Boston Scientific India Pvt. Ltd., New Delhi V. DCIT Circle 4(2), New Delhi

ITA 871/DEL/2021

AI Insights

The case involves Boston Scientific India Pvt. Ltd., which appealed against the orders of the National Faceless Assessment Centre (NFaC) concerning transfer pricing adjustments and various corporate tax disallowances for the assessment year 2016-17. The primary issues revolved around the adjustments made to the trading segment and business support service segment under transfer pricing, and disallowances related to expenses incurred for clinical trials and other business activities. The Tribunal examined the nature of the expenses, the purpose for which they were incurred, and the compliance with relevant tax laws and regulations, including the Income Tax Act and the Medical Council of India regulations.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 131082 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 7 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-03-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: I
• Next Hearing Date: 12-12-2022
• Assessment Year: 2016-2017
• Appeal Filed On: 15-07-2021
• Other Referred Cases: Max Hospital Pitampura v. Medical Council of India, DCIT-8(2), Mumbai Vs PHL Pharma (P.) Ltd., Solvay Pharma India Ltd. Vs Pr. CIT, Range-2, Mumbai, M/s Apex Laboratories P. Ltd. Vs DCIT, CIT vs. AP Paper Mills, CIT vs. Shaan Finance Private Limited, CIT vs. Castle Rock Fisheries, CIT vs. Khemchand Motilal Jain, CIT vs. Jamal Uddin Ahmad, CIT vs. Bihari Lal Jaiswal, CIT vs. G.T. Girish, CIT vs. Maddi Venkataraman & Co. (P) Ltd., CIT vs. C.W.S. (India) Ltd., CIT vs. Biharilal Jaiswal, CIT vs. P.V. Narasimha Rao, CIT vs. T.A. Quereshi, CIT vs. M/s K.M. Jain, CIT vs. Pt. Vishwanath Sharma, CIT vs. Jamal Uddin Ahmad, CIT vs. Apex Laboratories P. Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Gift; Business income; Depreciation; Transfer pricing; Opportunity of being heard; Capital expenditure; TDS
• Section: 37; 92C; 143(3); 142(1); 37(1); 10B; 43; 48; 194J; 13; 22; 20

Judgement Text

Page | 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘I’, NEW DELHI Before Dr. B. R. R. Kumar, Accountant Member Sh. Yogesh Kumar US, Judicial Member ITA No. 871/Del/2021 : Asstt. Year : 2016-17 Boston Scientific India Pvt. Ltd, C-40/41, Okhla Industrial Area, Phase-2, New Delhi-110020 Vs DCIT, Circle-4(2), New Delhi (APPELLANT) (RESPONDENT) PAN No. AABCG9446Q Assessee by : Sh. Kanchun Kaushal, AR Sh. K. Bansal, AR Revenue by : Sh. Bhaskar Goswami, CIT DR Date of Hearing: 13.12.2022 Date of Pronouncement: 13.03.2023 ORDER Per Dr. B. R. R. Kumar, Accountant Member: The present appeal has been filed by the assessee against the order dated 22.06.2021 passed by the, National Faceless Assessment Centre, Delhi u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961. 2. The assessee has raised the following grounds of appeal:- “1. On the facts and circumstances of the case 8c in law, the final assessment order passed under section 143(3) r.w.s. 144C(i) and s. 144B of the Income-tax Act, 1961 (‘the Act’) dated 22 June 2021 by the National Faceless Assessment Centre (‘NFaC’ or ‘Ld. AO’) is bad in law. Grounds relating to transfer pricing adjustments: 2. On the facts and circumstances of the case & in law, the Ld. AO grossly erred in making an upward adjustment of INR 11,22,76,671 pertaining trading segment of Appellant in the final assessment order despite the adjustment being reduced to NIL in Ld. TPO’s subsequent rectification order dated 18 December 2019 and Ld. TPO’s Page | 2 order dated 16 April 2021 giving effect to Ld. DRP’s directions. 3. On the facts and circumstances of the case 8c in law, the Ld. AO/ TPO/ DRP grossly erred in making an upward adjustment of INR 1,75,15,590 pertaining to business support service segment by alleging that the transactions undertaken therein do not satisfy arm’s length principle and by including companies not comparable to Appellant’s functions performed, assets employed and risks assumed. 4. On the facts and circumstances of the case 8c in law, the Ld. AO/ TPO/ DRP grossly erred in enhancing Appellant’s income by INR 3,33,740 towards recovery of expenses without providing any opportunity of being heard as otherwise mandated under the first proviso to section 920(3) of the Act and without application of transfer pricing methods provided under section 92C r.w. Rule 10B of the Income-tax Rules, 1962. Grounds relating to corporate tax disallowances: 5. On the facts and circumstances of the case 8c in law, the Ld. AO/ DRP grossly erred in disallowing expenditure of INR 3,27,74,708 incurred in relation to doctors under Explanation 1 to section 37(1) of the Act read with CBDT circular no. 5/2012 despite being otherwise and specifically permissible under MCI Regulations 2002. 6. On the facts and circumstances of the case 8c in law, the Ld. AO/ DRP grossly erred in disallowing clinical trial expenses of INR 1,04,72,741 under section 37(1) of the Act despite it having been incurred wholly and exclusively for the business purpose of the Appellant. 7. On the facts and circumstances of the case 8c in law, the Ld. AO/ DRP grossly erred in disallowing depreciation under section 32(1) of the Act of INR 1,38,45,026 in respect of assets placed with hospitals whilst incorrectly alleging that the Appellant is engaged in hire purchase transaction and without appreciating that the Appellant is the owner of such assets being used for its business purpose. 8. On the facts and circumstances of the case 8c in law, the Ld. AO grossly erred in not granting credit of advance tax paid of INR 2,75,00,000 to the Appellant in the computation sheet annexed with impugned assessment order. 9. On the facts and circumstances of the case 8c in law, the Ld. AO erred in initiating penalty under section 271(1)(c) of the Act without appreciating that the Appellant has neither concealed any income nor furnished inaccurate particulars relating to any income.” Page | 3 3. The assessee is a private limited company domiciled in India and incorporated under the provisions of the Companies Act, 1956. 4. It is engaged in promotion, marketing, sales and distribution in India of a wide range of cardio products (such as coronary stents, pacemakers etc.) and related medical instruments and devices manufactured by Boston Scientific Group and also provides related post-sales support services. Its product portfolio emphasizes on critically important therapeutic areas such as interventional cardiology, cardiac rhythm management and electrophysiology, peripheral interventions, endoscopy, urology and women’s health. Transfer Pricing Adjustment: Business Support Services: 5. The TPO has choosen the following comparables and determined the ALP margin @ 15.81% and made an adjustment of Rs.1.75 Cr. S. No. Comparable Operating Margin (OP/TC) 1. Aptico Ltd. 4.50% 2. Husys Consulting Ltd. 4.70% 3. Crystal Hues Ltd. 4.93% 4. Kestone Integrated Mktg. Services Pvt. Ltd. 5.89% 5. ICRA Management Consulting Services Ltd. 8.31% 6. Praendex Management Resources Pvt. Ltd. 15.28% 7. Killick Agencies & Mktg. Ltd. 16.34% 8. EDCIL (India) Ltd. 20.75% 9. Just Dial Ltd. 29.26% 10.. Info Edge (India) Ltd. 30.49% 11. Kitco Ltd. 30.20% 12. Interactive Manpower Solutions Pvt. Ltd. 35.54% 35 th Percentile 8.31% Median 15.81% 65 th Percentile 29.26% Page | 4 6. Based on the above companies selected as comparables, the TPO passed a final order u/s 92CA(3) of the Act and computed the TP adjustment as under: Particulars Amount (INR) Operating Cost 224,271,316 Arm’s Length Operating Margin (OP/TC) as computed by Ld. TPO 15.81% Arm’s Length Operating Profit as computed by Ld. TPO 3,54,57,293 Arm’s Length Price as computed by Ld. TPO 25,97,28,611 Particulars Amount (INR) Transfer Price of the Assessee 24,22,13,021 Proposed Adjustment 1,75,15,590 7. Before us, the assessee contested for exclusion of four comparables on the grounds of FAR and Government companies. We hold that the “Government companies” per se cannot be a reasoned to be excluded and FAR of each company is examined with relevance to the FAR of the assessee. S No. Name of the Company DRP’s contention Appellant’s contentions 1. 1. Info Edge (India) Ltd. The company does market activities by managing and releasing classified advertisements for many types of business entities Functionally Different Online classifieds company for services such as jobs, real estate, matrimony etc Owns significant intangible assets unlike a usual service provider such as the appellant Entrepreneur vis-a-vis limited risk service provider Entrepreneur deploying surplus cash as investment in other companies vis- a- vis limited risk support services provided by the appellant Functionally dissimilar Hence, directed to the excluded 2. Just Dial Ltd. Company is a search engine providing search through platforms such as web, mobile app etc. Functionally Different Development of apps and mobile platforms to transact, enquire and connect buyers and sellers Page | 5 Functionally dissimilar Hence, directed to the excluded Unique Intangibles & their contribution Owns and exploits significant intangible assets such as unique telephone numbers, application development etc. leading to high revenues unlike the appellant 3. EDCIL (India) Limited The Company has been selected by the Assessee itself. 4. Kitco Ltd. The Company is engaged in marketing / business support services Government Owned Company Functionally Different & Diverse Engaged in engineering consultancy services 73% of revenue from engineering consulting services and for rest of operations, no segment segmental information is available. Functionally dissimilar Hence, directed to the excluded 8. The AO is directed to re-compute ALP taking into consideration the comparable excluded by the Tribunal. Transfer Pricing Adjustment: Recovery of Expenses: 9. During the relevant year under consideration, the assessee procured certain assets amounting to Rs.22,22,933/- lying with third parties for re-export to Associated Enterprises (AEs) on a cost-to-cost basis. The ld. DRP determined a 15% mark-up on the amount of such recovery treating the same to be support services rendered by the assessee to its AEs and computed an adjustment of Rs.3,33,740/-. 10. The ld. AR submitted that the assets were procured by it on behalf of its AEs purely for administrative convenience and that entire cost of such assets was recovered by it Page | 6 from its AEs. Accordingly, it was submitted that there was no service element involved in such recovery of expenses. 11. It was also submitted that arm’s length price of such recoveries without issuing a valid show-cause notice to the assessee and without application of provisions of section Q2C of the Act read with Rule 10B of the Rules is against the principles of natural justice and argued that the ALP adjustment proposed be directed to be deleted. 12. We have gone through the written submissions, the alternative arguments of the ld. AR and also the arguments of the Revenue. After hearing both the parties we hold that in the specific facts of the instant case for the year before us, a mark-up of 8% instead of 15% is considered to be reasonable. The AO is directed to re-compute the ALP. The appeal of the assessee on this ground is allowed for statistical purpose. Corporate Tax Issues: Disallowance u/s 37(1): 13. In the instant year, the assessee incurred expenses totaling to INR 3.27 crores in respect of doctors/ medical practitioners as follows: Nature of expense Amount (in INR) Consulting expenses paid to doctors Travelling, boarding and lodging expenses paid for reimbursed to doctors with whom affiliate arrangements has been entered 1,80,49,486 1,47,25,222 Total 3,27,74,708 14. It was submitted that the disallowance of expenses under section 37 of the Act has been made by the AO solely Page | 7 on application of CBDT Circular No. 5/ 2012 dated 1 August 2012 read with clause 6.8 of Medical Council of India (MCI) by holding that “any amount paid in whatever form to the Doctors is not an allowable expense”. The ld. DRP thereafter upheld the above disallowance and rejected the assessee’s reliance on the ITAT’s order in its own case for AY 2011-12 by incorrectly observing “that applicability of Circular No. 5/2012 has not been examined but the ITAT in A.Y. 2011-12”. 15. It is argued that both the DRP erred in not following the ITAT’s order in assessee’s own case for AY 2011-12 where the applicability of above CBDT circular has duly been considered by the Hon’ble ITAT both in respect of (a) the relevant assessment year from which above circular applies and separately (b) on merits as well based on a detailed consideration of legal and factual assertions made by the assessee. 16. The relevant extracts from the aforesaid order of ITAT reproduced as under: “3... The Id. Counsel for the assessee submitted that the assessee had raised objections against the order of Id. DRP and stated that CBDT Circular No. 5/2012 does not apply. It was further submitted that the expenditure incurred was not prohibited by MCI Regulations and therefore, the claim made, did not fall within the purview of CBDT Circular No. 5/2012. It was further submitted that the MCI Guidelines are applicable only to medical practitioners and not to Pharma Companies It was also stated that the issue under consideration is covered by the decision of the ITAT Mumbai Bench in the case of DCTT-8(2), Mumbai Vs PHL Pharma (P.) Ltd. reported at 163ITD10. Page | 8 5. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is not in dispute that the assessee incurred expenses of Rs.12.14.Ft48/- for conducting a seminar/conference of the Doctors and provided the travelling facilities to the participant Doctor's in the seminar. The AO disallowed the expenses for the reasons that the expenditure incurred on consultant Doctors was covered within the purview of CBDT Circular No. 5/2012 dated 01.08.2012. The present case, relates to the assessment year 2011- 12 and the previous year ended on 31.03.2011. Therefore, the circular issued by the CBDT on 01.08.2012 was not applicable for the year under consideration. 6. On a similar issue, the ITAT Mumbai Bench in the case of DCIT- 8(2), Mumbai Vs PHL Pharma (P.) Ltd. (supra) held as under: “From the perusal of the Board Circular No. 5 of 2012 dated 1-8 - 2012, it can be seen that heavy reliance has been placed by the CBDT on the Circulars issued by the Medical Council of India, which is the regulatory body constituted under the Medical Council Act, 1956'. One such regulation has been issued is 'Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002'. The said regulation deals with the professional conduct, etiquette and ethics for registered medical practitioners only. Chapter 6 of the said regulation/notification deals with unethical acts, whereby a physician or medical practitioners shall not aid or abet or commit any of the acts illustrated in clauses 6.1 to 6.7 of the said regulation which shall be construed as unethical. Clause 6.8 has been added (by way of amendment dated 10-12-2009 ) in terms of notification published on 14-12-2009 in Gazette of India laying down the code of conduct for doctors and professional association of doctors in their relationship with pharmaceutical and allied health sector industry. [Para 5] On a plain reading of the aforesaid notification, which has been heavily relied upon by the department, it is quite apparent that the code of conduct enshrined therein is meant to be followed and adhered by medical practitioners/doctors alone. It illustrates the various kinds of conduct or activities which a medical practitioner Page | 9 should avoid while dealing with pharmaceutical companies and allied health sector industry. It provides guidelines to the medical practitioners of their ethical codes and moral conduct. Nowhere the regulation or the notification mentions that such a regulation or code of conduct will cover pharmaceutical companies or health care sector in any manner. The department has not brought anything on record to show that the aforesaid regulation issued by Medical Council of India is meant for pharmaceutical companies in any manner. On the contrary, before us the learned senior counsel. Shri Mistry brought to our notice the judgment of Hon'ble Delhi High Court in the case of Max Hospital v. MCI (WPC1224/2012. dated 10-1-2014I. wherein the Medical Council of India admitted that the Indian Medical Council Regulation of 2002 has jurisdiction to take action only against the medical practitioners and not to health sector industry. From the aforesaid decision, it is ostensibly clear that the Medical Council of India has no jurisdiction to pass an order or regulation against any hospital or any health care sector under its 2002 regulation. So once the Indian Medical Council Regulation does not have any jurisdiction nor has any authority under law upon the pharmaceutical company or any allied health sector industry then such a regulation cannot have any prohibitory effect on the pharmaceutical company like the assessee. If Medical Council regulation does not have any jurisdiction upon pharmaceutical companies and it is inapplicable upon Pharma companies like assessee then, where is the violation of any of law /regulation? Under which provision there is any offence or violation in incurring of such kind of expenditure. The relevant provision of section 37(1) applies to an assessee who is claiming deduction of expenditure while computing his business income. The Explanation provides an embargo upon allowing any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law. This means that there should be an offence by an assessee who is claiming the expenditure or there is any kind of prohibition by law which is applicable to the assessee. Here in this case, no such offence of law has been brought on record, which prohibits the pharmaceutical company not to incur any development or sales promotion expenses. A law which is applicable to different class of persons or particular category of Page | 10 assessee. same cannot be made applicable to all. The regulation of2002 issued by the Medical Council of India (supra), provides limitation/curb/prohibition for medical practitioners only and not for pharmaceutical companies. Here the maxim of "Expressio Unius Est Exclusio Alterius" is clearly applicable, that is, if a particular expression in the statute is expressly stated for particular class of assessee then by implication what has not been stated or expressed in the statute has to be excluded for other class of assessee. If the Medical Council regulation is applicable to medical practitioners then it cannot be made applicable to Pharma or allied health care companies. If section 37(1) is applicable to an assessee claiming the expense then by implication, any impairment caused by Explanation 1 will apply to that assessee only. Any impairment or prohibition by any law/regulation on a different class of person/assessee will not impinge upon the assessee claiming the expenditure under this section. [Para 6]” It has further been held as under: “From the perusal of the nature of expenditure incurred by the assessee, it is seen that under the head "Customer Relationship Management", the assessee arranges national level seminar and discussion panels of eminent doctors and inviting of other doctors to participate in the seminars on a topic related to therapeutic area. It arranges lectures and sponsors knowledge upgrade course which helps pharmaceutical companies to make aware of the products and medicines manufactured and launched by it. Under Key Account Management, the assessee makes endeavour to create awareness amongst certain class of key doctors about the products of the assessee and the new developments taking place in the area of medicine and providing correct diagnosis and treatment of the patients. The said activities by the assessee are to make the doctors aware of its products and research work carried out bu it for bringing the medicine in the market and its results are based on several levels of tests and approvals. Unless the pharmaceutical companies make aware of such kind of products to key doctors or medical practitioners, then only it can successfully launch its products/medicines. This kind of expenditure is definitely in the nature of sales and business promotion, which has to be allowed. Page | 11 Coming to the gift articles and free samples of medicines, it is seen that the assessee gives various kind of articles like, diaries, pen sets, calendars, paper weights, injection boxes etc. embossed with bold logo of its brand name and the product name so that the doctors remembers the brand of the assessee and also the name of the medicine. All the gift articles, as pointed out by the assessee before the authorities below and also before us are very cheap and low cast articles which bears the name of assessee and it is purely for the promotion of its product, brand reminder, etc. These articles cannot be reckoned as freebies given to the doctors. Even the free sample of medicine is only to prove the efficacy and to establish the trust of the doctors on the quality of the drugs. This again cannot be reckoned as freebies given to the doctors but for promotion of its products. The pharmaceutical company, which is engaged in manufacturing and marketing of pharmaceutical products, can promote its sale and brand only by arranging seminars, conferences and thereby creating awareness amongst doctors about the new research in the medical field and therapeutic areas, etc. Every day there are new developments taking place around the world in the area of medicine and therapeutic, hence in order to provide correct diagnosis and treatment of the patients, it is imperative that the doctors should keep themselves updated with the latest developments in the medicine and the main object of such conferences and seminars is to update the doctors of the latest developments, which is beneficial to the doctors in treating the patients as well as the pharmaceutical companies. Further as pointed out and concluded by the learned CIT(A) there is no violation by the assessee in so far as giving any kind of freebies to the medical practitioners. Thus, such kind of expenditures by a pharmaceutical companies are purely for business purpose which has to be allowed as business expenditure and is not impaired by Explanation l to section 37(1). [Para 10]” 7. In the present case also, the assessee incurred the expenses and arranged the seminar, those expenses were not prohibited by law. So, respectfully following the aforesaid referred to order of the Coordinate bench, we are of the view that the disallowance made by the AO was not justified. Page | 12 8. A similar view has been taken by the ITAT Mumbai Bench in the case of Solvay Pharma India Ltd. Vs Pr. CIT, Range-2, Mumbai (2018) 169ITD13... 9. In the present case also, the assessee incurred a sum ofRs.13,14,548/- on account of travelling, lodging, conveyance and registration fees on behalf of Doctors who attended the seminar, the assessee incurred expenses being a promoter of medical education and to train Doctors/medical practitioner for providing best available care to the patient and better quality medical services We, therefore, considering the totality of the facts and in view of the aforesaid discussion, delete the addition of Rs.13,14,548/- being a reimbursement of expenses incurred by the assessee on travelling, lodging and registration fees on behalf of the Doctors.” 17. It was argued that the assessee being a promoter of medical education had incurred these expenses to train Doctors/ medical practitioners for providing best medical available care to the patient and better quality medical services. Hence, the disallowance made by the AO was directed to be deleted by the Hon’ble Bench in assessee’s own case for AY 2011-12. It was argued that such expenses on travelling, lodging, conveyance and registration fees of behalf of doctors are not prohibited by law while appreciating that these cannot be considered as freebies to doctors. 18. It was further argued that given the complex and advanced nature of the medical products in which the assessee trades and the clinical needs that such products are intended to meet, the assessee treats doctors training and education as a major priority for its business. For this purpose, during AY 2016-17, the assessee had entered into a consultancy arrangement with several doctors (refer P.B. Vol-I 297-342), who are renowned names in the medical Page | 13 field in India, for providing consultancy/ advisory services to the assessee. Under the above contractual arrangements, the doctors were required to attend lectures worldwide in events/ conferences which are generally organized to promote innovations and new medical technologies and also to provide a platform to doctors/ medical practitioners to collaborate and share their knowledge/ views through live demonstration of cases. Generally, these doctors provided the following consultancy/advisory services to the assessee: • Advising and assisting the assessee with respect to its products • Assisting assessee in assessing and evaluating its latest methodologies and products • Submitting and providing regular reports, as requested under agreement, on assessee’s products and methodologies • Attend worldwide or domestic lectures or scientific meetings upon request of assessee and submit written reports on such meetings • Attend meetings with persons or parties specified by assessee • Provide trainings at seminars for assessee’s employees and/or fellow healthcare professionals • Hold lectures at meetings sponsored by the assessee • Provide general advice on available technologies in the market as well as current market trends 19. In lieu of the services rendered by these doctors, the assessee paid consultancy fees to these doctors as per the agreed consultancy agreement (refer P.B. Vol-I 297-342) entered with them after deducting appropriate taxes. It Page | 14 was argued that the genuineness of these expenses ought not to be questioned has the assessee has duly deducted tax at source under section 194J of the Act as professional payments made to such doctors. It was argued that these consultancy agreements have been entered by the assessee with renowned doctors during AY 2016-17 and consultancy charges have been paid as per the agreement, based on the work report submitted as per the agreement. In this regard, the assessee submits that the consultancy charges paid to such doctors are in the normal course of its business as these activities are directly related to its business and assist in furtherance of its commercial interest. The ld. AR concluded the arguments by submitting that the aforesaid expenses incurred by the assessee for availing certain consultancy/advisory services are in the normal course of its business and represent genuine business expenditure of the assessee. Thus, the same should be allowable as deductible business expenditure in accordance with the provisions of section 37(1) of the Act. 20. On the other hand, the ld. DR supported the order of the authorities below and argued that owing to the agreement entered by the assessee there is change of facts as well as legal proposition. The Ld. DR argued and relying on the judgment of Hon’ble Supreme Court in the case of M/s Apex Laboratories P. Ltd. Vs DCIT in SLP (Civil) No. 23207 of 2019 vide order dated 22.02.2022. 21. Heard the arguments of both the parties and perused the material available on record. 22. We have examined the “Invoice-Cum-Report” of various Doctors which are addressed to the sales Manager Page | 15 of the assessee intimating performance of rotablation technique and to release the honorarium for the said services. We have gone through the supplementary synopsis of the assessee for the relevant grounds. The consulting expenses paid, travelling, boarding & lodging expenses, reimbursement to doctors are indirect way of gifting the doctors to promote the products. We have gone through the consulting and proctorship agreement entered by the assessee and also considered the TDS deducted. The agreement and deduction of TDS cannot give credence that the incentives received by the doctors is in fact a deductible expense in the hands of the assessee. On this issue, we are guided by the judgment of Hon’ble Supreme in the case of M/s Apex Laboratories P. Ltd. Vs DCIT in SLP (Civil) No. 23207 of 2019 vide order dated 22.02.2022. For the sake of ready reference, the entire order of the Hon’ble Supreme Court is reproduced as under: “S. RAVINDRA BHAT, J. 1. Leave granted. The appellant (hereinafter, “Apex”) is aggrieved by a judgment of the High Court of Judicature of Madras1, wherein the Division Bench upheld an order of the Income Tax Appellate Tribunal2 (hereinafter, “ITAT”), which in turn upheld an order of the Commissioner of Income Tax (Appeals)3 (hereinafter, “CIT(A)”). The CIT(A) had partly allowed an appeal from an order of the respondent Deputy Commissioner of Income Tax4, which partially allowed amounts claimed by Apex as ‘business expenditure’ under Section 37(1) of the Income Tax Act, 1961 (hereinafter, “IT Act”). 2. The facts in brief are as follows: On 01.08.2012, the Central Board of Direct Taxes (hereinafter, “CBDT”) issued a circular5, which clarified that expenses incurred by pharmaceutical and allied health sector industries for distribution of incentives (i.e., “freebies”) to medical practitioners are ineligible Signature Not Verified Digitally Page | 16 signed by Dr. Mukesh Nasa Tax Case Appeal No. 723 of 2018, dated 18.03.2019. Date: 2022.02.22 12:34:43 IST Reason: 2 IT ACT No. 1153/Mds/2014, dated 29.01.2018. I.TA. No. 10/13-14/LTU(A), dated 29.01.2014. G.I. No./PAN AAACA5174G, dated 21.03.2013. Circular No. 5/2012 [F. No. 225/142/2012-ITA.II]. for the benefit of Explanation 1 to Section 37(1), which denies the application of the benefit for any purpose which is an ‘offence’ or ‘prohibited by law’. 3. After the circular was issued, on 22.11.2012, Apex was issued a notice under Section 142(1) of the IT Act, to explain why the expenditure of Rs.4,72,91,159/- incurred towards gifting freebies such as hospitality, conference fees, gold coins, LCD TVs, fridges, laptops, etc. to medical practitioners for creating awareness about the health supplement ‘Zincovit’, should not be added back to the total income of Apex. 4. The reason for only a partial allowance by the authorities below was that an amendment6 to the Medical Council Act, 1956 (now repealed) through the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (hereinafter, “2002 Regulations”), published in the Official Gazette on 14.12.2009, disallowed medical practitioners from accepting emoluments in the form of inter alia gifts, travel facilities, hospitality, cash or monetary grants. Acceptance of such freebies could result in a range of sanctions against the medical practitioners, from ‘censure’ for incentives received up to Rs.5,000/-, to removal from the Indian Medical Register or State Medical Register for periods ranging from three months to one year. Therefore, only the expenses incurred till 14.12.2009 were eligible for the benefit of Section 37(1), and not for the entirety of the Assessment Year 2010-2011, as claimed by Apex. Contentions of Apex Page | 17 5. It was argued by the counsel for Apex, Mr. S. Ganesh, Senior Advocate, that the amended 2002 Regulations were not applicable to Apex, i.e., pharmaceutical companies were not bound by them. While medical practitioners were expressly prohibited from accepting freebies, no corresponding prohibition No. MCI-211(1) / 2009 (Ethics) / 5567. Id., Regulation 6.8, Code of Conduct for Doctors in their Relationship with Pharmaceutical and Allied Health Sector Industry. Regulation 6.8.1, inserted by Notification No. MCI- 211(1)/2010(Ethics)/163013, issued on 01.02.2016. in the form of any binding norm was imposed on the pharmaceutical companies gifting them. In the absence of any express prohibition by law, Apex could not be denied the benefit of seeking exclusion of the expenditure incurred on supply of such freebies under Section 37(1). 6. Counsel placed reliance on rulings by different High Court to establish that the 2002 Regulations were enforceable only against medical practitioners and not the donors, i.e., pharmaceutical companies. In Max Hospital Pitampura v. Medical Council of India9 (hereinafter, “Max Hospital”) the Delhi High Court held that the Medical Council of India (hereinafter, “MCI”) had no jurisdiction to pass any orders against the appellant hospital, and adverse observations made against the hospital by MCI were quashed. Equally, in Dr. Anil Gupta v. Addl. Commissioner of Income Tax10, a Division Bench of the Rajasthan High Court gave benefit of Section 37(1) to the appellant as Explanation 1 could not be raised by the respondent for the first time at an appellate stage, observing: “Even otherwise in income tax proceedings the medical ethics will not be taken into consideration. At the most even if it is a professional misconduct, it is to be dealt with by Medical Council of India. The income tax authority cannot decide the medical ethics when the original authority has partly allowed the expenses.” The Counsel urged that as these decisions were not challenged by the revenue authorities, and thereby accepted by them, the present matter was not open for reconsideration.11 Page | 18 7. The Counsel further submitted that it was not open to the revenue to deny a tax benefit on the ‘nature’ of expenses incurred. This Court, in T.A. Quereshi v. Commissioner of Income Tax, Bhopal (hereinafter, “T.A. Quereshi”) allowed the appellant to deduct the cost of heroin seized as a business loss, holding that: W.P. (C) No. 1334/2014 / ILR (2014) 1 Delhi 620, dated 10.01.2014. Income Tax Appeal No. 485/2008, decided on 18.07.2017. See Berger Paints Ltd. v Commissioner of Income Tax, (2004) 12 SCC 42 and South India Bank Ltd. v Commissioner of Income Tax, Civil Appeal No. 9606 of 2011 / 2021 SCC Online SC 692, dated 09.09.2021. (2007) 2 SCC 759. “In our opinion, the High Court has adopted an emotional and moral approach rather than a legal approach. We fully agree with the High Court that the assessee was committing a highly immoral act in illegally manufacturing and selling heroin. However, cases are to be decided by the court on legal principles and not on one's own moral views. Law is different from morality, as the positivist jurists Bentham and Austin pointed out.” 8. It was argued that similarly, in Commissioner of Income Tax v. M/s Khemchand Motilal Jain, a Division Bench of the Madhya Pradesh High Court allowed ransom money paid to the kidnappers of an employee of the respondent company on a business trip as business expenditure under Section 37(1), holding that: “The aforesaid section provides that kidnapping a person for ransom is an offence and any person doing so or compelling to pay is liable for the punishment as provided in the Section, but nowhere it is provided that to save a life of the person if a ransom is paid, it will amount to an offence. No provision is brought to our notice that payment of ransom is prohibited by any law. In absence of it, the Explanation of sub-section (1), section 37 will not be applicable in the present case.” *** “Sukhnandan Jain remained in custody for a period of near about 20 days. The police were also informed and after waiting 20 days for the police action. If the respondents to save his Page | 19 life paid the aforesaid amount, then the aforesaid amount cannot be treated as an action, which prohibited under the law. No provision could be brought to our notice that payment of ransom is an offence. In absence of which, the contention of the petitioner that it is prohibited under Explanation of section 37(1) of the Income Tax Act has no substance. The entire tour of Sukhnandan Jain was for purchase of Tendu leaves of quality and for this purpose, he was on business tour and during his business tour, he was kidnapped and for his release the aforesaid amount was paid.” (emphasis supplied) 9. Counsel brought this Court’s attention to the Memorandum Explaining the Provisions of the Finance (No. 2) Bill, 1998 which stated that the introduction of Explanation 1 to Section 37(1) would disallow tax payers from claiming “protection money, extortion, hafta, bribes, etc.” as business expenditures,14 from 2011 (4) MPLJ 691. Memorandum Explaining the Provisions of the Finance (No. 2) Bill, 1998, Section 15. Later adopted by CBDT Circular No. 772 ([1999] 235 ITR (St.) 35, 53), dated 23.12.1998. which it could be inferred that the intention of the Parliament was to only bring into the ambit of Explanation 1 ‘illegal’ activities which were designed as ‘offences’ under relevant statutes. The IT Act not being a social reform statute, needed to be interpreted strictly, and not in a wide manner so as to include in its scope an act by a pharmaceutical company not recognized as ‘illegal’ by any statute – doing so would be against the canons of public law. 10. Finally, Counsel submitted that the CBDT circular dated 01.08.2012 enlarged the scope of the 2002 Regulations, and made it operable beyond medical practitioners, i.e., to pharmaceutical companies and allied health sector industries, which, in the absence of any enabling provision, was outside its dominion. Arguendo, if the CBDT circular had to be brought into effect, it could be done so only ‘prospectively’, and not ‘retrospectively’, i.e., from the date of publication of the CBDT circular on 01.08.2012, and not the date of publication of the 2002 Regulations on 14.12.2009. Reliance was placed on various decisions of this Court to show that beneficial circulars had to be applied retrospectively, however oppressive Page | 20 circulars could only be applied prospectively.15 Contentions of Revenue Authorities. 11. Mr. Sanjay Jain, Additional Solicitor General appearing for the respondent revenue authorities, submitted that while the act of pharmaceutical companies gifting freebies to medical practitioners for promotion of their products may not be classified as an ‘offence’ under any statue, it was squarely covered within the scope of Explanation 1 to Section 37(1) by use of the words “prohibited by law”, as it was specifically prohibited by the amended 2002 Regulations. While Apex could not be ‘punished’, it should not be allowed to benefit by claiming a tax exemption on the freebies distributed. See for e.g., Director of Income-tax v. S.R.M.B Dairy Farming (P.) Ltd. (2018) 13 SCC 239. 12. Further, the ASG submitted that Parliament’s intention to disincentivize the practice of receiving extravagant freebies in exchange for prescribing expensive branded medication over its equally effective generic counterparts, thereby burdening patients with unnecessary costs, was apparent not only from the amended 2002 Regulations, but also the Prevention of Corruption Act, 1988 (hereinafter, “PC Act”). A government doctor receiving any illegal gratification amounting to malpractice or any other offence was liable to be charged under PC Act and the Indian Penal Code, 1860 (hereinafter, “IPC”). 13. In the present instance, the medical practitioners were provided expensive gifts such as hospitality, conference fees, gold coins, LCD TVs, fridges, laptops, etc. by Apex to promote its nutritional health supplement ‘Zincovit’. It was argued that receiving these, clearly - in letter and spirit, constituted professional misconduct on part of the medical practitioner. The scope of the 2002 Regulations was not limited to a finite list of instances of professional misconduct, but broad enough to cover those instances not specifically enumerated as well. The menace of prescribing expensive branded medication as a quid pro quo arrangement had a direct bearing on public policy, which was implicit in the 2002 Regulations itself. Page | 21 14. To elucidate the same, reliance was placed on two High Court decisions. In Commissioner of Income-Tax v. Kap Scan and Diagnostic Centre P. Ltd., a Division Bench of the Punjab and Haryana High Court disallowed the benefit of the exemption for commission provided to doctors engaged in private practice for referring their patients to the assessee’s diagnostic centre, holding that: “It, thus, emerges that an assessee would not be entitled to deduction of payments made in contravention of law. Similarly, payments which are opposed to public policy being in the nature of unlawful consideration cannot equally be recognized. It cannot be held that businessmen are entitled to conduct their business even contrary to law and claim deductions Kanwarjit Singh Kakkar v. State of Punjab, (2011) 13 SCC 158. See regulation 8 of the 2002 Regulations. (2012) 344 ITR 476 (P&H HC). of payments as business expenditure, notwithstanding that such payments are illegal or opposed to public policy or have pernicious consequences to the society as a whole.” *** “If demanding of such commission was bad, paying it was equally bad. Both were privies to a wrong. Therefore, such commission paid to private doctors was opposed to public policy and should be discouraged. The payment of commission by the assessee for referring patients to it cannot by any stretch of imagination be accepted to be legal or as per public policy. Undoubtedly, it is not a fair practice and has to be termed as against the public policy.” *** Further, the High Court referred to Section 23 of the Contract Act, 1872 (hereinafter, “Contract Act”) to hold the consideration or object of the agreement between the assessee and private doctors as unlawful, and the agreement therefore void, as it was opposed to public policy. 15. A Division Bench of the Himachal Pradesh High Court decided along similar lines in Confederation of Indian Pharmaceutical Industry (SSI) v. Central Board of Direct Taxes19( hereinafter, “Confederation”), holding: Page | 22 “This regulation is a very salutary regulation which is in the interest of the patients and the public. This court is not oblivious to the increasing complaints that the medical practitioners do not prescribe generic medicines and prescribe branded medicines only in lieu of the gifts and other freebies granted to them by some particular pharmaceutical industries. Once this has been prohibited by the Medical Council under the powers vested in it, section 37(1) of the Income-tax Act comes into play” The High Court also upheld the legality of the CBDT circular dated 01.08.2012, stating that it was for the assessee to establish to the Assessing Officer that the expenditure incurred was not in violation of 2002 Regulations: “Shri Vishal Mohan, advocate, on behalf of the petitioner, contends that the circular goes beyond the section itself. We are not in agreement with this submission. The Explanation to section 37(1) makes it clear that any expenditure incurred by an assessee for any purpose which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession. The sum and substance of the circular is also the same. In case the assessing authorities are not properly understanding the circular (2013) 353 ITR 388 (HP HC). then the remedy lies for each individual assessee to file appeals under the Income-tax Act but the circular which is totally in line with section 37(1) cannot be said to be illegal. In fact paragraph 4 of the circular quoted hereinabove itself clarifies that the value of the freebies enjoyed by the medical practitioner is also taxable as business income or income from other sources depending on the facts of each case. Therefore, if the assessee satisfies the assessing authority that the expenditure is not in violation of the regulations framed by the Medical Council then it may legitimately claim a deduction, but it is for the assessee to satisfy the Assessing Officer that the expense is not in violation of the Medical Council Regulations referred to above”. (emphasis supplied) 16. Lastly, the ASG submitted that had the Assessing Officer allowed Apex to claim tax benefit, the authorities would have been deprived of revenue in the form of tax amount leviable on Rs.4,72,91,159/-, Page | 23 which was a crucial omission. Thus, on a holistic reading of the statutes and regulations, Apex could not be allowed to claim deduction under Section 37(1). Analysis and Conclusions 17. An examination of the relevant provisions is first necessary. Section 37 of the IT Act states as follows: Section 37. General.—(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.] (emphasis supplied) Section 37 is a residuary provision. Any business or professional expenditure which does not ordinarily fall under Sections 30-36, and which are not in the nature of capital expenditure or personal expenses, can claim the benefit of this exemption. But the same is not absolute. Explanation 1, which was inserted in 1998 with retrospective effect from 01.04.1962, restricts the application of such exemption for “any purpose which is an offence or which is prohibited by law”. The IT Act does not provide a definition for these terms. Section 2(38) of the General Clauses Act, 1897 defines ‘offence’ as “any act or omission made punishable by any law for the time being in force”. Under the IPC, Section 40 defines it as “a thing punishable by this Code”, read with Section 43 which defines ‘illegal’ as being applicable to “everything which is an offence or which is prohibited by law, or which furnishes ground for a civil action”. It is therefore clear that Explanation 1 contains within its ambit all such activities which are illegal/prohibited by law and/or punishable. 18. Regulation 6.8 of the 2002 Regulations states as follows: Page | 24 “6.8 Code of conduct for doctors in their relationship with pharmaceutical and allied health sector industry. 6.8.1 In dealing with Pharmaceutical and allied health sector industry, a medical practitioner shall follow and adhere to the stipulations given below:— (a) Gifts: A medical practitioner shall not receive any gift from any pharmaceutical or allied health care industry and their sales people or representatives. (b) Travel facilities: A medical practitioner shall not accept any travel Facility inside the country or outside, including rail, road, air, ship, cruise tickets, paid vacation, etc. from any pharmaceutical or allied healthcare industry or their representatives for self and family members for vacation or for attending conferences, seminars, workshops, CME Programme, etc. as a delegate.] (c) Hospitality: A medical practitioner shall not accept individually any hospitality like hotel accommodation for self and family members under any pretext. (d) Cash or monetary grants: A medical practitioner shall not receive any cash or monetary grants from any pharmaceutical and allied healthcare industry for individual purpose in individual capacity under any pretext. Funding for medical research, study etc. can only be received through approved institutions by modalities laid down by law / rules / guidelines adopted by such approved institutions, in a transparent manner. It shall always be fully disclosed.” The regulation further lays down corresponding action or sanction which can be taken against, or imposed upon, the medical practitioner for violation of each stipulation, based on the monetary value of the same. Thus, acceptance of freebies given by pharmaceutical companies is clearly an offence on part of the medical practitioner, punishable with varying consequences. 19. The CBDT circular dated 01.08.2012 is set out below: 1. It has been brought to the notice of the Board that some pharmaceutical and allied health sector Industries are providing Page | 25 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. 2. The council in exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries. 3. Section 37(1) of Income Tax Act provides for deduction of any revenue expenditure (other than those failing under sections 30 to 36) from the business Income if such expense is laid out/expended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this sub-section denies claim of any such expense, if the same has been incurred for a purpose which is either an offence or prohibited by law. Thus, the claim of any expense incurred in providing above mentioned or similar freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37(1) of the Income Tax Act being an expense prohibited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector Industries or other assessee which has provided aforesaid freebees and claimed it as a deductable expense in its accounts against income. 4. It is also clarified that the sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner or professional associations is also taxable as business income or income from other sources as the case may be depending on the facts of each case. The Assessing Officers of such medical practitioner or professional associations should examine the same and take an appropriate action. Page | 26 This may be brought to the notice of all the officers of the charge for necessary action. (emphasis supplied) The CBDT circular being clarificatory in nature, was in effect from the date of implementation of Regulation 6.8 of the 2002 Regulations, i.e., from 14.12.2009. 20. In Dy. CIT 8(2) Mumbai v PHL Pharma P. Ltd., the ITAT reiterated Max Hospital’s (supra) decision to conclude that the 2002 Regulations were inapplicable to pharmaceutical companies, and that in absence of requisite jurisdiction, it could not be said that the pharmaceutical companies had violated any law or regulation. Further, it held that there was no enabling provision to allow the CBDT to bring pharmaceutical companies within the fold of the 2002 Regulations, and even if such an act were to be permitted, it could be only be done so prospectively: “Adverting to the contention of the Ld. CIT DR that CBDT is well empowered to issue such clarification, it is seen that the CBDT Circular dated 01.08.2012 (supra) in its clarification has enlarged the scope and applicability of 'Indian Medical Council Regulation 2002' by making it applicable to the pharmaceutical companies or allied health care sector industries. Such an enlargement of scope of MCI regulation to the pharmaceutical companies by the CBDT is without any enabling provisions either under the provisions of Income Tax Law or by any provisions under the Indian Medical Council Regulations. The CBDT cannot provide casus omissus to a statute or notification or any regulation which has not been expressly provided therein. The CBDT can tone down the rigours of law and ensure a fair enforcement of the provisions by issuing circulars and by clarifying the statutory provisions. CBDT circulars act like 'contemporanea expositio' in interpreting the statutory provisions and to ascertain the true meaning enunciated at the time when statute was enacted. However the CBDT in its power cannot create a new impairment adverse to an assessee or to a class of assessee without any sanction of law. The circular issued by the CBDT must confirm to tax laws and for purpose of giving administrative relief or for clarifying the provisions of law and cannot impose a burden on the assessee, leave alone creating a new burden by enlarging the scope of a different Page | 27 regulation issued under a different act so as to impose any kind of hardship or liability to the assessee. In any case, it is trite law that the CBDT circular which creates a burden or liability or imposes a new kind of imparity, same cannot be reckoned retrospectively. The beneficial circular may apply retrospectively but a circular imposing a burden has to be applied prospectively only. Here in this case the CBDT has enlarged the scope of 'Indian Medical Council Regulation, 2002' and made it applicable for the pharmaceutical companies. Therefore, such a CBDT circular cannot be reckoned to have retrospective effect. The same CBDT circular had come up for consideration before the co-ordinate Bench ITA No. 4605/Mum/2014, dated 12.01.2017. of the ITAT, Mumbai Bench in the case of Syncom Formulations (I) Ltd. (in ITA Nos. 6429 & 6428/Mum/2012 for A.Ys. 2010-11 and 2011-12, vide order dated 23.12.2015), wherein Tribunal held that CBDT circular would not be not be applicable in the A.Ys. 2010-11 and 2011-12 as it was introduced w.e.f. 1.8.2012.” (emphasis supplied) 21. PHL Pharma (supra) further discussed the High Court decisions of Kap Scan and Confederation (supra), holding the even though they were decided against the assessee, they did not lay down a blanket ban on pharmaceutical companies claiming tax benefit under Section 37(1), and made it subject to the satisfaction of the Assessing Officer on a case-to-case basis. Subsequent decisions by ITATs across states have placed heavy reliance on PHL Pharma to grant relief to the assessee pharmaceutical companies. 22. This Court is of the opinion that such a narrow interpretation of Explanation 1 to Section 37(1) defeats the purpose for which it was inserted, i.e., to disallow an assessee from claiming a tax benefit for its participation in an illegal activity. Though the memorandum to the Finance Bill, 1998 elucidated the ambit of Explanation 1 to include “protection money, extortion, hafta, bribes, etc.”, yet, ipso facto, by no means is the embargo envisaged restricted to those examples. It is but logical that when acceptance of freebies is punishable by the MCI (the range of penalties and sanction extending to ban imposed on the medical practitioner), pharmaceutical companies cannot be Page | 28 granted the tax benefit for providing such freebies, and thereby (actively and with full knowledge) enabling the commission of the act which attracts such opprobrium. 23. The illogicality and completely misconceived nature of such an interpretation was dealt with in a similar interpretation of the provisions of PC Act, by a Constitution Bench of this Court in P.V. Narasimha Rao v. State (CBI/SPE). Prior to the 2018 amendment22, the PC Act only punished the bribe- (1998) 4 SCC 626. Subs. Section 8, Act 16 of 2018, w.e.f. 26.07.2018. taker who was a public servant, and not the bribe-giver. Reliance was placed on this to acquit the appellant bribe-giver. Rejecting such an interpretation, this Court held: “145. Mr. Rao submitted that since, by reason of the provisions of Article 105(2), the alleged bribe-takers had committed no offence, the alleged bribe-givers had also committed no offence. Article 105(2) does not provide that what is otherwise an offence is not an offence when it is committed by a Member of Parliament and has a connection with his speech or vote therein. What is provided thereby is that a Member of Parliament shall not be answerable in a court of law for something that has a nexus to his speech or vote in Parliament. If a Member of Parliament has, by his speech or vote in Parliament, committed an offence, he enjoys, by reason of Article 105(2), immunity from prosecution therefor. Those who have conspired with the Member of Parliament in the commission of that offence have no such immunity. They can, therefore, be prosecuted for it. *** 147. Mr. Rao submitted that the alleged bribe-givers had breached Parliament's privilege and been guilty of its contempt and it should be left to Parliament to deal with them. By the same sets of acts the alleged bribe- takers and the alleged bribe-givers committed offences under the criminal law and breaches of Parliament's privileges and its contempt. From prosecution for the former, the alleged bribe-takers, Ajit Singh excluded, enjoy immunity. The alleged bribe-givers do not. The criminal prosecution against the alleged bribe-givers must, Page | 29 therefore, go ahead. For breach of Parliament's privileges and its contempt, Parliament may proceed against the alleged bribe-takers and the alleged bribe-givers. *** 150. To repeat what we have said earlier, Mr. Rao is right, subject to two caveats, in saying that Parliament has the power not only to punish its Members for an offence committed by them but also to punish others who had conspired with them to have the offence committed : first, the actions that constitute the offence must also constitute a breach of Parliament's privilege or its contempt; secondly, the action that Parliament will take and the punishment it will impose is for the breach of privilege or contempt. There is no reason to doubt that the Lok Sabha can take action for breach of privilege or contempt against the alleged bribe-givers and against the alleged bribe-takers, whether or not they were Members of Parliament, but that is not to say that the courts cannot take cognizance of the offence of the alleged bribe-givers under the criminal law. (emphasis supplied) 24. Even if Apex’s contention were to be accepted - that it did not indulge in any illegal activity by committing an offence, as there was no corresponding penal provision in the 2002 Regulations applicable to it - there is no doubt that its actions fell within the purview of “prohibited by law” in Explanation 1 to Section 37(1). 25. Furthermore, if the statutory limitations imposed by the 2002 Regulations are kept in mind, Explanation (1) to Section 37(1) of the IT Act and the insertion of Section 20A of the Medical Council Act, 195623 (which serves as parent provision for the regulations), what is discernible is that the statutory regime requiring that a thing be done in a certain manner, also implies (even in the absence of any express terms), that the other forms of doing it are impermissible. 26. In this regard the decision of this Court in Jamal Uddin Ahmad v. Abu Saleh Najmuddin & Anr is of some relevance. There, the scope of Section 81 of the Representation of the People Act, 1951 was examined in the light of powers of the High Court to administer Page | 30 election petitions by invoking the rule of implied prohibition. The Court observed that: “Dealing with "Statutes conferring power; implied conditions, judicial review", Justice G.P. Singh states in the Principles of Statutory Interpretation (Eight Edition 2001, at pp. 333, 334) that a power conferred by a statute often contains express conditions for its exercise and in the absence of or in addition to the express conditions there are also implied conditions for exercise of the power. An affirmative statute introductive of a new law directing a thing to be done in a certain way mandates, even if there be no negative words, that the thing shall not be done in any other way. This rule of implied prohibition is subserved to the basic principle that the Court must, as far as possible, attach a construction which effectuates the legislative intent and purpose. Further, the rule of implied prohibition does not negative the principle that an express grant of statutory power carries with it by necessary implication the authority to use all reasonable means to make such grant effective. To illustrate, an Act of Parliament conferring jurisdiction over an offence implies a power in that jurisdiction to make out a warrant and secure production of the person charged with the offence; power conferred on Magistrate to grant maintenance under Section 125 of the Code of Criminal Procedure 1973 to prevent vagrancy implies a power to allow interim maintenance; power conferred on a local authority to issue licences for holding 'hats' or fairs implies incidental power to fix days therefore; power conferred to compel cane growers to Inserted vide Medical Council (Amendment) Act, 1964. (2003) 4 SCC 257. supply cane to sugar factories implies an incidental power to ensure payment of price. In short, conferment of a power implies authority to do everything which could be fairly and reasonably regarded as incidental or consequential to the power conferred. *** Herbert Broom states in the preface to his celebrated work on Legal Maxims --"In the Legal Science, perhaps more frequently than in any other, reference must be made to first principles." The fundamentals or the first principles of law often articulated as the maxims are manifestly founded in reason, public convenience and Page | 31 necessity. Modern trend of introducing subtleties and distinctions, both in legal reasoning and in the application of legal principles, formerly unknown, have rendered an accurate acquaintance with the first principles more necessary rather than diminishing the values of simple fundamental rules. The fundamental rules are the basis of the law; may be either directly applied, or qualified or limited, according to the exigencies of the particular case and the novelty of the circumstances which present themselves. In Dhannalal vs. Kalawatibai and Ors.25 this court has held that: "When the statute does not provide the path and the precedents abstain to lead, then sound logic, rational reasoning, common sense and urge for public good play as guides of those who decide".” 27. It is also a settled principle of law that no court will lend its aid to a party that roots its cause of action in an immoral or illegal act (ex dolo malo non oritur action) meaning that none should be allowed to profit from any wrongdoing coupled with the fact that statutory regimes should be coherent and not self- defeating. Doctors and pharmacists being complementary and supplementary to each other in the medical profession, a comprehensive view must be adopted to regulate their conduct in view of the contemporary statutory regimes and regulations. Therefore, denial of the tax benefit cannot be construed as penalizing the assessee pharmaceutical company. Only its participation in what is plainly an action prohibited by law, precludes the assessee from claiming it as a deductible expenditure. 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 (2002) 6 SCC 16. 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’ Page | 32 – 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 that is significantly marked up, over effective generic counterparts in lieu of such a quid pro quo exchange was taken cognizance of by the Parliamentary Standing Committee on Health and Family Welfare26 which made the following observations: “The Committee also notes that despite there being a code of ethics in the Indian Medical Council Rules introduced in December 2009 forbidding doctors from accepting any gift, hospitality, trips to foreign and domestic destinations etc from healthcare industry, there is no let-up in this evil practice and the pharma companies continue to sponsor foreign trips of many doctors and shower with high value gifts like air conditioners, cars, music systems, gold chains etc. to obliging prescribers who then prescribe costlier drugs as quid pro quo. Ultimately all these expenses get added up to the cost of drugs. The Committee’s attention was drawn to a news item in Times of India dated July 1, 2010 by Reema Nagarajan giving specific instances of violations of MCI code. The Committee calls upon the Government to take strict and speedy action on such violations. Since MCI has no jurisdiction over drug companies, the Government should take parallel action through DCGI and the Income Tax Department to penalize those companies that violate MCI rules by cancelling drug manufacturing licences and/or disallowing expenses on unethical activities.” (emphasis supplied) Interestingly, a similar conclusion was arrived at by the US Department of Health and Human Services Office of the Assistant Secretary for Planning and Evaluation, in a report called Savings Available Under Full Generic Substitution 45th Report on Issues Relating to Availability of Generic, Generic-Branded and Branded Medicines, their Formulation and Therapeutic Efficacy and Effectiveness), dated 04.08.2010. of Multiple Source Brand Drugs in Medicare Part D (dated 23.07.2018).27 The report noticed inter alia, that an empirical study conducted in respect of 20 odd (out of the 600 drugs which were the subject matter of the research paper) brand medications dispensed for a particular period, were capable of generic substitution and would have resulted in substantial benefit to the patients: Page | 33 “Beneficiaries could have saved over $600 million in out of pocket payments had they been dispensed generic equivalent drugs. A significant amount of this spending occurred among the top 20 multiple source brands. Substituting these drugs for generic competitors at their median prices would have saved the program and beneficiaries $1.8 billion.” Likewise, in a previous study by ProPublica (an independent, non-profit newsroom that does investigative journalism) titled “Dollars for Doctors: Now Extracted from https://aspe.hhs.gov/reports/data-point-savings-available-under-full- generic-substitution- multiple-source-brand-drugs-medicare accessed at 16:37 on 13.02.2022. The report states, inter alia, that: “More 600 brand name drugs were dispensed and paid for by Part D plans in 2016, despite the presence of generic competition. Plans and beneficiaries paid $8.7 billion for multiple source brands and $34.0 billion for generics. Full substitution of multiple source brands would have resulted in total spending on generic drugs of $39.9 billion, saving the Part D program and its beneficiaries $2.8 billion in 2016. These estimates do not account for manufacturer rebates paid to Part D plans or pharmacy benefit managers (PBMs) or statutory discounts paid by manufacturers for brand name drugs, and thus may overstate savings to the program after accounting for the effects that rebates often have on premiums. See Figure 1. *********** Of this $2.8 billion, $2.25 billion is for brand name drugs that have faced generic competition for at least a full year (e.g. the first generic was available in 2015 or earlier). A further $584 million in savings is estimated for substituting generics that were first launched in 2016 and therefore on the market for less than a full year. These 12 Single source includes payments for brand drugs prior to generic entry, e.g. $1.13 billion of Crestor spending in the example used in the Methods section savings are likely to grow as additional generic competitors enter the market. Beneficiaries spent $1.1 billion out-of-pocket in cost-sharing for brand drugs with comparable generics, averaging twice as much out-of-pocket than for comparable generics. In 2016, multiple source brand drug cost- sharing averaged $39.15, while generic cost-sharing for substitutable products was $17.04. Beneficiaries could have saved over $600 million in out of pocket payments had they been dispensed generic equivalent drugs. A Page | 34 significant amount of this spending occurred among the top 20 multiple source brands. Substituting these drugs for generic competitors at their median prices would have saved the program and beneficiaries $1.8 billion. See Appendix Table A for these drugs, and figure 2 below for an example. In terms of beneficiary cost-sharing, we find similar results as for the overall calculation. Average per beneficiary spending is significantly higher for these brands than for the substitutable generics. (See Appendix Table A, also.) Brand drug cost-sharing averaged $30.69, compared to $22.41 for their generic equivalents. For 17 of the top 20 drugs, the ratio of brand to comparable generic out-of-pocket spending ranges from 117% (Namenda) to 1,476% (Lamictal) indicating significant per-drug savings are available for beneficiaries. In three cases (Abilify, Lovenox, and Tricor), beneficiary out-of-pocket costs are marginally higher for the generic than the brand drug. We believe this is due to the interaction of total drug costs and plan coverage in the coverage gap for generics (42% in 2016), meaning patients paid 58% coinsurance for generics that year. This compares to 25% plan coverage and a 50% statutory manufacturer discount for brand drugs in 2016.” There’s Proof: Docs who Get Company Cash Tend to Prescribe More Brand- Name Meds” (dated 17.03.2016)28 stated that: “...doctors who receive payments from the medical industry do indeed tend to prescribe drugs differently than their colleagues who don’t. And the more money they receive, on average, the more brand-name medications they prescribe.” Data is now available publicly, in the United States, by reason of the Physician Payment Sunshine Act, 2010 i.e., Section 6002 of the Affordable Care Act, 2010. This law compels manufacturers of drugs, devices, biologics, and medical supplies covered by Medicare, Medicaid, or the Children's Health Insurance Program to report to the Centers for Medicare & Medicaid Services on three broad categories of payments or "transfers of value". These categories cover general payments or transfers of value such as meals, travel reimbursement, and consulting fees. These include expenses borne by manufacturers, such as speaker fees, travel, gifts, honoraria, entertainment, charitable contribution, education, grants and research grants, etc. Page | 35 29. The impugned judgment, along with the judgments of Punjab & Haryana High Court (Kap Scan) and Himachal Pradesh High Court (Confederation) (supra) have correctly addressed the important public policy issue on the subject of allowance of benefit for supply of freebies. The impugned judgment’s reasoning is quoted as follows: “A perusal of the decision of Co-ordinate Bench of this Tribunal in the assessee's own case as also the decision of the Hon'ble Himachal Pradesh High Court clearly shows that the basic intention of the decision was that the receiving of the gifts/freebies by Professionals is against public policy as also against the law in so far as the amendment by the Medical Council Act, 1956 to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, once receiving of such gifts have been held to be unethical obviously the corollary to this would also be unethical, being giving of such gifts or doing such acts to induce such Doctors and Medical Professionals to violate the Medical Council Act, 1956.” (emphasis supplied) https://www.propublica.org/article/doctors-who-take- company-cash-tend-to-prescribe-more-brand-name- drugs accessed at 16:45 on 13.02-2022 30. Thus, one arm of the law cannot be utilised to defeat the other arm of law – doing so would be opposed to public policy and bring the law into ridicule.29 In Maddi Venkataraman & Co. (P) Ltd. v. CIT30, a fine imposed on the assessee under the Foreign Exchange Regulation Act, 1947 was sought to be deducted as a business expenditure. This Court held: “Moreover, it will be against public policy to allow the benefit of deduction under one statute, of any expenditure incurred in violation of the provisions of another statute or any penalty imposed under another statute. In the instant case, if the deductions claimed are allowed, the penal provisions of FERA will become meaningless”. (emphasis supplied) 31. 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 Page | 36 and Haryana High Court in Kap Scan (supra)). The provision is as follows: “23. What considerations and objects are lawful, and what not.—The consideration or object of an agreement is lawful, unless— it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful, is void. (emphasis supplied) 32. Before us, Apex has continually stressed on the need to divorce interpretation of tax provisions from a perceived immorality / violation of public policy. Apex repeatedly relied on T.A. Quereshi (supra), M/s K.M. Jain (supra) and CIT v. Pt. Vishwanath Sharma31. We find that none of these judgments find Biharilal Jaiswal v. CIT, (1996) 1 SCC 443. (1998) 2 SCC 95. I.T.R. No. 27 of 1999, Allahabad HC, dated 21.02.2008. much favour with the case of the appellant. T.A. Quereshi addressed a business ‘loss’, not a business ‘expenditure’ as envisioned under Section 37(1). In M/s K.M. Jain, the ransom money paid to kidnappers of the employee of the assessee company was allowed deduction primarily based on the fact that the assessee was helpless and coerced to pay the amount in order to save its employee’s life. Thus, the assessee was not a wilful participant in commission of an offence or activity prohibited by law. The same is not applicable to the present facts. Pharmaceutical companies have misused a legislative gap to actively perpetuate the commission of an offence. In Pt. Vishwanath Sharma, a Division Bench of the Allahabad High Court was faced with the question of whether payment of commission to government doctors could be exempted under Section 37(1). At the time, there was no statutory provision prohibiting doctors Page | 37 engaged in private practice from accepting such commission. Hence, the High Court held that while the Assessing Officer had correctly allowed such deduction for private doctors, the same could not be allowed for Government doctors: “In the present case, payment of commission to Government Doctors cannot be placed on the same pedestal. A distinction has already been made by the authorities while allowing deduction to the assessee in respect to commission which the assessee has paid to private doctors since in their case, payment of commission cannot be said to be an offence under any statute but in respect to Government doctors such payment could not have been allowed as it is an offence under the Statutes as stated above.” *** “We are, therefore, clearly of the opinion that payment as commission to Government doctors for obtaining a favour therefrom by prescribing medicines in which the assessee was dealing cannot be said to be a “business expenditure” and no deduction can be allowed thereof under the Act.” (emphasis supplied) The 2002 Regulations, applicable to all medical practitioners (including doctors in private practice), was introduced w.e.f. 14.12.2009. 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 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. A Bench of this Court in C.W.S. (India) Ltd. v. CIT32 held as follows: “While a literary construction may be the general rule in construing taxing enactments, it does not mean that it should be adopted even if it leads to a discriminatory or incongruous result. Interpretation of statutes cannot be a mechanical exercise. Object of all the rules of interpretation is to give effect to the object of the enactment having regard to the language used”. Justice Oliver Wendell Holmes had once said: Page | 38 “A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in colour and content according to the circumstances and the time in which it is used." 33 Holmes thus summed up the elusive nature of words, which lies at the heart of the many issues concerning interpretation of statutes. 34. Interpretation of law has two essential purposes: one is to clarify to the people governed by it, the meaning of the letter of the law; the other is to shed light and give shape to the intent of the law maker. And, in this process the courts' responsibility lies in discerning the social purpose which the specific provision subserves. Thus, the cold letter of the law is not an abstract exercise in semantics which practitioners are wont to indulge in. So viewed the law has birthed various ideas such as implied conditions, unspelt but entirely logical and reasonable obligations, implied limitations etc. The process of continuing evolution, refinement and assimilation of these concepts into binding norms (within the body of law as is understood and enforced) injects vitality and dynamism to statutory provisions. Without this dynamism and contextualisation, laws become irrelevant and stale. 1994 Supp (2) SCC 296. Tomne v. Eispzer, 245 U.S. 418 (1918). 35. In Bihari Lal Jaiswal & Ors. v. Commissioner of Income Tax & Ors34, the issue of what is “prohibited by law” was considered by this Court, in the context of interpretation of a condition in a statutory license (for vending liquor) which prohibited transfer of the license by way of sub-letting or entering into a partnership agreement. While dealing with the recognition of such a partnership under the IT Act, this Court held that allowing the same would attract the very mischief sought to be avoided: “This object will be defeated if the licencee is permitted to bring in strangers into the business, which would mean that instead of the licencee carrying on the business, it would be carried on by others - a situation not conducive to effective implementation of the excise law and consequently deleterious to public interest. It is for this very reason that transfer or sub- letting of licence is uniformly prohibited Page | 39 by several State Excise enactments. It, therefore, follows that any agreement whereunder the licence is transferred, sub-let or a partnership is entered into with respect to the privilege/business under the said licence, contrary to the prohibition contained in the relevant excise enactment, is an agreement prohibited by law. The object of such an agreement must be held to be of such a nature that if permitted it would defeat the provisions of the excise law within the meaning of Section 23 of the Contract Act. Such an agreement is declared by Section 23 to be unlawful and void. The question is whether such an unlawful or void partnership can be treated as a genuine partnership within the meaning of Section 185(1) and whether registration can be granted to such a partnership under the provisions of the Income Tax Act and the Rules made thereunder. We think not. When the law prohibits the entering into a particular partnership agreement, there can be in law no partnership agreement of that nature. The question of such an agreement being genuine cannot, therefore, arise. It is also a known principle that what cannot be done directly, cannot be achieved indirectly. As was said in Fox v. Bishop of Chester35 that it is a: "Well-known principle of law that the provisions of an Act of Parliament shall not be evaded by shift or contrivance" And that: (1995) Supp (5) SCR 285. (1824) 2 B & C 635, quoted and applied in Jagir Singh v. Ranbir Singh & Ors. 1979 (2) SCR 282. "To carry out effectually the object of a Statute, it must be construed as to defeat all attempts to do, or avoid doing, in an indirect or circuitous manner that which it has prohibited or enjoined" This Court, in an appeal arising from an action for specific performance, in G.T. Girish v. Y. Subba Raju (D) by L. Rs & Ors36, held that giving the relief would imply doing something prohibited by law (bar against Page | 40 conveyance, for a specific period) – it had the effect of defeating the provisions of the law. It was held that: “Taking the agreement as it is, it necessarily would be in the teeth of the obligation in law of the first Respondent to put up the construction. The agreement to sell involved clearly terms which are impliedly prohibited by law in that the first Defendant was thereunder to deliver title to the site and prevented from acting upon the clear obligation under law. This is a clear case at any rate wherein enforcing the agreement unambiguously results in defeating the dictate of the law. The 'sublime' object of the law, the very soul of it stood sacrificed at the altar of the bargain which appears to be a real estate transaction. It would, in other words, in allowing the agreement to fructify, even at the end of ten-year period of non- alienation, be a case of an agreement, which completely defeats the law for the reasons already mentioned. 78. Going by the recital in the agreement entered into between the Plaintiff and the first Defendant, possession is handed over by the first Defendant to the Plaintiff. The original Possession Certificate is also said to be handed over to the Plaintiff. The agreement, even according to the Plaintiff, contemplated that within three months of conveyance of the site in favour of the first Defendant, the first Defendant was to convey her rights in the site to the Plaintiff. It is quite clear that the parties contemplated a state of affairs which is completely inconsistent with and in clear collision with the mandate of the law. On its term, it stands out as an affront to the mandate of the law. 79. The illegality goes to the root of the matter. It is quite clear that the Plaintiff must rely upon the illegal transaction and indeed relied upon the same in filing the suit for specific performance. The illegality is not trivial or venial. The illegality cannot be skirted nor got around. The Plaintiff is confronted with it and he must face its consequences. The matter is clear. We do not require to rely upon any parliamentary debate or search for the purpose beyond the plain meaning of the law. The object of the law is set out in unambiguous term. If every allottee chosen after a process of selection under the Rules with reference to certain objective criteria were to enter into Page | 41 bargains of this nature, it will undoubtedly make the law a hanging (sic laughing) stock.” 2022 SCC Online SC 60. 36. In the present case too, the incentives (or “freebies”) given by Apex, to the doctors, had a direct result of exposing the recipients to the odium of sanctions, leading to a ban on their practice of medicine. Those sanctions are mandated by law, as they are embodied in the code of conduct and ethics, which are normative, and have legally binding effect. The conceded participation of the assessee- i.e., the provider or donor- was plainly prohibited, as far as their receipt by the medical practitioners was concerned. That medical practitioners were forbidden from accepting such gifts, or “freebies” was no less a prohibition on the part of their giver, or donor, i.e., Apex. 37. In view of the foregoing discussion, the impugned judgment cannot be faulted with. The appeal is dismissed without order on costs. Pending application(s), if any, also stand disposed of. .................................... [UDAY UMESH LALIT, J.] ...................................... [S. RAVINDRA BHAT, J.] New Delhi February 22, 2022.” 23. On perusal of the record, we find that the payments made by the assessee to the Doctors in a different form as training and consultancy is another form devised to camouflage the real purpose. The deduction of TDS doesn’t give any credence or legalize the payments which are in contravention with the law laid down by the Hon’ble Apex Court. Hence, we hold that the payments made by the assessee have been rightly disallowed by the Revenue. The appeal of the assessee on this ground is dismissed. Page | 42 Disallowance on account of Depreciation: 24. During the year under consideration, the assessee has claimed depreciation amounting to Rs.1,38,45,026/- on fixed assets lying with various hospitals/ distributors. Briefly, given the complex and advance nature of assessee’s products e.g. pacemakers, stents etc., it is imperative that the assessee also place certain fixed assets i.e. machines owned by it with the hospitals/ dealers for ready to use monitoring/ servicing of pacemakers and evaluation of relevant category of stents. 25. The AO disallowed the claim of depreciation of INR 1.38 crores on above machines on the ground that “the assessee company is not using the assets for self use. Since the assessee company is not the actual user of the machinery/equipments, which were hired out, depreciation cannot be allowed to the assessee company.” Further, the AO held that “the transactions carried out by the company are in the nature of hire purchase transactions.” 26. The ld. DRP upheld the above disallowance on the grounds that “it is observed that the assessee is not the actual user of the machinery. Therefore, disallowance of depreciation made by the assessing officer is upheld. The objection of the assessee is dismissed.” 27. We have examined the issue in detail. It is necessary to understand the nature and use of machines in question to decide about the purpose of legislation “used for the purpose of business”. • Programmers - These are the machines which are used for servicing/ follow-up of the pacemakers Page | 43 which is the product that is being dealt with by the assessee. It is humbly submitted that pacemakers are required by certain patients to help control abnormal heart rhythms. The performance of the pacemaker is required to be monitored over its useful life, which is done by using these programmers. Accordingly, across various hospitals pan India, these programmers are frequently required to monitor the performance of the pacemaker during follow-up visit of the patients. These programmers are owned by the assessee and lies with the distributors who are located across various locations. These distributors provide the programmers on request basis for servicing/ monitoring the functioning of pacemakers which is supplied by the assessee and implanted in patients. Further, such programmers are also used to analyze any additional requirements in patient due to implantation of such pacemakers. We wish to mention that providing such services is essential to the business of the assessee as its pacemakers will not be purchased by anyone if prompt service is not provided by the assessee. Since it is not possible for the assessee to itself provide such services to all patients across India, it provides the same through its dealer network and accordingly, these programmers are placed with the dealers to provide such follow-up/ monitoring services. • Rotablator machines/ I-Labs imaging machines - These machines are used to examine/ evaluate/ investigate the feasibility of the assessee’s products (stents) which can be used for treating patients Page | 44 with heart problems. These machines scan the level of blockage in arteries and help in ascertaining the type/ level of product which is required to be implanted in the patient. For instance, the assessee’s product portfolio contains different type of stents (such as bare-metal/ drug-coated) and with the help of such machines, the level of blockages in the patients/ treatment required are analysed by doctors and basis the results obtained, it helps in identifying which kind of stent is to be implanted in the patients. 28. These machines are not easily movable and hence, placed in the hospitals to perform such investigative procedures. It may be noted that these machines are necessary for determining the suitability of the assessee’s products and hence, an essential element of promoting sales of the assessee’s products. Once placed with the hospital, it is the assessee who continues to be the owner of such machinery and has the responsibility of maintaining, repairing and managing the machines. 29. Thus, given the complex and advanced nature of the medical products (pacemakers and stents) in which the assessee deals, it is imperative that the above machines are placed at various locations with hospitals/ dealers and readily available for assessee’s products to sustain in the market. The assessee has claimed depreciation of INR 1.38 crores on above machines as per the provisions of section 32 of the Act. Under the said provision, the following conditions are required to be satisfied for a claim of depreciation: Page | 45 • The assets should be wholly or partly owned by the assessee; and • The assets should be used for the purpose of business or profession of the assessee. 30. As regards the first condition, in the instant case, the assessee purchased the machines in its own name and the ownership remains with the assessee. This is clearly evident from the ‘Title’ clause of the agreement entered between the assessee and the hospital which is reproduced as under: “4. Title and Insurance: Boston Scientific is and shall be at all times during the term of this Placement Agreement the sole owner of the Equipment. You shall affix to the Equipment any labels supplied by Us evidencing Our ownership At all times during the term of this Placement Agreement, You shall maintain such policies of insurance as are adequate to fully insure against damage to or loss of the Equipment.” 31. The said equipment in question is the property of the assessee is not meant for sale and is being issued for regular follow up of pacemakers and post implant programming support. Thus, the first condition i.e. the ownership of such machines in name of the assessee is clearly established and is in fact also not disputed by the tax department. 32. As regards the second condition, it is clearly evident that these machines are used solely for the purposes of business of the assessee for providing pre-sales and post- sales activities i.e. servicing/ follow-up monitoring/ Page | 46 feasibility evaluation etc. in relation to its products i.e. pacemakers and stents. 33. Reliance is being placed on the following judicial precedents wherein it has been held that actual owner of asset has the right to claim the depreciation and such claim is not based upon the user of the asset:  ICDS Ltd vs. CIT [2013] 29 taxmann.com 129 (Supreme Court)  ACIT vs. National Stock Exchange of India Ltd. [2011] 14 taxmann.com 107 (Mumbai Tribunal)  CIT vs. AP Paper Mills [1997] 225 ITR 262 (Andhra Pradesh High Court)  CIT vs. Shaan Finance Private Limited [1998] 97 Taxman 435 (Supreme Court)  CIT vs. Castle Rock Fisheries [1997] 10 SCC 770 (Supreme Court). 34. Further we find that Section 2(c) of The Hire- Purchase Act, 1972 defines a ‘hire-purchase agreement’ to mean an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which— (i) possession of goods is delivered by the owner thereof to a person on condition that such person pays the agreed amount in periodical instalments, and (ii) The property in the goods is to pass to such person on the payment of the last of such instalments, and (iii) such person has a right to terminate the agreement at any time before the property so passes; 35. Thus, a cursory reading of aforesaid definition makes it evident that a hire purchase agreement is one where the hirer has an option to purchase the goods in accordance with terms of the agreement and the property in the goods Page | 47 pass on to such person on the payment of the last installment. Thus the allegation of the revenue is on a totally wrong appreciation of facts. The appeal of the assessee on this ground is allowed. Clinical Trial expenses of INR 1,04,72,741: 36. Facts relevant to the adjudication of this issue are that the assessee’s product portfolio includes cardio products (i.e. stents) and related medical instruments. In generic terms, a “coronary stent” is a small, self- expanding, metal mesh tube which is placed inside a coronary artery to prevent the artery from re-closing or coronary lesion. Having a stent placed is minimally invasive procedure, meaning it is not a major surgery. The assessee incurred clinical trial expenses amounting to INR 1.04 crores which were in the nature of financial aid provided to two hospitals to support the clinical trials. The expenses are as under: S. No. Name of Hospital Clinical Trial Amount paid (in INR) 1 Escorts Heart Institute & Research Center (Escorts) Address: Okhla Road, New Delhi - 110025 This is an investigator initiated study to compare the safety and performance of the Taxus Element (appellant’s product) against XIENCE Prime (competitor’s product) coronary stent system for treatment of coronary lesion in diabetic patients in India. 75,30,011 2 The Madras Medical Mission (Madras Medical) Address: No. 4A, Dr. J Jayalalitha Nagar, Mogappair, Chennai, Tamil Nadu - 600037 This is an investigator initiated study to examine the safety and performance of the Promus Element Stent System (again being appellant’s product) in the treatment of coronary lesion in Indian population. 29,42,730 Total (in INR) 1,04,72,741 Page | 48 37. The AO disallowed the aforesaid expenses holding that “the clinical trials are studies undertaken by the hospitals over the period of time to see the impact of different products including the products being dealt with by the assessee. It was held that the trials are not solely & exclusively to see the impact of products dealt by the assessee or clinical research to see the efficacy of the products dealt by the assessee company” and “the benefit of the trials so undertaken are not solely and exclusively for the business of assessee.” The ld. DRP upheld the above disallowance by holding that “since the assessee has failed to prove that the expenditure was incurred solely and exclusively for business purposes, therefore the same has been disallowed”. 38. Heard the arguments of both the parties and perused the material available on record. 39. The relevant extracts from summary of these reports i.e. the objective and conclusion of clinical study reports is reproduced herein below: Relevant extracts from clinical study report ‘TUXEDO- India ’from Escorts (refer P.li. Vol-1377 & 381) Relevant extracts from clinical study ‘PROMUS Element™ India All Comers Registry’ from Madras Medical (refer P.B. Vol-I 506 & 510) “4 SUMMARY Title A Prospective, Single Blind, Multi- center, Randomized Trial to Compare the TAXUS Element™ Coronary Stent System against the XIENCE Prime™ Coronary Stent System in the treatment of a Diabetic Patient Population in India 4.1 Study Objectives The primary objective of the TUXEDO-India was to compare the safety and performance of Boston Scientifics’ Paclitaxel- eluting coronary stent system (TAXUS Element™) against the XIENCE Prime™ coronary stent system for the treatment of up to up three “2 SUMMARY 2.1 INTRODUCTION The PROMUS Element™ is the latest generation stent from Boston Scientific Corporation (BSC, Natick, Massachusetts, United States) and has received DCGI approval on 13 April 2010.... 2.2 OBJECTIVE The primary objective of the Page | 49 de novo native coronary artery lesions with a maximum of two lesions per epicardial vessel in diabetic patients. 4.2 Introduction TUXEDO-India was designed to investigate the clinical and safety outcome of diabetic mellitus2 in Indian patients receiving two different drug eluting stents of TAXUS Element Paclitaxel-Eluting (PES) Coronary Stent System and XIENXE Prime Everolimus- Eluting Stent (EES) System, both approved by the DCGI in India. 4.7Summary and Conclusion This study did not show noninferiority of TAXUS Element to Xience Prime in patients with coronary artery disease and diabetes mellitus Between 1 year and 2 years of follow-up after stent implantation, the clinical outcomes were comparable between the two treatment groups.” Promus Element™ India Registry was to evaluate the safety and effectiveness of the Promus Element™ Coronary Stent System in a population of all consecutive and new comers. 2.7 CONCLUSION In this prospective, multi-center registry, Everolimus- Coronary Stent System (Promus Element™ system) demonstrated to be safe and effective for coronary revascularization in Indian population... The device success and the procedural success was reported in 100% and 99.7% of the patients over the period of 2 years, respectively...” Appellant’s contention based on above extracts Appellant’s contentions based on above extracts: a) the name of clinical trial study - TUXEDO-India is per-se an abbreviation derived from appellant’s product ‘TAXUS’ Element™ Coronary Stent (letters ‘T and ‘IT in TUXEDO being derived from TAXUS stent of appellant), as also explained in the ‘Title’ section below Summary in Para 4 of above relevant extract; b) the objective of the study was to compare the safety and performance of Appellant’s TAXUS Element™ stent with that of a competitor (i.e. Xience Prime™ stent) as also mentioned in the tabulation provided under para 6.5 hereinabove and also duly being submitted before the Ld. AO in appellant’s submission dated 10 December 2019 (refer P.B. Vol-I 254 for relevant extract of aforesaid tabulation as submitted before Ld. AO); c) the appellant’s product has received due approval of the Drug Controller General of India (DCGI); d) The conclusion of aforesaid study was that appellant’s product was not inferior to the competitor’s products and the clinical outcomes of the study were comparable between the two treatment groups. Thus, the outcome of aforesaid study establishes beyond any iota of doubt that a) the name of clinical trial study - ‘PROMUS Element™ India All Comers Registry’ is per-se taken from appellants product ‘PROMUS Element™ Coronary Stent System; b) the objective of the study was to evaluate the safety and effectiveness of Appellant’s PROMUS Element™ Coronary Stent System as also mentioned in the tabulation provided under para 6.5 hereinabove and also duly being submitted before the Ld. AO in appellant’s submission dated 10 December 2019 (refer P.B. Vol-1234 for relevant extract of aforesaid tabulation as submitted before Ld. AO); c) the appellant’s product has received due approval of the DCGI; d) The conclusion of aforesaid study was that appellant’s product demonstrated to be safe and effective for coronary revascularization in Indian population. The device success and procedural success was reported in 100% and 99.7% of Page | 50 the clinical study was specifically undertaken to compare the safety and performance of appellant’s product (i.e. the Taxus Element™ stent) with the competitor’s product and is by no stretch of imagination a generic study undertaken by Escorts for different categories of stents, as has been alleged by the Ld. AO. the patients over 2 year period respectively. Thus, the outcome of aforesaid study establishes beyond any iota of doubt that the clinical study was specifically undertaken to evaluate the safety and effectiveness of appellant’s product (i.e. the PROMUS Element™ stent) and is by no stretch of imagination a generic study undertaken by Madras Medical for different categories of stents, as has been alleged by the Ld. AO. Allegations by the Revenue Appellant’ a) Para 7.3, Page 43 of appeal set: Clinical trials are studies undertaken by the hospitals over the period of time to see the impact of different products including the products being dealt with by the assessee. The trials are not solely & exclusively to see the impact of products dealt by the assessee or clinical research to see the efficacy of the products dealt by the assessee company. b) Para 7.4, Page 43 of appeal set: The Company has claimed the expenses against study for effect of stunts (stents) used in cardiac surgery. Without going into the product details or productivity it is relevant to mention here that such products are being used by the hospitals from different companies as per their requirement on various basis. c) Para 7.5, Page 43 of appeal set: The aid paid by the assessee company to carry out clinic trials is nothing but an alibi to promote the interest of the company by procuring and recommending the products of the company. The assessee company in guise of aid to these institutions for carrying out clinical trials have advanced huge sum to promote its interest. The reason for this payment is to circumvent the CBDT Circular No. 3/ 2012 dated 1-08-2012 stating that.. a) The understanding of the Ld. AO is grossly misplaced and incorrect for the detailed reasoning given above that both the studies were specific to one single category of stent system from appellant’s product portfolio (i.e. TAXUS Element™ stent and Promus Element™ stent). These trials were therefore solely and exclusively to see the impact and efficacy of specific products/ stents being dealt with by the appellant. b) The Ld. AO, on a cursory reading of facts, has incorrectly assumed that the appellant has claimed expenses against hospital study for stents of various companies which was in fact for two very specific categories of stent system from appellant’s product portfolio only as explained in detail hereinabove. The fallacy in Ld. AO’s allegation is apparent from the fact that the Ld. AO himself stated that his conclusion was arrived at “without going into the product details” which was extremely critical to understand and appreciate the purpose of study, the outcomes therefrom, the nature of expense and the commercial rationale for incurring the same. c) (i) At the outset, it is respectfully reiterated that this Hon’ble Bench has already held in appellant’s own case for AY 2011-12 (refer P.B. Vol-1281), after a detailed and reasoned Page | 51 order, that no disallowance under section 37(1) of the Act is warranted since CBDT Circular No. 5/2012 does not apply to health care sector or pharma companies. Hence, the premise of Ld. AO to allege that payment has been made to circumvent the above CBDT circular does not hold good on correct application of law at the threshold. (ii) Even otherwise, the products (i.e. stents) which were subject matter of these clinical trials are duly approved by DCGI products for commercial sale in India (as mentioned in above extracts from the clinical study reports). (iii) It is clarified that these clinical trials are conducted by the approved institutions of Directorate General of Health Services (DGHS) office of DGCI and such institutions have taken permission/ approval to conduct such clinical trial on patients, as per the guidelines issued by the DGHS, with prior approval of the Ethical guidelines for biomedical research on human subjects published by Indian Council of Medical Research (ICMR) and Good Clinical Practice (GCP) guideline issued by DGHS along with the approval of Ethical Committee of the Institute before initiation of this study. The results of such clinical trials have been submitted by the Institutes to ICMR clinical registry at www.ctri.in. The annual status of on each clinical trial, i.e. ongoing, completed and terminated, has to be submitted to DGHS. (iv) Thus, even in a case where the CBDT Circular No. 5/2012 dated 1-08-2012 is to be applied to the instant case, the appellant is in clear compliance of ‘clause 6.8.1(e)’ of the MCI regulation dated 10 December 2009 (refer P.B. Vol-1293) as all conditions prescribed therein (eg. taking requisite approvals from concerned competent authorities, Ethical committees etc.) have been fulfilled in the Page | 52 instant case and therefore there is no “offence or prohibition of law” done by the appellant. d) Para 7.6, Page 43 of appeal set: Moreover it is not the case of assessee that research is being undertaken for development of a new product or to examine the efficacy of a product dealt by it... ...The benefit of the trials so undertaken are not solely and exclusively for the business of Para 7, Page 70 of appeal set (DRP directions): Since the assessee has failed to prove that the expenditure was incurred solely and exclusively for business purposes, therefore the same has been disallowed. (iv) The appellant duly deducts tax at source on the impugned payments which have been made to both the hospitals, Escorts and Madras Mission which further establishes the genuineness of these expenses. It is, therefore, far-fetched and highly unreasonable for the Ld. AO to allege the said payments to carry out clinical trials are an ‘alibi’ or ‘in guise of aid’ to promote the appellant’s interest without a single shred of evidence been brought on record to substantiate such allegation and despite a series of pre- approvals, as explained above, to be taken from various regulators and Ethical Committees before such clinical trials are conducted the hospitals. (i) The said allegation is grossly misplaced. As mentioned in detail above, the clinical trial studies have being conducted to categorically examine the efficacy of two very specific products dealt by the appellant, as is evident from the relevant extracts of objectives and summary/ conclusion of the clinical trial reports. (ii) It is respectfully submitted that the results of these studies establish the safety, effectiveness/ non- inferiority of appellant’s product vis-a-vis competitor’s product. In case of Madras Medical, the appellant’s device demonstrated 100%/ 99.7% success rate for device/ procedure as per clinical trial outcome. These, results of these trials are directly related to appellant’s business and clearly are solely and exclusively for business purposes itself. 40. Having gone through the entire issue, we hold that clinical trials are an integral part of the feedback system on efficiency of the products of the assessee and hence it is Page | 53 intricately connected with the business of the assessee and hence it cannot be said that the expenses have not been incurred solely and exclusively for the business purpose. The appeal of the assessee on this ground is allowed. 41. In the result, the appeal of the assessee is partly allowed. Order Pronounced in the Open Court on 13/03/2023. Sd/- Sd/- (Yogesh Kumar US) (Dr. B. R. R. Kumar) Judicial Member Accountant Member Dated: 13/03/2023 *Subodh Kumar, Sr. PS* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR