Income Tax Appellate Tribunal - Delhi
Boston Scientific India Pvt. Ltd.,, New ... vs Dcit Circle 4(2),, New Delhi on 13 March, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I', NEW DELHI
Before Dr. B. R. R. Kumar, Accountant Member
Sh. Yogesh Kumar US, Judicial Member
ITA No. 871/Del/2021 : Asstt. Year : 2016-17
Boston Scientific India Pvt. Ltd, Vs DCIT,
C-40/41, Okhla Industrial Area, Circle-4(2),
Phase-2, New Delhi-110020 New Delhi
(APPELLANT) (RESPONDENT)
PAN No. AABCG9446Q
Assessee by : Sh. Kanchun Kaushal, AR
Sh. K. Bansal, AR
Revenue by : Sh. Bhaskar Goswami, CIT DR
Date of Hearing: 13.12.2022 Date of Pronouncement: 13.03.2023
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present app eal has been filed by the assessee against the order dated 22.06.2021 passed by the, National Faceless Assessment Centre, Delhi u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961.
2. The assessee has raised the following grounds of appeal:-
"1 . On the facts a nd c ircumst anc es of the c as e 8c in law, the fi nal ass essment order pass ed under section 143(3) r.w.s . 144C(i ) and s. 144B of the Inc ome-t ax Ac t, 1961 ('the Act') dated 22 June 2021 by the National Fac eles s Assessment Centre ('NFaC' or 'Ld. AO') is bad i n law. Grounds re lating to transfer pricing adjustme nts:
2. On t he fac ts and circumstances of the cas e & in law, the Ld. AO grossly erred i n m aki ng an upward adj ustment of INR 11,22,76,671 pertai ni ng trading s egment of Appellant i n the fi nal as sessment order des pite the adj ustment being reduc ed to NI L i n Ld. TPO's s ubs equent rec tificati on ord er dat ed 18 Dec ember 2019 and Ld. TPO's Page | 1 order dated 16 April 2021 giving ef fect to Ld. DRP's direc tions.
3. On the facts a nd c ircumst anc es of the c as e 8c in law, the Ld. AO/ TPO/ DRP grossly erred in maki ng an upward adj ustment of I NR 1,75,15,590 pertaining t o busi ness support s ervice s egment by allegi ng that the trans act ions undertaken t herein do not s atisfy arm's l ength p ri nciple and by incl udi ng c ompa ni es not c omparabl e to Appella nt's functions perf ormed, assets empl oy ed and risks assumed.
4. On the facts a nd c ircumst anc es of the c as e 8c in law, the Ld. A O/ TPO/ DRP grossly erred i n enhanci ng Appellant's i nc ome by INR 3,33,74 0 towa rds rec overy of expenses wi thout providing any oppor tuni ty of being heard as ot herwis e mandated under t he f irst proviso to section 920(3) of t he Act a nd without application of transfer pricing met hods provided under sec tion 92C r .w. Rule 10B of the Income-tax Rul es , 1962.
Grounds re lating to corporate tax d isallo wances:
5. On the fact s a nd circumst ances of the cas e 8c i n law, the Ld . AO/ DR P grossly erred i n disallowi ng expenditure of INR 3,27,74,708 inc urred in relation to doctors under Explana tion 1 t o s ection 37(1) of the Act read wit h CBDT circular no. 5 /2012 despite being otherwise and specifically permissible under MCI Regul ations 2002.
6. On the fact s a nd circumst ances of the cas e 8c i n law, t he Ld. A O/ DRP gros sly er red in disallowi ng clinical trial expens es of I NR 1,04,72,741 und er secti on 37(1) of the Act despite it havi ng been incurred wholly and exclusively for t he busi ness pur pose of t he App ellant.
7. On the fact s a nd circumst ances of the cas e 8c i n law, the Ld . AO/ DR P grossly erred i n disallowi ng depreciation under s ec tion 32(1 ) of the Act of INR 1,38,45,026 in respect of assets placed with hospitals whilst i nc orrectly alleging that the App ellant is engaged i n hire purc has e trans acti on and wi thout appr eciati ng that the Appellant is the owner of s uch assets being us ed for its busi ness purpose.
8. On the fact s a nd circumst ances of the cas e 8c i n law, t he Ld. AO gr ossly err ed in not granti ng credit of adva nce tax paid of INR 2,75,00,000 to the Appellant in the computation s heet annex ed wit h impugned assess ment order.
9. On the fact s a nd circumst ances of the cas e 8c i n law, the Ld. AO erred i n initia ti ng penalty under sec tion 271(1)(c) of the Ac t wit hout appreciating that the Appellant has neit her c oncealed any income nor furnished inaccur ate particul ars relati ng t o a ny inc ome."
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3. The assessee is a private limited company domiciled in India and incorporated under the provisions of the Companies Act, 1956.
4. It is engaged in promotion, marketing, sales and distrib ution in India of a wide range of cardio products (such as coronary stents, pacemakers etc.) and related medical instruments and devices manufactured by Boston Scientific Group and also provides related post-sales support services. Its product portfolio emp hasizes on critically important therapeutic areas such as interventional cardiology, cardiac rhy thm management and electrophysiology, peripheral interventions, endoscopy, urology and women's health.
Transfer Pricing Adjustment:
Business Support Services:
5. The TPO has choosen the following comparab les and determined the ALP margin @ 15.81% and made an adjustment of Rs.1.75 Cr.
S. N o . Co mp a r ab le Op era t i ng M a rg in (O P /T C)
1. Ap t ic o Lt d . 4.5 0 %
2. H us y s Co ns ul t ing Lt d. 4.7 0 %
3. Cr ys t a l H ues L t d. 4.9 3 %
4. K es t o ne I nt eg ra t ed M k tg . Se rv ic es 5.8 9 % P vt . L t d .
5. I CR A Ma na g em e nt Cons u lt ing 8.3 1 % Se rv ic es Ltd .
P ra end ex Ma na g em en t R es ourc es 1 5. 28 %
6. P vt . L t d .
7. K il lic k Ag enc ies & M k t g . Lt d. 1 6. 34 %
8. E D CI L (I nd ia ) Ltd . 2 0. 75 %
9. J us t D ia l Ltd . 2 9. 26 % 10 .. I nf o Ed g e (I nd ia ) Lt d. 3 0. 49 % 11 . K itc o L td . 3 0. 20 % 12 . I nt era c t iv e Ma np ow e r Sol ut i ons P v t . 3 5. 54 % Lt d .
35 t h P e rc e nt i le 8.3 1 % M ed ia n 1 5. 81 % 65 t h P e rc e nt i le 2 9. 26 % Page | 3
6. Based on the above companies selected as comparables, the TPO passed a final order u/s 92CA(3) of the Act and comp uted the TP adjustment as under:
Particulars Amount (I NR )
Operati ng Cost 224,271,316
Arm's Lengt h Operati ng Margin (OP/TC ) as
computed by Ld. TPO 15.81%
Arm's Length Operati ng Profit as c omput ed by 3,54,57, 293
Ld. TPO
Arm's L ength Pric e as c omputed by Ld. TPO 25,97,28,611
Particulars Amount (I NR )
Trans f er Price of the Ass essee 24,22,13,021
Proposed Adjustment 1,75,15,590
7. Before us, the assessee contested for exclusion of four comparables on the grounds of FAR and Government companies. We hold that the "Government companies" per se cannot be a reasoned to be excluded and FAR of each company is examined with relevance to the FAR of the assessee.
S N o. Nam e of D RP ' s c ont e nt ion Ap p el la nt 's c ont e nt i ons t he Co mp a ny
1. I nf o Ed g e T he c om p a n y d oes F unc t ion a ll y D iffe re nt On line
1. (I nd i a ) m a rk et ac t i v it ies by c la s s i fieds c om pa ny f or s er v ic es s uc h Ltd . m a nag ing a nd re lea s ing a s j obs , r ea l es ta t e, m a tri m o ny e tc c la s s i fied a d v er t is e me nt s f or ma ny t y p es of Ow ns s ig n ific a nt int a ng ib le as s et s b us ines s e nt it ies un lik e a us ua l s erv ic e p ro v id er s uc h a s t he a pp e lla nt Fu n c ti on al l y d is si mi l a r Ent r ep ren eu r v is -a - v is li m it ed ris k He n c e, d ir e ct e d t o t he s erv ic e p ro v id er e x cl u d ed Ent r ep ren eu r d ep l o y ing s u rp lus c a sh a s inv es t m e nt in ot her c om pa nies v is -
a - v is lim it e d r is k s upp o rt s er v ic es pr ov id ed b y t h e ap p e lla nt
2. Jus t D ia l Co mp a ny is a s ea rc h F unc t ion a ll y D i ff erent Ltd . e ng i ne p ro v id ing s ea rc h t hro ug h p la t fo rm s s uc h D ev elo pm ent of a pp s a nd m ob ile a s w eb , m ob ile a pp etc . pl at form s t o t ra ns ac t , enq uir e a nd c on nec t b uy e rs a nd se lle rs Page | 4 Fu n c ti on al l y d is si mi l a r He n c e, d ir e ct e d t o t he U niq ue I nt a ng ib l es & t he ir c ont ri b ut ion e x cl u d ed Ow ns a nd e xp loits s ig nific a nt int a ng ib le a s s et s s uc h as uni q ue t ele p ho ne num b ers , a pp lic at ion de v elop m ent e tc . lead i ng t o hig h re v e nu es un lik e t he ap p el la nt
3. ED CI L Th e Co mp an y h a s b e en (I nd i a ) s el ec t ed by th e L im it ed A s s e s se e i t s el f.
4. K it c o L td . T he C om p a n y is eng ag ed G ov er nm ent Ow ne d Com pa ny in m a rk e t i ng / b us ines s F unc t ion a ll y D i ff erent & D iv e rs e s up p o rt s e rv ic es Eng a g ed i n e ng ine er ing c ons u lt a nc y s erv ic es Fu n c ti on al l y d is si mi l a r 73 % o f r ev en ue fro m en g ine er ing He n c e, d ir e ct e d t o t he c ons ult ing s e rv ic es a nd f or r es t of e x cl u d ed op era t ions , n o s e gm ent s egm ent a l in fo rm at ion is a v a ila b le.
8. The AO is directed to re-compute ALP tak ing into consideration the comparable excluded by the Tribunal.
Transfer Pricing Adjustment:
Recovery of Expenses:
9. During the relevant year under consideration, the assessee procured certain assets amounting to Rs.22,22,933/- lying with third parties for re-export to Associated Enterprises (AEs) on a cost-to-cost basis. The ld. DRP determined a 15% mark-up on the amount of such recovery treating the same to be support serv ices rendered by the assessee to its AEs and computed an adjustment of Rs.3,33,740/-.
10. The ld. AR submitted that the assets were procured by it on behalf of its AEs purely for administrative convenience and that entire cost of such assets was recovered by it Page | 5 from its AEs. Accordingly, it was sub mitted that there was no service element involved in such recovery of ex penses.
11. It was also submitted that arm's leng th price of such recoveries without issuing a valid show-cause notice to the assessee and without app lication of provisions of section Q2C of the Act read with Rule 10B of the Rules is against the princip les of natural justice and argued that the ALP adjustment proposed be directed to be deleted .
12. We have gone throug h the written submissions, the alternative arg uments of the ld. AR and also the arguments of the Revenue. After hearing both the parties we hold that in the specific facts of the instant case for the year before us, a mark-up of 8% instead of 15% is considered to be reasonable. The AO is directed to re-compute the ALP. The appeal of the assessee on this ground is allowed for statistical purpose.
Corporate Tax Issues:
Disallowance u/s 37(1):
13. In the instant y ear, the assessee incurred expenses totaling to INR 3.27 crores in respect of doctors/ med ical practitioners as follows:
Nat ure of ex p e ns e A m o unt (in I N R ) Cons ult ing e xp ens es pa i d to d oc t ors 1 ,8 0, 49 ,48 6
T ra v elli ng, b o ar d ing and lod g ing ex p e ns es p a id f o r 1 ,4 7, 25 ,22 2 re im b urs ed to d oc t o rs w it h w h om a ff ilia t e ar ra ng em e nt s has b e en e nt er ed T ota l 3 ,2 7, 74 ,70 8
14. It was sub mitted that the disallowance of expenses under section 37 of the Act has been made by the AO solely Page | 6 on application of C BDT Circular No. 5/ 2012 dated 1 August 2012 read with clause 6.8 of Medical Council of India (MCI) by holding that "any amount paid in whatever form to the Doctors is not an allowab le expense". The ld. DRP thereafter upheld the above disallowance and rejected the assessee's reliance on the ITAT's order in its own case for AY 2011-12 by incorrectly observing "that applicability of Circular No. 5/2012 has not been examined but the ITAT in A.Y. 2011-12".
15. It is argued that both the DRP erred in not following the ITAT's order in assessee's own case for AY 2011-12 where the applicability of above CBDT circular has duly been considered by the Hon'ble ITAT both in respect of (a) the relevant assessment year from which above circular applies and separately (b) on merits as well based on a detailed consideration of legal and factual assertions made by the assessee.
16. The relevant extracts from the aforesaid order of ITAT reproduced as under:
"3 .. . T he I d . Co uns e l fo r t h e as s es s ee s ub m itt ed t ha t t h e as s es s e e ha d ra is ed o bj ec t ions a ga ins t t he o rd e r of Id . D R P a nd s ta t ed t hat CBD T Circ u la r N o . 5/ 201 2 d oes not ap ply . I t wa s f ur t h er s ub m itt ed th at t he ex p e nd it ur e i nc urr ed wa s not p ro hib it ed b y M CI R e gu lat ions an d t he re fo re, t he c la im ma d e, d id not fa l l w it hin t h e p urv ie w o f CBD T Circ ula r N o. 5/ 201 2. It wa s fu rt her s ub m it t ed t ha t t he M CI Gu id e line s a re a pp lic a b le onl y t o m ed ic a l p ra c t it io ners a nd not t o P ha rm a Com pa n ies It wa s a ls o s t at ed t ha t the is s ue und er c ons id erat ion is c ov er ed b y th e d ec is i on of t h e I T A T M um b a i Be nc h in th e c a s e o f D CT T -8 (2 ) , M um ba i Vs PH L P ha rm a (P. ) Lt d. rep o rt ed at 16 3I T D 1 0.
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5. W e ha v e co ns id ered t h e s ub m is s io ns of b ot h t he p a rt ies a nd c ar ef ully go ne t hro ug h t he ma t e ria l a v a ila b le on t he r ec o rd . I n t he pr es e nt c as e, it is not in d is p ut e t ha t t h e as s es s e e inc u rre d ex p e ns es of Rs . 12 .1 4 .Ft 48 / - f or c o nd uc t in g a s em in a r/c onf e re nc e of t he D oc t o rs a nd p rov id ed t he t ra v elli ng f ac il it ies to t he pa rt ic ip a nt D oc t o r's in t h e s em ina r. T h e A O d is a llow ed t h e e xp ens es fo r t he reas o ns t ha t t he e xp end it ure inc ur red on c ons ult a nt D o c to rs w a s c ov er ed w it hin t he pu rv iew of CBD T Ci rc ula r N o. 5 /2 0 12 d at ed 01 .0 8 .20 12 . T he p res e nt c as e , re lat es t o t he a s ses sm e nt y ea r 20 1 1 - 12 a nd t he pr ev ious y ea r end ed on 3 1.03 .2 0 11 . T h er ef or e, t he c irc ula r is s ue d b y t he CBD T on 0 1 .0 8. 2 01 2 w as not ap p lic a ble f or t he y ea r und er c o ns id e ra t io n.
6. On a s im ila r is s ue , t h e I T A T M u mb a i Be nc h i n t he c as e of D C I T - 8(2 ), M um ba i V s P H L P ha rm a ( P. ) Lt d . ( s up ra ) h eld as und er :
"F rom t h e p e rus a l of t h e Bo a rd Circ ula r N o. 5 of 201 2 d a t ed 1 -8 - 20 12 , it c a n b e s ee n t ha t he av y r eli anc e ha s b e en pl a c ed b y t he CBD T on t he Circ ula rs is s ued by t he M e dic a l Cou nc il of I nd ia, w hic h is th e re gula t ory b od y c onst it ut ed und e r t he M ed ic a l Cou nc il Ac t , 1 95 6 ' . On e s uc h r eg ula t io n h as b ee n is s ued is ' I nd ia n M ed ic a l Co unc i l (P rof es s i ona l Co nd u ct , Et iq uet t e a nd Et hic s ) R e gul a t ions, 2 0 02 ' . T he s aid re gul at ion d ea ls w i t h t he p r of es s io na l c ond uc t , et i q uett e a nd et hic s for re gis t er ed m ed ic a l p ra c t it io n ers o nly . Cha pt er 6 of t h e s a id re gul at ion /not if ic a t io n d ea ls w it h un et hic a l a c ts , w h er eb y a p hy s ic ia n or m ed ic a l p ra c t it ion ers s ha ll not a id or ab et o r c om m it a ny o f t he ac t s illus t ra t e d in c la us es 6 .1 t o 6 .7 o f t h e s a id reg ula tio n w hic h s ha ll b e c ons t ru ed as u net hic a l. Cla us e 6 .8 ha s b ee n add ed (by w a y of a m e nd m e nt da t e d 1 0 -12 -20 0 9 ) in t erms of not if ic a t io n pub lis h ed on 14 -1 2 -2 009 i n G az et t e of I nd ia la y ing d ow n t he c od e of c ond uc t f or d oc t o rs a nd pro f es s io na l as s oc iat ion of d oc t ors in t h eir re la t ions hip w it h p ha rm ac e ut ic a l a nd a ll ied h ea lt h s ec t o r ind us t r y. [P a ra 5 ] On a p la in rea d ing o f t he af or es a id not if ic a t io n, whic h has b e en hea v ily rel ied up o n b y t he d epa rt m ent , it is q u it e ap p ar ent t ha t t he c od e of c ond uct e ns hr ined t he re in is m ea nt to be fo llow e d a nd ad he red b y m e d ic a l p ra c t it ion ers /d oc t ors a lon e. I t illust ra t es t he va rio us k ind s of c o nd uc t or ac t iv it ies w h ic h a m ed ic a l p ra c t it ion er Page | 8 s ho uld av oid w h ile dea lin g w it h p ha rm ac e ut ic a l c om p a n ies a nd a ll ied hea lt h s ect or ind us t ry . It p rov id es g uid elin es to t he m e d ic a l pr ac t it io ne rs of t h eir et hic a l c od es a n d m o ra l c o nd uc t . N ow her e t he re gul at ion o r t he n ot if ic a t ion m ent io ns t ha t s uc h a re gul at ion or c o d e of c o nd uc t w ill c ov er p ha rm a c eu t ic a l c om p a nies o r h ea lt h c a re s ec t or in a ny m a nne r. T h e d ep a rt m e nt ha s not b r oug ht a ny t hing on rec o rd to s h ow t h at t he a fores a id re gu la t ion is s ued b y M ed ic a l Counc il o f In d ia is m e a nt f o r p ha rma c eut ic a l c om pa nies in a ny m a nn er. O n t he c ont ra ry , b ef or e us the lea rne d s en ior c o uns e l. Sh ri M is t ry b rou ght to ou r no t ic e t he j ud g me nt o f H o n'b l e D elh i H ig h Cou rt in t he c as e of Ma x H os p it a l v . M CI (W P C12 2 4 /20 1 2 . d a t ed 1 0 -1 -201 4 I. w he re in t he M ed ic a l Cou nc il o f I nd ia a d m itt ed t h at th e I nd ia n M ed ic al Co unc i l R eg ula t io n of 200 2 h as j u ris d ic t io n t o t ak e ac t ion o nly a ga ins t t he m ed ica l p rac t it i one rs a nd n ot t o he a lt h s ec t or ind us t ry . F ro m t he af o res a id d ec is io n, it is os t ens ib ly c lea r t ha t t he M ed ic a l Co unc il of In d ia has no j urisd ic tio n t o p as s a n ord er or r eg ula t io n a g a ins t a ny hos p it a l or a n y he a lt h ca re s ec t o r u nd e r its 200 2 r eg ula t io n. So o nc e th e I nd ia n M ed ic a l Cou nc il R e gul at ion do es not ha v e a n y j ur is d ic t ion no r has a ny a u t ho rit y un d e r law up on t he p ha r ma c eutic a l c om p a n y or an y a llied h ea lt h s ec t or ind us t r y t he n s uc h a reg ula t i on ca nn ot ha v e an y p r oh ib it or y ef f ec t on t he p ha r ma c eut ic a l c om p a n y lik e t he as s es se e . If M ed ic a l Cou nc il re gul at ion do es not ha v e a ny j ur is d ic t ion up on p ha rm a c eut ic a l c om pa nies a nd it is ina pp lic ab le up o n P ha rm a c om p a nies lik e a s s es s ee t he n, w he re is t he v iola t io n of an y of la w /re gu lat ion? U nd er w hic h p ro v is io n t h ere is a ny off enc e or v iola t i on in inc u rrin g of s uc h k ind o f e xp end it u re.
T h e rel ev a nt p ro v is io n of s ec t io n 37 ( 1 ) app lies t o a n as s ess e e w ho is c la i m in g d ed uc t io n of ex p e nd it u re w hile c om p u t in g his b us ines s inc om e . T he Ex p la na t i on p r ov id es a n em ba rg o up on a l low ing a ny ex p e nd it u re inc ur re d b y t h e as s es s e e for a ny p urp os e w h ic h is a n off enc e o r w h ic h is pr oh ib it ed by la w . T his m ea ns t ha t t h er e s ho uld be a n off enc e b y an as s es s e e w ho is c la im in g t he e xp e nd it u re or th er e is a n y k ind o f p ro hib it io n b y law w h ic h is ap p lic a b le t o t he as s es se e . H e re in t his c a s e, n o s uc h of fe nc e of la w has b ee n b ro ug ht on rec o rd , w hic h p roh ib it s t h e p h a rm a c eut ic a l c om p a ny n ot to i nc ur an y d ev elo pm ent or s a les pro m ot i on ex p ens es . A la w w hic h is ap p lic a b le t o d iff e rent c la ss of p e rs ons o r p a rt ic ula r c a t e gory of Page | 9 as s es se e . s am e c a nnot b e m ad e ap p lic a b le to a ll. T h e re gu lat ion of20 0 2 is s ued by th e M ed ic a l Co unc i l of I nd ia (s up ra ), pr ov id es lim it a t i on/c u rb /pr ohib it ion f o r m ed ic a l p rac t it i one rs o nly a nd not f or ph a rm a c e ut ic a l c om p a ni es . H ere t he m ax im o f " E xp ress io Un ius Es t Ex c lus io A lt e rius " is c lea rly ap p lic a b le , t ha t is, if a pa rt ic u la r ex p r es s io n in t h e s ta t ut e is ex p r es s ly s t at ed f o r pa rt ic u la r c la s s o f as s es se e t h en b y imp lic at ion w hat ha s not b ee n s t at ed or ex pres s ed in t he s ta t ut e ha s t o b e ex c lud ed fo r o th er c las s o f a s s es s e e. I f t he M ed ic a l Cou nc il r eg ula t io n is ap p lic a b le to m ed ic a l p ra c t it ion ers t h en it c a nnot be made ap p lic a b le to P ha rm a or a llied hea lt h c a re c om p a nies . I f s ec t io n 3 7 (1 ) is ap p lic a b le t o a n as s es s e e c la im ing t he ex p e ns e t he n b y im pl ic at ion, a n y im pa irm en t c a us ed b y Ex p la nat ion 1 w il l a p p l y to t hat a s s es s e e only . A n y im p a ir me nt o r p ro hib it io n b y an y la w /re gu lat ion o n a d iffe re nt c la s s of p e rs on /as s es s e e w i ll n ot im p ing e up o n t he as s es s e e c la im ing the ex p e nd it u re und er t h is s ec t ion . [P a r a 6 ]"
It has f urt he r b e en h eld as und er :
"F rom t h e p e rus a l o f t h e na t u re of ex p e nd it ur e inc u rred by t he as s es se e , it is s ee n t h at u nd e r t he hea d " Cus t om er R e lat ions hip Ma na g em e nt " , t he a ss es s ee a r ra n ge s na t io na l lev e l sem ina r a nd dis c uss io n pa n els of em in en t d oc t ors a n d in v it ing o f ot he r d oc t ors to pa rt ic ip a t e in t h e s em in a rs on a to p ic r ela t ed t o t he ra p e ut ic a rea . It ar ra nges lec t ur es and s p o ns ors k no w led ge u p grad e c ours e w hic h he lps p ha rm a c eu t ic a l c om pa nies t o m a k e a wa re of t h e p r od uc t s a nd m ed ic i nes ma nufa c tur ed a nd la unc hed by it . U nd er K ey Ac c ou nt Ma na g em e nt , t h e as s es s ee m a k es e nde av ou r t o c rea t e aw a re nes s am on gs t c e rt a in c las s of k e y d oc t ors a bou t t h e p rod uc ts of t he as s es se e a nd t he ne w d e v e lop m ent s t ak ing p la c e in th e a r ea o f m ed ic i ne a nd p rov id i ng c or rec t d ia g n os is a nd t r ea t m ent of t he pa t ie nt s . T he s a id a c t iv it ies by t he a ss e s s ee a re to m ak e t h e d oc t ors aw a r e of its p ro d uc t s a nd r es e a rch w ork c arr ied o ut b u it f or b ring ing th e m ed ic ine in t he m a rk et a nd it s r es u lts a r e b a s ed o n s ev era l le v e ls of t es ts a nd a pp rov a ls . U nles s t h e p h arm a c e ut ic a l c om p a nies m a k e aw a r e of s uc h k ind of p r od uc ts to k ey d oc t o rs or m ed ic a l pr ac t it io ne rs , t h en on ly it can s uc c es s f ully la unc h it s pr od uc ts /m ed ic ines . T h is k ind of ex p end it ure is d ef init ely in t he na t u re of s a les a nd bus ines s p ro m ot ion, w hic h ha s to b e a llo w ed .
Page | 10 Com ing t o t he gift art ic les a nd f re e sa m p les of m ed ic ines , it is s e en th at t he as s es s e e giv es v a r ious k ind of a rt ic les lik e, d ia ries , p e n s ets , c ale nd a rs, p a p er w e igh ts , inj ec t io n b ox es et c. em b os s ed w it h b old log o of it s b ra nd na m e a nd t h e p rod uc t na m e s o t ha t t h e d oc t ors rem e m b ers t he b ra nd of t he as s es s e e a nd a ls o t he n am e of t he m ed ic i ne. A l l t he gift a rt ic les , as p oint ed o ut by t he as s ess e e b efo re th e a u t horit ies b e low a nd a ls o b efor e us a re v ery ch ea p a nd lo w c as t art ic les w hic h b ea r s t he na m e of as s es s e e a n d it is p ure ly f or t he pr om ot ion of it s p rod uc t , b r a nd re m i nde r, et c . T hes e a rt ic les ca nn ot be r ec k on ed a s f re eb ies giv en t o t he d oc to rs . E v e n t h e f re e s am p le o f m ed ic i ne is on ly t o pr ov e t he e ffic a c y and t o es t a b lis h t h e t r us t of th e d oc t ors on the q ua lit y of t he dr ugs . T his a ga in c a nnot be rec k o ned a s f re eb ies giv en t o t h e d oc t ors b ut f or p r om ot ion of it s pr od uc ts . T he p h arm a c e ut ic a l c om p a ny , w hic h is en gag ed in m a nu fa c t u ring a nd m a rk e t i ng of p ha r ma c eut ic a l p rod uc t s , c an pr om ot e it s s a le a n d b ra nd o nly by a r ran gin g s em in ars, c on f ere nc es an d t he reb y c rea t ing a wa ren es s a m ongs t d oc t ors a b out the n ew res ea rc h in t he m ed ic a l f ie ld a n d t h er ap e ut ic a rea s, et c . Ev e ry d ay th er e a re new d ev e lop m e nt s ta k in g p lac e a rou nd t h e w or ld i n t he ar ea of m e d ic in e a nd t he ra pe ut ic, he nc e in ord e r t o p r ov id e c orr ec t dia gn os is a nd t re at m ent of t he pa t i ent s , it is im p erat iv e t ha t t he doc t o rs sh ou ld k e ep them s elv es up da t ed w it h t h e la t est d e v e lop m e nt s in t he m e d ic in e a nd t he m a in ob j ec t of s uc h c on fere nc es a nd s em ina rs is t o u pd a t e t he d oc t ors of t he lat es t d e ve lop m e nt s , w hic h is b en ef ic ia l t o t he d oc t ors in t r ea t in g t h e pa t ie nts as w e ll a s t he ph a rm a c e ut ic a l c o m p a n ies . F u rt he r as p oin t ed out a nd c o nc lud ed by th e l ea rned C I T ( A ) t her e is no v i ola t io n b y t he a s s es s ee i n s o f a r a s giv ing a ny k i nd o f f reeb ies t o t h e m ed ic a l p rac t it i one rs . T hus , s uc h ki nd of ex p e nd i t ures by a p ha rm ac e ut i ca l c om pa nies a re p ure ly f or bus i ness p urp os e w hic h ha s t o be a llo w ed a s bus ines s ex pe nd it u re an d is not im p a ir ed b y Ex p l a na t io n l t o s ec t i on 3 7 (1 ). [P a r a 10 ] "
7. In t he p res ent c a s e a ls o , t he as s ess e e inc urr ed t h e ex p e ns es an d a rra ng ed t he s em ina r, t hos e e xp ens es w e re no t prohib it ed b y la w . So, res p ec t f ully f oll ow i ng t he a fo res a id re fe rred t o ord er of t he Coo rd ina t e b e nc h, w e a re o f t he v iew t hat t he d is a llo wa n c e m a de b y th e A O w as not j us t ifi ed .
Page | 11
8. A s im ila r v i ew has b e en t ak en b y t he I T AT M u mb ai Be nc h in th e c as e of So lv a y P ha rm a I nd ia Lt d . V s P r. CI T, R ang e-2 , M um b a i (2 0 18 ) 1 69 I TD 13 .. .
9. In the p res e nt c as e a ls o, t he as s es s e e inc ur red a s um of Rs . 13 ,14 ,5 4 8 /- o n ac c ou nt of t rav el ling , lod gin g, c o nv e y a nc e a nd re gis t ra t io n f e es o n b eha lf of D oc t o rs w ho a tt end ed t he s em ina r, t he as s es se e inc u rred ex p e ns es b e ing a p r om ot er o f m ed ic a l ed uc a t ion an d t o t ra in D oc t o rs /m e d ic a l p r ac t it io ne r f o r p rov id i ng b est a va ila b le c ar e to t he p at ient a nd b ett er q u a lit y m ed ic a l s er vic es We, th er ef or e, c o ns id e rin g t he t ot a lit y of t he fac ts a nd in v ie w of t he af o res a id d is c uss io n, d elet e t he a dd it i o n of Rs .1 3 ,1 4 ,548 /- b e ing a re im b urs em ent of e xp ens es i nc ur red b y t h e as s ess e e on t ra v e llin g, lod gin g a nd re gis t ra t io n fe es o n b e ha l f of t h e D oc t ors. "
17. It was argued that the assessee being a promoter of medical education had incurred these expenses to train Doctors/ medical practitioners for providing best medical availab le care to the patient and better quality medical services. Hence, the disallowance made by the AO was directed to be deleted by the Hon'ble Bench in assessee's own case for AY 2011-12. It was argued that such expenses on travelling, lodging, conveyance and registration fees of behalf of doctors are not prohib ited by law while appreciating that these cannot be considered as freebies to doctors.
18. It was further argued that giv en the complex and advanced nature of the medical products in which the assessee trades and the clinical needs that such products are intended to meet, the assessee treats doctors training and education as a major priority for its business. For this purpose, during AY 2016-17, the assessee had entered into a consultancy arrangement with several doctors (refer P.B. Vol-I 297-342), who are renowned names in the medical Page | 12 field in India, for providing consultancy/ advisory services to the assessee. Under the above contractual arrangements, the doctors were required to attend lectures worldwide in events/ conferences which are generally organized to promote innovations and new medical technolog ies and also to provide a platform to doctors/ medical practitioners to collaborate and share their knowledge/ views through live demonstration of cases. Generally , these doctors provided the following consultancy/advisory services to the assessee:
• Advising and assisting the assessee with respect to its products • Assisting assessee in assessing and evaluating its latest methodologies and products • Sub mitting and providing regular reports, as requested under agreement, on assessee's products and methodologies • Attend worldwid e or domestic lectures or scientific meetings upon request of assessee and submit written reports on such meetings • Attend meetings with persons or parties specified by assessee • Provide trainings at seminars for assessee's employees and/or fellow healthcare professionals • Hold lectures at meetings sponsored by the assessee • Provide general advice on availab le technologies in the market as well as current market trends
19. In lieu of the services rendered by these doctors, the assessee paid consultancy fees to these doctors as per the agreed consultancy agreement (refer P.B. Vol-I 297-342) entered with them after deducting appropriate taxes. It Page | 13 was argued that the genuineness of these expenses ought not to be questioned has the assessee has duly deducted tax at source under section 194J of the Act as professional payments made to such doctors. It was argued that these consultancy agreements have been entered by the assessee with renowned doctors during AY 2016-17 and consultancy charges have been paid as per the agreement, based on the work report submitted as per the agreement. In this regard, the assessee submits that the consultancy charges paid to such doctors are in the normal course of its business as these activities are directly related to its business and assist in furtherance of its commercial interest. The ld. AR concluded the arguments by submitting that the aforesaid expenses incurred by the assessee for availing certain consultancy/advisory services are in the normal course of its business and represent genuine business expenditure of the assessee. Thus, the same should be allowable as deductible business expenditure in accordance with the provisions of section 37(1) of the Act.
20. On the other hand, the ld. DR supported the order of the authorities below and argued that owing to the agreement entered by the assessee there is change of facts as well as legal proposition. The Ld. DR arg ued and relying on the judgment of Hon'ble Supreme Court in the case of M/s Apex Laboratories P . Ltd. Vs DCIT in SLP (Civil) No. 23207 of 2019 vide order dated 22.02.2022.
21. Heard the arguments of both the parties and perused the material availab le on record.
22. We have examined the "Invoice-Cum-Report" of various Doctors which are addressed to the sales Manager Page | 14 of the assessee intimating performance of rotablation technique and to release the honorarium for the said services. We have gone through the supp lementary synopsis of the assessee for the relevant grounds. The consulting expenses paid, travelling , boarding & lodging expenses, reimbursement to doctors are indirect way of gifting the doctors to promote the products. We have gone through the consulting and proctorship agreement entered by the assessee and also considered the TDS deducted. The agreement and deduction of TDS cannot give credence that the incentives received by the doctors is in fact a deductible expense in the hands of the assessee. On this issue, we are g uided by the judgment of Hon'b le Supreme in the case of M/ s Apex Laboratories P . Ltd . Vs DCIT in SLP (Civil) No. 23207 of 2019 vide order dated 22.02.2022. For the sake of ready reference, the entire order of the Hon'ble Supreme Court is reproduced as under:
" S. R AVI N D R A BH AT , J.
1. L ea v e g ra nt ed . T h e a p p e lla nt (he re ina ft er , " Ap ex " ) is a g g rie v ed b y a j ud gm ent o f th e H ig h Cou rt of Jud ic at ur e o f Ma d ras1 , w here in t he D iv is io n Benc h up h eld a n ord e r of t h e I nc om e T a x App ella t e T ri b una l2 (he re ina f t er, "I T AT " ), w h ic h in t urn up h eld an o rd e r of t he Com m is s ione r of I n com e T a x (Ap p ea ls )3 (he re ina ft er, " CI T ( A)" ). T he CI T (A) ha d p a rt ly a llow ed a n a p p ea l f ro m a n ord e r o f t he res p ond e nt D ep ut y Co mm is s ion er of I nc om e T a x4 , w hic h pa rt i a lly a l low ed am ou nt s c la im ed b y Ap ex as 'b us ines s exp en d it ure ' und e r Sec t ion 37 (1 ) of t h e I nc om e T a x Ac t , 1 96 1 (h er ein aft e r, "I T Act " ).
2. T he f a c ts in br ief ar e as fo llo ws : On 0 1. 08 .20 12, t h e Cent r a l Boa rd of D irec t T a x es (he re ina ft e r, " CBD T " ) iss u ed a c irc u lar 5, w hic h c la r if ied tha t ex p en ses inc u rred b y p h arm a c e ut ic a l a nd a llie d h ea lt h s ec t or ind us t r ies f or d is t rib ut ion of inc e nt iv es (i. e., " f re eb ies " ) t o m ed ica l p ra ct it ion ers a re in elig ib le Si g na t ur e N ot V eri fie d D ig ita lly Page | 15 s ig n ed by D r. M uk es h Na s a T a x Cas e Appe a l No. 7 23 of 2 018 , d at ed 18 .0 3 .20 19 .
D at e: 20 22 .02 .2 2 1 2 :3 4 :4 3 I ST R ea s on: 2 IT ACT No . 11 53 /M ds /2 014 , da t ed 2 9 .0 1. 201 8.
I .T A. N o. 10 /1 3 -1 4 / LT U (A) , da te d 29 .0 1 .20 1 4 .
G.I . N o. /P AN AAAC A 5 17 4 G, da t e d 21 .0 3 .20 1 3 .
Circ u la r N o . 5 /2 01 2 [F . N o. 2 2 5 /14 2 /20 12 -I T A.I I ].
f or t he b ene f it of Ex p la na t io n 1 t o S ec t ion 37 (1 ), w h ic h de nies t he ap p lic a t io n of t he b ene f it f or a n y p ur pos e w hic h is a n ' off enc e' or 'p r oh ib it ed b y la w ' .
3. Aft e r t h e c irc u la r wa s is s ued , on 2 2.1 1 .2 01 2 , Ap ex w as is s ued a not ic e und er Sec t io n 14 2 (1 ) o f t he IT Ac t , to ex p la in w hy t he ex p e nd it u re of Rs. 4,7 2 ,9 1 ,15 9 /- inc ur red t ow a rds g ift in g fr eeb ies s uc h as h os p ita lit y , c on f ere nc e f ees , go ld c o ins , L CD T V s, fr idg es , la pt ops , etc . t o m e dic a l p ra c t it ion ers f or c reat ing a wa r en es s a b o ut th e he a lt h s upp lem ent ' Zinc o v it ' , s ho u ld no t b e a dd ed b a c k t o t he tot a l inc o m e o f Ap ex .
4. T he re as on fo r on ly a p a r t ia l a llow a nc e b y t he a ut hor it i es b e low wa s t ha t a n a m e nd m e nt 6 t o t he M ed ica l Counc il Ac t , 1 956 (n ow rep e a led ) t hroug h t h e I nd ia n M ed ic a l Cou nc il (P rofes s iona l Con d uct , Et iq u et t e a nd Et hic s ) R eg ula t io ns , 20 0 2 (he re ina f t e r, " 2 00 2 R eg ula t io ns " ) , p ub lis hed in t he O ffic ia l Ga z et t e on 1 4 .1 2 .2 00 9 , dis a llow ed m ed ic a l pra c t it ion ers f rom a c c ep t in g em o lum ents i n t he f orm of i nt e r a li a g ifts , t ra v e l fa c ilit ies , h os p it a lit y , c a s h or mo ne ta ry gr a nt s . Ac c ept a nc e of s uc h f re e b ies co uld res ult in a r a ng e of s anc t io ns a g a ins t th e m e d ic a l p rac t itio ne rs , f rom 'c ens u re' f or inc e nt iv es rec e iv ed up t o Rs . 5, 000 /-, to rem o va l f ro m t he I nd ia n M ed ic a l R eg ist er or St at e M ed ic a l R eg is te r f or p er iod s ra ng ing f rom th re e m ont hs t o on e y ea r. T h er ef or e, o nly t h e e x p ens es inc urr ed t il l 14 .1 2 .20 09 w er e eli g ib le fo r t h e b en ef it o f Sec t io n 37 ( 1 ), a nd not f or th e ent ir et y of t he As s es sm e nt Y ea r 2 0 1 0 -2 0 11 , as c la im ed b y Ap ex .
Con t e nt ions o f Ap ex Page | 16
5. I t w as a rg ued by t he c ou ns el fo r Ap e x, Mr . S. Ga n es h, Sen ior Adv oc a t e , t hat t he am end ed 2 0 02 R eg ula t io ns w er e not a pp lic ab le t o Ap ex , i.e ., p ha rm ac e ut ic a l c om pa nies w e re n ot b o und b y t h em . W h ile m ed ica l p rac t it i one rs w er e e xp ress ly pr oh ib it ed fr om a cc ept ing f reeb i es , no c o rres p o nd i ng p ro hib it i on No. M CI -2 1 1 (1 ) / 2 00 9 (Et hics ) / 55 67 .
I d ., R eg u lat io n 6 .8 , Cod e of Cond uc t f or D oc t ors in t h eir R e lat io ns hip w it h P h a rma c eut ic a l a nd A llied H ea lt h Sec t o r I nd us t ry.
R eg ula t io n 6 .8 .1 , ins ert ed by N ot if ic at ion No. M CI - 21 1 (1 ) /20 1 0 (Et h ic s ) /1 6 30 1 3 , iss u ed o n 01. 02 .2 0 16 .
in t he for m of a n y b ind ing no rm wa s imp os e d o n t he p h a rm a c e ut ic a l c om p a nies g ift ing t hem . I n t h e ab s e nc e o f a ny ex pr es s pro hib it io n by la w , Ap ex c ou ld not be d e nie d t h e b e nef it of s ee k i ng ex c lus io n of t he ex p e nd it u re inc urr ed o n s upp ly o f s uc h f ree b ies u nd e r Sect i on 37 (1 ).
6. Couns el p la c ed r eli a nc e on ru ling s b y d iff er ent H ig h Co urt t o es t a b lis h t ha t t he 20 02 R eg ula t io ns w ere e nf orc eab le onl y a ga ins t m ed ica l p ra ct it ion ers a nd not t he d ono rs , i. e. , p har ma c eut ic a l c om p a nies . I n Ma x H os p it a l P it a m p ura v. M e d ic a l Cou nc il of I nd ia 9 (he re ina ft er, "Ma x H os p it a l" ) t he D e lhi H ig h Cou rt he ld t hat th e M ed ic a l Co unc il o f I nd ia (h er ein a ft e r, "M CI " ) h ad n o j ur is d ic t ion to pa s s any o rd er s ag a inst t he a p p el la nt h os p it a l , a nd ad v e rs e ob s erv a t io ns ma d e a ga ins t t he h os p it a l by M CI w ere q ua s hed . Eq ua l ly, in D r. An il G up t a v . Ad d l. Com m is s io ner of I nc om e T a x 10 , a D iv is io n Benc h of t he Raj as t ha n H ig h Cou rt g av e b e ne fit of Sec t ion 37 (1 ) t o t he ap p el l an t as Ex p la na t io n 1 co uld n ot b e ra is ed b y t he res p ond e nt f or t h e fi rs t t im e a t a n a pp e lla t e s t ag e, ob se rv ing :
" Ev en ot h erw is e in i nc om e ta x p roc e ed ing s t he m ed ic a l et hic s w il l n ot be t a k e n in t o c ons id er at ion . At t h e m os t ev en if it is a p ro f es s io na l m is co nd uc t , it is t o b e d ea lt w it h b y M ed ic a l C ounc il o f I nd ia . T he inc om e t a x a u t ho rit y c a n not d ec id e t he m ed ic a l et hics w h en t he or ig in a l a u t h orit y has p a rt l y a llo w ed th e ex p e ns es ." T h e Cou ns e l urg ed t ha t as t hes e d ec is i ons we re not c ha l len g ed b y t he r ev en ue au t h orit ies , a nd t her eb y a cc ept ed b y t hem , t he p resen t m at t e r wa s not op en f o r reco ns id er at ion .1 1 Page | 17
7. T he Co uns e l f urt h er s ub m itt ed t hat i t wa s not op en t o t he r ev en ue to d e ny a ta x b en ef it o n t he ' nat ur e' of ex p ens es inc u rred . T h is Cou rt , in T. A. Que res hi v. Com m iss io ne r of I nc om e Ta x , Bho pa l ( he rei naf t er , " T. A. Q ue res h i" ) a llo w ed t he ap p ella nt t o d ed uc t th e c os t of h er oin s e iz ed a s a b us i nes s loss , ho ld in g t hat :
W. P . (C) N o. 13 34 /2 014 / I LR ( 20 14 ) 1 D e lhi 6 2 0, d at ed 10 .01 .2 014 .
I nco m e Ta x Ap p ea l No. 4 85 /2 00 8 , d ec id ed o n 18 .0 7 .2 017 .
See Berg er Pa i nt s L td . v Co mm is s ion er o f I nc om e T ax , (20 0 4) 1 2 SC C 42 a nd So ut h I nd ia Ba nk Lt d. v Com m iss io ne r of I nco m e Ta x, Civ i l App ea l No. 96 0 6 of 2 01 1 / 2 021 SCC On line SC 6 9 2, dat ed 09 .0 9 .20 21 .
(2 0 07 ) 2 S CC 7 59 .
"I n our op in ion , t he H ig h Cou rt ha s ad op t e d a n em o tio na l a nd m o ra l ap p roa c h ra t h er t h a n a le ga l a pp r oa c h. W e f ull y a gr ee w it h t he H ig h Cou rt t ha t t he a s s es s ee wa s c omm it t in g a hig hly im mo ra l a c t in ille ga lly ma nuf a ct ur ing a nd s elli ng h er oin. H ow ev er , ca s es a re t o b e dec id e d b y t he c ou rt on leg a l p rinc ip les a nd not on one 's o w n m o ra l v i ew s . L aw is d i ff e rent fro m m ora lit y, as t he p os it iv is t ju ris t s Ben t ha m a nd A us t in p oi nt ed out . "
8. I t wa s a rg u ed t ha t s im ila rly , in Co mm is s ion er of I nc o me T a x v . M /s K he mc ha nd Mo t il a l Ja in , a D iv is io n Be nc h of t he Ma d h y a P rad es h H ig h Co urt a llo w ed ra ns om m on ey p a id t o t h e k id na pp ers of a n em p l oy ee of t h e r es p ond ent c o mp a n y o n a b us in es s t rip as b us ines s ex p e nd it u re u nd er Sect ion 37 (1 ), h old ing t ha t :
"T h e af or es a id s ec t io n p rov id es t ha t k idn app ing a p ers on fo r ra ns om is a n of f enc e a nd a n y p ers o n d oing s o or c om p e lling t o p a y is lia b le f or t he p u nis hm e nt as prov id e d i n t he Sec t ion , b ut no w he re it is pr ov id ed t ha t t o s a v e a lif e of t he p e rs on if a ra ns om is pa id , it w ill am ou nt to a n of f enc e. N o p rov is io n is b ro ug ht t o o ur not ic e t hat pa y m ent of ra ns om is p roh ib it e d b y a ny la w . I n ab s enc e o f it , t he Ex p la na t io n of s ub -s ec t ion (1 ) , s ect io n 3 7 w ill no t be a p plic a b le in th e p res e nt c as e." * ** " Su k h na nda n Ja in rem a ined in c us tod y fo r a pe rio d of nea r a b o ut 20 da y s . T he p olic e w er e a ls o inf or m e d a nd a ft er wa it i ng 2 0 d a y s f or the p olic e ac t ion . I f t h e res p ond en ts t o sa v e h is Page | 18 lif e pa i d t he a f or es a id am ount , t he n t he a for es a id a m ount c a nnot b e tr ea t ed as a n a c t io n, w hic h p r oh ib it ed u nd e r t h e law . N o pr ov is ion c ou ld b e b r oug ht t o ou r not ic e t ha t p ay me nt of ra ns om is a n of f ence . I n a bs enc e of w hic h, t h e c ont ent io n of t he p et it ion er t hat it is pr ohi b it ed u nd er Ex p la nat ion of s ec t i on 3 7 (1 ) of t h e I nc om e Ta x Ac t ha s no s ub st a nc e. The ent ire t ou r of Suk hna nda n Ja in wa s f or pu rc ha s e o f T e nd u lea v es of q ua lit y a nd fo r t his p urp os e, he w a s on bus i ness t o ur a nd d u ring h is b us ines s t ou r, h e wa s k id na pp ed a nd f or his re leas e t he a f ores a id am ount w a s p a id. " (em p has is s up plie d )
9. Co uns e l bro ug h t th is Co urt 's a tt ent io n to t he M e m ora nd um Ex p la ining t he P ro v is i ons of t he F ina nc e (N o. 2 ) Bill , 1 998 w hic h s ta te d t ha t t he i nt r od uc t i on o f Exp la na t ion 1 t o Sec t ion 3 7( 1 ) w o uld dis a llow ta x p a y er s from c la i m in g " p rot ect io n m one y, e xt ort io n, ha ft a, b r ib es , et c. " a s b us in es s e xp end it u res ,1 4 f rom 2 01 1 (4 ) MP LJ 69 1 .
M em o ra nd u m Ex p la i nin g t he P ro v is io ns of t he F ina nc e (N o. 2 ) B ill, 19 98 , Sec t ion 15 . L at er a d opt ed by CB DT Circ ula r No . 7 7 2 ([19 9 9 ] 23 5 I T R (St . ) 35 , 5 3) , da t ed 23 .1 2 .1 99 8.
w h ic h i t co uld b e i nf erre d t ha t t h e int e nt ion of t h e P a rlia m e nt w as t o on ly b r ing int o t h e am b it of Ex p la na t io n 1 ' ille g a l' a c t iv it ies w hic h w ere d es ig ned as ' off enc es ' und er r ele va nt s t at ut es. T he I T Ac t n ot be ing a s oc ia l r ef or m st at ut e, ne ed ed to b e int erp r et ed s t rict ly , a nd not in a w id e ma nn er s o as t o inc lu de in its s c op e a n a c t b y a ph a rm a c e ut ic a l co m p a ny n ot rec og n iz ed a s ' ille ga l' b y a ny s t at ut e - do ing s o w ou ld b e a ga ins t t he c a no ns of p ub lic law .
10 . F ina lly , Cou n s el s ub m itt ed t ha t the CBD T c irc u lar d a t ed 01 .0 8 .20 12 e nla rg e d t he s c op e of t he 20 02 R eg ula t io ns , a nd ma d e it op era b l e b e y o nd m ed ic a l p ra ct it ione rs , i. e., to p h ar ma c eut ic a l c om p a nies a nd a llied he a lt h s ec t o r ind us t ries , w hic h , i n t he a bs e nc e of a ny e na b lin g p ro v is io n, w as o ut s id e it s d om i nio n. Arg ue nd o , if t he CBD T c irc ula r h ad t o b e b ro ug ht int o eff ec t , it c o uld b e d on e s o o nly 'p r os p ec t i v e ly ' , a nd n ot ' ret r os p ec t i v e ly ', i. e., f rom the d at e of pu b lic a t io n o f t he C BD T c irc u la r on 01 . 08 .2 01 2 , a nd not t h e d at e of pu b lic a t io n of th e 20 02 R eg ula t i ons on 14 .12 .2 009 . R el ia nce w a s pla c ed on v a r ious d ec is io ns of t his Cou rt t o s h ow t ha t b en ef ic ia l c irc ula rs ha d to be ap p lie d ret r os p ec t iv el y, how ev er opp res s iv e Page | 19 c irc ula rs c ou ld onl y be a p p l ied p ros p ec t iv e ly .15 Co nt ent io ns of R ev en ue Aut h or it ies .
11 . Mr. Sa nj a y Ja in , Add it io na l So lic i t or Ge ne ra l ap p ea ring f or t he res p ond e nt re v e nue a ut hor it i es , s ub m it t ed t ha t w hi le the act of ph a rm a c e ut ic a l c o m p a nies g ift i ng f re eb i es to m ed ic al p ra ct it ion ers f or pr om ot ion of t hei r p r od uc ts m ay not b e c la s s if ied as a n ' o ff e nc e' und er a ny s t a t ue , it wa s s q ua re ly c ov e red w it h in t he s c op e of Ex p la na t io n 1 t o S ec t ion 37 (1 ) b y us e o f t h e wo rds " p ro hib it ed by la w ", as it w as s p ec if ic a l ly p ro hib i ted by t he a m en ded 2 0 02 R eg ula t io ns . W hile Ap ex c ould not b e 'p u nis hed ' , it s h ould not b e a ll ow ed to b en ef it by c la im ing a ta x ex em p t io n on the fr eeb ies dis t rib ut ed .
See fo r e. g. , D irec t o r of I nc om e -t a x v . S.R .M . B Da iry F a rm ing (P .) Ltd . (20 18 ) 1 3 SCC 239 .
12 . F u rt h er, the ASG s ub m it t ed t h at P a r lia m ent ' s int ent io n to dis inc ent iv iz e t he p ra c t ic e of rece iv ing ex t ra v a g a nt fr ee b ies in ex c ha ng e f or p res c rib i ng ex p ens iv e bra nd ed m ed ic a t io n over it s eq ua lly e ff ec t iv e g ene ric c o unt er pa rts , t h er eby b u rd e nin g pa t ie nt s w it h u nnec es s a ry c os t s, w as a pp a re nt not onl y f ro m t h e a m e nd ed 20 02 R e g u lat ions , but a ls o t he P rev e nt ion of Co rrupt ion Ac t , 1 9 88 (he re ina f t er, "P C Act " ). A g ov er nm ent d oc t o r r ec e iving a ny ille ga l gr at ific at ion a m o unt ing t o m a lp ra ct ic e o r a ny ot her o ffe nc e w as lia b le to be c ha rg ed und er P C Ac t a nd t he I nd ia n P e na l Cod e, 1 860 (he re ina f t er, " I P C" ).
13 . I n t he p res ent i ns ta nc e , t he m ed ic a l p ra ct it ione rs w er e p rov id ed ex p e ns iv e g ifts s uc h as h os p ita lit y , c on fe re nc e fe es , g old c oins , L CD T Vs , f rid g es , la pt op s , et c . b y Ap ex t o prom ot e it s nut rit iona l h ea lt h s up p le m e nt ' Zi nc ov it' . I t w as a rg ue d t h at r ec e iv in g t h es e, c lea rly - in let t er a nd s p irit , c o ns t it ut ed p r of es s io n a l m is c ond uct on p art of t he m ed ica l p rac t it io ne r. T he sc o p e of t he 200 2 R eg ula tio ns wa s n ot lim it ed t o a f in it e list of ins t a nc es of p ro fes s iona l m isc o nd uc t , b ut br oa d eno ug h t o c ov e r t hos e ins t a nc es not sp ec if ic a lly en um er at ed a s w e ll. T he m e na c e of p r es c rib ing ex p en s iv e br a nd ed m ed ic a t io n as a qu id p r o q u o a rra ng em ent ha d a d irec t b ea ring on p ubl ic p oli cy , w h ic h wa s im p l ic it in t he 2 0 02 R e g u lat ions it s el f.
Page | 20 14 . T o e luc id a t e t he s a m e , re lia nc e w a s p lac ed on tw o H ig h Cou rt dec is ions . I n Com m iss io ne r of I nc om e -T a x v. K ap Sc an a nd D iag nos t ic Cen t r e P. Lt d . , a D iv is i on B enc h of t he P unj a b a nd H ary a na H ig h Cou r t d isa llo w ed t he b en ef it of t he e xe m pt ion f or c om m is s i on p ro v id ed to d oc t ors eng a g ed in pri v a t e p ra c t ic e f or re ferr ing t he ir pa t ie nt s t o t he a s ses s ee 's d ia g nos tic c ent r e, h old ing th at :
"I t , t hus , e m erg es tha t an a ss es s ee w ou ld not be ent it led to ded uct io n of p a y m e nt s m ad e in c on tra v ent io n of l a w. Si m ila rly , pa y m ents w hic h a re op p os e d t o p u b lic po lic y b ei ng in t he na t u re of un law fu l c ons id erat io n c a n not eq ua lly be rec og n iz ed . I t c a nn ot b e he ld t ha t b us i nes s m en a re ent it led t o co nd uc t t h eir b u s iness ev en c ont ra ry t o la w a nd c la im d ed uc t io ns K an wa rj it Sing h K a k k a r v . Sta t e of P u nj a b , (2 011 ) 1 3 SCC 1 58 .
See reg ula t i on 8 of t he 2 0 02 R eg u lat ion s .
(2 0 12 ) 3 44 I T R 47 6 (P& H H C).
of p ay m e nt s as b us in es s e xp end it u re , not w it hs t a nd ing that s uc h pa y m ents a r e ill eg a l or o pp os e d to p ub lic p ol ic y or h av e p ern ic ious c onse q u enc es t o t he s oc iet y a s a w ho l e." * ** " I f d e ma nd ing of s uc h c om m is s i on wa s ba d, p a y ing it wa s eq ua lly ba d . Bot h w ere p riv ies t o a w ro ng. T her ef or e, s uc h c om m is s io n p aid to p ri va t e doc t ors wa s op p os ed t o p ub lic p olic y a nd s h ould b e d is c o urag ed. T he p a ym en t o f c om m is s i on b y t he a s s es s ee for re ferr i ng p a t ie nt s t o it c a n not b y a ny s tr et c h of im a g ina t i on b e ac c ep t ed t o b e leg a l or as pe r p u b lic p oli cy . U nd o ub t ed ly , it is not a fa ir p rac t ic e a n d has t o b e t erm ed a s a ga ins t th e p ub lic p olic y . " * ** F u rt h er , t he H ig h Cour t re fe rr ed to Sec t ion 23 o f t h e Con t rac t Ac t , 18 7 2 (he re ina ft er , " Co nt ract Ac t " ) to h old t he c ons id erat ion or ob j ec t of t he a g re em e nt b et w e en t he as s es se e a nd pr iva t e d oc to rs a s unla w f ul , a nd t he a gre em e nt t he ref ore v oid , a s it wa s op p os e d t o p ub l ic p olic y .
15 . A D i v is io n Be nc h of t he H ima c ha l Pra d es h Hig h Co urt d ec id ed a lo ng s im ila r lines i n Con fe d e ra t io n of I nd ia n P ha rm ac e ut ic a l I n d us t ry (SSI ) v. Cent r a l Boa rd of D ir ec t T a x es 1 9 ( he re ina fte r, " Co nf ed era t i on" ), h old ing :
Page | 21 "T h is r eg u lat io n is a v er y sa lut ar y reg ula t i on w hic h is in t he int er es t of t he pa t ie nt s a nd th e p ub l ic . T his c o urt is not ob l iv io us t o t he inc r ea s i ng c om p la int s t hat t h e m ed ic a l pr ac t it i one rs d o n ot p r es c r ib e ge ne ric m ed ic in es a nd p res c rib e b ra nd ed m ed ic ines o nly in lieu of t he gift s a nd o t he r fr eeb ies g ra nt ed to t he m by s om e p art ic u la r ph a rm a c e ut ic a l ind us t ries. Onc e t his has b e en pr ohi b it ed by t he M ed ic a l Co un c il u nde r t h e p ow e rs v es ted in it , s ec t ion 3 7(1 ) of t he I nco m e-t a x Ac t c o mes int o p la y " T he H ig h Cour t a ls o up he ld t he leg a l it y of t he CBD T c irc u la r d a t ed 0 1 .0 8.2 0 12 , s tat in g t hat it wa s f or th e a ss es s ee to es ta b lis h to the As s es s ing Off ic er tha t t he ex p e nd it u re inc urr ed w as not in v iola t i o n of 2 0 02 Reg ula t i ons :
" Shr i Vis ha l M oha n , ad v oc at e, on b eha lf of t h e p et it io ner, c ont e nd s th at t he c irc u la r g o es b ey o nd the s ec t ion it s elf . We a re n ot in ag re em ent w it h t his s ubm is s ion . Th e Exp la nat ion t o s ec t ion 37 (1 ) m ak es it c le ar t ha t a n y e xp end it u re inc urr ed b y a n as s es s e e f or an y p ur pos e w h ic h is p ro hib it ed b y la w sha ll no t b e d eem ed t o ha v e be en inc urr ed f or t he p urp os e of b us ine s s or p ro fess ion . T h e s um a nd s ub st a nc e o f t h e c irc ula r is a ls o t he s a m e. I n ca s e t he a ss es s ing au t h orit ies a r e not pr op e rly u nd e rs t a nd ing t h e c irc ula r (20 13 ) 3 53 I T R 3 88 (H P H C).
th en t he rem ed y li es fo r e ac h ind iv id ua l a s s es s ee to fi l e a pp ea ls und er t he I nc om e -t ax Ac t b u t t he c irc ula r w hic h is t ot a l ly in l ine w it h s ec t ion 3 7 (1 ) c a nn ot b e s a id t o b e il leg a l. I n fac t p a ra gr ap h 4 o f th e c irc u lar q uot ed h er ein ab ov e it s e lf c la r ifi es t h at t h e v a lu e of t he f reeb i es e nj oy ed by th e m ed ic a l p ra c tit ion er is a ls o t ax a b l e as bus i ness inc om e or inc om e fr om ot her s o urc es d ep end ing o n t h e fac t s of eac h c as e. T h ere for e, if t he as s e s see s at is f ies t he a s ses s ing au t h orit y t ha t t he e xp end it ure is n ot in v io la t io n of t h e reg u lat ions f ra m e d by the M e dic a l Cou nc il t h en it may leg it im a t ely c la im a ded uct io n, b ut it is for t he as s es s e e to s at is fy t he As ses s ing Of f ic er th at t he ex p e ns e is not in v i ola t io n of t h e M ed ic a l Co unc i l R e g u lat ions re ferr ed t o a bov e ".
(e mp ha s is s up p lie d ) 16 . La s t ly , t h e ASG s ub m it t ed t hat ha d the As s es s i ng Of f ic er a llow ed Ap ex t o c la im ta x b en ef it , t he a ut h orit ies w o uld hav e b ee n d ep riv ed of rev e nu e in t he fo rm of ta x a m o unt lev ia b le on Rs .4 ,7 2,9 1 ,1 59 / -, Page | 22 w h ic h wa s a c ruc i a l om is s io n. T hus , on a h olis t ic rea din g o f t he s ta t ut es a nd reg ul at ions, Ap e x c oul d not be a llo w ed to c la im ded uct io n und er Sec tio n 3 7 (1 ).
Ana lys is a nd Co nc lus io ns 17 . An e xa m in a t ion of t he re le va nt p r ov is ions is f irs t nec es s a ry . Sec t ion 3 7 of t h e I T Act s ta t es a s f o llow s :
Sect ion 37 . G en era l.-- (1 ) A ny e x p en d it ur e (n ot b e ing ex p e nd i t ur e of th e na t ur e d es c rib ed in Sec t io ns 30 t o 36 a nd not b e ing in t he na t u re of c ap ita l e xp end it ure or p e rs o na l e xp ens es o f t he a s s es s ee ), la id o ut or ex p e nd ed w ho lly a nd e xc lus iv e ly fo r t he p u rp os es o f t h e b us ines s or p rof es s i on s ha ll b e a l low ed in c om p ut in g t he inc om e c ha rg ea b le und er t he head "P ro fits a nd ga ins of b u s in es s or p rofes s ion" .
[Ex p la na t io n 1 ]. --F or t he re m ov a l of do ubt s , it is he reb y d ec la r ed th at a n y e x p end it ure inc urr ed b y a n as s es se e fo r a ny p u rp os e w hic h is a n o ff e nc e o r w h ic h is p ro hib it ed b y law s ha ll not b e d e em ed t o ha v e b e en inc u rred for t he p u rp os e of b us ines s or pr of es s io n a nd no ded uct io n or a llow a nc e s ha l l b e m a d e in res p ec t of s uc h ex p end it u re .] (e mp ha s is s up p lied ) Sec t io n 37 is a res idua ry p rov is io n. A ny b us ines s or p r ofes s io na l ex p e nd i t ur e w hic h do es not ord ina rily fa l l und er Sec t ions 3 0 -3 6, a nd w h ic h a r e n ot in t he na t ur e o f ca p it a l ex p e nd it u re or p ers o na l e xp ens es , c an c la im the be ne fit of th is ex em pt ion . But the s am e is not a b so lut e. Ex p la na t io n 1 , w hic h wa s inse rt ed in 1 9 98 w it h ret r os p ec tiv e ef f ec t f rom 0 1 .0 4. 196 2, res t r ic ts t he a pp lic a ti on of s uc h e x emp t io n fo r " a ny p urp os e w h ic h is an of fe nc e o r w h ic h is p ro hib it ed by la w " . T h e I T Ac t d o es not pr ov id e a d ef in it io n f or t h es e t e rm s . Sec t io n 2 (38 ) of t h e G en era l Cla us es Ac t , 1 89 7 d e fin es ' o ffe nc e ' a s " a ny a c t o r om is s io n m a d e pun is ha b le by a ny la w f or t he t im e b eing in fo rc e" . U nd er t he I P C, Sec t ion 40 d ef ines it as "a t hin g p unis ha b le b y th is Cod e" , r ea d w it h Sec t ion 43 w hic h d ef in es ' ill eg a l' a s b e ing ap p lic a b le t o " e v e ry t hi n g w hic h is an of f enc e or w hic h is p ro hib it ed b y la w, or w h ic h f urn is hes g ro und f or a c iv il ac t ion " . I t is th er ef or e c lea r t hat Ex p la nat ion 1 co nt a ins w it hin it s a mb it a ll s uc h ac t iv it ies w h ic h a re ill ega l/p roh ib i t ed b y law an d /o r p u nis ha b le .
18 . R eg ula t io n 6 .8 of t he 2 0 02 R e g ulat io ns s t at es as f ollows :
Page | 23 "6 .8 Cod e of c ond uc t for d oc t ors in t he ir re lat ions hip w it h ph a rm a c e ut ic a l a nd a llied hea lt h s ec t or in d us t ry .
6.8 .1 In d ea ling w it h P h arm a c e ut ic a l a nd a llie d h ea lt h s ec t or ind us tr y , a m ed ic a l p r ac t it io ne r s ha ll f ollow a nd ad h er e to t he s tip ula t io ns g iv en b el ow :--
(a ) Gi ft s : A m ed ic a l p rac t it i one r s ha ll n ot r ec e iv e a n y g ift f rom a ny ph a rm a c e ut ic a l o r a llie d hea lt h c a r e in dus t ry a nd the ir s a les p eop le or r ep res e nt at iv es .
(b ) T ra v e l fa c ilit ies : A m ed ic a l p rac t it io ne r s ha l l n ot ac c ep t an y t rav e l Fa c ilit y ins id e t h e c ou nt ry or o ut s id e , inc lud ing ra il, r oad , a ir, s hi p, c ruis e t ic k e ts , p a id v ac at io n, et c . f ro m a ny p ha rm ac e ut i ca l o r a ll ied hea lt hc a re i nd us t ry or t h eir r ep res ent a t iv es f or s e lf an d fam ily m em b e rs f or v a c a t ion or f or at t e ndin g c o nf er enc es , sem ina rs , wo rk s hop s , CM E P ro gra m m e , etc . as a d e leg at e. ] (c ) H os p it a li ty : A me d ic a l p ra ct it ion er s ha ll not ac c e pt ind iv id ua lly an y hos p it a lit y lik e hot e l a c c om m oda t io n fo r s elf and fa m il y m emb ers und er a ny p ret e x t.
(d ) Ca s h o r m o neta ry g ra nts : A m ed ic a l p rac t it i one r s ha l l n ot rec ei v e an y c a s h or m on et ar y g ra n ts f rom a n y p ha r ma c eut ic a l an d a ll ied hea lt hc a re ind us t ry f or ind iv id ua l p urp os e in ind ivid ua l ca p a c ity und er an y p r et ex t .
Fu nd ing f or m ed ic a l r es e a rc h, s t ud y et c . c a n o nly b e r ec e iv ed t h ro ug h ap p rov e d i ns t it ut ions by m oda lit ies la id d ow n by la w / ru les / gu id e lines a d op t ed b y s uc h app ro v ed i ns t it ut ions , in a t ra ns p a re nt m a nn er. I t s ha ll a l w a y s b e f ully d is c los ed ." T h e r eg ula t io n f urt h er la ys d ow n c o rres p o nd in g ac t i on or s anc t io n w hic h can be t a k en ag a ins t , o r imp os ed u pon , t h e m ed ic a l p ra ct it ion er f or v io la t io n of ea c h st ip u lat io n, b a s ed o n t he m on et ary v a l ue of t he s a m e. T h us , ac c ept a nc e of f re eb ies g iv e n b y p h a rm a c eut ic a l c om pa nies is cl ea rly an of f enc e on part of the m e d ic a l pr ac t it io ne r, p u nis ha b le w it h va ry ing c o ns eq ue nc es.
19 . T h e CBD T c irc ul ar d at ed 0 1 .0 8.2 0 12 is s et o ut b elow :
1. It ha s b e en b r oug ht to the n ot ic e of the Bo a rd t ha t s om e ph a rm a c e ut ic a l a nd a l lied he a lt h s ec to r I nd ust ries are p rov id ing Page | 24 f reeb e es ( fr eeb ies ) to m ed ic a l pr ac t it io ne rs a nd t h eir p rof es s io na l as s oc iat ions in v io lat ion of t he reg u lat ions is s ued b y M ed i ca l Co unc il of I nd ia (t he ' Cou n c il' ) w h ic h is a reg ul at ory b o dy c ons t it ut ed und er th e M e d ic a l Counc il Ac t , 195 6 .
2. T he c o unc il in e x e rc is e of its s ta t ut o ry po w e rs am end ed the I nd ia n M ed ic a l Co un c i l ( Pr of es s io na l Co nd uc t , Et iq ue t t e a nd Et h ic s) R eg ula t io ns , 2 0 02 (t he r eg u lat io ns ) on 10 - 12 -2 00 9 im p os ing a pr ohi b it ion on the m ed ic a l p rac t it i one r a nd t hei r p rof es s io na l as s oc iat ions f ro m ta k ing a ny G ift, T ra v e l fa c ilit y , H os p it a lit y, C as h or m one ta ry g ra nt f ro m t he p ha r ma c eut ic a l a nd a llie d he a lt h s ec t or I nd us t ries .
3. Sec t ion 37 (1 ) of I nc om e T ax Ac t p rov id es f or d e duct ion of a ny re v e nue e xp end it u re (ot he r t ha n t hos e fa ilin g u nd e r s ec t ions 30 t o 3 6 ) fr om the b us ines s I nc om e if s uc h ex p e ns e is la id out /e x p en d ed w ho lly or ex c lus iv ely f or t he p u rp os e of b us ines s or pr of es s io n. H ow ev er , t he ex p la n at ion ap p e nd ed t o t h is s ub -s ec t ion de nies c la im of a ny s uc h ex p e ns e, if t he s a m e ha s bee n inc ur red f or a pu rp os e w h ic h is eit he r a n off e nc e o r p r ohib it ed b y la w .
T h us , t he c la im of a ny ex p ense inc u rred in pr ov id ing a bo v e m ent ion ed o r s im ila r f r ee b ees in v iola t io n of t he p r ov is ions of I nd ia n M ed ic a l Co un c i l ( Pr of es s io na l Co nd uc t , Et iq ue t t e a nd Et h ic s) R eg ula t io ns , 20 0 2 s ha ll b e ina dm is s ib le und e r s ec t ion 37 (1 ) of t he I nco m e Tax Ac t b e ing an ex p e ns e p roh ib it ed by the la w. T h is dis a llow a nc e s ha ll be m ad e in t he h a nd s of s uc h p harm ac e ut ic a l or a ll ied he a lt h s ect or I nd us t ries or ot her as s es s e e whic h ha s p ro v id ed af o res a id fre eb ees an d c la im ed it as a d ed uc t a b le ex p e ns e in it s ac c o unt s a g a ins t i nc om e.
4. I t is a ls o c la rif ied t ha t t he s um equ iv a le nt t o va lue o f f re eb ees enj o y ed by the a fo res a id m ed ic a l p ra c t it ion er or pr of es s io na l as s oc iat ions is a ls o ta x a b le a s b us ines s inc o m e o r i nc om e f rom o t h er s ourc es as t he ca s e m a y b e d ep end in g o n t h e fa c ts of e a c h c a s e. T he As s es s ing Of fic e rs of s uc h m ed ic a l p rac t it i one r or pr of es s io na l as s oc iat ions s h ould ex a m in e t he sa m e a nd take an a pp r op ria t e ac t ion .
Page | 25 T h is m a y b e b r oug ht t o t h e not ic e o f a ll t he o ffic e rs of t he c ha rg e f or nec es s a ry a c t io n.
(e mp ha s is s up p lie d ) T he CBD T c irc u lar be ing c la rif ic at or y in na t ure , wa s in ef fec t f rom t he d at e of im p le m e nt at ion of R eg u lat ion 6 .8 of th e 20 02 R eg ula t i ons , i.e ., f ro m 14 .1 2 .2 00 9 .
20 . I n D y . CI T 8 (2 ) M um b a i v P H L P ha r ma P. L t d. , t he I T AT r eit er at ed Ma x H os p it a l 's (s up r a ) dec is ion t o c onc lud e t h at t he 2 002 R eg u lat ions w ere ina pp l ic ab l e t o p ha rm a c eut ic a l c om pa n ies , a nd t ha t in a bs e nc e of r eq uis it e j u ris d ic t ion , it c ould not b e s a id t ha t t he p ha rm a c eut ic a l c om p a nies h ad v iol at ed a ny la w or reg ula t i on. F u rt her, it held t ha t th er e w as no en ab ling p r ov is ion to a llo w t he CBD T to b r ing ph a rm a c e ut ic a l c om pa nies w it h in t he f old of t he 2 0 02 R e g ula t io ns , an d ev en if s uc h a n a c t w e re t o b e p erm itt ed , it c o uld be onl y b e do ne s o p ros p ec t iv e ly :
" Ad v e rt i ng t o t h e co nt ent io n o f t h e Ld . CI T D R t ha t CB DT is w el l em p ow e red to is s ue s uc h c la ri fic a t io n, it is s e en t hat the C BD T Circ u la r d at ed 0 1 .0 8.2 0 12 (s up ra ) i n it s c la r ific a t i on ha s e nla rg ed t he s c op e a nd a p p lic ab il it y of 'I nd ia n M ed ic a l Cou nc il R eg ula t io n 200 2 ' by m ak ing it a pp l ic ab l e to t he p ha rm a c eu t ic a l c om p a ni es or a l l ied h ea lt h c ar e s ec t o r ind us t r ies . Suc h an en lar g em e nt of s cop e of M CI reg ul at ion t o t he p ha r m ac eut ic a l c om p a nies b y t h e CBD T is w it ho ut an y enab l ing p r ov is ions eit he r und er t he p r ov is ions of I nc om e T ax La w or by a ny pro v is i ons und e r th e I nd ia n M ed ic a l Co unc il R eg ula t io ns . T h e CB D T c a nn ot p r ov id e c as us om is s us t o a s ta t ut e or not if ic a t io n o r a ny reg ul at ion w hic h ha s no t b ee n e x p res s l y p ro v id ed th er ein . T h e CBD T c a n t o ne d ow n t he r igo urs of la w a nd e ns ur e a fa ir en fo rc e m e nt of t he pro v is io ns by is s uing c i rc ula rs a nd b y c la rif y ing th e st a t ut ory p ro v is io ns . CBD T c irc ula rs act l ik e 'c o nt e m p or a n ea ex p os it io ' in int e rp r et ing t he s t at ut or y pr ov is ions a nd t o as c e rt a in t he tr ue m ea nin g en unc ia te d at t he t im e wh en s t at ut e was e na ct ed . H ow e v er t he CB D T i n its p ow e r c a n not c reat e a n ew i mp a ir m e nt ad v e rs e t o a n a s s es s ee or t o a c la ss of as s es se e w it h out a ny sa nc t ion of law . T h e ci rc ula r is s ued b y t h e CBD T m us t c o nf irm t o ta x la ws a nd f or p urp os e of g i v ing a dm inis t rat iv e re lie f or for c la rify in g t he pr ov is ions of la w a nd c a nn ot im p os e a burd e n o n t h e as s es s e e, l ea v e a lo ne c r ea t in g a n ew b urd en b y e nla rg ing t he s c op e of a d if fe re nt Page | 26 reg ul at ion is s u ed u nd er a d iff er ent ac t so as t o imp os e a n y k ind o f ha rds h ip o r l iab ilit y t o t he a s s es s ee . I n a ny c a s e, it is t rit e l aw t hat th e CBD T c irc ula r w hic h c re a t es a b u rd e n or lia b il ity o r imp os es a ne w k ind of im p a r it y , s a m e c a nno t b e r ec k one d r et rosp ec t iv e ly . T he be ne fic ia l c irc ula r m ay a pp ly ret r os p ec t iv e ly b ut a c irc ul a r i m p os i ng a bu rd e n ha s t o b e a pp li ed p r os p ec t i v e ly on ly . H e re in t his c as e t he CBD T ha s e nla rg ed t he s cop e of 'I nd i a n M ed ic a l Co unc i l R eg u la t io n, 20 02 ' a nd made it ap p lic a b le f or t he p ha rm a c eu t ic a l c om p a ni es . T h eref or e, s uc h a CBD T c irc ula r c a nno t be rec k o ne d to ha v e ret r os p ec t iv e e ffec t. The s am e CB D T c i rc ula r ha d c om e up f or c ons id erat ion b e f ore t he c o-o rd i nat e B enc h I T A No . 4 60 5 /M um / 201 4 , da t ed 12 .0 1. 201 7.
of th e I T AT , M um b a i Benc h in t he c a s e of Sy nc om F orm ula t io ns (I ) Ltd . (in I T A N os . 64 29 & 64 28 / M um /20 12 f or A.Y s . 2 010 -11 a nd 20 11 -1 2 , v id e o rd er d a t ed 2 3 .1 2 .20 1 5 ), w he re in T rib una l he ld t ha t CBD T c irc ula r w o uld n ot b e not b e a p p lic ab le in t he A.Ys . 2 0 10 -1 1 an d 20 1 1 -1 2 as it w as int rod uc ed w. e.f . 1 .8 .2 012 . " (e mp ha s is s up p lie d ) 21 . PH L P ha rm a (s upr a ) f urt he r d is c uss ed t h e H ig h Cou rt d ec is io ns o f Ka p Sc a n a n d Con fed e ra t io n (s up ra ), ho ld i ng t h e e v e n t ho ug h t h ey w ere d ec id e d a g a in s t t he as s ess e e, t hey d i d not la y d ow n a b la nk et ba n o n p h ar ma c eut ic a l c om pa nies c la im in g t a x b e nef it un d e r Sec t ion 37 (1 ), a n d m a d e it s ubj ec t t o t he s at is fa c t io n of th e As s es s in g Of f ic er on a c a s e-t o-c a s e b a s is . Sub s eq u en t d e cis ions by I TAT s a c ros s s ta t es ha v e p la c ed hea v y relia nc e on PH L P ha rm a t o gra nt re l ief t o t he as s es se e p ha rm ac eu tic a l c om pa nies .
22 . T his Co urt is of t h e op in ion t ha t s uc h a na rr ow int erp reta t io n o f Ex p la na t io n 1 t o Se ct io n 37 (1 ) d e f ea ts t he p urp os e fo r w hic h it w a s ins e rt ed , i.e ., t o d is a llow a n a ss es s ee f rom c la im ing a t ax b en ef it f or it s pa rt ic ipa t i on in a n illeg a l a ct iv ity . T houg h t he m em ora n d um t o t he Fi na nc e Bill, 19 9 8 eluc id a t ed t he am b it of E xp la n at ion 1 t o inc lud e "p r ot ec t ion m one y , ex t o rt i on, ha ft a , b ri bes , et c ." , y e t, ip s o fa c t o , b y no m ea ns is t he em ba rg o en v isa g e d r es t ric t ed t o t h os e ex am p les . I t is b ut log ic a l t h at w he n a c c ept a nc e of f re eb ies is p unis ha b le b y t he M CI (t h e ra ng e of pe na lt ies a nd s a nct ion ex t e nd i ng t o b a n im p os ed on t h e m ed ic a l p ra c t it ion er) , p ha rm ac eut ic a l c om pa nies c ann ot b e Page | 27 gr a nt ed t he ta x b e ne fit f or p r ov id in g s uc h f re eb ies , a nd t he reb y (a ct iv ely a nd w it h f ull k now led g e ) ena b li ng t h e c om m is s i on of t h e ac t w h ic h at t rac t s s uc h opp rob riu m .
23 . T he i llog ic a li ty a nd c om p let e ly m is c onc e iv ed na t u re o f s uc h a n int er pr et at ion w as d ea lt w it h in a sim il a r i nt e rp reta tio n of t he pr ov is ions of P C Ac t, b y a Const it ut i on Benc h o f t his Co urt i n P . V. Na ras im ha Ra o v . St at e (CB I /SP E). P r ior t o t he 20 18 am e nd m ent2 2, th e P C Ac t o nly p un i s hed t h e b r ib e -
(1 9 98 ) 4 S CC 6 26 .
Sub s . Sect io n 8 , Ac t 16 of 2 0 18 , w . e. f . 26 .0 7 .20 1 8.
ta k e r w h o wa s a p ub lic se rv a n t, a nd not t he b ri b e-g iv er. R e lia nc e w a s pla c ed on t h is t o a c q uit t h e a pp ell a nt br ib e -g i v e r. R ej ec t ing s uc h a n int er pr et at ion , t h is Cour t he ld :
"14 5. M r. Ra o s u b m itt ed t ha t s inc e, b y reas o n of t h e pr ov is ions of Art ic le 1 0 5 (2 ) , t h e a lleg ed b rib e- ta k e rs ha d c o mm itt ed n o off enc e , th e a l leg ed b rib e -g iv e rs ha d a ls o c om m it t ed no o ffe nc e. Art ic le 10 5 (2 ) d oes not p r ov id e t ha t w ha t is ot he rw is e a n of f enc e is n ot a n off enc e w h en it is c om m itt ed b y a M em b e r o f P a r liam e nt a nd has a c on nec t ion w it h his s pe ec h or v ot e t he re in. W ha t is p r ov id ed t he reb y is t ha t a M e m b er o f Pa rlia m e nt s ha ll n ot b e a ns w erab le in a co urt of la w f or s om et hing th at ha s a n ex u s to his s p eec h or v ot e in Pa rlia m ent . I f a M e mb er of Pa rli a m ent has , by his sp eec h or v ot e in Pa rlia m ent , c om m i t t ed a n of fe nc e , h e e nj o ys , b y reas o n of Art ic le 10 5 (2 ) , im m unit y fro m p ros ec ut ion th ere for . T hos e who ha v e c onsp ired w it h t he M em b e r of Pa rli am ent in t he c om m is s ion of t h at off enc e ha v e no s u c h im m un it y . T he y c a n, t he re f ore , b e p ros ec ut ed f or it . * * * 14 7 . M r . R a o s ub m it t ed t h at t he a lleg ed b rib e-g iv e rs ha d bre ac h ed Pa rlia m ent 's p r iv il eg e a n d b e en g ui lt y of its c o nt em p t a nd it s ho uld be lef t t o P arl ia m en t t o d e a l w it h t h em . By t he s am e s et s o f ac t s t he a ll eg ed b r ib e - ta k e rs and t he a lle g ed b rib e- g iv ers c om m itt ed of fe nc es und er t he c r im ina l la w a nd b r ea ch es of Pa rlia m e nt 's p riv ile ges a nd it s c ont em p t. F rom p ro s ec ut io n f or t he f orm e r, t h e a lleg e d brib e- ta k e rs , Aj it Sin g h ex c lud ed , enj o y im m u nit y. T he a lle g ed b ri b e-g iv ers d o not . The c rim ina l p r os e cut io n a ga i ns t t he a lleg ed br ib e -g iv ers m ust , Page | 28 th er ef or e, g o a hea d. F or b rea c h of P ar liam en t' s p riv ile g es a n d it s c ont em p t, P a r lia m e nt m ay p roc e ed a g a ins t t he a lleg ed b rib e -t a k ers an d t h e a l leg ed b rib e -g iv e rs . * ** 15 0 . T o rep ea t w h at w e ha v e s a id ea rlie r, M r. R a o is rig ht , s ubj ect t o tw o ca v ea ts , in s a y ing t hat Pa rlia m ent h as t he p o w e r n ot on ly to pu nis h its M em b e rs fo r a n of f enc e co m m it t e d by t hem b ut a ls o t o pu nis h ot he rs w h o ha d c onsp ire d w it h t he m to ha v e t he of fe nc e c om m itt ed : f irs t , t he ac t ions t ha t c on s tit ut e t he o ff e nc e m us t a ls o c onst it ut e a b rea c h of P a rl ia m en t's p riv ile g e or it s c ont e mp t ; s ec o nd ly , t h e a c t io n t ha t P a r liam e nt w ill t a k e a nd t h e p unis hm ent it w il l im p os e is for t h e b r ea c h of p riv il eg e o r c ont em p t . T he re is no reas o n t o d o ubt t ha t t h e Lo k Sab ha c an t a k e ac t ion f or br ea c h of pr iv il eg e or c o nt em pt a ga ins t t he a lleg ed b ri b e-g iv ers a nd a ga ins t t he a ll eg ed b r ib e -t a k e rs , w he t h er or n ot t hey w ere M em b e rs of Pa rlia m ent , b ut t ha t is n ot to say t ha t t he c o urt s c a nnot take c og niz a nc e of t he off enc e of t he a l leg e d b ri b e-g iv ers un d er t he c rim ina l la w .
(e mp ha s is s up p lie d ) 24 . Ev en if A p ex 's c ont e nt i on w er e t o be ac c ep t ed - t ha t it d id n ot ind ulg e in a ny il leg a l ac t iv it y b y c om m it t ing a n of f enc e, a s t her e wa s no co rr es p o nd ing p ena l p r ov is ion in t h e 2 00 2 R e g u lat ions app lic ab le to it - t h er e is n o do ub t t hat i ts ac t ions f el l w it h in t h e p u rv iew o f "p r oh ib it ed b y la w " in E xp la n at ion 1 t o Sec t io n 3 7 (1 ).
25 . F urt h erm o re , i f t he s t at ut ory lim i t at ions im p os ed b y t he 2 002 R eg ula t io ns a re k ep t in m i nd , E xp la nat i on (1 ) t o Sec t io n 3 7(1 ) of t he I T Ac t a nd t he ins e rt ion o f Sec t io n 2 0 A o f t he M ed ic a l Counc il Act , 19 56 23 (w hic h s erv es a s pa r ent p ro v is io n f or t h e r eg ula t io ns ), w hat is d is c e rnib le is t ha t t h e s t at ut ory reg i m e req u iring t ha t a t hing be do ne i n a c e rt a in m a nne r, a ls o imp lie s ( ev en i n t h e a bs enc e o f a ny ex p r es s t e rm s ), t ha t t h e ot he r f orms of d o ing it a r e im p er m is si b le.
26 . I n t h is r eg a rd t he d ec is io n of t his C our t in Jam a l U d d in Ahm a d v . Ab u Sa le h N aj m ud d i n & An r is of s om e re lev a nc e. T he re , t he s c op e of Sec t ion 8 1 of t h e R ep res ent a t io n of t he P e op le Ac t , 195 1 w a s ex am in ed in t h e lig ht o f p ow ers of t h e H ig h Cour t t o a dm inis t er Page | 29 el ec t i on p et it ions b y i nv o k i ng t he ru le o f imp lie d p roh i bit ion. T he Cou rt obs e rv ed t ha t :
"D ea ling w it h " St at ut es c o nf er ring p ow er; im p lied c ond it i o ns , j ud ic ia l re v iew " , Jus t ic e G. P. Sing h s t at es in the P rinc ip les of St a t ut o ry I nt e rp r et at ion (E ig ht E d it ion 2 0 01 , a t p p. 33 3 , 3 3 4 ) t ha t a p ow er c onfe rr ed by a s t a t ut e oft en c o nta ins ex p res s c ond it ions f or it s ex erc is e a nd in t he ab s e nc e of or in a d d it ion to t he ex p res s c ond it ions t he re a re a ls o im p lied c ond it ions f o r ex erc is e of t h e p o w e r. An a ffi rm at iv e s ta t u te int rod uc t iv e of a ne w la w d irec t ing a t h ing t o be d one in a c erta in w a y m a n da t es , ev en if t he re b e no nega t iv e wo rd s, t hat t he t hin g s h a ll not b e d one in a ny ot her w a y . T h is r ule of im p lie d p ro hib it io n is s ubs e rv ed t o t he bas ic p ri nc ip le t ha t t he Cou rt m us t , a s fa r as p os s ib le, a tt ac h a c o ns t ruc t ion w h ic h e ff ec tua t es t he leg is la t iv e int ent a n d pu rpos e. F u rt h er , t he ru le o f im p lie d pr ohi b it ion do es not n eg at iv e t he p r inc ip le t hat an e xp ress gr ant o f s ta t ut o ry po w e r ca rr ies w it h i t by nec es s a ry imp li c at io n t he a ut ho rit y to us e a ll reas o na b le m ea ns t o m a k e suc h g ra nt eff ec t iv e . T o illu s t ra t e, a n Ac t of P a r lia m e nt c onf e rring j u ris d ict ion o v e r a n off e nc e im p lies a p ow er in t ha t j uris d ic t i on t o m ak e o ut a w a rra nt a nd s ec ur e p rod uc t ion o f th e p ers o n c ha rg ed w it h t he off enc e ; p ow e r c o nf er red o n Ma g is t ra t e to g ra nt m a int ena nc e und er Se c t io n 125 o f t he Cod e of Cr im i na l Pr oc ed ur e 197 3 t o pre v ent v ag ra nc y i m p lies a p ow e r t o a ll ow int er im m a int e na nc e; p ow e r c o nf er re d on a lo ca l a ut h or ity to is s u e lic e nc es f or h old ing ' ha ts ' or fa i rs im p lies inc id ent a l p ow er to f ix days th er ef or e; p ow e r c onf err ed to c om p e l cane g row e rs to I ns e rt ed v id e M e d ica l Cou nc il (Am en dm ent ) Ac t , 19 64 .
(2 0 03 ) 4 S CC 2 57 .
s up p ly c a ne t o s ug ar f ac t ori es im p li es a n inc id e nta l p ow e r t o ens u re pa y m ent o f pric e . I n s h ort , c onf e rm ent o f a p o w e r im p lies a ut h orit y to d o ev er yt hin g w hic h c o uld b e f a irly a nd rea s o na b ly r eg a rd ed a s inc id en ta l o r c ons eq uent ia l t o t he po w er co nf er red .
** * He rb ert Bro om s t at es in t he p re fa c e t o his c eleb rat ed w or k on L eg a l M ax ims - -"I n th e L eg a l Sc ienc e, pe rha ps m or e f req u ent ly t ha n in a ny ot he r, ref er enc e m us t be m a de to f irst p r inc ip les ." T he f und a m enta ls o r t he firs t p ri nc ip les o f la w oft e n art ic u lat ed a s t he m ax ims a re ma nif e st ly f ound ed in rea s on , p ub lic c onv e nie nc e a nd Page | 30 nec es s it y . M od e rn t re nd o f int rod uc in g s ub t le t i es and d is tinc t io ns , bot h in le ga l reas o ning a n d in t h e a pp l ic at ion of lega l pri nc ip les , f orm e rly unk now n , ha v e r en d e red a n a c c urat e ac q ua in ta nc e w it h t he f irs t pri nc ip les m or e n ec ess a ry ra t h er th a n d im inis h ing t he v a lu es o f s im p le f und am ent a l r ules . T h e fu nda m e nt a l ru les a re t he b as is of t he la w ; m a y b e e it h er dir ec t ly ap p lied , o r qua lif ied o r lim it ed , a c cord ing to t he ex ig enc ies of t he p a rt ic ul ar c as e a nd t he no v e lty of t he c irc ums t a nc es w hic h p r es e nt t he ms e lv es . I n D ha nna la l vs. Ka l a wa t i ba i a nd O rs .25 t his c ou rt ha s held t h at :
"W hen t h e s t at ut e do es n ot p rov i d e t he pa t h a nd t h e p rece d e nt s ab s ta in t o l ea d , t h en s oun d lo g ic , ra t i o na l re as o nin g, c om mo n s e ns e an d ur g e f or p ub lic g ood p la y a s g uid es of t h os e w ho d ec id e ". "
27 . I t is a ls o a s ett led p r inc ip le of la w tha t no c ou rt w il l le nd its a id to a pa rt y t hat ro ot s it s c a us e of a c t io n in a n im mo ra l or ille ga l ac t (e x d o lo m a lo n on o rit ur a ct io n) m ea n ing t ha t no ne s ho uld b e a llow ed to p ro fit fr om a ny w ro ngd oing c o up led w it h t he f ac t t ha t s ta t ut o ry reg im es s ho uld b e c o her ent a nd no t s e lf - d efe at ing . D oc t ors a nd ph a rm a c is ts b ei ng c om p l em ent a ry a nd s up p lem e nt a r y to ea c h ot h er in t he m ed ic a l p ro f es s io n, a c om p re he ns iv e v ie w m us t b e a d opt e d t o reg ul at e t he ir c on d uc t in v iew of t h e c o nt em p o ra ry s ta t ut o ry reg i m es an d r eg ula t io ns . T h ere for e, d e nia l of the tax be ne fit c a nnot be c onst ru ed as p e na li z ing t he as s ess e e p ha r ma c eut ic a l c om p a ny . O nly it s pa rt ic ipa t io n in w ha t is p la inly an a c t io n p ro hib it e d by la w , pr ec lud es t he a s s es s ee fr om c la im ing it as a d ed uc tib le e xp end it u re.
28 . T his Cou rt a ls o n ot ic es t hat m ed ic a l p rac t it io ne rs ha v e a q u as i- f id uc ia ry r ela t io ns h ip w it h t he ir pa t ie nt s. A d oc to r's p r es c rip t io n is c ons id er ed t he fin a l w ord o n t he m ed ic a t ion t o b e av a iled by t he pa t ie nt , ev e n if t he cos t o f s uc h (2 00 2 ) 6 SCC 1 6.
m ed ica t i on is una ff o rd a b le o r ba re ly w it hin t he ec on om ic r ea ch of t he pa t ie nt - s uc h is t he le v e l of tr us t re po s ed in d oc t ors . T he re f ore , it is a m at t e r of g reat p ub lic im p o rt a nc e a nd c onc er n, w hen it is de m o ns t ra t ed t ha t a doc t o r's p res c r ipt ion c a n b e m anip ula t ed, a nd dr iv e n by t he m ot iv e to a v a il t he f re eb i es off e red to t hem by ph a rm a c e ut ic a l c om p a n ies , ra ng i ng fro m g ifts s uc h as g o ld c o ins , f rid g es a nd L CD T Vs to f un d ing int e rna t iona l t ri ps f or v ac a t io ns o r to at t e nd m ed ic a l c on fe re nc es . T hes e f re eb ies a re t ec hnic a lly not ' f ree' Page | 31
- t he c os t of s upp ly ing s uc h fr ee b ies is us ua lly fac t or ed int o t he dr ug , d r iv ing p r ic es up , t hus c re at ing a p e rp et u a l p ub lic ly inj ur ious c yc le . T he t h reat of p res c rib ing m e dic a t io n t hat is s ign if ic a nt ly m a rk ed u p, ov er e ff ec t iv e g e ner ic c o unt erp a rt s in lieu o f s uc h a q uid pr o q u o ex c ha ng e was t a k en c o g niza nc e of b y t he P a rl iam ent a ry St a nd ing Com m itt ee o n H ea lt h a nd F am ily W elfa r e2 6 w hic h m ad e t he f ollow in g ob s erv a t io ns :
"T h e Com m it t e e a ls o not es t ha t d es p it e t he re b e ing a c od e of e t h ic s in t he I nd ia n M e d ic a l Counc il R ules i nt rod uc ed in Dec em b e r 2 0 09 f orb idd ing d oc t ors fr om ac c ept i ng a ny g if t, hos p it a lit y , t rip s to f ore ig n a nd d o m es t i c des t i nat ions etc fr om h ea lt hc ar e ind us tr y, t he re is no let - up i n t his e v il p rac t ic e a nd t he p ha r ma c om p a nie s c ont in ue to s p o ns o r f or eig n t rip s of m a n y d oc t or s and s ho w e r w it h hi g h v a lue gift s li k e a ir c ond it ion ers , c a rs , m us ic s y s t ems , g ol d c ha ins etc . t o ob lig ing p res c r ib e rs w ho t h en p r es c rib e cos t li er d ru gs a s qu id p ro qu o. U lt im at ely a ll t hes e ex p e ns es g e t a dd ed up t o t he c os t of d rugs . T h e Co m m it t e e' s a t te nt ion w a s d raw n t o a n ew s it e m in T im es o f I nd ia d at ed Ju ly 1, 2 0 10 by R eem a Na ga raj a n g iv ing s pec if ic ins t a nces of v iola t i o ns of M CI co d e. T h e Com m itt ee c a lls up on t he Go v ern m e nt t o t a k e s tr ic t a nd s p e ed y a c t ion o n s uc h v iola t io ns . Sinc e M CI ha s no j ur is d ic t ion ov e r d rug c o mp ani es , t he Go v e rnm e nt s ho uld ta k e p a r a lle l ac t i on th roug h D CGI a nd t h e I nc om e T ax D ep art m ent t o pe na liz e t h os e c o m p a ni es t ha t v iola t e M CI ru les by c a nc ell ing dr ug m a nu fa c t u ring lic e nc es a nd / or d is a ll ow ing e xp ens es on un et hic a l ac t iv i t ies ." ( em p ha s is s upp lied ) I nt e rest ing ly , a s im ila r c onc lus ion wa s a r riv ed at b y t h e U S D e pa rt m ent o f H ea lt h a nd H um a n Ser v ic es Off ic e of t he Ass is t an t Sec ret a ry f o r P la nning a nd E va lua tio n, in a rep o rt c a lle d Sa v ing s Av a ilab le U nd er F ul l Ge ner ic Sub st it ut i on 4 5 t h R ep or t on I s s ues R e lat ing t o Av a i lab ilit y o f G ene ric , G e ner ic -Bra nd ed an d Br a nd ed M ed ic i nes , t he ir F or m u la t io n a nd T he ra p e ut ic Eff ic ac y an d Ef f ec t iv e nes s ) , da t ed 0 4 .0 8. 201 0.
of M ult ip le So urc e B ra nd D r ugs in M ed ic a r e P a rt D (d at ed 23 .0 7 .20 18 ).27 T he r ep ort n ot ic ed int er a lia , t ha t a n em p i ric a l s t udy c ond uc t ed in res p ec t o f 20 odd (o ut of t he 6 00 d rugs w hic h we re t he s ub j ec t m a t t e r of t he r es ea rc h p a p er ) b ra nd m ed ic at ions d is p ens ed f or a p a rt ic u la r p eri od , w e re c a pa b le o f g en eric s ub s t it ut ion a nd wo uld ha v e res ult ed in su bs t a nt ia l b en ef it t o t he p at ients :
Page | 32 " Be ne fic ia ries c o uld ha v e sa v e d ov er $ 600 m illio n in out of p oc k et pa y m ents h ad t he y be en d is p e ns e d ge ne ric e q u iv a len t d rug s . A s ig n ific a nt a m o unt of t h is s p e nd i ng oc c urr ed a m o ng the t op 20 m ult ip le s ou rc e b ra n ds . Subs t it ut ing t hes e d ru gs for g en er ic c om p et it ors a t t he ir me d ia n p r ic es w o uld h av e s av ed t he p rog ra m a nd be ne fic ia ri es $1. 8 b i llion ." L ik ew is e, in a pr ev ious s t ud y by P roP u b lic a (a n ind ep e nd ent , n on- p rof it ne ws ro om t ha t d o es inv es t iga t i ve j our na lis m ) t i t led " D o lla rs f or D oc t o rs : N ow Ex t ra c ted f rom ht t p s : //a s p e .h hs .g ov /rep o rt s /d a ta -po in t -s a v ing s -a v a i lab le-u nd er- fu ll- ge ne ric -s ubs t it ut ion -
m ult ip le -s ou rc e-b ra nd -d rugs -m e d ic a r e ac c es s ed at 16 :37 on 13 .0 2 .20 22 . T he r ep ort s ta t es , int e r a lia , t ha t : " Mor e 60 0 b ra nd na m e d ru gs w er e d is p ens ed a nd pa id f or b y P a rt D p la ns in 201 6, des p it e t he p res enc e of g ene ric c o mp et it i on. P l a ns a nd b en ef ic ia ries pa id $ 8. 7 b il lion fo r m ult ip le s ou rc e b ra nds a nd $ 34 .0 b illio n for ge ne ric s . F ull s ubs t it ut io n of m ult ip le s o urc e b ra nds w ou ld ha v e res ult ed in t ot a l s p end ing on g e ne ric dr ugs o f $3 9 .9 b illi on, s a v ing th e P ar t D p r og ra m a nd it s b e ne fic ia ri es $ 2 .8 b illi on i n 2 0 16 . T h es e es t im at es d o n ot a cc oun t f o r m a n uf ac t ure r re bat es pa id t o Pa rt D pla ns or p ha rm a cy b en ef it m a n ag e rs (P BM s ) o r s ta t ut or y d is c ou nt s pa id b y m a n uf ac t ur ers f or b r a nd na m e d rug s , a n d t h us m a y ov ers ta t e s av ing s t o t h e p rog ra m a ft e r a cc o unt ing f or t he e ff ect s th at re ba t es oft en ha v e o n p re m iums . Se e F ig ur e 1. * * ** * *** *** Of t h is $2 .8 bil lion , $2 .25 b i llion is fo r b ra nd na m e d rugs t ha t ha v e fac ed g en er ic c om p et it io n f or at lea st a f ull y ea r (e .g . the f irst g en eric wa s av a i lab le i n 2 0 15 or ea rlie r). A fu rt he r $ 58 4 m il lion in sa v ings is es t im at ed f o r s ub st it ut i ng g en erics t ha t w ere f irs t l a unc he d in 2 01 6 an d t h eref or e on t he m a r k et for les s t ha n a f ull y ea r. T hes e 12 Sin g le s ou rc e inc lud es p a y m e nt s f or b r a nd dru gs p rio r t o g ene ric ent r y, e.g .
$1 .1 3 b illio n o f Cre s to r s pen d ing i n t he ex a mp le us ed i n t he M et h od s s ec t ion s a v i ngs a r e lik el y t o g r ow a s a dd it i ona l g e ne ric c om p et it ors ent e r t he m a rk et . Be nef ic ia ries s p e nt $1. 1 b illi on out -o f-p oc k et in c os t -s ha ring fo r b ran d d r ug s w it h c om pa ra b le g en eric s , av er ag ing tw ic e a s m uc h o ut - of -p oc k et t ha n f or c om p a ra b le g e ne ric s . I n 20 1 6 , m ult ip le s o urc e b ra nd d rug c os t - s ha rin g a v erag ed $ 3 9.1 5 , w h ile ge ne ric c os t -s ha r ing f or s ub s t it ut a bl e p rod uct s w as $17 .0 4 . Ben ef ic ia ries c ou ld h av e sa v ed ov er $60 0 m illio n i n o ut of p oc k et pa y m ents h ad t he y be en d is p e ns e d ge ne ric e q u iv a len t d rug s . A Page | 33 s ig n ific a nt a m o unt of t h is s p e nd i ng oc c urr ed a m o ng the t op 20 m ult ip le s ou rc e b ra n ds . Subs t it ut ing t hes e d ru gs for g en er ic c om p et it ors a t t he ir me d ia n p r ic es w o uld h av e s av ed t he p rog ra m a nd be ne fic ia ri es $ 1. 8 b illio n. See Ap p e nd ix T ab le A f or t h es e dr ug s , a nd f ig ur e 2 b e low f or an ex am p le . I n t er ms o f b e ne fic ia ry c os t -s ha ring , w e f ind s im i la r res ult s as f or t he ov era ll ca lc ula t i on. Av era g e p er be ne fic ia ry s p e nd ing is s ig n if ic a nt ly hi g he r f or t h es e br a n ds t ha n f or th e s ubs t it uta b le g e ne ric s . (Se e Ap p e nd ix Ta b le A, a ls o. ) Bra nd d r ug c os t -s ha ring av er ag ed $ 30 .6 9 , c om p ar ed to $ 22 .4 1 f or t he ir g en er ic eq uiv a le nt s . For 17 of the to p 2 0 d rugs , t he ra t io o f b ra n d to c om p a ra b le g en er ic o ut -of -p oc k et s p en d ing ra ng es f r om 117% (Na m enda ) to 1 ,4 7 6 % (L am ic t a l) ind ic at ing s ig n if ic a n t per -d r ug s av ing s a re a v a ila ble fo r b e ne fic ia ri es . In t hre e cases (Ab il ify , L ov eno x , a nd T ric or ), b e nef ic ia ry out -o f-p ock et c os t s a re m a rg ina lly hig her f o r t he g e ne ric t h a n t h e b ra nd dr ug . W e b e lie v e t his is d u e t o th e int erac t i on of t ot a l d r ug c os t s a n d p la n c o v e rag e in t he c o v e ra g e ga p fo r g en er ic s (4 2 % in 20 16 ) , me a n ing p a t ie nt s pa id 58 % c oins ura nc e f or g e ner ic s t hat y ea r. T h is c om pa res to 25% p la n c ov er ag e a nd a 5 0 % st at ut or y m a nufa c tur er d is c oun t fo r bra nd d rug s in 2 0 16 ." T her e' s P ro of : D oc s w ho G et C om pa n y Ca s h T e nd to Pr es c rib e M or e Bra nd - N am e Med s " (d at ed 1 7 .0 3 .20 1 6 )2 8 s t at ed th at :
"... d oc t ors w h o rec e iv e p a y m ents fr om t he m ed ic a l ind us t ry d o ind e ed te nd t o p resc r ib e d rugs d iff er ent ly t ha n t h eir co lle ag ues w h o d on' t . And t he m ore m o ney t he y rec eiv e, o n a v erag e , t he m ore b ra nd - na m e m ed ica t i ons t h ey p r es c r ib e." D a t a is no w a v a ila b le p ub l ic ly, in t he U nit ed Sta t es , b y r ea s o n o f t he P h ys ic ia n P a y m e nt S un s hi ne Act , 20 10 i. e. , Sec t io n 6 0 02 o f t he Aff ord ab le Ca re Ac t , 2 0 10 .
T h is la w c o mp els m a nu fac t u re rs of d rugs , d ev ic es , b io log ic s , a nd m ed ica l s up p lies c ov er ed b y M ed ic a r e, M ed ic a id, or t h e Ch ild r en 's H ea lt h I ns ura nc e P r og ra m t o rep o rt t o t he Ce nt ers f or M ed ic a r e & M ed ic a id Se rv ic es on t hr ee b road c a t eg o ries of p ay m ent s or "t ra ns fe rs of v a lu e". T h es e c a t eg o rie s c o v er g e ne ra l p a y m ents or tra ns f e rs of v a l ue s uc h as m ea ls , tra v el r ei mb urs e me nt , a nd c ons u lt i ng f ees . T h es e inc l ud e ex p ens es b o rne b y m anu fac t u re rs , s uc h as s p ea k e r f ees , t ra v e l, g if t s, ho nora r ia , e nt ert a i nm ent , c ha rit ab l e c ont rib ut i on , e d uc a t io n, g ra nt s a nd r es e a rch g ra nt s, etc .
Page | 34
29 . T h e im p ug ne d j ud gm ent , a lo ng w i t h t he j u dgm en ts o f P unj a b & H ary a na H ig h Co ur t (K a p Sc a n) a nd Hi ma c ha l P ra d es h H ig h Cou rt (Co nf ed era t i on) (s up ra ) ha v e c or rec tly a d d ress ed the im p or ta nt pu b lic p o lic y is s ue on t he s ub j ec t of a llow a nc e of b e ne fit fo r s up p ly of f reeb i es . T he i mp ug n ed j ud gm ent 's re as o ning is q uot ed as f ollo ws :
" A p e rus a l of t he d ec is i on of Co- ord ina t e B enc h of t his Tr ib un a l in t he as s es se e 's ow n c a s e a s a ls o t he d ec i s ion of t he H o n'b le Him a c ha l Pr ad es h H ig h Cou r t c lea r ly s ho ws t hat t h e b as ic int ent io n of t he dec is ion w a s t hat t h e r ec e iv i ng of t h e g ifts /f re eb ies b y P r of es s io na ls is ag a ins t p u b lic p olic y as a ls o a g a in s t t he law in s o f a r as t he am endm en t by t he M ed ic a l Cou nc il Ac t , 195 6 t o t he I nd ia n M ed ic a l Cou nc il ( P ro f es s io na l Cond uc t , Et iq ue tt e and Et hics ) R eg ula t io ns , 20 02 , o nc e rec eiv ing of s uc h g ift s ha v e b ee n h eld t o b e un et hic a l ob v io us ly t h e c o roll ary t o t his w o uld a ls o b e unet h ic a l, b e i ng g iv ing of s uc h g ifts o r d o ing s uc h a c ts t o in d uc e s uc h D oc t ors a nd M ed ic a l Pr of es s io na ls t o v io lat e t he M ed ic a l C o unc i l Ac t , 19 56. " (e mp ha s is s up p lie d ) ht tp s ://w ww .p rop ub lic a . or g /a rt ic le/ d oct or s -w h o-t ak e- c om p a ny -c as h-t e nd - to -pr es c rib e- m o re -b ra nd -na m e -
dr ugs a cc es s ed a t 1 6 :45 o n 13 .02 -20 2 2
30 . T hus , on e a rm of t he la w ca nn ot b e ut i lis ed t o d e feat t h e ot h er ar m o f la w - d oing s o w o uld b e opp os ed t o p ub lic pol ic y an d b r ing th e la w i nt o rid ic ule .29 I n Mad d i Ve nk at a ram a n & Co. (P ) Ltd . v . CI T 30 , a f ine im p o s ed o n t h e a ss es s ee u nd e r t he F or eig n Ex c ha ng e R eg ula t io n Ac t , 1 9 47 wa s s ou g ht to be d ed uc t ed as a b us ines s ex p e nd it u re. T h is C o urt he ld :
"M o re ov er , i t w ill b e a g a ins t p ub lic po lic y to a ll ow t he b e nef it o f ded uct io n u nd e r one s t at ut e, o f a n y ex pe nd it ur e inc ur red i n v io la t ion of t he p rov is io ns of a no t he r s ta t u t e o r a ny p en a lt y im p os ed und er an ot he r st at ut e. I n t h e ins t a n t c as e, if t he d ed uc tio ns c la im ed a re a ll ow ed , t h e p e na l p rov is i ons of F ER A w ill b ec om e m e a ni ng le s s ".
(e mp ha s is s up p lie d ) 31 . It is c ruc ia l to not e t ha t the a g reem ent bet w een t he ph a rm a c e ut ic a l c o mp a n ies a nd t he me d ic a l pra c t it io ners in g i ft ing f reeb i es fo r b o os t ing s a les of p res c r ipt ion d rugs is a ls o v iola t iv e of Sec t ion 23 o f t he Cont rac t Ac t, 1 8 72 (a s a ls o n ot ed b y t he P u nj a b Page | 35 an d Ha ry a na H ig h Cour t in K ap Sc a n (s up r a )) . T he p rov is io n is a s f ollows :
"23 . W ha t c ons id er at ions a nd obj ec t s ar e la w f ul , a nd w ha t not . --T he c ons id erat ion or ob j ec t o f a n ag ree m ent is la wf ul , un les s -- it is f orb idd en by la w ; or is of s uc h a nat ure t h at , if p erm it t ed , it w o uld de fea t t he p r ov is ions of a ny law ; o r is f ra ud ule nt ; or inv ol ves or im p lies inj ur y to t h e p ers on or p ro p e rt y of a n ot her ; o r t he Cou rt reg a rds it a s im m or a l, or op p os e d t o p ubl ic p olic y .
I n ea c h of t hes e c a s es , t h e c o ns id e ra t io n o r obj ect of a n a g re em e nt is sa id t o b e un la w f ul. E v e ry a g reem e nt o f w h ic h t he obj ec t or c ons id erat ion is u nla w f ul, is v oi d.
(e mp ha s is s up p lie d )
32 . Be f ore us , Ap ex ha s co nt inu a lly s tr es s e d on t h e nee d t o d iv o rc e int er pr et at ion of ta x p r ov is ions f ro m a pe rc e iv ed im mo ra lit y / v i ola t io n of p u b lic p olic y . Ap e x rep eat ed l y r eli ed on T . A. Qu er es hi (s up ra ), M /s K. M . Ja in (s up r a ) a nd CI T v . Pt . Vis hwa na t h Sha rm a 3 1 . W e fin d th at n on e of thes e j ud g m ent s f ind Biha ril a l Ja is w a l v . CI T , (1 9 96 ) 1 S CC 4 43 .
(1 9 98 ) 2 S CC 9 5.
I .T. R . N o. 2 7 of 1 99 9 , All a ha b a d H C, da ted 2 1 .0 2 .200 8 .
m uc h fa v o ur w it h t he c as e o f t he a pp ella nt . T . A. Qu er es hi ad d res s ed a b us ines s ' los s ' , not a b us in es s 'e xp end it ure ' as e nv is ion ed und er Sec t ion 37 (1 ). I n M /s K. M . Ja in, t he ra ns om m on ey pa id t o k id na pp ers of t he em p loy e e of t he as s es s ee c om p a ny w a s a llow ed ded uct io n p rim a r ily ba s ed on t h e fa c t t ha t t h e as s ess e e w a s he lp les s an d c oe rc ed t o p ay th e a m o unt in ord er t o sa v e it s em p lo y e e' s li fe. T h us , t he as s es se e was n ot a w ilf ul pa rt ic ip a nt in c o mm is s ion of a n off enc e or ac t iv it y p roh ib it ed by la w . T he s a m e is not ap plic a b le t o th e pr es e nt f ac t s . P ha rm ac eut ic a l com p a n ies ha v e m is us ed a leg is la t iv e g ap t o a c ti v e ly p erp et ua t e t h e c om m is s ion of a n off enc e . I n P t . Vis h wa na t h Sha rm a , a D iv is ion Be nc h of t h e Alla ha b ad H ig h Cou rt w as fa c ed w it h t he q u es t ion o f w h et her p ay m e nt of c om m is s ion to g ov ern m e nt d oc to rs c o uld b e e x e mp t ed und er Sec t io n 3 7 (1 ). At th e t i m e, t her e wa s no s ta t u to ry pr ov is ion p ro hib it in g doct ors Page | 36 eng a g ed in p riv a t e pra c t ice f rom a c c ep tin g s uc h c om m is s io n. H ence , th e H i g h Court he l d t ha t w hi le t h e A ss es s ing Of f ic er ha d c or rec t ly a ll ow ed s uc h de d uc t io n f o r p riv a t e d o c to rs , t he s am e c ou ld not b e a ll ow ed f or G o v e rnm en t doc t o rs :
"I n t he p r es e nt c as e , p a y m ent o f c om m is si on t o G ov er nm ent D oc t ors c an not b e p lac ed o n t he s a m e p ed est a l. A d is t inc t ion ha s alr ea d y be en made by the a u t hori t ies w hil e a llo w in g d ed uc t ion to t he as s es se e in res p ec t t o c om m is s i on w h ic h t he a s s es s ee ha s pa id to pr iva t e d oc t ors s inc e in t hei r c a s e, p a y m ent o f c omm is s ion c an not b e s aid t o b e a n of f enc e und er a ny s t a t ut e b ut i n r es p ec t t o Go v ern m e nt doc t o rs s uc h p ay m e nt c o uld n ot ha v e b e en a l low ed a s it is an of fe nc e und er t he Sta t ut es a s s ta t ed a b o v e ." * * * " W e a r e, t he refo re , cl ea rly of t h e op inio n t h at p ay m ent as c om m is s io n t o Gov e rn m e nt d oc t ors f or ob t a inin g a fa v ou r th ere f rom by p res c rib i ng m ed ic ines in w hic h t he as s es se e w as d ea ling c a nn ot b e s a id t o b e a "b us ines s ex pe nd it ur e"
an d no d ed uc t ion c a n b e a l low ed t he re of und er t he Ac t ." (em p ha s is s up p lie d ) T he 2 00 2 R eg u lat ions , a pp lic a b le to a ll m ed ic a l pr ac t it io ne rs (inc lu ding doc t ors in p riv at e p rac t ic e), wa s int r od uc ed w. e.f . 1 4 .1 2. 20 0 9.
33 . T hus , p ha rm ac eut ic a l c om p a ni es ' g i ft ing f re e b ies t o d o c to rs , et c . is c le a r ly "p roh ib it ed b y law ", a nd no t a llo w ed t o b e c la im ed a s a ded uct io n u nd er Se c tio n 3 7 (1 ). D o ing s o w o uld w ho lly und e rm ine pu b lic p olic y . T he we ll-es ta b lis h ed p r inc ip le of int e rp ret a t io n of ta x i ng s t at ut es - t ha t t h ey need t o b e int erp r et ed s t ric t l y - ca nn ot s us t a in w he n it res ult s i n a n ab s u rd ity c ont ra ry t o t h e int e nt ions o f th e Pa rlia m e nt . A Be nc h of t his Cou rt in C. W. S. (I nd i a ) Lt d. v. CI T 32 he ld a s f o llow s :
"W hile a li t e ra r y c o ns t r uc t i on m a y b e t he g en er a l ru le i n c ons t ru ing ta x i ng enac t m e nt s , it d oes n ot m e a n t ha t it s h ould b e a do p ted e v e n if it le ad s t o a d is c rim ina t o ry o r inc o ng r uo us res u lt . I nt e rp r et at ion o f s ta t ut es ca nn ot b e a m ec ha nic a l ex erc is e. Obj ec t o f a ll t h e r ules o f int er pr et at ion is t o giv e eff ec t t o t he ob j ec t of the e na c t m ent h av ing reg a rd t o t h e la ng u ag e us ed " .
Jus t ic e O liv e r W end el l H o lm es ha d onc e sa id :
Page | 37 " A w o rd is n ot a c ry s ta l, t ra ns p a re nt a n d unc ha ng ed ; it is t he s k i n o f a liv ing t ho ug ht a nd m ay v ar y g r ea t ly in c olo ur a nd c ont e nt a c co rd ing to t he c i rc um s ta nc es a nd t h e t i m e i n w hic h it is us ed . " 33 H ol m es th us s um m ed up t he elus iv e na t u re of w or ds , w h ic h li es a t th e h ea rt of t h e m a ny is s ues c onc er ning i nt erp ret a t io n of s tat ut es .
34 . I nt e rp r et at ion o f la w ha s t w o ess e nt ia l p u rp os es : o ne is to c la rif y to t h e p e op le g ov er ned b y it , t h e m ea nin g of t he let t e r of t he la w ; th e ot he r is t o s hed l ig ht a nd g iv e s h ap e to t he int ent of th e law m ak er. And , in t h is p r oc ess the c o urt s ' r es p o ns ib ilit y lies in dis c e rni ng t he s oc ia l p urp os e w h ic h t he s pec ific p ro v is i on s ubs e rv es . T h us , the c old let t er of the l aw is not an a bs t ra ct e x e rc is e in s em a nt ic s w hic h p ra c t it ion ers a re w o nt t o ind u lg e in. So v iew e d t he la w has b irt hed v a r ious id ea s s uc h as i mp lied c o nd it io ns , unsp elt b ut ent ir ely lo g ic a l a nd rea s on ab le o b lig at io ns , im p lied lim it a t ions e tc . T h e p r oc es s of c on tin uing e v o lut io n, r ef inem e nt a nd a s s im i lat ion of th es e c o nc ept s i nt o b ind ing norm s ( w it hin t he bod y of la w a s is und ers t o od a nd enfo rc ed ) i nj ec t s v it a lit y a nd d y na mis m t o s t a t ut o ry pr ov is ions. W it h out th is d y nam is m a nd c o nt ex t ua lis a t io n, law s bec om e ir rel ev a nt a nd s ta le.
19 94 Sup p (2 ) SCC 29 6 .
T om n e v . Eis p z er, 2 4 5 U. S. 41 8 ( 19 1 8 ).
35 . I n Bih a ri L a l Ja is w a l & O rs . v . Co m m is s io ne r of I nc om e Ta x & Ors 34 , t he iss u e of w ha t is " pro hib it e d by la w " wa s c o ns id e red b y th is Co urt , in t he c o nt ex t of int e rp r et a t ion of a c o nd it io n in a s ta t ut o ry lic e ns e (f or v end in g l iq uo r) w h ic h pro hib it ed t ra nsf e r of t he lic e ns e by way of s ub -le tt ing or e nt er ing int o a p art ners hip ag re em ent . W h ile d ea lin g w it h t he rec og nit ion of s uc h a pa rt ners hip und er t he I T Ac t , t his Cour t he ld t ha t a ll ow ing t h e s am e w oul d at t r ac t th e v ery m isc h ief s oug ht t o b e a v oid ed :
"T h is ob j ec t w ill b e d ef ea t e d if t he lic enc e e is p erm it t ed to b rin g in s tra ng ers int o t he bus ines s , w hic h w ou ld m ea n t ha t ins t ea d o f t he lic e nc ee c a r ry ing on t he b us in es s , it w o uld b e c a rried on b y ot he rs - a s it ua t ion n ot c o nduc iv e t o eff ec t iv e im p lem e nt at ion of t he e xc is e la w a nd c o ns eq ue nt ly d e let er ious t o p ub lic int er es t . I t is f or t his v e ry reas o n t ha t t ra ns f er o r s ub - l et t in g o f lic enc e is un iform ly pr oh ib it ed Page | 38 by s e v e ra l S ta t e E xc is e e nac t m ent s . I t , t he refo re , f ollo w s that a ny ag re em ent w h ere und e r t he lic enc e is t ra ns f err ed , s ub -le t or a pa rt ners hip is e nt er ed in t o w it h res p ect t o t h e p r iv il eg e /b us ines s und er t he s a id lic e nc e, c o nt ra ry t o t h e pr ohi b it ion c o nta ined in t he re lev a nt ex c is e e na c t me nt , is a n a g re em e nt p roh ib it ed b y la w . T he ob j ec t o f s uc h a n a gr ee me nt m ust b e he ld t o b e o f s uc h a na t ure t ha t if p erm i tt ed it w o uld d ef ea t t he p rov is io ns of t he ex c is e l a w w it hin th e m ea n ing of Sec t ion 2 3 of t he Con t r ac t Ac t . Suc h a n ag re em ent is dec lar ed b y Sec t ion 2 3 t o b e unla wf ul a nd v o id . T he q ues t io n is w h et her s uc h a n u nla w f ul or v oid pa rt ne rs hip c a n b e t re at ed a s a ge nui ne p a rt ne rs hi p w it hin t he m e an ing o f Sec t io n 18 5 (1 ) a nd w h et her re g ist ra t io n c a n b e g ra nt ed t o s uc h a p a rt ne rs hi p und e r t he pr ov is ions of t h e I nc om e T a x Act a nd t he R u les ma d e t her eu nd e r. W e th ink n ot . W hen t he la w p roh ib it s t he e nt er ing int o a p art ic u la r pa rt ners hip a g re em e nt , t h er e c a n b e in law n o p a rt ne rs hip a g re em e nt of t ha t nat ur e. T h e q ues t io n of s uc h a n a gr ee m e nt be ing g e nu ine c an not , t he refo re , a ris e.
I t is a ls o a k n ow n p rinc ip le t ha t w h at c a nno t b e d on e d ir ec t ly , ca nn ot be a c hie v ed ind irec t ly . As w a s s a id in F ox v . Bis h op o f Ch es te r3 5 t h at it is a :
"W ell- k n ow n p rinc i ple of l aw t ha t the p r ov is ions of an Ac t of Pa rlia m ent s ha l l n ot b e e v a d ed b y s h ift or c o nt riv anc e "
And t ha t :
(1 9 95 ) Su pp (5 ) SC R 2 85 .
(1 8 24 ) 2 B & C 6 3 5, q u ot ed a nd a p pl ied in Ja g ir Sing h v . R a nb ir Sing h & O rs . 1 97 9 (2) SCR 2 8 2.
"T o c a rr y ou t ef f ect ua lly t he o bj ec t o f a St a t ut e , it m us t b e c onst ru ed as to d e fea t a ll a t t em pt s t o d o, o r a v o id d o ing, in a n ind ir ec t or c irc uit o us ma nne r t ha t w hic h it ha s p ro hib it ed or e nj oi ned "
T h is Cou rt , in an a ppe a l a r is ing fr om an a c t io n f or s pec if ic pe rf orma nc e , in G . T .
Gi ris h v . Y . Sub ba R aj u (D ) b y L . Rs & Ors 3 6, hel d t hat g iv i ng t he re lie f w ou ld im p ly doi ng s om et hing p r oh ib it ed b y la w (b a r a ga ins t Page | 39 c onv e ya nc e, fo r a s pec i fic p e rio d ) - it ha d t he ef fec t of d e feat ing t he pr ov is ions o f t he la w. I t w as he ld t hat :
"T a k ing t he a gre em ent a s it is , it nec es s ar ily w ould b e in t he t eet h o f th e ob l ig a t io n in la w of t he f irs t R es p ond e nt to p ut up t he c onst ruc t io n. T h e a gr ee me nt t o s e ll in v o lv e d c lea r ly t e rm s w h ic h a re im p lie d ly pro hib it e d by la w in t ha t t he f irs t De fe nd a nt wa s t he re und er to d e liv er t it le t o t h e s it e a nd p rev ent ed f rom a c ting up on t h e c lea r ob liga t i on und er la w . T h is is a c le ar c as e at a ny ra t e w h er ein en fo rc in g t he ag reem ent una m b ig uo u s ly res u lts in d ef ea t ing t he dic t at e of t he law . T h e 's ub li m e' o bj ec t of t he la w, t he v er y s ou l o f it s to od s a c rif ic ed a t t he a lta r of t he b a rg a in w h ic h ap p ea rs t o b e a re a l es t at e t ra ns a c t io n. It w ould , in ot he r w ord s , in a ll ow in g t he ag re em ent t o f ruc t ify , e v e n at t he en d o f t en- y ea r p e rio d of n on- a li enat ion, b e a c a s e of a n ag r eem e nt , whic h c om p let ely d e f ea ts t he la w fo r t h e rea s o ns a lr ea d y m e nt i oned .
78 . G oing b y t h e r ec it a l in t h e a g re em e nt e nt er ed int o bet w ee n t he P la int if f a nd t he f irs t D ef e nda nt , p os s es s ion is ha nd ed o v e r by t he f irs t D e f end a n t t o t he P l a int if f . T he or igin a l P os s es s i on Cert if ic at e is a lso s a id to b e ha nd ed o v e r to t h e P la int if f. T he ag re e me nt , ev en ac c o rd in g t o t he P la i nt i ff , c ont em p lat ed t ha t w it h in t hre e m ont hs of c onv e ya nc e o f th e s it e in f av our of t he firs t D efe nda nt , t he f irs t D ef end a nt w as t o c o nv ey he r rig ht s in t he s it e t o th e P la int if f . I t is qu it e c lea r t hat t h e p a rt ies c o nt em p la t ed a s ta t e of a ff a ir s w hic h is c om p le t e ly inc ons is te nt w it h a nd in c l ea r c oll is ion w it h t h e m a n da t e of t he la w . On it s t erm , it s ta nds out a s a n a ff ro nt t o t he m a nda t e o f th e la w .
79 . T h e ille ga l ity g oes t o t h e root of t h e ma t t er. I t is q uit e c lea r t h at th e P la i nt i ff m us t re ly u p on t h e il leg a l t ra ns a ct ion a n d in de ed rel ied up on t he s am e in f iling t he su it fo r s p ec if ic p erf orm a nc e . T he ille ga lity is not t riv ia l or v e nia l. T he illeg a lit y c a n not b e s k i rt ed n or got a rou nd . T h e P l a int iff is c o nfro nt ed w it h it a nd he m us t fa c e it s c onse q u enc es . T he m at t e r is c lea r. W e d o no t re q ui re t o re ly up on an y pa r lia m e nt a ry d eb at e or s ea rc h f or th e p urp os e b ey ond t he p l a in m ea n ing of t he la w . T he ob j ec t of t he l aw is s e t o ut in un am b ig uous te rm . I f ev e ry a ll ot te e c hos en af t er a p roc es s of se lect io n und e r t he R ules w it h ref ere nc e t o c e rt a in obj ec t iv e c rit e ria w er e t o ent e r in t o Page | 40 ba rg a ins of t his na t ure , it w ill und ou bt ed ly m ak e t he la w a ha ng ing (s ic la ug hi ng ) s t oc k ." 2 0 22 SCC O nlin e SC 60 .
36 . I n t h e p r es e nt c a s e t oo , t he inc en tiv es (or " f r eeb ies " ) g iv en by Ap ex , t o t he d oc t ors , had a d irec t res ul t o f ex p os ing t he r ec ip ien ts to th e od iu m of sa nc t ions , lead ing to a ban on t he ir p rac t ic e of m ed ic i ne. T hos e s anct ions a re m a n dat ed by la w , as th ey a re em b od ied in t h e c o de o f c ond uc t a nd et hics , w hic h a re no rm at iv e, an d ha v e l eg a lly b ind in g ef fec t . T he c onc ed ed p a rt ic ip at ion of t he as s es se e- i.e. , t he pro v id er or d on or- wa s p la in ly p ro hib it ed , as fa r as t he ir r ec e ipt by th e m ed ic a l p ra c t it ion ers w as c o nc er ned . T h at m ed ica l p ra ct it ion e rs w ere fo rb idd e n f ro m ac c ep t i ng suc h g ift s , or "f re eb ies " wa s no les s a p ro hib it i on on t h e p a rt of t he ir g iv er , or do no r, i. e ., Ap ex .
37 . I n v iew of t he fo reg o ing d is c us si on, t h e im p ug ne d jud g m e nt c an not b e f a u lt ed w it h . T he ap p e a l is d is m is s ed w it ho ut ord er on c os t s . P e nd ing a p p lic at ion (s ), i f a ny , a ls o s t a nd d isp os ed of.
.... .... . ...... ...... ... ... ... ... ... [U D AY U M E SH L ALI T , J. ] .... .... ...... ... .. .... ... ... ... ... ... [ S. R AVI ND R A BH AT , J. ] N ew D el hi Feb r ua ry 2 2, 2 022 ."
23. On perusal of the record, we find that the payments made by the assessee to the Doctors in a different form as training and consultancy is another form devised to camouflage the real purpose. The deduction of TDS doesn't give any credence or legalize the payments which are in contravention with the law laid down by the Hon'ble Apex Court. Hence, we hold that the payments made by the assessee have been rightly disallowed by the Revenue. The appeal of the assessee on this ground is d ismissed.
Page | 41 Disallowance on account of Depreciation:
24. During the year under consideration, the assessee has claimed depreciation amounting to Rs.1,38,45,026/- on fixed assets ly ing with various hospitals/ distributors. Briefly, given the comp lex and advance nature of assessee's products e.g . pacemakers, stents etc., it is imperative that the assessee also place certain fixed assets i.e. machines owned by it with the hosp itals/ dealers for ready to use monitoring/ servicing of pacemakers and evaluation of relevant category of stents.
25. The AO disallowed the claim of depreciation of INR 1.38 crores on above machines on the ground that "the assessee company is not using the assets for self use. Since the assessee company is not the actual user of the machinery/equipments, which were hired out, depreciation cannot be allowed to the assessee company." Further, the AO held that "the transactions carried out by the company are in the nature of hire p urchase transactions."
26. The ld . DRP up held the above disallowance on the grounds that "it is observed that the assessee is not the actual user of the machinery . Therefore, disallowance of depreciation made by the assessing officer is upheld. The objection of the assessee is dismissed."
27. We have examined the issue in detail. It is necessary to understand the nature and use of machines in question to decide about the purpose of legislation "used for the purpose of business".
• Programmers - These are the machines which are used for servicing/ follow-up of the pacemakers Page | 42 which is the product that is being dealt with by the assessee. It is humb ly submitted that pacemakers are required by certain patients to help control abnormal heart rhythms. The performance of the pacemaker is required to be monitored over its useful life, which is done by using these programmers. Accordingly, across various hospitals pan India, these programmers are frequently required to monitor the performance of the pacemaker during follow-up visit of the patients. These programmers are owned by the assessee and lies with the distributors who are located across various locations. These distrib utors provide the programmers on request basis for servicing/ monitoring the functioning of pacemakers which is supplied by the assessee and implanted in patients. Further, such programmers are also used to analyze any additional requirements in patient due to imp lantation of such pacemakers. We wish to mention that providing such services is essential to the business of the assessee as its pacemakers will not be purchased by anyone if prompt service is not provided by the assessee. Since it is not possible for the assessee to itself provide such services to all patients across India, it p rovides the same through its dealer network and according ly, these programmers are placed with the dealers to provide such follow-up/ monitoring services.
• Rotablator machines/ I-Labs imaging machines - These machines are used to examine/ evaluate/ investigate the feasibility of the assessee's products (stents) which can be used for treating patients Page | 43 with heart problems. These machines scan the level of blockage in arteries and help in ascertaining the type/ level of product which is required to be imp lanted in the patient. For instance, the assessee's product portfolio contains d ifferent type of stents (such as bare-metal/ drug-coated) and with the help of such machines, the level of blockages in the patients/ treatment required are analysed by doctors and basis the results ob tained, it helps in identifying which kind of stent is to be imp lanted in the patients.
28. These machines are not easily movable and hence, placed in the hospitals to perform such inv estigative procedures. It may be noted that these machines are necessary for determining the suitability of the assessee's products and hence, an essential element of promoting sales of the assessee's products. Once placed with the hosp ital, it is the assessee who continues to be the owner of such machinery and has the responsibility of maintaining , repairing and managing the machines.
29. Thus, given the complex and advanced nature of the medical products (pacemakers and stents) in which the assessee deals, it is imperative that the above machines are placed at various locations with hospitals/ dealers and readily available for assessee's products to sustain in the market. The assessee has claimed depreciation of INR 1.38 crores on above machines as per the provisions of section 32 of the Act. Under the said provision, the following cond itions are required to be satisfied for a claim of depreciation:
Page | 44 • The assets should be wholly or partly owned by the assessee; and • The assets should be used for the purpose of business or profession of the assessee.
30. As regards the first condition, in the instant case, the assessee purchased the machines in its own name and the ownership remains with the assessee. This is clearly evident from the 'Title' clause of the agreement entered between the assessee and the hospital which is reproduced as under:
"4. Title and Insurance: Boston Scientific is and shall be at all times during the term of this Placement Agreement the sole owner of the Equipment. You shall affix to the Equipment any labels supplied by Us evidencing Our ownership At all times during the term of this P lacement Agreement, You shall maintain such policies of insurance as are adequate to fully insure against damage to or loss of the Equipment."
31. The said equipment in question is the property of the assessee is not meant for sale and is being issued for regular follow up of pacemakers and post implant programming support. Thus, the first condition i.e. the ownership of such machines in name of the assessee is clearly estab lished and is in fact also not disputed by the tax department.
32. As regards the second cond ition, it is clearly evident that these machines are used solely for the purposes of business of the assessee for providing pre-sales and post- sales activities i.e. servicing / follow-up monitoring/ Page | 45 feasibility evaluation etc. in relation to its products i.e. pacemakers and stents.
33. Reliance is being placed on the following jud icial precedents wherein it has been held that actual owner of asset has the right to claim the depreciation and such claim is not based upon the user of the asset:
ICDS Ltd vs. CIT [2013] 29 taxmann.com 129 (Supreme Court) ACIT vs. National Stock Exchange of Ind ia Ltd . [2011] 14 tax mann.com 107 (Mumbai Tribunal) CIT vs. AP Paper Mills [1997] 225 ITR 262 (Andhra Pradesh Hig h Court) CIT vs. Shaan Finance Private Limited [1998] 97 Taxman 435 (Supreme Court) CIT vs. Castle Rock Fisheries [1997] 10 SCC 770 (Supreme Court).
34. Further we find that Section 2(c) of The Hire- Purchase Act, 1972 defines a 'hire-purc has e agreement' to mean an agreement under which goods are l et on hire a nd under whic h the hirer has an option to purc has e them in accordanc e with t he ter ms of t he agreement a nd i ncludes a n agreement under whic h--
(i) poss essi on of goods is deliv ered by the owner thereof to a pers on on c ondition that suc h person pays the agreed am ount in periodical i nstalments, and
(ii) The property in the goods is t o pass t o s uch pers on on the paym ent of the las t of s uch instalments, and
(iii) such pers on has a right t o terminate the agr eement at any time bef ore the property s o passes ;
35. Thus, a cursory reading of aforesaid definition makes it evident that a hire purchase ag reement is one where the hirer has an option to purchase the goods in accordance with terms of the agreement and the property in the goods Page | 46 pass on to such person on the payment of the last installment. Thus the allegation of the revenue is on a totally wrong appreciation of facts. The appeal of the assessee on this ground is allowed.
Clinical Trial expenses of INR 1,04,72,741:
36. Facts relevant to the adjudication of this issue are that the assessee's product portfolio includ es cardio products (i.e. stents) and related medical instruments. In generic terms, a "coronary stent" is a small, self- expanding, metal mesh tube which is placed inside a coronary artery to prevent the artery from re-closing or coronary lesion. Having a stent p laced is minimally invasive procedure, meaning it is not a major surgery. The assessee incurred clinical trial expenses amounting to INR 1.04 crores which were in the nature of financial aid provided to two hospitals to support the clinical trials. The expenses are as under:
S. N a m e o f H o s p it a l C l in i c a l T r ia l Amount
p a id (in
No. INR)
1 E s c o r t s H e a r t I n s t it u t e & T h is i s a n in v e s t i g a t o r in it ia t e d 7 5 , 3 0 , 0 1 1
R e s e a rc h C e n t e r (E s c o r t s ) s t u d y t o c o m p a re th e s a f e t y a n d p e r f o r m a n c e o f t h e T a x u s E le m e n t A d d r e s s : O k h la R o a d , N e w (a p p e l l a n t ' s product) against Delhi - 110025 XIENCE P r im e (c o m p e t i t o r ' s p r o d u c t ) c o ro n a ry s t en t s y s t e m f o r t r e a t m e n t o f c o r o n a ry l e s io n i n d i a b e t i c p a t ie n t s in I n d i a .
2 The Madras M e d ic a l T h is i s a n in v e s t i g a t o r in it ia t e d 2 9 , 4 2 , 7 3 0 M i s s io n (M a d r a s M e d ic a l) s t u d y t o e x a m in e t h e s a f e t y a n d p e r f o r m a n c e o f t h e P ro m u s E le m e n t Address: No. 4A, Dr. J Stent System (a g a in b e in g Ja y a l a lit h a N a g a r, a p p e lla n t ' s p r o d u c t ) i n M o g a p p a ir , C h e n n a i, Tamil Nadu - 600037 t h e t r e a t m e n t o f c o r o n a r y l e s io n i n I n d i a n p o p u la t io n .
T o t a l (in I N R ) 1,04,72,741
Page | 47
37. The AO disallowed the aforesaid expenses holding that "the clinical trials are studies undertaken by the hospitals over the period of time to see the impact of different products including the products being dealt with by the assessee. It was held that the trials are not solely & exclusively to see the impact of products dealt by the assessee or clinical research to see the efficacy of the products dealt b y the assessee company" and "the benefit of the trials so undertaken are not solely and exclusively for the business of assessee." The ld. DRP up held the above disallowance by holding that "since the assessee has failed to prove that the expenditure was incurred solely and exclusively for business purposes, therefore the same has been disallowed".
38. Heard the arguments of both the parties and perused the material availab le on record.
39. The relevant extracts from summary of these reports i.e. the objective and conclusion of clinical study reports is reproduced herein below:
R e le v a n t e x t ra c t s f r o m c l i n i c a l s t u d y r e p o r t R e le v a n t e x t ra c t s f r o m c l in i c a l ' T U X E D O - I n d ia ' f ro m E s c o rt s (r e f e r P . l i. s t u d y ' P R O M U S E l e m e n t ™ I n d ia V o l- 1 3 7 7 & 3 8 1 ) A l l C o m e r s R e g is t r y ' f ro m M a d r a s M e d ic a l ( re f e r P . B . V o l -I 5 0 6 &
510) "4 SUMMARY "2 SUMMARY T it le A P ro s p e c t iv e , S in g l e B l in d , M u lt i- 2 . 1 I N T R O D U CT I O N c e n t e r , R a n d o m ize d T r ia l t o C o m p a r e t h e T A X U S E le m e n t ™ C o ro n a r y S t e nt S y s t e m a g a in s t t h e X I E N C E P ri m e ™ C o ro n a ry S t e n t S y s t e m in t h e t re a t m e n t o f a D ia b e t ic T h e P RO M U S E l e m e n t ™ is t h e P a t ie n t P o p u l a t i o n in I n d ia la t e s t generation stent from Boston S c ie n t i f i c C o r p o r a t io n 4 . 1 S t u dy O b j e c t i v e s (B S C , N a t ic k , M a ss a c h u s e t t s , U n it e d S t a t e s ) a n d h a s re c e i v e d T h e p ri m a ry o b j e c t iv e o f t h e T UX E D O -I n di a D CG I a p p ro v a l on 13 A p ri l w a s t o c o m p a re t h e s a f e t y a n d p e r f o r m a n c e 2 0 1 0 . . . .
o f B o s t o n S c ie n t if i c s ' P a c l it a x e l- e lu t in g c o ro n a ry s t e n t s y s t e m ( T A X U S E l e m e n t ™ ) 2 . 2 O B J E C TI V E a g a in s t t h e XI E N C E P ri m e ™ c o r o n a r y s t e n t s y s t e m f o r t h e t re a t m e n t o f u p t o u p t h r e e T h e p r im a r y o b j e c t i v e o f t h e Page | 48 d e n o v o n a t iv e c o r o n a r y a rt e ry l e s io n s w it h P ro m u s E le m e n t ™ I n d i a R e g i s t ry a m ax i m u m o f t w o le s i o n s p e r e p i c a rd ia l w a s t o e v a l u a t e t h e s a f e t y a n d v e s s e l in d i a b e t ic p a t i e n t s . e f f e c t iv e n e s s of the P ro m u s Element™ Coronary Stent 4 . 2 I n t ro d u c t i o n S y s t e m i n a p o p u la t i o n o f a l l c o n s e c u t iv e a n d n e w c o m e rs .
T U X E D O -I n d ia wa s de s i g n e d t o in v e s t ig a t e t h e c l i n i c a l a n d s a f e t y o u t c o m e o f d ia b e t ic 2 . 7 CO N C L U SI O N m e l l i t u s 2 in I n d ia n p a t ie n t s re c e i v i n g t w o d if f e r e n t d r u g e l u t i n g s t e n t s o f T A X US I n t h is p ro s p e c t iv e , m u l t i - c e n t e r E l e m e n t P a c l i t a x e l - E l u t in g (P E S ) C o r o n a r y re g i s t r y , E v e r o l im u s - C o ro n a r y S t e n t S y s t e m a n d XI EN X E P r im e E v e r o l im u s - S t e n t S y s t e m (P r o m u s E l e m e n t ™ E l u t in g S t e n t ( E E S ) S y s t e m , b o t h a p p ro v e d s y s t e m ) d e m o n s t ra t e d t o b e s a f e b y t h e D C G I i n I n d ia . and effective for c o ro n a r y re v a s c u la r i za t i o n in I n d ia n 4 . 7 S u m m a r y a n d C o nc l u s io n p o p u la t i o n . . .
T h i s s t u d y d i d n o t s h o w n o n in f e ri o r it y o f T h e d e v ic e success and the T A X U S E le m e n t t o X ie n c e P ri m e in p a t ie n t s p r o c e d u r a l s u c c e s s w a s r e p o r t e d w it h c o ro n a r y a rt e r y d i s e a s e a n d d ia b e t e s in 1 0 0 % a n d 9 9 . 7% o f t h e mellitus B e t w e e n 1 y e a r an d 2 y e a rs o f p a t ie n t s o v e r t h e p e r io d o f 2 f o llo w - u p after stent im p la n t a t io n , t h e y e a r s , re s p e c t iv e ly . . . "
c l i n i c a l o u t c o m e s w e r e c o m p a ra b le b e t w e e n t h e t w o t re a t m e n t g ro u p s . "
A p p e l la n t ' s contention based on a b o v e A p p e l la n t ' s c o n t e n t io n s b a s e d o n extracts a b o v e ex t r a c t s :
a ) t h e na m e o f c l i n i c a l t r i a l s t u d y - a ) t h e n a m e o f c l i n ic a l t r ia l T U X E D O -I n d ia is p e r -s e a n a b b re v ia t io n s t u d y - ' P R O M U S E le m e n t ™ I n d ia d e r iv e d f r o m a p p e l la n t ' s p ro d u c t ' T A X U S ' A l l C o m e r s R e g i s t ry ' is p e r- s e t a k e n f r o m a p p e lla n t s p r o d u c t E l e m e n t ™ C o ro n a r y S t e n t ( le t t e r s ' T a n d 'I T ' P R O M U S E le m e n t ™ C o ro n a r y in T U X E D O b e in g d e r i v e d f r o m T A X U S s t e n t S t e n t Sy s t e m ; o f a p p e l la n t ) , a s a ls o e x p la in e d i n t h e ' T it le ' s e c t io n b e lo w S u m m a ry i n P a ra 4 o f a b o ve b ) the objective of the study re l e v a n t e x t ra c t ; was to evaluate the safety and e f f e c t iv e n e s s of A p p e lla n t ' s
b) t h e o b j e c t iv e o f t h e s t u d y w a s t o P R O M U S E le m e n t ™ C o ro n a r y c o m p a r e t h e s a f e t y a n d p e r f o rm a n c e o f S t e n t S y s t e m a s a ls o m e n t io n e d A p p e l la n t ' s T A X U S E le m e n t ™ s t e n t w i t h t h a t in t h e t a b u l a t io n p ro v id e d u n d e r o f a c o m p e t i t o r ( i. e . X ie n c e P r im e ™ s t e n t ) p a r a 6 . 5 h e re i n a b o v e a n d a ls o a s a l s o m e n t io n e d in t h e ta b u la t i o n p ro v id e d d u ly b e in g s u b m it t e d b e f o r e t h e u n d e r p a r a 6 . 5 h e r e i n a b o v e a n d a ls o d u l y L d . AO i n a p p e l la n t ' s s u b m is s i o n b e i n g s u b m it t e d b e f o re t h e L d . AO i n d a t e d 1 0 D e c e m b e r 2 0 1 9 (r e f e r a p p e lla n t ' s s u b m is s io n d a t e d 1 0 D e c e m b e r P . B . V o l- 1 2 3 4 for r e le v a n t 2 0 1 9 ( r e f e r P . B . Vo l- I 2 5 4 f o r re le v a n t e x t r a c t o f a f o r e s a id t a b u l a t i o n a s e x t r a c t o f a f o re s a id t a b u la t io n a s s u b m it t e d s u b m i t t e d b e f o re L d . A O );
b e f o r e L d . AO ) ;
c) the a p p e lla n t ' s product c) t h e a p p e lla n t ' s p r o d u c t h a s r e c e iv e d h a s r e c e i v e d d u e a p p ro v a l o f t h e
d u e a p p ro v a l o f t h e D ru g C o n t ro ll e r G e n e ra l D CG I ; o f I n d i a ( D C G I );
d) The c o n c lu s io n of d) T h e c o n c l u s io n o f a f o re s a id s t u d y w a s a f o r e s a id study was that t h a t a p p e lla n t ' s p r o d u c t w a s n o t in f e r io r t o a p p e lla n t ' s product
t h e c o m p e t i t o r ' s p r o d u c t s a n d t h e c l in i c a l d e m o n s t ra t e d t o b e s a f e an d o u t c o m e s o f t h e s t u d y w e r e c o m p a r a b l e e f f e c t iv e for c o ro n a r y between the two treatment groups. re v a s c u la r i za t i o n in I n d ia n p o p u la t i o n . T h e d e v ic e s u c c e s s Thus, the outcome of a f o r e s a id s t u d y a n d procedural success was e s t a b l i s h e s b e y o n d an y i o t a o f d o u b t t h a t re p o rt e d i n 1 0 0 % a n d 9 9 . 7 % o f Page | 49 the c l in i c a l study was s p e c if ic a l l y t h e p a t ie n t s o v e r 2 y e a r p e r io d u n d e rt a k e n t o c o m p a re t h e s a f e t y a n d re s p e c t iv e ly . p e r f o rm a n c e o f a p p e l l a n t ' s p ro d u c t ( i. e . t h e Taxus E le m e n t ™ stent) with t h e T h u s , t h e o u t c o m e o f a f o r e s a id c o m p e t it o r ' s p r o d u c t a n d is b y n o s t r e t c h o f s t u d y e s t a b l i s h e s b e y o n d a n y im a g in a t io n a g e n e r ic s t u d y u n d e rt a k e n b y io t a o f d o u b t t h a t t h e c l i n i c a l E s c o rt s f o r d i f f e r e n t c a t e g o ri e s o f s t e n t s , a s s t u d y was s p e c if i c a l ly h a s b e e n a ll e g e d b y t h e L d . AO . u n d e rt a k e n to e va l u a t e the safety and effectiveness of a p p e lla n t ' s p ro d u c t ( i. e . the P R O M U S E le m e n t ™ s t e n t ) a n d i s b y n o s t r e t c h o f im a g in a t io n a g e n e ri c study undertaken by Madras M e d ic a l for d if f e r e n t c a t e g o ri e s o f s t e n t s , a s h a s b e e n a lle g e d b y t h e L d . A O .
A l l e g at i o n s b y th e R e v e n u e A p p e l l an t'
a) P a ra 7 . 3 , P a g e 4 3 o f a p p e a l s e t : a) T h e u n d e r s t a n d in g o f t h e
L d . A O is g r o s s ly m i s p la c e d a n d
C l i n i c a l t r ia ls a r e s t u d ie s u n d e r t a k e n b y t h e in c o r r e c t for the d e t a ile d
h o s p it a l s o v e r t h e p e rio d o f t i m e t o s e e t h e re a s o n in g g iv e n a b o v e t h a t b o t h im p a c t o f d i f f e r e n t p ro d u c t s in c lu d i n g t h e t h e s t u d i e s w e r e s p e c i f ic t o o n e p ro d u c t s b e in g d e a lt w i t h b y t h e a s s e s s e e . s in g le c a t e g o r y o f s t e n t s y s t e m T h e t ria l s a r e n o t s o l e ly & e x c l u s i v e l y t o s e e f ro m a p p e lla n t ' s product the im p a c t of products d e a lt by t h e p o r t f o l i o ( i. e . T A X U S E l e m e n t ™ assessee or clinical research to see the stent and P ro m u s Element™ e f f i c a c y o f t h e p r o d u c t s d e a lt b y t h e s t e n t ). These trials w e re assessee company. t h e r e f o r e s o le ly a n d e x c lu s iv e ly to see the impact and efficacy of
b) P a ra 7 . 4 , P a g e 4 3 o f a p p e a l s e t : s p e c if i c p r o d u c t s / s t e n t s b e i n g d e a lt w it h b y t h e a p p e l l a n t .
T h e C o m p a n y h a s c la i m e d t h e e x p e n s e s a g a in s t s t u d y f o r e f f e c t o f s t u n t s ( s t e n t s ) b ) The Ld. AO, on a cursory u s e d i n c a r d ia c s u r g e r y . W it h o u t g o in g in t o re a d in g o f f a c t s , h a s in c o r re c t ly t h e p r o d u c t d e t a ils o r p r o d u c t iv it y it is a s s u m e d t h a t t h e a pp e l l a n t h a s re l e v a n t t o m e n t i o n h e r e t h a t s u c h p ro d u c t s c la im e d expenses a g a in s t a re b e in g u s e d b y t h e h o s p it a l s f r o m h o s p it a l study for stents of d if f e r e n t c o m p a n ie s as per t h e i r v a r io u s c o m p a n ie s w h i c h w a s in re q u ir e m e n t o n v a r io u s b a s i s . fact for two v e ry specific c a t e g o ri e s o f s t e n t s y s t e m f r o m
c) P a r a 7 . 5 , Pa g e 4 3 o f a p p e a l s e t : a p p e lla n t ' s p r o d u c t p o r t f o l io o n ly as e x p la in e d in detail T h e a i d p a id b y t h e a s s e s s e e c o m p a n y t o h e r e in a b o v e . T h e f a lla c y in L d . c a rr y o u t c li n i c t r ia l s is n o t h i n g b u t a n a l ib i A O ' s a l le g a t io n is a p p a re n t f r o m t o p r o m o t e t h e in t e re s t o f t h e c o m p a n y b y t h e f a c t t ha t t h e L d . A O h i m s e lf p ro c u r i n g a n d r e c o m m e n d in g t h e p ro d u c t s s t a t e d t h a t h is c o n c lu s io n w a s o f t h e c o m p a n y . T h e a s s e s s e e c o m p a n y i n a rr iv e d a t " w it h o u t g o in g i n t o g u i s e o f a id t o t h e s e in s t it u t i o n s f o r t h e p ro d u c t d e t a i ls " w h ic h w a s c a rr y in g o u t c l in i c a l t ri a l s h a v e a d v a n ce d e x t r e m e ly c r it i c a l t o u n d e r s t a n d h u g e s u m t o p r o m o t e it s in t e r e s t . T h e a n d a p p re c i a t e t h e p u rp o s e o f re a s o n f o r t h is p a y m e n t is t o c i r c u m v e n t t h e s t u d y , t h e o u t c o m e s t h e r e f r o m , C B D T C ir c u la r N o . 3 / 2 0 1 2 d a t e d 1 -0 8 - 2 0 1 2 t h e n a t u re o f e x p e ns e a n d t h e stating that.. commercial r a t io n a le for in c u r r in g t h e s a m e .
c) (i ) A t t h e o u t s e t , it i s re s p e c t f u l ly r e i t e r a t e d t h a t t h i s H o n ' b l e B e n c h h a s a lr e a d y h e ld in a p p e l la n t ' s o w n c a s e f o r A Y 2 0 1 1 - 1 2 (r e f e r P . B . V o l -1 2 8 1 ), a f t e r a d e t a il e d a n d re a s o n e d Page | 50 o rd e r, that no d is a l lo w a n c e u n d e r s e c t io n 3 7 ( 1 ) o f t h e A c t i s w a r r a n t e d s in c e C B D T C irc u l a r N o . 5 / 2 0 1 2 d o e s n o t a p p ly t o h e a lt h c a re s e c t o r o r p h a r m a c o m p a n ie s .
H e n c e , t h e p re m i s e o f L d. AO t o a lle g e t h a t p a y m e n t h a s b e e n m a d e t o c i rc u m v e n t t h e a b o v e C B D T c i rc u la r d o e s n o t h o ld g o o d o n c o rr e c t a p p l ic a t io n o f la w a t the threshold.
(i i ) Even o th e r w i s e , the p r o d u c t s ( i . e . s t e n t s ) w h ic h w e re subject matter of these clinica l t ria l s a r e d u l y a p p r o v e d b y D C G I p r o d u c t s f o r c o m m e r c i a l s a l e in I n d ia (a s m e n t io n e d in a b o v e e x t r a c t s f r o m t h e c l i n ic a l s t u d y re p o rt s ) .
(i i i ) I t i s c l a r if i e d t h a t t h e s e c l i n ic a l t r ia ls a r e c o n d u c t e d b y the a p p ro v e d i n s t it u t io n s of D ir e c t o r a t e G e n e ra l o f H e a lt h S e r v i c e s ( D G H S ) o f f i c e o f D G CI a n d s u c h i n s t it u t i o n s h a v e t a k e n p e r m is s io n / a p p ro v a l t o c o n d u c t s u c h c l i n i c a l t r ia l o n p a t ie n t s , a s p e r t h e g u id e l in e s is s u e d b y t h e D G H S , w it h p r io r a p p ro v a l o f t h e E t h ic a l g u id e l in e s f o r b io m e d i c a l re s e a r c h on human subjects p u b l is h e d b y I n d ia n C o u n c i l o f M e d ic a l R e s e a r c h ( I CM R ) a n d Good C l in ic a l Practice (G C P ) g u id e l in e is s u e d b y D G H S a l o n g w it h t h e a p p r o v a l o f E t h i c a l C o m m it t e e of the I n s t it u t e b e f o r e in it ia t io n o f t h is s t u d y .
T h e r e s u lt s o f s u c h c l in ic a l t r i a l s h a v e b e e n s u b m it t e d b y t h e I n s t it u t e s to ICMR c l in i c a l re g i s t r y at w w w . c t ri. i n . The annual status of on each clinica l t ria l , i . e . o n g o i n g , c o m p l e t e d and t e r m in a t e d , ha s to be submitted to DGHS.
(i v ) T h u s , e v e n in a c a s e w h e r e t h e CB D T C i rc u la r N o .
5 / 2 0 1 2 d a t e d 1 - 0 8 -2 0 1 2 i s t o b e a p p li e d t o t h e i n s t a n t c a s e , t h e a p p e lla n t is i n c le a r c o m p l ia n c e o f ' c la u s e 6 . 8 . 1 (e )' o f t h e M CI re g u la t i o n d a t e d 1 0 D e c e m b e r 2 0 0 9 (r e f e r P . B . V o l- 1 2 9 3 ) a s a l l c o n d it io n s p re s c r ib e d t h e re in (e g . t a k i n g re q u i s it e a p p r o v a l s f ro m concerned competent a u t h o r it ie s , E t h ic a l c o m m i t t e e s e t c . ) h a v e b e e n f u l f il l e d i n t h e Page | 51 in s t a n t c a s e a n d t h e re f o re t h e r e is n o " o f f e n c e o r p r o h ib it io n o f la w " d o n e b y t h e a p p el la n t .
d) P a r a 7 . 6 , Pa g e 4 3 o f a p p e a l s e t : (i v ) The a p p e l la n t d u ly deducts tax at source on the M o r e o v e r i t is n o t t h e c a s e o f a s s e s s e e t h a t im p u g n e d p a y m e n t s w h i c h h a v e re s e a r c h is being undertaken f o r b e e n m a d e t o b o t h t h e h o s p it a ls , d e v e lo p m e n t o f a n e w p r o d u c t o r t o e x a m in e E s c o rt s and M a d ras M is s i o n t h e e f f ic a c y o f a p ro d u c t d e a lt b y it . . . w h i c h f u rt h e r e s t a bl is h e s t h e g e n u in e n e s s o f t h e s e e x p e n s e s .
. . .T h e b e n e f it o f t h e t ri a l s s o u n d e r t a k e n a re n o t s o le ly a n d e x c lu s iv e ly f o r t h e I t is , t h e r e f o r e , f a r -f e t c h e d a n d business of h i g h ly u n r e a s o n a b l e f o r t h e L d .
A O t o a ll e g e t h e s a i d p a y m e n t s P a r a 7 , P a g e 7 0 o f a p p e a l s e t (D R P t o c a rr y o u t c l i n i c a l t r ia ls a re a n d ire c t io n s ): ' a l ib i' o r ' in g u i s e o f a id ' t o p r o m o t e t h e a p p e ll a n t ' s in t e re s t S i n c e t h e a s s e s s e e h a s f a i le d t o p r o v e t h a t w it h o u t a s i n g le shred of t h e e x p e n d it u r e w a s in c u r r e d s o le ly a n d e v i d e n c e b e e n b ro u g h t o n r e c o rd e x c lu s iv e ly f o r b u s i n e s s p u r p o s e s , t h e re f o r e t o s u b s t a n t i a t e s u c h a lle g a t i o n t h e s a m e ha s b e e n d is a l l o w e d . a n d d e s p it e a s e r i e s o f p r e -
a p p r o v a ls , a s e x p la i n e d a b o v e , to be taken from v a r io u s re g u la t o r s and Ethical C o m m it t e e s b e f o r e s u c h c l i n i c a l t ria l s a re condu cted the h o s p it a l s .
(i ) The s a id a l le g a t io n is g r o s s ly m i s p la c e d . A s m e n t io n e d in d e t a i l a b o v e , t h e c l in ic a l t r ia l s t u d ie s h a v e b e in g c o n d u c t e d t o c a t e g o ri c a l ly e x a m in e the e f f i c a c y o f t w o v e ry s p e c i f i c p r o d u c t s d e a lt b y t h e a p p e l la n t , a s i s e v i d e n t f ro m t h e r e le v a n t extracts of o b j e ct iv e s and s u m m a ry / c o n c lu s io n of the c l i n ic a l t r ia l r e p o r t s .
(i i ) It is r e s p e c t f u l ly submitted that the results of these s t u d ie s establish the safety, effectiveness/ non-
in f e r io r it y o f a p p e l la n t ' s p r o d u c t v is - a - v is c o m p e t it o r ' s p r o d u c t .
I n c a s e o f Ma d ra s Me d ic a l , t h e a p p e lla n t ' s d e v i c e d e m o n s t r a t e d 100%/ 99.7% success rate for d e v ic e / p r o c e d u re a s p e r c l i n i c a l t ria l o u t c o m e . T h e s e , r e s u l t s o f t h e s e t r ia l s a r e d i r e c t ly r e la t e d to a p p e lla n t ' s business and c le a r l y a r e s o le l y a n d e x c lu s iv e ly f o r b u s i n e s s p u rp o s e s it s e lf .
40. Having gone through the entire issue, we hold that clinical trials are an integral part of the feedback system on efficiency of the products of the assessee and hence it is Page | 52 intricately connected with the business of the assessee and hence it cannot be said that the expenses have not been incurred solely and exclusively for the business purpose. The appeal of the assessee on this ground is allowed.
41. In the result, the appeal of the assessee is partly allowed.
Order Pronounced in the Open Court on 13/03/2023.
Sd/- Sd/-
(Yogesh Kumar US) (Dr. B. R. R. Kumar)
Judicial Member Accountant Member
Dated: 13/03/2023
*Subodh Kumar, Sr. PS*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
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