2016 (9) TMI 856 - AT - Income Tax

Expenditure allowable u/s 37 - expenses on Doctor overseas tours - Held that - Overseas trips for Doctors and their spouses were organized by the assessee whereby no details of the contents of seminar, if any conducted by the assessee overseas has been brought on record and also even the spouses accompanied the Doctors to the overseas trip which included cruise visit to island, gala dinners, cocktail, gala entertainment etc. rather than being directed towards seminar for product information dissemination or directed towards knowledge enhancement or knowledge sharing oriented as no details of seminar and its course content is brought on record rather the trip is directed towards leisure and entertainment of Doctors and their spouses which in our view appears to be clearly a distinguishable feature in this year enabling us to take a divergent view and the expenses incurred by the assessee cannot be allowed as business expenditure u/s 37 of the Act as it is clearly hit by explanation to Section 37 of the Act being against public policy as unethical prohibited by law. Even otherwise, these expenses cannot be considered to be incurred wholly and exclusive for the purpose of the business as the same were incurred to create good relations with the doctors in lieu of expected favours from doctors for recommending to patients the pharmaceutical products dealt within by the company to generate more and more business and profits for the assessee company. For claiming the expenses u/s 37 of the Act which is a residuary section, it is essential that the expenses are not covered under clauses of Section 30 to 36 of the Act of 1961 and are incurred wholly and exclusive for the purposes of business and it is not sufficient that it has some connection with the business of the assessee. No details of the seminars conducted abroad are brought on record as also spouses of the Doctors also travelled overseas along with Doctors and the expenses of the spouse on air ticket as well stay abroad are charged as an business expenditure u/s 37 of the Act which cannot be called as being incurred wholly and exclusively for the purposes of business of the assessee. - Decided against assessee

Summary

Issues Involved:
1. Disallowance of expenditure under Section 37 of the Income Tax Act, 1961.
2. Ad-hoc disallowance of expenses incurred on physician samples.

Issue 1: Disallowance of Expenditure under Section 37 of the Income Tax Act, 1961

Detailed Analysis:

The assessee company, engaged in the manufacturing of drugs and pharmaceuticals, incurred ?76,54,986/- for sponsoring doctors' overseas tours. The assessee claimed these expenses under Section 37 of the Income Tax Act, 1961, asserting they were incurred wholly and exclusively for business purposes. The Assessing Officer (AO) disallowed the claim, stating that the assessee failed to provide evidence that the expenses were incurred for business purposes, such as conducting seminars during these trips. The AO concluded that the trips were organized to maintain good relations with doctors to influence them to prescribe the assessee's medicines, which is not allowable under Section 37.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, referencing the Indian Medical Council's Circular dated 10-12-2009 and the CBDT Circular dated 01-08-2012, which prohibit such expenses. The CIT(A) noted that these circulars formalized principles already existing under Section 37(1) since 1998. The assessee's appeal to the Tribunal cited a previous favorable decision for the assessment year 2008-09, but the Tribunal upheld the CIT(A)'s decision, emphasizing that the expenses were prohibited by law and thus not allowable under Section 37.

The Tribunal referenced Regulation 6.4.1 of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, which prohibits physicians from receiving any form of gratuity for referring patients. The Tribunal affirmed that the expenses were not incurred wholly and exclusively for business purposes and were against public policy, thus disallowing the claim under Section 37.

Issue 2: Ad-hoc Disallowance of Expenses Incurred on Physician Samples

Detailed Analysis:

The AO disallowed 25% of the expenses amounting to ?1,26,75,000/- incurred on physician samples, citing the assessee's failure to substantiate the claim with confirmations from doctors. The CIT(A) reversed this disallowance, stating that the distribution of free samples was a legitimate business promotion activity, supported by detailed records and confirmations from some doctors.

The Revenue appealed, arguing that the assessee had not provided sufficient evidence to prove the expenses were wholly and exclusively for business purposes. The Tribunal reviewed the case and referenced its previous decision in the assessee's favor for the assessment year 2008-09. The Tribunal agreed with the CIT(A) that the expenses were incurred for business promotion and were supported by adequate documentation, thus dismissing the Revenue's appeal.

However, the Tribunal noted that if the free samples were distributed after the products' introduction in the market, they would be considered sales promotion, which could be prohibited under Regulation 6.4.1 of the Indian Medical Council Regulations, 2002. The Tribunal remanded the issue back to the AO for verification, instructing the AO to determine whether the samples were distributed to test the efficacy of new products or as a sales promotion measure for established products.

Conclusion:

The Tribunal dismissed the assessee's appeal regarding the disallowance of expenses on doctors' overseas tours, upholding the CIT(A)'s decision based on the prohibition under the Indian Medical Council Regulations and public policy considerations. The Tribunal allowed the Revenue's appeal for statistical purposes, remanding the issue of ad-hoc disallowance of physician sample expenses back to the AO for further verification.