Supreme Court clarifies the definition of ‘manufacture’ under the Drugs and Cosmetics Act in INOX Air Products vs. State of Andhra Pradesh (2025) INSC 128 (30 January 2025)

Introduction

Date of the Judgment: 30 January 2025

Citation: 2025 INSC 128

Judges: B.R. Gavai, J. and Augustine George Masih, J.

Can a company with a license to manufacture a drug sell it to another company also holding a manufacturing license, even if the latter doesn’t have a separate license for wholesale? The Supreme Court of India recently addressed this question in a case involving the sale of Nitrous Oxide I.P. This case clarifies the scope of “manufacture” under the Drugs and Cosmetics Act, 1940. The court held that the sale was legal, as both parties possessed manufacturing licenses.

The judgment was delivered by a two-judge bench comprising Justice B.R. Gavai and Justice Augustine George Masih. The majority opinion was authored by Justice B.R. Gavai.

Case Background

The case began with a complaint filed by a Drugs Inspector in Kadapa, Andhra Pradesh, on December 22, 2017. The complaint alleged that INOX Air Products Limited (Appellant No. 1), represented by its Managing Director, Pavan Kumar Jain (Appellant No. 2), had illegally sold Nitrous Oxide I.P. to an unlicensed firm, M/s. R.S. Gas Products (Accused No. 3).

The investigation revealed that RIMS General Hospital, Kadapa, had been purchasing Oxygen I.P. and Nitrous Oxide I.P. from M/s. Varasi Oxygen firm (Accused No. 1). It was found that Accused No. 1 only had a license for Oxygen I.P., not Nitrous Oxide I.P. Further investigation showed that Accused No. 1 had purchased Nitrous Oxide I.P. from Accused No. 3, who in turn had purchased it from INOX Air Products (Appellant No. 1).

The Drug Inspector concluded that INOX Air Products (Appellant No. 1), represented by Appellant No. 2, had violated Section 18(a)(vi) of the Drugs and Cosmetics Act, 1940, by selling Nitrous Oxide I.P. to an unlicensed firm (Accused No. 3), which is punishable under Section 27(d) of the same Act.

Timeline

Legal Framework

The case revolves around the interpretation of the following key legal provisions:

• Section 3(f) of the Drugs and Cosmetics Act, 1940: Defines “manufacture” as including any process for making, altering, ornamenting, finishing, packing, labeling, breaking up, or otherwise treating or adopting any drug with a view to its sale or distribution.
  
  “manufacture” in relation to any drug or cosmetic includes any process or part of a process for making, altering, ornamenting, finishing, packing, labelling, breaking up or otherwise treating or adopting any drug or cosmetic with a view to its sale or distribution but does not include the compounding or dispensing of any drug, or the packing of any drug or cosmetic, in the ordinary course of retail business; and “to manufacture” shall be construed accordingly;”
• Section 18(a)(vi) of the Drugs and Cosmetics Act, 1940: Prohibits the manufacture, sale, or distribution of any drug in contravention of the provisions of the Act or any rule made thereunder.
  
  “18. Prohibition of manufacture and sale of certain drugs and cosmetics .—From such date as may be fixed by the State Government by notification in the Official Gazette in this behalf, no person shall himself or by any other person on this behalf — (a) manufacture for sale or for distribution, or sell, or stock or exhibit or offer for sale, or distribute — (vi) any drug or cosmetic in contravention of any of the provisions of this Chapter or any rule made thereunder;”
• Section 27(d) of the Drugs and Cosmetics Act, 1940: Prescribes penalties for manufacturing, selling, or distributing drugs in contravention of the Act.
  
  “27. Penalty for manufacture, sale, etc., of drugs in contravention of this Chapter .—Whoever, himself or by any other person on his behalf, manufactures for sale or for distribution, or sells, or stocks or exhibits or offers for sale or distributes, — (d) any drug, other than a drug referred to in clause (a) or clause ( b) or clause ( c), in contravention of any other provision of this Chapter or any rule made thereunder, shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to two years and with fine which shall not be less than twenty thousand rupees:”
• Rule 65(5)(1)(b) of the Drugs and Cosmetics Rules, 1945: Specifies the conditions for the supply of drugs by wholesale, requiring the name and address of the licensee to whom the drugs are sold and their sale license number.
  
  “65. Condition of licences. —Licences in Forms 20, 20 -A, 20 -B, 20 -F, 20 -G, 21 and 21 -B shall be subject to the conditions stated therein and to the following general conditions — (5)(1) Subject to the other provisions of these rules the supply of a drug by wholesale shall be made against a cash or credit memo bearing the name and address of the licensee and his licence number under the Drugs and Cosmetics Act in which the following particulars shall be entered — (b) the name, address of the licensee to whom sold and his sale licence number. In case of sale to an authority purchasing on behalf of Government, or to a hospital, medical, educational or research institution or to a Registered Medical Practitioner for the purpose of supply to his patients the name and address of the authority, institution or the Registered Medical Practitioner as the case may be, ……”
• Form 20B of the Drugs and Cosmetics Rules, 1945: License to sell, stock or exhibit or offer for sale, or distribute by wholesale, drugs other than those specified in Schedules C, C(1) and X.
• Form 25 of the Drugs and Cosmetics Rules, 1945: License of manufacture for sale or for distribution of drugs other than those specified in Schedules C, C(1) and X.

Arguments

Appellants’ Arguments:

• Dr. A.M. Singhvi, learned Senior Counsel for the appellants, argued that the term “manufacture” under Section 3(f) of the Drugs and Cosmetics Act, 1940, is broad and includes processes like “making, altering, ornamenting, finishing, packing, labeling, etc.”
• It was submitted that the process undertaken by Accused No. 3, which involved purchasing Nitrous Oxide I.P. in large cylinders, testing it, and then filling it into smaller cylinders, falls within the definition of “manufacture.”
• It was argued that Form 20B and Rule 65(5) of the Drugs and Cosmetics Rules, 1945, apply to wholesale sales, meaning “sale to a person for the purpose of selling again.” It does not cover manufacturing.
• The appellants contended that the sale of Nitrous Oxide I.P. from Appellant No. 1 to Accused No. 3 was a sale between two manufacturers for further manufacturing.
• It was submitted that Accused No. 3 was granted a manufacturing license under Form 25 without needing a Form 20B license.
• The appellants argued that the Magistrate’s order taking cognizance of the complaint and issuing summons was non-speaking and did not record any reasons, making it liable to be set aside based on the judgment of the Supreme Court in the case of Lalankumar Singh and Others v. State of Maharashtra [2022 SCC OnLine SC 1383].
• Without prejudice, it was submitted that Appellant No. 1 had nominated Mr. E.S.K. Sastry as the person in charge of day-to-day affairs, and Appellant No. 2, being a 73-year-old residing in Mumbai, had no role in the daily operations. Therefore, the complaint against Appellant No. 2 should be quashed based on the law laid down in Pepsi Foods Ltd. and Another v. Special Judicial Magistrate and Others [(1998) 5 SCC 749].

Respondent’s Arguments:

• Ms. Prerna Singh, learned counsel for the State, argued that the license under Form 25 is subject to the conditions laid down in Form 20B.
• It was submitted that since neither Accused No. 3 nor Appellant No. 1 possessed a license under Form 20B, there was a contravention of Section 18(c) of the Drugs and Cosmetics Act, 1940, constituting an offense under Section 27(d) of the same Act.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the primary issue before the Court was:

1. Whether the sale of Nitrous Oxide I.P. by Appellant No. 1 to Accused No. 3, both holding manufacturing licenses under Form 25, constitutes a violation of Section 18(a)(vi) of the Drugs and Cosmetics Act, 1940, read with Rule 65(5)(1)(b) of the Drugs and Cosmetics Rules, 1945, punishable under Section 27(d) of the Act, when Accused No. 3 does not possess a license under Form 20B.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• Lalankumar Singh and Others v. State of Maharashtra [2022 SCC OnLine SC 1383] – Supreme Court of India. This case was cited to support the argument that the Magistrate’s order issuing process/summons should record reasons.
• Pepsi Foods Ltd. and Another v. Special Judicial Magistrate and Others [(1998) 5 SCC 749] – Supreme Court of India. This case was cited to support the argument that summoning an accused is a serious matter and the Magistrate must apply their mind to the facts and law.
• Sunil Bharti Mittal v. Central Bureau of Investigation [(2015) 4 SCC 609] – Supreme Court of India. This case was cited to reiterate that the Magistrate must form an opinion based on sufficient grounds before issuing process.
• Mehmood Ul Rehman v. Khazir Mohammad Tunda and Others [(2015) 12 SCC 420] – Supreme Court of India. This case was cited to support the principle that the Magistrate must apply their mind before issuing process.
• Krishna Lal Chawla and Others v. State of Uttar Pradesh and Another [(2021) 5 SCC 435] – Supreme Court of India. This case was cited to support the principle that the Magistrate must apply their mind before issuing process.

Legal Provisions:

• Section 3(f) of the Drugs and Cosmetics Act, 1940: Definition of “manufacture”.
• Section 18(a)(vi) of the Drugs and Cosmetics Act, 1940: Prohibition of manufacture and sale of certain drugs and cosmetics.
• Section 27(d) of the Drugs and Cosmetics Act, 1940: Penalty for manufacture, sale, etc., of drugs in contravention of the Act.
• Rule 65(5)(1)(b) of the Drugs and Cosmetics Rules, 1945: Conditions of licenses.
• Form 20B of the Drugs and Cosmetics Rules, 1945: License to sell, stock, or distribute drugs by wholesale.
• Form 25 of the Drugs and Cosmetics Rules, 1945: License to manufacture drugs.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Lalankumar Singh and Others v. State of Maharashtra [2022 SCC OnLine SC 1383] – *Followed*. The Court relied on this case to emphasize the need for the Magistrate to provide reasons when issuing summons.
• Pepsi Foods Ltd. and Another v. Special Judicial Magistrate and Others [(1998) 5 SCC 749] – *Followed*. The Court reiterated the principle that summoning an accused is a serious matter and requires the Magistrate to apply their mind to the facts and law.
• Sunil Bharti Mittal v. Central Bureau of Investigation [(2015) 4 SCC 609] – *Followed*. The Court cited this case to emphasize that the Magistrate must form an opinion based on sufficient grounds before issuing process.
• Mehmood Ul Rehman v. Khazir Mohammad Tunda and Others [(2015) 12 SCC 420] – *Followed*. The Court cited this case to support the principle that the Magistrate must apply their mind before issuing process.
• Krishna Lal Chawla and Others v. State of Uttar Pradesh and Another [(2021) 5 SCC 435] – *Followed*. The Court cited this case to support the principle that the Magistrate must apply their mind before issuing process.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of the term “manufacture” under Section 3(f) of the Drugs and Cosmetics Act, 1940, and the fact that both Appellant No. 1 and Accused No. 3 possessed valid manufacturing licenses under Form 25. The Court emphasized that the definition of “manufacture” is inclusive and wide enough to cover the processes undertaken by Accused No. 3.

The Court also noted the lack of reasoning in the Magistrate’s order issuing summons, which was a critical factor in quashing the proceedings.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

The Court’s decision was more heavily influenced by legal interpretations and principles (70%) than by the specific factual aspects of the case (30%).

Logical Reasoning

Judgment Analysis

The Supreme Court’s decision was based on a plain and literal interpretation of the term “manufacture” as defined in Section 3(f) of the Drugs and Cosmetics Act, 1940. The court found that the term is inclusive and wide enough to cover any process or part of a process for making, altering, ornamenting, finishing, packing, labeling, breaking up, or otherwise treating or adopting any drug with a view to its sale or distribution.

The Court emphasized that since both Appellant No. 1 and Accused No. 3 possessed licenses under Form 25, which allows for the manufacture and sale of drugs, the sale between them was legal. The Court rejected the argument that Accused No. 3 needed a separate license under Form 20B for wholesale dealing, stating that the Form 25 license already authorized the sale by way of wholesale dealing.

The Court also highlighted the Magistrate’s failure to record any reasons for issuing the summons, which was a procedural flaw. The Court cited several precedents, including Pepsi Foods Ltd. and Lalankumar Singh, to emphasize the need for the Magistrate to apply their mind and provide reasons when issuing process.

The Court quoted the following from the judgment:

• “It could be seen that the term ‘manufacture’ as defined in the said Act is firstly inclusive and secondly wide enough to include any process or part of process from making, altering, ornamenting, finishing, packing, labelling, breaking up or otherwise treating or adopting any drug or cosmetic with a view to its sale or distribution.”
• “A perusal of clause 2 of Form 25 which is a licence issued under Rule 70 of the said Rules would reveal that it authorizes the sale by way of wholesale dealing and storage for sale by the licensee of the drugs manufactured under the licence , subject to the conditions applicable to licence for sale.”
• “The order of issuance of process is not an empty formality. The Magistrate is required to apply his mind as to whether sufficient ground for proceeding exists in the case or not. The formation of such an opinion is required to be stated in the order itself.”

There was no dissenting opinion in this case.

Implications for Future Cases:

This judgment clarifies the scope of “manufacture” under the Drugs and Cosmetics Act, 1940, and provides guidance on the legality of sales between licensed manufacturers. It emphasizes that a Form 25 license is sufficient for both manufacturing and wholesale dealing of drugs. This ruling may prevent unnecessary litigation against manufacturers who sell their products to other licensed manufacturers for further processing or distribution.

New Doctrines or Legal Principles:

The judgment does not introduce any new doctrines but reinforces the importance of a plain and literal interpretation of statutory definitions. It also reiterates the principle that a Magistrate must apply their mind and provide reasons when issuing summons, as established in prior judgments.

Key Takeaways

• The definition of “manufacture” under Section 3(f) of the Drugs and Cosmetics Act, 1940, is broad and includes any process for altering, breaking up, or repacking drugs for further sale or distribution.
• A license under Form 25 of the Drugs and Cosmetics Rules, 1945, allows for both manufacturing and wholesale dealing of drugs manufactured under the license.
• A manufacturer holding a Form 25 license can legally sell drugs to another manufacturer holding a Form 25 license without the need for a separate Form 20B license.
• Magistrates must apply their mind and provide reasons when issuing summons in criminal cases.
• This judgment provides clarity on the legal framework for the sale of drugs between licensed manufacturers, potentially reducing litigation in similar cases.

Directions

The Supreme Court issued the following directions:

1. The appeal was allowed.
2. The impugned judgment and order passed by the High Court of Judicature at Andhra Pradesh at Amravati, dated 12 January 2024, was set aside.
3. The proceedings initiated by the learned Magistrate against the appellants were quashed.