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2021 (4) TMI 621 - AT - Income TaxDisallowing on account of expenses incurred in giving free samples of veterinary medicines - AO observed on the basis of details furnished by the assessee that these expenses are mostly incurred to give free samples to veterinary doctors and these veterinary doctors are further supposed to distribute the same to their patients so that the business of the assessee flourishes - HELD THAT - The sample distributed for marketing these products by the assessee is not in violation of any guidelines issued by the Veterinary Council of India or Medical Council of India. Besides the said regulations are applicable to the doctors and their associate professionals and not to the company engaged in manufacturing of these veterinary products. In fact these expenses are incurred wholly and exclusively for the purpose of increasing the sale of the company by making these samples available to the end user and also studying the effect of those products on animal and birds. Moreover the case of the assessee is supported by the decisions as referred and relied before the ld CIT(A) by the assessee. In the case of Max Hospital Vs MCI 2014 (1) TMI 1829 - DELHI HIGH COURT has held that regulations issued by MCI are applicable to medical professional and not to the pharmaceutical companies. Hon ble Apex Court in the case of Eskayel Pharmaceutical's India Ltd 2000 (7) TMI 1 - SUPREME COURT has held that physician samples are must in order to ascertain the efficiency and efficacy of the medicine and introduce the same in the market for circulation. We are in agreement with the conclusion drawn by the Ld. CIT(A) on this issue. Accordingly, we uphold the order of Ld. CIT(A) by dismissing the appeal of the revenue.
Issues Involved:
1. Deletion of addition of ? 6,10,76,573/- by CIT(A) as made by the AO by disallowing the claim of the assessee on account of expenses incurred in giving free samples of veterinary medicines. Issue-Wise Detailed Analysis: 1. Deletion of Addition of ? 6,10,76,573/- by CIT(A): The Revenue appealed against the CIT(A)'s order dated 28.03.2019, which pertained to the assessment year 2013-14, challenging the deletion of an addition of ? 6,10,76,573/-. This amount was disallowed by the Assessing Officer (AO) as the claim of the assessee for expenses incurred in distributing free samples of veterinary medicines. Facts and AO's Observations: The assessee, engaged in the business of manufacturing, trading, and exporting animal health care products, filed a return of income declaring ? 96,15,700/-, later revised to ? 96,02,250/-. During the assessment proceedings, the AO noted that the assessee charged ? 6,10,76,573/- as sample distribution cost under "Marketing Development Cost" in the profit & loss account. The AO observed that these expenses were primarily for distributing free samples to veterinary doctors, who would then distribute them to their patients. The AO issued a show cause notice to the assessee, referring to a notification by the Veterinary Council of India and Circular No. 5/2012 issued by the CBDT, which prohibits pharmaceutical companies from providing incentives to doctors. The AO concluded that these expenses were not allowable under Section 37(1) of the Act, as they were prohibited by the Medical Council of India Act, and added the amount to the income of the assessee. CIT(A)'s Decision: Upon appeal, the CIT(A) allowed the assessee's appeal, stating that the distribution of free samples was a necessary activity to promote the product and ascertain the efficacy of the medicine. The CIT(A) noted that the samples were distributed directly to farmers and end customers without the involvement of veterinary doctors, and thus did not constitute freebies or gifts to doctors. The CIT(A) emphasized that the regulations and circulars cited by the AO were applicable to medical professionals, not to the companies manufacturing and marketing these products. The CIT(A) relied on several case laws, including the judgment of the Delhi High Court in Max Hospital vs. MCI and the Supreme Court decision in Eskayef Pharmaceuticals (India) Ltd. vs. CIT, which supported the assessee's claim. Tribunal's Analysis: The Tribunal reviewed the submissions of both parties and the material on record. It confirmed that the assessee was engaged in the manufacturing and marketing of veterinary products and had distributed free samples worth ? 6,10,76,573/- to promote its business. The Tribunal agreed with the CIT(A) that these samples were distributed to end users and stockists, overseen by medical representatives, without any involvement of veterinary doctors. The Tribunal upheld that these expenses were incurred wholly and exclusively for the purpose of increasing the company's sales and were not in violation of any guidelines issued by the Veterinary Council of India or Medical Council of India. The Tribunal also noted that the cited regulations and circulars were applicable to medical professionals, not to the assessee company. Conclusion: The Tribunal upheld the CIT(A)'s order, concluding that the sample distribution expenses were necessary for promoting the product and introducing it to the market. The Tribunal dismissed the Revenue's appeal, affirming that the expenses were allowable under Section 37(1) of the Act. Result: The appeal of the Revenue was dismissed. The order was pronounced in the open court on 01.02.2021.
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