2016 (9) TMI 607 - AT - Income Tax

Allowable business expenditure u/s 37 - overseas trips for Doctors and their spouses - expenditure on seminars - 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. Expenses towards free samples distributed to the physicians - Held that - Explanation to Section 37 of the Act and regulation 6.4.1. of The Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002 makes it clear that such free samples granted post introduction of pharmaceutical products in market when its end use stood established will be hit by explanation to Section 37 of the Act and shall not be allowable as deduction . The other decisions relied upon by the assessee as set out in the assessment order are all related to the assessment years prior to insertion of explanation to Section 37 of the Act of 1961 by Finance Act, 1998 w.e.f. 01-04-1962. Thus, keeping in view our detailed discussions and reasoning as set out above , we set aside and restore the issue to the file of the AO for de-novo determination of the issue on merits in accordance with our detailed reasoning and discussions as set out above. Needless to say proper and adequate opportunity of being heard shall be provided to the assessee in accordance with the principles of natural justice in accordance with law and the assessee will be provided sufficient and proper opportunity of being heard by the AO in accordance with principles of natural justice in accordance with law. The assessee shall be allowed by the AO to submit relevant evidences and explanations in support of its contentions. We order accordingly.

Summary

Issues Involved:

1. Disallowance of ?76,54,986/- under Section 37 of the Income Tax Act, 1961 for expenses incurred on overseas travel of doctors.
2. Disallowance of 25% of ?1,26,75,000/- expenses incurred on physicians' samples.

Issue-wise Detailed Analysis:

1. Disallowance of ?76,54,986/- under Section 37 of the Income Tax Act, 1961:

The assessee, engaged in manufacturing drugs and pharmaceuticals, incurred ?76,54,986/- for sponsoring doctors' overseas tours. The Assessing Officer (AO) disallowed this expense, stating that the assessee failed to prove that the expenditure was incurred wholly and exclusively for business purposes. The AO noted that the trips were organized to maintain good relations with doctors to increase sales, which is not a valid business expense under Section 37 of the Act. The CIT(A) upheld this disallowance, citing that the expenses were not directly linked to business sales and were against public policy as per the Indian Medical Council regulations and CBDT circulars.

The Tribunal observed that the assessee admitted the trips were to maintain good relations with doctors for increased prescriptions and sales. Since no evidence of seminars or business-related activities was provided, and the expenses included travel costs for doctors' spouses and entertainment activities, the Tribunal concluded these expenses were not incurred wholly and exclusively for business purposes. The Tribunal upheld the disallowance, emphasizing that such expenses are prohibited by law and against public policy, referencing the Indian Medical Council regulations and CBDT Circular No. 5/2012 dated 01-08-2012.

2. Disallowance of 25% of ?1,26,75,000/- expenses incurred on physicians' samples:

The AO disallowed 25% of the ?1,26,75,000/- claimed by the assessee for distributing free samples to physicians, arguing that the assessee failed to provide a complete list of doctors and confirmations of receipt of the samples. The CIT(A) deleted this disallowance, noting that the assessee maintained detailed records and provided sufficient evidence of the distribution process.

The Tribunal, referencing the decision in the assessee’s own case for the previous year, concluded that free samples distributed to test the efficacy of new products are necessary and should be allowed as business expenses. However, if the samples are given after the product's introduction in the market, they are considered sales promotion and are disallowed under Section 37(1) due to the Indian Medical Council regulations. The Tribunal remanded the issue back to the AO to verify if the samples were distributed to test efficacy or as sales promotion, directing the AO to allow the expenses only if they were for testing efficacy.

Conclusion:

The Tribunal upheld the disallowance of ?76,54,986/- for doctors' overseas travel expenses as they were not incurred wholly and exclusively for business purposes and were against public policy. For the disallowance of 25% of ?1,26,75,000/- on physicians' samples, the Tribunal remanded the issue back to the AO for verification, allowing the expenses only if they were for testing the efficacy of new products.