2021 (11) TMI 701 - AT - Income Tax

Disallowance by relying on CBDT Circular No. 5/2012 r.w explanation 1 to Sec. 37(1) - scope of regulations issued by Medical Counsel of India - claim of marketing promotional activity under the selling and distribution expenses u/sec. 37(1) - HELD THAT - We find that the facts of the present case are similar and identical to the above decision in respect of sales promotional expenses claimed in the profit and loss account. The Hon ble Tribunal in the ARISTO PHARMACEUTICALS P LTD. 2019 (7) TMI 862 - ITAT MUMBAI has considered the provisions of law, facts and circumstances, CBDT circular, MCI guidelines and granted the relief to the assessee. Accordingly, we follow the judicial precedence and set aside the order of the CIT(A) to the extent of disallowance of sale promotion expenses incurred by way of gifts, freebies, travel allowance and monetary grants and direct the Assessing Officer to delete the addition and allow the ground of the appeal of assessee.

Issues Involved:
1. Merger of Order u/s 143(3) into order u/s 147.
2. Individual issues on material already subject to order u/s 143(3).
3. Claim in respect of profits derived from manufacturing activity carried out by outside parties on a job work basis.
4. Disallowance of ?8,68,24,374/- by relying on CBDT Circular No. 5/2012 r.w. Explanation 1 to Sec. 37(1).
5. Short Credit of taxes paid.

Issue-wise Detailed Analysis:

1. Merger of Order u/s 143(3) into order u/s 147:
The CIT(A) held that the AO has the power to assess or reassess income that has escaped assessment involving matters which are the subject matters of proceedings referred to in the third proviso to Sec. 147 if any fresh materials have emerged in the course of the proceedings initiated u/s 147. However, this ground of appeal was not pressed by the assessee and thus was treated as withdrawn and dismissed.

2. Individual issues on material already subject to order u/s 143(3):
The CIT(A) erred in dismissing the individual issues on merits which were subject matter of proceedings referred to in the third proviso to Sec. 147. This ground of appeal was also not pressed by the assessee and thus was treated as withdrawn and dismissed.

3. Claim in respect of profits derived from manufacturing activity carried out by outside parties on a job work basis:
The CIT(A) erred in dismissing the ground of appeal despite concluding that the AO has not brought any fresh material in relation to LLM issue and hence the AO is legally barred from making addition in the reassessment proceedings initiated u/s 147 of the Act. This ground of appeal was not pressed by the assessee and thus was treated as withdrawn and dismissed.

4. Disallowance of ?8,68,24,374/- by relying on CBDT Circular No. 5/2012 r.w. Explanation 1 to Sec. 37(1):
The CIT(A) upheld the disallowance of ?8,68,24,374/- by relying on CBDT Circular No. 5/2012 r.w. Explanation 1 to Sec. 37(1) of the Act towards amounts incurred by the company for business expenditure on Marketing & Promotional Activity. The CIT(A) also upheld that the regulations issued by Medical Council of India (MCI) are applicable to Pharmaceutical Companies apart from Doctors / Medical Practitioners. The CIT(A) erred in upholding the disallowance without appreciating that the CBDT circular No. 5 of 2012 dated 01.08.2012 cannot be applied retrospectively for the year under consideration. The CIT(A) also erred in stating that the appellant has not been able to produce relevant documentary evidence to substantiate that the expenditure has been incurred wholly and exclusively for the purpose of business without allowing an opportunity to the appellant to produce the related evidence.

The Hon’ble Tribunal observed that identical issues have been decided by the Coordinate Bench in favor of the assessee in the case of M/s. Aristo Pharmaceuticals Pvt Ltd Vs. ACIT. The Tribunal concluded that the MCI regulations are applicable to medical practitioners/doctors and not to pharmaceutical companies. The CBDT Circular No. 5/2012, dated 01.08.2012, which enlarged the scope of MCI regulations to pharmaceutical companies, cannot be applied retrospectively. Therefore, the disallowance of sales promotion expenses incurred by way of gifts, freebies, travel allowance, and monetary grants was deleted.

5. Short Credit of taxes paid:
The CIT(A) erred in law and on facts in concluding the Ground as dismissed even though he has given direction to AO to allow appropriate credit for taxes paid after verification. The Tribunal directed the Assessing Officer to examine and verify the authenticity of the taxes paid and allow the credit.

Conclusion:
The Tribunal partly allowed the appeal filed by the assessee, setting aside the order of the CIT(A) to the extent of disallowance of sales promotion expenses and directing the AO to delete the addition. The Tribunal also directed the AO to verify and allow the credit for taxes paid.

Order Pronounced:
The order was pronounced in the open court on 20.09.2021.

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