2019 (5) TMI 27 - AT - Income Tax

Addition u/s 37 - expenses on account of business promotion - Allowable business expenditure - assessee is admittedly engaged in the business of trading and marketing of medicines - Authorities below, rejected the claim of assessee company considering that assessee company has provided freebies to the Medical Practitioners and referred to the provisions contained under Indian Medical Council (Professional Conduct Etiquette and Ethics) Regulations, 2002 and also referred to CBDT Circular No.5/2012, Dated 01.08.2012 - HELD THAT - The said Circular have been considered by the ITAT, Mumbai Bench in the case of DCIT-8(2), Mumbai vs. PHL Pharma (P.) Ltd., 2017 (1) TMI 771 - ITAT MUMBAI in which it was clearly held that said Regulations and Board Circular are not applicable to Pharma and allied Health Care Companies. Therefore, there is no question of application of Section 37(1) of the I.T. Act. Thus whatever expenses incurred by the assessee company are only on account of business promotion expenses which are allowable under the provisions of the I.T. Act. The authorities below have failed to provide as to what offence have been committed by the assessee company on incurring such expenses under any Law. There is no question of applying Explanation to Section 37(1) of the I.T. Act, 1961, against the assessee company. We, accordingly, set aside the Orders of the authorities below and delete the entire addition. - Decided in favour of assessee.

Summary

Issues:
Challenge to addition of ?57,27,412 under section 37 of the Income Tax Act, 1961 for A.Y. 2015-2016 based on disallowance of business promotion expenses.

Detailed Analysis:

Issue 1: Disallowance of Business Promotion Expenses
The appellant, a resident company engaged in trading/marketing of medicines, claimed ?54,27,412 as business promotion expenses. The Assessing Officer (A.O.) disallowed the claim citing violation of Indian Medical Council regulations and CBDT Circular No.5/2012. The appellant defended the expenses as essential for survival in a competitive market and not as freebies to medical practitioners. The A.O. rejected the explanation, invoking Section 37(1) of the IT Act, and disallowed the expenses. The CIT(A) and ITAT Delhi Bench upheld the disallowance, relying on precedents. However, the appellant argued that the expenses were for business promotion, not gifts, citing a Mumbai ITAT case where similar expenses were allowed for a pharma company.

Issue 2: Applicability of Regulations
The A.O. and CIT(A) referenced the Punjab & Haryana High Court judgment and ITAT Delhi Bench decision to support disallowance based on violation of public policy. The appellant contended that these decisions were distinguishable, emphasizing that the expenses were for brand recognition, not prohibited gifts. The ITAT, following the Mumbai ITAT precedent, held that the expenses were allowable business expenditures, not freebies, as they were for brand recognition and not in contravention of Section 37(1) of the IT Act.

Conclusion:
The ITAT allowed the appeal, emphasizing that the expenses were legitimate business promotion costs, not freebies. The ITAT ruled in favor of the appellant, setting aside the lower authorities' orders and deleting the entire addition of ?54,27,412. The decision was based on the nature of the expenses, compliance with regulations applicable to pharma companies, and the distinction from previous judgments cited by the revenue authorities.