APRICA PHARMACEUTICALS P. LTD.,,AHMEDABAD vs. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(2),, AHMEDABAD

The assessee Company is carrying on the business of trading of Drugs and Pharmaceuticals. The assessee filed return of income on 27.09.2013 declaring total income of Rs.76,59,050/-. During the year under consideration the assessee has shown total turnover of Rs.22,60,35,739/- on which net profit of Rs.76,35,667/- was declared. The Assessing Officer made addition on account of inadmissible expenses under Section 37(1) of the Income Tax Act, 1961 amounting to Rs.71,72,703/-. The Assessing Officer observed that the addition was made in respect of Gift/freebees to Doctors, Conference Zurich Expenses for spouse & children, New Zealand Tour expenses of spouse and children of Doctors and Travelling expenses in India of spouse and children.

4. Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) has partly allowed the appeal of the assessee.

Page 3 of 6 “With reference to the above appeal and further to the submissions made, written as well as oral, the appellant begs to submit as under, more particularly, in view of the recent decision of Hon'ble Apex court in the case of Apex Laboratories Pvt. Ltd. Vs. DCIT (442 ITR 1).

2.0 The issue under present appeal is the disallowance to the extent of Rs.61,71,629/- in respect of freebies to the medical practitioners and their family members allowed by the Pharma company. It consist of the following items :-

Sr. Particulars Amount No.

3. New Zealand Conference family members Rs.13,48,681/-

5. Total Rs.71,72,703/-

7. Disallowance upheld by CIT(A) Rs.61,71,629/- 2.1 So far as the disallowance of freebies to the medical practitioners is concerned, the same will have to be considered by applying the test laid down in the aforesaid decision.

2.2 The perusal of the aforesaid decision of the Hon'ble apex court shows that the issue involved was with respect to the admissibility of expenses incurred by pharmaceutical and allied health sector industries for distribution of incentive i.e. Freebies to medical practitioners in view of the Explanation 1 to Sec. 37(1) r.w. Medical Council Act, 1956, CBDT circular dated 01/08/2012.

2.3 It was held that even if the pharmaceutical companies contention that they do not indulged in any illegal activity by committing an offence, as there is no corresponding penal provision in the 2002 Regulations applicable to them were to be accepted, there is no doubt that their actions falls within the purview of "prohibited by law" in Explanation 1 to Sec. 37(1). It was further held that the agreement between Pharma companies and medical practitioners in gifting Freebies for boosting sales of prescription drugs was violating of sec. 23 of Contract Act, 1872.

2.4 The following observations of the Hon'ble Court are important to examine the applicability of this decision.

Page 4 of 6 It is a matter of great public importance and concern when it is demonstrated that a Doctor's prescription can be manipulated and driven by the motive to avail of the Freebies offered to them by Pharma companies, ranging from gifts such as gold coins, fridges and LCD Television sets to funding international trips for vacation or to attend medical conferences. These Freeebies are technically not "free"-the cost of supplying such freebies is usually factored into the drug, driving prices up thus, creating a perpetual publicly injurious cycle. The threat of prescribing medication i.e. significantly marked up, over effective generic counter parts in lieu of such a quid pro quo exchange was taken cognizance by the Parliamentary Standing Committee on Health and Family Welfare which recommended that the Govt. should take parallel action to penalize those companies by cancelling drug manufacturing licenses and/or disallowing expenses on unethical activities.

2.5 The appellant submits that in view of the above said proposition of law propounded by the apex court, the test to be applied for deciding whether the freebies given by the Pharma companies is that there should be quid pro quo between the medical practitioners and the Pharma companies. In other words, the AO is supposed to give a finding that the appellant Pharma company had given freebies to the medical practitioners wherein consideration of the drugs of the Pharma company prescribed by these medical practitioners. The appellant submits that so far as disallowance of Rs.23,35,486/- as per para-2.3 of the impugned order is concerned, there is no finding of quid pro quo and simply on the basis of regulations, the disallowance is not justified. The conference at Munich was organized by European Society of Cardiology Congress wherein the appellant company had deputed 60 expert doctors and staff of 20 persons which facts are available at page 41 & 58-59 of the paper book. Since the said conference was meant for updating the doctors with the latest trends in the cardiology branch of medicine, the question of quid pro quo does not arise and the marketing and sale promotion expenses would even otherwise include such expenses which will not result into marking up of the price of medicines (which is the reason advanced in the aforesaid case law).

2.6 Similarly, the medical conference at New Zealand was organized for discussion and presentation on a) Obesity & Emergency Threa b) Diagnostic and Management of hyper tension (see page 58 of Paper Book).

2.7 So far as the disallowance of expenses relating to the spouse of the medical practitioners are concerned, the appellant has relied upon the decision in case of J.K. Industries Ltd. Vs. CIT 335 ITR 170 (Cal) and CIT vs. Alfa Level (I) Ltd. (282 ITR 445 (Bom) wherein the foreign trip expenses of the wife of company's director/president has been allowed (see page 109-110 and 120- 125 of Paper Book).”

Page 5 of 6 6. The Ld. DR relied upon the assessment order and the order of CIT(A) and also relied upon the decision of the Hon’ble Supreme Court in the case of Apex Laboratories Pvt. Ltd.

Order pronounced in the open Court on this 15th day of June, 2022.