2021 (5) TMI 1073 - AT - Income Tax

Allowability of the sales promotion expenses incurred by assessee/pharmaceutical company - freebies given to doctors in light of the CBDT Circular No. 5/2012 read a/w the Medical Council of India (MCI) Regulations, 2012 - HELD THAT - Expenses wholly and exclusively incurred by a pharmaceutical company in the normal course of its business towards, viz. gifts, travel facility, conference expenses or similar freebies to medical practitioners or their professional associations would not be hit by the Explanation 1 to Sec. 37 of the Act. Tribunal had concluded that even if the assessee had incurred expenditure on distribution of freebies to doctors and medical practitioners, the same, may though not be in conformity with the Indian Medical Council (Professional Conduct, Etiquette and Ethics) regulations, 2002, however, as the same only regulates the code of conduct of the medical practitioners/doctors, therefore, in the absence of any prohibition on the pharmaceutical companies on incurring of such sale promotion expenses, it cannot be held to have incurred an expenditure for a purpose which is an offence or is prohibited by law. See M/S. ARISTO PHARMACEUTICALS PVT. LTD. VERSUS DCIT-2 (1) (1) (VICE-VERSA) 2020 (1) TMI 777 - ITAT MUMBAI In the case of the present assessee before us, as it is neither a fact nor the case of the revenue that the assessee had incurred expenses for the purpose of personal benefit/enjoyment of the doctors or their spouses, therefore, on a similar footing as in the case of PHL Pharma P. Ltd. ( 2017 (1) TMI 771 - ITAT MUMBAI ), the order passed by the Tribunal in the case of Liva Healthcare Limited ( 2016 (9) TMI 856 - ITAT MUMBAI being distinguishable on facts would not assist the case of the revenue. Thus we are of the considered view that the CIT(A) had erred in upholding the disallowance of the assessee s claim for deduction of sale promotion expenses. Entitled for deduction of cess - HELD THAT - As respectfully following the judgment of Sesa Gold Limited 2020 (3) TMI 347 - BOMBAY HIGH COURT we are principally in agreement with the assessee s claim that Education Cess and the Secondary and Higher Education Cess are not disallowable as a deduction u/s 40(a)(ii) of the Act. However, as the aforementioned claim had been raised by the assessee for the very first time before us, we, therefore, in all fairness restore the matter to the file of the A.O for considering the said claim of the assessee in the backdrop of our observations recorded hereinabove, though, subject to verification of the factual position as had been claimed by the assessee before us. Ground of appeal No. 4 is allowed for statistical purposes in terms of our observations recorded hereinabove.

Summary

Issues Involved:
1. Deduction for Sales Promotion Expenses incurred on doctors prescribing the appellant company’s products.
2. Application of Explanation-1 to Section 37(1) to disallow sales promotion expenses.
3. Consistency in claiming deductions for similar expenses in different years.
4. Deduction of cess paid by the appellant under the Act.

Issue-wise Detailed Analysis:

1. Deduction for Sales Promotion Expenses incurred on doctors prescribing the appellant company’s products:
The assessee claimed a deduction for sales promotion expenses, which included freebies given to doctors. The Assessing Officer (A.O) disallowed this deduction based on CBDT Circular No. 5/2012, which deemed such expenses inadmissible under Section 37(1) as they were considered in violation of the Indian Medical Council (Professional conduct, etiquette, and ethics) regulations, 2002. The CIT(A) upheld this disallowance, stating that the regulations applied to doctors and not pharmaceutical companies. However, the CIT(A) rejected the assessee's claim that the expenses should be allowed as business promotion expenses. The Tribunal, referencing various ITAT decisions, including PHL Pharma Pvt. Ltd., concluded that the Medical Council of India (MCI) regulations apply only to medical practitioners and not to pharmaceutical companies. Therefore, the sales promotion expenses were not in violation of any law applicable to the assessee, and thus, the disallowance was not justified.

2. Application of Explanation-1 to Section 37(1) to disallow sales promotion expenses:
The CIT(A) applied Explanation-1 to Section 37(1) to disallow the sales promotion expenses, stating that the CBDT Circular No. 5/2012 rendered such expenses inadmissible. The Tribunal, however, observed that the circular could not impose an obligation adverse to the assessee without any enabling provision under the Income Tax Act or the Indian Medical Council Regulations. The Tribunal noted that the CBDT circular extended the scope of MCI regulations to pharmaceutical companies without any statutory backing, which was not permissible. Therefore, the Tribunal held that the sales promotion expenses were not hit by Explanation-1 to Section 37(1).

3. Consistency in claiming deductions for similar expenses in different years:
The CIT(A) held that since the assessee had disallowed similar expenses in earlier years, it was not open to the assessee to claim a deduction in the relevant year. The Tribunal disagreed, stating that the assessee is entitled to raise new claims if they are based on facts available on record and do not require new facts to be looked into. The Tribunal cited the judgment of the Hon’ble Supreme Court in National Thermal Power Co. Ltd. Vs. CIT, which allows the Tribunal to entertain new legal issues based on existing facts. Therefore, the Tribunal allowed the assessee's claim for the sales promotion expenses.

4. Deduction of cess paid by the appellant under the Act:
The assessee claimed a deduction for cess paid, which was raised for the first time before the Tribunal. The A.O and CIT(A) did not consider this claim as it was not part of the original return. The Tribunal, referencing the judgment of the Hon’ble High Court of Bombay in Sesa Goa Ltd. vs. JCIT, held that education cess and higher education cess are not disallowable under Section 40(a)(ii) of the Act. The Tribunal restored the matter to the A.O for verification of the factual position and directed the A.O to consider the claim in light of the judgment.

Conclusion:
The Tribunal allowed the appeals filed by the assessee for both A.Y. 2016-17 and A.Y. 2015-16, setting aside the disallowance of sales promotion expenses and directing the A.O to consider the deduction for cess paid, subject to verification of facts. The Tribunal emphasized that MCI regulations do not apply to pharmaceutical companies and that the CBDT circular cannot extend the scope of these regulations without statutory backing.