Recently the Delhi high Court in Bostom Scientific India (p) Ltd.v.Asst.CIT 2017 Tax Pub (DT) 3985 (Del –HC) has give it’s verdict regarding allowability of expenditure incurred by pharma companies on sponsoring medical conference in and outside India. The learned author analyses the impugned issue in the light of this recent verdict.
It is general practice of pharma companies to sponsor and conduct medical conferences in & outside India and for this purpose these companies also make arrangements for travel and accommodation of doctors attending the conferences. In a recent past, a serious controversy arose as regards allowability of expenditure incurred b pharma companies for organising such conferences. These expenditure incurred by pharma companies for organising such conference.these expenditure are claimed to be allowable as business expenditure for being incurred for business purpose, however, the department tends to disallow the same by invoking Explanation 1 to section 37 (1).
The Finance (No. 2) Act, 1998 has inserted an Explanation to section 37(1), with retrospective effect from 1-4-1962, so as to clarify 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.
The pharma companies incr expenditure to sponso and conduct doctors’ conferences , to distribute its product amongst doctors as free samples, to give gift articles to doctors , etc. These expenditure are classified as advertisement and sales promotion expenditure and claimed to be allowable on the ground of being incurred wholly and exclusively for the business purposes.
The Medical council of India in excersise of its statutory powers amended the Indian medical Council (Professional Conduct, Etiquette and Ethics) Reguations, 2002 (the Regulations ) on 10-12-2009 imposing a prohibition on the medical practitioner & their professional associations from taking any gift travel facility , hospitality, cash of monetary grant from the pharmaceutical and allied health sector industries.
Section 37(1) of the 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 expenses is laid out/expended wholly or exclusively for the purpose of 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 of any expense incurred in providing above mentioned or similar freebies 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 beingan expense prohibtited 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 freebies and claimed it as a deductable expense in it’s accounts against income.
It is also clarified that the sum equivalent to value of freebies enjoyed by the aforesaid medical practitioner or professional associatiosns is also taxable as business income or income from the other sources, as teh 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.
However,the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations,2002 which has been amended on 10-12-2009 prohibits medical practitioners and their professional associations from taking any gift, travel facility, hospitality, cash or monetary grant from the pharmaceutical and allied health sector industries.
Thus, the expenditure incurred on freebies are disallowed on the ground of being incurred in violation of the provision of Indian medical Council ( Professional Conduct, Etiquette and Ethics) Regulations, 2002.- circular No. 5/2012,dt.1-8-2012.
In live Healthcare Ltd. v. DCIT (2016) 161 ITD 63 (Mum),the Mumbai Bench of the Tribunal held that the expenditure on foreign travel and accomdation of doctors and their spouses was incurred with the intent and the objective of profiteering form the distribution and entertainment that had a direct nexus with promoting the sales and profitability which made such expenditure violative of the provisions of the said regulations of 2002.It held that the expenditure was incurred to seek favours from the doctors by way of recommendation of the company’s product which was an illegal gratification ,was against public policy,was unethical and was prohibited by law. Accordingly,the expenditure in question was liable for disallowance.
However in PHL Parma (p) Ltd. v. ACIT (2017) 163 ITD 10(Mum),the decision was given in favour of the assessee by observing that the code of conduct has meant to be followed and adhered to by the medical practironers and doctors alone and did not apply in any manner to pharmaceutical companies. The Indian Medical Council did not have any jurisdiction nor had any authority upon the pharmaceutical companies and could not have prohibited such companies in conduct of their business. The CBDT in issuing Circular No. 5, dt. 1-8-2012 had enlarged the scope of the said Regulations by applying it to the pharmaceutical companies without any enabling provisions to do so. Further the circular in any case could not be reckoned retrospectively i.e., it could not be applied before the date of its issue, i.e., on 1-8-2012.
Thus the expenditure incurred by the assessee company was in the nature of sales and business promotion and was to be allowed; the gift articles bore the logo of the assessee and could not be held to the freebies,the free samples proved the efficacy of the products of the products of the company and again were not in violation of the said Regulations framed by the Medical Council of India.
In Syncom Foundations (I) Ltd. ( IT PPEAL Nos. 6429 & 6428 (Mum) of 2012, it was observed that CBDT circular would not be applicable in the assessment years 2010-11 and 2011-12 as it was introduced w.e.f. 1-8-2012. Similarly it was held in UCB India (P) Ltd.v. ITO (IT Appeal No. 6681 (Mum) of 2013, dt 13-5-2016), that the CBDT circular colud not have a retrospective effect.
In Boston Scientific India (P) Ltd v. Asstt. CIT 2017 Tax Pub (DT) 3985 (Del-HC), the assessing officer on the specific heads of ‘advertisement and business promotion’ and travel related expenses ‘ made the following disallowances :
(i) Expenditure of Rs. 13,14,548 was stated to be constituting freebies provided to medical consultants and other doctors, disallowable in view of Explanation 1 to section 37(1) of the Act , read with CBDT Circular No. 5/2012, dt.1-8-2012.
(ii) Expenditure of Rs 19,06,000 incurred on conducting seminars conventions, meetings, etc., for the purpose of Appellant’s business.
This was disallowed on the ground that details were scanty, despite ample opportunity being given to the assessee .
(iii) Expenditure of Rs 8,00,000 incurred on sponsorship for organizing conference/seminor. This was disallowed on the ground that the payment was made after the event had place.
On appeal before ITAT , it was held that as the assessee had incurred expenses in the garb of marketing the cardiac machine, onus was upon the assessee to prove that the expenses incurred did not violate any law that may be applicable. The burden lies uopon the assessee which has not been discharged by evidences/materials. Merely by placing the bills of payments, the travel details, the hotel details , where the doctors were stationed , and the seminars / conferences that were actually attended by such doctors. Assessee had also not demonstrated that the doctors by participating in such conferences and accepting the hospitality extendedby it (the assessee ) have not contravened any MCI Regulations.
The High Court ,however, said that the ITAT placed an unfair burden on the assessee to prove that the above expenses was incurred bona fide for the business purpose of the assessee. The assessee had placed before the ITAT all the relevant details thereby discharging the initial onus. Thereafter,it was open to the Revenue to prove to the contrary . It was not possible for the assesee to show that doctors “actually delivered any lectures, attented any meetings for, providing training courses and seminars for assessee, etc.
As regards other disallowances, it was held that since the ITAT proceeded on and conjectures and failed to deal with the contentions of the assessee in that regard , it is only fair that the ITAT considers the entire appeal of the assessee on merits afresh.
Thus, the High Court rendered decision in favour of assessee and against the revenue and all the contentions of the assessee raised in the appeal before the ITAT would be considered afresh.
The decision of the Delhi High Court has provided some rays of hope in favour of Pharmaceutical Companies for doctors. If relief is provided, it wil be of great help in sharing and upgrading knowledge in the field of medical science and ultimately whole mankind would get benefitted therefrom.
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Accommodation services are under the purview of tax net since a long time It was a handsome source of revenue under service tax law and the legacy is continuing in refined manner,even under GST law.
Accommadation service is the service to provide a place to live or stay, it has been introduced in the service tax net since positive list regime.The same is carried forward in the GST law also.Under GST law there is classification of services and accordingly accomdation services have been classified into the various categories according to the practice prevailing in the industry.
Accommodation services have been classified under HSN/SAC 9963 wherein the further classification ia as under.
Service Tariff Code (HSN/SAC)
Description of Service
Room or unit accomdation services provided by Hotels, INN,Guest House , club, etc
Camp Site Services
Recreational an vocational camp services
Room or unit accomdation services for students in student residences
Room or unit accomdation services provided by Hotels, Capms, Paying Guests, etc.
Other room or unit accomdation services not specified else where
3.Nature of supply
Accommodation services are generally provided at the premises used for providing accomdation services. Since the GST is destination based consumption tax, therefore, the place of supply of accomdation services is the place where the property used forproviding such services is situated and the nature of supply is intra – State supply. However, before reaching at the conlusion we need to understand the relevantprovisions of the GST law.
The relevant provisions of law determaining the nature of services are coverd under the provisions of section 8 and setion 12 of the IGST Act,2017 read together.
According to setion 8(2) of the IGST Act,2017 supply of services where the location of the supplier and the place of supply of services are in the same State or the same Union territory shall be treated as intra-state supply.
According to setion 12(3)(b) of the IGST Act,2017, the place of supply of service by way of lodging accomdation by a hotel, inn, guest house ,home stay , club or campsite, by whatever name called and including a house boat or any other vessel shall be the location at which the immovable property or boat or vessel, as the case may be, is located or intended to be located.
Thus, on a combined reading of the above two provision,one can easily figure out the nature of supply of accomdation services is intra-State supply.
4.Whether accomdation services can be an inter-State supply
Although by referring to the provisions cited above, it can be inferred that the basic philosophy of implematon of destination based consumption tax goes in line of taxing accommodation services as intra-State supply. Howeve, the following provisions of IGST Act,2017 are worth noting-
(a)Provisio to section 8(2) : The said provision reads as –“the intra-State supply of services shall not include supply of services shall not include supply of services to or by a Special Economic Zone developer or a Special Economic Zone unit”.
(b) Section 7(5) (b) : Supply of goods or services or both to or by a Special Economic Zone developer or a Special Economic Zone unit shall be treated to be a supply of goods or services or both in the course of inter –State trade or commerce.
The direct implication of the above provisions on accomdation services is that the said services if provided to any unit in SEZ shall not be considered as intra-State supply. In other words, it shall be considered as inter –State supply.
Hence, it can be fairly concluded that the accommodation services when provided to any unit in SEZ or by unit in SEZ evolves a concept divergent to the basic intent of the GST law of taxing the services on consumption basis.Now the question that flashes in the minds is the need of such a provision. The purpose of introduction of such provison can be understood with the provisions of section 16 of the IGST Act, 2017
Implication of sections 7(5), 8(2) and 16 of the IGST Act, 2017
The implication of sections 16 and 8(2) can be understood i two parts. In one part the supplier of services is outside the SEZ and in other part the supplier of services is in the SEZ. The impact on both the transaction shall be different.
(i) Supply to SEZ – Zero- rated supply
Accordingly to section 16 of the IGST Act, 2017, “zero-rated supply “ means any of the following supplies of goods or services or both namely :- (a) export of goods or services or both; or (b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.
The provision stated in section 16 clearly mandates that the accommodation services provided to SEZ developer or to a unit in SEZ shall be treated as zero-rated supply. To put it differently, the same shall be considered at par with export of services. Thus, such services shall fall under zero –rated supply under GST law and shall be eligible for benefits attributed to zero rated supplies including refund of taxes paid on the relevant , services,subject to the other provisionsof GST law.
(ii) Supply by SEZ-Inter-State-supply
On a close reading of section 8(2) and section 16 as mentioned above, it can be inferred that accomdation services provided by the unit in SEZ to any person outside SEZ shall be treated as inter-State supply. Meaning thereby that the said services provided by SEZ shall be considered as inter-State supply and IGST shall be considered as inter –State supply and IGST shall be chargeable on the same.
(iii) Supply within SEZ–Zero–rated supply
Since in case of supply within SEZ the recipient shall always be in SEZ, therefore, such supply shall always fall within the meaning of zero-rated supply.Hence,supplies within SEZ shall be eligible for benefits at par with the benefits available to zero –rated supply.
Accomdation services are generally taxed as intra-state supply, however the law contains the relevant provisions for treating the same as inter-state supply also. Thus, before reaching at any conclusion about the place of supply, it is essential to refer the lwa as a whole and relevancy of sections 7(5) and 8(2) cannot be undermined.
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The learned author attempts to make an overview of anti-Profiteering measure introduced under the GST regime and the scope of powers of National Anti- Profiteering Authority.
It is fundamental spirit of an indirect tax regime that reduction in rate of tax any supply of goods or services or the benefit by input tax credit should have been passed on to the recipient by way of commensurate reduction in prices. However, it has been the experience of many countries that when GST was introduced there has been a marked increase in inflation and the prices of the commodities. This happended in spite of the availability of the tax credit right from the production stage to the final consumtion stage which should have actually reduced the final prices.
This was obviously happening because the supplier was not passing on the benefit to the consumer and thereby indulging in illegal profiteering.
With the introduction of GST regime in india, National Anti- Profiteering Authority has been constituted central Government to examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price o fthr goods or services or both supplied by him,this is to ensure that thecosumer is protected from arbitrary price increase in the name of GST.
The statutory provision relating to anti- Profiteering measure are enshrined under section 171of the CGT Act.Rules 123 to 133 of the CGST Rules,2017 deal with provision in respect of constitution of the National Anti- Profiteering Authority and scope of its powers.
As per sub–section (1) of section 171 of the CGST /SGST Act, any reduction in rate tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices.
As per sub- section (2) of section 171, the Central Government may, on recommendation of the Council, by notification, constitute an Authority, or empower an existing Authority constituted under any law for the time being force, to examine whether input tax credits availed by any registreted person or the reduction in the tax rate have actually resulted in a commensure reduction in the price of the goods or services or both supplied by him.
It is clear from the above that when input tax credit is availed of by an registered person, the amount of tax is excluded from the purchase price or cost the goods and the input tax credit is used for discharge of output tax on outward supply. The Authority constituted under sub-section (2) of section 171 is required to examine that input tax credits availed by any registered person results in a commensurate reduction in the price of the goods or services or b both supplies by him.
The Authority is also required to ensure that any reduction in the tax rate must result in a commensurate reduction in the price of the goods or services or b both supplies by him.
3. Constitution of Authority
The National Anti- Profiteering Authority shall be a five-member committee consisting of a Chairman who holds or has held a post equivalent in rank to a Secretary to the Government of India ; and four technical Members who are or have been Commissioners of State tax or central tax or have held an equivalent post under existing laws.
The Additional shall cease to exist after the expiry of two years from the date on which the Chairman enters upon his office unless the Council recommends otherwise.
4.Power to determine the methodology and procedure
The Authority can determine the methodology and procedure for determination as to whether the reduction in the rate of tax on the suppy of goods or services or the benefit by way of commensurate reduction in prices.
5.Duties of Authority
As per rule 127 of the CGst Rules, the Authority would have the following duties:
(i) to determine whether any reduction in the rate of t axo any supply of goods o services or the benefits of input tax has been passed o to the recipient by way of commensurate reduction in prices;
(ii) to identify the registered person who has not passedon the benefit of reduction in the rate of tax on supply of goods or services or the benefit of input tax credit to the recipient by way of commensurate reduction in prices;
(iii) to order;
(a) Reduction in prices
(b) Return to the recipient , an amount equivalent to the amount not passed on by way of commensurate reduction in prices along with interest at the rate of eighteen per cent. Fromthe date of collection of the higher amount till the date of the return of such amount or recovery of the amount or recovery of the amount not returned, as the case maybe, in case the eligible person does not claim return of the amount or is not identifiable, and deposite the same in the Consumer Welffare Fund;
(c) Imposition of penalty; and
(d) Cancellation of registration.
(vi) to furnish a performance report to the Council by the 10th of the close each quarter.
6. Application to the Authority
According to sub-rule 128, the Standing Committee shall within a period of two months from the date of the receipt of a written application froman interested party or from a Commissioner or any other person, examine the accuracy and adequacy of the evidence provided in the application to determine whether there is prima-facie evidence to support the claim of goods or to the recipient by way of commensurate reduction in prices.
All applications from interested parties on issues of local nature shall first be examined by the State level Screening Committee constituted in each State by the State Government consisting of an officer of the State Government to be nominated by the Commissioner, and an officer of the Central Government to be nominated by the Chief Commissioner.
7. Initiation and conduct of proceeding
In terms of sub-rule (1) or rule 129, if the Standing Committee is satisfied that there is a prima-facie evidence to show that the supplier has not passed on the benefit of reduction in the rate of tax on thesupply of goods or services or the benefit of input tax credit to the recipient by way of commensurate reduction in prices , it shall refer the matter to the Director General of Safeguards for a detailed investigation.
In terms of sub-rule (3) of rule 129, if the Director General of Safeguards shall conduct
investigation and collect evidence necessary to determine undue profiteering and before initiation of the investigation,issue a notice to the interested parties (and to such other persons as deemed fit for a fair enquiry into the matter) containing, inter alia, information on the following, namely:-
(a) The description of the goods or services in respect of which the proceedings have been initiated;
(b) Summary of the statement of facts on which the allegations are based; and
(c) The time limit allowed to the interested parties and other persons who may have information related to the proceedings for furnishing their reply.
The evidence or information presented to the Director General of Safeguards by one interested party can be made available to the other interested parties participating in the proceedings in the proceedings. The evidence provided will be kept confidential and the provisions of section 11 of the Right to Infomration Act,2005, shall apply mutatis to the disclose of any information which is provided on a confidential basis.
The Director General of Safeguards can seek opinion of any other agency or statutory authorities in the discharge of his duties. The Director Genearal of Safeguards,or an officer authorised by him will have the power to summon any person necessary either to give evidence or to produce a document or any other thing. He will also have same powers as that of a civil court and every such inquiry will be a judicial proceeding.
The Director General of Safeguards will complete the investigation within a period of three months for reasons to be recorded in writing as allowed by the Standing committee and, upon completion of the investigation, furnish to the Authority, a report of its findings along with the relevant records.
8. Confidentiality of information
For the purpose of ensure confidentiality of information, it has been provided that notwithstanding anything contained in sub-rules (3) and (5) of rule 129 and sub-rule (2) of rule 133, the provisions of section 11 of the Right to Information Act, 2005, shall apply mutatis mutandis to the disclosure of any information which is provided on a confidential basis.
It is also provided under sub-section (2) of section 130 that the Director General of Safeguards may requie the parties providing information on confedential basis to furnish non-confidential summary thereof and if in the opinion of the party providing such information, the said information cannot be summarised, such party may submit to the Director General of Safeguards a statement of reasons as to why summarisation is not possible.
9. Cooperation with other agencies or statutory authorities
As per rule 131 of the CGST Rules, where the Directors General of Safeguards deems fit, he may seek opinion of any other agency or statutory.
Authorities in the discharge of his duties.
10. Power to summon persons to give evidence and produce documents
In terms of sub-rule 132,the Director General of Safeguards, or an officer authorised by him in this behalf,shall be deemed to be the proper officer to exercise the power to summon any person whose attendance he considers necessary either to give evidence or to produce a document or any inquiry in the same manner, as provided in the case of a Civil Procedure,1908.
Every such inquiry referred to in sub-rule (1) shall be deemed to be a judicial proceedings within the meaning of sections 193 and 228 of the Indian Penal Code.
11. Order of the Authority
As per sub-rule (1) of the CGST Rules, the Authority shall (after granting an opportunity of hearing to the interested parties if so requested) within a period of three months from the date of the receipt of the report from the Director General of Safeguards determaine whether a register person has passed on the benefit of the reduction in the rate of tax on the supply of goods or services or the benefit of input tax credit to the recipient by way of commensurate reduction in prices.
If the Members of the Authority differ in opinion on any point, the point shall be decided according to the opinion of the majority.
Where the Authority determines that a registered person has not passed on the benefit of the reduction in the rate of tax credit to the recipient by way of commensurate reduction in prices, the benefit of input tax credit to the recipient by way of commensurate reduction in prices, the Authority may order-
(a) Reduction in prices;
(b) Return to the recipient, an amount equivalent to the amount not passed on by way of commensurate reduction in prices along with interested at the rate of eighteen percent. from the date of collection of the higher amount till the date of the return of such amount or recovery of the of amount including interest not returned, as the case may be, in case the eligible person does not claim return of the amount or is not identifiable, and depositing the same in the Fund refered to in section 57;
(c) Imposition of penalty as specified under the Act ; and
(d) Cancellation of registered under the Act.
Any order passed by the Authority shall be immediately complied with by the registered person failing which action shall be initiated to recover the amount in accordance with the provisions of the Integrated Goods and service Tax Act or the Central Goods and Services Tax Act or the Union territory Goods and Services Tax Act of the respective States , as the case may be.
The Authority can direct any authority of central tax,State tax or Union territory tax to monitor the impletion of the order passed by it.
12. Decision to be taken by the majority
As per rule 134 CGST Rules, if the Members of the Authority differ in opinion on any point, shall be decided according to the opinion of the majority.
13. Compliance by the registered person
In terms of rule 135 of the CGST Rules, any order passed by the Authority shall be immediately complied with by the registered person failing which action shall be initiated to recover the amount in accordance with the provisions of the Integrated Goods and Services Tax Act or the State goods and Services Tax Act of the respective States, as the case may be.
14. Summing up
Anti-profiteering measures are globally Accepted policies which are implemented by various countries for controlling temporary inflationary prices of goods and services during the transition phase of implementation of GST. Anti-profiteering measure are adopted for providing benefit of GST to the consumers in terms of reduced prices and curbing more profit margins to the businessmen sought to be earned due to rise in prices of goods and services resulting inflation in country.
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