2020 (1) TMI 777 - AT - Income Tax

Disallowance of expenditure on sales promotional articles - allowable business expenditure us 37(1) - HELD THAT - Entire expenditure incurred by assessee on sales promotional article would be an allowable deduction. The grounds raised by the assessee, in this regard stand allowed whereas the grounds raised by revenue stand dismissed. See assessee's own case 2018 (7) TMI 1883 - ITAT MUMBAI Disallowance of medial conference expenditure - as per assessee this expenditure was never disallowed in earlier years but the same has been disallowed for the first time in this year - HELD THAT - Genuineness of the expenditure was never under doubt either in earlier assessment years or in the year under consideration. The reasoning applied by lower authorities to disallow the same stem from same reasoning logic as applied to disallow expenditure on sales promotional articles. This being the case, our adjudication as well as reliance on orders of Tribunal in assessee s own case for earlier years as well as reliance on the decision of this Tribunal in DCIT V/s PHL Pharma Limited ( 2017 (1) TMI 771 - ITAT MUMBAI (which has been co-authored by one of us) would equally apply to this issue also - we direct for deletion of disallowance of medical conference expenditure as sustained by learned first appellate authority. Resultantly, the grounds raised by the assessee stands allowed.

Issues Involved:
1. Disallowance of expenditure on 'Sales Promotion Articles'
2. Limitation on the cost of gift articles
3. Disallowance of expenditure on 'Medical Conference Expense'
4. Applicability of regulations issued by the Medical Council of India (MCI) as 'Delegated Legislation'
5. Interpretation of Explanation to Section 37(1) of the Income Tax Act
6. Validity and applicability of CBDT Circular No. 5/2012

Detailed Analysis:

1. Disallowance of expenditure on 'Sales Promotion Articles':
The assessee contested the disallowance of ?1,04,96,044/- incurred on sales promotion articles. The expenditure represented the cost of gift articles distributed among doctors, stockists, and chemists. The CIT(A) sustained the disallowance for articles costing more than ?750/- each, while allowing expenditure on articles costing less than ?750/- per article.

2. Limitation on the cost of gift articles:
The CIT(A) fixed a limit of ?750/- per article for gift articles, sustaining the disallowance for articles exceeding this cost. The Tribunal noted that the CIT(A) followed the precedent set in earlier years (AYs 2011-12 & 2012-13), where similar disallowances were made and partially allowed by the appellate authority.

3. Disallowance of expenditure on 'Medical Conference Expense':
The assessee incurred ?23,63,65,631/- on medical conferences, which included registration fees, travel, stay, food, and other related expenses for doctors. The AO disallowed the expenditure, invoking the MCI regulations and Explanation to Section 37(1), arguing that the expenses were incurred in violation of MCI guidelines.

4. Applicability of regulations issued by the Medical Council of India (MCI) as 'Delegated Legislation':
The CIT(A) held that MCI regulations issued under Section 33 of the Indian Medical Council Act, 1956, constituted 'delegated legislation' and were thus binding. The Tribunal, however, observed that MCI regulations are applicable only to medical practitioners and not to pharmaceutical companies. The Tribunal cited the Delhi High Court's decision in Max Hospital, which stated that MCI's jurisdiction is limited to registered medical practitioners.

5. Interpretation of Explanation to Section 37(1) of the Income Tax Act:
The Tribunal emphasized that the Explanation to Section 37(1) prohibits deduction of any expenditure incurred for purposes that are an offence or prohibited by law. The Tribunal concluded that since MCI regulations do not apply to pharmaceutical companies, the expenditure on sales promotion and medical conferences by the assessee does not fall under the purview of this Explanation.

6. Validity and applicability of CBDT Circular No. 5/2012:
The Tribunal scrutinized CBDT Circular No. 5/2012, which disallowed expenses incurred on providing freebies to medical practitioners, citing MCI regulations. The Tribunal held that the CBDT had overstepped its authority by extending the scope of MCI regulations to pharmaceutical companies, which was not supported by any enabling provision under the Income Tax Act or the Indian Medical Council Regulations. The Tribunal reiterated that the circular could not override statutory provisions or impose new burdens retrospectively.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the expenditure on sales promotion articles and medical conferences was an allowable deduction. The Tribunal dismissed the revenue's appeal, which sought to restore the AO's disallowance based on CBDT Circular No. 5/2012. The Tribunal's decision was consistent with its earlier rulings in the assessee's own case and similar cases, affirming that MCI regulations apply only to medical practitioners and not to pharmaceutical companies.

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