2015 (10) TMI 249 - AT - Income Tax

Expenditure incurred towards the drugs consumed for quality control disallowed - Held that - On evidence put forth by the assessee-company, the Assessing Officer is not justified in making observation that the assessee was not required to act as a drug/medicine testing agency. The Assessing Officer has to verify the evidence produced by the assessee and find out whether the assessee has acted as a testing agency or not. It is not for the Assessing Officer to comment that the assessee was not required to act as a drug/medicine testing agency. Since the material available on record clearly suggest that the assessee has tested the quality of drugs procured, this Tribunal is of the considered opinion that the expenditure incurred by the assessee towards the drugs consumed for quality control has to be allowed as expenditure. Expenditure on damaged drugs and unusable drugs - Held that - This Tribunal is of the considered opinion that the Assessing Officer has to examine the matter afresh after considering the necessary material that may be filed by the assessee to support the claim of damaged drugs, unusable drugs and drugs consumed for quality control. In other words, the assessee has to produce necessary details with regard to damaged drugs, unusable drugs and drugs consumed for quality control, liquidated damages, if any, claimed from the respective companies for the damaged and unusable drugs. In view of the above discussion, the orders of the lower authorities are set aside and the entire claim of damaged drugs, unusable drugs and drugs consumed for quality control is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matte afresh in the light of the material/details that may be filed by the assessee with regard to damaged drugs, unusable drugs and drugs consumed for quality control and thereafter decide the same in accordance with law after giving a reasonable opportunity to the assessee. Cost of blood pressure checking apparatus said to be supplied to the members of the State Legislative Assembly - Held that - This Tribunal is of the considered opinion that the cost of blood pressure checking apparatus cannot be considered to be a marketing expense. The assessee-company was expected to procure the drugs, medicines, equipments etc. and supply the same to the Government Hospitals. Supply of any machinery or equipment including blood pressure checking apparatus to the members of the State Legislative Assembly or to any of the Officers of the Government, in their individual capacity cannot be considered as marketing expenses, therefore, this Tribunal is of the considered opinion that the expenditure of ₹ 6,45,741/- cannot be allowed as customer care expenses for the assessment year 2010-11. Accordingly, the order of the CIT(A) on this issue for assessment year 2010-11 is set aside and that of the Assessing Officer is restored. - Appeal Decided partly in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Deduction claims for damaged drugs, unusable drugs, and drugs consumed for quality control.
2. Expenditure incurred for customer care expenses related to the supply of blood pressure checking apparatus to members of the State Legislative Assembly.

Detailed Analysis:

1. Deduction Claims for Damaged Drugs, Unusable Drugs, and Drugs Consumed for Quality Control:
The primary issue revolves around the assessee, a wholly-owned company of the Government of Tamilnadu, claiming deductions for damaged drugs, unusable drugs, and drugs consumed for quality control. The Assessing Officer (AO) disallowed these claims, arguing that the assessee maintained a separate system of accounting outside the books for these drugs and did not follow the FDA procedure for destroying damaged drugs. The AO also noted that the assessee was not required to act as a drug/medicine testing agency and lacked material evidence to support the claims.

Conversely, the Commissioner of Income-tax (Appeals) [CIT(A)] allowed the claims based on the certificate issued by the Comptroller & Auditor General of India (CAG), which indicated no adverse comments. However, the certificate was not available to the AO during the assessment.

The Tribunal observed that the assessee, being a government company, is expected to ensure the supply of quality drugs to government hospitals, which includes testing the quality of drugs. The Tribunal noted that the CIT(A) allowed the claims without examining the material evidence and solely relied on the CAG certificate. Therefore, the Tribunal remitted the matter back to the AO for a fresh examination, instructing the AO to consider the necessary material and the CAG certificate while re-evaluating the claims.

2. Expenditure Incurred for Customer Care Expenses Related to the Supply of Blood Pressure Checking Apparatus:
For the assessment year 2010-11, the Revenue raised an additional issue regarding the expenditure of Rs. 6,45,741 towards customer care expenses for supplying blood pressure checking apparatus to members of the State Legislative Assembly. The AO disallowed this expenditure, arguing that it was not a business expense related to the assessee's primary activity of procuring and supplying drugs to government hospitals.

The assessee contended that this expenditure was part of marketing its products and raising public awareness about new health schemes. However, the Tribunal concluded that supplying blood pressure checking apparatus to legislators could not be considered a marketing expense. The Tribunal held that such expenditures are not related to the assessee's business activities and thus cannot be allowed as customer care expenses.

Conclusion:
The Tribunal allowed the appeals of the Revenue for statistical purposes, remitting the issue of deduction claims for damaged, unusable, and quality control drugs back to the AO for a fresh examination. For the assessment year 2010-11, the Tribunal set aside the CIT(A)'s order regarding the expenditure on blood pressure checking apparatus and restored the AO's decision, disallowing the expenditure as a business expense.