Expenses incurred by pharma company for purchase of medical books for professionals, are ‘freebies to doctors’ and attracts Sec 37(1)

The Mumbai Bench of Income Tax Appellate Tribunal upholds disallowance under Section 37 as the Assessee failed to produce the evidence of incurring the expenditure and the purpose for which it is incurred.

A Division Judge Bench of Justice Rahul Chaudhary and Accountant Member Prashant Maharishi observed that “Brand reminder and the purchase of medical books and journals for the medical professionals are specifically covered under the gift prohibited by the rules of Indian Medical Council. Nobody can deny that it is not a freebie given by assessee to those doctors”.

“The decision of the honorable Supreme Court in the case of Apex laboratories has strong binding precedent and serves as an authority on the facts with respect to the payment of freebies by the pharmaceutical companies and on all the legal issues arising out of such payment and its allowability in the hence of pharmaceutical companies”, added the Bench. 

Advocate P.J. Pardiwala appeared for the Assessee whereas Advocate Ajay Kumar Sharma appeared for the Revenue. 

The brief facts of the case were that the assessee is a company engaged in the business of manufacturing, and sale of pharmaceuticals including over-the-counter [OTC] pharmaceuticals, cosmetics, and allied consumer products and trading of pharmaceuticals. It filed its return of income in the month of November 2014 which was revised by the Assessing Officer (AO) and picked up ROI for complete scrutiny. During the course of the Assessment, the AO found that he had issued notices under section 133 (6) of the Act to the concerned parties, however, he did not receive any replies. Therefore, AO added the sum to Income. Ao also found brand reminder customer gifts and the purchase of medical books and journals are not allowable as an expenditure in view of the provisions of section 37 (1) of the act. Ao also found that the honorable High Court has passed the order sanctioning the amalgamation of Wyeth Limited with the assessee. But there was a decline in payment. Accordingly, an assessment order under section 143 (3) of the Act was passed. The assessee approached the CIT and got an order in his favor. Here, the Revenue approached the Bench to seek justice with the facts. 

After considering the submission, the Bench noted that the Assessee accounted for the excess consideration over the value of net assets of Wyeth Ltd. as Rs.4272 Cr towards intangible assets such as brands/trademark, etc., and the rest of Rs.6908 Cr as Goodwill, in its books of account.

The Bench relying on the Supreme Court ruling in Apex Laboratories, stated that any free gifts in any manner are prohibited by the provisions of the Indian Medical Council’s rules and therefore are not allowable under section 37(1).

The Bench remarked that “the decision of the SC is the law of the land and decision is not at all narrow in its scope and it needs to be applied to the facts of each case irrespective of its consequences”.

While Rejecting Assessee’s additional ground that the dividend distribution tax (DDT) paid by the Assessee on dividend distributed to its non-resident shareholders should have been charged at the rate prescribed under the applicable DTAA, as against the rate prescribed under Section 115-O, by relying on Mumbai ITAT Special Bench ruling in Total Oil India observing that, dividend distribution tax is a tax on the distributed profits of the company and it is not a tax on the income of the shareholder and thus, DTAA does not get triggered at all when a domestic company pays DDT under Section 115-O.

The Bench stated that neither the quantification nor the examination of conditions of depreciation on goodwill arising on amalgamation of Wyeth Ltd. in the Assessee’s hands was examined, during the course of the assessment as there were no sufficient materials available on record for the quantification of goodwill.

The Bench further stated by Relying on the SC ruling in CIT V Smif Securities Ltd (2012) 348 ITR 302 to observe that goodwill is an intangible asset on which depreciation can be allowed under the provisions of section 32(1)(ii).

The Bench remarked that the exclusion of goodwill has been inserted by the FA 2021 with effect from Apr 1, 2021, prior to that, the goodwill was a depreciable asset under Section 32 (1) (ii).

Hence, the Bench partly allowed the appeal filed by the AO and assessee whereas the cross objection filed by the assessee was dismissed.

Cause Title: ACIT Vs. M/s Pfizer Limited. [ITA No.2108/Mum/2018 / 2023-Enterslice-42-ITAT-Mum]

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