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TMI Blog2016 (9) TMI 856X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 - I.T.A. No. 904/Mum/2013, I.T.A. No. 945/Mum/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought before the AO anything on record to show that whether any seminar was conducted during these trips. Thus, as per AO that the assessee has not proved that the expenditure were incurred wholly and exclusively for the purposes of business. It was submitted by the assessee that by conducting such trip/tour programs , it is creating certain amount of relationship with the Doctors who may buy or prescribe medicines. Thus, it was observed by the AO from reply of the assessee that it is trying to keep the Doctors in good humour who may then buy or prescribe medicines . Thus, these trips are organized to lure the doctors to buy/prescribe the medicines and to allure the Doctor the assessee company is trying to sponsor their travel program. Thus, the Doctors have undertaken the trip which is merely sponsored by the assessee and this does not substantiate the fact that it was incurred wholly and exclusively for the purposes of the business of the assessee. The assessee submitted before the AO that these doctors nor the tour operators are related to the assessee. Thus, it is was observed by the AO that neither the doctor, nor the tour operator nor the expenses are related to the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .e.f. 01-04-1962 by Finance Act,1998. Thus, learned CIT(A) confirmed/sustained the additions made by the learned AO vide appellate order dated 08-11-2012 passed by learned CIT(A). 6. Aggrieved by the appellate order dated 08-11-2012 passed by learned CIT(A), the assessee filed second filed second appeal with the Tribunal. The learned counsel for the assessee submitted at the outset that the issue is covered in favour of the assessee by the decision of the Tribunal in assessee s own case in ITA No 388/Mum/2012 for the assessment order dated 2008-09 vide Tribunal order dated 31-08-2015. It was submitted that the said expenses be allowed as expenses u/s 37(1) of the Act. It was submitted that the assessee has incurred expenses on tours of the Doctors to Istanbul and Hongkong. The details of the expenses are placed in paper book/page 18-37 which also included few photographs of the program abroad. 7. The learned DR relied upon the orders of learned CIT(A). 8. We have heard the rival parties and considered the material available on record. We have observed that the assessee has incurred expenditure of ₹ 76,54,986/- towards Doctors foreign tours to Istanbul and Hongkong. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed in computing the income chargeable under the head Profits and gains of business or profession . [Explanation.-For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.] (2) [* * *] [ (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.] The purpose for incorporation of this Explanation had been explained by the Central Board of Direct Taxes in Circular No. 772, dated December 23, 1998 ([1999] 235 ITR (St.) 35, 53) as under : 20. Disallowance of illegal expenses. 20.1 Section 37 of the Income-tax Act is amended to provide that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purposes of business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b) Travel facilities: A medical practitioner shall not accept any travel facility inside the country or outside, including rail, air, ship , cruise tickets, paid vacations etc. from any pharmaceutical or allied healthcare industry or their representatives for self and family members for vacation or for attending conferences, seminars, workshops, CME programme etc as a delegate. c) Hospitality: A medical practitioner shall not accept individually any hospitality like hotel accommodation for self and family members under any pretext. d) Cash or monetary grants: A medical practitioner shall not receive any cash or monetary grants from any pharmaceutical and allied healthcare industry for individual purpose in individual capacity under any pretext. Funding for medical research, study etc. can only be received through approved institutions by modalities laid down by law / rules / guidelines adopted by such approved institutions, in a transparent manner. It shall always be fully disclosed. e) Medical Research: A medical practitioner may carry out, participate in, work in research projects funded by pharmaceutical and allied healthcare industries. A medical practition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es or published in appropriate scientific journals in a proper way . The title of Section 6.8 shall be further amended by deleting the words and professional association of doctors in terms of Notification published on 01.02.2016 in Gazette of India as under:- 6.8 Code of conduct for doctors in their relationship with pharmaceutical and allied health sector industry The Section 6.8.1(b) shall be substituted in terms of Notification published on 01.02.2016 in Gazette of India, as under:- (b) Travel Facilities : A medical practitioner shall not accept any travel Facility inside the country or outside, including rail, road, air, ship, cruise tickets, paid vacation, etc. from any pharmaceutical or allied healthcare industry or their representatives for self and family members for vacation or for attending conferences, seminars, workshops, CME Programme, etc. as a delegate. The CBDT brought a circular no. 5/2012 dated 01-08-2012 as under: SECTION 37(1) OF THE INCOME TAX ACT, 1961 - BUSINESS EXPENDITURE - ALLOWABILITY OF - INADMISSIBILITY OF EXPENSES INCURRED IN PROVIDING FREEBEES TO MEDICAL PRACTITIONER BY PHARMACEUTICAL AND ALLIED HEALTH SECTOR INDUSTR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is clarificatory and clarifies that any expenses incurred in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37(1) of the Income Tax Act being an expense prohibited by the law. The law as stood during relevant previous year as per provisions of Section 37(1) of the Act read with explanation inserted by Finance Act , 1998 w.e.f. 01-04-1962 clearly stipulates that if an expenditure is incurred for any purpose which is an offence or which is prohibited under law shall not be allowed as deduction due to restriction contained u/s 37 of the Act read with explanation. The said circular dated 01-08-2012 issued by the CBDT was subject to challenge in writ petition filed in Hon ble Himachal Pradesh High Court in writ petition no. 10793 of 2012-J in the case of Confederation of Pharmaceutical Industry v. CBDT where in validity of the said CBDT was challenged , the Hon ble Himachal Pradesh High Court held that the said circular is valid and the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 governing professional ethics of Doctors issued is salutary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng any gift, travel facility, hospitality, cash or monetary grant from any pharmaceutical and allied health sector Industries. This regulation is a very salutary regulation which is in the interest of the patients and the public. This Court is not oblivious to the increasing complaints that the medical practitioners do not prescribe generic medicines and prescribe branded medicines only in lieu of the gifts and other freebies granted to them by some particular pharmaceutical industries. Once this has been prohibited by the Medical Council under the powers vested in it, Section 37(1) of the Income-tax Act comes into play, which reads as follows:- 37(1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . (Explanation - For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egard to section 37(1) of the Act was never raised though it was only under the said provision. The argument, thus, does not carry any weight. 11. Adverting to the second and third arguments, the payment of commission to the private doctors for having referred the business for diagnosis to its centre requires examination with reference to section 37 of the Act. 12. Section 37 is a residuary provision. An assessee is entitled to deduction of all expenditure which is wholly and exclusively laid out or expended for the purposes of the business which has not been expressly covered by any other specific provision of the Act. 13. In order to be eligible for an allowance under this residuary provision, the following conditions are required to be fulfilled : (i) The expenditure must not be governed by the provisions of sections 30 to 36. (ii) The expenditure must have been laid out wholly and exclusively for the purposes of the business of the assessee. (iii) The expenditure must not be personal in nature. (iv) The expenditure must not be capital in nature. 14. The Explanation to sub-section (1) was inserted by the Finance (No. 2) Act, 1998 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, Etiquette and Ethics) Regulations, 2002, which describes unethical acts under Chapter 6 of the said regulations. Regulation 6.4 provides that no physician shall give, solicit, receive, or offer to give, solicit or receive, any gift gratuity, commission or bonus in consideration of a return for referring any patient for medical treatment. Regulation 6.4 reads thus : 6.4.1 A physician shall not give, solicit, or receive nor shall he offer to give solicit or receive, any gift, gratuity, commission or bonus in consideration of or return for the referring, recommending or procuring of any patient for medical, surgical or other treatment. A physician shall not directly or indirectly, participate in or be a party to act of division, transference, assignment, subordination, rebating, splitting or refunding of any fee for medical, surgical or other treatment. 6.4.2 The provisions of para. 6.4.1 shall apply with equal force to the referring, recommending or procuring by a physician or any person, specimen or material for diagnostic purposes or other study/ work. Nothing in this section, however, shall prohibit payment of salaries by a qualified physician to other duly qualif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir business came up for consideration before the Madhya Pradesh High Court in Gwalior Road Lines v. CIT [1998] 234 ITR 230 wherein it was held that after insertion of the Explanation to section 37(1) by the Finance Act, 1998, with effect from April 1, 1962, the assessee could not claim such payment as expended for commercial exigency and, therefore, the same was not an allowable deduction. 23. The Allahabad High Court in Pt. Vishwanath Sharma's case (supra) while considering the issue relating to commission paid to Government doctors for prescribing the assessee's medicines to patients held it to be contravening public policy and an inadmissible expenditure. However, no distinction can be made in respect of Government doctors and private doctors as has been canvassed by the learned counsel for the assessee. 24. Thus, the commission paid to private doctors for referring patients for diagnosis could not be allowed as a business expenditure. The amount which can be allowed as business expenditure has to be legitimate and not unlawful and against public policy. 25. Consequently, the order passed by the Commissioner of Income-tax (Appeals) and the Tribunal wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... public policy , the said bar always existed in the statute by virtue of the existence of explanation to Section 37 of the Act which was inserted by Finance Act,1998 w.e.f. 01-04- 1962 and in our considered view based on factual matrix of the case as emerging from the records, the expenses of ₹ 76,54,986/- incurred by the assessee company are directly hit by explanation to Section 37 of the Act . There is one more fact which has come to our notice on perusal of the invoices raised by K.V.Travels Private Limited no. I0803192 dated 24-11- 2008 and invoice no. M0802580 dated 24-11-2008 which pertained to air tickets and hotel arrangements of Doctors for Istanbul Trip(pb/page18-25) that spouses of the Doctors also accompanied the Doctors to overseas trip to Istanbul and these expenses claimed by the assessee as revenue/business expenditure included the costs incurred for travel overseas to Istanbul of spouses of Doctors also , and also the arrangements included cruise travels to island, gala dinners, cocktails, gala entertainment etc. which clearly reflect that these overseas trips are merely to entertain doctors abroad and lure doctors to solicit business for the assessee by unet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 13(3)(a) whereby it is defined as under: Article 13(3) In this Article, unless the context otherwise requires, - (a) law includes any ordinance, order, bye-law, rule, regulation, notification, custom or usage having in the territory of India the force of law. Thus, the Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002 has force of law as it was promulgated in exercise of the powers conferred under section 20A read with section 33(m) of the Indian Medical Council Act, 1956 (102 of 1956), the Medical Council of India, with the previous approval of the Central Government, made the regulations relating to the Professional Conduct, Etiquette and Ethics for registered medical practitioners, namely the Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002 and hence these regulations shall be covered under the definition of law and hence is covered under explanation to Section 37 of the Act. The assessee has contended that in the immediately preceding assessment year the Tribunal has decided the issue in favour of the assessee in ITA No. 388/Mum/2012 for assessment year 2008-09. In our conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. We keeping in view our foregoing detailed discussions and reasoning as set out above in preceding para s uphold the order of the learned CIT(A) and dismiss the appeal of the assessee on this ground for the detailed reasons and discussions as indicated above. We order accordingly. 9. This disposes of the appeal of the assessee in ITA No.945/Mum/2013 for assessment year 2009-10 which is dismissed as indicated above. 10. In the Revenue Appeal No. ITA No. 904/Mum/2013 for the assessment year 2009-10 filed with the Tribunal , the Revenue has raised following grounds of appeal in the memo of appeal filed with the Tribunal as under: 1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the ad-hoc disallowance of 25% of ₹ 1,26,75,000/- i.e. ₹ 31,68,750/- expenses incurred on physicians sample as claimed . 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of 25% of expenses incurred on physicians samples ignoring the facts that the assessee had not been able to substantiate its claim for the allowability of the expenses as business expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d staff for their necessary distribution to doctors . It was submitted that goods purchased for distribution to Doctors as samples are manufactured as Physician samples not for sale and the same is also marked in suppliers invoices as Physician Samples only. It was submitted by the assessee that the expenditure incurred on distribution of free samples is purely on account of advertisement and business promotion expenses incurred during the course of the business only. The assessee relied upon the following decisions : 1. Smithkline and French (India) Limited v. CIT (1992) 193 ITR 582(Kar.) 2. CIT v. J J Dechane Laboratories Private Limited (1996) 222 ITR 11(AP) 3. Eskayef Limited v. CIT (2000) 245 ITR 116(SC) 4. CIT v. Wochardt Private Limited (2001) 250 ITR 118(Bom.) 5. Ethnor Limited v. CIT (2003) 260 ITR 401(Bom.) The AO rejected the contentions of the assessee and the AO relied upon the assessment order of the earlier years wherein the then AO had made detailed enquiry and analysis of the free samples distributed by the assessee to physician. It was observed by the AO that the assessee is unable to provide the complete list of doctors and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avour as under: First, we shall take up the Revenue s appeal in ITA No. 847/Mum/2012 for A.Y. 2008-09. 3. The sole issue taken by the Revenue in its appeal is regarding the deletion of the disallowance of 70% of expenses incurred by the assessee on physician s samples. The assessee is engaged in the business of manufacturing of drugs and pharmaceuticals. During the course of assessment proceedings, the A.O. noticed that the assessee had claimed expenses in relation to free samples distributed to physicians. The A.O., however, observed that the assessee could not prove that the amount expensed was exclusively for business purpose of the assessee. He observed that the assessee could not provide the list of Doctors and the confirmations from them regarding the receipt of physician s sample. He, therefore, disallowed 70% of the total expenditure on this account and added the same to the total income of the assessee. In appeal, the ld. CIT(A), however, observed that the assessee had been engaged in the business of manufacture and marketing of pharmaceutical formulations, mainly skin care products. In the course of its business, it distributed physician s sample to various doc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the business expediency of the distribution of the free samples. The ld. CIT(A) further observed that the distribution of free samples were directly related to the business promotion activity of the assessee. The assessee had duly proved the genuineness of the expenses, proper recording in its books of account and the relationship of the expense with the business of the assessee. He, therefore, deleted the additions so made by the A.O. 4. We have gone through the well reasoned order passed by the ld. CIT(A). It is a known fact that the free sample of medicines supplied to the doctors is done for the promotion of the product of the company. Even when a new product is launched, the doctors are given necessary inputs regarding the use and effects etc. of the product and which also contributes imparting knowledge to the doctors about the new medicine/product coming into the relevant for practice of their profession. The genuineness of the transactions has not been doubted by the A.O. We do not find any infirmity in the well reasoned order passed by the ld. CIT(A) holding that the expenses were incurred for the business promotion activity of the assessee. We therefore do not fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an offence or prohibited under the law , the same shall not be allowable as deduction under the residuary provision of Section 37 of the Act. The mandate of Section 37(1) of the Act being residuary clause covers expenses which are not covered by clauses of Section 30 to 36 of the Act of 1961 and that the expenses should be incurred wholly and exclusively for the purposes of the business of the assessee , the said expenditure should not be capital expenditure nor the same should be personal in nature. Further explanation has been inserted in Section 37 of the Act by Finance Act,1998 w.e.f. 01-04-1962 whereby if the expenses are incurred for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purposes of business or profession and no deduction on account of business expenditure shall be allowed w.r.t. such expenditure. Section 37 of the Act as applicable for the assessment year 2009-10 is reproduced hereunder: General. 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reproduced hereunder: 6.4 Rebates and Commission: 6.4.1 A physician shall not give, solicit, or receive nor shall he offer to give solicit or receive, any gift, gratuity, commission or bonus in consideration of or return for the referring, recommending or procuring of any patient for medical, surgical or other treatment. A physician shall not directly or indirectly, participate in or be a party to act of division, transference, assignment, subordination, rebating, splitting or refunding of any fee for medical, surgical or other treatment. Thus, in our considered view, if the free samples of pharmaceutical products are distributed to physicians / doctors at the initial stage of introduction to test the efficacy of the products , the same are incurred wholly and exclusively for the purposes of the business of the assessee , while if the free samples of pharmaceutical products are distributed to doctors/physicians after the products are introduced in the market and its uses are established , giving of free samples will be a measure of sales promotion which will be hit by regulation 6.4.1 of The Indian Medical Council (Professional conduct, Etiquette and Ethics) Regula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose is achieved. In such cases giving physicians' samples for a reasonable period is essential to the business of manufacture and sales of the medicine. But if a particular medicine has been introduced into the market and its uses are established, giving of free samples could only be as a measure of sales promotion and advertisement and would, thus, be hit by sub-section (3A). As in this case, there is a finding of the Commissioner (Appeals) and confirmed by the Tribunal that the expenditure was incurred to test the efficacy of the drug, the expenditure would be within the ambit of bare minimum to carry on the business. For these reasons, it has to be held that the expenditure on physicians' samples distributed to doctors is outside the scope of sub-section (3A) of section 37 of the Act. Therefore, the appellate authority, as well as the Tribunal are right in directing the exclusion of the expenditure on free samples supplied to the doctors in working out disallowance under section 37(3A) of the Act. (p. 15) The above decision was rendered in context of Section 37(3A) of the Act and the assessment year involved therein are prior to insertion of explanation to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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