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TMI Blog2021 (10) TMI 794X X X X Extracts X X X X X X X X Extracts X X X X ..... ue. It is in this backdrop that we proceed to place on record our reasons as to why the Assessing Officer, in our considered view, deserves to succeed on this issue and as to why it is a fit case for the constitution of a special bench of three or more members, to consider the following question: Whether an item of expenditure on account of freebies to medical professionals, which is hit by rule 6.8.1 of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002- as amended from time to time, read with section 20A of the Indian Medical Council Act 1956, can be allowed as a deduction under section 37(1) of the Income Tax Act, 1961 read with Explanation thereto, in the hands of the pharmaceutical companies? 2. When the grievances raised by the Assessing Officer, as referred to in paragraph 1 above, came up for our consideration, we noticed that the related material facts are like this. By way of these appeals, the Assessing Officer has challenged correctness of a consolidated order dated 27th June 2018, passed by the learned CIT(A), in the matter of assessment under section 143(3) r.w.s. 153A of the Income Tax Act, 1961 for the assessment years 2011-12 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued by Medical Council of India and the circular issued by the Central Board of Direct Taxes that the sales promotion expenses made by the assessee are prohibited in law (and) therefore, these are deemed to have been not incurred for the purpose of business and profession, and hence not an allowable expenditure". The stand of the assessee was that a coordinate bench, in assessee"s own case, has allowed such expenditure mainly accepting the plea that "no disallowance of such sales promotion expenses could be made by applying CBDT circular dated 1-8-2012 insofar as CBDT circular was effective from AY 2013-14", and that, in view of the decision of another coordinate bench in the case of DCIT Vs PHL Pharma Pvt Ltd [(2017) 163 ITD 10 (Mum)] the disallowance could not be sustained as the MCI guidelines bind only the medical professionals and not the pharmaceutical companies. The Assessing Officer, however, proceeded to make the disallowances of Rs. 111,11,70,500 for the assessment year 2011-12 and of Rs. 137,62,61,659 for the assessment year 2012-13, on account of payments made for freebies to the doctors, by giving detailed reasons, common in both of these years, as follows: 1. Board, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch describes unethical acts under Chapter 6 of the said regulations. The MCI has made amendment in the above regulation vide notification dated 10-12-2009. As per said notification a medical practitioner is not allowed to receive any gift, travel facility, hospitality, cash or monetary grants from the pharmaceuticals or allied health care industry and violation of these conducts are liable for punishment as per The IndianMedical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002. The Hon'ble Himachal Pradesh High Court in case of Confederation of Indian Pharmaceutical Industries has upheld the validity of circular No. 5 of 2012 issued by the CBDT. The Hon'ble High Court has also observed that any violation of the same will attract the provisions of explanation to section 37(1) of the Act. 8. In the case Kap Scan and Diagnostic Centre (P) Ltd. the Hon'ble High Court of Punjab & Haryana held that payments which are opposed to public policy being in the nature of unlawful consideration cannot equally be recognized. It cannot be held that businessmen are entitled to conduct their business even contrary to law and claim deductions of payments as busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h was inserted by Finance Act, 1998 w.e.f. 01-04-1962. 11. Therefore, it is amply clear from the above discussion that the expenditure claimed by the assessee is not allowable under the provisions of the Act. 10.11 Thus, Rs. 1376261659 is disallowed (which has been incurred for gifts, providing travel facilities & hospitality to medical practitioners) from the total expenditure incurred for sales promotion keeping in view the discussion in paras above and added to the total income of the assessee. As apparent from the above discussion, it is clear that the nature of pre and post MCI notification expenses for freebees to doctors are illegal in nature. These illegal practices were later on noticed by Medical Council of India and Central Board of Direct Taxes which resulted in the amendment made in the Medical Council of India (MCI) Regulations vide Notification date 10.12.2009 and Circular No. 05/2012 dated 01.08.2012 issued by the Central Board of Direct Taxes, New Delhi vide F.No.225/142/2012-ITA-II respectively. In absence of these notification and circular also, the freebees to doctors are illegal in nature and liable to be disallowed u/s 37(1) of the Act. 4. Quite clearly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circular dated 1-8- 2012 was applicable for A.Y.2013-14 and onwards and not applicable to prior assessment years. The Tribunal after observing that nature of expenses allowed the same. The Tribunal further observed that sponsoring doctors for conferences and extending hospitality by pharmaceuticals companies, to attend prestigious conferences so that they gather contemporary knowledge about management of certain illness/disease and learn about newer therapies, which can promote assessee"s business as pharmaceutical manufacturer. Under these facts and circumstances the Tribunal held that no disallowance of such sales promotion expenses can be made by applying CBDT Circular dated 1-8-2012, insofar as CBDT Circular was effective from A.Y.2013-2014. In the instant case before us the relevant assessment years are A.Y.2010- 2011 & 2011-2012 during which this CBDT Circular was not applicable. As per the details of expenses placed on record, we found that same was in the nature of sales promotion. Neither the AO nor the CIT(A) had doubted genuineness of the expenses nor there is any allegation to the effect that expenses were not incurred for the purpose of business. Even the G.P. and N.P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T Vs Liva Healthcare Ltd [(2016) 161 ITD 63 (Mum)], in the light of Hon"ble Himachal Pradesh High Court decision in the case of Confederation of Indian Pharmaceutical Industry Vs Central Board of Direct Taxes [(2013) 335 ITR 388 (HP)], in the light of Hon"ble Punjab & Haryana High Court judgment in the case of CIT Vs Kap Scan & Diagnostic Centre Pvt Ltd [(2012) 344 ITR 476 (P&H)], and in the light of his analysis about the scope of Explanation to Section 37(1) read with the provisions of the Medical Council of India Regulations". In any case, the coordinate bench decision relied upon by the learned CIT(A) did not take into account another coordinate bench decision in the case of Live Healthcare (supra) and Hon"ble HP High Court"s judgment in the case of Confederation of Indian Pharmaceutical Industry (supra), which were rendered prior to that date but not taken into account by the coordinate bench. As to what should be precedence value of such a coordinate bench decision, we find guidance from Hon"ble AP High Court"s full bench decision in the case of CIT Vs B R Constructions [(1993) 202 ITR 222 (AP-FC)] wherein Their Lordships has observed that a "precedent ceases to be a binding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 37(1) read with MCI regulations. 9. Coming back to the content of the CBDT circular (supra), we are of the considered view that what is material is whether the interpretation assigned in the circular to the provisions of the Act, i.e. Explanation to Section 37(1), is correct or not, because the true test, as noted by Hon"ble Supreme Court in Keshavji Raviji & Co"s case (supra), is as to what the burden that the Act itself "on a true interpretation envisages". If the burden so envisaged on a true interpretation of the law is lesser than the burden envisaged by the CBDT circular, ignore that extra burden, but when the burden that the Act itself that a correct interpretation of law envisages is equal to or higher than the burden envisaged by the CBDT circular, that burden of law cannot be negated because the circular also so states. In other words, while an Assessing Officer does not get any help from the CBDT circular, in a situation in which the CBDT circular also states something which the correct interpretation of law envisages, just because CBDT circular also states so, such a correct interpretation of law cannot be ignored either. 10. Let us, in this light, see what the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unlop India Ltd. [(1985) 154 ITR 172 (SC)], wherein the Their Lordships quoted, with approval, from the decision of House of Lords to the effect that "We desire to add and as was said in Cassell & Co. Ltd. v. Broome [1972] AC 1027 (HL), we hope it will never be necessary for us to say so again that "in the hierarchical system of courts" which exists in our country, "it is necessary for each lower tier", including the High Court, "to accept loyally the decision of the higher tiers". "It is inevitable in hierarchical system of courts that there are decisions of the Supreme appellate Tribunal which do not attract the unanimous approval of all members of the judiciary... But the judicial system only works if someone is allowed to have the last word, and that last word, once spoken, is loyally accepted" and observed that. . . "the better wisdom of the Court below must yield to the higher wisdom of the Court above. That is the strength of the hierarchical judicial system." The principle is thus unambiguous. As a rule, therefore, judicial discipline warrants that the wisdom of a lower tier in the judiciary has to make way for higher wisdom of the tiers above. Unlike the decisions of Hon&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en if any, as is laid down by the apex Court in the case of Ambika Prasad Mishra v. State of UP AIR 1980 SC 1762 : [1980] 3 SCC 719 (p. 1764 of AIR 1980 SC) "Every new discovery nor argumentative novelty cannot undo or compel reconsideration of a binding precedent A decision does not lose its authority merely because it was badly argued, inadequately considered or fallaciously reasoned...." Similarly, in the case of Kesho Ram & Co. v. Union of India [1989] 3 SCC 151, it was stated by the Supreme Court thus: "The binding effect of a decision of this Court (as indeed any superior court) does not depend upon whether a particular argument was considered or not, provided the point with the reference to which the argument is advanced subsequently was actually decided in the earlier decision". The more we ponder upon the correct course to be adopted in such matters as is before us, the more we are convinced with respect to the binding nature of decisions of even Hon'ble non-jurisdictional High Courts, unless there are specific good reasons not to do so. The doubts, if at all, and somewhat nightmarish doubts at that, arise about the manner in which Bank of India decision (supra) could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maceutical Industry (supra).is an unreported judgment or it is a judgment in the writ jurisdiction rather than an appellate jurisdiction, it does not bind us. Whether the judgment is reported or is unreported, there is no difference so far as its binding nature is concerned, and the same is the position as to whether the judgment is in writ jurisdiction or in appellate jurisdiction. It is not the evidentiary value but the binding precedence value of a judgment from the Hon"ble Court above that is really matters. The expression "evidentiary value", as used by the learned counsel, is, therefore, somewhat inappropriate in the present context. A judgment of the Hon"ble Court above as for paramount importance to us as it constitutes a binding judicial precedent for us on the point decides in the said judgment. The distinctions being canvassed by the learned counsel between unreported judgments vis-à-vis reported judgments, and between judgments, in writ jurisdictions, vis-à-vis appellate jurisdictions are distinctions without any material difference so far as relevance to us is concerned. We are unable to see any legally sustainable merits in these arguments so advanced by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailable in the hospital were inspected and were found to be in order. 10. The petition therefore has to succeed. I hereby issue a writ of certiorari quashing the adverse observations passed by the MCI against the Petitioner hospital highlighted in Para 1 above. 16. In our humble understanding, this judgment does not negate, dilute, or even deal with, ratio decidendi of, or even casual observations in, Hon"ble HP High Court"s judgment in the case of Confederation of Indian Pharmaceutical Industry (supra). These judgments are in altogether different fields. While Hon"ble HP High Court deals with the interpretation of Explanation to Section 37(1), Hon"ble Delhi High Court deals with the powers of the MCI to pass an order against a Hospital in Delhi on the question of adequacy regarding infrastructure facilities by Hospitals in Delhi, and that too without affording an opportunity of hearing to the said hospital. As for the affidavit filed by the Medical Council of India, which has been referred to by the learned counsel, all it states is that "That the jurisdiction of MCI is limited only to take action against the registered medical professionals under the Indian Medical Council (Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall 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". If there is a prohibition for incurring an item of expenditure by the pharmaceutical companies, such expenditure cannot be incurred at all and the discussions about its admissibility as deduction are wholly academic. The true test, therefore, is whether the expense is incurred for any purpose which is prohibited by law or not. When acceptance of freebies by the doctors is prohibited by law, as undisputedly is the position, can it be said that extending these freebies does not constitute expenditure for a purpose that is prohibited by law. It may be perfectly legal for a corporate to send free first-class tickets and hotel vouchers for vacations abroad to anyone but when they extend such freebies to the public servants, who are forbidden under the law from accepting the same, it cannot be said that the expenditure is made for a purpose not prohibited by law. The true test, therefore, is whether such a transaction is legally permissible in principle. When it is not permissible in law, for whatever reasons, the purpose of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be accepted by the medical professionals notwithstanding anything contained in any law for the time being in force. As a corollary to this legal position, any payments of such a nature as above are "for any purposes which is prohibited by law" and, as such, these expenses "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". Let us also see it from the perspective that once Hon"ble Himachal Pradesh High Court, in the case of Confederation of Pharmaceutical Industry (supra), holds that "if the assessee satisfies the assessing authority that the expenditure is not in violation of the regulations framed by the medical council then it may legitimately claim a deduction, but it is for the assessee to satisfy the assessing officer that the expense is not in violation of the Medical Council Regulations referred to above", it cannot be open to us to hold that, irrespective of whether the expenditure is in violation of the MCI regulations or not, the Explanation to Section 37(1) will not be invoked. The better wisdom of the coordinate bench has to make way for the higher wisdom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e. the patients seeking medical help- overwhelmingly from the most underprivileged sections of the fellow citizenry. Hon"ble Prime Minister echoed these feelings when, on 19th April 2018, he explained how the use of generic medicines, through Jan Aushadhalya, has brought down medicine cost by almost 85%, and subtly hinted towards this not so holy nexus between medical professionals and pharmaceutical companies by observing that "In the same way.....the person who writes the medicine also gets something. You must know that the doctors' conference is sometimes in Singapore, sometimes it is in Dubai. It is not because someone is sick there; it is so because it is necessary for the pharmaceutical companies" (https://www.narendramodi.in/preliminary-text-of-pm-s-interaction-in-bharat-ki-baat-sabke-saath-programme-at-london--539744). If Government can bring down the effective cost of medicine by 85% by selling the same medicine by its generic name, one can imagine how end users have been taken for a ride all along- and these freebies have played a critical role in those manoeuvrings. Not only it is wholly illegal that medical professionals are extended freebies by the pharmaceutical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interpretation to the scope of Explanation to Section 37(1), as given in the circular, is a correct legal interpretation, it cannot be open to us to discard the interpretation so approved to be correct legal interpretation just because it is so stated in the CBDT circular. Nothing, therefore, turns on the CBDT circular having an only a prospective effect; that is wholly immaterial. We, therefore, regret our inability to be persuaded by the PHL Pharma decision (supra). This coordinate bench decision also comes in conflict with the decision of another coordinate bench in the case of Live Healthcare (supra), wherein, even dealing with pre 2011-12 period, that coordinate bench had held that the expenditure on freebies to medical professionals will attract disallowance under Explanation to Section 37(1). This decision was disregarded by the coordinate bench in PHL Pharma case (supra) by pointing out, what they perceived as, lacunas in the said order. There is, thus, no meeting ground between these two diametrically opposed schools of thought- one followed by PHL Pharma (supra), and the other followed by Liva Healthcare (supra). As a coordinate bench of equal strength, it is not for us ..... X X X X Extracts X X X X X X X X Extracts X X X X
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