Pharmaceutical Companies Cannot Claim Promotional Expenses As Expenditure
The Supreme Court, in M/s Apex Laboratories Pvt. Ltd. v. Deputy Commissioner of Income Tax1, held that the expenses incurred by pharmaceutical companies towards gifts such as hospitality, gold coins, conference fees and LCDs/ TVs to medical practitioners (freebies) cannot be claimed as expenditure under section 37 of the Income Tax Act, 1961 (Act). Before the Supreme Court decision, there were conflicting court decisions on the issue.
The petitioner, a pharmaceutical company, claimed expenses incurred on freebies as expenditure under section 37(1) the Act, which allows taxpayers to claim deduction on expenses incurred for the purpose of business or profession.
The Supreme Court took note of, (a) regulation 6.8 of Indian Medical Council (Professional Conduct, Etiquette and Ethics) regulations, 2002 (regulations) which prohibits a doctor (which includes in its definition a medical practitioner) from receiving gifts such as hospitality, cash or monetary grants, etc., from a pharmaceutical company; and (b) the circular2 issued by the Central Board of Direct Taxes which provides that expenditure incurred on freebies in violation of the regulations will be inadmissible under section 37(1).
The Supreme Court noted that explanation 1 to section 37 of the Act, (i) was inserted to disallow a taxpayer from claiming deductions for expenditure on illegal activities. Thus, the act of pharmaceutical companies gifting freebies to medical practitioners, would be 'prohibited by law' and cannot be claimed as a deduction under section 37(1); and (ii) should not be narrowly interpreted.
The Supreme Court decision comes as a huge relief to the income tax authorities and settles the position of law on this issue. The Supreme Court's decision is also consistent with the amendment proposed to explanation 1 to section 37 of the Act by the Finance Bill, 2022 to disentitle a taxpayer to claim expenditure that violates any law or regulation.
Applicability Of The Most Favoured (MFN) Clause Under The DTAA To Not Require A Separate Notification
Income Tax Appellate Tribunal (ITAT), a quasi judicial authority to hear appeals against the decisions of income tax authorities, in GRI Renewable Industries S.L. v. ACIT (IT), Circle - 13, considered whether a separate Notification must be issued by the Government of India for applicability of the most favoured nation (MFN) clause under India's tax treaty (DTAA) with one country to claim the benefits granted by a subsequent DTAA with second country.
The Central Board of Direct Taxes (CBDT), statutory authority responsible for administration of direct tax laws, issued a circular dated February 3, 20224 (CBDT Circular) stating the conditions for claiming the benefits of the MFN clause in India's DTAA's with certain countries. One of them being, Government of India having issued a separate Notification importing the benefits of the second DTAA into the first DTAA as required by section 90(1) of the Act.
The petitioner company (assessee) was incorporated in Spain and covered by the India-Spain DTAA. This DTAA was notified on April 21, 1995 and a protocol containing the MFN clause was also signed on the date of signing the DTAA and made a part of it. The assessee claimed a lower withholding tax rate of 10% (as applicable under the India-Portugal DTAA which was notified on June 16, 2000) on 'royalty' and 'fees for technical services' by applying the MFN clause under the India-Spain DTAA (Article 7 of the Protocol).
The income tax authorities rejected assesse's claim on the ground that the protocol containing the MFN clause was not notified separately as required by the CBDT Circular.
ITAT overruled the decision of the income tax authorities and held that: (a) on Notification of the India-Spain DTAA, the protocol containing the MFN clause automatically stood notified without the need for a separate Notification under section 90 of the Act; and (b) CBDT Circular cannot apply to DTAA & protocol containing MFN clause notified prior to the CBDT Circular date.
Notice Pay and Parental Insurance Recoveries Made From Employees Do Not attract Goods & Services Tax (GST)
The Maharashtra Authority for Advance Ruling (AAR), in M/s Syngenta India Limited5, held that recoveries made from the employees towards providing parental insurance do not constitute a supply of service and the amount recovered would not attract a levy of GST. The AAR further held that as per the employer-employee contract, the employee resigning and making payment of Notice period pay does not amount to consideration. Thus, Notice pay recoveries don't attract any levy of GST.
Medical Instruments Placement In Hospitals/Labs Without Consideration, A 'Supply Of Service'
The Kerala Appellate Authority for Advance Ruling (AAAR), in Abbott Healthcare Pvt. Ltd.6, while upholding the decision of AAR held that placement of specified medical instruments without any consideration at the unrelated hospital/lab in accordance with an agreement, does constitute a 'supply of service' as the term 'consideration' under the Central Goods & Services Tax Act, 2017 (Act) includes the monetary value of an Act or forbearance i.e. act of doing something or abstain from doing something will be subject to GST.
Transfer Of Business Of The Same Entity To Be Deemed As Supply Of Goods
The Andhra Pradesh AAAR, in the case of M/s Shilpa Medicare Limited7, while settng aside the order passed by AAR held that since both the companies are holders of the same PAN and are distinct persons, thus, the transfer between the two companies will be treated as a deemed supply of goods. Since, it is a supply of goods, the transaction would not be covered under Sl. No.2 of the Notification No.12/20178. Therefore, since there is no change in the constitution of the registered person as required under section 18(3) of the Act, the transfer of Input Tax Credit (ITC) would not be permissible.
CIRCULARS AND NOTIFICATIONS
Applicability Of Social Welfare Surcharge On Goods Exempted From Basic Customs Duty, Customs Duty And CESS9
The Government of India (GOI) issued clarifications regarding the applicability of Social Welfare Surcharge (SWS) on goods exempted from basic and other customs duties/cesses since it specifies the scenarios wherein SWS will be applicable.
1. Special Leave Petition (Civil) No. 23207 of 2019
2. Circular No. 5/2012 [F. No. 225/142/2012-ITA.II] dated August 1, 2012 August 1, 2012
3. ITA No. 202/PUN/2021
4. Circular No. 3/2022 dated February 3, 2022
8. Notification No. 12/2017- Central Tax (Rate) dated June 28, 2017
9. Circular No. 3/2022-Customs dated February 1, 2022
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.