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TMI Blog2019 (7) TMI 862X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Explanation to Sec. 37(1) We are of the considered view that there is no error in the findings recorded by the Ld.CIT(A) insofar as deletion of addition made by the AO towards sales promotion expenses and hence, we are inclined to uphold the findings of the CIT(A) and dismiss the appeal filed by the revenue. - Decided in favour of assessee. - ITA No. 5807/Mum/2017 And ITA No. 6223/Mum/2017 - - - Dated:- 28-6-2019 - Shri Mahavir Singh (JUDICIAL MEMBER) And Shri G Manjunatha (ACCOUNTANT MEMBER) For The Assessee : Shri Ajay Kumar Rastogi For The Revenue : Shri Anadi Varma Shri Ajey Malik ORDER Per G Manjunatha, AM : These cross appeals filed by the assessee and the revenue are directed against the order of the CIT(A)-4, Mumbai dated 14-07-2017 for the assessment year 2013-14. 2. The grounds raised by the respective parties are as under:- ITA No.5807/Mum/2017 1. For that the Ld. CIT(A) has erred in sustaining disallowance of sales promotion expense amounting to ₹ 1,42,97,051/-. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it the details of the same and allowability of the same u/s 37(1) of the Income-tax Act, 1961. In response, the assessee, vide letter dated 15-10-2015 submitted full particulars showing the party from whom said purchases were made, the particulars of gift articles purchased, details of the products which is printed / embossed on the articles so purchased, quantity, etc. The assessee further stated that the said gift articles are distributed amongst doctors, stockists and chemists through their medical representatives and also used during various medical camps conducted by the assessee. The AO, after considering relevant submissions of the assessee and also by taking note of the circular issued by the Medical Council of India (MCI, in short) under the Medical Council (Professional Conducts, Etiquettes and Ethics) Regulation Act, 2002 held that expenditure incurred under the head sales promotional article expenses is not allowable as deduction u/s 37(1) because such expenditure has been incurred in violation of prescribed law. Therefore, the same cannot be allowed as deduction. 4. Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on articles costing less than ₹ 750/-each which amounts to ₹ 14,25,13.380/-. The details of such expenditure has been given by the appellant at Pg. No.75 to 96 of the paper book. Further details of expenditure which exceeds ₹ 750/- has been given at Pg. No 97-98 of the paper book. It is also pertinent to mention that at Pg No 105, appellant has given working of Sales Promotion Expenses with regard to overall sales of 3 years i.e. A.Y.2011-12 to 2013-14. It can be seen that Sales Promotion Expenses: is only 1.22% of total sales of ₹ 1,27,982.81 (lakhs). Thus the claim of the appellant about genuineness, of expenditure cannot be ignored. Thus in the facts and circumstances of the case, as pointed out earlier the disallowance of expenditure is restricted to ₹ 1,42,97,051/-. The A.O. is therefore, directed to delete the balance disallowance of expenditure of ₹ 14,25,13,380/-. 6. Aggrieved by the order of Ld.CIT(A), assessee as well as the revenue are in appeal before us. 7. The Ld.DR submitted that the Ld.CIT(A) was erred in deleting disallowance of sales promotion expenses without consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities below. The issue involved in the present appeal, i.e. whether freebies distributed to medical professionals by a pharmaceutical company is allowable u/s 37(1) of the Act or not in light of circular issued by MCI was subject matter of deliberations by the co-ordinate bench of ITAT, Mumbai Bench A in assessee s own case for AY 2011-12. The co-ordinate bench, after considering various aspects including the circular issued by MCI and also circular of CBDT vide circular No.5 of 2012 held that the assessee was entitled for claim of sales promotion expenses incurred on distribution of articles to the stockists, distributors, dealers and doctors. The relevant findings of the Tribunal are as under:- 21. We have deliberated at length on the issue under consideration and after perusing the regulations issued by the Medical Council of India, find that the same lays down the code of conduct in respect of the doctors and other medical professionals registered with it, and are not applicable to the pharmaceuticals or allied health sector industries. Rather, a perusal of the provisions of the Indian Medical Council Act, 1956, reveals that the scope and ambit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lthcare sector, then any such regulation issued by it cannot have any prohibitory effect on the manner in which the pharmaceutical company like the assessee conducts its business. On the basis of our aforesaid observations, we are unable to comprehend that now when the MCI has no jurisdiction upon the pharmaceutical companies, then where could there be an occasion for concluding that the assessee company had violated any regulation issued by MCI. We thus, in terms of our aforesaid observations are of the considered view that even if the assessee had incurred expenditure on distribution of freebies to doctors and medical practitioners, the same though may not be in conformity with the Indian Medical Council (Professional Conduct, Etiquette and Ethics) regulations, 2002 (as amended on 10.12.2009), however, as the same only regulates the code of conduct of the medical practitioners/doctors, therefore, in the absence of any prohibition on the pharmaceutical companies in incurring of such sales promotion expenses, the latter cannot be held to have incurred an expenditure for a purpose which is an offence or is prohibited by law. In this regard we are reminded of the maxim Expressio U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 37(1) of the Income Tax Act being an expense prohibited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector Industries or other assessee which has provided aforesaid freebees and claimed it as a deductible expense in its accounts against income. 4. It is also clarified that the sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner or professional associations is also taxable as business income or income from other sources as the case may be depending on the facts of each case. The assessing officers of such medical practitioner or professional associations should examine the same and take an appropriate action. This may be brought to the notice of all the officers of the charge for necessary action. We may herein observe that a perusal of the aforesaid CBDT Circular reveals that the freebies provided by the pharmaceutical companies or allied health sector industries to medical practitioners or their professional associations in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) regulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r its Circular No. 5/2012, dated 01.08.2012 had enlarged the scope and applicability of Indian Medical Council Regulation, 2002, by making the same applicable even to the pharmaceutical companies or allied healthcare sector industries. We are of the considered view that such an enlargement of the scope of MCI regulation to the pharmaceutical companies by the CBDT is without any enabling provision either under the Income Tax Act or under the Indian Medical Council Regulations. We are of a strong conviction that the CBDT cannot provide casus omissus to a statute or notification or any regulation which has not been expressly provided therein. Still further, though the CBDT can tone down the rigours of law in order to ensure a fair enforcement of the provisions by issuing circulars for clarifying the statutory provisions, however, it is divested of its power to create a new impairment adverse to an assessee or to a class of assessee without any sanction or authority of law. We are of the considered view that the circulars which are issued by the CBDT must confirm to the tax laws and though are meant for the purpose of giving administrative relief or for clarifying the provisions of law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ively only. Our aforesaid view is fortified by the judgment of the Hon ble Supreme Court in the case of Director of Income-tax Vs. S.R.M.B Dairy Farming Pvt. Ltd. (2018) 400 ITR 9 (SC). The Hon ble Apex Court in its aforesaid judgment has held that beneficial circulars had to be applied retrospectively, while oppressive circulars had to be applied prospectively, observing as under: 25. It is in this context, the question arises, when the instruction expressly states that the benefit of the said policy is prospective, still can the courts place a construction on such instruction so as to make it retrospective. In this context, the apex court in the case of CCE v. Mysore Electricals Industries Ltd. reported in [2006] 204 ELT 517 (SC) : [2007] 8 RC 1, dealing with the question how a beneficial circular is to be construed, has approached this question in the following manner. At paragraph 13 of the judgment, it is stated that the learned counsel further submitted that the circular being oppressive and against the respondent, has to apply only prospectively and cannot be applied retrospectively. In other words, a beneficial circular has to be applied prospec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,20,22,518 4 Cost of samples 3,60,85,320 Total 22,99,72,607 The nature of aforesaid expenses has already been explained above. Now whether the nature of such expenditure incurred by the assessee is to be disallowed in view of the CBDT Circular dated 01.08.2012. For the sake of ready reference, the said CBDT Circular No.5/2012 is reproduced hereunder: INADMISSIBILITY OF EXPENSES INCURRED IN PROVIDING FREEBEES TO MEDICAL PRACTITIONER BY PHARMACEUTICAL AND ALLIED HEALTH SECTOR INDUSTRY Circular No. 5/2012 [F. No. 225/142/2012-ITA.II], dated 1-8-2012 It has been brought to the notice of the Board that some pharmaceutical and allied health sector Industries are providing freebees (freebies) to medical practitioners and their professional associations in violation of the regulations issued by Medical Council of India (the 'Council') which is a regulatory body constituted under the Medical Coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on deals with the professional conduct, etiquette and ethics for registered medical practitioners only. Chapter 6 of the said regulation/notification deals with unethical acts, whereby a physician or medical practitioners shall not aid or abet or commit any of the acts illustrated in clause 6.1 to 6.7 of the said regulation which shall be construed as unethical. Clause 6.8 has been added (by way of amendment dated 10.12.2009) in terms of notification published on 14.12.2009 in Gazette of India. The said clause reads as under:- 6.8 Code of conduct for doctors and professional association of doctors in their relationship with pharmaceutical and allied health sector industry. 6.8.1 In dealing with Pharmaceutical and allied health sector industry, a medical practitioner shall follow and adhere to the stipulations given below: a) Gifts: A medical practitioner shall not receive any gift from any pharmaceutical or allied health care industry and their sales people or representatives. b) Travel facilities: A medical practitioner shall not accept a any travel facility inside the country or outside, including rail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sults of the research in the greater interest of the society by inserting such a clause in the MoU or any other document / agreement for any such assignment. f) Maintaining Professional Autonomy: In dealing with pharmaceutical and allied healthcare industry a medical practitioner shall always ensure that there shall never be any compromise either with his / her own professional autonomy and / or with the autonomy and freedom of the medical institution. g) Affiliation: A medical practitioner may work for pharmaceutical and allied healthcare industries in advisory capacities, as consultants, as researchers, as treating doctors or in any other professional capacity. In doing so, a medical practitioner shall always: ( i) Ensure that his professional integrity and freedom are maintained. ( ii) Ensure that patients interests are not compromised in any way. ( iii) Ensure that such affiliations are within the law. ( iv) Ensure that such affiliations / employments are fully transparent and disclosed. h) Endorsement: A medical prac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes Registration Act, 1953. It is urged that in fact, an inspection was also carried out on 22.07.2011 by Dr. R.N. Dass, Medical Superintendent (Nursing Home) under the Directorate of Health Services, Govt. of NCT of Delhi and the necessary equipments and facilities were found to be in order which negates the observations dated 27.10.2012 of the Ethics Committee of the MCI. It is also the plea of the Petitioner hospital that the Petitioner was not provided an opportunity of being heard and thus the principles of natural justice were violated. 7. In the counter affidavit filed by the Respondents, it is not disputed that the MCI under the 2002 Regulations has jurisdiction limited to taking action only against the registered medical practitioners. Its plea however, is that it has not passed any order against the Petitioner hospital therefore; the Petitioner cannot have any grievance against the impugned order. 8. It is clearly admitted by the Respondent that it has no jurisdiction to pass any order against the Petitioner hospital under the 2002 Regulations. In fact, it is stated that it has not passed any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e computing his business income. The Explanation provides an embargo upon allowing any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law. This means that there should be an offence by an assessee who is claiming the expenditure or there is any kind of prohibition by law which is applicable to the assessee. Here in this case, no such offence of law has been brought on record, which prohibits the pharmaceutical company not to incur any development or sales promotion expenses. A law which is applicable to different class of persons or particular category of assessee, same cannot be made applicable to all. The regulation of 2002 issued by the Medical Council of India (supra), provides limitation/curb/prohibition for medical practitioners only and not for pharmaceutical companies. Here the maxim of Expressio Unius Est Exclusio Alterius is clearly applicable, that is, if a particular expression in the statute is expressly stated for particular class of assessee then by implication what has not been stated or expressed in the statute has to be excluded for other class of assessee. If the Medical Council regulation is applicable to med ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts: A medical practitioner shall not receive any gift from any pharmaceutical or allied health care industry and their sales people or representatives; Gifts more than ₹ 1,000/ - upto ₹ 5,000/- : Censure Gifts more than ₹ 5,000/- upto ₹ 10,000/- : Removal from Indian Medical Register or State Medical Register for 3 (three) months Gifts more than ₹ 10,000/ - to ₹ 50,000/- : Removal from Indian Medical Register or State Medical Register for 6(six) months. Gifts more than ₹ 50,000/- to ₹ 1,00,000/ - : Removal from Indian Medical Register or State Medical Register for 1 (one) year. Gifts more than ₹ 1,00,000/ - : Removal for a period of more than 1 (one) year from Indian Medical Register or State Medical Register (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 vacations etc. from any pharmaceutical or allied healthcare industry or their representatives for self an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived 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 Cash or monetary grants more than ₹ 5,000/-upto ₹ 10,000/-: Removal from Indian Medical Register or State Medical Register for months. Cash or monetary grants more than ₹ 10,000/-to ₹ 50,000/-: Removal from Indian Medical Register or State Medical Register for 6 (six) months. Cash or monetary grants more than more than ₹ 50,000/-to ₹ 1,00,000/-: Removal from Indian Medical Register or State Medical Register for 1 (one) year. Cash or monetary grants more than ₹ 1,00,000/-: Removal for a period of more than 1 (one) year from Indian Medical Register or State Medical Register. From the aforesaid notification, ld. CIT DR submitted that so many violations and censures have been prescribed for any expenditures/ or benefit given to doctors, thus, violation of such guidelines for incurring such kind of expenditures cannot be held to be allowable expenditure. CBDT is we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law. The circular issued by the CBDT must confirm to tax laws and for purpose of giving administrative relief or for clarifying the provisions of law and cannot impose a burden on the assessee, leave alone creating a new burden by enlarging the scope of a different regulation issued under a different act so as to impose any kind of hardship or liability to the assessee. In any case, it is trite law that the CBDT circular which creates a burden or liability or imposes a new kind of imparity, same cannot be reckoned retrospectively. The beneficial circular may apply retrospectively but a circular imposing a burden has to be applied prospectively only. Here in this case the CBDT has enlarged the scope of Indian Medical Council Regulation, 2002 and made it applicable for the pharmaceutical companies. Therefore, such a CBDT circular cannot be reckoned to have retrospective effect. The same CBDT circular had come up for consideration before the co-ordinate Bench of the ITAT, Mumbai Bench in the case of Syncom Formulations (I) Ltd. (in ITA Nos. 6429 6428/Mum/2012 for A.Ys. 2010-11 and 2011-12, vide order dated 23.12.2015), wherein Tribunal held that CBDT circular would not be not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts, can promote its sale and brand only by arranging seminars, conferences and thereby creating awareness amongst doctors about the new research in the medical field and therapeutic areas, etc. Every day there are new developments taking place around the world in the area of medicine and therapeutic, hence in order to provide correct diagnosis and treatment of the patients, it is imperative that the doctors should keep themselves updated with the latest developments in the medicine and the main object of such conferences and seminars is to update the doctors of the latest developments, which is beneficial to the doctors in treating the patients as well as the pharmaceutical companies. Further as pointed out and concluded by the learned CIT(A) there is no violation by the assessee in so far as giving any kind of freebies to the medical practitioners. Thus, such kind of expenditures by a pharmaceutical companies are purely for business purpose which has to be allowed as business expenditure and is not impaired by EXPLANATION 1 to section 37(1). 11. Before us, the Ld. CIT DR has also much harped upon the decision of the Hon ble Himachal Pradesh High Court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reiterated that the Hon ble Delhi High Court in the case of Max Hospital (supra) and the Jurisdictional Tribunal in the case of Syncom (supra) have held that such IMC Regulations apply only to medical practitioners. He further submitted that the Tribunal in the case of ACIT vs. Liva Healthcare Ltd. (ITA 847/Mum/2012) for A.Y. 2008-09, has decided similar issue in favour of the assessee. However, in A.Y. 2009-10, Hon ble Tribunal while noting the fact that consistency has to be adopted, distinguished the order of A.Y. 2008-09 as under: 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 considered view, principles of Res judicata is not applicable to income tax proceedings although we are fully agreeable that principles of consistency is to be maintained (Hon ble Supreme Court decision in Radha Soami Satsang v. CIT (1992) 193 ITR 321 (SC) but in the instant assessment year, we have observed that these overseas trips for Doctors and their spouses were organized by the assessee whereby no details of the conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequent year orders of the same assessee. As brought on record before us, we find that similar issue of allowance of such expenditure in the case of pharmaceutical companies has been decided in favour of the assessee, in the case of UCB India Pvt. Ltd. v. ITO (ITA No. 6681/Mum/2013 order dated 13.05.2016, wherein it was held that CBDT circular cannot have a retrospective effect. This judgment was lost sight of by the bench. In any case on careful perusal of the Tribunal order in the case of Liva Healthcare (supra) we find that the Tribunal though has incorporated the relevant provisions and clauses of the Indian Medical Council Regulation 2002 , however, has not elaborated or dwell upon as to how this MCI regulation which is strictly meant for medical practitioners and doctors can be made applicable to pharmaceutical companies. There has to be some enabling provision or specific clause in the said regulation whereby the pharmaceutical companies are barred from conducting seminars or conferences by sponsoring the doctors. The entire conduct relates to doctors and medical practitioners and lists out the censures and fines imposed upon them. What has not been provided in the MCI r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the market and its uses are established then giving of free samples could only be the measure of sale/ promotion and development would thus be hit by subsection (3A). Said decision no way prohibits the nature of expenditure which has been incurred in the case of the assessee. Therefore, such a reference to a Hon ble Apex Court decision is not germane to the issue involved. Thus, in our opinion, the aforesaid decision of this Tribunal is clearly distinguishable and cannot be held to be applicable and also we have already given our independent finding as to allowability of expenses in the hands of the assessee as business expenditure. Still further, the coordinate bench of the Tribunal in the case of India Medtronic Pvt. Ltd. Vs. DCIT (2018) 52 CCH 43 (Mum), following the view taken by the Tribunal in the case of PHL Pharma Pvt. Ltd. (supra), had concluded that the MCI guidelines are only applicable to the doctors and the medical professionals registered with the council, and cannot govern the other tax entities like drug manufacturing companies or individuals other than the doctors. In the backdrop of the aforesaid observations, the Tribunal had observed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which were held by the Tribunal as being akin to giving commissions to the doctors for prescribing medicines manufactured by the assessee company. The facts involved in the said case being distinguishable as against that of the present assessee before us, thus would not assist the case of the revenue. ( ii) ACIT, Circle-6(3), Mumbai Vs. Liva Healthcare Ltd., Mumbai (ITA No. 904/Mum/2013, dated 12.09.2016) In the aforesaid order passed by the coordinate bench of the Tribunal, expenses were incurred by the assessee for creating good relations with the doctors in lieu of expected favours from them for recommending to the patients the pharmaceuticals products of the company. We find that the Tribunal while adjudicating the case of DCIT-8(2), Mumbai Vs. PHL Pharma (P.) Ltd. had considered the aforesaid order of the Tribunal. ( iii) Confederation of Indian Pharmaceutical Industry (SSI) Vs. The Central Board of Direct Taxes (CWP No. 10793 of 2012, dated 26.12.2012)(HP): We find that the aforesaid judgment of the Hon ble High Court of Himachal Pradesh was considered by the ITAT, Mumbai Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... costly ar ticles (exceeding ₹ 750/- each ar ticle) are f reebies to doctors and professionals. 3. For that the Ld. CIT(A) has erred in holding that the such expenditures (exceeding ₹ 750/- each articles) have been incurred in violation of CBDT circular no. 5/2012 dated 01.08.2012 and are against regulations issued by Medical Counsel of India. 4. For that the Ld. CIT(A) has erred in holding that such expenditures are prohibited by law and thus hit by Explanation to section 37(1). 5. For that the sustenance of disallowance of ₹ 77,42,416/- is wrong, illegal and unjustified on the facts and in the circumstances of the appellant's case. 6. For that the whole order sustaining disallowance of ₹ 77,42,4161- is bad in fact and law of the case and is fit to be modified. 7. For that the whole order is bad in fact and law of the case and is fit to be modified. 8. For that the other grounds, if any, shall be urged at the time of hearing of the appeal 30. The revenue on the other hand has assailed the order of the CIT(A) for A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etary grants (known as freebies ) from pharmaceutical and allied health care sector industry; and (ii) the CBDT circular No. 5/2012 issued vide F.No. 225/142/2012-ITA.II, dated 01.08.2012 had clarified that such freebies shall be inadmissible under Sec. 37(1) of the Act, being an expense prohibited by the law. On the basis of the aforesaid deliberations the A.O being of the view that the expenditure incurred by the assessee on distribution of freebies was inadmissible as per the Explanation to Sec. 37(1) of the Act, thus disallowed the entire amount of sales promotion expenses of ₹ 11,37,45,179/- debited by the assessee under the said head of expenditure. 32. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the contentions advanced by the assessee before him, observed that the issue under consideration was squarely covered by the order passed by his predecessor while disposing off the appeal of the assessee for the immediately preceding year viz. A.Y. 2011-12. The CIT(A) following the view taken by his predecessor, thus restricted the disallowance of the sales promotion expenditure to the extent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al or allied health sector industry incurs any expenditure in providing any gift, travel facility, cash, monetary grant or similar freebies to medical practitioners and their professional associations in violation of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, the same shall be disallowed in the hands of such pharmaceutical or allied health sector industry. We are unable to persuade ourselves to subscribe to the burden imposed by the CBDT vide its aforesaid Circular No. 5/2012, dated 01.08.2012 on the pharmaceutical or allied healthcare sector industries, which as observed by us hereinabove, despite there being an absence of any enabling provisions under the Income Tax law or the Indian Medical Council Regulations, therein contemplating an authority to regulate the conduct of the pharmaceutical and allied health sector industries, had clearly impinged on the conduct of business by the latter. We thus, in the absence of any sanction or authority of law on the basis of which it could safely be concluded that the assessee company which is engaged in the business of manufacturing and sale of pharmaceuticals and allied products, had in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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