Supreme Court Quashes Criminal Proceedings Against Manufacturer Over Sale of Nitrous Oxide Without Wholesale License – “No Violation When Both Parties Hold Manufacturing Licenses”

Court’s Decision

The Supreme Court ruled in favor of the appellants, quashing the criminal case and setting aside the summoning order. The Court concluded:

1. No violation of law occurred since both the accused (Appellant No. 1) and the buyer (Accused No. 3) held valid manufacturing licenses (Form 25).
2. The High Court misapplied the law by holding that a manufacturing license holder cannot purchase Nitrous Oxide without a separate wholesale license.
3. The trial court’s summoning order was quashed as it was a non-speaking order, failing to record any reasons for proceeding against the accused.
4. The case lacked legal merit, even if all allegations in the complaint were taken at face value.

Facts of the Case

• Appellant No. 1 is a company engaged in the manufacture and sale of industrial and medical gases, including Nitrous Oxide I.P..
• Appellant No. 2 is its Managing Director.
• A complaint was filed by the Drugs Inspector, Kadapa on December 22, 2017, alleging that the appellants sold Nitrous Oxide I.P. to an unlicensed firm (Accused No. 3).
• The investigation began after the Drugs Inspector inspected RIMS General Hospital, Kadapa, which had purchased Nitrous Oxide I.P. from M/s. Varasi Oxygen (Accused No. 1).
• The supply chain was traced back to Appellant No. 1 (INOX Air Products Ltd.), which had sold the gas to Accused No. 3, which in turn supplied it to Accused No. 1.
• The complaint alleged that Accused No. 3 did not have a wholesale license (Form 20B) and that the sale from Appellant No. 1 was, therefore, illegal.
• On January 20, 2018, the trial court took cognizance of the case and issued summons to all accused, including the appellants.
• The appellants filed a petition under Section 482 of the CrPC before the Andhra Pradesh High Court, seeking quashing of the case.
• The High Court dismissed the petition on January 12, 2024, ruling that the appellants had sold Nitrous Oxide I.P. without proper authorization.
• Aggrieved, the appellants approached the Supreme Court.

Issues Before the Court

1. Whether selling Nitrous Oxide I.P. by a manufacturer (Form 25 license holder) to another manufacturer (also a Form 25 license holder) without a Form 20B wholesale license constitutes an offense under the Drugs and Cosmetics Act, 1940?
2. Whether the trial court’s summoning order was valid and in compliance with the law?
3. Whether the High Court correctly interpreted the licensing requirements?

Petitioner’s Arguments (Appellants)

• Definition of ‘Manufacture’:
  • The appellants argued that the definition of “manufacture” under Section 3(f) of the Drugs and Cosmetics Act, 1940, is broad.
  • It includes breaking up, repackaging, and relabeling of a drug for further sale or distribution.
  • Since Accused No. 3 held a manufacturing license, it did not require a wholesale license (Form 20B) to purchase Nitrous Oxide I.P.
• Wholesale Sale vs. Manufacturing:
  • Wholesale sale (Form 20B) only applies when drugs are resold without modification.
  • Accused No. 3 was engaged in further manufacturing by repackaging and relabeling the gas, which did not require a Form 20B license.
• Trial Court’s Summoning Order Was Invalid:
  • The summoning order did not record any reasons, violating the principles laid down in Pepsi Foods Ltd. v. Special Judicial Magistrate (1998).
  • Summoning an accused is a serious matter and should not be done mechanically.
• Managing Director’s Role:
  • Appellant No. 2 (Managing Director) was not responsible for daily business operations.
  • The company had already nominated a responsible officer under Section 34 of the Drugs and Cosmetics Act.
• Reliance on Precedents:
  • Cited Lalankumar Singh v. State of Maharashtra (2022) and Sunil Bharti Mittal v. CBI (2015), arguing that company directors cannot be held liable without specific allegations of direct involvement.

Respondent’s Arguments (State)

• Violation of Licensing Rules:
  • The prosecution argued that Form 25 is subject to Form 20B, meaning that a manufacturer must have a wholesale license to sell to another entity.
• Contravention of Section 18(c) of the Act:
  • The sale violated Rule 65(5)(1)(b) of the Drugs and Cosmetics Rules, making the accused liable under Section 27(d) of the Act.
• Summoning Order Was Justified:
  • The trial court correctly issued summons, and prima facie evidence existed.

Analysis of the Law

• Scope of ‘Manufacture’:
  • The Supreme Court analyzed Section 3(f) and held that the term manufacture includes breaking up, repackaging, and relabeling.
  • Since Accused No. 3 had a manufacturing license, it could lawfully receive, alter, and resell Nitrous Oxide I.P..
• Form 25 and Wholesale License (Form 20B):
  • The Court ruled that Form 25 is not dependent on Form 20B when both parties hold manufacturing licenses.
• Trial Court’s Order Was Legally Unsound:
  • The order lacked reasoning and failed to justify why the accused should be summoned.

Precedent Analysis

• Pepsi Foods Ltd. v. Special Judicial Magistrate (1998):
  • Held that summoning an accused is a serious matter and must be supported by reasons.
• Sunil Bharti Mittal v. CBI (2015):
  • Company directors cannot be held liable unless specific allegations establish direct involvement.
• Lalankumar Singh v. State of Maharashtra (2022):
  • Summoning orders must contain reasons and show judicial application of mind.

Court’s Reasoning

• No offense was made out under the Drugs and Cosmetics Act because both parties held valid Form 25 licenses.
• The High Court misinterpreted the law by holding that Accused No. 3 was not authorized to purchase from Accused No. 5.
• The trial court’s order lacked reasoning and was legally flawed.
• Even if all allegations were taken as true, no offense was committed.

Conclusion

1. Appeal Allowed.
2. High Court’s Judgment Quashed.
3. Summoning Order and Criminal Proceedings Quashed.

Implications

• Clarifies Licensing Rules: A Form 25 license holder can sell to another Form 25 license holder without needing a Form 20B wholesale license.
• Higher Standard for Summoning Orders: Courts must record reasons when issuing summons.
• Protects Senior Executives: Managing directors cannot be held liable without direct involvement.

This ruling prevents unwarranted criminal prosecution and ensures due process in regulatory cases.

Also Read – Supreme Court Upholds Statutory Bar Against Conversion of Acquittal into Conviction by High Court in Revisional Jurisdiction, Emphasizing Violation of Procedural Fairness and Constitutional Rights of the Accused