Glaxo Smithkline Pharmaceuticals India Limited v. Union Of India & Ors.

Badar Durrez Ahmed, J.— In this writ petition, the petitioner is aggrieved by the seizure memo dated 23.5.1988 issued by the Drug Inspector, Delhi Administration, in accordance with which stocks of Zinetac tablets (300 mg) and certain documents have been seized from the petitioner's Sales Depot at Mathura Road, New Delhi. The above seizure was purportedly done under the Drugs (Price Control) Order, 1987 (hereinafter referred to as “DPCO, 1987”), which, in turn, is issued under Section 3 of the Essential Commodities Act, 1955.

2. The petitioner herein, is engaged in the business of manufacturing, selling and distributing a wide range of pharmaceutical products. The formulation in question is Zinetac, which is a formulation of the bulk drug Ranitidine, manufactured by Biotech Pharma. The petitioner is a distributor of the said Zinetac tablets in strengths of 150 mg and 300 mg per tablet and has several branches and sales depots all over the country. The distribution chain is such that the petitioner distributes the tablets to wholesales, who in turn, supply them to retailers, who then sell the tablets to the ultimate consumers. For the purposes of distribution of the said product, the petitioner had 17 depots and 4 branches in 1988. The said depots and branches further supplied it to 2000 wholesale dealers and ultimately to about 75,000 retailers.

3. The prices of various bulk drugs and their formulations are controlled by the Government through the Drug Price Control Orders. Prior to 1988, the said Zinetac tablets were being marketed by the petitioner at the prices fixed by the manufacturer since the bulk drug Ranitidine was not listed in the Schedules of the 1979 DPCO, which was in operation at the time. In 1987, the DPCO of 1979 was repealed and DPCO, 1987 came into force. Under this, the bulk drug Ranitidine was included at Item 106 of the Second Schedule and accordingly Zinetac fell under Category-II formulations in the Third Schedule. Being a “Scheduled Drug”, it became subject to the provisions of Para 9 of DPCO, 1987, with respect to its pricing.

4. Accordingly, on 17.3.1988, a Price Fixation Order under DPCO, 1987 was issued by the Government whereunder the price of Zinetac tablets was fixed for the first time. A comparison of the prices fixed by the manufacturer prior to this order with those fixed by the Government through the order is given below:

Formulation Maximum Retail Price (Inclusive of Excise Duty) Price fixed by the manufacturer (In Rs.) Price fixed by the Government (In Rs.) Zinetac Tablets 150mg 28.86 19.00 Zinetac Tablets 300mg 55.65 36.86

5. According to the provisions of Para 16(3) of the DPCO, 1987, the prices so fixed by the Government are to be implemented within a period of 15 days from the receipt of the order. The same was also reiterated in the order dated 17.3.1988 The relevant extract of which reads as under:

“3. These prices/revised articles shall be made effective within 15 days of receipt of this order. The necessary price list indicating the compliance of this order may be sent to Government as required under sub-paragraph (3) of paragraph 16 of the Drugs (Price Control) Order, 1987.”

6. Para 16(3) of the DPCO 1987 reads as under:

“16. Furnishing of price list of manufacturer or importer to Government.—

(1) xxxxxxxxxxxxxxxx

(2) xxxxxxxxxxxxxxxx

(3) Every manufacturer or importer shall give effect to the price of a bulk drug or formulation, as the case may be, as fixed by the Government from time to time, within fifteen days from the receipt by such manufacturer or importer of the communication in this behalf from the Government and issue a supplementary price list in this regard to the dealers, State Drugs Controllers and the Government and indicate necessary reference to such price fixation.”

7. The Price Fixation Order was received by the manufacturer (Biotech Pharma) on 21.3.1988 Therefore, 15 days from 21.3.1988 expired on 4.4.1988

8. The manufacturer thus wrote a letter to the Assistant Development Commissioner, Ministry of Industries, indicating that the Price Fixation would be implemented with effect from 4.4.1988 and with respect to Batch Nos. BT 430 onwards for 150mg tablets and BT 3115 onwards for 300 mg tablets as required under the DPCO. The necessary price list given in the requisite Form 5 was enclosed alongwith the letter. The relevant extract of the same is as under:

ZINETAC TABLETS

NAME OF THE

FORMULATION

AND ITS FORM

COMPOSITION AS

APPROVED BY

STATE DRUG

CONTROLLER

SPECIFICATION OF

THE PACK DUTY

OF EXCISE

PRICE TO RETAILER

(Inc. of Excise Duty) Rs.

RETAIL PRICE

(Inc. of Excise Duty) Rs.

Effective Batch Nos.

RATE %

AMOUNT RS.

ZINETAC TABLETS

RANITIDINE

150 mg

Wholesale

package of

6 × 10.s

Advalorem

BT 430

ZINETAC TABLETS

RANITIDINE

300 mg

Wholesale

package of

3 × 10.s

Advalorem

BT 3115

9. Thus, it was clearly indicated that the prices stipulated in the order dated 17.3.1988 would apply to the formulations/stocks manufactured prior to the “Effective Batch Nos.”, being BT 430 (in the case of 150 mg tablets) and BT 3115 (in the case of 300 mg tablets) and not to the batches already manufactured and packed.

10. Also, in the letter dated 8.5.1979 (at page 48 of the paper book), a copy of Circular No. 9/27/79 D III dated 28.4.1979, is reproduced, which clarified that the new prices would be applicable to stocks cleared after effectuation of reduction. The relevant extract of the Circular is as under:

“A question has been raised whether the reduction in prices is applicable to all the stocks of such formulations, whether lying with the manufacturers, distributors, dealers, etc. or only to such of the stocks as are cleared after the date of effectuation of reduction. This matter has been examined in consultation with the Ministry of Law, Justice and Company Affairs (Department of Legal Affairs), based on which it is clarified that all reductions in the prices of formulations effected from time to time by the Central Government would be applicable to the stocks cleared on and after the date of effectuation of reduction provided, however that:

1. The batch numbers from which the reduction is effective, are clearly indicated on the price list issued in pursuance of the reduction;

2. The manufacturers shall, jointly with the distributors, dealers, etc. ensure that the formulations batches which are meant to be sold at the reduced prices are actually sold at the reduced prices; and

3. In doing so they do not infringe any other law of the land.” As per Para 16(2) of the DPCO, 1987, the said price list must be furnished in Form 5. Para 16(2) reads as under:

‘16. Furnishing of price list of manufacturer or importer to Government—

(1) xxxxxxxxxxxx

(2) Every manufacturer, importer or distributor of a formulation intended for sale shall, within thirty days from the commencement of this order and thereafter, every year, within one month of introduction of the Finance Bill in Parliament, shall furnish a price list to the dealers, State Drugs Controllers and the Government in Form 5:

Provided that where a manufacturer or an importer furnishes such a price list, it shall not be obligatory for such manufacturer or importer to furnish a fresh price list at the time of every subsequent sale to the dealer unless there is any change by way of addition, deletion or alteration in that list, in which case a supplementary price list including such additions, deletions or alterations shall be furnished.”

11. However, the seizure memo of 23.5.1988 contemplates the seizure of 300 mg tablets from Batch No. 3104, which is prior to Batch No. 3115 mentioned as the Effective Batch No. in the manufacturer's letter dated 4.4.1988

12. The short question which arises for consideration in this writ petition is whether the new prices stipulated under the DPCO, 1987 in respect of Zinetac tablets would be operative in respect of all sales subsequent to 15 days from the date of receipt of the said order or whether the new prices would be applicable only in respect of Batches of the said drug manufactured after the said 15th day?

13. It was contended by Mr. Ganesh, the learned Senior Counsel appearing for the petitioner that from all the abovementioned provisions, it is clear that it is the “Effective Batch No.” which is the cut-off point for effectuating the price fixation. The price list giving the new prices in Form 5 clearly indicates the Effective Batch Nos. Thus, it is from that Batch No. onwards that the new prices would operate. The Batch Nos. prior to the Effective Batch No. would continue to be sold under the old prices printed on the said product. He also submitted that paragraph 17 of the DPCO, 1987 makes provisions for printing of maximum retail price etc. on the product and, that too, indelibly. He submitted that there is no provision for reprinting of the labels or of return of the drugs once they leave the factory premises. Thus, the Batches which have been manufactured and stamped with the old prices can continue to be sold at those prices.

14. There are two points raised by the respondents, as can be discerned from the counter-affidavit filed by them. Firstly, that the Circular of 1979 clarifying the position pertains to DPCO, 1979, which is no longer in vogue and, therefore, the said circular would not apply to DPCO, 1987. The other plea of the respondents is that the new fixed prices would apply from the 15th day to all stocks of Zinetac tablets irrespective of their Batch Nos. notwithstanding that they were manufactured prior to the date of effectuation.

15. Mr. Ganesh submitted that since the mode of conducting the business and the steps in the distribution chain necessarily involved time lags, therefore, the stand taken by the respondents is highly unreasonable and without any logic. The manufacturers sell their products to the petitioners within a week from the date of manufacture of the said product. The petitioners then hold inventory at its various branches/depots for about 4 to 6 weeks and thereafter the product in question is sold to the wholesele dealers, who then sell it to the retailers. Therefore, the product when it reaches the consumer, is generally two to three months old from the date of manufacture.

16. Mr. Ganesh fairly pointed out that the Karnataka High Court in the case of Smithkline Beecham Pharmaceuticals (India) Limited v. Union of India, [WP(C) No. 38973/1998, decided on 12.11.2002], considered a similar issue which was decided in favour of the respondents. The Karnataka High Court took the view that the new fixed price would apply even to batches prior to the Effective Batch Nos. However, the Karnataka High Court did not refer to Para 16(2) of the DTCO, 1987 which dealt with the price list in Form 5 and Effective Batch Nos. and nor did it refer to the Circular of 1979. He submitted that the said Court did not consider the conflict that would arise between the printed prices and the new fixed prices in the case of a price increase, with respect to the buyers, interests, if such an interpretation was allowed. Therefore, the said decision, according to him, was clearly distinguishable and, in any event, did not consider the relevant issues which are being raised in this petition. He also informed the Court that a Special Leave Petition has been preferred against the said decision being SLP (Civil) 349/2003 and the Supreme Court has issued notice and has ordered stay of prosecution. The Special Leave Petition is pending before the Supreme Court.

17. Lastly, Mr. Ganesh referred to the decision of the Supreme Court in the case of Union of India v. Ranbaxy Laboratories Limited, (2008) 7 SCC 502, which pertained to exemption from price control. The Supreme Court held that for the purpose of exemption from price control, the date of manufacture of the product would have to be considered. The relevant paragraphs of the decision are reproduced hereunder:

“25. The short question which arises for our consideration is as to whether the exemption Notification would apply in respect of drugs which were manufactured upto 31.10.1999 or manufactured and sold up to the said date. The exemption granted is in respect of what. It is in respect of a drug manufactured by a company. What is marketed for sale is the drug manufactured. Manufacture of a drug is controlled by a different statute, namely the Drugs and Cosmetics Act, 1940. Process of marketing the drug as also the maximum price which can be charged have direct relation with manufacture and also the date thereof. The wrapper/foil/containers in which the drug is marketed contains several informations for the general public; one of them being the date of manufacture and the retail price. Various other informations are also required to be furnished.

26. The contention of learned Additional Solicitor General that the drug could be manufactured upto 31.10.1999 but on and from 1.11.1999 it could be sold only at the price specified in the order, in our opinion, cannot be accepted. If the first respondent was entitled to avail the benefit of the exemption notification till the midnight of 31st October, 1979, some time would be necessary for it to market the same. There must be some time lag between the period the drug is manufactured and the actual sale by a retail dealer to the customer.

27. The Court while construing an exemption notification cannot lose sight of the ground realities including the process of marketing and sale. The exemption order dated 29th August, 1995 is clear and unambiguous. By reason thereof what has been exempted is the drug which was manufactured by the company and the area of exemption is from the operation of the price control. They have a direct nexus. They are co related with each other. While construing an exemption notification not only a pragmatic view is required to be taken but also the practical aspect of it. A manufacturer would not know as to when the drug would be sold. It has no control over it. Its control over the drug would end when it is despatched to the distributor. The distributor may despatch it to the whole seller. A few others may deal with the same before it reaches the hands of the retailer. The manufacturer cannot supervise or oversee as to how others would be dealing with its product. All statutes have to be considered in light of the object and purport of the Act.”

18. It is obvious that there is a time lag between the Zinetac tablets being manufactured in the factory premises of Biotech Pharma and the same reaching the ultimate consumers. The time lag is because of the various steps involved. The manufacturer supplies to the distributor (the petitioner herein), who, in turn, supplies to the wholesalers, who supply the same to the retailers across the length and breadth of the country. It is from these retailers that the consumers ultimately purchase the Zinetac tablets. The Price Fixation Order itself, probably appreciating this time lag, allows for a period upto 15 days of the receipt of the order by the manufacturer to make the price change effective. In other words, the manufacturer is given 15 days time to continue to manufacture the drug at the old prices and it is only from the 16th day that the new prices become effective. It is for this reason that Form 5, which gives the price list mentions the Effective Batch Nos. The Circular of 1979 also makes the position absolutely clear. We do not agree with the stand taken by the respondents that the said circular pertained to DPCO, 1979 and is no longer applicable under the DPCO, 1987. When we compare DPCO, 1979 with DPCO, 1987 and particularly paragraphs 19 and 20 of the former with paragraphs 16 and 17 of the latter, we find the same to be virtually identical.

19. Paragraphs 19 and 20 of DPCO, 1979 are reproduced hereunder:

“19. Furnishing of price list by manufacturer or importer to dealers—(1) Every manufacturer or importer of a formulation intended for the sale shall furnish to the dealers, State Drug Controllers and the Government, a price list showing the price at which the formulation is sold to a retailer (inclusive of excise duty) and the retail price of such formulation and the list shall be furnished to dealers, in Form 5, not later than thirty days from the commencement of this Order:

Provided that where a manufacturer or an importer furnishes such a price list, it shall not be obligatory for such manufacturer or importer to furnish a fresh price list at the time of every subsequent sale to the dealer unless there is any change by way of addition, deletion or alteration in that list, in which case a supplementary price list including such additions, deletions or alterations shall be furnished.

(2) Every manufacturer or importer shall give effect to the change in prices as approved by the Government from time to time, within fifteen days from the receipt by such manufacturer or importer of the communication in this behalf from the Government.

(3) Every dealer shall display the price list at a conspicuous part of the premises where he carries on business, in a manner so as to be easily accessible to any person wishing to consult the same.

20. Retail price to be displayed on label of container.-Every manufacturer, importer or distributor of a formulation intended for sale shall display in indelible print mark on the label of the container of the formulation or the minimum pack thereof offered for retail sale, the maximum retail price of that formulation with the words ‘retail price not to exceed’ preceding it, and ‘local taxes extra’ succeeding it.”

20. Paragraphs 16 and 17 of DPCO, 1987 are reproduced hereunder:

“16. Furnishing of price list of manufacturer or importer to Government—(1) Every manufacturer or importer of a bulk drug intended for sale shall within thirty days from the commencement of this order and thereafter every year within one month of introduction of Annual Finance Bill in Parliament, submit a price list in Form 5 in case of Scheduled Formulations, and in Form 5-A, in the case of non-scheduled formulations to the Government.

(2) Every manufacturer, importer or distributor of a formulation intended for sale shall, within thirty days from the commencement of this order and thereafter every year, within one month of introduction of the Finance Bill in Parliament, shall furnish a price list to the dealers, State Drug Controllers and the Government in Form 5:

Provided that where a manufacturer or an importer furnishes such a price list, it shall not be obligatory for such manufacturer or importer to furnish a fresh price list at the time of every subsequent sale to the dealer unless there is any change by way of addition, deletion or alteration in that list, in which case a supplementary price list including such additions, deletions or alterations shall be furnished.

(3) Every manufacturer or importer shall give effect to the price of a bulk drug or formulation, as the case may be, as fixed by the Government from time-to-time, within fifteen days from the receipt by such manufacturer or importer of the communication in this behalf from the Government and issue a supplementary price list in this regard to the dealers, State Drugs Controllers and the Government and indicate necessary reference to such price fixation.

(4) Every dealer shall display the price list on a conspicuous part of the premises where he carries on business, in a manner so as to be easily accessible to any person wishing to consult the same.

17. Retail price to be displayed on label of container.—Every manufacturer, importer or distributor of a formulation intended for sale shall display in indelible print mark on the label of container of the formulation and the minimum pack thereof offered for retail sale, the maximum retail price of that formulation with the words ‘retail price not to exceed’ preceding it, and ‘local taxes extra’ succeeding it, in the case of scheduled formulations and the words ‘maximum retail price’ preceding it and the words ‘inclusive of all taxes’ succeeding it, in the case of non-scheduled formulations:

Provided that in the case of a container consisting of smaller salable packs, the retail price of such smaller pack shall also be displayed on the label of each smaller pack and such price shall not be more than the pro-rata price of the main pack rounded off to the nearest paisa.”

21. The Circular of 1979 was in the context of paragraph 19(2) of DPCO, 1979, which is almost identical to paragraph 16(3) of the DPCO, 1987, as can be discerned from the above extracts. Therefore, in our view, the circular explaining the position in respect of the DPCO, 1979 would continue to hold the field in respect of the very same provisions in DPCO, 1987.

22. We also feel that if the respondents, stand that the new prices would be effective in respect of all batches irrespective of the Effective Batch No is accepted, the same would be highly arbitrary and unreasonable, particularly when the Price Fixation Order itself gives 15 days time to the manufacturers to continue to manufacture the product at the old prices. We agree with the submissions made by Mr. Ganesh that the Karnataka High Court decision did not consider Form 5 nor its reference to “Effective Batch No.” Nor did the said decision refer to the Circular of 1979 which we have already indicated to be applicable to the DPCO, 1987 also. We, therefore, do not agree with the view adopted by the Karnataka High Court. In fact, the Supreme Court decision cited by Mr. Ganesh clearly recognizes the practical aspects of pricing in the context of time lags. Once the reality of time lags in the process of manufacture, clearance, distribution and sale is recognised, the importance of “Effective Batch Nos.” as mentioned in Form 5 comes to the fore. The Effective Batch No. represents the cut-off point for the new pricing. The seizure memo which is impugned herein relates to Batch No. BT 3104 (for 300 mg tablets) which is prior to the “Effective” Batch No. BT 3115. The said seizure was, thus, in respect of tablets which had been manufactured prior to the “effective. Batch No. BT 3115 which, we have explained above, is to be taken as the cut-off point insofar as the new prices are concerned.

23. Consequently, the seizure was bad and contrary to law. The impugned seizure memo is quashed.

24. The writ petition is allowed.

Writ Petition allowed.