2018 (4) TMI 1869 - AT - Income Tax

Admissibility of expenditures incurred by the assessee (a pharmaceutical company)u/s 37 - Disallowance on account of marketing expenses - AO noticed that the marketing expenses included gift to the Doctors which was in violation to the provisions of Indian Medical Council (Professional conduct Etiquettes and Ethics) Regulations 2002 issued by M.C.I. and circular No. 5/2012 dated 12.8.2012 issued by CBDT - HELD THAT - Since the facts of the assessee s case are similar to the facts involved in the aforesaid referred case of DCIT vs. PHL Pharma Private Limited 2017 (1) TMI 771 - ITAT MUMBAI there is no violation by the assessee in so far as giving any kind of freebies to the medical practitioners. Thus such kind of expenditures by a pharmaceutical companies are purely for business purpose which has to be allowed as business expenditure and is not impaired by EXPLANATION 1 to section 37(1). - Decided in favour of assessee So respectfully following the said order the impugned disallowance made by the AO and sustained by the learned CIT(A) is deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of ?4,79,603/- on account of marketing expenses.
2. Charging of interest under sections 234B and 234C of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Disallowance of ?4,79,603/- on Account of Marketing Expenses:

The primary issue in this appeal was the disallowance of ?4,79,603/- made by the Assessing Officer (AO) on account of marketing expenses. The assessee filed a return of income declaring ?6,44,246/-, which was scrutinized, leading to an addition of ?37,44,440/- being 20% of the marketing expenses due to a significant increase from the preceding year. Upon appeal, the CIT(A) initially found no reason for disallowance but the ITAT restored the issue to the AO for fresh adjudication.

The AO identified that the marketing expenses included gifts to doctors, which violated the Indian Medical Council (Professional Conduct Etiquettes and Ethics) Regulations, 2002, and CBDT Circular No. 5/2012 dated 12.8.2012. The assessee contended that the regulations apply only to medical practitioners, not pharmaceutical companies, and the circular was not applicable for the assessment year 2006-07. However, the CIT(A) sustained the AO's addition.

The ITAT referred to a similar case adjudicated by the ITAT Mumbai Bench in DCIT vs. PHL Pharma Private Limited, where it was held that the CBDT circular enlarging the scope of the Indian Medical Council Regulation to pharmaceutical companies was without any enabling provisions under the Income Tax Law or the Indian Medical Council Regulations. The circular cannot impose a new burden retrospectively. The expenditure was deemed as business promotion, and such expenses were allowed as business expenditure under section 37(1).

The ITAT concluded that the facts of the assessee’s case were similar to the PHL Pharma case and followed the precedent to delete the disallowance made by the AO and sustained by the CIT(A).

2. Charging of Interest under Sections 234B and 234C:

The assessee also contested the charging of interest under sections 234B and 234C of the Income Tax Act, 1961. However, the judgment primarily focused on the disallowance of marketing expenses, and the detailed analysis or decision regarding the interest under sections 234B and 234C was not explicitly discussed in the provided text.

Conclusion:

The ITAT allowed the appeal of the assessee, deleting the impugned disallowance of ?4,79,603/- made by the AO and sustained by the CIT(A), based on the precedent set by the ITAT Mumbai Bench in the PHL Pharma case. The judgment emphasized that the CBDT circular could not retrospectively impose a burden not envisaged by the statute or regulations. The ruling was pronounced in the open court on 27.04.2018.