Weekly Round-up on Tax and Corporate Laws | 21st to 26th February 2022

This weekly newsletter analytically summarises the key stories reported at taxmann.com during the previous week from 21st to 26th February 2022, namely:

(a) The Supreme Court held that Pharma Cos. cannot claim a deduction for freebies given to doctors

(b) CCI orders probe against Apple for forcing ‘app developers’ to use its in-app payment solution

(c) Blocking of ITC when credit is not available in the ledger is without jurisdiction and illegal

(d) Assessee can seek extension or shelter from the Court if an unreasonably short time is granted in the summons

(e) No violation of Competition Act if Govt. dept. insists suppliers to get accreditation from NABL only

(f) Presentation of Trade Payables in Ind AS Financial Statements

1. Gifting freebies to doctors is prohibited by law; Pharma Cos. are not eligible for deduction: SC

The Supreme Court of India has put the controversy to rest regarding the deductibility of freebies gifted by Pharma Company to doctors. The Apex Court held that when acceptance of freebies is punishable under Indian Medical Council Regulations, pharmaceutical companies cannot be granted the tax benefit for providing such freebies.

Facts

The CBDT vide Circular No. 5/2012, dated 01-08-2012, had clarified that expenses incurred by pharmaceutical and allied health sector industries for the distribution of incentives (freebies) to medical practitioners are not eligible for deduction. The benefit of the deduction is denied in view of Explanation 1 to Section 37(1). Said explanation denies the deduction for an expenditure incurred for any purpose which is an ‘offence’ or ‘prohibited by law’.

The assessee contended that Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, prohibits medical practitioners from accepting freebies. No corresponding prohibition in the form of any binding norm was imposed on the pharmaceutical companies gifting them. Thus, the benefit of deduction shouldn’t be denied to the assessee being a pharmaceutical company. The matter reached the Supreme Court of India.

Ruling

The Supreme Court of India held that 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 illegal activity. When acceptance of freebies is punishable, pharmaceutical companies cannot be granted the tax benefit for providing such freebies.

The 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 medication is unaffordable or out of the economic reach of the patient. Such is the level of the trust reposed in doctors.

Therefore, 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 attending medical conferences.

Further, these freebies are technically not ‘free’. 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 instead of such a quid pro quo exchange was taken cognisance by the Parliamentary Standing Committee on Health and Family Welfare.

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.

In the present case, the freebies given by the assessee to the doctors directly resulted in 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 effects.

The conceded participation of the assessee, i.e. the provider or donor, was prohibited, as far as their receipt by the medical practitioners was concerned. The medical practitioners were forbidden from accepting such gifts or freebies that was no less a prohibition on the part of their giver or donor.

Thus, the freebies distributed by the assessee were squarely covered within the scope of Explanation 1 to Section 37(1) and accordingly not allowable as a deduction.

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2. CCI orders probe against Apple for forcing ‘app developers’ to use its in-app payment solution

In the instant ruling in the case of Together We Fight Society v. Apple Inc. 135 taxmann.com 194 (CCI), the CCI ordered a probe against Apple for abusing its dominant position by requiring app developers to use its in-app payment solution for selling their digital in-app content to consumers.

Brief Facts

The Informant (an NGO called ‘Together We Fight Society’) alleged that Apple uses anti-competitive restraints and abuses its dominance for distribution of applications (‘apps’) to users of smartphones, tablets and processing of consumers’ payments for digital content used within iOS mobile apps (‘in-app content’).

The Informant averred that Apple imposes unreasonable and unlawful restraints on app developers from reaching users of its mobile devices (e.g., iPhone and iPad) unless they go through the ‘App Store’, which was stated to be controlled by Apple.

Further, Apple requires app developers who wish to sell digital in-app content to their consumers to use Apple’s in-app payment solution, i.e. In-App Purchase (IAP) which carries a 30% commission which is 10 times higher than compared to open market rates. The Informant alleged that such restrictive practice and charge of exorbitant price amounts to abuse of dominant position under Section 4 of the Act.

The Informant further asserted that Apple enjoys a dominant position in the market for non-licensable mobile OS for smart mobile devices and the relevant market for an app store for Apple smart mobile OS in India. Apple’s App Store was the only approved App Store for iOS devices. App developers have no other alternative except Apple’s App Store, through which they could reach users of iOS. Thus, Apple was stated to have a monopoly in the iOS app distribution market.

The Informant had alleged that Apple prevents iOS users from downloading app stores or apps directly from websites. It pre-installs its own app store on every iOS device it sells, disables iOS users’ ability to remove the App Store from their devices, and conditions all app developers’ access to iOS on the developers’ agreement to distribute their apps solely through the App Store and not to distribute third-party app stores.

CCI’s Ruling

The Competition Commission of India observed that in a relevant market of app stores, Apple’s App Store is the only means for developers to distribute their apps to consumers using Apple’s smart mobile devices. Thus, Apple holds a monopoly position in the relevant market.

Apple requires app developers who wish to sell digital in-app content to their consumers to use Apple’s in-app payment solution (In-App Purchase (‘IAP’)). Thus, restricting the choices available to app developers to select a payment processing system especially considering that Apple charges a commission of 30%. However, other payment processing solutions charge a significantly lower fee for processing payments. Apple also prohibits app developers from including a button/link in their apps that take the user to a third party payment processing solution other than Apple’s IAP. These restrictions imposed by Apple foreclose the market for app stores for iOS for potential app distributors in violation of section 4(2)(c)

The CCI prima facie viewed that Apple violated the provisions of Section 4(2)(a), 4(2)(b), 4(2)(c), 4(2)(d), and 4(2)(e) of the Act, and therefore, it warrants detailed investigation. Accordingly, CCI directed the Director-General to cause an investigation into the matter under the provisions of Section 26(1).

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3. Blocking of ITC when credit is not available in the ledger is without jurisdiction and illegal: HC

The Gujarat High Court had held that blocking of Electronic Credit Ledger and insertion of a negative balance in the ledger when no ITC was available is without jurisdiction and illegal. The High Court of Gujarat gives this ruling in the case of Samay Alloys India (P.) Ltd. v. State of Gujarat.

Facts

The petitioner was filing GST returns and noticed that the portal displayed a message that the electronic credit ledger had been blocked. Despite the fact that there were no credit balances in the electronic credit ledger, ITC was blocked, and a negative balance was entered. It filed a writ petition challenging the same.

High Court

The High Court observed that Rule 86A allows the proper officer to disallow debit from Electronic Credit Ledger (ECL) for a limited period of time and not to make debit entries in ECL. But the department has no power to negatively block credit to be availed in future. If credit is fraudulently availed and utilised, then appropriate proceeding under Section 73 or 74 can be initiated but not under Rule 86A. Therefore, it was held that blocking of ECL under Rule 86A and insertion of a negative balance in the ledger when no ITC was available was without jurisdiction and illegal.

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4. Assessee can seek extension or shelter from Court if unreasonably short time granted in summons: HC

The Rajasthan High Court has recently held that if summon issued under section 70 grants an unreasonably short time, which is impossible for noticee to comply with, it is always open for an aggrieved person to seek an extension from Authority or to take a shelter of Court proceedings. The High Court of Rajasthan gives this ruling in the case of S.K. Metal v. Assistant Commissioner, Jaipur.

Facts

The Competent Authority issued a summon under section 70 of the CGST Act to the assessee. The assessee filed a writ petition challenging the constitutionality of section 70. It submitted that Section 70 violates the principle of separation of powers. It also submitted that the Competent Authority issued a summon without indicating the nature of the inquiry conducted against it.

High Court

The High Court observed that section 70 empowers proper officers to summon a person to give evidence. Such powers are not beyond the competence of the legislature or opposed to any fundamental rights or other provisions of the constitution of India. However, if summon in a particular case grants an unreasonably short time, which would be impossible for noticee to comply with, it would always be open for an aggrieved person to seek an extension from Authority or take shelter of Court proceedings.

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5. No violation of Competition Act if Govt. dept. insists their suppliers to get accreditation from NABL only

Brief Facts

In the instant case, Mr. Dushyant (“Informant”) filed an application under Section 19(1)(a) of the Competition Act, 2002 (Act) alleging contravention of the provisions of Sections 3 and 4 of the Act by the National Accreditation Board for Testing and Calibration Laboratories (“NABL”) and other Department of Government/ Government-affiliated bodies or Public Sector Undertakings-Opposite Parties (OPs).

The Informant alleged that NABL entered into Exclusive Supply Agreements (ESA) with the other OPs where no other accreditation service other than that of NABL was allowed. The suggested bidders/ suppliers had to obtain accreditation services from NABL and its accredited laboratories only. The Informant contended that when there were other accreditation agencies existing as on date in India, it violated the provisions of section 3 (4) of the Act.

The Informant further submitted that it led to the monopolisation of power in the hands of NABL and caused an appreciable adverse effect on competition, leading to the denial of market access. The Informant contended that this violates Sections 4(2)(a) and 4(2)(c) of the Act.

CCI’s Ruling

The CCI held that the Informant failed to provide any evidence about NABL having an agreement/ arrangement with OPs in relation to some exclusive arrangement in favour of NABL. Thus, the CCI, prima facie, does not find a contravention of Section 3(4) of the Act by any OPs.

As far as the question of violation of section 4 of the Act was concerned, CCI held that the Informant failed to provide any data/ information to support his claim regarding the market share or dominance of each of the OPs.

The OPs seeking NABL’s accreditation (based on their policies/ guidelines/ rules of procurement/ some enactments governing their functioning), there was nothing to suggest that NABL had any role in framing the same.

Further, OPs are free to stipulate standards for procurement, and the same cannot be held to be out-rightly anti-competitive. There was no hint to suggest that procurers other than OPs are also imposing similar conditions as the present OPs. Therefore the question of foreclosure of the market for other accreditation agencies does not arise.

The CCI ordered that there was no prima facie case of contravention of any of the provisions of Section 3 and/or 4 of the Act was made out against the OPs for causing an investigation into the matter. Therefore, the matter was ordered to be closed forthwith.

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6. Presentation of Trade Payables in Ind AS Financial Statements

Trade Payable is the amount due on account of goods purchased or services received in the normal course of business. The amount that is due under any contractual obligations or that is statutory payable shall not be considered as Trade Payables.

Ind AS Schedule III requires the presentation of ‘Trade Payables’ as a separate line item on the face of the Balance Sheet under ‘Financial Liabilities’. The same should be further categorised into total outstanding dues to micro-enterprises and small enterprises and total outstanding dues to creditors other than small enterprises and micro-enterprises. A separate disclosure shall be provided for the outstanding dues of micro and small enterprises.

Also, the company is required to provide the ageing of trade payables due for payment as on the balance sheet date and as per the prescribed format, along with the disclosure of the amount of unbilled payables and the amount of trade payables that are not due. However, the ageing requirement is not applicable to the trade payables that are not due for payment.

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