UNION OF INDIA & ORS. v. MIS. CIPLA LTD. & ANR.

The Judgment of the Court was delivered by MADAN B. LOKUR, J. I. The issues that arise in this batch of appeals are as follows: a. Whether the notification dated J3•h July, 1999 issued by the D Central Government under Paragraph 7 of the Drugs (Prices Control) Order, 1995 prescribing the norms for conversion cost, packing charges and process loss of raw materials (other than packing materials in conversion) and packing and process loss of packing materials in packaging was issued mechanically and without any application of mind or is it valid iq law? b. Whether the notifications dated 12th July, 2000, J21h July, 200 I, J2•h July, 2002 and I J1h July, 2003 issued by the Central Government under Paragraph 7 of the Drugs (Prices Control) Order, 1995 re-notifying the norms prescribed on 13th July, 1999 were issued mechanically, without any application of mind and without re-determining the norms every year as required by the Drugs (Prices Control) Order, 1995 and are valid in law? c. Whether various notifications issued by the Central Government fixing the r\ltail price or ceiling price of formulations under Paragraphs 8 G and 9 (as the case may be) of the Drugs (Prices Control) Order, 1995 without determining the norm for cost of packing material as required by Paragraph 7 of the Drugs (Prices Control) Order, 1995 are valid in law? d. Whether fixing the retail price of a formulation under Paragraph 8 of the Drugs (Prices Control) Order, 1995 without first fixing the sale • H

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A price of a bulk drug under Paragraph 3 of the Drugs (Prices Control) Order, 1995 utilized in the manufacture of a formulation is valid in law?

2. We are primarily concerned with the Drugs (Prices Control) Order, 1995 (the DPCO 1995) and for historical reasons with the Drugs (Prices Control) Order, 1970 (the DPCO 1970), the Drugs (Prices Control) B Order, 1979 (the DPCO 1979) and the Drugs (Prices Control) Order, 1987 (the DPCO 1987). All these Orders were issued by the Central Government in exercise of powers conferred by Section 3 of the Essential CommoditiesAct, 1955. The appeals before us c 3. The principal appeal before us and in which the leading submissions were made is Civil Appeal No. 329 of 2005 filed against Cipla. This appeal is directed against the judgment and order dated 3rd March, 2004 passed in Writ Petition (C) No.41214 of2003 by the Di vision Bench of the Allahabad High Court.

D 4. The challenge in the writ petition was to notifications issued by the Central Government on 12'h July, 2000, 12'h July, 2001, J2•h July, 2002 and 11th July, 2003 re-notifying the norn1s prescribed by notification dated 13'11 July, 1999 issued under Paragraph 7 of the DPCO 1995 on the basis of which the retail price of formulations is fixed under Paragraph E 8 of the DPCO 1995. It was held by the High Court that these notifications were issued mechanically and without any application of mind.

5. The consequence of the decision of the Allahabad High Court is that about 40 notifications fixing the retail price and ceiling price of formulations have been invalidated.

F 6. The High Court also quashed the show cause notice dated I 61h August, 2003 issued by the Inspector of Drugs in Varanasi alleging that Cipla had charged higher retail prices than those notified by various notifications. In view of this allegation, the Inspector of Drugs required Cipla to clarify whether it had any order from the National Pharniaceutical Pricing Authority exempting it from compliance with the price G notifications and to give the quantities of the formulations sold during the period 1995 till date.

7. Civil Appeal No. 4005 of2004 is directed against the judgment and order dated 271h April, 2002 passed by the Division Bench of the High Court of Punjab & Haryana at Chandigarh in C.W. P. No. 15677 H

UNION OF INDIA & ORS. v. M/S. CIPLA LTD. & ANR. 543 [MADAN B. LOKUR, J.]

of 1999 filed by M/s Martin & Harris Laboratories Ltd. A

8. Three issues have been raised in this appeal. The first is whether the inclusion of the bulk drug Diosmin in the First Schedule to the DPCO 1995 is valid or not. The second is whether the ceiling price fixed by the Central Government in the notification dated 20th July, 1998 of the Diosmin formulation was in accordance with the provisions of Paragraph 7 of the B DPCO 1995. The third is whether the ceiling price of the Diosmin formulation could have been fixed under Paragraph 9 of the DPCO 1995 without first fixing the maximum sale price of the bulk drug Diosmin under Paragraph 3 of the DPCO 1995.

9. By an order dated I 5th September, 2016 we had declined to go c into the first question. We had remanded the matter back to the High Court to reconsider the issue in the light of the decision rendered by this Court in Secret(lry, Ministry of Cliemic(l/s & Fertilizers, Government of Indi" v. Ciplu Ltd & Otliers. 1

I 0. As far as the second question is concerned, it is really somewhat D similar to the principal issue raised by Cipla, while the third question is quite independent. 11 \ Civil Appeal No. 9585 of 2016 filed by the Union of India arises out of judgment and order dated 6th August, 2012 passed by the Division Bench of the High Court of Karnataka at Bangalore allowing E Writ Petition (C) No. 6585 of 2004 filed by Jshaan Labs Pvt. Ltd. & another.

12Copy pinpoint12. The first issue raised in this appeal pertains to the validity of the notification dated 11th July, 2003 issued by the Central Government re-notifying the norms for conversion cost, packing and process loss F earlier prescribed by the notification dated J 3th July, 1999. In this context, the contention of Ishaan Labs is that the notification dated 11th July, 2003 was issued by the Central Government mechanically and without any application of mind and that it was rightly quashed by the High Court. G

13Copy pinpoint13. The second issue i& regarding the validity of the notification dated 3rt1 September, 2003 fixing the ceiling price ofGlipizide formulations under Paragraph 9 of the DPCO 1995. This is consequential to the first issue. The contention oflshaan Labs is that the requirements of Paragraph 1 (2003) 7 sec 1 H

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A 7 of the DPCO 1995 were not adhered to and, therefore, the notification dated 3rd September, 2003 is liable to be struck down.

14Copy pinpoint14. Civil Appeal No. 9586 of 2016 and Civil Appeal Nos. 9561-9584 of 2016 arise out of a common judgment and order dated 301h October, 2012 passed by the Division Bench of the High Court of B Kamataka at Bangalore in a batch of Writ Appeals and Writ Petitions including those filed by Remidex Pharmaceuticals Pvt. Ltd. and Johnson & Smith Co. & Another. By the impugned judgment and order, the High Court effectively followed its earlier decision dated 6•h August, 2012 in W. P. No. 6585 of2004 filed by lshaan Labs Pvt. Ltd.

c 15. The High Court dealt with and struck down the validity of several notifications fixing the ceiling price of formulations under Paragraph 9 of the DPCO 1995. These notifications were struck down because they were based on notifications issued under Paragraph 7 of the DPCO 1995 which in turn were struck down because the requirements of Paragraph 7 of the DPCO 1995 were not adhered to. D The correctness of this decision is before us.

16Copy pinpoint16. One additional contention urged on behalf of one of the respondents (M/s Okasa Limited) is that small scale industries were exempted from the operation of Paragraph 8 of the DPCO 1995 (relating to the retail price of formulations) by a notification dated znd March,

E 1995. It was submitted that fixing the ceiling price of formulations under Paragraph 9 of the DPCO 1995 was a collateral attempt to bypass the effect of the exemption notification dated znd March, 1995 and deny its benefit to small scale industries.

17Copy pinpoint17. Civil Appeal Nos. 9609-9610 of2016 arise out of judgment and order dated 16th April, 2004 passed by the High Court of Judicature, Andhra Pradesh at Hyderabad in Writ Petitions Nos. 18507 of 1996 and 645 of 1997 filed by Dr. Reddy's Laboratories Ltd.

18Copy pinpoint18. Dr. Reddy's Laboratories manufactures the bulk drug Norfloxacin and formulations from the said bulk drug. The challenge in the High Court was to a notification dated !3 1h December, 1996 issued under Paragraph 3 of the DPCO 1995 fixing the price of the bulk drug Norfloxacin at Rs.2162/- per kilogram. However, prior to that on 271h December, 1995 the ceiling price of formulations from the bulk drug Norfloxacin was fixed under, Paragraph 9 of the DPCO 1995. This notification was also challenged in the High Court. The High Court found H

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no merit in the writ petitions and dismisse·d them. A

19Copy pinpoint19. The primary submission made before us by learned counsel appearing on behalf of Dr. Reddy's Laboratories was that the ceiling price of the Nortloxacin formulations could not be fixed prior to fixing the maximum sale price of the bulk drug Nortloxacin under Paragraph 3 of the DPCO 1995. It was also contended that the requirements of B Paragraph 7 of the DPCO 1995 were not adhered to while notifying the ceiling price DfNortloxacin formulations. Brief b!!_ckeround

20Copy pinpoint20. The core issue in this batch of appeals relates to the interpretation and application of Paragraph 7 of the DPCO 1995 and c Paragraphs 8 and 9 of the DPCO 1995 -the extent of flexibility available to the Central Government in fixing the retail price and ceiling price of formulations and the rigidity expected by the statutory Order. The specific issue in these appeals relates to the validity of various notifications prescribing the norms for calculating the retail price of formulations under D Paragraph 7 of the DPCO 1995 for the purposes of Paragraphs 8 and 9 of the DPCO 1995.

21Copy pinpoint21. Paragraph 7 of the DPCO 1995 reads as follows: "7. Calculation of retail price of formulation. The retail price of a formulation shall be calculated by the Government E in accordance with the following fo1mula, namely, xx R.P. = (M.C.+ C.C.+ P.M.+P.C.) x (l+MAPE/100) +ED. Where- "R.P." means retail price; F "M.C." means material cost and includes the cost of drugs and other pharmaceutical aids used including overages, if any plus process loss thereon specified as a norm from time to time by notification in the Official Gazette in this behalf; G "C.C." means conversion cost worked out in accordance with established procedures of costing and shall be fixed as a norm every year by notification in the Official Gazette in this behalf; H

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A "P.M." means cost of the packing material used in the packing of concerned fonnulation, including process loss, and shall be fixed as a norm every year by notification in the Official Gazette in this behalf; "P.C." means packing charges worked out in B accordance with established procedures of costing and shall be fixed as a norm every year by notification in the Official Gazette in this behalf; "MAPE" (Maximum Allowable Post-manufacturing Expenses) means all costs incurred by a manufacturer from c the stage of ex-factory cost to retailing and includes trade margin and margin for manufacturer and it shall not exceed one hundred per cent for indigenously manufactured scheduled formulations; "E.D." means excise duty; D Provided that in the case of an impo11ed formulation, the landed cost shall fonn the basis for fixing its price along with such margin to cover selling and distribution expenses including interest and importer's profit which shall not exceed fifty per cent of the landed cost. E Explanation.- For the purpose of this proviso, "landed cost" means the cost of import of formulation inclusive of customs duty and clearing charges." [Emphasis supplied]

22Copy pinpoint22. A perusal of the above provision would show that for calculating the retail price of formulations, the five determining factors are material cost, conversion cost, packing material cost, packing charges and maximum allowable post-manufacturing expenses (or MAPE). During the hearing of these appeals, there was no discussion at all about detennination of material cost or MAPE. It must, however, be mentioned that in one of the appeals a submission was made that the retail price of a fonnulation could not be fixed without first determining the maximum sale price ofa bulk drug in terms of Paragraph 3 of the DPCO 1995. That apart, there was no dispute or grievance made about material cost and MAPE. The dispute centred round fixing the norms for conversion · cost, packing material cost and packing charges "every year". There was also a question raised in one of the appeals that in the absence of H

UNION OF INDIA & ORS. v. M/S. CIPLA LTD. & ANR. 547 [MADAN 8. LOKUR, J.]

the cost of packing material being fixed as a norm, the formula for fixing A the retail price of formulations under Paragraph 7 of the DPCO 1995 . could not operate.

23Copy pinpoint23. According to the Central Govemment, the norms fixed under Paragraph 7 of the DPCO 1995 have been fixed after due application of mind to the available materiat and despite the lack of any effective 8 cooperation from the manufacturers/formulators in disclosing information that could have been of further assistance to the Central Government. Additionally, according to the Central Government ifthe manufacturers/ formulators were aggrieved by the retail price and ceiling price fixed on the basis of the norms, they had the remedy (which they did not avail) of having them revised in accordance with the provisions of the DPCO c 1995.

24Copy pinpoint24. Before discussing the historical background leading up to the dispute before us, it is necessary to state that there is no dispute that earlier the norms were fixed under Paragraph 6 of the DPCO 1987 by a notification dated 17th February, 1989 issued by the Central Government D and later updated by another notification dated l 51h July, 1993 pursuant to the recommendations of the Sankaran Committee. There is no challenge to the I 989 or the I 993 norms.

25Copy pinpoint25. However, it is significant that the norms prescribed by the February 1989 notification pertained to conversion cost, packing charges and process loss of raw materials (other than packing materials in conversion and packing) and process loss of packing materials in packaging. Norms were not prescribed for cost of packing material. Similarly the July I 993 notification prescribed nonns only for conversion cost and packing charges. It did not prescribe any norms for process loss of raw materials (other than packing materials in conversion and packing) and process loss of packing materials in packaging or for cost of packing material.

26Copy pinpoint26. Paragraph 6 of the DPCO 1987 is as follows and its contrast with Paragraph 7 of the DPCO 1995 with reference to determination of norms "from time to time" and "every year" can be easily seen: "6. Calculation of retail price of formulations. xx The retail price of the formulation shall be calculated in accordance with the following formula, namely: H

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A R.P. = (M.C.+ C.C.+ P.M. + P.C.) x (I+ MAPE/100) +E.D. Where xx "R.P." means retail price,

B "M.C." means material cost and includes the cost of drugs and other pharmaceutical aids used including overages, if any, plus process loss thereon specified as a norm from time to time by notification in the Official Gazette in this behalf,

c "C.C." means conversion cost worked out in accordance with established procedures of costing and may be fixed as a norm from time to time by notification in the Official Gazette in this behalf, "P.M." means cost of the packing material used in the packing of concerned fonnulation and includes process loss, as a norm fixed from time to time by notification in the Official Gazette in this behalf, "P.C." means packing charges worked out in accordance with established procedures of costing and may be fixed as a norm from time to time by notification in the Official Gazette in this behalf, "MAPE" means Maximum Allowable Post- Manufacturing Expenses including trade margin referred to in para. 7, F "E.D." means excise duty: Provided that in the case of an imported formulation, the landed cost shall form the basis for fixing its price along with such margin to cover selling and distribution expenses including interest and importer's profit which shall not G exceed 50 per cent of the landed cost. Explanation. xx For the purposes of above proviso, "landed cost" shall mean the cost of irnp01t of drug inclusive of customs duty and clearing charges." [Emphasis supplied]

27Copy pinpoint27. We have been informed by the learned Solicitor General that H

UNION OF INDIA & ORS. v. M/S. CIPLA LTD. & ANR. 549 [MADAN B. LOKUR, J.]

today as many as 2147 formulations are manufactured in the country. A The number might have been less during the period that we are concerned with, but surely the number would not have been significantly less. But be that as it may, there can be no doubt that the Central Government is concerned with the retail price and ceiling price of an extremely large number of formulations. To this may be added the 'complication' of the B variety in which the formulations could be available. These could be in the form of plain tablets, coated tablets, sustained release tablets (all three categories being small, medium, large and extra large); capsules (soft, hard and sustained release); liquids (syrup and elixirs, suspension, emulsion and malts and paediatric drops); ointments and creams; ampoules; sterile liquid vials; non sterile dry powder and granules; sterile c dry powder and sterile dry powder liophylised. The packing of the formulations could be in strips of I 0 or 15 or 20 or more or in bottles, or tubes or vials etc. In other words, the task of fixing the retail price and ceiling price of formulations is not only gargantuan but also extremely complex. D

28Copy pinpoint28. lt is also important to remember that the purpose of fixing the retail price and ceiling price of formulations is to make them affordable and ultimately benefit the consumer of medicines. Profits earned by manufacturers/formulators are secondary and 'profiteering' is certainly out of the question. The preamble to the Essential Commodities Act, 1955 provides: E

"An Act to provide, in the interests of the general public, for the control of the production, supply and distribution of, and trade and commerce, in certain commodities." [Emphasis supplied by us]. F There is no dispute that "drugs" as defined in the Drugs and Cosmetics Act, 1940 is an essential commodity in view of Section 2A read with the Schedule to the Essential Commodities Act, 1955. Historical background beginning with the Sankaran Committee

29Copy pinpoint29. The DPCO 1987 was issued on 261h August, 1987. Soon G thereafter, a Committee called the Sankaran Committee was set up on 2"d September, 1987 the occasion being that the norms prescribed for conversion cost, packing charges and process loss of raw materials (other than packing materials in conversion and packing) and process loss of packing materials in packaging were last announced a decade ago in H

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A I 979 in accordance with the provisions of the DPCO·l 979. The Sankaran Committee was set up for a quick revision of the norms and it was mandated to submit its report within three months. It is important to note that Paragraph 6 of the DPCO 1987 provided for the calculation of retail price as per a given formula. One of the factors in the formula is P.M. meaning "cost of the packing material used in the packing of B concerned formulation and includes process loss, as a norm fixed from time to time by notification in the Official Gazette in this behalf." Notwithstanding this, the norm for cost of packing material was not prescribed in the notification dated J 7•h February, 1989 and no objection was apparently raised by any manufacturer of formulations or formulator c - at least no ol1jection was brought to our notice by anybody. In other words, as far as the drug industry is concerned the formula given in Paragraph 6 of the DPCO 1987 and Paragraph 7 of the DPCO 1995 could be operated without prescribing the norm for cost of packing material.

30Copy pinpoint30. The Sankaran Committee held its first meeting on 22 1h September, 1987. During the course of deliberations, it sought the views of the drug industry associations such as the Organization of Pharmaceutical Producers of India (OPPI) and the Indian Drug Manufacturers Association (IDMA) to enable itto satisfactorily complete its task. The Sankaran Committee also issued a questionnaire to 23 E companies (manufacturers/formulators) soliciting some information. Subsequently, the questionnaire was sent to another 12 such companies since the response from the earlier set of23 companies was somewhat lukewarm.

31Copy pinpoint31. After analyzing all the material available before it, hearing the F drug industry associations and visiting a few companies to be acquainted with the actual conversion and production centres in the field 1 the Sankaran Committee submitted its Report sometime in April, 1988.

32Copy pinpoint32. A few observations from the Report of the Sankaran Committee need mentioni~: G (i) The nonns for conversion cost, packing charges, process losses for raw materials and packing material were originally notified sometime in 1974 under the DPCO 1970. These norms were re-notified as recommended by the Bureau of Industrial Costs and. Prices (for short the BICP) on 3rd May, 1979 vide S.0. No. 259(E) under the DPCO H

UNION OF INDIA & ORS. v. M/S. CJPLA LTD. & ANR. 551 [MADAN B. LOKUR, J.]

1979. These norms as notified on 3rct May, 1979 were essentially the same as notified in 1974. However, with regard to the cost of packing materials, norms were not fixed under the DPCO 1979. The Sankaran Committee observed in this regard as follows: "4. No norms have been fixed under DPCO 1979 for cost of packing material. This fluctuates and differs from product to product. The BICP is at present guided by cost ceilings which are reviewed periodically. These have not been statutorily notified as norms. Calculations of these norms are very difficult as a large number of large pack sizes are c involved. It is therefore recommended that till such time the norms are worked out by BICP, and these are notified, the actuals may be allowed." (ii) The Report noted that "While notifying the norms under the Drugs (Prices Control) Order, 1979 the Bureau of Industrial Costs and D Prices reviewed the earlier nonns by examining the information provided by about 7 of the 36 manufacturers who were asked to submit data and concluded that the norms notified in 1974 were adequate and did not call for any revision." In other words, the manufacturers/formulators did not provide the necessary information and assistance even to the BICP in its endeavour to determine the norms for conversion costs and packing charges.

33Copy pinpoint33. Faced with this situation, the Sankaran Committee took the following view on the basis of available information: (a) Conversion cost: The increasing cost of production and conversion costs have led to a situation where the existing norms cover less than 50% of the actual costs. In the case of public sector companies like IDPL and HAL they cover less than 30% of the actual costs. Accordingly, it was generally recommended that conversion cost to be increased by 100% over the existing norms. G (b) Packing charges: By and large, a similar view (as above) was taken with regard to packing charges namely that the existing norms be increased by I 00%. (c) Process loss of raw materials and packing materials: H

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A Perhaps due to improved technological processes and efficiencies in manufacturing techniques, the data submitted by the manufacturers "though hesitantly" clearly indicated that the existing norms for process loss of materials were on the higher side. Accordingly, a reduction of I% (broadly- we are not going into specifics since it is not necessary) was recommended in the norms for process loss on raw materials and B packing materials. (d) Packing material: As mentioned above, the cost of packing materials was not fixed under the DPCO 1979 since the cost of packing material fluctuates frequently and also differs from product to product. It was observed that an exercise is being undertaken by the BICP in this c regard and until the ceiling cost of packing material is updated by the BICP, it was recommended by the Sankaran Committee that the actuals may be allowed.

34Copy pinpoint34. Paragraphs 11 and 12 from Chapter 5 (titled Recommendations) of the Report of the Sankaran Committee are important for appreciating why the cost of packing materials was not fixed. These paragraphs read as follows: "I I. As regards the norms for packing materials costs, the Industry Associations (IDMA & OPP!) represented that packing material costs vary from product to product depending on the nature of the product being marketed and fixation of norms for such type of products may not be justifiable. They, therefore, requested the Committee to consider actual cost of packing materials.

12. The Committee notes that cost of packing material fluctuates frequently and also differs from product to product. Due to this reason and the fact that fixation of norm for this is very difficult, no norms were fixed in 1979. No norms have been subsequently recommended by the BICP. The current practice of the BICP is to regulate the claims for packing material cost on the basis of ceiling cost for various packages as approved by Drugs Prices Review Committee. These ceiling costs, we understand, are reviewed periodically by the BICP. While recommending prices of formulations, the BICP is being guided by these ceilings. However, these have not been H

UNION OF INDIA & ORS. v. MIS. CJPLA LTD. & ANR. 553 [MADAN B. LOKUR, J.]

notified as norms though statutorily required. It is A obvious that calculation ofnorms are very difficult as large number of pack sizes and large number of dosage forms of different material are in the market. The Committee recommends that the BICP be requested to up-date the ceilings and recommend to the Department of Chemicals B and Petrochemicals that these may be notified as norms. Till such time as these are communicated by the BICP, the actuals may be allowed. It is recommended that while the norms are notified this provision that actuals for packing material costs are allowed till further norms are notified, be included. This will provide for meeting the statutory c requirements also. While allowing the actuals it will be nc;;essary to insist on a certificate from the State Drug Controller that a particular dosage form is being packed by a particular material." [Emphasis supplied by us].

35Copy pinpoint35. Paragraph 16 of the Report is relevant for appreciating the D strategy for implementation of the recommendations made by the Sankaran Committee and this reads as follows: "16. The newly recommended norms are in Annexure VIII. The revised norms are bound to lead to some increase in the prices of formulations. In Annexure IX this Committee E has tried to work out the likely impact of recommended norms in the prices ofa few select formulations. The effect on 37 representative formulations of various companies is included here. The price increase ifthe entire recommended norms are announced, varies from 0.45 percent to 4 7. 71 percent. These formulations cover almost all the dosage forms. In view of the substantial increase in the price ofa few formulations, this Committee recommends that instead of giving full increase in the norms, that is, implementing the revised norms immediately, it is suggested that 50% of the increased norms may be announced immediately. At the end of the first year, a further25% increas" in norms may be implemented, the remaining 25% being added at the end of the second year. The likely effect of such staggered implementation of the revised norms shall result in increase of 0.3,!}% to 26.32 percent H

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A change in the existing prices." [Emphasis supplied by us].

36Copy pinpoint36. A perusal of Annexure VIII indicates that the Sankaran Committee recommended fixing of norms for conversion cost, packing charges and process loss of raw materials (other than packing materials in conversion and packing) and process loss of packing materials. B Significantly, norms for cost of packing materials were not fixed by the Sankaran Committee for the reasons given above and instead, it was recommended that provision for actual cost of packing materials be allowed, as recommended by the drug industry. The discussion in the Sankaran Committee points to a two-fold significance - that from 1979 onwards, at least, the cost of packing material (as a nonn) had not been c prescribed and that the drug industry was apparently quite satisfied with the provision of actuals for packing material which could certainly not be to the disadvantage of anybody in the drug industry. 3 7. The Central Government accepted the Report of the Sankaran Committee and a notification was issued on I 7'h February, 1989 by which D the norms for conversion cost, for packing charges and for process loss ofraw materials (other than packing materials in conversion and packing) and process loss of packing materials in packaging were notified with effect from I" April, 1989.

38Copy pinpoint38. It appears that even though the Sankaran Committee E recommended an increase in conversion cost at 25% in the first year (over and above an immediate increase of 50%) and at 25% in the second year and that recommendation was accepted by the Central Government, but it was not implemented. Apparently realizing this, in exercise of powers conferred by Paragraph 6 of the DPCO 1987, a F notification dated 15'11 July, 1993 was issued. By this notification, the norms for conversion cost and for packing charges were increased by 50% in one stroke. The increase in the norms for conversion cost as mentioned in the notification dated 15'" July, 1993 tallies with the recommendations made by the Sankaran Committee in Annexure VIII of its Report. However, no change was effected in the norms for process G loss of raw materials (other than packing materials in conversion and packing) and process loss of packing materials in packaging which continued to be as per actuals.

39Copy pinpoint39. At th is stage it may be mentioned that pursuant to the study or exercise conducted by the l31CP, the Central Government approved the H

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ceiling price of packing material cost and made it applicable from 7'h A July, 1994. However, this was not notified in the Official Gazette. Drug Policy, 1994

40Copy pinpoint40. The Government of India announced the new Drug Policy which was issued on I 5'h September, 1994. Some of the relevant paragraphs of the Policy relate to the background of the earlier Drug B Policy ofl 986, the necessity of setting up an independent body of experts to be called the National Pharmaceutical Pricing Authority (NPPA) to do the work of price fixation of drugs and formulations and the establishment of a National Drug Authority by a separate Act of Parliament to perform a variety of specified functions. It is not necessary c to detail the functions of the National Drug Authority except to say that despite a l1>pse of more than 20 years the National Drug Authority has not yet been set up.

41Copy pinpoint41. Subsequent to the new Drug Policy of 1994, the DPCO 1995 was notified on 6'h January, 1995 by the Central Government and the D NPPA was set up on 29'h August, 1997. Masood Committee

42Copy pinpoint42. Instead of taking immediate steps to set up the NPPA in terms of the new Drug Policy, the Central Government set up a Norms Review Committee (called the Masood Committee) on 24'h April, 1995 to review the norms recommended by the Sankaran Committee. The terms of reference of the Masood Committee were as follows: "The terms of reference of the Committee will include review of the existing norms relating to Conversion Cost (CC), Packing Costs (PC) and Process Losses and working out of norms for Packing Material (PM) and also giving recommendations in regard to related matter such as norms for pro-rata price fixation on the basis of ceiling prices of formulations. The Committee will submit its recommendations to the G Government within a period of2 months from the date of issue of this office memorandum."

43Copy pinpoint43. During the course of submissions before us learned counsel for Cipla was intensely critical of the Report submitted by the Masood H

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A Committee on 31" August, 1995 and, therefore, some broad details of the contents of the Report are necessary.

44Copy pinpoint44. The Masood Committee was of the view that it was necessary to elicit the views of the drug industry before making its recommendations. Accordingly, a meeting was held on 31" May, 1995 in which B representatives from various drug industry associations participated. The industry associations represented were the Indian Drug Manufacturers Association (!OMA), the Organization of Pharmaceutical Producers of India (OPP!), All India Small Drug Manufacturers Association (AISDMA) and All India Small Scale Pharmaceutical Manufacturers Association (AISSPMA). In that meeting the industry associations made c the following demands: (a) Ad-hoc relief based on inflation/increase in consumer price index since 1987 should be given. (b) Associations felt that a simplified questionnaire would D meet the requirements to give maximum benefit in fastest time and no detailed exercise was required. It was suggested that Cost Audit Reports may be made use of for broad categories of dosage form and escalations be worked out over the existing norms. E Additional costs on account ofGMP [Good Manufacturing Practices] should be given.

45Copy pinpoint45. Prior to the above meeting, the Masood Committee had prepared a questionnaire for eliciting information from various companies for the purposes of carrying out its duties. This questionnaire (referred to in (b) above) was discussed with the industry associations on 31" May, 1995 when they requested for time to examine it and assured the Masood Committee that their suggestions on the questionnaire would be submitted latest by 81h June, 1995. However, no suggestions were received by the Masood Committee which then issued the questionnaire on 9/12 June, 1995 requesting the manufacturers/formulators to furnish the requisite information by 30 1h June, 1995. Thereafter, some representations were received requesting for the deletion of some questions but this was not acceded to by the Masood Committee. It is recorded in the Report of the Masood Committee that no unit furnished replies to the questionnaire despite reminders and requests to the industry H

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through the Department of Chemicals and Petrochemicals for extending necessary cooperation to the Masood Committee. The absence of any response to the questionnaire was perhaps due to the demand of the associations [demand (c) above} to make use of the Cost Audit Reports for working out escalations over the existing norms.

46Copy pinpoint46. Faced with this situation, the Masood Committee had no option but to examine the Report prepared by the Sankaran Committee and also the available Cost Audit Reports (hereinafter referred to as the CARs) for the latest years, namely, 1993-94.

47Copy pinpoint47. With regard to the norms for conversion cost and packing charges, the Masood Committee observed in Chapter 3 of its Report c that it examined the data in respect of 16 companies which had apparently submitted some information to the Sankaran Committee out of 35 companies to whom the questionnaire had been sent. [Earlier even the Sankaran Committee and the BlCP did not receive full cooperation from the drug industry]. The Masood Committee was of the view that since the absorbed cost of conversion costs and packing charges was in the range of more than 50% and up to 82% for 7 out of 16 companies, the conclusion earlier arrived at that absorption was to the extent of 50% of the then prevailing norms appeared to be arbitrary. On an examination of the materials before the Sankaran Committee, the conclusion arrived at by the Masood Committee was that it was not possible to review the norms. The Masood Committee therefore decided to look into CA Rs of 1993-94. It was noted that the CARs were available in respect of only 6 companies and some discrepancies were noted in the information made available in the CARs. One of the criticisms made by learned counsel for Cipla was that the Masood Committee considered the CA Rs of only two companies and that too for only three or four formulations and therefore the conclusion that costs as given in the CARs "have not been allocated in accordance with the established Costing procedures but in an arbitrary manner" was not justified.

48Copy pinpoint48. Notwithstanding the (disputed) discrepancies, the data available in the CARs was analyzed by the Masood Committee to determine a whether there was an increase in the conversion cost and packing charges keeping in mind that the Sankaran Committee had based its conclusions on data available in 1985-86/1986-87. The analysis made by the Masood Committee gave a mixed picture of actual costs being H

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A equal, higher or lower than the existing nonns for conversion cost with respect to various dosage forms. The Masood Committee came to a similar conclusion in the cost of packing charges also.

49Copy pinpoint49. It was then concluded that ifthe cost allocation in the CARs was as per established costing procedures and the norms recommended B by the Sankaran Committee were on a realistic basis, inflation during the period 1986-87 to 1994-95 and increase in energy and other costs should have resulted in the actual conversion cost being higher than the existing norms. Accordingly, the Masood Committee was of the view that the data available in the CARs could also not be made use of. c 50. The Masood Committee also considered other factors including profitability situation as per the CARs, the revision of packing material ceilings from 7'h July, 1994, a decrease in total formulation activity coming under price control from 70% under the DPCO l 987 to 50% under the DPCO 1995 and uniform MAPE of 100% under the DPCO 1995 as against 75% and 100% MAPE under the DPCO 1987. D

51Copy pinpoint51. On the basis of the analysis and details available from the Report of the Sankaran Committee and the CARs, it was concluded by the Masood Committee that no case was made out for an increase in conversion cost and packing charges without a proper study. The question of an ad hoc increase also did not arise. E

52Copy pinpoint52. On the issue of process loss on raw materials and packing materials, it may be recalled that this had actually been reduced by the Sankaran Committee. On the basis of the CARs of the 6 companies that were available with the Masood Committee, it was concluded that with high production levels and better capacity utilization as well as new technological processes, the process loss was expected to come down. In any event, since no infonnation was provided to the Masood Committee through the questionnaire sent to the industry and the companies, it was not desirable to recommend any ad hoc reduction in the existing norms. However, the Masood Committee expressed the view that the existing norms for process loss on raw materials and packing materials were on the high side. 53_. With regard to the packing material cost, as already noted above, these were subject to ceilings as worked out and recommended by the BICP and approved by the Central Government from time to time. The last such approval was on 7'h July, 1994. The Masood H

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Committee decided to adopt packing material costs (without process A loss) "as might be available from the study by Drug Cell [of the BICP] and utilise the same for developing norms for Packing Material Cost."

54Copy pinpoint54. The Masood Committee gave its conclusion in Chapter 7 of its Report. Some of the relevant conclusions are given below (not in seriatim): B (i) The Sankaran Committee after estimating the CC & PC [conversion cost and packing charges] for the industry recommended that the differential between the estimated CC and PC and the then existing [norms?], be given in phases. It imp lied that the industry got the assessed CC & c PC for 1986-87 in July 1993 when the third and final increase was allowed. In other words, the industry should have suffered losses on a continuing basis at increasing levels i.e. years subsequent to 1986-87, on two counts (a) assessed CC & PC fc,r 1986-87 was not allowed to be absorbed fully and (b) due to impact of general inflation subsequent to 1986-87. (ii) The Committee has also examined the actual CC & PC as given in the Cost Audit Reports of six companies with a view to develop norms for the same as suggested by Industry Associations. Analysis of the data did not reveal any logical correlation of cost elements over a large range of products. Discrepancies and anomalies observed in the data have already been described in Chapter 3. (iii) Non-response to the questionnaire by industry and their insistence that no detailed exercise should be undertaken by the Committee further lends support to the conclusion arrived at by the Committee that the possible cushion in the existing norms and in other inputs more than offsets the inflation during the period l 986-87 to l 994-95. The Committee, therefore, recommends that no further escalation should be given till replies to the Questionnaire are received and an in-depth analysis done by an Expert Group to assess the escalation/de-escalation required in the existing norms of not only CC, PC and PL (both for raw materials & packing materials) but also overages. H

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A (iv) The other terms of reference ...... have been dealt with in Chapters 5 and 6. Based on the information furnished by the industry in response to the questionnaire earlier issued by the BICP, nonns for packing material (with process loss) only could be worked out.

55Copy pinpoint55. The recommendations made by the Masood Committee in connection with the terms of reference were given in Chapter 8 of the Report and the relevant recommendations are: (i) On the basis of analysis described in relevant chapters, the revision of existing norms for CC, PC and PL in c accordance with established procedures of costing cannot be done without evaluation of the latest data. Taking into account all the relevant factors, the Committee is firmly of the view that there is no case for any increase in the present norms without study. Consequently, the question of an ad-hoc increase, does not exist at all. D (ii) Norms for packing material costs (without process loss) have been worked out as given in Annex. 5.3 Implementation of these norms in isolation is not recommended keeping in view the overall profitability scenario of the industry. E (iii)xxxxx (iv) (a) In-depth study in regard to CC, PC, PL and also overages is necessary for revision of existing norms/ ceilings on a scientific basis and in accordance with the F established procedures of costing. (b) Para 7 of DPCO, 1995 stipulates yearly revision of norms for CC, PC, PM and PL and does not provide for any ad-hoc increases. This calls for developing indices based on in-depth study and effecting revision of all 0 the norms simultaneously every year. (c) xxxxx [Emphasis supplied by us]

56Copy pinpoint56. It will be seen from a reading of the Report of the Masood Committee that the industry was not at all inclined to furnish information to the Masood Committee and the exercise which it was tasked to perform H

UNION OF INDIA & ORS. v. MIS. CIPLA LTD. & ANR. 561 [MADAN B. LOKUR, J.]

could be carried out only on the basis of the Report of the Sankaran A Committee and the CARs of 6 companies. According. to the Masood Committee this material was clearly inadequate to arrive at any definite conclusion, necessitating the recommendation of setting up an Expert Group to complete the task. Apart from a criticism of the Report, the submission made by learned counsel for Cipla was that all the information B required by the Masood Committee was available in the CARs which were with some Ministry or the other of the Central Government, ifnot with the Ministry of Industry or the Department of Company Affairs. All the CARs could easily be requisitioned by the Masood Committee to fix the norms and this was possible even ifthe industry did not co-operate with the Masood Committee, more particularly since price fixing is a c legislative exercise required to be carried out independently.

57Copy pinpoint57. However, the Masood Committee determined the norms for cost of packing material (without process loss) and these norms were mentioned in Annexure 5.3 of the Report of the Masood Committee' but the Central Government decided not to prescribe the norms for cost of D packing material and accepted the view of the Masood Committee that prescribing the norms for cost of packing material in isolation (and without process loss) wou Id not serve any purpose. Jharwal Committee

58Copy pinpoint58. After the Report of the Masood Committee was ·submitted on E 31" August, 1995 it appears that there was little or no activity from the side of the Central Government or from the side of the industry in respect of fixing the norms "every year" under the DPCO 1995. Our attention has been drawn to an unspecified "demand" made perhaps sometime in early 1997 for a revision in the norms in the cost of packing material. F This was brought out in an official file noting dated 2'id April, 1997 followed by another official file noting of the same date suggesting acceptance of the Report of the Masood Committee, including the recommendation that the norms for cost of packing material (without process loss) could not be implemented in isolation. Jt also appears from the official file notings placed before us by the learned Solicitor General that the G constitution of the NPPA was expected and one of the suggestions put forth in the official file notings was to await the constitution and functioning of the NPPA and authorize it to conduct a thorough study of the type recommended by the Masood Committee. H

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59Copy pinpoint59. The NPPA was eventually constituted on 29th August, 1997. We are not aware of the activities of the NPPA thereafter except that a meeting was held on 27th January, 1998 by the NPPA with representatives of IDMA and OPPI where there was a discussion for the need to revise the norms of conversion cost and packing charges. This was followed by a letter dated 27th April. 1998 sent by the industry indicating that the B existing norms were based on the data available in 1988 which had become outdated and obsolete and since then there had been a significant increase in the cost of various items that go into the calculation of these norms.

60Copy pinpoint60. Apparently as a result of the dialogue and correspondence c between the NPPA and the industry, a Committee called tlie Jharwal Committee was set up on 8th October, 1998. It may be noted that Dr. Jharwal was the Member Secretary of the NPPA. In its Report submitted on 5'" April, 1999 the Jharwal Committee noted that the packing material cost ceiling had been revised on 7•h July, 1994 by the D BICP and thereafter it was revised by the NPPA in February 1998 (again with no objection from the drug industry). Consequently, the only issue addressed by the Jharwal Committee was the fixing of norms for conversion cost, for packing charges and for process Joss.

61Copy pinpoint61. The Jharwal Committee had earlier prepared a draft questionnaire (as was done by the Sankaran Committee and the Masood Committee) sometime in October 1998 and circulated it to the industry so that suggestions could be made for appropriate modifications in the questionnaire. The Jharwal Committee met on 28th November, .1998 and finalized the questionnaire in the absence of an adequate response from the industry. In the next meeting held on ! 2•h December, 1998 the industry expressed its inability to furnish the data in respect of the installed capacity of the companies.

62Copy pinpoint62. Be that as it may, the information required in terms of the questionnaire prepared by the Jharwal Committee was not at all forthcoming from the industry. Faced with these difficulties and in the absence of cooperation from the industry, the Jharwal Committee considered the suggestion of the Department of Chemicals and Petrochemicals for a partial increase in the existing norms of conversion cost and pack!_ng charges based on the inflation factors and till a full- fledged cost study is finalized. Acting upon this suggestion the Jharwal Committee considered several factors as mentioned in its Report as H

UNION OF INDIA & ORS. v. MIS. CIPLA LTD. & ANR. 563 [MADAN B. LOKUR, J.]

well as the wholesale price index and other relevant factors and felt that it would be adequate and reasonable to compensate for the assessed increase in conversion cost and packing charges only to the extent of 50% of the inflation factor which worked out to 4.5%. This was criticized by learned counsel for Cipla as being totally unrealistic.

63Copy pinpoint63. As already mentioned above since the packing material cost had already been revised in February 1998 (after July 1994) no recommendation was made by the Jharwal Committee in this regard. As regards process loss the Jharwal Committee felt that there was no appropriate measure available to suggest any ad hoc revision in the absence of factual data and it was suggested that the process loss may be re-notified at the existing level till revised on the basis of a fresh c study already in progress through the NPPA.

64Copy pinpoint64. One important observation made by the Jharwal Committee in its Report relating to the non-cooperation of the industry and its suggestion to defer a detailed study is required to be quoted. This reads as follows: D "It would also be pertinent to mention that though the Industry Associations (OPPI and IDMA) were impressed upon the need to advise their member companies to furnish the required data to NPPA as early as in October, 1998, there has been a luke-warm response and indifference on their part in furnishing the data. They have even suggested E NPPA to defer the detailed study, which is already in progress. NPPA is continuing its effort to complete the study and accordingly sent couple of reminders to the manufacturers, advising them to submit the data expeditiously. However, the response so far has been far from satisfactory."

65Copy pinpoint65. The conclusions of the Jharwal Committee were to the effect that the existing norms of conversion cost and packing charges may be revised by giving an ad hoc increase of only 4.5% in each as an interim measure; there is no need to revise the said norms on an ad-hoc basis beyond 4.5% unless warranted by the outcome of a detailed study already in progress; ifthe industry does not furnish the required data the same norms may be re-notified every year to meet the requirements of the DPCO 1995 and the norms for process loss may be re-notified at the existing level till revised on the basis of the fresh study already in progress. H

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66Copy pinpoint66. The Report of the Jharw'al Committee and its acceptance by the Central Government led to the issuance of a notification S.0. 578 (E) dated 13m July, 1999 under Paragraph 7 of the DPCO 1995. Through this notification fresh norms were prescribed for conversion cost, packing charges and process loss of raw materials (other than packing materials in conversion) and packing and process loss of packing materials in B packaging for the purposes of Paragraph 7 of the DPCO 1995. Norms for cost of packing material were not prescribed, apparently since this was permitted on actuals. Review of the three Reports c 67. A review of the Report of the Sankaran Committee, the Report of the Masood Committee and the Report of the Jharwal Committee bring out the following salient points: a) The drug industry was unwilling to extend its full cooperation in furnishing data required by the Central Government for prescribing the nonns as required by the DPCO 1987 and the DPCO 1995. One of the possible explanations for this reluctance put forth by learned counsel for Cipla (it was clarified that Cipla was not a member of any drug industry association after a particular point of time) that the members of the drug industry might not have been willing to part with confidential infonnation which could be used by competitors. b) Faced with the reluctance of the drug industry to part with necessary data the Central Government had no option but to carry out its exercise of prescribing norms in terms of Paragraph 6 of the DPCO 1987 and Paragraph 7 of the F DPCO 1995 for conversion cost, packing charges and process loss ofraw materials (other than packing materials in conversion) and packing and process loss of packing materials in packaging. This might have involved some element of ad hoc decision making and guess-work but that G was necessitated by the circumstances confronting the expert bodies set up by Central Government. c) The norms prescribed by the Sankaran Committee appeared to be adequate and actually provided a cushion but required a little tweaking at a later stage due to a variety of factors, including inflation. There does appear to be general H

UNION OF INDIA & ORS. v. MIS. CIPLA LTD. & ANR. 565 [MADAN B. LOKUR, J.]

acceptance by the drug industry of the norms prescribed pursuant to the Report of the Sankaran Committee. Similarly, there does appear to be general acceptance of the ad hoc measures taken post the Masood Committee and eventually the notification issued by the Central Government pursuant to the Report of the Jharwal Committee in respect of conv,~rsion cost, packing charges and process loss.

d) The issue of packing material cost was separately addressed by the Central Government through the BICP and also through decisions taken on 7'h July, 1994 and February 1998. The norms for the cost of packing material were not prescribed or notified in the Official Gazette. However, the c drug industry was entitled to work out the cost of packing material on actuals, and it seemed quite satisfied with the result given that the ceiling was fixed in July 1994 and February 1998.

68Copy pinpoint68. Norms were not prescribed "every year" as required by D Paragraph 7 of the DPCO 1995 particularly for the years 1995-1996, 1996-1997, 1997-1998 and 1998-1999. We were informed thatthe ''year" is from July to June of the following year. The learned Solicitor General sought to justify the absence of prescribing the norms "every year" as required by Paragraph 7 of the DPCO 1995 for the four years mentioned E above. We will be dealing with the submissions in this regard at a later stage. Exercise for subsequent years

69Copy pinpoint69. Post the notification dated lJ'h July, 1999 the next stage for the Central Government was to notify the norms for 2000-2001. This F exercise appears to have been initiated with reference to the norms for the cost of packing material through a letter dated 61h October, 1999 issued by the NPPA to IDMA and similar letters to other associations. What is on record before us is the reply by OPP! to the NPPA of I l'h January, 2000 to the effect that a meaningful response could be given if G the existing norms for packing material costs were made available and some clarity brought regarding the basis for the ceiling fixed. This letter was viewed by the NPPA as yet another delaying tactic in providing the requisite information. Apparently realizing this, OPP! addressed a letter to the NPPA on 9 1h March, 2000 to the effect that an "independent H

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A professional consultant" had been assigned the task "to facilitate expeditious compilation of the requisite data" to assist in the development of norms for cost for packing materials. Although it is not clear from the record, but it does appear that the data compiled (if any) by the independent professional consultant engaged by OPP! was not furnished to the NPPA. B

70Copy pinpoint70. Quite independently, a dialogue was initiated by the NPPA with the drug industry with regard to fixing the norms for conversion cost and for packing charges. It appears that the drug industry associations had engaged an independent consultant in this regard and a two page report given by the consultant was submitted to the NPPA by c a letter dated 2"d March, 2000 by the associations.

71Copy pinpoint71. We have seen the report and it is clearly inadequate. It was pointed out by the NPPA in a letter dated 23'd March, 2000 that no justification had been given in the report for the rise in the industrial average in respect of conversion cost and packing charges nor had any D indication been given as to.how the industrial average had been worked out as also the source of information.

72Copy pinpoint72. No further material has been brought to our notice with regard to fixing the norms for the year 2000-200 I in terms of Paragraph 7 of the DPCO 1995. E

73Copy pinpoint73. As on earlier occasions and in the absence of any further information or data with the NPPA or the Central Government, a decision was taken towards the end of June, 2000 to notify the existing norms for 2000-200 I without allowing for any change from the norms prescribed on J3'h July, 1999. Accordingly, a notification being S.O. 660(E) dated F 12•h July, 2000 was issued and gazetted.

74Copy pinpoint74. Similarly, for 2001-2002 what is placed before us by the Union of India is a two page official noting dated 9'h July, 200 I referring to the · Report of the Jharwal Cornmittee. The official file noting further records that despite requests by the NPPA to IDMA and OPP! requisite G information was not forthcoming from October, 1998 onward. A reference was made to the letter dated 23'd March, 2000 and that no response to it had been received. In view of this, it was proposed (and that proposal was accepted) that the same norms as were prescribed on J3•h July, 1999 may be re-notified as the norms for 2001-2002. There is H

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no dispute that a gazette notification dated 12'h July, 200 I was issued in terms of the decision taken.

75Copy pinpoint75. The stalemate continued even thereafter for the next two years 2002-2003 and 2003-2004 with the NPPA and the Central Government insisting on a response to the questionnaires sent for collecting data for fixing the nonns under Paragraph 7 of the DPCO 1995 and the reluctance of the associations to supply the data. This resulted in the nonns prescribed by the notification dated l 31hJuly, 1999 being re-notified for 2002-2003 by a notification dated 12•h July, 2002 and for the year 2003-2004 by a notification dated 11 •h July, 2003. We do not think it necessary to detail the correspondence between the Central Government and the drug industry except to say that the non-cooperation and dilly-dallying by the c industry in providing necessary infonnation and data continued throughout th is period.

76Copy pinpoint76. There were, however, three significant and distinguishing features during this period. The first was that the Central Government decided to take the services of and involve the Cost Accounts Branch of the Department of Expenditure in the Ministry of Finance to undertake a study for the development of norms for conversion cost, packing charges, and process loss. However, nothing substantive came out of this exercise by the Cost Accounts Branch. The second significant development was an unambiguous decision of the drug industry that the information required by the NPPA or the Central Government was already available in the Cost Audit Reports (CARs) of the various companies. The third was the clear view of the drug industry to not cooperate at all with the Central Government in the exercise of reviewing the norms for conversion cost, packing charges and process loss. F

77Copy pinpoint77. The Indian Pharmaceutical Association wrote to the N PPA on 9•h March, 2002 to the effect that its Executive Council in a meeting held on s•h March, 2002 expressed its inability to participate in the exercise for a study to review the norms for conversion cost, packing charges and process loss. G

78Copy pinpoint78. Similarly, IDMA communicated to the Cost Accounts Branch on I O•h July, 2003 that its Executive Committee had passed the following resolution: "All the major pharmaceutical companies are covered by cost records and cost audit. Hence a cost audit report duly H