2015 (12) TMI 1172 - AT - Income Tax

Disallowance under section 37(1) - expenditure incurred towards distribution of free samples to doctors/medical practitioners - whether the same to be incurred in contravention of the guidelines issued by Indian Medical Council read with circular 05/2012 issued by the CBDT - whether the free samples were neither freebies not gifts and were distributed by the appellant to doctors/medical practitioners on the specific written request of the latter? - Held that - As held by the Hon ble Supreme Court in the case of Eskayef Pharmaceuticals (2000 (7) TMI 1 - SUPREME Court ), the object of distribution of the samples of the drugs to the doctors is to make them aware that such drugs are available in the market in relation to the cure of a particular affliction and, therefore, to persuade them to prescribe the same in appropriate cases and this is tantamount to publicity and sales promotion. Accordingly, such expenditure cannot be said to be disallowable u/s 37(1) of the Income-tax Act in the hands of the Pharma companies distributing such free samples to doctors. In the light of the details discussion made above, the Panel holds that the free samples are not covered by the IMC regulations of 2002 (as amended in 2009) read with CBDT circular no. 5/2012, UCPMP and the Drugs and Cosmetic Act and regulations made there under. Accordingly the AO is directed to delete the proposed addition on this account.- Decided against REVENUE Transfer Pricing Adjustment on account of provision of business support services - Held that - Since the operating profit to cost margin of the appellant at 9.26% is higher than the operating profit to cost ratio of the comparable companies at 6.30%, the adjustment made by the AO/TPO/DRP, in relation to international transaction of provision of business support services, is deleted. In view of the above conclusion, we do not find, it necessary to adjudicate as to the comparability of inclusion of Aptico Limited , Global Procurement Consultants Limited. and HCCA Business Services (P) Ltd., and the objection of the assessee in respect of these two companies are kept open. The grounds are allowed to the extent discussed above.

Summary

Issues Involved:
1. Disallowance under Section 37(1) of the Income-tax Act for expenditure on free samples distributed to doctors.
2. Transfer Pricing Adjustment for provision of business support services.
3. Levy of interest under Section 234C of the Income-tax Act.

Issue-Wise Analysis:

1. Disallowance under Section 37(1) of the Income-tax Act for expenditure on free samples distributed to doctors:
- The assessee incurred Rs. 5,42,19,943 towards the distribution of free samples to doctors, which the Assessing Officer (AO) disallowed, citing Circular No. 5/2012 and Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002.
- The AO argued that the free samples were gifts or freebies, violating the IMC regulations and thus disallowable under section 37(1).
- The assessee contended that the samples were distributed based on specific written requests from doctors for patient use, not as gifts or for personal benefit.
- Reference was made to the Uniform Code of Pharmaceutical Marketing Ethics (UCPMP) and Drugs and Cosmetics Act, 1945, which permit the distribution of free samples under certain conditions.
- The Dispute Resolution Panel (DRP) for the previous assessment year (2009-10) had deleted a similar disallowance, and the Tribunal upheld this view, emphasizing consistency and referring to the Supreme Court's judgment in CIT vs. Excel Industries.
- The Tribunal concluded that the distribution of free samples was not a violation of the IMC regulations and thus not disallowable under section 37(1).

2. Transfer Pricing Adjustment for provision of business support services:
- The assessee provided business support services and received Rs. 7,57,78,032. The Transfer Pricing Officer (TPO) made an adjustment of Rs. 88,85,591, rejecting the assessee's benchmarking analysis.
- The TPO applied specific filters and excluded some companies from the set of comparables while including others.
- The Tribunal reviewed the comparables and directed the inclusion of Educational Consultant India Limited (EDCIL), ITDC Limited, and In House Production Limited, while excluding TSR Darashaw Limited.
- The Tribunal found that the average operating profit to cost ratio of the final set of comparables was 6.30%, which was lower than the assessee's margin of 9.26%.
- Consequently, the Tribunal deleted the adjustment made by the AO/TPO/DRP, as the assessee's transactions were within the arm's length range.

3. Levy of interest under Section 234C of the Income-tax Act:
- The Tribunal held that interest under section 234C is leviable on the shortfall of advance tax compared to the tax due on returned income.

Conclusion:
- The appeal of the assessee was allowed, with the Tribunal deleting the disallowance under section 37(1) for free samples and the transfer pricing adjustment for business support services. The levy of interest under section 234C was upheld.