Brief of the Case
ITAT Delhi held In the case of Eli Lilly & Co. (India) Pvt. Ltd. vs, ACIT that a clear distinction has been made between the free samples, gifts, travel facilities, hospitality and cash or monetary grants. It would accordingly be incorrect to put samples in the definition of gifts being separately categorized in Para 5 & 6 of the Uniform Code of Pharmaceutical Marketing Ethics (UCPMP) respectively. It is noticed from the CBDT Circular No. 5/2012 that it refers the IMC Regulations 2002 which imposed a provision on the medical practitioner for taking any gift, travel facility, hospitality, cash and medical grant from the pharma sector. Also the Drugs and Cosmetics Act and regulations made there under do not prohibit the licensee or a medical practitioner to distribute the free samples, albeit following prescribed conditions. Hence free samples are not covered by the IMC regulations of 2002 (as amended in 2009) read with CBDT circular no. 5/2012, UCPMP and the Drugs and Cosmetic Act and regulations made there under.
Facts of the Case
The assessee is a wholly owned subsidiary of Eli Lilly Netherlands B.V. and engaged in the business of trading of formulations in the domestic market which is purchased from its AE’s and third parties. It is also into marketing and selling of life saving drugs formulations that find usage in the treatment of several disease segments ranging from Oncology, CNS, Cardiovascular, Cancer, Infectious diseases, Endocrine, etc. The assessee filed its return of income on 13.10.2010 declaring an income of Rs. 16,75,13,196/- which came to be assessed at an income of Rs. 23,06,18,730/- in an order dated 12.1.2015 u/s 144C/143(3) and hence this appeal by appellant Company.
Disallowance under section 37(1)
The assessee had incurred an amount of Rs. 5,42,19,943/- towards distribution of free samples to doctors/medical practitioners. The Assessing Officer/DRP disallowed the whole of the above expenditure in view of the Circular No. 5/2012 [F. No. 225/142/2012-ITA-II] dated 01.08.2013 issued by the Central Board of Direct Taxes read with Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 observing that above free samples of medicines distributed by the appellant to doctors/ medical practitioners and others constituted gifts or freebies, which are not allowable in terms of Explanation to section 37(1).
TP Adjustment on account of provision of business support services.
During the relevant assessment year, the assessee had undertaken the various international transactions including an amount of Rs. 7,57,78,032/- for business support services. The assessee submitted a Transfer Pricing Report adopting operating profits to the total cost as its profit level indicator for the transfer pricing study. It was submitted that since arithmetic average of the operating profit margin of the said comparables was computed at 7.23% and the price charged in its international transactions is more than the said arithmetical mean price, the price charged in the international transactions has been treated as at arm’s length.
The Assessing Officer referred the matter to the TPO. The TPO, by an order dated 23rd January, 2014, under section 92CA (3), computed the TP adjustment at Rs. 88,85,591/-. The TPO accepted the method adopted by the assessee (i.e. TNMM), but rejected the benchmarking report after having been found the defects in the TP analysis carried on by the taxpayer and holding that the data used in computation of the arms length price is not reliable and correct. The TPO also rejected the assessee’s claim for any adjustment on account of working capital provided to the assessee and/or risks borne by the AE.
The final set of 8 comparable companies considered by the TPO in the impugned order, having average operating profits of 22.08%. Accordingly, the TPO computed an adjustment of Rs.88,85,591/- to the total income of the assessee on account of difference in arm’s length price of provision of business support services by the assessee to its associated enterprises.
Upon receiving the Draft Assessment Order forwarded by the Assessing Officer to assessee on 31.03.2014 under section 143(3) read with section 144C (1), the assessee filed its objections to the same before the Dispute Resolution (DRP) against the adjustment proposed by the Assessing Officer in its draft order. The DRP vide its order dated 16.12.2014, rejected the objections raised by the assessee in its order and confirmed the above adjustment and, following which addition of Rs. 88,85,591 was made in the final order dated 12.1.2015 u/s 143(3)/144C.
Contention of the Assessee
The ld counsel of the assessee submitted that the sample so distributed to the doctors/medical practitioners by the appellant are in pursuance of the specific request being made by the latter and such samples are not distributed voluntarily/ suo-moto to any doctor/ medical practitioner in order to influence the latter’s discretion of prescribing its medicines to the patients.
It was further submitted that doctors/medical practitioners are prohibited from receiving, inter-alia, any gift or cash or monetary grants or travel facility from any pharmaceutical or any allied healthcare industry. It was submitted that as per Medical Council guidelines only those freebies which confer personal benefit to the medical practitioner directly could only be considered to be in violation of the Medical Council’s guidelines. It was submitted that in the present case, samples are distributed by the assessee only on the specific written requests of the doctors/medical practitioners for their patients; therefore, the above distribution does not constitute a gift. The assessee also made reference to Circular No. 5/3/2009-PI-II issued by Ministry of Chemicals & Fertilizers, Department of Pharmaceuticals, dated 19.03.2012, in relation to Uniform Code of Pharmaceutical Marketing Ethics (“UCPMP”) wherein also the distribution of free samples to a person qualified to prescribe such product subject to certain conditions is permitted. Further, reference was also made to the provisions of Drugs and Cosmetics Act, 1945 wherein the distribution of free samples had been held to be permissible, i.e. not against the public policy, subject to certain conditions.
Further AR contended that similar disallowance of expenses on sample distribution was made while completing the assessment for the assessment year 2009-10 as well. It was submitted that assessee had challenged the said order before DRP and the DRP vide order dated 05.09.2013, inter alia, deleted the said disallowance. On the basis of above, it was submitted that assessee had, as per the terms of the SOP, provided free samples only on the specific written requests of doctors/medical practitioners. In other words, there is no voluntary act on behalf of the assessee in distributing such samples to the doctors/medical practitioners Moreover; such samples are used by the patients of the doctors and not by the doctor himself. It was submitted that such samples could not, in any manner, be said to be covered within the ambit of the term ‘gift’, much less conferring any benefit to such doctors/medical practitioners.
Contention of the Revenue
The ld counsel of the revenue relied upon the orders of the AO.
Held by ITAT
Disallowance under section 37(1)
We find that in the immediately preceding assessment year DRP by an order dated 5.9.2013 had deleted the identical disallowance. In this order it was held that a clear distinction has been made between the free samples, gifts, travel facilities, hospitality and cash or monetary grants. It would accordingly be incorrect to put samples in the definition of gifts being separately categorized in Para 5 & 6 of the Uniform Code of Pharmaceutical Marketing Ethics (UCPMP) respectively. It is noticed from the CBDT Circular No. 5/2012 that it refers the IMC Regulations 2002 which imposed a provision on the medical practitioner for taking any gift, travel facility, hospitality, cash and medical grant from the pharma sector. Also the Drugs and Cosmetics Act and regulations made there under do not prohibit the licensee or a medical practitioner to distribute the free samples, albeit following prescribed conditions. Hence free samples are not covered by the IMC regulations of 2002 (as amended in 2009) read with CBDT circular no. 5/2012, UCPMP and the Drugs and Cosmetic Act and regulations made there under.
The above order has acquired finality and no appeal there from has been preferred by the revenue. In light of the above and in accordance with principle of consistency the disallowance is held to be legally untenable. In support of the above conclusion reliance is placed on the judgment of Apex Court in the case of CIT vs. Excel Industries 358 ITR 295 in which apex court reiterated the law laid down in Radhasoami Satsang vs. CIT 193 ITR 321 to hold that, where a fundamental aspect permeating through the different assessment years have been found as a fact one way or the other, and the parties have allowed the position to be sustained by not challenging the order, it is not allowed to change the position in any subsequent year. Accordingly, disallowance deleted.
TP Adjustment on account of provision of business support services
The learned counsel for the assessee during the course of hearing that once M/s Educational Consultant India Ltd. (EDCIL), M/s ITDC Ltd. and M/s In House Production Ltd. are included in the set of comparables and furthermore M/s TSR Darashaw Ltd. is excluded from set of comparables, then the margin of the appellant is within the range.
Educational Consultant India Limited (EDCIL)
The TPO/DRP has excluded the above comparable on the ground that the company is involved in educational consultancy business and is not providing any services, hence it is functionally different and cannot be accepted. We find that the aforesaid company was held to be valid comparable in our own order for Assessment year 2009-10. It was held that EDCIL was accepted as comparable to the assessee by the learned TPO during the assessment proceedings for AY 2007-08 as well as earlier years. Hence since the business of EDCIL and the assessee has remained unchanged from last year, EDCIL continues to be comparables to the assessee and there exist no legitimate reason to reject the company this year.
Following the same EDCIL is held to be functionally comparable to the appellant and therefore included in the final set of comparable companies.
M/s ITDC Ltd
The TPO/DRP has rejected the said comparable by holding that the event management segment as considered by the assessee as comparable does not match to the profile of the assessee. It was held that ITDC owns hotels, motels, inns, resorts providing short term lodging faculties including accommodation in house boats and hence this is not a suitable comparable. We find that ITDC operates in the various segments, and for the purpose of the comparability analysis, the “SEL” & “ARMS” & Misc Operations segment has been considered comparable to assessee’s business. The relevant segment provides event management services, which identifies and coordinates with various service agencies for its clients and the same is comparable to the nature of services rendered by the assessee to its AEs. In view of the above ITDC is directed to be included in the final set of comparables
M/s In House Production Ltd.
We noted that TPO/DR excluded the said comparable on the ground that such company is an ITES company engaged in medical transcription. He has held that during financial year 2009-10 as per prowess database 69.33% of its income was from medical BPO and 15.05% from programme rights and hence it is functionally different and was rejected as a comparable. Before us the learned counsel submitted that the said company has two segments namely healthcare; and media division. It was submitted that under the healthcare division, IHPL provides access to information, relating to healthcare technology including management practices and knowledge databases to healthcare delivery institutions and health professionals in India, which is similar to the information/knowledge being provided by the appellant to its associated enterprises on the market conditions in India and accordingly for the purposes of comparability analysis, the “Healthcare” segment of the company has been considered comparable to the appellant. Having considered the rival submission, we notice that the said company has also been considered comparable by the DRP in AY 2008-09 and AY 2009-10. Having regard to the above we find force in the submission of assessee and as such direct the inclusion of M/s In House Production Ltd.
M/s TSR Darashaw Ltd.
The TPO/DRP have held that the said company is engaged in BPO services, payroll processing services, registrar and transfer agents services etc. which are in the nature of business support services and therefore was retained as a comparable in the final set of comparables. The learned AR submitted that the TPO has included TSR Darashaw Ltd. in the final set of companies with an operating profit margin of 41.15%. In this regard, it was submitted that the company is a BPO Company providing payroll process outsourcing services to its customers. Moreover, it was submitted that the company has identified three business segments namely, registrar and transfer agent activity, records management activity and payroll and trust activity in the annual report. In view of the above, it was submitted that the services provided by TSRDL are far more complex than the business support services provided by assessee to its AEs. The company is engaged in providing altogether different set of services and therefore it is functionally different from the appellant company.
Having considered the rival submissions it is seen that Delhi Bench of Tribunal in the case of M/s Microsoft Corporation Ltd. vs. DCIT ITA No. 5766/D/2011 has held that TSR Darashaw is not functionally comparable to the company providing marketing support services. Following the above decision M/s TSR Darashaw is held to be not functionally comparable to the appellant and is directed to be excluded from the set of comparable companies.
Having regard to the above conclusion we find that as a result of the above inclusion of M/s Educational Consultant India Ltd., M/s ITDC Ltd. and M/s In House Production Ltd. and exclusion of TSR Darashaw Ltd. in the final set of comparable, the average operating profit to cost ratio works out to 6.30%. Since the operating profit to cost margin of the appellant at 9.26% is higher than the operating profit to cost ratio of the comparable companies at 6.30%, the adjustment made by the AO/TPO/DRP, in relation to international transaction of provision of business support services, is deleted.
Accordingly appeal of the assessee allowed.