ETERNAL FOUNDATION,JAIPUR vs. COMMISSIONER OF INCOME TAX (E), JAIPUR

exemptions under section 80G was also rejected. First, we take up the appeal challenging the order of ld. CIT (Exemptions) withdrawing/cancellation of the registration granted under section 12AA of the IT Act. The assessee has raised the following grounds :-

“ 1. The ld. CIT (E) has erred on facts and in law in cancelling the registration granted to the assessee trust u/s 12AA(3) of the IT

Act, 1961 by incorrectly holding that activities of the trust are not as per its objects and therefore not genuine.

2. The appellant craves to alter, amend and modify any ground of appeal.

2. The assessee trust was constituted on 16.05.2015 and was granted registration under section 12AA by the ld. CIT (Exemptions) vide order dated 17.12.2015. During the year under consideration the assessee filed an application dated 25th April, 2018 for approval of exemption under section 80G of the IT Act. In the course of proceedings, the ld. CIT (Exemptions) observed that the assessee is indulging in the activity of conducting clinical trial sponsored by various multi- national pharmaceutical companies which is at the instance of such MNCs and not from volition of the Trust. Accordingly, the ld. CIT (Exemptions) issued a show cause notice dated 24.10.2018 as to why the impugned clinical trials shall not be treated as non-charitable activity and also an activity not as per the objects of the assessee Trust and consequently the registration granted under section 12AA shall not be cancelled under section 12AA(3) of the Act. In response, the assessee filed a detailed reply objecting to the cancellation of the registration. The ld. CIT (Exemptions) was not satisfied with the reply of the assessee and finally held that the activities of the trust are not as per the objects and, therefore, are not genuine and consequently the registration granted under section 12AA was cancelled while passing the impugned order.

The ld. A/R has submitted that one of the objects of the Trust is to carry out other medical projects which may help and alleviate human sufferings solely for philanthropic purposes. The activity of carrying out clinical trial is covered by the said object of other medical projects as such clinical trials would result in invention of medicines which would provide relief from the particular disease for the whole society and public at large. The ld. A/R has submitted that it does not make any difference whether such clinical trial is conducted for MNCs and assessee received fees from the MNCs when the said fee is utilized for incurring expenditures for conducting such trials and for organizing various medical camps free of costs. The activity of the assessee is philanthropic in nature and merely because the said activity would be beneficial for the MNCs it cannot be held that the activities of the assessee are not charitable. The ld. A/R has pointed out that there is no change in the objects of the assessee when it is granted registration till the impugned order is passed by the ld. CIT (Exemptions). Therefore, once the registration is granted and there is no change in the objects of the assessee, the same cannot be withdrawn by drawing incorrect inference that the activity of carrying out clinical trials which ultimately help in invention of medicines for treatment of incurable diseases is not a philanthropic activity. In support of his contention he has relied upon the decision of Agra Bench of the Tribunal in case of Samarpan Samiti vs. CIT, 54 SOT 30 (URO).

The ld. A/R has further contended that the decision in case of CIT vs. Annadan Trust, 258 Taxman 54 (Kerala) as relied upon by the ld. CIT (Exemptions) is not applicable on the facts of the assessee’s case. Thus he prayed that the impugned order may be set aside as the activities of the assessee are charitable and philanthropic in nature.

He has referred to the details of the clinical trials carried out by the assessee and submitted that the assessee has entered into agreements with a series of pharmaceutical companies which are all MNCs for conducting clinical trials on their behalf. Such activities cannot be held as charitable in nature when it is only for the benefit of the pharmaceutical companies and not for the benefit of the public. The ld. D/R has also referred the Clinical Trial Agreement placed at page 23 of the Paper Book and submitted that there was a clear cut understanding between the parties that the outcome of the clinical trial would belong to the MNCs and the assessee shall not have any right over the end product of the clinical trial. Even the assessee was not a party to the said clinical trial agreement but one Eternal Heart Care Centre & Research Institute Pvt. Ltd. was party to the Agreement. He has strongly relied upon the impugned order of the ld. CIT (Exemptions) as well as the decision of Hon’ble Kerala High Court in case of CIT vs. Annadan Trust (supra). The ld. D/R has also referred to the financial break-up for the various years and submitted that the major receipts of the assessee is only from the clinical trials and the expenditure is also in respect of the activities of the clinical trials, therefore, no other charitable activity has been carried out by the assessee. The ld. D/R has pointed out that since the assessee’s activities are not carried out in accordance with the objects on which the registration was granted, therefore, the ld. CIT (Exemptions) is justified in withdrawing/cancellation of the registration granted under section 12AA of the IT Act.

“ 03. It is pertinent to state that the trust deed of the applicant trust envisages following objects :-

(a) Relief of the poor including in general the establishment, maintenance and support of institutions or funds for the relief of any form of poverty.

(b) Medical relief particularly :-

To grant aid for medical relief to poor persons including free distribution of drugs and medicines and establishment maintenance or support to institutions such as hospitals, dispensaries and centres for yogic/treatment or blind relief and other medical projects which may help and elevate human suffering solely for philanthropic purpose.

(c) Advancement of educational particularly :-

(i) To establish and run library, reading room, research centers and other institutions for medical, educational, cultural and spiritual purposes and not for purposes of profit within the meaning of Sec. 10(23)© of the Income Tax Act, 1961 as amended from time to time. (ii) To promote, to set up, held or subsidise institutions and persons and societies for study and research in literature, art, humanities, social sciences, dance and musical performances or for any other benevolent purposes. (iii) To promote, encourage aid or conduct study courses, seminars, lectures or camps for literary studies, human welfare, ancient culture, folk arts and other sciences in its widest and most comprehensive sense.

(iv) To grant scholarships, fellow-ships, aid for educational purposes, aid for publications and free distribution of literature for the purposes of improving study and research work in humanities, medical science, social sciences, Sanskrit and spiritual and philosophical studies.

(v) To make endowment and or donations to Universities, Colleges, Schools and other educational institutions at present existing or which may hereafter come into existence in India for the purpose of encouraging or spreading medical, technical, spiritual or other general education including free or subsidized students boarding houses.”

We further note that for the financial year 2015-16 the assessee has shown the receipt of donation of Rs. 20,000/- only and, therefore, at the time of registration there was no such activity of clinical trial carried out by the assessee. Thus it is clear that the registration was granted by considering the objects of the assessee trust which are no doubt charitable in nature. Subsequently, when the assessee applied for approval under section 80G of the IT Act vide application dated 25.04.2018, the ld. CIT (Exemptions) noted from the record annexed to the application that the assessee has indulged in the activities of conducting clinical trials sponsored by various MNC pharmaceutical companies. This fact is not in dispute that the assessee has been carrying out the activities of clinical trials on behalf of the various pharmaceutical companies, the details of which are as under :-

The assessee has undertaken the job of clinical trial on behalf of as many as 14-15 pharmaceutical companies which are all MNCs. The assessee has not disputed that as per the terms and conditions agreed by the parties, the final product as outcome of the clinical trial would be owned by the pharmaceutical companies who sponsored the clinical trial undertaken by the assessee. As per one of the clinical trial agreement dated 29th June, 2016 between Novartis Healthcare Private Limited and other persons, we find that one M/s. Eternal Heart Care Centre & Research Institute Pvt. Ltd. is the party to the said agreement and Consultant Dr. Krishna Kumar Sharma of the said M/s. Eternal Heart Care Centre & Research Institute Pvt. Ltd. has also signed the said agreement as Chief Consultant, Pulmonary & Sleep Medicine being an Investigator of the clinical trial. The payments of the clinical trials were made by these MNCs to various persons including the Investigator and assessee trust though in the agreement the assessee was not referred as a party. For ready reference, we reproduce clauses 16 & 17 of the Agreement as under :-

“ 16. All rights, title and interests including the rights to any intellectual property in all documentation used or supplied by the Sponsor, all the data, inventions, discoveries and results arising out of or in connection with this Agreement and the clinical trial and in the know-how incidental thereto and any patent applications and resultant patents derived therefrom shall be owned and be the exclusive property of the Sponsor. The Sponsor may use this information in any way it deems fit. The Investigator and the Institution agree and undertake to cause their employees to execute promptly all documents and take all such other action as may reasonably be requested by the Sponsor to permit the Sponsor to obtain the benefit of its rights under this Agreement. This includes without limitation taking all necessary steps for the transfer/assignment of ownership of all data, information, documents, inventions and discoveries to the Sponsor in accordance with this Agreement, and assisting the Sponsor in the preparation and prosecution of patent applications. The Parties agree that this clause shall survive the termination/earlier determination of the Agreement.

Thus it is clear from the agreement that all rights, title and interests including intellectual property rights as well as know-how incidental to the clinical trial, any patent derived from the said trial shall be exclusive property of the Sponsor (Pharmaceutical companies). Thus it is clear that the pre-dominant object of the said arrangement of conducting the clinical trial is to bring out an end product which shall be owned and be exclusive property of MNC. This is nothing but part of the business activities of pharmaceutical companies given as a job work to the other institutions including the assessee. It is not assessee’s own activity in fulfillment of the objects as enumerated in the Trust Deed. Even otherwise, the final product in the shape of development of new drug and test of drug is owned and exclusively a product of the said pharmaceutical company as an outcome of their regular business activity. Therefore, doing such work on behalf of the said company would not be falling in the ambit of charitable activity carried out by the assessee as it is clear from the objects of the assessee that the main object of the assessee trust is to establish, maintain and support institutions or funds for relief of any form of poverty.

Secondly, to grant aid for medical relief to poor persons including free distribution of drugs, medicines or support to the institution such as hospitals, dispensaries and other treatment centers which may help and alleviate human suffering. By any stretch of imagination or expanding the term charitable activity, the clinical trial carried out by the assessee on behalf of the pharmaceutical companies does not fall in the expanded meaning and term of charitable activity. There is no dispute that this activity does not fall in any of the pre-dominant object of the assessee trust.

From the financial details and particularly income and expenditure account of the assessee for the years 2016-17 and 17-18 it is manifest that the entire receipt is from clinical trial activity and major expenditure incurred by the assessee during these years is also in respect of the clinical trial activity. Therefore, except the clinical trial and related activities, the assessee has not carried out any other charitable activity. Once registration is granted under section 12AA based on the charitable nature of the objects of the assessee trust and subsequently if it is found that the activities of the assessee are not carried out as per the objects and the said activities are also not in the nature of charitable, then the ld. CIT (Exemptions) is empowered and authorized to cancel/withdraw the registration as per the provisions of section 12AA(3)/(4) of the IT Act. The ld. CIT (Exemptions) has considered all these relevant facts and after a detailed discussion has cancelled/withdrawn the registration as under :-

“ Applicant trust has specifically contended vide submission letter dated 24.10.2018 that the impugned clinical trials have been carried out for achievements of the objects of Trust and advancement of medical health of society at large and therefore are charitable activities. However, the contention is not tenable in the factual matrix of the case and in the eyes of law due to following reasons :-

(1) The applicant trust submitted copy of one of the contracts between INVESTIGATOR, INSTITUTION (Eternal Foundation) & SPONSOR. The clinical trials performed by the applicant trust i.e. INSTITUTION is due to such “contracts” between the three parties INVESTIGATOR, INSTITUTION & SPONSOR in order to find out the outcome of various medicines/drugs on a target population which volunteers for such trials with the sole motive of catering to the commercial profits of the SPONSOR (Multinational pharmaceutical Companies). The finding of such trials become the exclusive property of the MNC, and is evidently used by the MNC to maximize its profits. Further, the contract also contains clauses for fixing compensation in case of physical harm or death of any volunteer. Thus, the trials do not serve any philanthropic purpose and are carried out in developing countries like India due to low costs of such trials and compensation, thereby serving the purpose of maximizing the profit of MNC. Since, the clinical trials have been performed without any volition on part of the applicant trust and performed only due to the legal bindings emerging out of impugned contracts with the sole motive to maximize the profits of the SPONSORS, such trials cannot be termed as a charitable activity. In fact, the claim of the applicant leads to a self-contradictory proposition of contractual charity. Hon’ble Kerala High Court has disapproved of such charity in its decision in the case of CIT vs. Annadan Trust (2018) 258 Taxman 54 (Kerala), where it is held as follows :- “ The sub-contract of the assessee cannot be considered to be a charitable activity, especially since the supply of food is with the funds of the State Government, received by the assessee as contract amounts. The activity of the assessee confined to such sub-contracts cannot be deemed to be a charitable activity and, hence the Trust is not entitled to Registration u/s 12AA… The assessee, as rightly found, is engaged in a business and there can be no registration as a charitable institution.”

(2) On examination of Income & Expenditure accounts of various years, it transpires that applicant trust has performed meager and insignificant activities (as envisaged in objects of the Trust Deed) in comparison to the receipts of the trust. A comparison table is mentioned hereunder :- Particulars F.Y. 2015-16 2016-17 2017-18 Amount in Rs. Spent NIL 751.18 19797.95 for Medical camps for human welfare Total Receipts 20000 1564038 9734530 (Income) % in respect of total NIL .04% .00002% receipts Here, in the instant case of applicant trust, it is clerly evident that the income derived by the Trust does not enure for the benefit of the public instead the Trust is performing activities in order to maximize the profits of Multinational Pharmaceutical companies (SPONSORS). The main activity of the applicant is in direct contravention of the object (b) (supra) which stipulates carrying on of “medical projects which may help and alleviate human suffering solely for philanthropic purpose.”

6. Based on aforesaid discussions, it can be concluded that the activities of the trust are not as per the objects of the trust and, therefore, are not genuine. Therefore the provisions of section 12AA(3) are attracted. In view of these provisions, registration granted

vide Unique Registration No. (URN) AAATE6375J/08/15-16/T- 0193/12AA is hereby cancelled.”

Thus the ld. CIT (Exemptions) has followed the decision of Hon’ble Kerala High Court in case of CIT vs. Annadan Trust (supra) which in our view is squarely applicable in the facts of the present case where the assessee is engaged in the activities which are sponsored by the Pharmaceutical companies (MNCs) in their regular business activity. Accordingly, in view of the above facts, we do not find any error or illegality in the impugned order of the ld. CIT (Exemptions).

ITA No. 1504/JP/2018 :

“ 1. The ld. CIT (E) has erred on facts and in law in rejecting the application of assessee trust seeking exemption/s 80G(5) of the Income Tax Act, 1961. 2. The appellant craves to alter, amend and modify any ground of appeal

3. Necessary cost be awarded to the assessee.”