Page 1

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 329 OF 2005

UNION OF INDIA & ORS.              .…APPELLANTS    VERSUS

M/S. CIPLA LTD. & ANR.              .…RESPONDENTS  WITH

CIVIL APPEAL NO. 4005 OF 2004

UNION OF INDIA & ORS.     ….APPELLANTS VERSUS

M/S. MARTIN & HARRIS LABORATORIES LTD. & ANR.           ….RESPONDENTS

WITH

CIVIL APPEAL NOS.9609-9610 OF 2016

DR.REDDY’S LABORATORIES LTD.      ….APPELLANT

VERSUS

SECRETARY, GOVT. OF INDIA & ANR.      …RESPONDENTS

WITH

C.A. Nos. 329 of 2005 etc. etc. Page 1 of 94

Page 2

CIVIL APPEAL NO.9585 OF 2016

UNION OF INDIA & ANR.      …APPELLANTS VERSUS

ISHAAN LABS PVT. LTD. & ANR.      …RESPONDENTS

WITH

CIVIL APPEAL NO.9586 OF 2016

UNION OF INDIA & ANR.       …APPELLANTS VERSUS

M/S REMIDEX PHARMACEUTICALS PVT. LTD.        …RESPONDENTS & ANR.

AND

CIVIL APPEAL NOS.9561-9584 OF 2016

UNION OF INDIA & ANR. ETC.ETC.                                 …APPELLANTS VERSUS

M/S. JOHNSON & SMITH CO. & ANR. ETC.ETC.                       …RESPONDENTS

J U D G M E N T

Madan B. Lokur, J.

(a)  The issues that arise in this batch of appeals are as follows:  

(i) Whether the notification dated 13th July, 1999 issued by the Central

Government under Paragraph 7 of the Drugs (Prices Control) Order,

C.A. Nos. 329 of 2005 etc. etc. Page 2 of 94

Page 3

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 in law?

(ii) Whether the notifications dated 12th July, 2000, 12th July, 2001, 12th

July, 2002 and 11th 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?

(iii) Whether  various  notifications  issued  by  the  Central  Government

fixing  the  retail  price  or  ceiling  price  of  formulations  under

Paragraphs 8 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?

(iv) Whether fixing the retail price of a formulation under Paragraph 8 of

the       Drugs (Prices Control) Order, 1995 without first fixing the sale

C.A. Nos. 329 of 2005 etc. etc. Page 3 of 94

Page 4

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) 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 Commodities Act, 1955.

The appeals before us  

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 of 2003 by the Division Bench of the Allahabad High Court.

4. The challenge in the writ petition was to notifications issued by the Central

Government on 12th July, 2000, 12th July, 2001, 12th July, 2002 and 11th July, 2003

re-notifying the norms prescribed by notification dated 13th July, 1999 issued under

Paragraph  7  of  the  DPCO  1995  on  the  basis  of  which  the  retail  price  of

formulations is fixed under Paragraph 8 of the DPCO 1995. It was held by the

High  Court  that  these  notifications  were  issued  mechanically  and  without  any

C.A. Nos. 329 of 2005 etc. etc. Page 4 of 94

Page 5

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.

6. The High Court also quashed the show cause notice dated 16th 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 Pharmaceutical Pricing Authority exempting it from compliance with the

price notifications and to give the quantities of the formulations sold during the

period 1995 till date.  

7. Civil Appeal No. 4005 of 2004 is directed against the judgment and order

dated 27th April, 2002 passed by the Division Bench of the High Court of Punjab &

Haryana at Chandigarh in C.W. P. No. 15677 of 1999 filed by M/s Martin & Harris

Laboratories Ltd.  

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 DPCO 1995.  The third is whether the

C.A. Nos. 329 of 2005 etc. etc. Page 5 of 94

Page 6

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 15th September, 2016 we had declined to go 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 Secretary, Ministry of

Chemicals & Fertilizers, Government of India v. Cipla Ltd & Others.1

10. As far as the second question is concerned, it is really somewhat 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 Writ Petition (C)  No. 6585 of

2004 filed by Ishaan Labs Pvt. Ltd. & another.  

12. 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 earlier  prescribed by the notification

dated 13th July, 1999.  In this context, the contention of Ishaan Labs is that the

notification  dated  11th July,  2003  was  issued  by  the  Central  Government

1  (2003) 7 SCC 1

C.A. Nos. 329 of 2005 etc. etc. Page 6 of 94

Page 7

mechanically and without any application of mind and that it was rightly quashed

by the High Court.  

13. The  second  issue  is  regarding  the  validity  of  the  notification  dated  3rd

September, 2003 fixing the ceiling price of Glipizide formulations under Paragraph

9 of the DPCO 1995.  This is consequential to the first issue. The contention of

Ishaan Labs is that the requirements of Paragraph 7 of the DPCO 1995 were not

adhered to and, therefore, the notification dated 3rd September, 2003 is liable to be

struck down.  

14. Civil Appeal No. 9586 of 2016 and Civil Appeal Nos. 9561-9584 of 2016

arise out of a common judgment and order dated 30th October, 2012 passed by the

Division Bench of the High Court of Karnataka 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 6th August, 2012 in

W. P. No. 6585 of 2004 filed by Ishaan Labs Pvt. Ltd.  

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

C.A. Nos. 329 of 2005 etc. etc. Page 7 of 94

Page 8

adhered to. The correctness of this decision is before us.  

16. 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 2nd March, 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 2nd March, 1995 and deny its

benefit to small scale industries.   

17. Civil  Appeal Nos. 9609-9610 of 2016  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.  

18. 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 13th 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 27th 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 no

merit in the writ petitions and dismissed them.

C.A. Nos. 329 of 2005 etc. etc. Page 8 of 94

Page 9

19. The primary submission made before us by learned counsel appearing on

behalf of Dr. Reddy’s Laboratories was that the ceiling price of the Norfloxacin

formulations could not be fixed prior to fixing the maximum sale price of the bulk

drug Norfloxacin under Paragraph 3 of the DPCO 1995.  It was also contended that

the requirements of Paragraph 7 of the DPCO 1995 were not adhered to while

notifying the ceiling price of Norfloxacin formulations.  

Brief background  

20. The  core  issue  in  this  batch  of  appeals  relates  to  the  interpretation  and

application of Paragraph 7 of the DPCO 1995 and 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 Paragraph 7 of the DPCO 1995 for the purposes of Paragraphs 8 and 9 of the

DPCO 1995.  

21. 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 in accordance with the following formula, namely, ˗˗

R.P. = (M.C.+ C.C.+ P.M.+P.C.) x (1+MAPE/100) + ED. Where- “R.P.” means retail price;

C.A. Nos. 329 of 2005 etc. etc. Page 9 of 94

Page 10

“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.”  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;

“P.M.” means cost of the packing material used in the packing of concerned  formulation,  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  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 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; 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 exceed fifty per cent of the landed cost.

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]

22. 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 determination of material cost or MAPE. It

C.A. Nos. 329 of 2005 etc. etc. Page 10 of 94

Page 11

must, however, be mentioned that in one of the appeals a submission was made

that the retail price of a formulation could not be fixed without first determining

the maximum sale price of a 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 the cost of packing material being fixed as a

norm, the formula for fixing the retail price of formulations under Paragraph 7 of

the DPCO 1995 could not operate.  

23. According to the Central Government, the norms fixed under Paragraph 7 of

the DPCO 1995 have  been fixed after due application of mind to the available

material  and  despite  the  lack  of  any  effective  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 if the 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 1995.   

24. 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

C.A. Nos. 329 of 2005 etc. etc. Page 11 of 94

Page 12

under Paragraph 6 of the DPCO 1987 by a notification dated 17th February, 1989

issued by the Central Government and later updated by another notification dated

15th July, 1993 pursuant to the recommendations of the Sankaran Committee. There

is no challenge to the 1989 or the 1993 norms.  

25. 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 1993 notification prescribed norms 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.

26. 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. ˗˗ The retail price of  the  formulation  shall  be  calculated in  accordance  with  the  following formula, namely :

R.P. = (M.C.+ C.C.+ P.M. + P.C.) x (1 + MAPE/100) + E.D.  Where ˗˗ “R.P.” means retail price, “M.C.” means material cost and includes the cost of drugs and other

pharmaceutical  aids  used  including  overages,  if  any,  plus  process  loss

C.A. Nos. 329 of 2005 etc. etc. Page 12 of 94

Page 13

thereon  specified  as  a  norm  from  time  to  time by  notification  in  the Official Gazette in this behalf,

“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 formulation 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,   

“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 exceed 50 per cent of the landed cost.

Explanation. ˗˗ For  the  purposes  of  above proviso,  “landed cost” shall mean the cost of import of drug inclusive of customs duty and clearing charges.” [Emphasis supplied]

27. We have been informed by the learned Solicitor General that today as many

as 2147 formulations are manufactured in the country. 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 variety in which the formulations could be available. These

could be in the form of plain tablets, coated tablets, sustained release tablets (all

C.A. Nos. 329 of 2005 etc. etc. Page 13 of 94

Page 14

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  dry  powder  and  sterile  dry  powder

liophylised. The packing of the formulations could be in strips of 10 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.

28. It 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:

“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].  

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

29. The  DPCO  1987  was  issued  on  26th August,  1987.   Soon  thereafter,  a

C.A. Nos. 329 of 2005 etc. etc. Page 14 of 94

Page 15

Committee called the Sankaran Committee was set up on 2nd 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 1979 in accordance with the provisions of the DPCO 1979.  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  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 17th February, 1989 and no objection

was apparently raised by any manufacturer of formulations or formulator  –  at

least no objection 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.  

30. The Sankaran Committee held its  first  meeting on 22th September, 1987.

During  the  course  of  deliberations,  it  sought  the  views  of  the  drug  industry

C.A. Nos. 329 of 2005 etc. etc. Page 15 of 94

Page 16

associations such as the Organization of Pharmaceutical Producers of India (OPPI)

and  the  Indian  Drug  Manufacturers  Association  (IDMA)  to  enable  it  to

satisfactorily  complete  its  task.  The  Sankaran  Committee  also  issued  a

questionnaire  to  23  companies  (manufacturers/formulators)  soliciting  some

information.   Subsequently,  the  questionnaire  was  sent  to  another  12  such

companies since the response from the earlier set of 23 companies was somewhat

lukewarm.   

31. After analyzing all the material available before it, hearing the drug industry

associations  and  visiting  a  few  companies  to  be  acquainted  with  the  actual

conversion and production centres in the field, the Sankaran Committee submitted

its Report sometime in April, 1988.

32. A  few  observations  from  the  Report  of  the  Sankaran  Committee  need

mentioning:

(i) The norms 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.O. No. 259(E)

under the DPCO 1979.  These norms as notified on 3rd May, 1979

were essentially the same as notified in 1974.

C.A. Nos. 329 of 2005 etc. etc. Page 16 of 94

Page 17

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  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

Prices  reviewed  the  earlier  norms  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.  

33. 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

C.A. Nos. 329 of 2005 etc. etc. Page 17 of 94

Page 18

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.

(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 100%.

(c) Process loss of raw materials and packing materials: 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 1% (broadly – we

are not going into specifics since it is not necessary) was recommended

in the norms for process loss on raw materials and 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 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

C.A. Nos. 329 of 2005 etc. etc. Page 18 of 94

Page 19

allowed.   

34. 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:

“11. As  regards  the  norms  for  packing  materials  costs,  the  Industry Associations (IDMA & OPPI) 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  notified  as  norms  though  statutorily required.  It is obvious that calculation of norms 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 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 requirements also.  While allowing the actuals it will be necessary 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].

C.A. Nos. 329 of 2005 etc. etc. Page 19 of 94

Page 20

35. Paragraph  16  of  the  Report  is  relevant  for  appreciating  the  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 has tried to work out the likely impact of recommended norms in the prices of a few select formulations.  The effect on 37 representative formulations of various companies is included here. The price increase if the entire recommended norms are announced, varies from 0.45 percent to 47.71 percent.  These formulations cover almost all the dosage forms.  In view of the substantial increase in the price of a 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 further 25% increase 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  0.36% to 26.32 percent change in the existing prices.” [Emphasis supplied by us].  

      36. 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.  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 norm) had not been prescribed and that the drug

C.A. Nos. 329 of 2005 etc. etc. Page 20 of 94

Page 21

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.   

37. The Central Government accepted the Report of the Sankaran Committee

and  a  notification  was  issued  on  17th February, 1989  by  which  the  norms for

conversion cost, for packing charges and for process loss of raw materials (other

than packing materials in conversion and packing) and process loss of packing

materials in packaging were notified with effect from 1st April, 1989.   

38. It  appears  that  even  though  the  Sankaran  Committee  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

notification dated 15th 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

15th 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  loss  of  raw materials  (other  than  packing  materials  in  conversion  and

C.A. Nos. 329 of 2005 etc. etc. Page 21 of 94

Page 22

packing) and process loss of packing materials in packaging which continued to be

as per actuals.

39. At this  stage it  may be mentioned that  pursuant  to the study or  exercise

conducted  by the BICP, the  Central  Government  approved the  ceiling  price  of

packing material cost and made it applicable from 7th July, 1994. However, this

was not notified in the Official Gazette.

Drug Policy, 1994  

40. The Government of India announced the new Drug Policy which was issued

on 15th September, 1994.  Some of the relevant paragraphs of the Policy relate to

the background of the earlier Drug Policy of 1986, 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 to detail the functions

of the National Drug Authority except to say that despite a lapse of more than 20

years the National Drug Authority has not yet been set up.  

41. Subsequent to the new Drug Policy of 1994, the DPCO 1995 was notified on

6th January, 1995 by the Central Government and the NPPA was set up on 29 th

August, 1997.  

Masood Committee

C.A. Nos. 329 of 2005 etc. etc. Page 22 of 94

Page 23

42. 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 24th 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 Government within a period of 2 months from the date of issue of this office memorandum.”      

43. During the course of submissions before us learned counsel for Cipla was

intensely  critical  of  the  Report  submitted  by  the  Masood  Committee  on  31st

August, 1995 and, therefore, some broad details of the contents of the Report are

necessary.  

44. 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 31st May, 1995 in which representatives from various drug

industry associations participated.  The industry associations represented were the

Indian  Drug  Manufacturers  Association  (IDMA),  the  Organization  of

Pharmaceutical Producers of India (OPPI), All India Small Drug Manufacturers

Association (AISDMA) and All India Small Scale Pharmaceutical Manufacturers

C.A. Nos. 329 of 2005 etc. etc. Page 23 of 94

Page 24

Association  (AISSPMA).   In  that  meeting  the  industry  associations  made  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 meet the requirements to give maximum benefit in fastest time and no detailed exercise was required.  

c) 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.  

d) Additional costs on account of GMP [Good Manufacturing Practices] should be given.  

45. 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 31st 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  8th 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  30th 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

C.A. Nos. 329 of 2005 etc. etc. Page 24 of 94

Page 25

reminders and requests to the industry 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.  

46. 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.

47. With regard to the norms for  conversion cost and packing charges,  the

Masood Committee observed in Chapter 3 of its Report 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 BICP 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

C.A. Nos. 329 of 2005 etc. etc. Page 25 of 94

Page 26

possible to review the norms.  The Masood Committee therefore decided to look

into CARs 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 CARs 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.    

48. Notwithstanding the (disputed) discrepancies, the data available in the CARs

was  analyzed  by  the  Masood  Committee  to  determine  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 equal, higher or lower than the existing norms for

conversion cost  with respect  to  various dosage  forms.  The Masood Committee

came to a similar conclusion in the cost of packing charges also.

49. It was then concluded that if  the cost allocation in the CARs was as per

established  costing  procedures  and  the  norms  recommended  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

C.A. Nos. 329 of 2005 etc. etc. Page 26 of 94

Page 27

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.  

50. The Masood Committee also considered other factors including profitability

situation as per the CARs, the revision of packing material ceilings from 7th July,

1994, a decrease in total formulation activity coming under price control from 70%

under the DPCO 1987 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.

51. 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.  

52. 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 information 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,

C.A. Nos. 329 of 2005 etc. etc. Page 27 of 94

Page 28

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 7th July, 1994.  The Masood Committee decided to adopt packing material

costs (without process 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.”

54. The  Masood  Committee  gave  its  conclusion  in  Chapter  7  of  its  Report.

Some of the relevant conclusions are given below (not in seriatim):

(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  implied  that  the  industry  got  the  assessed  CC & 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 for 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

C.A. Nos. 329 of 2005 etc. etc. Page 28 of 94

Page 29

inflation during the period 1986-87 to 1994-95.  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.    

(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, norms for packing material (with process loss) only could be worked out.  

55. 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:

a. On the basis  of  analysis  described in  relevant  chapters,  the  revision of existing  norms  for  CC,  PC  and  PL  in  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.

b. 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.

 c. xxxxx

d. (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 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 the norms simultaneously every year.   (c) xxxxx       [Emphasis supplied by us]       

C.A. Nos. 329 of 2005 etc. etc. Page 29 of 94

Page 30

 56. 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 could be carried out

only on the basis of the Report of the Sankaran 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 required by the Masood Committee was available in the CARs which

were with some Ministry or the other of the Central Government, if not 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 if the industry did not co-operate with the Masood Committee, more

particularly since price fixing is a legislative exercise required to be carried out

independently.  

57. 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 packing material and accepted the view of the

C.A. Nos. 329 of 2005 etc. etc. Page 30 of 94

Page 31

Masood Committee  that  prescribing the  norms for  cost  of  packing  material  in

isolation (and without process loss) would not serve any purpose.

Jharwal Committee  

58. After the Report of the Masood Committee was submitted on 31st 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.  This was brought out in an official file noting dated 2nd

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.  It  also  appears  from  the  official  file  notings  placed

before us by the learned Solicitor General that the 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.

59. 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

C.A. Nos. 329 of 2005 etc. etc. Page 31 of 94

Page 32

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 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.  

60. Apparently  as  a  result  of  the  dialogue  and  correspondence  between  the

NPPA and the industry, a Committee called the 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 5th April, 1999 the Jharwal Committee noted

that the  packing material cost ceiling had been revised on 7th July, 1994 by the

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 loss.  

61. 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

C.A. Nos. 329 of 2005 etc. etc. Page 32 of 94

Page 33

response from the industry.   In the next meeting held on 12 th December, 1998 the

industry  expressed  its  inability  to  furnish  the  data  in  respect  of  the  installed

capacity of the companies.

62. 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 packing 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 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.  

63. 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

C.A. Nos. 329 of 2005 etc. etc. Page 33 of 94

Page 34

loss may be re-notified at the existing level till revised on the basis of a fresh study

already in progress through the NPPA.

64. 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:

“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 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.”

65. 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; if the 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.   

66. The Report  of  the Jharwal  Committee  and its  acceptance  by the  Central

Government led to the issuance of a notification S.O. 578 (E) dated 13th July, 1999

C.A. Nos. 329 of 2005 etc. etc. Page 34 of 94

Page 35

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 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

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:

1. The  drug  industry  was  unwilling  to  extend  its  full  cooperation  in

furnishing data required by the Central Government for prescribing the

norms 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

information which could be used by competitors.

2. 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

C.A. Nos. 329 of 2005 etc. etc. Page 35 of 94

Page 36

prescribing  norms  in  terms  of  Paragraph  6  of  the  DPCO  1987  and

Paragraph 7 of the DPCO 1995 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.  This

might  have  involved  some  element  of  ad  hoc  decision  making  and

guess-work but that was necessitated by the circumstances confronting

the expert bodies set up by Central Government.

3. 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  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 conversion cost, packing charges and process loss.

4. The  issue  of  packing  material  cost  was  separately  addressed  by  the

Central Government through the BICP and also through decisions taken

on 7th July, 1994 and February 1998. The norms for the cost of packing

material were not prescribed or notified in the Official Gazette. However,

C.A. Nos. 329 of 2005 etc. etc. Page 36 of 94

Page 37

the 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.   

68. Norms were not prescribed “every year” as required by Paragraph 7 of the

DPCO  1995  particularly  for  the  years  1995-1996,  1996-1997,  1997-1998  and

1998-1999. We were informed that the “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 above. We will be dealing with the submissions in this regard at a

later stage.

Exercise for subsequent years

69. Post  the  notification  dated  13th July, 1999 the  next  stage  for  the Central

Government was to notify the norms for 2000-2001.  This exercise appears to have

been initiated with reference to the norms for the cost of packing material through

a letter dated 6th October, 1999 issued by the NPPA to IDMA and similar letters to

other associations. What is on record before us is the reply by OPPI to the NPPA of

11th January, 2000 to the effect that a meaningful response could be given if 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.

C.A. Nos. 329 of 2005 etc. etc. Page 37 of 94

Page 38

Apparently realizing this, OPPI addressed a letter to the NPPA on 9th March, 2000

to the effect that an “independent 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 OPPI was not furnished to the NPPA.

70. 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 a letter dated 2nd March, 2000 by the associations.

71. We have seen the report and it is clearly inadequate. It was pointed out by

the NPPA in a letter dated 23rd 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 indication been given as to how the industrial average

had been worked out as also the source of information.   

72. No further material has been brought to our notice with regard to fixing the

norms for the year 2000-2001 in terms of Paragraph 7 of the DPCO 1995.

73. 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

C.A. Nos. 329 of 2005 etc. etc. Page 38 of 94

Page 39

June, 2000 to notify the existing norms for 2000-2001 without allowing for any

change from the norms prescribed on 13th July, 1999.  Accordingly, a notification

being S.O. 660(E) dated 12th July, 2000 was issued and gazetted.

74. Similarly, for 2001-2002 what is placed before us by the Union of India is a

two page official noting dated 9th July, 2001 referring to the Report of the Jharwal

Committee.  The official  file  noting further  records that  despite  requests  by the

NPPA to  IDMA  and  OPPI  requisite  information  was  not  forthcoming  from

October, 1998 onward.  A reference was made to the letter dated 23 rd 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 13 th July,

1999 may be re-notified as the norms for 2001-2002.  There is no dispute that a

gazette notification dated 12th July, 2001 was issued in terms of the decision taken.

75. 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 norms under Paragraph

7 of the DPCO 1995 and the reluctance of the associations to supply the data. This

resulted in the norms prescribed by the notification dated 13th July, 1999 being

re-notified for 2002-2003 by a notification dated 12th July, 2002 and for the year

2003-2004 by a notification dated 11th July, 2003. We do not think it necessary to

detail the correspondence between the Central Government and the drug industry

C.A. Nos. 329 of 2005 etc. etc. Page 39 of 94

Page 40

except  to  say  that  the  non-cooperation  and  dilly-dallying  by  the  industry  in

providing necessary information and data continued throughout this period.   

76. 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.  

77. The Indian Pharmaceutical  Association wrote to the NPPA on 9 th March,

2002 to the effect that its Executive Council in a meeting held on 8 th 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.   

78. Similarly, IDMA communicated to the Cost Accounts Branch on 10 th July,

2003 that its Executive Committee had passed the following resolution:

C.A. Nos. 329 of 2005 etc. etc. Page 40 of 94

Page 41

“All the major pharmaceutical companies are covered by cost records and cost  audit.   Hence a cost  audit  report  duly audited by a practicing cost accountant  is  submitted  by  these  companies  to  the  cost  audit  branch, Department of Company Affairs, New Delhi.  NPPA should be requested to use these readily available audited cost audit reports,  for the purpose of revision of CC/PC norms, instead of asking the companies to again send the cost data in separate formats which will be voluminous and time consuming for the industry.”  

79. The  Taxation  and  Pricing  Policy  Committee  of  OPPI,  addressed  a  letter

dated  22nd July,  2003  to  the  Cost  Accounts  Branch  to  the  effect  that  the

representatives of OPPI and IDMA had suggested in a meeting held on 5th July,

2002 with the NPPA that a study of the conversion cost and packing charges should

be based on the CARs already available with the Central Government and that the

study should be conducted on that basis.

80. The Cost Accounts Branch informed OPPI by a letter dated 2nd September,

2003 that a study based “entirely on the information available in the cost audit

reports might result in the Government not obtaining a total picture of the actual

conversion cost, packing charges and process loss in the drug formulation industry.

Our aim, when we requested the industry for making available the cost data and

other information vide our questionnaire, was to take into account the actual cost

implications of all the factors in the drug industry and not restrict it to only those

where the cost audit report is available.” It was added that despite the availability

of the CARs “it was considered appropriate to frame the questionnaire for seeking

the company specific information/data relevant to the study under reference.  The

C.A. Nos. 329 of 2005 etc. etc. Page 41 of 94

Page 42

questionnaire  was  circulated  to  the  pharmaceutical  units  with  the  purpose  of

safeguarding the interest of industry and taking them into confidence to develop

the  realistic  CC,  PC and  PL norms  based  on  the  actual  cost  data/information

available with the formulation companies.”  

81. It will be seen from the above that as far as the drug industry was concerned,

the CARs could form the basis for prescribing the norms as required by Paragraph

7 of the DPCO 1995. On the other hand, the Masood Committee had concluded

that the data provided through the CARs was not entirely reliable. That apart, to

obtain an overall picture of the ground realities, the NPPA, the Central Government

and  the  Cost  Accounts  Branch  felt  that  the  information  called  for  through  the

questionnaires would be more comprehensive and beneficial rather than the CARs

of a handful of manufacturers/formulators.

82. On the basis of the above material, the submission of the learned Solicitor

General  was  that  the  drug  industry  did  not  extend  the  necessary  cooperation

expected of it, that the notifications issued by the Central Government prescribing

the  norms  for  conversion  cost,  packing  charges  and  process  loss  were  not

mechanically issued but were issued after due application of mind to the available

material and that the decisions taken by the Central Government were subject to

revision under the provisions of the DPCO 1995 but the manufacturers/formulators

did not take recourse to these provisions and instead approached the Courts after

C.A. Nos. 329 of 2005 etc. etc. Page 42 of 94

Page 43

much delay and by way of an after-thought. These submissions were refuted by the

learned counsel appearing for Cipla and other manufacturers/formulators.

Judicial review  

83. The primary issues before us relate to (i) the legitimacy and soundness of the

materials on the basis of which the norms were prescribed for application of the

formula given in Paragraph 7 of the DPCO 1995 and on the basis of which the

retail price and ceiling price of formulations were fixed under Paragraphs 8 and 9

of the DPCO 1995; (ii)  the effect  of  the failure of  the Central  Government to

prescribe the norms under Paragraph 7 of the DPCO 1995 on a yearly basis, and

(iii) the effect of the failure of the Central Government to prescribe the norms for

cost of packing material under Paragraph 7 of the DPCO 1995. The issue before us

does not relate to the actual norms or actually fixing the retail price or ceiling price

of formulations under Paragraphs 8 and 9 of the DPCO 1995 in the sense that there

is  no dispute that  for  the purposes of  fixing the retail  price or  ceiling price of

formulations  under  Paragraphs  8  and  9  of  the  DPCO  1995  the  norms  were

prescribed and the formula given in Paragraph 7 thereof was adhered to.  Even

otherwise, the actual norms and price fixing on the basis of the norms is out of

bounds for us.

(i) Issue of non-application of mind

C.A. Nos. 329 of 2005 etc. etc. Page 43 of 94

Page 44

84. The first submission of learned counsel for Cipla relates to the materials and

the non-application of mind resulting in the Central Government prescribing the

norms under Paragraph 7 of the DPCO 1995. The challenge to the retail price and

ceiling price of formulations fixed through various notifications is only collateral

or consequential. In its impugned judgment and order the Allahabad High Court

held  that  there  was  no  application  of  mind  by  the  Central  Government  in

prescribing the norms for conversion cost, packing charges and process loss. The

second conclusion is that the Central Government failed to adhere to the provisions

of Paragraph 7 of the DPCO 1995 in not prescribing the norms on a yearly basis.

85. Although there is no direct challenge to the notification dated 13th July, 1999

prescribing the norms under Paragraph 7 of the DPCO 1995 it was submitted that

that notification and subsequent notifications were issued without any application

of mind.  It was in this context that it had become necessary to make a detailed

reference to the Reports of the Sankaran Committee, the Masood Committee, the

Jharwal Committee, the file notings and correspondence which were the materials

before the Central Government and which led to the issuance of the notifications

prescribing the norms for conversion cost, packing charges and process loss.

86.  Paragraph 7 of  the  DPCO 1995 consists  of  two parts  –  prescribing the

norms and applying those prescribed norms to the formula for arriving at the retail

price of a formulation. In the first instance, we are concerned with prescribing the

C.A. Nos. 329 of 2005 etc. etc. Page 44 of 94

Page 45

norms under Paragraph 7 of the DPCO 1995 on the basis of the recommendations

of the Masood Committee and the Jharwal Committee since it was contended that

there was no application of mind in doing so. It may be mentioned that there is no

challenge to the norms prescribed as such on the ground of arbitrariness or being

ultra  vires the  DPCO 1995  or  the  Essential  Commodities  Act,  1955.  What  is

presently  questioned is  only  the  application  of  mind and the  soundness  of  the

materials on the basis of which the norms were prescribed, namely, the Masood

Committee Report and the Jharwal Committee Report.  Learned counsel  had no

criticism of the Sankaran Committee Report and indeed generally supported its

conclusions and recommendations.

87. A perusal  of  the Report  of  the Masood Committee and subsequently the

Report of the Jharwal Committee clearly brings out that the Central Government

initiated a detailed exercise for prescribing the norms but unfortunately the drug

industry did not extend its full cooperation in the exercise and declined to provide

necessary  information  and  data  despite  requests  and  reminders.  Therefore,  the

Central  Government  was  left  with  no  alternative  but  to  notify  the  norms  in

compliance with the provisions of the DPCO 1995 on the basis of the materials

already available.   The first  question is,  could the Central  Government rely on

these materials?  

C.A. Nos. 329 of 2005 etc. etc. Page 45 of 94

Page 46

88. The Report  of  the Masood Committee was roundly criticized by learned

counsel for Cipla since its exercise was hasty and carried out without any field

visits  and  without  considering  ground  realities.  The  Report  of  the  Jharwal

Committee was also strongly criticized by learned counsel.  The general  line of

criticism  was  that  the  Reports  of  the  Masood  Committee  and  the  Jharwal

Committee were based on flawed reasoning and an incorrect appreciation of the

data and facts. As far as the Report of the Masood Committee is concerned, it was

also criticized for not recommending the norms – a task it was set up to perform.

The Masood Committee merely passed on the buck to another expert  body for

conducting an in-depth study for recommending the norms for conversion cost and

packing charges. However, it must be said that the Masood Committee did some

useful  work by recommending the norms for  cost  of  packing material  but  that

could not be acted upon by the Central Government in isolation and in the absence

of  norms on process  loss.  A significant  observation  of  the Masood Committee

related to the stipulation for a yearly notification of norms in terms of the DPCO

1995.  The Report of the Jharwal Committee was criticized for taking, amongst

others, an unrealistic view of the inflation factor and not really adding anything of

value to the Report of the Sankaran Committee.  

89. There is no doubt that the Masood Committee Report was the justification

for the Central Government not revising the norms recommended by the Sankaran

C.A. Nos. 329 of 2005 etc. etc. Page 46 of 94

Page 47

Committee and the Report of the Jharwal Committee was the basis for revising the

norms as notified on 13th July, 1999. These Reports were the antecedent material

available  with the Central  Government  for  the purposes  of  Paragraph 7 of  the

DPCO  1995.  Can  this  “antecedent  material”  be  subject  to  judicial  review  or

judicial scrutiny and if so to what extent?   

90. The criteria  for  price fixing can be statutory or  non-statutory (such as  a

Report).  This  distinction  was brought  out  in Rayalaseema Paper  Mills  Ltd.  v.

Government of A.P.2 . In that decision, a committee of officials was appointed to

consider the factors relating to fixing the rates of royalty on the forest produce to

be  supplied  to  wood-based  industries  on  a  sustained  basis,  and  to  make

recommendations to the Government. The committee made its recommendations

which were accepted by the State Government and an appropriate G.O.Ms was

issued.  The  result  of  the  G.O.Ms  was  that  the  royalty  for  bamboo  went  up

considerably and continued to rise every year. The G.O.Ms was then challenged in

a writ petition.   

91. The submission made by the appellants in that case was that even though

“price  fixation  is  neither  the  function  nor  the  forte  of  the  court,  it  is  neither

concerned with the policy nor the rates. But the court cannot deny to itself the

jurisdiction  to  enquire  into  the  question,  in  appropriate  proceedings,  whether 2

(2003) 1 SCC 341

C.A. Nos. 329 of 2005 etc. etc. Page 47 of 94

Page 48

relevant considerations have gone in and irrelevant considerations kept out of the

determination of the price.”  

92. In that context and in response to the submission made, this Court drew a

distinction between price fixation governed by statutory considerations and price

fixation governed by non-statutory considerations. It was held that on this basis

Union of India v. Cynamide India Ltd. & Anr.3 was distinguishable since it dealt

with price fixation based on statutory considerations. In a case of price fixation

having its origin on non-statutory materials the scope of judicial scrutiny would be

far less. It was said in paragraph 15 of the Report as follows:

“This  Court  was  examining  [in  Cynamide  India]  the  scope  of  judicial scrutiny in the matters of price fixation where it was governed by statutory provisions. The scope of judicial scrutiny would be far less where the price fixation  is  not  governed by the  statute  or  a  statutory  order.  Where the legislature  has  prescribed  the  factors  which  should  be  taken  into consideration and which should guide the determination of price, the courts would examine whether the considerations for fixing the price mentioned in the statute or the statutory order have been kept in mind while  fixing  the  price  and  whether  these  factors  have  guided  the determination.  The  courts  would  not  go  beyond  that  point. In  the present appeals, there is no law, or any statutory provision laying down the criteria or the principles which must be followed, or which must guide the determination of rates of royalty. No doubt, any arbitrary action taken by the State would be subject to scrutiny by the courts because arbitrariness is the very antithesis of rule of law. But this does not mean that this Court would  act  as  an  Appellate  Authority  over  the  determination  of  rates  of royalty by the Government….. It  is open to the Government to fix such price as it thinks appropriate having regard to public interest, which inter alia, may include interest of revenue, environmental, ecology, the need of

3

(1987) 2 SCC 720

C.A. Nos. 329 of 2005 etc. etc. Page 48 of 94

Page 49

mills and the requirements of other consumers. The price is not to be fixed keeping in mind the requirements of the mills alone.” [Emphasis supplied].

93. In these appeals,  we too are presently concerned with a stage anterior to

actual price fixation namely recommending and prescribing the norms that would

eventually  form  the  basis  for  fixing  the  retail  price  and  ceiling  price  of

formulations.  The  view  expressed  in  Rayalaseema  Paper  Mills  would,  in  our

opinion,  apply  to  the  Reports  of  the  Masood  Committee  and  the  Jharwal

Committee set up by the Central Government for recommending the norms for the

purposes  of  Paragraph  7  of  the  DPCO  1995.  The  Reports  were  antecedent

materials, non-statutory and recommendatory and could have been rejected by the

Central  Government.  The  Masood  Committee  did  not  (and  perhaps  could  not)

recommend  any  norms  for  conversion  cost,  packing  charges  and  process  loss,

except for cost of packing material (without process loss). The Masood Committee

was alive to the statutory requirement of prescribing the norms on a yearly basis

and therefore referred to it.  

94. However, as far as the Report of the Jharwal Committee is concerned, the

Central Government accepted and implemented it by issuing a notification on 13th

July, 1999 under Paragraph 7 of the DPCO 1995 – but still did not prescribe the

norms for cost of packing material recommended by the Masood Committee, an

issue that will be considered later.  

C.A. Nos. 329 of 2005 etc. etc. Page 49 of 94

Page 50

95. While learned counsel for Cipla might have serious differences of opinion

with the recommendations of these particular non-statutory Reports,  generally a

challenge to Reports prepared by expert bodies is not easy but is subject to lesser

judicial scrutiny.  To rephrase what was said in Prag Ice and Oil Mills and Anr. v.

Union of India4 a factor here or a factor there that should have been taken into

account but has been ignored should not invalidate the Reports - mere errors in the

Reports are not subject to judicial review.

96. That  there  can be a  legitimate difference of  opinion (sometimes serious)

between two expert bodies is not at all unusual. In Shri Sitaram Sugar Co. Ltd. v.

Union of India5 the decision of  the  Central Government was supported by the

recommendations  of  the  Tariff  Commission.  These  recommendations  were

criticized  in  some respects  by  the  BICP. Some members  of  the  sugar  industry

accepted the views of the Central Government while some did not. Considering the

overall circumstances, the Constitution Bench observed that the conclusions of the

Central Government are expert conclusions which were not shown to be arbitrary,

discriminatory,  unreasonable  or  ultra  vires.  Reliance  was  placed  upon  the

following passage from Railroad Commission of Texas v. Rowan & Nichols Oil

Company6:

4  (1978) 3 SCC 459 5  (1990) 3 SCC 223 6  311 US 570, 85 L Ed 358, 362

C.A. Nos. 329 of 2005 etc. etc. Page 50 of 94

Page 51

“Nothing  in  the  Constitution  warrants  a  rejection  of  these  expert conclusions.  Nor, on the basis  of  intrinsic skills  and equipment,  are the federal courts qualified to set their independent judgment on such matters against that of the chosen State authorities.... When we consider the limiting conditions of litigation — the adaptability of the judicial process only to issues  definitely  circumscribed  and  susceptible  of  being  judged  by  the techniques and criteria within the special competence of lawyers — it is clear that the Due Process Clause does not require the feel of the expert to the  supplanted  by  an  independent  view  of  judges  on  the  conflicting testimony and prophecies and impressions of expert witnesses”. This observation is of even greater significance in the absence of a Due Process Clause.”

97. The feel  of  the  expert  is  important,  if  not  conclusive. Insofar  as  we are

concerned,  two  expert  Committees  made  their  recommendations.  These

recommendations were then examined and considered by the Central Government

and on the basis of the expert conclusions arrived at, the norms were prescribed by

a notification dated 13th July, 1999 issued under Paragraph 7 of the DPCO 1995.

Under the circumstances, the question of judicial scrutiny of the Reports of the

Masood  Committee  and  the  Jharwal  Committee  and  the  acceptance  of  their

recommendations by the Central Government is not only limited, but in this case it

does not arise. It  cannot be said that the notification dated 13 th July, 1999 was

based on no material  or  was  issued without  any application  of  mind.  Learned

counsel  for  Cipla  may  disagree  with  the  contents  of  the  materials,  but  cannot

ignore their existence or that they were considered by the Central Government.   

98. Fixing the price of any commodity is not only difficult but also tricky. There

is material to be considered, a bundle of factors to be considered and appropriate

C.A. Nos. 329 of 2005 etc. etc. Page 51 of 94

Page 52

weight is to be given to the material and the factors. This is not easy to decide and

there will always be some criticism with regard to either the material utilized or the

factors considered or the weight attached to the materials and factors. In matters

pertaining to drug formulations, it is not only an issue of demand and supply but

also the ability of a common person to afford the formulation. At the same time,

the manufacturer must also make some profit  and be in a position to invest  in

research and development. There simply cannot be any mathematical precision in

fixing the price of a commodity. More than enough elbow room or a play in the

joints  is  required to be given in such matters – and even then the price fixing

authority may commit an error. Once this is appreciated, it will be realized that the

task before the Central Government in prescribing the norms was not easy.    

Failure to consider the cost audit reports

99. Learned counsel for Cipla contended that assuming the drug industry did not

extend any cooperation in providing necessary data, the CARs were nevertheless

material  available  and  they  could  be  and  should  have  been  made  use  of  for

recommending the norms by the Masood Committee and the Jharwal Committee to

the Central Government. In other words, relevant material was not considered.  

100. The value or utility of the CARs has already been mentioned above, which is

that the Masood Committee did not find the information contained in whatever

CARs were available to be fully reliable.  This view was accepted by the Central

C.A. Nos. 329 of 2005 etc. etc. Page 52 of 94

Page 53

Government. Even the Cost Accounts Branch of the Department of Expenditure in

the Ministry of Finance did not find the CARs of particular use for the purposes of

prescribing the norms. Additionally, no study could be based entirely on the CARs.

We must accept the opinion of expert bodies in this regard. We do not have any

contrary expert opinion on the subject and must go by the existing expert views.

Proceeding on this basis, it would be incorrect on the part of Cipla and indeed the

drug industry to  say  and contend that  whatever  information is  required by the

Central Government for fixing the norms was already available in the CARs and

nothing more need be supplied to the Central Government.

101. Assuming the submission of Cipla and the drug industry to be correct, it

would certainly not have been a problem at all for each company to fill up the

questionnaires sent by each of the Committees, if all the information required by

the questionnaires was already available in the CAR of each company. Assuming

again that the required information could be extracted by each Committee from the

CAR, it could more easily be extracted by each company from its own CAR and

provided to  the  Masood  Committee  and the  Jharwal  Committee.   Under  these

circumstances,  it  is  inexplicable  why the  drug  industry  declined  to  fill  up  the

questionnaires  sent  to  their  member  companies  from  time  to  time.  There  is

certainly more to it than meets the eye.  

C.A. Nos. 329 of 2005 etc. etc. Page 53 of 94

Page 54

102. It  is  true,  as  contended  by  learned  counsel  for  Cipla  that  no

manufacturer/formulator is under an obligation to furnish whatever information is

required  by  the  Central  Government  including  information  that  might  be

confidential.   But that  does not  mean that  absolutely no information should be

supplied by any company or incomplete information should be supplied by a very

few of them. It would certainly be more appropriate for each company to have

responded to the questionnaires sent with a communication that some particular

information  is  not  being  furnished  for  reasons  of  confidentiality.  But  no  such

courtesy was extended.  While there may not be a statutory obligation on each

manufacturer/formulator to furnish information for prescribing the norms, there is

certainly  a  moral  and social  obligation  on them to  furnish  information so  that

appropriate  norms could be  notified  not  only  for  their  benefit  but  also  for  the

benefit of the consumers. The preamble to the Essential Commodities Act, 1955

cannot be forgotten. By not furnishing the information required, the drug industry

pushed the  Central  Government  into a  corner  leaving it  with no option but  to

prescribe the norms on the basis of available material and later re-notify the norms.

103. It  is  also  true  that  fixing  the  price  of  formulations  based  on  the  norms

prescribed under Paragraph 7 of the DPCO 1995 is a legislative activity which the

Central Government was obliged to carry out on its own research and assessment,

assuming  there  was  no  cooperation  from  the  manufacturers/formulators.   The

C.A. Nos. 329 of 2005 etc. etc. Page 54 of 94

Page 55

efforts made by the Masood Committee and the Jharwal Committee for prescribing

the norms for the purposes of Paragraph 7 of the DPCO 1995 were steps leading up

to this legislative activity. It is nobody’s case that no preliminary steps were taken

or that no exercise was undertaken for arriving at appropriate norms - the steps and

exercise were in fact undertaken through expert Committees but the material used

in  the  exercise  and  the  resultant  Reports  were  criticized  by  learned  counsel

appearing for Cipla.  We are of the view that given the circumstances that the two

Committees were faced with and given the virtual non-cooperative attitude of the

drug industry, the Central  Government prescribed the norms and Cipla and the

drug industry were obliged to accept them as notified without much ado. It cannot

be that the drug industry does not supply necessary information and data to the

expert  Committees  appointed  by the  Central  Government  and then  blames  the

Central Government for taking a decision without necessary information and data.

104. The failure of the drug industry to extend effective cooperation appears to be

an  endemic  problem.  A  situation  somewhat  similar  to  the  one  that  we  are

concerned with had arisen in Union of India v. Swiss Garnier Life Sciences.7  In

that decision, it was noticed by this Court that communications were sent to the

manufacturers/formulators of a particular formulation to provide reasons why that

formulation  should  not  be  classified  as  a  derivative  of  another  formulation.  In

7  (2013) 8 SCC 615

C.A. Nos. 329 of 2005 etc. etc. Page 55 of 94

Page 56

paragraph 4 of  the  Report,  it  was noted that  the requisite  information was not

furnished, even after a substantial lapse of time and a reminder.  This observation

was reiterated in paragraph 44 of the Report and it was held that in view of the

refusal of the manufacturers/formulators to furnish the detailed information, the

Central Government was well within its jurisdiction to resort to Paragraph 11 of

the DPCO 1995 and fix the price of the formulation on the basis of information

available.   

105. Similarly, in Secretary, Ministry of Chemicals and Fertilizers v. Cipla Ltd.8

it  was  observed  by  this  Court  in  paragraph  8.4  of  the  Report  that  bulk  drug

producers  did  not  disclose  necessary  information  to  the  Central  Government,

despite  a  request  having been made in that  regard and that  there was no good

reason why the relevant information should be withheld.  It was observed:

“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 the writ petitioners and there is no good reason why they should withhold all this relevant information and harp on the ORG data. There is no need to resort to guesswork when the actual figures are available at the doorsteps of the respondents.”

106. Be that as it  may, our conclusion on this aspect  of the matter is  that  the

antecedent  materials  (the  Reports)  on  the  basis  of  which  the  norms  were 8  (2003) 7 SCC 1

C.A. Nos. 329 of 2005 etc. etc. Page 56 of 94

Page 57

recommended  and  then  prescribed  under  Paragraph  7  of  the  DPCO  1995  are

subject  to  lesser  judicial  scrutiny,  limited  perhaps  only  to  the  application  of

completely erroneous principles. The burden for demonstrating the application of

completely  erroneous  principles  is  heavy  as  it  is  and  it  is  heavier  still  if  the

antecedent  material  is  prepared by experts.  The onus  of  discharging the  heavy

burden must  necessarily  fall  on the challenger, and Cipla  has not  been able  to

sustain the challenge. There can be and are differences of opinion but we cannot

and will not reconsider the opinion of experts, particularly in matters of economic

affairs or other economy related issues unless there is extremely strong reason to

do so.  

107. We end  this  discussion  with  a  conclusion  arrived  at  by  the  Constitution

Bench in Shri Sitaram Sugar Co. Ltd. in paragraph 49 of the Report:

“Where a question of law is at issue, the court may determine the rightness of the impugned decision on its own independent judgment. If the decision of the authority does not agree with that which the court considers to be the right one, the finding of law by the authority is liable to be upset. Where it is  a  finding  of  fact,  the  court  examines  only  the  reasonableness  of  the finding. When that finding is found to be rational and reasonably based on evidence, in the sense that all relevant material has been taken into account and no irrelevant material has influenced the decision, and the decision is one which any reasonably minded person, acting on such evidence, would have come to, then judicial review is exhausted even though the finding may not necessarily be what the court would have come to as a trier of fact. Whether  an  order  is  characterised  as  legislative  or  administrative  or quasi-judicial,  or,  whether  it  is  a  determination  of  law  or  fact,  the judgment of the expert body, entrusted with power, is generally treated as final and the judicial function is exhausted when it is found to have “warrant in the record” and a rational basis in law: See Rochester Tel.

C.A. Nos. 329 of 2005 etc. etc. Page 57 of 94

Page 58

Corp. v. United States9. See also Associated Provincial Picture Houses Ltd. v. Wednesbury Corporation10.” [Emphasis supplied]

This view was reaffirmed in paragraph 58 of the Report in the following words:

“Price fixation is not within the province of the courts. Judicial function in respect  of  such  matters  is  exhausted  when  there  is  found  to  be  a rational basis for the conclusions reached by the concerned authority. As stated by Justice Cardozo in Mississippi Valley Barge Line Company v. United States of America.11 “The structure of a rate schedule calls in peculiar measure for the use of that  enlightened  judgment  which  the  Commission  by  training  and experience is qualified to form.... It is not the province of a court to absorb this function to itself.... The judicial function is exhausted when there is found  to  be  a  rational  basis  for  the  conclusions  approved  by  the administrative body.” [Emphasis supplied]

108. For the above reasons we disagree with the Allahabad High Court and hold

that the various notifications issued under Paragraph 7 of the DPCO 1995 in 1999

and  thereafter  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 were issued after due

application of mind and based on available material duly examined by an expert

body. The notifications were not arbitrarily issued nor were they discriminatory in

any manner at all nor were they issued mechanically nor could it be said that they

were issued without any application of mind.

Re-notification of norms

109. Another facet of the submission of learned counsel for Cipla was that the 9  307 US 125 (1939) : 83 L ed 1147 10  (1948) 1 KB 223 : (1947) 1 All ER 498 11  292 US 282, 286-287 : 78 L ed 1260, 1265

C.A. Nos. 329 of 2005 etc. etc. Page 58 of 94

Page 59

same norms prescribed by the notification dated 13th July, 1999 could not have

been notified mechanically year after year and the fact that the norms were simply

re-notified from 2000 to 2003 is a clear indication of non-application of mind by

the Central  Government to the issue at  hand. In response,  the learned Solicitor

General referred to  Shri Malaprabha Coop. Sugar Factory v. Union of India. 12

In that  decision,  it  was noted that  the levy sugar  prices for  the 1975-76 sugar

season were notified at the same level as those in the previous season.  This Court

took the view that the re-notification could not be faulted on grounds of arbitrary

exercise of power for several reasons mentioned in paragraph 84 of the Report. In

other words, the concept or principle of re-notification is not unheard of and there

is no illegality per se in re-issuing the norms without any change, but the reasons

for re-notification ought to exist – re-notification should not be a short-cut method

to be routinely employed.   

110. What then are the reasons that prompted the Central Government to re-notify

the norms prescribed by the notification dated 13th July, 1999? On the one hand,

there was virtual non-cooperation from the drug industry in providing information

to the Central Government despite repeated requests and reminders even by expert

Committees  constituted  for  the  purpose.  On  the  other  there  was  a  perceived

statutory obligation on the Central Government to notify the norms every year and

12  (1994) 1 SCC 648

C.A. Nos. 329 of 2005 etc. etc. Page 59 of 94

Page 60

that responsibility could not be effectively discharged without the cooperation of

the drug industry. Therefore the Central Government, faced with an extra-ordinary

situation and a stalemate putting the consumers of an essential commodity at the

mercy of the drug industry, had no option but to re-notify the existing norms in

public interest on the basis of the available material.  

111. We have  adverted  to  the  issues  that  confronted  the  Central  Government

during this period, namely, the unambiguous decision of the drug industry not to

extend any cooperation to the Central Government in arriving at appropriate norms

for  the  purposes  of  Paragraph  7  of  the  DPCO 1995.  The  views  of  the  Indian

Pharmaceutical  Association  and  the  IDMA have  already  been  referred  to.  The

insistence of the drug industry to work out the norms on the basis of the CARs was

another stumbling block staring at the face of the Central Government. The Cost

Accounts Branch of the Department of Expenditure in the Ministry of Finance, a

neutral body in that sense, had clearly expressed the view that the norms could not

be  effectively  determined  only  on  the  basis  of  the  CARs.  Finally,  the

non-cooperation of the drug industry from October 1998 onwards was another road

block. The overall attitude of the drug industry appears to be one of profit making

or  preserving  commercial  interests,  while  the  concern  should  really  be  of

promoting consumer interest.  Faced with these competing interests,  the Central

Government sided with the consumer and cannot be faulted for it.  The Central

C.A. Nos. 329 of 2005 etc. etc. Page 60 of 94

Page 61

Government  did  not  act  in  a  routine or  mechanical  manner  in  re-notifying the

norms every year from 2000 onward. In our opinion, the explanation put forward

by the learned Solicitor General deserves acceptance.

112. We conclude that the re-notification of the prescribed norms in the period

2000  to  2003  was  not  mechanical  or  without  any  application  of  mind.  The

materials  were before the Central  Government and there was no change in the

content of the materials. If there was, the drug industry failed to effectively point it

out as a result of their non cooperative attitude. We also hold that re-notification of

the prescribed norms is  per se  not impermissible and in the present case it was

justified in the circumstances.  

Challenge to the actual norms prescribed

113. In  Prag Ice & Oil Mills it was held that price fixation is really legislative in

character since it satisfies the tests of legislation.  Similarly, in Cynamide India it

was held that price fixation is more in the nature of a legislative activity than in

any other.  Price fixation may affect manufacturers and producers or commodities

but  those  who  are  most  vitally  affected  are  the  consumers.  Similarly,  in

Glaxosmithkline Pharmaceuticals Ltd. v. Union of India13 it was held that price

fixation  by  the  Central  Government  under  the  DPCO  is  in  the  nature  of  a

legislative measure and the dominant object and purpose of such price fixation is

13  (2014) 2 SCC 753

C.A. Nos. 329 of 2005 etc. etc. Page 61 of 94

Page 62

the equitable distribution and availability of commodities at a fair price.  A similar

view was expressed by a Constitution Bench of this Court in Shri Sitaram Sugar

Company Ltd.  when it was said: “Price fixation is in the nature of a legislative

action even when it is based on objective criteria founded on relevant material.”  In

Saraswati  Industrial  Syndicate  Ltd. v.  Union  of  India14 this  Court  was  more

specific when it  said that  “Price fixation is  more in  the nature of  a legislative

measure even though it may be based upon objective criteria found in a report or

other material.”

114. The norms fixed by the Central Government are of general application, they

are not intended to benefit or harm any particular manufacturer or formulator and

indeed no manufacturer or formulator is required to be heard (or was heard) in the

determination, they are notified in the Official Gazette for the information of the

general  public  and in  arriving at  the norms the general  attributes of  legislative

activity  are  attended  to  by  the  Central  Government  for  the  benefit  of  the

consumers. The notification of the norms therefore has the character of legislative

activity.

115. No submission was made before us to the effect that the formula given in

Paragraph 7 of  the DPCO 1995 was not  applied  proprio vigore  by the Central

Government.  The  statutory  criterion  for  price  fixing is  the  formula  given  in

14  (1974) 2 SCC 630

C.A. Nos. 329 of 2005 etc. etc. Page 62 of 94

Page 63

Paragraph 7 of  the DPCO 1995.  Whether  this  formula has been operated as it

should be is certainly subject  to judicial review. Therefore, while operating the

formula, if the Central Government did not take conversion cost into consideration

(for example) or took into consideration some factor not in the formula then, the

Court could certainly strike down the retail price or the ceiling price so fixed by the

Central Government on the ground that relevant factors were ignored or irrelevant

factors were taken into consideration. No such allegation was made and no such

contention was advanced by learned counsel  for  Cipla.  Therefore,  we need not

dwell on this aspect.  

(ii) Yearly prescription of norms

116. It may be recalled that prior to 1995, 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 were

prescribed by notifications issued on 17th February, 1989 and 15th July, 1993 in

exercise of powers conferred by Paragraph 6 of the DPCO 1987. When the DPCO

1995 was issued, it provided for a ‘transitional’ provision through Paragraph 8(5)

and Paragraph 27 thereof.  

117. Paragraph  8(5)  of  the  DPCO  1995  provides  that  the  retail  price  of  a

scheduled formulation shall, until the retail price thereof is fixed under the DPCO

C.A. Nos. 329 of 2005 etc. etc. Page 63 of 94

Page 64

1995, be the price which prevailed immediately before the commencement of the

DPCO 1995.15  Paragraph 8 of the DPCO 1995 reads as follows:  

“8.  Power  to  fix  retail  price  of  scheduled  formulations. –  (1)  The Government  may, from time to  time,  by  order,  fix  the  retail  price  of  a Scheduled formulation in accordance with the formula laid down in para. 7.

(2) Where the Government fixes or revises the price of any bulk drug under the provisions of this Order and a manufacturer utilises such bulk drug in his scheduled formulations he shall, within thirty days of such fixation or revision,  make  an  application  to  the  Government  in  Form III  for  price revision of all such formulations and the Government may, if it considers necessary, fix or revise the price of such formulation.

(3) The retail price of a formulation once fixed by the Government under sub-paragraphs  (1)  and  (2)  shall  not  be  increased  by  any  manufacturer except with the prior approval of the Government.

(4)  Any  manufacturer,  who  desires  revision  of  the  retail  price  of  a formulation fixed under sub-paragraph (1), shall make an application to the Government  in  Form  III  or  Form  IV,  as  the  case  may  be,  and  the Government shall after making such enquiry, as it deems fit within, a period of two months from the date of receipt of the complete information, fix a revised price for such formulation or reject the application for revision for reasons to be recorded in writing.

(5) Notwithstanding anything contained in the foregoing sub-paragraphs the retail price of a scheduled formulation, of a manufacturer shall,  until the retail price thereof is fixed under the provisions of this Order, be the price which prevailed immediately before the commencement of this Order, and the manufacturer  of  such formulation shall  not sell  the formulation at  a price exceeding the price prevailing immediately before the commencement of this Order.

(6) No manufacturer or importer shall market a new pack, if not covered under sub-paragraph 3 of para 9, or a new formulation or a new dosage

15  “Retail  price includes ceiling price (fixed under  Paragraph 9 of  the DPCO 1995). Retail price is defined in Paragraph 2(s) of the DPCO 1995 as follows: “retail price” means the retail price of a drug arrived at or fixed in accordance with the provisions of this Order and includes a ceiling price.”

C.A. Nos. 329 of 2005 etc. etc. Page 64 of 94

Page 65

form  of  his  existing  scheduled  formulation  without  obtaining  the  prior approval of its price from the Government.

(7) No person shall sell or dispose of any imported scheduled formulation without obtaining the prior approval of its price from the Government.”

 Similarly, Paragraph 27 of the DPCO 1995 provides that any notification issued

under the DPCO 1987, unless it is inconsistent with its provisions will be deemed

to  have  been  issued  under  the  corresponding  provision  of  the  DPCO  1995.

Paragraph 27 of the DPCO 1995 reads as follows:   

“27.  Repeal and saving.- (1) The Drugs (Prices Control) Order, 1987 is hereby repealed.      (2) Notwithstanding such repeal, anything done or any action taken, including any notification or Order made, direction given, notice issued or exemption granted under the Drugs (Prices Control) Order, 1987, shall in so far as it is not inconsistent with the provisions of this Order, be deemed to have been done taken, made, given, issued or granted, as the case may be, under the corresponding provisions of this Order.”

Ex facie  therefore, there is no error in continuing the norms prescribed under the

DPCO  1987  even  after  the  promulgation  of  the  DPCO  1995.  However,  the

question is whether this arrangement can continue indefinitely?  

118. The  DPCO  1995  came  into  operation  on  6th January,  1995.   Ordinarily

therefore the first notification under Paragraph 7 thereof ought to have been issued

in July 1995, or soon thereafter.  (We were told by the learned Solicitor General

that the year for prescribing the norms is from July to June of the following year.

It is for this reason that the various notifications under Paragraph 7 of the DPCO

C.A. Nos. 329 of 2005 etc. etc. Page 65 of 94

Page 66

1995 were issued in July). Perhaps the Masood Committee was constituted on 24th

April, 1995 for this purpose and initially it was required to submit its Report on or

before 30th June, 1995 but time was extended till 31st August, 1995.

119. Whatever be the position, the fact is that the Central Government did not

notify  the  norms  on  a  yearly  basis  for  four  years  1995-1996,  1996-1997,

1997-1998  and  1998-1999.  We are  really  concerned  with  the  default  for  this

period. The NPPA was set up on 29th August, 1997 and the Jharwal Committee was

set up on 8th October, 1998 more than two years and three years respectively after

the DPCO 1995 was issued. The purpose of setting up the Jharwal Committee was

to revise the norms applicable since 15th July, 1993. Pursuant to the Report of the

Jharwal Committee the  Central Government did issue a notification on 13th July,

1999 under Paragraph 7 of the DPCO 1995. On the issue under consideration, we

are presently not concerned with the period 1999 onwards till 2004.

120. Paragraph 7 of the DPCO 1995 gives the formula for arriving at the retail

price of a formulation. The application of the formula is undoubtedly mandatory

and the Central Government cannot contend that the retail price of a formulation

can be fixed de hors the formula. The question is whether the norms mentioned in

Paragraph 7 of the DPCO 1995 are required to be prescribed every year even if

there is no perceived qualitative or quantitative change in them. In other words, is

the prescription of norms every year mandatory even though circumstances do not

C.A. Nos. 329 of 2005 etc. etc. Page 66 of 94

Page 67

warrant  any  such  prescription  and  what  is  the  consequence  if  the  Central

Government  does  not  prescribe  the  norms  every  year  –  is  it  fatal  to  the

notifications issued under Paragraphs 8 and 9 of the DPCO 1995 whereby the retail

price and ceiling price of formulations was fixed?

121. The purpose of determining and prescribing the norms every year is limited

to the requirement of fixing the retail price of formulations in terms of the formula

given in  Paragraph 7  of  the  DPCO 1995.  The  Central  Government  set  up  the

Masood Committee in April 1995 precisely for this purpose. However its work was

stymied  by  the  drug  industry  through  its  non-cooperation.  It  is  true  that

notwithstanding  the  road  block  set  up  by  the  drug  industry,  the  Central

Government could very well have determined and prescribed the norms as required

by Paragraph 7 of the DPCO 1995. Why didn’t the Central Government do so?

122. There are  several  reasons  that  can  be  culled out  from the Report  of  the

Masood Committee for the  Central Government not determining and prescribing

the norms in 1995 and thereafter for the next three years. Firstly, according to the

Masood Committee the drug industry had been provided a sufficient cushion by the

acceptance  of  the  recommendations  of  the  Sankaran  Committee.  Under  the

circumstances continuing with the norms for conversion cost and packing charges

prescribed  under  the  DPCO  1987  would  not  have  disadvantaged  the

manufacturers/formulators in any manner.  

C.A. Nos. 329 of 2005 etc. etc. Page 67 of 94

Page 68

123. Secondly, the packing material ceilings had been recently upwardly revised

from 7th July, 1994 and the manufacturers/formulators could take advantage of the

cost of packing material on actuals. Surely, this was beneficial to them.   

124. Thirdly, according to the Masood Committee with high production levels

and better capacity utilization as well as new technological processes, the process

loss on raw materials and packing material ought to have come down. But since the

drug industry did not provide necessary information through the questionnaire sent

to the drug industry and the companies, an ad hoc reduction in the existing norm

for process loss fixed by the Sankaran Committee was not recommended by the

Masood  Committee.  This  too  was  to  the  advantage  of  the  manufacturers  /

formulators. Actually, the Masood Committee expressed the view that the existing

norms for process loss on raw materials and packing materials was on the high

side.  

125. Fourthly, the Masood Committee noted that  there was a decrease in total

formulation activity coming under price control from 70% under the DPCO 1987

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. Even  this  was

advantageous to the manufacturers/formulators.  

126. Whichever  way  the  issue  is  looked  at,  it  is  clear  that  the

manufacturers/formulators  were  not  put  to  any  disadvantage  in  the  retail  price

C.A. Nos. 329 of 2005 etc. etc. Page 68 of 94

Page 69

fixed on the basis of the norms prescribed under the DPCO 1987. Therefore, we

are  of  opinion  that  under  these  circumstances,  the  bona  fides  of  the  Central

Government in not prescribing the norms every year certainly cannot be doubted.  

127. That apart, the provisions of Paragraph 8(5) and Paragraph 27 of the DPCO

1995 come to the aid of the Central Government and these provisions enabled the

continuation of the norms prescribed under Paragraph 6 of the DPCO 1987 and

saved the notifications issued under the provisions of  Paragraphs 8 and 9 of the

DPCO 1995. This ‘arrangement’ certainly could not have carried on indefinitely,

but the recalcitrance of the drug industry pushed the Central Government into a

corner  leaving  it  with  little  option  but  to  continue  the  ‘arrangement’  till  an

alternative was found through an in-depth study.  This is perhaps where the Central

Government erred. It should have set up the NPPA soon after announcing the new

Drug  Policy  in  1994  and  it  should  have  enacted  a  legislation  constituting  the

National Drug Authority in terms of the Drug Policy, 1994. Had these steps been

taken, the Central Government would not have to face litigation in different parts

of the country. What is tragic is that even today, there does not seem to be any sign

of the Central Government taking any steps to constitute a statutory National Drug

Authority.

128. But be that as it may, although several notifications issued between 1995 and

1999 were collaterally challenged by the manufacturers/formulators, we were not

C.A. Nos. 329 of 2005 etc. etc. Page 69 of 94

Page 70

shown any notification in which the retail price or the ceiling price was varied to

their detriment. Assuming there was such a notification, a manufacturer/formulator

was entitled to question the adverse revision by moving an application under the

provisions  of  Paragraph  8(4)  and  Paragraph  22  of  the  DPCO  1995.  No  such

application  was  moved  by  any  manufacturer/formulator.  Paragraph  22  thereof

reads as follows:

“22. Power to review.- Any person aggrieved by any notification issued or order made under paras. 3, 5, 8, 9 or 10 may apply to the Government for a review  of  the  notification  or  order  within  fifteen  days  of  the  date  of publication of the notification in the Official Gazette or the receipt of the order by him, as the case may be, and the Government may make such order on the application as it may deem proper :

Provided  that  pending  a  decision  by  the  Government  on  the application  submitted  under  the  above  paragraph,  no  manufacturer, importer  or  distributor,  as  the  case  may  be,  shall  sell  a  bulk  drug  or formulation, as the case may be, at a price exceeding the price fixed by the Government of which a review has been applied for.”  

It was contended that a revision could not be sought since norms were not fixed

and for the purposes of challenging the retail price or the ceiling price fixed under

Paragraphs 8 and 9 (as the case may be) of the DPCO 1995 it was necessary to

know the norms fixed. We propose to deal with this issue a little later.  

129. A question  of  seminal  importance  arises,  namely, whether  the legislative

activity of prescription of norms every year is at all necessary even if there is no

occasion to change or modify the retail price of a formulation. Is the exercise of

determining the norms by the Central Governments required to be mechanically

C.A. Nos. 329 of 2005 etc. etc. Page 70 of 94

Page 71

carried out every year as a ritual?  Perhaps not. It is not necessary to revise the

retail price or ceiling price of every formulation every year – and if there is no such

mandate, then it must follow that there is no mandate to prescribe the norms every

year under Paragraph 7 of the DPCO just for the sake of it. What consumer interest

would  an  annual  change  in  retail  price  serve  in  the  context  of  over  2000

formulations?   What  has  to  be  seen  by  the  Central  Government,  in  the  larger

context, is whether the drug industry is losing out in any manner and whether the

consumers of formulations are being put to any discomfort. A fine balance has to

be struck and if the Central Government has been successful in doing that, as it

appears,  then carrying out an annual  ceremonial  procedure or  annual  academic

exercise of determining and prescribing the norms under Paragraph 7 of the DPCO

1995 regardless of whether there is any necessity to do so is not mandatory.

130. The  Central  Government  cannot  be  compelled  to  perform  a  legislative

activity or legislative exercise that is of no consequence and is perhaps ritualistic.

We are of opinion that while the formula given in Paragraph 7 of the DPCO 1995

must be mandatorily adhered to for fixing the retail price of a formulation, the

requirement of prescribing the norms every year is discretionary and would depend

upon the exigencies of the situation – it might be every year or less frequently or

more frequently.  

C.A. Nos. 329 of 2005 etc. etc. Page 71 of 94

Page 72

131. It was also contended by learned counsel for one of the respondents before

us that there was a qualitative difference between the DPCO 1987 and the DPCO

1995  in  as  much  as  under  the  DPCO  1987  the  norms  were  required  to  be

prescribed from time to time under Paragraph 6 thereof.  However, as far as the

DPCO 1995 is concerned the norms were required to be prescribed on a yearly

basis under Paragraph 7 thereof.  The submission was that the principles known as

Heydon’s mischief rule16 are clearly applicable and there was a conscious decision

by the Central Government to switch over from prescribing the norms from time to

time to fixing the norms on a yearly basis.  Since the norms were not fixed on a

yearly  basis  under  the  DPCO  1995,  the  retail  prices  fixed  by  the  Central

Government on the formulations on the basis of Paragraph 7 of the DPCO 1995

were illegal and liable to be struck down.  

132. What was the mischief, if any, sought to be remedied? Nothing has been told

to us in this regard by learned counsel. Given the scheme of the DPCO 1995 there

was no mandate of prescribing the norms under Paragraph 7 of the said DPCO

every year. We therefore merely note the submission for whatever it is worth.   

(iii) Failure to prescribe the norms for cost of packing material   

133. We may recall that the Sankaran Committee had noted that the norms for

cost  of  packing  material  were  not  prescribed  from  1979  onward.   Far  from

16  Heydon’s Case, Neutral Citation Number: [1584] EWHC Exch J36

C.A. Nos. 329 of 2005 etc. etc. Page 72 of 94

Page 73

objecting to this, the drug industry had itself requested the Sankaran Committee to

permit  the  cost  of  packing  material  to  be  taken  on  actuals.  The  Sankaran

Committee  accepted  this  suggestion  while  taking  into  account  the  inherent

difficulty in prescribing any norm for cost of  packing materials.  We may draw

attention to the notification dated 17th February, 1989 followed by the notification

dated 15th July, 1993 both issued under Paragraph 6 of the DPCO 1987 in this

regard. Neither notification made any provision for cost of packing material as a

norm. The notification dated 17th February, 1989 prescribed 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.  The  notification  dated  15th July,  1993  prescribed  norms  only  for

conversion cost  and packing charges.  No manufacturer or formulator made any

grievance  or  complaint  regarding  the  failure  of  the  Central  Government  to

prescribe the cost of packing material as a norm.  

134. The situation has not changed at all over the years. The silence of the drug

industry continued as is evident from the fact that even 15 years later a notification

was issued by the Central Government on 11th August, 2004 under Paragraph 7 of

the DPCO 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 – but not for cost of

C.A. Nos. 329 of 2005 etc. etc. Page 73 of 94

Page 74

packing  material  as  a  norm.  Despite  this,  we  were  told  by  learned  counsel

appearing for the parties that there has been no dispute about price fixation since

2004 due to the absence of a norm for cost of material.   

135. In other words, it does appear to us that the drug industry was content with

being allowed to take the cost of packing material on actuals rather than insisting

on the Central Government issuing a notification prescribing the norms for cost of

packing material.  We believe that in fact there was no necessity of fixing the cost

of packing material as a norm for the purposes of Paragraph 7 of the DPCO 1995

and that there was no fatal error in the notifications issued under Paragraph 7 of the

DPCO 1995 from 1999 onward. This also adds to our conclusion that prescribing

the norms every year under Paragraph 7 of the DPCO 1995 was a discretionary

exercise.  

136. As  mentioned  above,  we  can  quite  understand  if  the  formula  given  in

Paragraph  7  of  the  DPCO  1995  is  not  strictly  adhered  to  by  the  Central

Government while working out the retail price of a formulation. But if the drug

industry is itself quite content with being given the benefit of actuals in material

cost rather than having a norm fixed in that regard, then there is no obligation on us

to completely upset the apple cart and quash a few dozen notifications at the behest

of only a couple of respondents.  If we do so, we would be acting to the detriment

of the entire drug industry (except one – and we must mention that not many other

C.A. Nos. 329 of 2005 etc. etc. Page 74 of 94

Page 75

manufacturers  and  formulators  are  before  us),  but  we  would  also  provide  no

advantage to the consumers who have already purchased the formulations more

than  a  decade  ago  and  have  no  hope  of  getting  a  refund  on  their  purchase.

Additionally, we would really be serving no public or societal interest in quashing

a few dozen notifications under these circumstances.   

137. We may mention en passant that the ceiling price fixed by the BICP on 7 th

July, 1994 and thereafter  revised  by the  NPPA in  February 1998 in respect  of

packing materials has not been questioned (let alone challenged) by anybody.  

(iv) Other submissions   

138. It  was contended by learned counsel  appearing on behalf of Dr. Reddy’s

Laboratories Ltd. that the retail price or the ceiling price of a formulation could not

have been fixed by the Central Government without first fixing the maximum sale

price  under  Paragraph  3  of  the  DPCO  1995  of  the  bulk  drug  utilized  in  the

formulation.  We are unable to accept this submission.   In the first place, there is

no obligation on the Central Government to fix the maximum sale price of every

bulk drug, whether it is in the First Schedule to the DPCO 1995 or not.  In fact, if a

bulk drug is not in the First Schedule to the DPCO 1995 the Central Government is

not  empowered to  fix  its  maximum sale  price.  There could also be a  situation

where a formulation consists of two or more drugs, one of which is not a scheduled

drug. In that event, if the contention of learned counsel is accepted then it would

C.A. Nos. 329 of 2005 etc. etc. Page 75 of 94

Page 76

mean that the retail price or the ceiling price of that formulation cannot be fixed.

This is surely not the intention of the DPCO 1995 nor is it a possible manner of

reading the DPCO 1995.  If the DPCO 1995 were to be read in the suggested

manner, then every drug would have to be included in the First Schedule to the

DPCO 1995  as  a  pre-condition  to  fixing  the  retail  price  or  ceiling  price  of  a

formulation which contains that drug.  This would be doing utmost violence to the

plain provisions of the DPCO 1995 and for this simple reason we are unable to

accept the submission of learned counsel. The learned counsel has unfortunately

overlooked that a formulation can contain one or more bulk drugs including a bulk

drug not included in the First Schedule to the DPCO 1995.

139. It has also been argued before us by learned counsel representing a small

scale industry that the ceiling price of formulations fixed under Paragraph 9 of the

DPCO 1995 denied the benefit of an exemption notification dated 2nd March, 1995

available to small scale industries. We are not inclined to take this argument with

any degree of seriousness particularly since it seems to suggest that the Central

Government  acted  with  a  mala  fide intent.   There  is  no  warrant  for  such  an

assumption and no such allegation or averment has been made in the pleadings.

The issuance of a notification under Paragraph 9 of the DPCO 1995 is a legislative

exercise of power and to say that it was resorted to for denying the benefit of an

exemption to small scale industries can hardly be given any credence.  However, if

C.A. Nos. 329 of 2005 etc. etc. Page 76 of 94

Page 77

the  submission  was  intended  to  convey  the  difficulty  faced  by  small  scale

industries, it can hardly be helped. There is nothing in the DPCO 1995 to suggest

that a small scale industry is kept out of the rigour of the DPCO 1995. It is equally

bound by any retail price or ceiling price fixation by the Central Government.

140. It was then contended on behalf of the manufacturers/formulators that the

delegate of a power cannot travel beyond its authorization.  Reliance in this regard

was  placed  on  V.K.  Ashokan v.  Assistant  Excise  Commissioner17 and  District

Collector, Chittoor v. Chittoor District Groundnut Traders Association.18  There

can be no dispute  about  this  proposition.   It  was  further  contended that  if  the

delegate  exceeds the powers conferred upon it  by the principal,  then the order

passed by the delegate is void ab initio and cannot even be ratified.  In this regard,

reliance  was  placed  on  Marathwada  University  v.  Seshrao  Balwant  Rao

Chavan.19 The  issue  in  the  present  case  is  not  that  the  delegate  (the  Central

Government)  had  exceeded  its  jurisdiction  -  the  issue  is  that  the  Central

Government failed to exercise the power vested in it by Paragraph 7 of the DPCO

1995.  It is this that is under challenge and not the exercise of power in excess of

jurisdiction.  The decisions cited on behalf of the manufacturers/formulators in this

regard are therefore not quite relevant. In any event, we have already dealt with the

issue  of  the  purported  failure  of  the  Central  Government  to  comply  with  the 17  (2009) 14 SCC 85 18  (1989) 2 SCC 58 19  (1989) 3 SCC 132

C.A. Nos. 329 of 2005 etc. etc. Page 77 of 94

Page 78

requirement of prescribing the norms under Paragraph 7 of the DPCO 1995 and

repetition is not necessary.

141. We may mention that relying upon  Associated Provincial Picture Houses

Ltd. v.  Wednesbury  Corporation,20 Mayor  &  C  Westminster  Corporation  v.

London and North Western Railway,21 Barium Chemicals Ltd. v. Company Law

Board22 and State  of  U.P. v.  Renusagar  Power  Co.  23 the  Constitution  Bench

observed in  Shri Sitaram Sugar Company Ltd. that “A repository of power acts

ultra vires either when he acts in excess of his power in the narrow sense or when

he abuses his power by acting in bad faith or for an inadmissible purpose or on

irrelevant  grounds  or  without  regard  to  relevant  considerations  or  with  gross

unreasonableness.” It was then concluded in paragraph 52 of the Report:

“The true position,  therefore,  is that any act of the repository of power, whether legislative or administrative or quasi-judicial, is open to challenge if it is in conflict with the Constitution or the governing Act or the general principles of the law of the land or it is so arbitrary or unreasonable that no fair minded authority could ever have made it.”

142. To this we may add that the action of a repository of power is also amenable

to judicial review if it is contrary to or violates the mandatory requirement of a

subordinate legislation. Therefore, if the  Central Government does not adhere to

the formula given in  Paragraph 7 of the DPCO 1995 and fixes the retail price or

20  (1948) 1 KB 223 : (1947) 1 All ER 498  21  1905 AC 426,430 : 93 LT 143 22  1966 Supp SCR 311 23  (1988) 4 SCC 59

C.A. Nos. 329 of 2005 etc. etc. Page 78 of 94

Page 79

ceiling  price  of  formulations  without  following  the  formula  laid  down,  the

notification issued by the Central Government under Paragraph 8 or Paragraph 9 of

the DPCO 1995 (as the case may be) is liable to quashed as being contrary to law.

However, no instance has been pointed out to us compelling us to use our power of

judicial review and quash the notifications under consideration.

Alternative remedy

143. The learned Solicitor General was quite vehement in his submission that if

any manufacturer or formulator was aggrieved by the fixing of any the retail price

or ceiling price of any formulation, there was an alternative remedy available in the

DPCO 1995 to ventilate and articulate the grievance. There is no reason why no

one actually sought any revision or review of any of the price notifications before

us. In this context it was pointed out that several constituents of the drug industry

had taken resort to alternative procedures (including Cipla) and therefore it is not

as if the alternative remedy is illusory.  

144. In response, it was contended that there was hardly any material before Cipla

to meaningfully resort to the alternative remedy provided under the DPCO 1995.

Additionally, the norms were not prescribed on an annual basis and in the absence

of the norms it was not possible for anyone to make an effective case for revision

or review of any retail price or ceiling price notification. Reference was made to

Form III in the Second Schedule to the DPCO 1995.  

C.A. Nos. 329 of 2005 etc. etc. Page 79 of 94

Page 80

145. Form III is a Form of application for approval or revision of the price of

scheduled  formulations.  This  requires,  in  paragraph  13  thereof,  information

relating to  the break-up of  the retail  price  of  a  formulation.  Our  attention was

drawn to sub-paragraph (b) [Conversion Cost (as per norms)] and sub-paragraph

(c) [Packing Material Costs (Per Sl. No. 15 or as per norms)]. The submission was

that an effective application could not be made without the norms being prescribed.

As mentioned above,  the norm for  conversion cost  was  prescribed first  by the

notification dated 17th February, 1989 and then by the notification dated 13 th July,

1999 (and subsequent notifications). It  is difficult  to accept the submission that

despite these notifications a manufacturer or formulator was unaware of the norms

for conversion cost.  As far as the norm for packing material cost is concerned,

sub-paragraph  (c)  provides  an  option  to  the  applicant  –  either  the  information

mentioned  in  paragraph  15  may  be  provided  or  the  norms  may  be  provided.

Paragraph 15 requires the applicant to provide information pertaining to the pack,

batch size (tablets / gms etc.), name of the packing material, rate per unit, quantity

required per batch and value of packing material/batch nos./kgs etc. (in rupees).

Therefore,  even if  the norm for cost  of  packing material  is  not  prescribed,  the

applicant can provide the requisite information (based on actuals) for the purposes

of  making  an  effective  application  for  revision  of  the  price  of  a  scheduled

formulation.   Incidentally,  the  Form  also  confirms  that  no  manufacturer  or

C.A. Nos. 329 of 2005 etc. etc. Page 80 of 94

Page 81

formulator is placed at any disadvantage if the norm for packing material cost is

not prescribed under Paragraph 7 of the DPCO 1995 but actuals are allowed.  

146. The  efficacy  of  the  alternative  remedy  provided  in  the  DPCO  was  the

subject  matter  of  consideration in  Cynamide India Ltd.   The contention urged

therein was that for the purposes of price fixing, facts and figures were arbitrarily

assumed by the  Central Government. Rejecting this, it was held by this Court in

paragraph 31 of the Report as follows:

“………We do not propose to delve into the question whether there has been any such arbitrary assumption of facts and figures. We think that if there is any grievance on that score, the proper thing for the manufacturers to do is bring it to the notice of the Government in their applications for review. The learned counsel argued that they were unable to bring these facts to the notice of the Government as they were not furnished the basis on which the prices were fixed. On the other hand, it has been pointed out in  the  counter-affidavits  filed  on  behalf  of  the  Government  that  all necessary  and  required  information  was  furnished  in  the  course  of  the hearing of the review applications and there was no justification for the grievance that particulars were not furnished.  We are satisfied that the procedure  followed  by  the  Government  in  furnishing  the  requisite particulars  at  the  time  of  the  hearing  of  the  review  applications  is sufficient compliance with the demands of fair play in the case of the class of persons claiming to be affected by the fixation of maximum price under the Drugs (Prices Control) Order.” [Emphasis supplied by us].”

We have no doubt that if any manufacturer or formulator had taken the trouble of

preferring a revision or review application, all necessary material would have been

made available to the complainant for an effective representation. We are satisfied

that none of the parties before us was precluded by circumstances from preferring a

revision or review for corrective measures in relation to the retail price or ceiling

C.A. Nos. 329 of 2005 etc. etc. Page 81 of 94

Page 82

price of any particular formulation – in fact, we are told by the learned Solicitor

General that some of them did.   

147. Strictly speaking, in view of the availability of an alternative and efficacious

remedy available under the DPCO 1995 read with the decision of this Court in

Cynamide India Ltd. the writ petitions filed by the manufacturers and formulators

before us ought not to have been entertained by the concerned High Courts, but we

leave it at that.    

Forum shopping

148. The  learned  Solicitor  General  submitted  that  Cipla  was  guilty  of  forum

shopping  inasmuch  as  it  had  filed  petitions  in  the  Bombay  High  Court,  the

Karnataka High Court and also an affidavit in the Delhi High Court as a member of

the  Bulk  Drug  Manufacturers  Association  and  had  eventually  approached  the

Allahabad High Court  for  relief  resulting in  the impugned judgment  and order

dated 3rd March, 2004. It was submitted that since Cipla had approached several

constitutional  Courts  for  relief,  the proceedings initiated in the Allahabad High

Court clearly amount to forum shopping.      

149. We are not at all in agreement with the learned Solicitor General.  Forum

shopping takes several hues and shades and Cipla’s petitions do not fall under any

category of forum shopping.   

150. A classic  example  of  forum shopping is  when a  litigant  approaches  one

C.A. Nos. 329 of 2005 etc. etc. Page 82 of 94

Page 83

Court for relief but does not get the desired relief and then approaches another

Court for the same relief. This occurred in Rajiv Bhatia v. Govt. of NCT of Delhi

and others.24  The respondent-mother of a young child had filed a petition for a

writ of habeas corpus in the Rajasthan High Court and apparently did not get the

required relief from that Court.  She then filed a petition in the Delhi High Court

also  for  a  writ  of  habeas  corpus  and  obtained  the  necessary  relief.

Notwithstanding this,  this  Court  did not  interfere  with the order  passed by the

Delhi High Court for the reason that this Court ascertained the views of the child

and found that she did not want to even talk to her adoptive parents and therefore

the custody of the child granted by the Delhi High Court to the respondent-mother

was not interfered with.  The decision of this Court is on its own facts, even though

it is a classic case of forum shopping.  

151. In Arathi  Bandi  v.  Bandi  Jagadrakshaka  Rao25 this  Court  noted  that

jurisdiction in a Court is not attracted by the operation or creation of fortuitous

circumstances.  In that case, circumstances were created by one of the parties to the

dispute to confer jurisdiction on a particular High Court. This was frowned upon

by this Court by observing that to allow the assumption of jurisdiction in created

circumstances would only result in encouraging forum shopping.  

24  (1999) 8 SCC 525 25  (2013) 15 SCC 790

C.A. Nos. 329 of 2005 etc. etc. Page 83 of 94

Page 84

152. Another case of creating circumstances for the purposes of forum shopping

was World Tanker Carrier Corporation v. SNP Shipping Services Pvt. Ltd. and

others26 wherein it was observed that the respondent/plaintiff had made a deliberate

attempt to bring the cause of action namely a collision between two vessels on the

high seas within the jurisdiction of the Bombay High Court.  Bringing one of the

vessels to Bombay in order to confer jurisdiction on the Bombay High Court had

the character of forum shopping rather than anything else.  

153. Another form of forum shopping is taking advantage of a view held by a

particular High Court in contrast to a different view held by another High Court. In

Ambica Industries v. Commissioner of Central Excise27 the assessee was from

Lucknow. It challenged an order passed by the Customs, Excise and Service Tax

Appellate Tribunal (the CESTAT) located in Delhi before the Delhi High Court.

The CESTAT had jurisdiction over the States of Uttar Pradesh, NCT of Delhi and

Maharashtra. The Delhi High Court did not entertain the proceedings initiated by

the assessee for want of territorial jurisdiction. Dismissing the assessee’s appeal

this Court  gave the example of  an assessee affected by an assessment order in

Bombay invoking the jurisdiction of the Delhi High Court to take advantage of the

law laid down by the Delhi High Court or an assessee affected by an order of

assessment made at Bombay invoking the jurisdiction of the Allahabad High Court

26  (1998) 5 SCC 310 27  (2007) 6 SCC 769

C.A. Nos. 329 of 2005 etc. etc. Page 84 of 94

Page 85

to take advantage of the law laid down by it and consequently evade the law laid

down by the Bombay High Court. It was said that this could not be allowed and

circumstances such as this would lead to some sort of judicial anarchy.     

154. Yet another form of forum shopping was noticed in  Jagmohan Bahl and

another v. State (NCT of Delhi) and another28 wherein it was held that successive

bail applications filed by a litigant ought to be heard by the same learned judge,

otherwise  an  unscrupulous  litigant  would  go  on  filing  bail  applications  before

different  judges  until  a  favourable  order  is  obtained.  Unless  this  practice  was

nipped in the bud, it would encourage unscrupulous litigants and encourage them

to  entertain  the  idea  that  they  can  indulge  in  forum  shopping,  which  has  no

sanction in law and certainly no sanctity.   

155. Another category of forum shopping is approaching different Courts for the

same relief by making a minor change in the prayer clause of the petition.  In

Udyami Evam Khadi Gramodyog Welfare Sanstha and another v. State of Uttar

Pradesh and others29 it was noticed by this Court that four writ applications were

filed by a litigant and although the prayers were apparently different, the core issue

in each petition centred round the recovery of the amount advanced by the bank.

Similarly, substituting some petitioners for others with a view to confer jurisdiction

on  a  particular  Court  would  also  amount  to  forum shopping  by that  group  of

28  (2014) 16 SCC 501 29  (2008) 1 SCC 560

C.A. Nos. 329 of 2005 etc. etc. Page 85 of 94

Page 86

petitioners.  

156. Finally  and  more  recently,  in  Supreme  Court  Advocates  on  Record

Association  v.  Union  of  India  (Recusal  Matter)30 Justice  Khehar  noticed  yet

another form of forum shopping where a litigant makes allegations of a perceived

conflict  of  interest  against  a  judge  requiring  the  judge  to  recuse  from  the

proceedings so that the matter could be transferred to another judge.    

157. The decisions referred to clearly lay down the principle that the Court is

required to adopt a functional test vis-à-vis the litigation and the litigant.  What has

to be seen is whether there any functional similarity in the proceedings between

one Court and another or whether there is some sort of subterfuge on the part of a

litigant.  It is this functional test that will determine whether a litigant is indulging

in forum shopping or not.  

158. Keeping all  these examples in mind with several  other  nuances and also

keeping the functional test in mind, we have examined the relief claimed by Cipla

in the different  High Courts and find that  they have no substantive connection

whatsoever with the relief claimed in the Allahabad High Court.  

159. Be that as it may, we have examined the submissions made by the learned

Solicitor General in respect of each of the writ petitions filed by Cipla.

30  (2016) 5 SCC 808

C.A. Nos. 329 of 2005 etc. etc. Page 86 of 94

Page 87

160. The Bulk Drug Manufacturers Association had filed W.P.  No. 5578 of 1997

in the Delhi High Court in which it had challenged the inclusion of 8 bulk drugs in

the First Schedule of the DPCO 1995.  Among the bulk drugs whose inclusion was

challenged were Salbutamol, Theophylline, Ciprofloxacin and Norfloxacin.

161. The  Delhi  High  Court  required  the  members  of  the  Bulk  Drug

Manufacturers Association to file an affidavit stating that they would be bound by

the orders passed by the Delhi High Court.  Pursuant to this direction, Cipla filed

an  affidavit  in  the  Delhi  High  Court  on  24th May, 1999  stating  that  any  final

decision taken on the question of the inclusion or exclusion of Salbutamol and

Theophylline in W.P. No.5578 of 1997 will  be binding on Cipla subject to any

appeal preferred thereon. It was also disclosed by Cipla that it had already filed a

writ  petition  in  the  Bombay  High  Court  on  9th April,  1999  to  the  effect  that

Salbutamol be exempted from price control under the DPCO 1995.

162. As mentioned above, on 9th April, 1999 Cipla had filed a writ petition being

W.P.No.1749 of 1999 in the Bombay High Court. The challenge therein was to the

inclusion  of  bulk  drugs  Salbutamol  and  Theophylline  in  the  First  Schedule  of

DPCO 1995.

163. Cipla also filed Writ Petition No.1974 of 2000 in the Bombay High Court on

22nd September, 2000 seeking exclusion of the bulk drug Ciprofloxacin from the

ambit of price control under the DPCO 1995. It was contended that it should be

C.A. Nos. 329 of 2005 etc. etc. Page 87 of 94

Page 88

excluded from the First Schedule of the DPCO 1995.

164. Cipla  filed  a  third  writ  petition  in  the  Bombay  High  Court  being  W.P.

No.2019 of 2000.  This was filed on 28th September, 2000 and the challenge was to

the inclusion of the bulk drug Norfloxacin within the ambit of price control under

the DPCO 1995.

165. Cipla  also  filed  writ  petitions  in  the  Karnataka  High  Court  being  W.P.

Nos.33989-34011 of  2000.   In  these  writ  petitions,  several  notifications  issued

under Paragraph 8 and Paragraph 9 of the DPCO 1995 as well as demand notices

issued to Cipla were under challenge.

166. We find that almost all the notifications under challenge in the Karnataka

High Court were also the subject matter of challenge in the Allahabad High Court.

However, Cipla had disclosed before the Allahabad High Court that it had filed

writ  petitions  before  the  Karnataka  High  Court.  There  was  therefore  no

concealment of any facts by Cipla. We also find that the consequence of allowing

the three writ petitions filed by Cipla in the Bombay High Court would have had

an impact on the notifications challenged in the Allahabad High Court, but that

impact would have been collateral and consequential. We are of opinion that under

these circumstances, Cipla ought to have disclosed the filing of writ petitions in the

Bombay High Court, but at this stage we do not think it appropriate to non-suit

Cipla only on this ground.  

C.A. Nos. 329 of 2005 etc. etc. Page 88 of 94

Page 89

167. The proceedings in the Allahabad High Court were initiated as a result of a

show cause notice issued to Cipla. No similar show cause notice and no similar

factual circumstances existed in any of the other High Courts in which Cipla had

initiated proceedings.  It cannot, therefore, be said that Cipla had indulged in forum

shopping in any manner whatsoever.

Two comments

168. Before parting with these appeals, we would like to make two comments:

Firstly, with regard to the manner in which the Union of India has handled the

litigation. We find that by and large, very little or scanty material was placed by the

Union of India before the concerned High Courts, particularly the Allahabad High

Court. On the other hand, several volumes of documents have been filed in this

Court, though after permission. Such a practice deserves discouragement and we

do so. There are several reasons for this.  It  tends to degrade the importance of

proceedings in the High Court and could subsequently embarrass the High Court

which might inadvertently base its decision on insufficient material resulting in the

possibility of an incorrect decision which is liable to be set aside.  It might also

cause serious prejudice to a litigant because it is for the first time in this Court that

the entire material is made available to a litigant placing him/her at a disadvantage

in dealing with issues of importance. It certainly places an unnecessary and totally

avoidable burden on this Court which is required to deal with the material as a

C.A. Nos. 329 of 2005 etc. etc. Page 89 of 94

Page 90

court  of  first  instance.  Under  such circumstances  this  Court  does  not  have the

benefit of the opinion of the High Court while dealing with an appeal.  All in all

therefore,  for  the better adjudication of disputes and for the convenience of  all

concerned, it would be more appropriate for the Union of India, as indeed for all

litigants  to  place  on  record  all  the  material  before  the  court  of  first  instance,

whether it is a district court or a High Court.  We need say no more on this subject.  

169. Secondly, the learned Solicitor General specifically and repeatedly requested

us  to  comment  on  the  grant  of  interim  orders  by  the  High  Courts  in  matters

concerning economic issues and particularly in matters pertaining to the sale of

formulations at the retail price or ceiling price fixed by the Central Government

through notifications issued under the DPCO. Certain interim orders were brought

to our notice restraining coercive action against a manufacturer/formulator when a

price notification was under challenge. It is true that such an interim order could

have a huge impact on society.   

170. In  Cynamide  India this  Court  expressed  the  view that  an  interim  order

should not have the effect of staying the implementation of a notification fixing the

price of a formulation under the DPCO. That would be against public interest and,

therefore, ought not to be made by a Court unless it  is satisfied that no public

interest is going to be served.  This is what this Court had to say in paragraphs 37

and 38 of the Report:

C.A. Nos. 329 of 2005 etc. etc. Page 90 of 94

Page 91

“We notice  that  in  all  these  matters,  the  High  Court  granted  stay  of implementation  of  the  notifications  fixing  the  maximum prices  of  bulk drugs and the retail prices of formulations. We think that in matters of this nature, where prices of essential commodities are fixed in order to maintain or  increase  supply  of  the  commodities  or  for  securing  the  equitable distribution and availability at fair prices of the commodity, it is not right that the court should make any interim order staying the implementation of the notification fixing the prices. We consider that such orders are against the public interest and ought not to be made by a court unless the court is satisfied that no public interest is going to be served.  ………

In matters of fixation of price, it is the interest of the consumer public that must come first and any interim order must take care of that interest.”

171. Under these circumstances, we are clearly of the view that in matters where

public  interest  is  involved,  the  Court  ought  to  be  circumspect  in  granting  any

interim relief.   The consequence  of  an interim order  might  be quite  serious  to

society and consumers and might cause damage to public interest and have a long

term impact. We make it clear that it is not our intention to suggest to any Court

how and in what circumstances interim orders should or should not be passed but it

is certainly our intention to make it known to the Courts that the time has come

when it is necessary to be somewhat more circumspect while granting an interim

order in matters having financial or economic implications.

172. We would also like to draw the attention to the Drug Policy, 1994 which

mentions that as far as the drug industry is concerned, there are about 250 large

units and about 8000 small scale units in operation.  These units produce about 350

bulk drugs, and as we have mentioned above more than 2000 formulations.  The

C.A. Nos. 329 of 2005 etc. etc. Page 91 of 94

Page 92

Drug Policy, 1994 also mentions that the production of bulk drugs in 1993-94 is in

the  region  of  Rs.1320  crores  and  for  the  same  period  the  production  of

formulations is in the region of Rs. 6900 crores. In other words, not only is the

drug industry in the country extremely large with heavy financial stakes but there

is lot at stake in it not only for the industry but also for the consumers.  For this

reason,  the  Courts  have  to  extremely  cautious  in  interfering  in  any  manner

whatsoever with the working of the drug industry.  Any interference by the Courts

would have wide ranging repercussions not only in commercial terms but also for

the people of the country.  

Conclusion

173. Our answer to the questions identified are as follows:

a Whether  the  notification  dated  13th July,  1999  issued  by  the  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 in law?

Our answer to this is that the notification is valid and that the notification

was not issued mechanically or without any application of mind.

C.A. Nos. 329 of 2005 etc. etc. Page 92 of 94

Page 93

b Whether the notifications dated 12th July, 2000, 12th July, 2001, 12th July,

2002  and  11th 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 they valid

in law? Our answer is that the notifications are valid and were not issued

mechanically  or  without  any application  of  mind and  that  it  was  not

necessary to re-determine the norms every year.

c Whether various notifications issued by the Central Government fixing

the retail price or ceiling price of formulations under Paragraphs 8 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?

Our answer is in the affirmative.

d Whether fixing the retail price of a formulation under Paragraph 8 of the

Drugs (Prices Control) Order, 1995 without first fixing the sale 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? Our answer

is in the affirmative.

C.A. Nos. 329 of 2005 etc. etc. Page 93 of 94

Page 94

174. In view of the above, the appeals filed by the Union of India are allowed.

The  impugned  judgments  and  orders  are  set  aside.  The  appeals  filed  by  Dr.

Reddy’s Laboratories Ltd. are dismissed. No costs.

                             …....………………….J                         (Madan B. Lokur)

                         .....………………….J New Delhi;                                                                          (R.K. Agrawal) October  21, 2016                                

C.A. Nos. 329 of 2005 etc. etc. Page 94 of 94