ASST. COMMISSIONER OF INCOME TAX CEN CIRCLE 7(2), MUMBAI, MUMBAI vs. HEGDE AND HEDGE PHARMACEUTICA LLP, MUMBAI

4 Hegde and Hegde Pharmaceutica LLP (batch) statements from 20 employees. A statement was also recorded from a doctor located in Tamil Nadu by issuing commission u/s 131 of the Act. In the statements, all those persons confirmed that the doctors were paid commission only for prescribing the medicines of the assessee company. Some of the employees also confirmed that the doctors do not carry on any survey activity as mentioned by the company and it is the commission that is being paid in the name of survey fees/expenses. It was noticed that the assessee itself was paying the survey fees/expenses till the incorporation of another company named M/s Siranskn Research and Marketing Solutions P Ltd in the year November, 2017. From November, 2017, the survey fees/expenses were paid to the above said company, which in turn, paid the same to the doctors. Based on the above said enquiry conducted by the survey officials, the AO came to the conclusion that the assessee is paying monetary grants (commission payments) to the doctors under the pretext of Survey fees, which is in violation of MCI guidelines and accordingly he held that the said expenditure is not allowable as deduction as per the Explanation 1 to sec.37(1) of the Act. In this regard, the AO took support of the provisions of sec.37(1) of the Act, Circular No.05/2012 dated 01-08-2012 issued by CBDT and the decision of Hon‟ble Supreme Court rendered in the case of M/s Apex Laboratories P Ltd vs. DCIT (135 taxmann.com 286). Accordingly, the AO concluded that the survey fees paid to the doctors is not allowable as deduction u/s 37(1) of the Act. Accordingly, he disallowed the above said expenses in all the years under consideration. 3.1. The Ld CIT(A) deleted this disallowance in all these years and hence the revenue is challenging the decision so rendered by Ld CIT(A). 3.2. The question that arises for our consideration is whether the Survey fee paid to the doctors would fall under the category of expenses covered

5 Hegde and Hegde Pharmaceutica LLP (batch) by the proviso to sec.37(1) of the Act attracting the ratio of decision rendered by Hon‟ble Apex Court in the case of M/s Apex Laboratories P Ltd or not?

3.3. Before proceeding to discuss the facts prevailing in the present case, we may refer to the provisions of the Income tax Act, Circular issued by CBDT and the decision rendered by the Hon‟ble Supreme Court. The proviso to sec.37(1) read as under:- “37(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Explanation 1.—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession. Explanation 3.—For the removal of doubts, it is hereby clarified that the expression "expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law" under Explanation 1, shall include and shall be deemed to have always included the expenditure incurred by an assessee,— (i)for any purpose which is an offence under, or which is prohibited by, any law for the time being in force, in India or outside India; or (ii)to provide any benefit or perquisite, in whatever form, to a person, whether or not carrying on a business or exercising a profession, and acceptance of such benefit or perquisite by such person is in violation of any law or rule or regulation or guideline, as the case may be, for the time being in force, governing the conduct of such person; or 6 Hegde and Hegde Pharmaceutica LLP (batch)

(iii)to compound an offence under any law for the time being in force, in India or outside India.” The Central Board of Direct Taxes has issued a Circular No.5/2012 dated 01-08-2012 explaining the Explanations given below sec. 37(1) of the Act, which reads as under:-

“Circular No. 5/2012 [F. No. 225/142/2012-ITA.II], dated 1-8-2012 It has been brought to the notice of the Board that some pharmaceutical and allied health sector Industries are providing freebees (freebies) to medical practitioners and their professional associations in violation of the regulations issued by Medical Council of India (the 'Council') which is a regulatory body constituted under the Medical Council Act, 1956.

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This may be brought to the notice of all the officers of the charge for necessary action.” Since the provisions of Indian Medical Council Regulations are applicable to the doctors only and not to the pharma companies, there was divergent views in the legal forums on the Question as to whether the freebies paid to the doctors is allowable as deduction u/s 37(1) of the Act or not. This controversy has since been settled by Hon‟ble Supreme Court in the case of Apex Laboratories P Ltd (supra), wherein it was held that the freebies given to the doctors would be hit by the Explanations given below sec.37(1) and accordingly not allowable as deduction. 3.4. We notice that the AO has primarily placed reliance on the statements given by the employees and doctors recorded during the course of survey proceedings in order to come to the conclusion that the assessee is making commission payments in the form of freebies, which is in violation of Medical Council of India (MCI) guidelines. It is pertinent to note that the AO did not refer certain vital information in the assessment order, viz., (a) all the employees and the doctor from whom statements were taken u/s 131 of the Act during the course of survey proceedings have retracted their statement, but the AO did not refer to those retraction statements. In the retraction statement, they have stated that the survey team has recorded standard replies, which have been drafted by the survey team themselves. We also notice that identical replies were found recorded against the identical questions posed to various employees. (b) Further, all of them have also confirmed that the surveys on the efficacy of the products were conducted by the doctors who are prescribing medicines of the assessee. The assessee had contended

8 Hegde and Hegde Pharmaceutica LLP (batch) that the doctors alone could give valuable information about the efficacy of the products, since they are witness to the recovery of patients. (c) In this regard, the assessee furnished voluminous record containing the copies of survey reports. (d) AO himself has conducted enquiries with certain doctors and all of them have confirmed that they have carried out survey activities for the assessee. (e) The assessee is required to conduct surveys and furnish those survey reports to the Government Agency in order to renew license for continuation of the production of those products. Accordingly it was contended that the Survey fee paid to the doctors is for the services rendered by them for ascertaining the efficacy of the products of the assessee company and hence they cannot be called as freebies falling within the meaning of the Explanation to sec. 37(1) of the Act. 3.5. The above said contentions were appreciated by Ld CIT(A) and accordingly, the first appellate authority deleted this addition holding that the payments made to doctors for survey activities is for the services rendered by them and hence they would not fall under the category of freebies paid to the doctors. The decision rendered by Ld CIT(A) is extracted here, as the Ld CIT(A) has rendered his decision on sound reasoning:-

“20. Conclusions : 20.1 I have carefully gone through the survey report, assessment order, the submissions made by the appellant, details of enquires conducted by the A.O u/s. 133(6) and u/s. 131 of the Act during the assessment proceedings and facts available on record.

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20.2 Before discussing the issues raised by the A.O, first we have to understand the industry in which the appellant operates and weather it is necessary for then incur huge expenses on conducting the Market research and Product Sun activities. Hence, it is imperative to understand the regulatory mechanisms exist in India for pharmaceutical industry. In my opinion, one has to find out the follow aspect in the appellant's case :-

1. 1. Whether the market research and product survey are necessary.

2. Whether the appellant has actually conducted the surveys.

3. Whether the surveys conducted by the appellant are as per the guidelines of regulatory authorities.

encompasses the activities relating to the detection, assessment, understanding and prevention of adverse effects or any other possible drug related problems. Pharmacovigilance is essential and integral part of clinical research, both for clinical trials safety and also for post marketing. Pharmacovigilance is critical throughout the life cycle of the pharmaceutical product. II. The various aims of Pharmacovigilance Program of India (PvPl) are as under: a. To monitor Adverse Drug Reactions (ADRs) in the Indian Population b. To generate evidence-based data / recommendations on the Safe Use of Drugs c. To support Central Drugs Standard Control Organization (CDSCO) in formulating safety related regulatory decisions of medicines. d. To monitor benefit-risk profile of drugs and communicate information to all key stakeholders. e. To identify and analyze New Signal from the reported cases. f. To communicate the safety information on use of drugs to various stakeholders to minimize the risk. g. To promote rational use of medicine. From the above documents, it is apparent that it is mandatory for a pharma entity operating in India to have a pharmacovigilance system in place for collecting, processing and collating the data contemporaneously and forwarding the report to the licensing authority periodically or as and when asked for, as regards any information on adverse drug reactions emerging from the use of the drug manufactured or marketed by the Pharma entity operating in our country. 21.4 Even after the approval of manufacturing / marketing of a Pharmaceutical Products in India, a Pharma company has to collect, maintain and store various documents which can give insight of why the products are required to be allowed to be manufactured and marketed in India. This activity can be undertaken mainly by way of Post-Marketing Surveillance Study in the form of surveys being conducted regularly. 21.5 It is imperative that the pharma entity operating in India shall provide the Periodic Safety Update Report (PSUR), giving the details of the all the relevant information with the regulatory authorities from the appropriate sources, data of patients exposure, whether any changes should be made to the product information in order to optimize the use of the product. The reports should also cover the clinical and non-clinical data for the interval of the Report, The Pharma entity should inform the licencing authority of any serious unexpected adverse reaction within 15 days of receipt of the information. 21.6 The regulatory authority India also periodically reviews the list of the Fixed' Dose Combination (FDC) being marketed in India to evaluate as to whether a 11 Hegde and Hegde Pharmaceutica LLP (batch) particular FDC is required to be continued to be marketed in India or not. If they are satisfied that a particular FDC is no more effective or by continuing the sale of the same, will not be in the interest of public at large, they can issue a notice to the pharma entity requiring them to prove the efficacy and effectiveness of the said FDC in Indian population. 21.7 Thus, I observe that, Market Research and Product Surveys (Post Marketing Surveillance Study) conducted by a pharma entity is a core and critical activity for the very existence of a Pharma Entity which is to be performed diligently. In a scenario, if a pharma entity is not able to justify and prove the efficacy and effectiveness of its FDCs, then the regulator can pass an order and restrict / ban the sale and consumption of a particular drug in India. It is worthwhile to note that for proving the efficacy and effectiveness of any drug, a Pharma company is required to provide exhaustive details as to why the drug should be allowed to be continued to be sold in-India. It is mandatory for a pharmaceutical company to deduce the necessary evidence as per the statutory requirements. Both the above documents prescribe that pharmacovigilance activity should be undertaken by pharma entity under the supervision of qualified medical officer. 21.8 In order to maintain the sanctity of the entire exercise as well as to prove the authenticity of the results obtained from the Market Research and Product survey activity, it is imperative that the entire exercise is being undertaken and certified and qualified by medical professionals who themselves administer the pharma products. Thus, having prescribed a particular product, they are the best persons to conduct these Market Research and Product Survey activity, as they can gauge the efficacy and also the side effects of the products prescribed by them. I am of the opinion that any non-medico person cannot conduct these surveys and answer the structured questions raised in the Survey Forms. 21.9 From the details submitted as narrated hereinabove, I observe that Post- Marketing Surveillance activity is a core activity for survival of a pharma entity so as to comply with the requirements of the regulatory authority. The above discussion shows that the appellant has to collect the requisite data of the post- market surveillance by conducting the surveys through the qualified doctors.

22.2 On perusal of the Survey (133A) report, it is seen that the survey team had found the survey forms filled and signed by the doctors which are kept in the office premises of the appellant. The sample copy of the survey form is also a part of the survey report. Thus, there is no dispute to the fact that the survey forms signed

12 Hegde and Hegde Pharmaceutica LLP (batch) bythe doctors are in existence. The only dispute is the genuineness of these surveys conducted by the doctors. 22.3 I have gone through the various survey forms. These forms contain the structured questionnaires regarding the particular drug. The answers to these questions can be given only by the qualified dermatologist and practicing doctors who have been prescribing the drug over the time. These questionnaires are structured in a such a way that', the information regarding the safety, efficacy and any adverse reactions to the drug can be elicited there from. . 22.4 In the replies submitted by the doctors in response to the notices issued u/s. 133(6) of the Act by the A.O during the assessment proceedings, the doctors have accepted that the surveys had been conducted by them and the survey forms are signed by them. Thus, there is no dispute to the fact that survey forms signed by the doctors are in existence and the same are kept by the appellant in their office.

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23.5 The appellant has submitted before me, the copies of applications filed before theregulator with respect to 16 fixed dose combinations. I have gone through these 16 applications. On perusal of the same, it is seen that the appellant had also furnished volumenous data of Post-Marketing Survilance conducted by the appellant along with these applications. The details are as under.

Survey Report for DICLOGEL Total No. of Doctors 67 Total No. of patients 6908 Averge Number of patients for Rheumatic & Traumatic per Doctor/Month 111 Preferred Treatment Options Topical Treatment 59 Oral Treatment 8 Others 0

Along with this application form, survey report filled up by total 68 doctors have incorporated.

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15 Hegde and Hegde Pharmaceutica LLP (batch)

23.6 The above facts show that the post-marketing surveillance in the form of surveys conducted by the qualified doctors who have prescribed these medicines are the requisite documents to get the approval from the regulator, so as to continue manufacturing and marketing of these drugs in India.

23.7 Approval /No Objection granted by the Regulator :

23.7.1 The Directorate General of Health Services, office of Director General of India, FDC Division has issued no objection certificates for manufacturing and marketing the fixed dose combination in case of 16 drugs as discussed above. For ready reference a copy of such approval dated17.07.20l5 in case of fixed dose combination, fusidic acid beclomethasone diapropionate issued is scanned as under-

16 Hegde and Hegde Pharmaceutica LLP (batch) conditions mentioned therein. The condition No.5 is that, the appellant shall submit periodic safety update report as a part of post-marketing surveillance every 6 months for the first 2 years and annually for subsequent 2 years. Thus, the approval granted to manufacture and marketing the fixed dose combination is subject to the condition that the manufacturer has to submit the post-marketing surveillance periodically to the drug regulator. This approval is as per the PharamcoVigilance guidelines as discussed above. 23.8 The appellant has submitted a copy of the recent notification issued by the DCGI banning 14 FDCs of cough syrups manufactured and marketed by various multinational pharmaceutical companies on the ground that as per the DCGI these products have been found to be non-effective. Originally, notices were issued for banning 19 products, out of which 5 products were allowed to be continued to be marketed based on the Post-Marketing Surveillance data submitted by them. 23.9 The above facts clearly demonstrate that to manufacture-and to market the fixed dose combination drug, the manufacturer has to conduct the periodic safety update reports by conducting surveys through qualified doctors. Thus, conducting

17 Hegde and Hegde Pharmaceutica LLP (batch) surveys as a post-marketing surveillance is a mandatory condition for the appellant and the appellant has conducted the surveys as per the regulatory guidelines. 23.10 The appellant has been conducting Post-Marketing Surveillance Study over the past several years of its existence. It is also evident that in the absence of such surveys, the appellant cannot be in a position to respond to notices issued by the regulatory authorities. Further, non-compliance of such notices would definitely jeopardize the very existence of the appellant. Thus, this entire activity is to comply with the guidelines of regulatory authorities.

242 I have gone through the copy of the Annual Incentive Plan for the Calendar Year 2015 and I observe that nothing is there in this plan which would suggest that the appellant was engaged in making payment of prescription-based commission to various medical practitioners. In fact, this document provides for the mechanism and budget allocation towards the Marketing Expenses which can be incurred by the Sales Manager at various levels, which is basically meant to control the selling, marketing and distribution expenses. 243 Thesurvey team had recorded statements u/s131 of the Act in the course of survey from 26 persons. Out of these, 21 deponents have question-wise retractedtheirstatements. In the assessment order, the Assessing Officer had relied upon statements of 4 persons, including that of a doctor. The appellant has already tabulated the contents of the original statement vis-a-vis those as per the retracted statements. 24.4 Further, after going through the documents impounded during the course of the survey, statements recorded u/s 131 of the Act during the course of survey conducted u/s 133A of the Act, the retracted statements filed by the appellant, the detailed submissions made in the course of the reassessment proceedings as well as during the appellate proceedings, I find a subtle disconnect between the statements recorded during the course of survey and the actual facts.

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24.5 While recording the statements during the course of survey, the deponents had stated that no surveys were actually being carried out and there was no analysis being carried out on the same and neither they were used for the purpose of business. However, from the material impounded during the course of survey, I find that various survey forms and the analysis thereof were available on records. The appellant has aptly demonstrated that the surveys were conducted, and the survey forms were available on records. Moreover, I observe that the appellant had also submitted these survey forms in response to the notices received from DCGI in the Year 2013 and they have also received approval from the DCGI based on the same. In contrast to the statements recorded in the course of the survey proceedings, theretraction statements filed by the various deponents depict the facts about the being conducted which have further been supported by enough evidence laid on record.

24.6 Further, during the course of assessment proceedings for the A.Y. 2016-17, the A.O had issued notices u/s 133(6) of the Act to 15 medical professionals who had carried out Market Research and Product Survey activity for the appellant. Replies were received in this connection directly by the Assessing Officer from these medical professionals. I have gone through the notices issued u/s 133(6) of the Act as well as the replies filed by the medical professionals, and I observe that all these medical professionals have confirmed the following: - a) That they have actually conducted the Market Research and Product Survey activity for the appellant. To support this assertion, they have filed the copy of the Survey Forms for the surveys conducted by them. b) They have confirmed the receipt of the Professional Fees after deducting TDS for conducting the market research and product survey activity for the appellant and such income had been offered to tax by these medical professionals. c) They have also confirmed that receipt of the professional fees for conducting the Market Research and Product Survey activity does not violate guidelines issuedby the Medical Council of India. 24.7 Moreover, during the course of the assessment proceedings, the had filed confirmations from 15,280 doctors, confirming the receipt of Professional Fees for conducting Market Research and Product Surveys for the appellant. 24.8 From theassessment order, I find that the Assessing Officer has just brushed received by him in response to the notices issued u/s 133(6) of the Act as well as thevoluminous confirmations filed by the appellant. He has just relied upon the statements recorded u/s 131 of the Act during the course of survey, without making any further inquiry or verifying the veracity of the evidence filed by the by him directly. Apart from relying upon the statements of the survey, the Assessing Officer has not brought on evidence to support his contention that the entire survey exercise was an eye wash and was sham and bogus. It is not the case of the Assessing Officer tht the appellant has received cash back in lieu of payments

19 Hegde and Hegde Pharmaceutica LLP (batch) made towards the Market Research and Product Survey Fees and suppressed its profits.

25.2 From the above, it can be seen that it is difficult for the appellant to determine the prescription-based commission to the Doctors. One has to also understand the fact that the survey can be conducted by only those doctors who prescribed the products of the appellant. However, that does not indicate that the nature of payment is a commission for prescribing the medicine. As already discussed, it is difficult to ascertain the amount linked to prescription.

(**** Sic – Ld CIT(A) has extracted some other figures. The turnover of the assessee is much more, details of which are available in pages 107 and 108 of order passed by Ld CIT(A). For example, the turnover of assessee in FY 2013-14 was Rs.153.64 crores, in FY 2014-15 was Rs.333.79 crores…..in FY 2021-22 was Rs.639.17 crores)

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Sr. No. Financial Year Amount (Rs.)

1 2013-2014 50,89,56,675 2 2014-2015 95,54,92,107 .3 2015-2016 1,01,21,37,048 4 2016-2017 1,15,70,01,852 5 2017-2018 1,12,87,05,341 6 2018-2019 1,30,79,28,026 2019-2020 1,30,54,97,025 7 8 2020-2021 1,14,96,78,949 9 2021 -2022 1,27,76,15,597 Total 9,80,30,12,619 26.2 The appellant has vehemently argued that if the surveys had not been conducted, they could not have been in a position to comply with the notices and queries raised by DCGI and would not have been able to continue to market these 16 products. This contention is corroborated by the facts as mentioned above.

conducting surveys are not in a nature of any freebie or monetary grant provided to the doctors. Thus, there is no violation of any guidelines issued by the MCI.

3.6. A perusal of the order passed by Ld CIT(A) would show that the Ld CIT(A) has examined this issue thoroughly and has come to the conclusion that there was business necessity or exigencies to carry out survey on the efficacies of its products, since the regulatory authorities of Government would also ask for those details. We notice that the Ld CIT(A) has examined these aspects by forming following three questions:-

(a) Whether the market research and product survey are necessary?

(b) Whether the assessee has actually conducted surveys?

(c) Whether the surveys conducted by the assessee are as per the guidelines issued by the regulatory authorities?

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3.7. With regard to the first question, the Ld CIT(A) noticed that the Drug Controller General of India (DCGI) is the statutory authority constituted under the Drugs and Cosmetics Act, 1940 under the Ministry of Health & Family Welfare which regulates and also sets standards for manufacturing, sales, import and distribution of products in India. The Ld CIT(A) also examined the documents prescribed under Drugs and Cosmetics Act, 1940 viz., “Schedule Y” and “The Pharmacovigilance Guidance Document” for Marketing Authorisation Holders (MAH) of pharmaceutical products issued by the Secretary, Ministry of Health and Family welfare. From these documents, it was found that the “Pharmacovigilance Program of India (PvPI) aims to achieve certain objectives, mainly to monitor “Adverse Drug Reactions”(ADRs) in Indian Population. After making detailed discussions, the Ld CIT(A) concluded in paragraph 21.9 of his order that the Post Marketing Surveillance activity is a core activity for survival of a pharma entity so as to comply with the requirements of regulatory authority and further these data could be collected from the qualified doctors only. Accordingly, the Ld CIT(A) concluded that the post marketing survey is necessary for survival of the assessee. 3.8. The next question that was examined was Whether the assessee has actually conducted surveys?. The Ld CIT(A) has given finding that the survey forms have been properly maintained by the assessee. He also noticed that the AO himself has issued notices u/s 133(6) of the Act to various doctors and they have confirmed that the surveys were conducted by them and survey forms were signed by them. Accordingly, the Ld CIT(A) concluded that the assessee has carried out actual surveys through the doctors. 3.9. The next question that was examined was whether the surveys were conducted by the assessee in accordance with the guidelines issued by the 23 Hegde and Hegde Pharmaceutica LLP (batch) regulatory authorities? The Ld CIT(A) examined this question in paragraphs 23 onwards and noticed that the DCGI has issued no objection letters for 16 fixed dose combinations, vide his letter dated 17-07-2015, on the basis of survey forms only. He also noticed that the assessee is required to furnish periodic safety update reports as a part of post- marketing surveillance every 6 months for the first two years and thereafter annually. Accordingly, the Ld CIT(A) concluded that the activity of conducting surveys as a post marketing surveillance is a mandatory condition for the assessee and the assessee has conducted the surveys as per the regulatory guidelines. Following observations made by Ld CIT(A) are very much relevant:- “23.10 The appellant has been conducting Post marketing Surveillance Study over the past several years of its existence. It is also evident that in the absence of such surveys, the appellant cannot be in a position to respond to notices issued by the regulatory authorities. Further, non-compliance of such notices would definitely jeorpardize the very existence of the appellant. Thus, this entire activity is to comply with the guidelines of regulatory authorities.”

3.10. Having concluded that the assessee has actually carry out the survey activities involving qualified doctors and further giving finding that these kinds of post marketing surveillance study is necessary under the regulatory requirements to demonstrate the efficacy of products, good or bad effects of the products in order to continue their production and hence the post marketing surveillance surveys are required for the very existence of the assessee, the Ld CIT(A) proceeded to address the various observations made by the AO in paragraphs 24 of his order. The gist of observations made by Ld CIT(A) are given below:- (a) The Annual Incentive plan does not suggest that the assessee was making payment of Prescription based commission to various medical practitioners.

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(b) The AO has relied upon the statements taken u/s 131 of the Act by the Survey team from 26 persons. Out of these, 21 deponents have retracted their statements. However, the AO has relied upon statements given by four persons including a doctor, but all the four persons have retracted their statement. The assessee has tabulated the contents of original statements and retracted statements. (c) There is subtle disconnect between the statements recorded during the course of survey and actual facts. (d) In the statements, the deponents have stated that no surveys are being carried out and there was no analysis being carried out on the same and further they were not used for the purposes of business. However, the materials impounded during the course of survey included various survey forms, analysis thereof, which proves that the surveys are being actually conducted and the data are being used for analysis. These survey forms have been submitted to DCGI in the year 2013 and the product approval was received on the basis of these survey forms. (e) During the course of assessment proceedings, the AO himself has issued notices u/s 133(6) of the Act to 15 medical practitioners and they have confirmed that they have carried out market research and product survey activity. (f) Before the AO, the assessee also furnished confirmations obtained from 15,280 doctors confirming the receipt of professional fee for conducting research and product surveys. Accordingly, the Ld CIT(A) concluded that the AO has just brushed aside various evidences and has just relied upon the statements taken u/s 131 of the Act during the course of survey operations, which have also been 25 Hegde and Hegde Pharmaceutica LLP (batch) retracted. Accordingly, the Ld CIT(A) concluded that the view taken by the assessing officer is not correct . 3.11. The Ld CIT(A) also negated the view taken by the AO that the alleged payments are linked to the prescriptions issued by the doctors, since the products are not directly sold by the doctors. 3.12. During the course of hearing before us, the revenue could not bring any material to contradict various findings given by Ld CIT(A). In view of the detailed analysis of this issue by Ld CIT(A), we are of the view that the AO was not justified in holding that the professional fees paid to the medical practitioners for conducting market research and product survey are in the nature of freebies. Further, it is stated that the assessee has duly deducted TDS from the professional fees paid to the doctors. Accordingly, we are of the view that the Ld CIT(A) was justified in deleting this addition in all the years under consideration.

26 Hegde and Hegde Pharmaceutica LLP (batch) education/degree. The AR, therefore, contended that the expenditure cannot be treated to be in contravention to any MCI Guidelines and the same is also not hit by any Explanation to Section 37(1) of the Act. In support of the contention, the AR of the appellant has filed the ledger account of these expenses and bills/vouchers of the same. 34.3 I have considered the contentions of the appellant and the facts of the case. From the details filed by the appellant, it is seen that the expenditure had been incurred on books and periodicals provided to the Medical representatives and various students and not to Doctors. As such, the expenditure cannot be treated as freebies to doctors and incurred in contravention of the MCI Guidelines. Consequently, the expenditure cannot be disallowed u/s 37(1) of the Act. The appellant has identified the expenditure pertaining to the doctors and to others. The expenditure related to the doctors has been suo moto disallowed. The AO is, therefore, directed to delete the addition/adisallowce of Rs.18,14,917/- and accordingly, Ground no.3 of the appeal is ALLOWED.”

Following the decision rendered for AY 2016-17, the Ld CIT(A) deleted identical additions made in other years. 4.2. We heard the parties and perused the record. We notice that the Ld CIT(A) has given a finding that the cost of scientific books and periodicals given at free of cost to the doctors has been suo motu disallowed by the assessee. This expenditure pertains to the books given to the medical representatives and students and hence the same cannot be considered to be freebies to the doctors. Before us, the revenue did not file any material to contradict the finding so given by Ld CIT(A). Accordingly, we uphold the order passed by Ld CIT(A) on this issue in all the years under consideration.

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5.1. The AO noticed that the assessee had made payments in the nature of OTC Payments to beauticians, spa, salons etc through SRMSPL. The AO noticed that the expenditure claimed on this account was more than the amount actually paid. Hence, the AO disallowed the difference amount in AY 2019-20 to 2022-23. 5.2. The Ld CIT(A) deleted the same on appreciating that the difference represented the profit margin of SRMSPL. 5.3. We heard the parties and perused the record. We notice that the AO has not doubted the genuineness of the expenditure incurred towards OTC payments. He has disallowed the difference between the expenditure claimed and the actual payment made to OTC people. It has been explained that the difference represents the profit margin of SRMSPL, which was the agency that was marketing the products to OTC professionals. It is further stated that the OTC professionals are also utilized for survey activities. All these facts would show that the assessee has not booked any bogus expenses. Accordingly, we are of the view that the Ld CIT(A) was justified in deleting this disallowance made in AY 2019- 20 to 2022-23.

attending conferences. The contention of the assessee was that the registration charges were paid directly to the associations and they were incurred on behalf of the doctors as part of continuing medical education program. The AO did not agree with the contentions of the assessee and accordingly took the view that the conference registration expenses would also fall under the category of freebees and hence, the same is liable to be disallowed as per Explanation-1 and Explanation-2 of Section 37 of the Act in all the years under consideration. The Ld.CIT(A) also confirmed the disallowance. 6.2. The Ld.AR submitted that the conference fees were paid by the assessee directly to the associations, who were conducting conferences. The Ld.AR further submitted that the IMC guidelines bars a medical professional from accepting any travelling and other hospitality facilities in India as well as abroad for going for a vacation or for attending any seminar, conference or workshop. However, the MCI guidelines did not cover conference registration fee within its ambit. Accordingly, he contended that if a pharmaceutical company pays registration charges for registration on any doctor for attending a conference, then, the guidelines issued by IMC will not get violated. Accordingly, the Ld.AR submitted that the decision rendered by the Hon‟ble Supreme Court in the case ofM/s Apex Laboratories P Ltd (supra) will not be applicable to the conference registration charges. He further submitted that the Mumbai Bench of the Tribunal has held in the case of DCIT vs. PHL Pharma Ltd. [2017] (163 ITD 10) (Mumbai) has held that the conference registration fees will not be hit by the embargo provided in Explanation-1 to section 37(1) of the Act since the main objective of the conference and seminar is to update the knowledge of the doctors on latest developments, which would be beneficial to doctors as well as pharmaceutical companies. The Ld.AR further submitted that the Hon‟ble Apex Court in the case of M/s Apex

29 Hegde and Hegde Pharmaceutica LLP (batch)

Laboratories P Ltd (supra) has not specifically considered the issue relating to allowability of expenditure on conference registration fees paid for various medical professionals by a pharmaceutical company. Accordingly, the Ld.AR submitted that the Ld.CIT(A) was not justified in confirming the disallowance of conference registration expenses. 6.3. On the contrary, the Ld.DR, supported the order passed by the Ld.CIT(A) on this issue. He submitted that the Ld.CIT(A) has followed the decision rendered by the Hon‟ble Supreme Courtin the case of M/s Apex Laboratories P Ltd (supra) and also the decision rendered by the Mumbai Bench of the Tribunal has held in the case ofACIT vs. M/s.Pfizer Limited in dt. 22-09-2023wherein it was held that the conference registration is paid by a pharmaceutical company is liable to be disallowed. 6.4. In the rejoinder, the Ld.AR submitted that both the above said decisions were discussing about the freebees given to doctors and did not specifically address about the allowability of conference registration fees. 6.5. We heard rival contentions on this issue and perused the record. We notice that the Ld CIT(A) has confirmed the addition on this issue in all the years under consideration. The decision rendered in AY 2016-17 is extracted below:- “38.2 I have considered the contentions of the appellant and the findings of the AO as also the facts of the case. The appellant's contention is that the MCI Guidelines do not consider the registration fees paid by the pharmaceutical companies for registration of medical professionals as freebee provided to them and such expenditure is also not covered by the decision of the Hon'ble Supreme Court in the case of Apex Laboratories. 38.3 During the course of survey, it had been admitted that doctors used to make requests for making arrangements for attending various medical conferences, such as payment of registration fees, their travel and personal stay, etc. It had also been admitted that after receiving such requests, the appellant made necessary arrangements by acting as a 30 Hegde and Hegde Pharmaceutica LLP (batch) sponsor and incurred the expenses such as registration fee, travelling (for flight tickets, etc.), accommodation, etc., on behalf of the doctors. Further, the appellant has also treated all such expenses incurred on behalf of the doctors, except for the conference registration charges, as freebies to doctors and covered by the MCI Guidelines and the judgement of Hon'ble Supreme Court in the case of Apex Laboratories. I am not inclined to accept the contention of the appellant that this item of expenditure should be considered differently from the other items of expenses incurred by the appellant on behalf of the medical professionals. The appellant had incurred various expenses relating to medical conferences, on behalf of various doctors who had attended such conferences. For attending the conferences, the doctors were required to pay registration fees, which were paid by the appellant on their behalf. Payment of registration fee was the first step, and unless registration was done, there was no question of incurring of the other expenses on travel, stay, etc. 38.4 The doctors have to attend the medical conferences for updating themselves about the new and latest information, knowledge, etc. in their respective fields and the same is also compulsory. However, the expenses for attending such conferences are to be borne by them. It is not the duty of Pharma companies to incur such expenditure on behalf of the Doctor. If these expenses are sponsored by the pharmaceutical companies, it contravenes the MCI guidelines. 38.5 It would be pertinent to reproduce the various observations made by the Hon'ble Supreme Court while deciding the issue of allowability of various expensesincurred by pharmaceutical companies on behalf of medical professionals in the case of Apex Laboratories, hereunder: Para 28, "This Court also notices that medical practitioners have a quasi-fiduciary relationship with their patients. A doctor's prescription is considered the final word on the medication to be availed by the patient, even if the cost of such medication is unaffordable or barely within the economic reach of the patient-such is the level of trust reposed in doctors. Therefore, 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 the freebies offered to them by pharmaceutical companies, ranging from gifts such as gold coins, fridges and LCD TVs to funding international trips for vacations or to attend medical conferences. These freebies 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." Para 31,:

31 Hegde and Hegde Pharmaceutica LLP (batch)

"It is crucial to note that the agreement between the pharmaceutical companies and the medical practitioners in gifting freebies for boosting sales of prescription drugs is also violative of Section 23 of the Contract Act, 1872 (as also noted by the Punjab and Haryana High Court in Kap Scan (supra))". Para 33, "Thus, pharmaceutical companies gifting freebies to doctors, etc. is clearly "prohibited by law", and not allowed to be claimed as a deduction under Section 37(1). Doing so would wholly undermine public policy. The well- established 21 principle of interpretation of taxing statutes that they need to be interpreted strictly cannot sustain when it results in an absurdity contrary to the intentions of the Parliament".

As would be seen from the observations of the Hon'ble Supreme Court in para 28 of the judgment reproduced above, funding to attend medical conferences has also been considered by the Hon'ble Court as freebie offered by pharmaceuticalcompanies to doctors. Thus, it is obvious that the payment of conference registration fees by the appellant on behalf of doctors also has to be treated as a freebie offered by a pharmaceutical company to doctors. 38.6 Further, in the case of ACIT-14(2)(2), Mumbai v. M/s. Pfizer Ltd. (ITA No. 2108/Mum/2018A.Y. 2014-15) decision dated 22/09/2023, the Hon'ble ITAT, "I" Bench, Mumbai, has held as under:

"026. We have carefully considered the rival contention and perused the orders of the lower authorities. We do not find any reason to uphold the order of the learned and CITA which is now been decided by the honourable Supreme Court holding that any free gifts in any manner is prohibited by the provisions of Indian medical Council's rules and therefore same is not allowable under section 37 (1) of the act Brand reminder is in 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 free be given by assessee to those doctors. We also find that the decision of the honourable Supreme Court is a lot of land and decision is not at all narrow in its scope. Therefore, for this reason it needs to be applied to the facts of each case irrespective of its consequences. With respect to the claim of the assessee that purchase of medical books and journals are provided for dissemination of knowledge and education. There is no doubt about that that the profession of medical is always evolving. Therefore, the need of medical books and journals is imperative. Similarly is the purpose of attending conferences seminars et cetera by the Drs. We are also aware about the various clauses 1.2.2., 1.2.3. and 6.8.1 (g) of the IMC Regulations, wherein these are provided for. But 32 Hegde and Hegde Pharmaceutica LLP (batch) those regulations does not provide that the Drs should accept freebies of books, journals, conference fees paid, seminar fees, registration charges, hotel charges et cetera paid by a pharmaceutical company. Nobody denies that every profession should have a continuing education program but the cost of such a continuing education program should be bone by the professional himself and cannot be given as a free be by the other parties. The similarly, there is no bar in attending the conference and seminar purchasing books et cetera by the Drs, but footing of those bills defrayed by pharmaceutical companies is prohibited. Therefore, allowance of such expenditure in the hands of pharmaceutical company, which is required tobe incurred by the Drs for their continuing professional education, isagainst the letter and spirit of the law as well as against decision of the honourable Supreme Court. It would always be unfair, improper to find escape routes from the decision of the honourable Supreme Court when it covers extensively all the possible outcomes. Undoubtedly, the decision of the honourable Supreme Court in 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." From the above decision of Hon'ble ITAT also, it is quite clear that the conference registration charges paid by the appellant on behalf of medical practitioners have to be treated as freebies to doctors. Hence this expenditure is not allowable as deduction u/s 37 of the I.T.Act. 38.7 In view of the above discussion, the addition/disallowance of Rs.1,64,96,993/-, being conference registration charges paid by the appellant on behalf of medical practitioners, is upheld and Ground No. 4 of the appeal is DISMISSED.”

6.6. We notice that the Ld CIT(A) has followed the decision rendered by Hon‟ble Supreme Court in the case of Apex Laboratories P Ltd (supra) and the decision rendered by the Tribunal in the case of Pfizer Ltd (supra) in order to decide this issue against the assessee. However, it is the submission of the assessee that both the above said decisions did not specifically deal with the payment of “conference registration charges”. It is also the submission of the assessee that the MCI guidelines refers to the travel and stay arrangements only and hence Conference registration charges would not be covered by the MCI guidelines and consequently by 33 Hegde and Hegde Pharmaceutica LLP (batch)

Explanation 1 to sec.37(1) of the Act. In this regard, the assessee has relied upon the decision rendered by the Tribunal in the case of DCIT vs. PHL Pharma Ltd (2017)(163 ITD 10)(Mum), wherein the Tribunal had allowed the deduction of conference registration charges. 6.7. We notice that the decision in the case of PHL Pharma Ltd (supra) was rendered by the co-ordinate bench of Tribunal in 2017, much prior to the decision rendered by the Hon‟ble Supreme Court in the case of Apex Laboratories P Ltd, while the decision in the case of Pfizer Ltd (supra) has been rendered following the decision rendered by Hon‟ble Supreme Court in the case of Apex Laboratories P Ltd. In the case of Pfizer Ltd, the co- ordinate bench held that the conference registration charges paid by the pharmaceutical company are against the letter and spirit of law and against the decision of Supreme Court. In our view, the decision rendered by the Tribunal in the case of Pfizer Ltd, being a decision subsequent to the decision of Hon‟ble Supreme Court would merit preference. 6.8. We also notice that the Hon‟ble Supreme Court, in paragraph 28 of its order (extracted by Ld CIT(A)), has observed that “funding of international trips for vacation or to attend medical conference” would fall under the category of freebies. The Ld CIT(A) has also referred to the above said observation of the Hon‟ble Supreme Court and has accordingly held that the payment of conference registration fees by the assessee on behalf of the doctors has to be treated as freebies offered by a pharmaceutical company to doctors. 6.9. There should not be any dispute that, attending conference by a doctor would benefit that doctor only and it may sometimes benefit the assessee company in an indirect way. We noticed that the assessee has made arrangements for „Conference Registration‟, „travel‟ and „stay‟. In our view, all the three types of expenditure come as a package and hence the 34 Hegde and Hegde Pharmaceutica LLP (batch) entire expenditure should be considered as “freebies” only as observed by Hon‟ble Supreme Court. In our view, when the assessee pays for any expenditure on behalf of the doctors, which but for such payment, would have been payable by the doctors, then such kinds of payments would fall under the category of “freebies”. If the assessee is able to show that the doctors have attended the conferences as a representative of the assessee company, i.e., on behalf of the assessee company and if the assessee company had not sponsored those expenses, the concerned doctor would not have attended the conference at all, then the assessee company may be entitled for deduction of those expenses. Even in that case, the business/commercial expediency have to be shown by the assessee in order to get deduction of those expenses. In the instant case, the very fact that the assessee itself has voluntarily disallowed travel and stay expenses would show that it has sponsored the Conference registration expenses on behalf of the doctors only. Accordingly, we are of the view that the Ld CIT(A) was justified in confirming the disallowance of conference registration expenses in all the years under consideration.

35 Hegde and Hegde Pharmaceutica LLP (batch)

Copy to : 1) The Appellant 2) The Respondent 3) The CIT concerned 4) The D.R, “E” Bench, Mumbai 5) Guard file By Order

Dy./Asst. Registrar I.T.A.T, Mumbai