Case Law Details
Merk Limited Godrej One Vs DCIT (ITAT Mumbai)
Conclusion: While allowing deduction to pharma company, the free samples provided to doctors recognized under Uniform Code of Pharmaceutical Marketing Practices by The Department of Pharmaceuticals (UCPMP) guidelines were not violative of Indian Medical Council (MCI) Rules and distribution of free samples was directly related to business promotion activity of the pharmaceutical company. Thus it was wholly and exclusively for the purposes of the business of the company and could not be disallowed.
Held: Assessee-company was subsidiary of Merk Group Germany engaged in the business of manufacturing of pharmaceutical filed its return of income declaring income. The return of income was picked up for scrutiny where AO disallowed conference expenses with respect to the sales promotion and restricted the disallowance of 50% regarding free sample distributed. Assessee submitted that the disallowance in support of free sample had been deleted by the co-ordinate bench in assessee’s own case earlier. It was held that free sample of medicines supplied to doctors was for promotion of the product of the pharmaceutical company. When a new product was launched, the doctors through the free sample provided, test marketability of new drug launched in the market, give necessary inputs regarding its acceptability etc. of the product. Provision of free samples helped impart knowledge to other doctors about the new medicine/product coming into the relevant practice of their profession. Therefore, distribution of free samples was directly related to business promotion activity of the pharmaceutical company. Thus it was wholly and exclusively for the purposes of the business of the company. Further Providing samples of pharmaceutical products was not prohibited under either the Indian Medical Council (Professional Conduct, Etiquette and Ethics), Regulations 2002 (MCI Code) or the Uniform Code of Pharmaceutical Marketing Practices by the Department of Pharmaceuticals, 2014 (UCPMP) or 2019 Organization of Pharmaceutical Producers of India (OPPI) Code of Practice. The UCPMP prescribes guidelines under which medical samples should be dispensed which ensure that they were used strictly for clinical evaluation purposes and each sample should be marked “free medical sample – not for sale”. Even the draft Uniform Code for Medical Device Marketing Practices (UCMDMP) published for stakeholder consultation on March 16, 2022 laid down guidelines to ensure that medical devices were distributed as samples for evaluation purposes only. The Drugs and Cosmetics Rules, 1945 also recognized the practice of providing drugs for distribution to medical professionals as a free sample by providing specific labelling requirements, requiring such samples to be labelled with the words “Physician’s Sample – Not to be sold,” . Further assessee had submitted the complete details of such expenses therefore disallowing it to the extent of 50 % was not justified when the same issue was covered in favour of the assessee by the decision of the coordinate bench in earlier years. The disallowance of expenses on free samples was deleted.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
01. These are Cross appeals filed by the assessee M/s. Merck Limited [Assessee/ Appellant] as well as the DCIT Range 7/(2)/(1), Mumbai (the ld. AO) for A.Y. 2011-12 against the assessment order passed u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (The Act) by the ACIT, 7(2)(1), Mumbai on 25.01.2016 passed in pursuance of order passed u/s. 92C(1)(3) of the Act dated 12.01.2015 which was submitted to direction u/s. 144C(5) of the Dispute Resolution Panel-3, Mumbai (ld. DRP) dated 23.12.2015, assessing the total income of Assessee at ₹ 110,30,25,578/-.
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