DPCO 2013: Delhi High Court rejects NPPA interpretation on price monitoring

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In a defining precedent, the Delhi High Court vide a recent judgment dated September 22 rejected the interpretation of Para 20 of the Drugs (Prices Control) Order, 2013 (DPCO 2013) adopted by the drug regulator, National Pharmaceutical Pricing Authority (NPPA), since the inception of the drug pricing statute in May 2013.

A single judge bench of Justice Yashwant Varma was hearing writ petitions filed by Bard Healthcare and Bharat Serums challenging the demand notices and orders issued by NPPA for overcharging under Para 20 of DPCO which pertains to price monitoring of non-scheduled (non-essential) drugs & medical devices.

With the introduction of the DPCO 2013, the basis of price fixation shifted from the cost-based principle to a market driven price mechanism. The second significant policy change which was ushered in was of the NPPA retaining the power to fix prices in respect of scheduled (essential) formulations only. Insofar as non-essential formulations were concerned, all that was required was that NPPA would monitor the price of such formulations.

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NPPA view on Para 20 of DPCO 2013

In terms of Para 20, NPPA monitors the MRP of all non-essential drugs including medical devices and ensures that no manufacturer increases the MRP of a drug more than 10% of the MRP during preceding 12 months. In cases where the increase is beyond 10% of the MRP, it is mandated that the manufacturer shall reduce the same to the level of 10% of MRP for the next 12 months. In addition, the manufacturer is liable to pay overcharged amount along with interest and penalty to NPPA.

NPPA has proceeded to interpret the provision in a manner that if a manufacturer overcharges in a particular period, any periodical increase that may have accrued to a manufacturer, thereafter, would stand obliterated, till the revised price is reduced downwards to fall within the bracket of the permissible 10% increase and then maintained for the next 12 months.

Further, the interpretation by NPPA rested principally on the date when the violation is discovered either by NPPA and/or rectified by the manufacturer and not on the date when the infraction occurred as stipulated under the provision.

For e.g., If the MRP was increased beyond 10% for a drug in say 2014, and NPPA say issues a demand notice in 2020, a manufacturer is required by NPPA in 2020 to reduce the MRP to within 10% applicable in 2014 and maintain it for 12 months. In effect, denying the manufacturer the legally allowed 10% increase for 6 years from 2014 through to 2020.

Para 20 and rights of pharma companies

After hearing both parties in detail, the Court has rejected the interpretation of Para 20 of DPCO 2013 adopted by NPPA and has held that a manufacturer’s right to a 10% increase every 12 months cannot be denied due to overcharging in a particular year and must be taken into account while computing overcharging liability.

The Court has clarified that DPCO 2013 represents a conscious decision taken by the Government to leave the price of non-scheduled formulations to be determined by market forces. Para 20 of DPCO 2013 simply places an obligation upon the Government to monitor and oversee that the MRP of such formulations does not exceed 10% of the price which was prevailing in the preceding 12 months.

It undoubtedly permits a manufacturer to increase the MRP annually subject to the singular limitation that the price increase would not exceed 10% of the price which was prevailing in the preceding 12 months. The consequence of a breach of the aforesaid prescription is also not left open to speculation with Para 20 in clear and unequivocal terms prescribing the penalty as well as the remedial measures which must be adopted.

The Court has categorically held that Para 20 does not envisage a deprivation of the right to increase the MRP of a drug annually in case of an incidence of overcharging. The Court found that the stand taken by NPPA, would not only amount to a recasting of Para 20, but would also and on more fundamental terms, result in the introduction of a penal consequence which neither flows from a plain reading of that provision nor can be inferred.

Further, this freezing of prices for several years is clearly not permitted under the law as the provision envisages that both the commencement as well as the termination of the period during which the MRP must remain frozen has to be necessarily limited to 12 months with reference to the ‘date on which the manufacturer may have overcharged’ and not the ‘date when the violation of Para 20 may come to be discovered either by NPPA or rectified by the manufacturer’.

The Court while passing the judgment duly considered the fact that the issues involved relate to drugs and the importance of the said essential commodity being sold and distributed in a fair and equitable manner.

This will bring much needed relief to the manufacturers of non-essential drugs and medical devices who were being denied their statutory right to annual increase in MRP for several years due to the distorted interpretation of Para 20 adopted by the drug regulator, NPPA.

The second positive diktat of the judgment impacting the pharmaceutical industry is the recognition of the concept of rounding-off of prices as being applicable to both scheduled (essential) and non-scheduled (non-essential) drugs. The Court has deemed it arbitrary and discriminatory that while rounding-off of prices was allowed for essential drugs and same was restricted for non-essential drugs by NPPA.

The judgment also ruled on a third aspect which is the date from which interest would be payable under Para 20 (2) of DPCO 2013. On this issue, the Court held that interest would have to be paid from the date of overcharging and not from the date of payment stipulated in the demand notice in view of the specific language of Para 20(2) of DPCO 2013.

The issue before the Court was that Section 7A of the Essential Commodities Act 1955, the parent legislation, which states that government can recover the principal amount with 15% simple interest “from the date of such default to the date of recovery of such amount….” and DPCO 2013 being a sub-ordinate legislation cannot go beyond the mandate provided under the parent Act by requiring calculation of interest from the date of overcharging.

The judgment of the Allahabad High Court in TC Healthcare was relied upon by the manufacturers which had interpreted “default” under Section 7A as failure of the manufacturer to pay a demanded amount on the date stipulated in the demand notice.

(Krishna Sarma is the Founder and Managing Partner at Corporate Law Group, New Delhi. Archita Phookun is a Senior Associate and Navnit Kumar is a Partner at Corporate Law Group, New Delhi. They represented Bard Healthcare before the Delhi High Court.)

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