Alerts & Updates 29th Nov 2023

Delhi High Court Judgment in Bharat Serums – a relief to Drug Manufacturers

Authors

Ashishchandra Rao Partner | Mumbai
Vinuta Rayadurg Principal Associate | Mumbai

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  • Introduction
    • The Hon’ble Delhi High Court, recently, in the matter of Union of India v. Bharat Serums and Vaccines Limited (Judgment)[1], has interpreted Paragraph 20 (Para 20) of the Drug (Pricing Control) Order, 2013 (2013 DPCO) which relates to monitoring of prices of non- scheduled formulations.
    • This Judgment of the Division Bench of the Hon’ble Delhi High Court arose from a batch of Letters Patent Appeals impugning the common judgments of a Single Judge of the Hon’ble Delhi High Court dated 22.09.2022 and 6.10.2022 passed in various writ petitions. The said writ petitions were filed assailing demand notices issued to various pharmaceutical companies (the petitioners therein) by the National Pharmaceutical Pricing Authority (NPPA), interalia holding the said companies guilty of overcharging consumers for certain non-scheduled formulations, in contravention of Para 20 of the 2013 DPCO. By the impugned Judgment, the Ld. Single Judge, interalia set aside the demand notices issued by the NPPA.
  • The Legislation
    • The Drug and Cosmetics Act, 1940 and Rules made thereunder regulate the import, manufacture, distribution and sale of drugs and cosmetics. Additionally the 2013 DPCO is issued by the Central Government in exercise of powers conferred on it under Section 3 of the Essential Commodities Act, 1955,  for controlling and monitoring the prices of scheduled and non-scheduled drugs provided therein.
    • While the 2013 DPCO elaborately provides for pricing of the scheduled formulations ( contained in Schedule I), Para 20 confers the Central Government through the NPPA with powers to only monitor the pricing of non-scheduled formulations.
  • Analysis
    • There has always been a tussle between the NPPA and drug manufacturers regarding the pricing of non – scheduled formulations, which do not appear in the National List of Essential Medicines (NLEM) (Schedule I to the 2013 DPCO). The Delhi High Court in the Judgment has finally seemed to put to rest the various issues arising out of interpretation of Para 20 of the 2013 DPCO, which allows manufacturers to increase prices of non-scheduled formulations annually. Some key take aways from the Judgment are:
    • The 2013 DPCO, envisages only a price monitoring mechanism for non-scheduled formulations as opposed to a price control mechanism for scheduled formulations.
    • Under the 2013 DPCO, the powers of the Government to fix and revise MRP of drugs is limited to scheduled formulations and does not extend to non-scheduled formulations.
    • Para 20 of the 2013 DPCO, as a whole, is not a penal provision. The term, “penalty” used in Para 20 does not create an additional penalty beyond what is provided under the Essential Commodities Act.
    • Para 20 must be read in a manner that the date of transgression/ infraction by the manufacturer means the date from which such manufacturer has increased the MRP of a non-scheduled formulation by more than 10% within a period of 12 months from the previous revision in the price.
    • The duty of the manufacturer to deposit the overcharged amount as stipulated under sub-para (2) of para 20 of the DPCO 2013 does not depend on the issuance of a demand notice. The liability of the manufacturer to deposit the overcharged amount is from the date from which the MRP has been increased beyond 10% and not from the date of the demand notice.
    • The amount overcharged shall be calculated as the difference between the “actual increase in MRP” and the “permissible increase in MRP”.
    • Para 20 provides that the Government shall monitor the MRP of all the drugs, including the non-scheduled formulations and ensure that no manufacturer increases the MRP of a drug more than 10% of the MRP during the preceding 12 months. It further provides that where the price is increased beyond 10%, the same shall be reduce to the permissible price of 10% for the next 12 months. The Delhi High Court has provided various illustrations on how the drug manufacturers ought to increase the prices of the non-scheduled formulations while staying within the purview of Para 20.
    • The judgment examines various scenarios to interpret Para 20 based on the hypothetical situation that a company prices a non-scheduled formulation at INR 100/- on 01.02.2014[2]. Let us examine some of the illustrations provided in the judgment in light of this hypothesis.
    • Under illustration (h), is a scenario where the manufacturer increases the MRP to INR 121/- on 01.02.2015 (when it could increase only to Rs. 110) and keeps the MRP of Rs. 121/- till 31.01. 2017. The Hon’ble Court lays down that, in such a case, the manufacturer is liable to deposit the amount overcharged between 1.02.2015 and 31.1.2016 i.e. Rs. 11/- along with interest. The Hon’ble Court further clarifies that the manufacturer is not liable to deposit any amount for the period 1.02.2016 and 31.1.2017. This interpretation of the Hon’ble Court is a stark departure from the interpretation usually carried by the NPPA and the demands by NPPA for overcharging are without considering the allowable increase in price annually.
    • Under illustration (i), the scenario considered is where the manufacturer increases the MRP to INR 135 on 1.2.2015 and maintains the said INR till 31.1.2018. Hon’ble Court once again clarifies that the liability of the manufacturer to deposit the overcharged amount will be (i) INR 25/- for the period between 01.02.2015 to 31.01.2016; (ii) INR 14/- for the period between 01.02.2016 to 31.01.2017; and (iii) INR 1.9/- for the period between 01.02.2017 till 31.01.2018. On 01.02.2018, the manufacturer would be entitled to keep the MRP of the formulation as INR 135/- and he would be entitled to increase the MRP up to INR 148.5/- on 01.02.2019, i.e., a 10% increase from INR 135/-, which would be the MRP prevailing for the previous twelve months. This interpretation of the Hon’ble Court also provides the correct interpretation of Para 20 of the 2013 DPCO, as opposed to what the NPPA would interpret it to mean that the manufacturer would be liable to deposit the entire overcharged amount i.e INR 25/- (along with interest) for each year till the issuance of the demand notice and till actual deposit thereof.
    • However, opposed to the above illustrations, in illustration (f), the Hon’ble Court, has considered a scenario where the increase in price within a period of 12 months is less than 10%. The High Court has, in this scenario stated that the manufacturer cannot increase the price once again within the period of 12 months even if the previous increase was less than 10%. This interpretation may not be a correct interpretation keeping in view the clear provisions of Para 20. Para 20 clearly states that a manufacturer can increase prices of a non-scheduled formulation up to 10% within a period of 12 months but does not limit the number of times the price can be increased within a period of 12 months as far as the total increase is within the prescribed limit of 10%.
    • Another important aspect examined and settled by the Hon’ble Delhi High Court in the said Judgment is relating to rounding off the MRP of non-scheduled formulations. The Hon’ble Court holds that the benefit of rounding off the MRP has to be extended to non-scheduled formulations as well, keeping in view that the Union Government has consciously decided to exclude non-scheduled formulations from the rigors of price control. The Hon’ble Court further clarifies that for non -scheduled formulations, the benefit of rounding off must be limited to two decimal places as per general mathematical practices.
  • Conclusion

    India is the largest provider of generic drugs globally and is known for its affordable vaccines and generic medications. Indian Pharmaceutical industry ranks third in the pharmaceutical production by volume. Accurately known as the “pharmacy of the world” for its cost effective and high quality medicines, India accounts for 60% of global vaccines, 40% of generic demand in the US and 25% of all medicine in the UK[3]. A large percentage of drugs manufactured and sold in India fall within the non-scheduled category which, i.e. drugs which are not part of the list of the NLEM. In light of the said fact, the Judgment brings a long awaited relief to various drug manufacturers as far as monitoring of pricing of the said non-scheduled formulations by the NPPA is concerned.

    We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.com or write to our authors:

    Ashishchandra Rao – Partner – ashishchandrarao@elp-in.com
    Vinuta Rayadurg – Principal Associatevinutarayadurg@elp-in.com

  • References

    [1] Union of India and Anr. V. Bharat Serums and Vaccines Limited (LPA 118/2023 & C.M. No. 7868/2023, C.M. No. 7871/2023) 8th November 2013.
    [2] See paragraph 65 of the Judgement.
    [3]https://www.investindia.gov.in/sector/pharmaceuticals

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.