Price regulation of non-scheduled formulations has always been a contentious issue. While the Government can set prices of drug formulations that are listed on the National List of Essential Medicines (“NLEM”) – Scheduled Formulations, the Government can at best monitor prices of drug formulations that are not listed on the NLEM – Non-scheduled Formulations.
The Delhi High Court in its recent judgment in the matter of Bharat Serums and Vaccines Limited v. Union of India & Ors. provided much needed clarity on paragraph 20 Drugs (Price Control) Order, 2013 (“DPCO 2013”), which regulated the pricing of non-scheduled formulations and drugs, focusing on the legal implications ensuing from the breach thereof.
Background
The Drug Price Control Order 2013 (“DPCO 2013”) is the principle legislation, governing the fixing of ceiling prices by the pricing regulation – National Pharmaceutical Pricing Authority (“NPPA”). DPCO 2013 provides for scheduled (mentioned in Schedule 1 of the DPCO, 2013) and non-scheduled formulations.
Under Para 20 of the DPCO, 2013, Monitoring the prices of non-scheduled formulations – (1) The Government shall monitor the maximum retail prices (MRP) of all the drugs, including the non-scheduled formulations and ensure that no manufacturer increases the maximum retail price of a drug more than ten percent of maximum retail price during preceding twelve months and where the increase is beyond ten percent of maximum retail price, it shall reduce the same to the level of ten percent of maximum retail price for next twelve months. (2) The manufacturer shall be liable to deposit the overcharged amount along with interest thereon from the date of increase in price in addition to the penalty.
The Hon’ble Delhi High Court was dealing with 2 (two) petitions filed by Bard Healthcare India Private Limited (“Bard”) and Bharat Serums and Vaccines Limited (“Bharat Serums”) inter alia challenging the demand notices issued by the National Pharmaceutical Pricing Authority (“NPPA”) with respect to the following:
Bard: Bard was issued identical demand notices for 89 medical devices for the violation of Paragraph 20 DPCO 2013. Bard’s principal contention was that the DPCO 2013 did not provide any clarity on medical devices and their status as ‘formulations’ within the DPCO 2013. As per Bard, there was no clarity on price disclosure for medical devices.
Bharat Serums: Bharat Serums was issued demand notices for 2 (two) of its non-scheduled drugs viz. Histoglob and U-Tryp. Bharat Serums’ main contention was that it had not increased the prices of its non-scheduled drugs beyond 10%, but had merely rounded off the drug prices after increasing them by 10%.
In addition to the aforesaid, issues related to the manner of issuance of the above notices and the quantification of penalty and interest by NPPA were also raised. The following are the seminal issues regarding the true purport of Paragraph 20 of DPCO 2013:
(1) Whether a violation of Paragraph 20 of DPCO 2013 would effectively stop the manufacturer from raising prices in the future until the previous breach is reversed in accordance with Paragraph 20 of DPCO 2013?
(2) Whether the interest payable on the overcharged amount is from the date of infraction or from the date of demand raised by the NPPA?
Summary of arguments advanced
Bharat Serums contended that during the period of scrutiny, they did not overcharge but rounded off the price of drug.
Bard contended that overcharging on medical devices was the result of lack of clarity related to the format of price disclosures required to be made and was neither intentional nor purposeful.
The NPPA contended that once the manufacturer is in violation of restrictions placed under Paragraph 20 of the DPCO, 2013, he will not be eligible to claim ten per cent annual increase in MRP until the price of the non – scheduled formulation is not reduced in line with the permissible limit for the next twelve months.
Conclusions of the Hon’ble Delhi High Court
On the right of the manufacturers to increase Maximum Retail Prices (MRP) of non-scheduled drugs
The Hon’ble Delhi High Court held that under Paragraph 20 of the DPCO 2013, the NPPA merely has the right to monitor the pricing of non-scheduled drugs. The manufacturers have the right to increase the MRP of non-scheduled drugs by 10% on the MRP prevailing in the preceding 12 months. An infraction of Paragraph 20 of the DPCO 2013 does not efface the right of the manufacturers to increase the MRP of non-scheduled drugs.
As per the Hon’ble Delhi High Court, Paragraph 20 of the DPCO 2013 has two distinct parts – (1) provides manufacturers of non-scheduled drugs the right to increase MRP by 10% and; (2) provides for the consequences for increasing MRP beyond 10%. The right to increase the price is not lost when a manufacturer violates the 10% limit.
On ‘preceding’ and ‘next’
The Delhi High Court further held that the words ‘preceding’ and ‘next’ provide the focal point for determining the legally permissible MRP and the period during which such MRP must be kept static after being rolled back for infraction. To be precise, the right of the manufacturer to increase the MRP by 10% would be governed by the price prevailing in the preceding 12 months. However, in the event the manufacturer overcharges, the manufacturer will have to hold its price for a period of 12 months from the date of the infraction. However, after the completion of 12 months from the date of infraction, the manufacturer would once again acquire the right to increase the MRP.
On date of interest under Paragraph 20 of DPCO 2013
The Hon’ble Delhi High Court further held that Paragraph 20 of DPCO 2013 is a complete code and governs all aspects of pricing of non-scheduled drugs.
It was contended for and on behalf of the Petitioners that DPCO 2013 is a subordinate legislation and the NPPA derives the power to charge interest on overcharging by virtue of Section 7A of the Essential Commodities Act, 1995. Under the said provision, the interest would accrue from the date of demand. Hence, the interest under Paragraph 20 of the NPPA would start accruing from the date on which the demand notices are issued by the NPPA. Negating the said contention, the Hon’ble Delhi High Court held that Paragraph 20 of the DPCO is a self-regulating mechanism, which casts a duty upon the manufacturers to maintain the MRP of non-scheduled drugs within permissible limits. Paragraph 20 of DPCO 2013 unequivocally mandates that interest is required to be calculated and paid from the date of overcharging. Section 7A of the Essential Commodities Act, 1995, does not stifle the command of Paragraph 20 of DPCO 2013. The DPCO 2013 is itself an order made under Section 3 of the Essential Commodities Act, 1995, and hence it includes liability to pay all amounts, including interest payable.
On medical devices being covered by DPCO 2013
Medical devices would fall within the definition of drugs. As such, Bard had eventually conceded that the medical devices in question would qualify as drugs to be regulated by DPCO 2013.
On Rounding Off
It was undisputed that demand notices issued upon Bharat Serums for overcharging were only on account of rounding off of MRP and was not otherwise actuated by mala fides. Further, the authorities had contended that rounding off is available for scheduled drugs and not for non-scheduled drugs.
The Hon’ble Delhi High Court therefore held that depriving non-scheduled drugs of the benefit of rounding off would be manifestly arbitrary, considering that non-scheduled drugs are free from the rigours of price control. Once the NPPA has itself recognised rounding off as an acceptable mathematical principle, it cannot discriminate between scheduled and non-scheduled drugs on the application of rounding-off principle.
Accordingly, the Hon’ble Delhi High Court has quashed and set-aside demand notices issued to Bharat Serums and ordered a fresh exercise to be undertaken in relation to actions that were challenged by Bard.
Conclusion
The judgement rendered by the Hon’ble Delhi High Court brings in some clarity around the provision of Paragraph 20 of the DPCO Order, 2013. The court also clarified that there should be no discrimination between scheduled and unscheduled formulations as rounding off of prices has been a well-accepted mathematical principle by the NPPA. In addition, while computing the ultimate liability of the petitioners, the NPPA should also take into account the deposits that have been made by the Petitioners during the pendency of this litigation.
For further information, please contact:
Ashwin Sapra, Partner, Cyril Amarchand Mangaldas
ashwin.sapra@cyrilshroff.com
