of them are sold within the
country and part of the quantities produced are also exported
outside the country. The challenge is to the inclusion of the said
bulk drugs in the first schedule to the Drugs (Price Control) Order,
1995 (hereinafter referred to as ‘the DPCO’). Though the fixation of
price pursuant to the provisions of the said Order was also
challenged in some of the writ petitions, that issue was not gone into
by the High Court and at any rate, the mechanics of price fixation is
not the contentious issue before us. However, it may be noted that
the remedy by way of review is available under paragraph 22 of the
DPCO to seek reconsideration of price fixation. The immediate
provocation for filing the writ petitions in the High Court seems to be
the notices issued by the National Pharmaceutical Pricing Authority,
calling upon some of the Respondent-Companies to deposit the
overcharged amounts in relation to the formulations of scheduled
drugs.
1.2 The High Court held that the concerned drugs should not have
been brought within the purview of the DPCO, 1995 and
consequently, there could be no fixation of price in relation to those
drugs. The notices demanding overcharged amounts were
quashed. The writ petitions were thus allowed by the Division Bench
of High Court.
2.1 The DPCO, 1995 which came into force on 6th January, 1995,
was promulgated by the Central Government in exercise of the
powers conferred by Section 3 of the Essential Commodities Act. It
repealed the earlier DPCO of 1987, under which more number of
drugs were subjected to price control. ‘Drug’ as defined in Drugs &
Cosmetics Act is one of the essential commodities.
2.2 According to Section 2(a) of DPCO, ‘Bulk Drug’ means any
pharmaceutical, chemical, biological or plant product including its
salts, esters, stereo-isomers and derivatives, conforming to
pharmacopoeia or other standards specified in the Second
Schedule to the Drugs and Cosmetics Act, 1940 and which is used
as such or as an ingredient in any formulation. ‘Formulation’ is
defined to mean a medicine processed out of, or containing one or
more bulk drug or drugs with or without the use of any
pharmaceutical aids, for internal or external use in the diagnosis,
treatment, mitigation or prevention of disease in human beings or
animals.
2.3 Paragraph 3 of DPCO empowers the Central Government to
fix, from time to time, a maximum sale price at which the bulk drug
specified in the first schedule shall be sold, after making such
inquiry, as it deems fit. The opening clause of sub-para (1) spells
out the avowed purpose of price control on the scheduled bulk
drugs. The declared objective is to regulate the equitable
distribution and increasing supplies of the specified bulk drug and
making them available at a fair price. There is a prohibition against
the sale of bulk drug at a price exceeding the maximum sale price
fixed under sub-paragraph (1) plus local taxes, if any. As already
observed, we are not concerned here with the modalities of fixation
of price. The very inclusion of these bulk drugs in the schedule is
being assailed on the ground that it is opposed to the norms laid
down by the Central Government itself in the Drug Policy of 1994
and, therefore, the delegated legislative power exercised by the
Government is arbitrary and violative of Article 14 of the
Constitution. The plea of the respondents was accepted by the High
Court.
2.4 In the Drug Policy document issued on 15th September, 1994,
the Central Government noticed that during the last decade, the
drug industry had grown significantly in terms of production of bulk
drugs and formulations and the export performance of the industry
had been commendable. It was said that the pharmaceutical sector
had been able to carve a special niche for itself in the international
market as a dependable exporter of bulk drugs. The drug policy with
regard to pricing has been stated thus in paragraph 9 of the policy
Paper:
“9. Pricing—The aberrations which have come to notice,
in the listing of drugs and their categorization for the
purpose of price control, need to be eliminated by the
use of transparent criteria applied across the board on
all the drugs with the minimum use of subjectivity. The
high turnover of a drug is an index of its extent of usage
and is considered to meet the requirements of objectivity
justifiable on economic considerations. However, the
monopoly situation in cases of drugs with comparatively
lower turnover has also to be kept in view. Also, as an
experimental measure, drugs having adequate
competition may not be kept under price control and if
this proves successful it would pave the way for further
liberalization. In the event, however, of prices of these
drugs not remaining within reasonable limits, the
Government would reclamp price control.”
In paragraph 11, it is stated—
“In the light of the apprehensions expressed in the
Parliament on the likely spurt in the prices of medicines,
it has been felt that it would not be desirable to allow
automaticity in the pricing mechanism. The Government
would set up an independent body of experts, to be
called the National Pharmaceutical Pricing Authority, to
do the work of price fixation. This expert body would
also be entrusted with the task of updating the list of
drugs under price control each year on the basis of the
established criteria/guidelines….”
2.5 The Government’s resolve to closely monitor the trends of
prices of medicines and to take appropriate measures to reclamp
price control in case the prices of such medicines rise
unreasonably, has been stressed in paragraph 12. Then, we come
to the most important paragraph in the Drug Policy i.e., 22.7.2 which
bears the heading ‘Span of Control’. It sets out the criteria for
bringing the drugs under price control. We quote paragraph 22.7.2:-
22.7.2. Span of Control—
(i) The criterion of including drugs under price control
would be the minimum annual turnover of Rs.400
lakhs.
(ii) Drugs of popular use in which there is a monopoly
situation be kept under price control. For this
purpose for any bulk drug, having an annual
turnover of Rs.100 lakhs or more there is a single
formulator having 90% or more market share in
the Retail Trade (as per ORG) a monopoly
situation would be considered as existing.
(iii) Drugs in which there is sufficient market
competition viz., at least 5 bulk drug producers
and at least 10 formulators and none having more
than the 40% market share in the Retail Trade (as
per ORG) may be kept outside the price control.
However, a strict watch would be kept on the
movement of prices as it is expected that their
prices would be kept in check by the forces of
market competition. The Government may
determine the ceiling levels beyond which
increase in prices would not be permissible.
(iv) Government will keep a close watch on the prices
of medicines which are taken out of price control.
In case, the prices of these medicines rise
unreasonably, the Government would take
appropriate measures, including reclamping of
price control.
(v) For applying the above criteria, to start with, the
basis would be the data upto 31st March, 1990
collected for the exercise of the Review of the
Drug Policy. The updating of the data will be done
by the National Pharmaceutical Pricing Authority
as detailed in para 22.7.4(i).
3. The central theme of the arguments is that the norms set out
in sub-Paras (i), (ii) & (iii) have not been adhered to by the
Government while framing the first schedule to DPCO in purported
implementation of the drug policy. There was either deviation from
the criteria set out or there was no scientific or rational assessment
of the factors relevant to the norms. Most of the arguments centered
round the interpretation of the three clauses in para 22.7.2—an
exercise which is usually associated with the construction of
statutes. The sum and substance of the arguments on behalf of the
respondents is that the seven bulk drugs get excluded from the
span of control under one or more norms spelt out in para 22.7.2,
whereas the stand of the appellants is that the concerned bulk
drugs were included in the schedule only after being satisfied that
they came within the ambit of price control criteria. It is also the
contention of the appellant that the Government’s decision to bring
these important bulk drugs within price control is in accordance with
the objectives underlying in Section 3 of the Essential Commodities
Act, particularly, the interests of consumers. Every attempt was
made to examine the facts and figures by an Expert Group of the
standing committee, keeping in view the prescribed norms in Drug
Policy. It is pointed out that the High Court cannot go into the
intricacies of price fixation under Article 226 of the Constitution or sit
in judgment over the exercise done by experts.
4.1 It is axiomatic that the contents of a policy document cannot
be read and interpreted as statutory provisions. Too much of
legalism cannot be imported in understanding the scope and
meaning of the clauses contained in policy formulations. At the
same time, the Central Government which combines the dual role of
policy-maker and the delegate of legislative power, cannot at its
sweet will and pleasure give a go-bye to the policy guidelines
evolved by itself in the matter of selection of drugs for price control.
The Government itself stressed the need to evolve and adopt
transparent criteria to be applied across the board so as to minimize
the scope for subjective approach and therefore came forward with
specific criteria. It is nobody’s case that for any good reasons, the
policy or norms have been changed or became impracticable of
compliance. That being the case, the Government exercising its
delegated legislative power should make a real and earnest attempt
to apply the criteria laid down by itself. The delegated legislation
that follows the policy formulation should be broadly and
substantially in conformity with that policy; otherwise it would be
vulnerable to attack on the ground of arbitrariness resulting in
violation of Article 14.
4.2 In Indian Express Newspapers Vs. Union of India [(1985) 1
SCC Page 641], the grounds on which subordinate legislation can
be questioned were outlined by this Court. E.S. Venkataramiah, J.
observed thus:
“A piece of subordinate legislation does not carry the
same degree of immunity which is enjoyed by a statute
passed by a competent Legislature. Subordinate
legislation may be questioned on any of the grounds on
which plenary legislation is questioned. In addition it
may also be questioned on the ground that it does not
conform to the statute under which it is made.
*** *** ***
It may also be questioned on the ground that it is
unreasonable, unreasonable not in the sense of not
being reasonable, but in the sense that it is manifestly
arbitrary. In England, the Judges would say “Parliament
never intended authority to make such rules. They are
unreasonable and ultra vires.”
4.3 True, the breach of policy decision by itself is not a ground to
invalidate delegated legislation. But, in a case like this, the
inevitable fallout of the breach of policy decision which the
Government itself treated as a charter for the resultant legislation is
to leave an imprint of arbitrariness on the legislation. When the
selection or classification of certain drugs is involved for the purpose
of price control, such selection or classification should be on rational
basis and cannot be strikingly arbitrary. No doubt, in such matters,
wide latitude is conceded to the legislature or its delegate. Broadly,
the subordinate law-making authority is guided by the policy and
objectives of primary legislation disclosed by preamble and other
provisions. The delegated legislation need not be modelled on a set
pattern or pre-fixed guidelines. However, where the delegate goes a
step further, draws up and announces a rational policy in keeping
with the purposes of enabling legislation and even lays down
specific criteria to promote the policy, the criteria so evolved
become the guide-posts for its legislative action. In that sense, its
freedom of classification will be regulated by the self-evolved criteria
and there should be demonstrable justification for deviating
therefrom. Though exactitude and meticulous conformance is not
what is required, it is not open to the Government to go hay-wire
and flout or debilitate the set norms either by giving distorted
meaning to them or by disregarding the very facts and factors which
it professed to take into account in the interest of transparency and
objectivity. Otherwise, the legislative act of the delegate in choosing
some drugs for price control while leaving others will attract the
wrath of Article 14. That is why the Union of India has taken the
stand throughout that it stood by the policy while framing the
legislation and that there was every endeavour to apply the criteria
spelt out in the Drug Policy of 1994 before including the drugs in
question in the first schedule. The correctness of this contention
should, of course, be examined.
5.1 With this prologue, let us proceed to analyze the three
relevant criteria in the drug policy. According to the first criterion, for
bringing the drugs under the price control, the minimum annual
turnover of the drug should be 400 lacs. However, this requirement
is qualified by and subject to the criteria laid down in (ii) & (iii).
Where a monopoly situation prevails in respect of any bulk drug, the
minimum annual turnover requirement gets reduced to 100 lacs.
The monopoly situation is deemed to exist where there is a single
formulator commanding 90% or more market share in the retail
trade (as per ORG data). According to the 3rd criterion, even if
minimum annual turnover exceeds 400 lacs, the drug will be kept
outside price control in case there is sufficient market competition.
The yardstick for assessing whether there is sufficient market
competition, according to clause (iii) is that there are at least five
producers of the particular bulk drug and at least ten formulators
and none of them have more than 40% market share in the retail
trade (as per ORG data).
The said criteria have to be worked out with reference to the
data available upto 31st March, 1990 which means, the relevant
facts and figures relating to the financial year 1989-90 have to be
taken into account. This is not in dispute.
5.2 As already noted, there is no quarrel about the criteria that
has been laid down. It is not the case of the Union of India that any
different criteria had been applied while promulgating the DPCO of
1995. The controversy revolves round its actual application or
methodology of working out the criteria. What is the annual turnover
made up of? In other words, how to work out the turnover figures?
Is there sufficient market competition as contemplated by
clause (iii)? It is with reference to these two aspects that the
Government’s stand has not been accepted and the writ petitioner’s
contention found its acceptance by the High Court.
5.3 First, we shall take up the issue of ‘annual turnover’. The
stand of the appellant, as discernible from the affidavits on record
sworn to by the officials of the Department of Chemicals and
Petrochemicals, Government of India is that the turnover of bulk
drug ought not to be mixed up with retail sale data of the
formulations of that bulk drug; in other words, the retail sale data
pertains to formulations of a bulk drug and not to the bulk drug itself.
The broad manner in which the turnover has been assessed is
indicated in paragraph 8 of the rejoinder affidavit filed in SLPs. It is
stated that the expert group of the Standing Committee which went
into the whole issue of exclusion/inclusion of drugs under price
control “took the data for turnover of the bulk drugs comprising of
the value of its total production in the country and value of weighted
average of landed cost of total imports into the country, as the basis
for viewing the price scenario from different points of view”. It is then
stated in paragraph 10 – “In the further respectful submission of the
petitioner the intent behind using the said word (turnover) has been
to determine the extent of usage of a bulk drug in the country
(emphasis supplied). This was the measure adopted by the expert
group in case of each bulk drug by taking into account the
aggregate of its total imports into the country and its total
indigenous production in the country. This has been the connotation
of the word ‘turnover’ at various levels throughout the deliberations
and in implementation of the policy through DPCO 1995 and was
never confined to the narrow connotation of the word ‘sales
turnover’ “. In short, it is submitted (vide paragraph 13) that the
value of total production plus imports of the bulk drug in the country
determines the annual turnover for the purpose of clauses (i) & (ii)
of para 22.7.2. As a corollary to this stand, the contention advanced
on behalf of the Union of India is that export sales could also be
taken into account in arriving at the annual turnover. According to
the respondents (writ petitioners), the annual turnover could only
mean sales of bulk drug within the country either in the same form
or by way of formulations and it has nothing to do with export sales.
The entirety of production and imports cannot be regarded as
turnover. It is submitted by the respondents that the bulk drugs are
sold mostly in the form of formulations and the quantities of bulk
drugs utilized in such formulations are given in ORG data. From
this, the bulk drug turnover can be easily ascertained. The sales of
the bulk drugs as such to the institutions etc., will be negligible i.e.,
about 15%, as per the certificate issued by ORG in one of the
cases. It is, therefore, commented that the contention that the ORG
data does not afford the basis for ascertaining the annual turnover
of the bulk drug, is untenable.
5.4 The High Court, substantially agreeing with the contentions of
the respondents—writ petitioners held that the expression ‘turnover’
occurring in Drugs Policy can only mean domestic sales figures and
nothing else. Export sales cannot be included within the ambit of
turnover. The High Court observed that the concepts of ‘turnover’
and ‘market share’ are interrelated and inter-dependent. The
expression ‘turnover’, if interpreted in a contextual and purposive
manner, would not include exports. The extent of usage of the bulk
drug in the country would be determinative of turnover. By taking
the export sale figures and the value of entire production of bulk
drugs into account, the Central Government had acted contrary to
its own guidelines contained in Drug Policy, 1994. The High Court
then proceeded to discuss whether each of the drugs concerned
could be brought within the purview of DCPO, 1995 and answered
that question in favour of the writ petitioners.
5.5 Before proceeding further, we may notice that the National
Pharmaceutical Pricing Authority (NPPA) constituted by the
Government of India considered the representation of Bulk Drugs
Manufacturers Association (BDMA) on the subject of
inclusion/exclusion of drugs under DPCO. The NPPA passed a
reasoned order rejecting the representation on dt. 6.4.1998. In that
order, the issues raised by BDMA regarding exclusion of six out of
eight drugs with which we are concerned, were considered by the
said authority. There was however no consideration as regards two
drugs, namely, Doxycycline and Glipizide, probably because the
representation did not cover those two drugs.
5.6 Before we take up the issue of export sales, it is necessary to
understand the true import and expanse of the expression ‘turnover’
occurring in clause (i) of para 22.7.2 of the Drug Policy, 1994. What
is the ‘turnover’ contemplated by the said paragraph? Can it be
equated to the value of imported bulk drug and its production, as
contended by the appellant OR should it be equated to the actual
sales within the country? Should the export sales be included in
turnover? These are the questions to which this Court has to
address itself.
5.7 ‘Turnover’ in its ordinary sense connotes amount of business
usually expressed in terms of gross revenue transacted during a
specified period (vide Collins Dictionary). Broadly speaking, it
represents the value of the goods or services sold or supplied
during a period of time. The amount of money turned over or drawn
in a business during certain period, is another shade of meaning.
We need not refer to the definition of ‘turnover’ in Sales tax and
other fiscal enactments—reliance on which was placed by some of
the learned counsel as they are not quite relevant for the purpose
of understanding the expression ‘turnover’ occurring in a policy
document. Nor should we seek any assistance from the definition of
‘sale turnover’ occurring in DPCO in a different context and for a
different purpose. Going by its ordinary meaning and the way in
which it is commonly understood in trade and commerce, it is
difficult to equate turnover to the value of stock acquired either by
means of imports or production. For instance, the entire stock in
trade, say, lying in a godown and not circulated in business, cannot
be regarded as turnover, even giving broadest meaning to the
expression ‘turnover’. The reasoning which could be spelt out from
the order passed by NPPA (referred to supra) and in the counter
affidavits filed by the appellants that indigenous production plus
imports furnishes an indicia of the total business in the country in
relation to a particular bulk drug, cannot be accepted. It is only what
is sold out and marketed that could be legitimately regarded as
turnover of the specified drug. It may be that in the absence of
availability of reliable data regarding sales, the import value and
production value could be the basis to estimate the sale value after
giving due allowance to various factors such as wastage, unsold
stocks etc. But, treating the turnover as nothing but the value of
stock produced or imported during a given period will be doing
violence to the ordinarily accepted meaning of the expression
‘turnover’. There can be no presumption that the entire stock of
bulk drug produced or imported during the year had been sold out
during that year either in the form of formulations or otherwise.
However, we would like to make it clear that the production and
import statistics are not altogether irrelevant. They are relevant in
the sense that they furnish some basis for estimating the sales
when there is no other reliable and comprehensive data of sales
available.
5.8 The question whether export sales should also be taken into
account in computing the annual turnover needs to be discussed
now. There can be no doubt that the meaning of the expression
‘turnover’ either in its ordinary or legal sense includes export sales.
But, we must have regard to the terms and objectives of the policy
and try to understand that expression accordingly. Para 9 of the
Drug Policy, 1994 makes it clear that the high turnover of a drug is
an index of its extent of usage. ‘Usage’ has obvious reference to
consumption and consumption within the domestic market. Whether
the drug is extensively used within the country is one of the
considerations kept in view to clamp price control. The export
potential of the drug or its usage in foreign countries could not have
been the reason to notify the specified drugs for price control. If
there is any doubt in this regard, it is dispelled by what is stated in
paragraph 10 of the rejoinder affidavit which we quoted supra. To
repeat, it was stated therein that the intent behind using the word
‘turnover’ has been to determine the extent of usage of a bulk drug
in the country. It is also pertinent to note that the Govt. of India has
not come forward with any explanation as to why export sales also
should be taken into account in assessing the turnover as per the
criteria laid down in the Drug Policy. For all these reasons, we are
in agreement with the High Court that the export sales ought to
have been excluded while calculating the turnover. How far the
exclusion of export sales would make any difference is a different
matter.
5.9 Another grey area which has surfaced in the backdrop of the
Drug Policy, 1994 is whether for the purpose of clause (iii), the
expression ‘formulators’ should be confined to single ingredient
formulators or it should extend to multi-ingredient formulators as
well. The NPPA while rejecting the representation of the Bulk Drug
Manufacturers’ Association, referred to the clarification issued by
the Government of India in its communication dated 10.6.1997
addressed to one of the writ petitioners which is as follows:
“The basis of the single ingredient formulation as against
that of the combination formulation (for purpose of
calculating market share), is not only justified on account
of predominance of single ingredient formulation, on
over all basis, but also vindicates the objective of
“promoting the rational use of drugs in the country”
mentioned in paragraph 1(b) of the “Modifications in
Drug Policy, 1986″. The Principle of covering only single
ingredient formulations, for purposes of calculating
market share is a transparent, objective and verifiable
principle and hence suitable for policy issues.
Formulations of a bulk drug, containing one or more
other bulk drug are not comparable in terms of their
sales values. Therefore, it is practically not possible to
apply the criteria relating to market share of a formulator
of a bulk drug on the basis of data of its combination
formulations, across the board, in a transparent,
objective and verifiable manner as required for policy
issues.”
It is, therefore, contended by the Union of India that only
single ingredient formulations have to be taken into account for the
purpose of working out the criterion in clause (iii) and that the
number of single ingredient formulators of the concerned bulk drug
is not discernible from ORG data. Of course, it is the contention of
the respondents that no such distinction can be drawn. It is
contended that such distinction is irrational.
In our view, the clarification given by the Government of India
reflects a reasonable view point and it cannot be said that by
adopting such approach, a distorted meaning is given to the
expression ‘formulator’ much against the spirit of the policy. At any
rate, two views are possible and it is not for the Court to decide
which view is preferable.
6. Before closing the discussion on the controversies
surrounding the criteria evolved in the Drug Policy, there is one
argument of the learned Solicitor General which we would like to
refer to. The learned Solicitor General argued that the expression
‘may’ occurring in clause (iii) of para 22.7.2 of the Drug Policy
confers discretion and flexibility in approach to the Government of
India. Even if a particular bulk drug stands outside price control by
the application of such criteria, the discretion is still left to the
Government to include the drug in the Schedule for good reasons.
This argument cannot be countenanced for the simple reason that it
is not the case of the Government that for any particular reason or
reasons, the bulk drug concerned was brought within the purview of
price control, though the drug qualifies for exclusion under
clause (iii). Even assuming that the discretion is available in terms
of the policy, the factum of exercising such discretion for relevant
reasons should be disclosed. In the absence of such disclosure, the
Court must proceed on the basis that the Government stood by the
criteria and saw no need to deviate therefrom.
7.1 Now it is necessary to advert to the nature of the claim made
by the writ petitioners in relation to each of the bulk drugs, the stand
taken by the Union of India and the conclusions of the High Court.
7.2 Salbutamol: According to the writ petitioner-Company, the
annual turnover for the year ending March, 1990 was Rs.171.17
lacs based on the ORG data. The sales of formulations in domestic
market has been taken as the basis to calculate the consumption. It
is then multiplied by the notified price prevalent during the relevant
period. It is the further case of the writ petitioner that there were as
many as 24 formulators including the petitioner, none of whom had
the market share of more than 40%. Admittedly, there were more
than five bulk drug producers. The writ petitioner-Company,
therefore, claimed the benefit of exclusion both under clause (i) and
(iii) of para 22.7.2 of the Drug Policy, 1994. The Government of
India took the stand that the bulk drug turnover was Rs.11.50 crores
based on the value of domestic production and imports. Moreover,
there were only seven known formulators of the bulk drug.
Therefore, it is contended that the drug Salbutamol does not qualify
for exclusion either under clause (i) or (iii). The High Court accepted
the claim of the petitioner-Company on the ground that in the
counter-affidavit filed by the Union of India, there was only a bald
denial and the details given by the writ petitioners were not
controverted.
7.3 Theophylline: The writ petitioners claimed exclusion under
clause (iii). The names of six bulk drug producers and 31
formulators were given in the writ petition. In the counter-affidavit, it
was merely stated that there were less than five known
manufacturers of bulk drug and less than 10 known formulators of
the bulk drug and therefore the drug Theophylline did not qualify for
exclusion under clause (iii). The High Court observed that the
particulars furnished by the petitioner were not effectively
controverted, there being only a bald denial. It was therefore held
that the drug ought not to have been brought under price control.
As per the statement furnished by the learned Solicitor
General at the time of hearing, the fact that there were more than
five bulk drug producers, was accepted but the number of
formulators was given as seven. Therefore, the dispute is confined
to the number of formulators, the term ‘formulator’ being understood
in the sense in which the Government of India explained in its
clarificatory letter dated 6-4-1998.
7.4 Cloxacillin : The writ petitioners concerned are said to be the
manufacturers of formulations made out of Cloxacillin. There is no
dispute that the annual turnover at the relevant time was much more
than 400 lacs. The writ petitioners claimed exclusion of the drug
Cloxacillin on the basis of clause (iii) of para 22.7.2. According to
them, there were as many as 16 bulk drug producers and 23
formulators in respect of Cloxacillin and none of the formulators had
more than 40% market share as per the ORG figures for the year
1989-90 (upto March 1990). The High Court accepted the case of
the petitioners on the ground that the factual particulars were not
controverted, but there was only a bald denial in the counter
affidavit filed by Union of India. The counter-affidavit of Union of
India is not found either in S.L.P. paper books or the original record
of High Court. However, the stand of Union of India, as is clear from
the reply dated 6.4.1998 of the NPPA sent to the Bulk Drug
Manufacturers’ Association as well as the Grounds of SLP is that
the number of single ingredient formulators of the drug was less
than 10. According to the statement furnished by the learned
Solicitor General in the course of the arguments, the number of
formulators were only two. The NPPA clarified the position thus:
“The Association has claimed that the highest market share of
single formulator is 21.89%. This claim is based on consideration of
sale values of both single ingredient and combination products of
Cloxacillin. However, the highest market share of single drug
ingredient formulation of a particular formulator works out to 93.07%
which is more than the stipulated level of 40%.”
Thus, there is controversy regarding the number of
formulators and their market share.
7.5 Cyproflaxacin: The 2nd petitioner in writ petition No. 3449 of
1996, namely, Ranbaxy Laboratories Ltd. produced the said bulk
drug during the relevant period and captively consumed the same in
the manufacture of formulations marketed under the brand name of
Cifran both in India and foreign countries. The petitioner in W.P.No.
1974 of 2000 is Cipla Ltd. Inter alia, it is engaged in the
manufacture and sale of formulations of the drug Cyproflaxacin.
According to Ranbaxy Ltd., the annual domestic turnover of the
drug for the year ending March, 1990 was Rs.238 lacs and
according to the Cipla Ltd., it was Rs.243 lacs excluding the hospital
and institutional sales to the extent of 15%. It is therefore contended
that the drug stands excluded under clause (i) of para 22.7.2 of the
Drugs Policy. It is their further contention that there was no
monopoly situation as contemplated by clause (ii) inasmuch as
there was no single formulator having 90% or more market share in
the retail trade as per ORG data. The said turnover was calculated
on the basis of estimated consumption purportedly arrived at with
reference to the data relating to sales formulations given in ORG
publication. The quantum of consumption was then multiplied by
the then prevailing market price. However, a different method of
calculation of turnover was spelt out in the representation dated
7.3.1995 submitted by Ranbaxy Ltd., to Government of India (vide
Ext.B in W.P.No. 3449 of 1996). According to that calculation, the
turnover is Rs.280 lacs.
In the counter-affidavit, the turnover given by the writ
petitioners has been disputed. It is stated that ORG data relates to
formulation sales and it does not give data in regard to quantities
and values of bulk drug involved. It was also stated that
Cyproflaxacin was included in the first schedule on the basis of
criterion in clause (i) since the turnover in 1989-90 was taken as
Rs.990 lacs based on the landed cost of imports of the drug. It is
then stated that the data in regard to indigenous production is not
available.
The High Court merely referred to the contention of the writ
petitioners regarding the turnover and accepted the same on the
ground that there was only bald denial in the affidavit in reply.
Surprisingly, the High Court extended the benefit of exclusion under
clause (iii) also, though it was never the case of the writ petitioners.
The High Court stated that there were admittedly 16 bulk drug
producers and 20 formulators, though, no such case was set up by
either of the writ petitioners. In the ORG data furnished by the
petitioner in W.P.No. 3449 of 1996 and in the representation
submitted to the Government of India, only the names of seven
formulators was mentioned. Thus, there was an obvious error in the
High Court’s judgment. The plea of discrimination which was raised
for the first time in the rejoinder affidavit filed in W.P.No. 3449 of
1996 also found favour with the High Court.
7.6 Norfloxacin : The writ petitioner seeks exclusion from the
purview of DPCO on the basis of clause (iii) of para 22.7.2 of the
Drugs Policy. It is the case of the petitioner that there were at least
28 bulk drug manufacturers and 20 formulators and no single
formulator had more than 40% market share as per the ORG
figures. The names were given in the writ petition. However, the
stand taken in the counter- affidavit filed by the Government of India
is that there were only three manufacturers of the bulk drug and the
ORG data does not disclose the number of bulk drug producers. As
regards the formulators, the stand taken is that the number of single
ingredient formulators using the said bulk drug is not discernible
from the ORG data. It is, therefore, contended that the twin
conditions of a minimum of five bulk drug producers and at least 10
formulators are not satisfied. The High Court accepted the plea of
the writ petitioner on the ground that there was only a bald denial in
the counter-affidavit and no specific particulars were given to
controvert the contention of the petitioner. In the order passed by
NPPA in response to the representation of Bulk Drug
Manufacturers’ Association, it is stated that as per the records
available, there were only three bulk drug manufacturers in the
country during 1989-90. However, the names were not furnished
either in this document or the counter affidavit.
As per the ORG data, the market share of the formulation sold
by the petitioner-Company was 39.56% (vide annexure at page 38
of the original writ petition record) which, as pointed out by NPPA, is
technically lower than 40%. We may add that it is perilously close to
40%. It should also be noted that the writ petitioner did not furnish
any details of production to show that the bulk drug manufacturers
mentioned by it or at least five amongst them actually produced the
bulk drug.
7.7 Doxycycline : It is the case of the writ petitioner that it
manufactures and sells single ingredient formulation containing the
bulk drug Doxycycline in a concentration of 100 mg per capsule
under the brand name of Doxy-1. The annual turnover of the bulk
drug Doxycycline, according to the writ petitioner, was Rs. 316 lacs.
It is seen from the tabular statement appended to Annexure-A to the
writ petition at pages 85-86 of the original record, the petitioner
arrived at the total domestic consumption of the bulk drug with
reference to the ORG data pertaining to sales of formulations in the
market. It is the further case of the writ petitioner that as per ORG
data, there were at least 19 formulators producing Doxycycline
based formulations and none of them had more than 40% of market
share in retail trade. Therefore, the petitioner claimed that the bulk
drug Doxycycline should have been excluded from the purview of
price control in terms of under clause (i) & (iii) and that monopoly
situation contemplated by clause (ii) has no application because no
single manufacturer had 90% or more market share in retail trade.
The stand of the Government has been that the turnover of
Doxycycline was above 400 lacs during the relevant period and
therefore it comes under price control. Further, it is their case that
clause (ii) has no application because the turnover is above 400
lacs. It is also averred in the counter affidavit that the retail trade
sale data is not relevant since the need to calculate market share
does not arise. Moreover, since undisputably, there is only one
manufacturer of the bulk drug, i.e., Ranbaxy Limited, the exclusion
criteria laid down in clause (iii) of para 22.7.2 is not applicable.
In paragraph 89 of the judgment under appeal, the High Court
having merely referred to the arguments of the learned counsel for
the petitioner, accepted the case of the petitioner on the ground
that in the affidavit-in-reply filed by the Government, there was only
bald denial and that the particulars were not controverted.
Moreover, the High Court was under an apparent misapprehension
that the Writ Petitioner sought the benefit of exclusion under
clause (iii) also. The core controversy, as already noticed, is
regarding the quantum of turnover. The Union of India took the
stand that the turnover was above 400 lacs. In the statement filed
by the learned Solicitor-General at the time of argument, the figure
was given as 471.77 lacs. However, the appellant did not furnish
any details as to the calculation of turnover.
7.8 Glipizide: The writ petitioner—USV Limited is a manufacturer
of the bulk drug ‘Glipizide’ which is sold under the brand name of
Glynase. It does not appear that there was any other producer of
bulk drug during the relevant period. It is the case of the writ
petitioner that the annual turnover for the year ending 31st March,
1990 was only Rs. 82 lacs and that clause (ii) is not therefore
attracted. The writ petitioner estimated the turnover figure by
arriving at the consumption of the bulk drug in various formulations
and by multiplying the same by the MRP (Maximum Retail Price).
The ORG data relating to sales of formulations was furnished.
The stand of the Central Government is that production data
was not available for the year 1989-90 and the turnover of the bulk
drug was determined by the expert group on the basis of the landed
cost of imports during the year to the tune of Rs.322.50 lacs. As
there was only one formulator as reported in ORG survey of March,
1990, monopoly situation was considered to be existing “since one
formulator was having 100% market share as on 31.3.1990”.
Disputing the assertion of the writ petitioner that as per ORG data
furnished in Ext.F to the writ petition, there was no single formulator
having 90% or more market share in retail trade, it is pointed out in
Paragraph (iv) of the counter-affidavit that Ext.F includes
formulations based on the bulk drugs other than Glipizide. It is
further stated in the same para of the counter that there is only one
formulation, namely, Glynase based on Glipizide and in respect of
that, the writ petitioner had 100% market share.
Thus, the dispute mainly centers round the quantum of
turnover.
The High Court observed that “even assuming that the
petitioners were the sole manufacturers of the said drug, as the
turnover was below Rs.100 lacs, the monopoly situation, as
envisaged in para 22.7.2 (ii) of Drug Policy, 1994 does not apply
and as such the said drug ought to be kept out of the purview of
DPCO, 1995”. The plea of discrimination between this drug and
another anti- diabetic drug known as Insulin also found favour with
the High Court.
8.1 We are of the view that the approach of High Court in
considering the question of applicability of criteria laid down in the
Drugs Policy in relation to each of the above drugs is not correct
and the High Court failed to address itself to various crucial aspects
as indicated below:
8.2 ORG data does not give full and clear picture of the turnover
of bulk drug. ORG data relates to sales of formulations made either
exclusively out of the bulk drug or in combination with other drugs.
The formulations containing the particular bulk drug either wholly or
in part reach the consumers through normal trade channels. The
particulars of sales of such formulations entering the retail market
are compiled by ORG. Bulk drug sales as such are not covered by
ORG data. At best, from ORG data, it may be possible to deduce
the consumption of bulk drug on estimated basis especially if it is
the only drug used in that formulation. Moreover, direct sales to
institutions such as hospitals and Government organizations are not
reflected in ORG compilation. According to the certificate filed in
some of the cases, such sales would be about 14%. It is also borne
out by the same certificate issued by the Associate Research
Director of ORG (Ext. ‘C’ to W.P.No. 1974 of 2000 and Annexure-I
to written submissions) that out of this 86%, the ORG data covers
about 90% of the retail market sales. This is what the certificate
says:—
“The Retail Pharma Market in India contributes to 86%
of the total market and the remaining 14% towards
Hospital and Institutional sales.
I would like to confirm that out of this 86% of Retail
Pharma Market, ORG-MARG covers around 90%
through the Retail Store Audit (RSA).”
8.3 One more aspect which deserves notice is that from the ORG
data, it may not be possible to ascertain whether the formulation is
made up of single ingredient of the bulk drug or it has multi-
ingredients. We have held that the Government of India’s view that
single ingredient formulators alone should be taken into account for
the purpose of the criteria in clause (iii) of para 22.7.2 of Drugs
Policy cannot be said to be against the policy or otherwise
unreasonable.
8.4 Sales of bulk drugs effected during the year by bulk drug
producers including some of the respondents herein would have
furnished the best indicia of domestic sale turnover of bulk drug.
But, those details were not disclosed. Secondly, if the bulk drug
produced was consumed by any bulk drug producer or importer and
the drug was sold in the form of formulations, the statistics
regarding the quantum of bulk drug utilized in such formulations and
the value thereof must have been within the knowledge or reach of
writ petitioners and there is no good reason why they should
withhold all this relevant information and harp on ORG data. There
is no need to resort to guess-work when the actual figures are
available at the doorsteps of the respondents. Moreover, some of
the respondents have arrived at the estimates by varying methods
without reference to actual data available with them. For instance, in
the case of the drug Cyproflaxacin, we have adverted to different
methods of calculation given by the writ petitioners which yield
different results. If we go by the estimates of turnover made by the
respondents, there is vast difference between the value of the bulk
drug worked out by them and the sale value of formulations.
Moreover, in relation to some of the drugs, there is vast variation
between the quantity produced and imported and the quantity said
to have been utilized in formulations sold in the market. These
factors should have put the High Court on guard to subject the
petitioners’ version to close and critical scrutiny.
8.5 When the burden was on the writ petitioners to substantiate
their plea of violation of Article 14 and when the plea predominantly
rested on facts and figures, the High Court should have examined
the intrinsic worth and credibility of the version put forward with
regard to the turnover figures. The High Court oversimplified the
whole issue by addressing itself to the only question whether there
was effective rebuttal of the averments by the Union of India. The
callousness on the part of the officials concerned in not meeting the
points raised squarely and leaving the scope for ambiguity should
not, in our view, be a ground to accept whatever is falling from the
writ petitioners. The material placed before the Court should have
been critically examined before reaching a conclusion that Article 14
is violated. The High Court should have also examined whether the
writ petitioners withheld the relevant data which they were in a
position to produce and if so, what would be its effect. None of
these aspects received attention of the High Court. Before striking
down the legislation, the High Court should have realized that those
who challenged the legislation should lay firm factual foundation in
support of their plea. The complaint of violation of norms set out in
the policy leading to the alleged infraction of Article 14 depends, in
the ultimate analysis, on facts and figures. As already observed,
ORG data is neither comprehensive nor conclusive and moreover in
regard to some of the drugs, the data does not in unequivocal
terms, support the case of the writ petitioners. In such a situation,
further probe and analysis was required which the High Court failed
to do. The version of writ petitioners regarding the quantum of
turnover was accepted to be correct on its face value. That apart, in
the light of the clarification given by us that single ingredient
formulators alone could be legitimately taken into account in the
context of clause (iii), the need for reconsideration by the High Court
becomes inevitable. We are, therefore, of the view that the crucial
issues regarding the applicability of criteria laid down in para 22.7.2
of the Drugs Policy require reconsideration by the High Court from
various angles indicated supra in the light of the legal position
enunciated and the observations made in this judgment.
8.6 We have broadly indicated the aspects on which the High
Court could have focused its attention before reaching the
conclusion it did. Nothing precludes the High Court from having
regard to other aspects or material which it considers relevant to
test the correctness of the writ petitioners’ claims. However, we
would like to clarify one thing. If, on reconsideration, the turnover of
any drug is found to be very close to the figure—400 or 100 lacs, as
the case may be, the relevant criterion must be deemed to have
been satisfied. As we said earlier, mathematical accuracy is not
what is required.
8.7 There is one more point which we have to deal with, i.e., the
alleged discrimination between one drug and another. The High
Court upheld such plea raised in rejoinder affidavit in relation to the
drugs ‘Cyproflaxacin’ and ‘Glipizide’. We unhesitatingly vacate the
findings of the High Court in this regard because we are of the view
that the reasons given by the High Court for upholding such plea
are too tenuous to merit even prima facie acceptance.
8.8 In the case of Cyproflaxacin in W.P.No. 3449 of 1996 it was
contended that two bulk drugs, namely, Mefenamic Acid and
Amikacin Sulphate were wrongly and arbitrarily deleted from the
DPCO, 1995. It is difficult to comprehend as to how there could be
infraction of Article 14 merely because a few bulk drugs were
excluded from the purview of DPCO on a reconsideration. The
exclusion of some drugs, even if such exclusion is unjustified,
cannot be a ground to claim exclusion of other drugs on the so
called principle of parity. Logically, if the High Court’s view has to
be accepted, the entire Schedule should be invalidated for the
simple reason that one or two drugs, which were not eligible for
exclusion in the light of the policy guidelines were excluded. It would
then lead to a startling result frustrating the very objective of
regulating the price of essential drugs. That apart, the turnover
figures of the said two drugs furnished by the writ petitioner and
referred to by the High Court, do not establish that they fall within
the policy guidelines. Regarding Mefenamic Acid, what all is stated
in paragraph 16 of the rejoinder affidavit is that the turnover of this
drug has been “over Rs.4 crores between 1988-89 to 1991-92 and
yet it was excluded for reasons not known to the petitioners”.
Nothing has been stated as to how the turnover for the relevant year
was arrived at. No information was furnished regarding the number
of bulk drug producers and formulators and their market share.
Evidently, the petitioner made only a halfhearted attempt to put
forward a plea of discrimination, but, it succeeded in its attempt.
Coming to the other drug Amikacin Sulphate, even according to the
petitioner, the import value of the drug in 1989-90 was Rs.3.5
crores, which is much below the limit of Rs.4 crores and even if
there was a single formulator having a market share in excess of
40%, that does not make any difference. That apart, the
Government of India clarified in one of the counter affidavits filed in
the High Court that on the scrutiny and verification of details
submitted by the manufacturers, these two drugs were
subsequently deleted from the First Schedule having regard to the
criteria laid down in the policy.
We have, therefore, no hesitation in reversing the conclusion
of the High Court that the exclusion of the said two drugs from
DPCO amounted to hostile discrimination.
8.9 Regarding ‘Glipizide’, the plea of discrimination between this
drug and another anti-diabetic drug known as Insulin, found favour
with the High Court. The High Court, in paragraph 90 of the
judgment referred to the argument that Insulin having 441 lacs
turnover as on 31st March, 1990 was included in DPCO of 1995, but
subsequently excluded from price control and held that there was
discrimination on that account. The High Court evidently proceeded
on an erroneous assumption that Insulin was excluded from the
schedule. The averments in paragraph 22 of the writ petition
No.5219/1996 are otherwise. The plea of discrimination was aimed
at the drug known as Glibelclamide, which was excluded from the
DPCO of 1987 and continued to remain excluded from the DPCO of
1995. The respondent did not even aver that the said drug had the
turnover of more than 100 lacs and therefore it would fall within the
mischief of clause (ii). On the basis of a bald plea, the infraction of
Article 14 ought not to have been countenanced. The finding of the
High Court in this regard is palpably wrong.
9. We now summarize the conclusions as under:
1. Where the Central Government as the delegate of legislative
power announces a rational policy in keeping with the
purposes of enabling legislation and even lays down specific
criteria to promote the policy, the criteria so evolved become
the guide-posts of its legislative action. While classifying the
drugs for the purpose of price control, it is not open to the
Government to flout or debilitate the set norms which it
professed to follow in the interest of transparency and
objectivity. Otherwise, there will be an element of arbitrariness
and the delegated legislation will not withstand the test of
Article 14.
2. The expression ‘turnover’ in Drug Policy, 1994 represents the
sale value of bulk drug sold as such or in the form of
formulations.
3. Export sales should not be taken into account while computing
turnover.
4. The sum total of production and imports of bulk drug cannot
be equated to turnover, though they are not altogether
irrelevant in calculating the turnover.
5. ORG data does not give exhaustive account of turn over of
bulk drug. It may furnish the basis for estimating the turnover,
but is not the sole guide.
6. For the purpose of criterion No.(iii) of the Drug Policy, the
single ingredient formulators alone ought to be taken into
account as clarified by the Govt. of India.
7. Burden lies on those who challenge the legislation on the
ground of violation of Article 14 to make out their case by
furnishing all the relevant material which is within their reach
and knowledge. There should be frank disclosure of material
facts, more so, when the plea is founded on certain factual
aspects. The mere vagueness or lack of clarity in the stand
taken by the Union of India does not by itself advance the
case of the writ petitioners.
8. The plea of writ petitioners ought to have been tested and
subjected to scrutiny in the light of all relevant factors instead
of merely considering whether the particulars furnished by the
petitioners were effectively controverted or not. Such an
approach of the High Court is wholly impermissible while
deciding the validity of legislation—plenary or delegated, from
the stand point of Article 14.
9. The plea of discrimination between one drug and another is
unfounded and should not have been accepted by the High
Court.
10. In the result, the judgment of the High Court is set aside and
the writ petitions out of which these appeals arise shall stand
restored to the file of the High Court and the High Court will have to
consider afresh the relevant aspects concerning the criteria laid
down in para 22.7.2 of the Drug Policy, 1994 in relation to each
drug, having due regard to the observations made in the judgment.
The High Court may endeavour to expedite hearing of the writ
petitions.
11. The appeals are accordingly allowed without costs. We also
consider it just and proper to give liberty to the appellant and the
concerned statutory authorities to recover 50% of the ‘over
charged’ amounts pending fresh determination by the High Court.
Accordingly, we direct stay of recovery of 50% of the ‘overcharged’
amount subject to the payment of remaining 50% within the period
of four weeks from the date of communication of the amount
payable by each of the writ petitioners.