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TMI Blog2023 (10) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... acy and hence the payments were falling outside the purview of Circular issued by the Central Board of Direct Taxes being Circular No. 5 of 2012 dated 01.08.2012? - The assessee has not been able to establish that the aforesaid payments were made by the assessee to the doctors for rendition of any professional / advisory services, and hence, in our considered view, the payments essentially qualify as commission payments made to doctors for promoting the sale of medicines. In the instant facts, the payments have been denied in the hands of the assessee on the ground that in view of Circular No. 5/2012 dated 01.08.2012 read with Explanation 1 to Section 37(1), the aforesaid payments are prohibited by law. In our respectful view, the principles of tax neutrality would not apply in cases the payments have been held to be illegal or are prohibited by law. Accordingly, we are of the considered view that decision of Gujarat Gas Financial Service Ltd. [ 2015 (7) TMI 743 - GUJARAT HIGH COURT] has been rendered on a different set of facts and would not apply to the assessee s facts. Whether it can be stated that the assessee being a pharmacy engaged in trading of medicines, is not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01,85,353/-. During the course of assessment, the Ld. Assessing Officer observed that on verification of the profit and loss account for the year under consideration it was noticed that the assessee had debited an amount of Rs. 50,46,000/- on account of commission which was paid to the following Doctors namely (1) Dr. Ramanbhai S. Patel (ii) Dr. Ratilal G. Patel (Rs. 15,96,601/- plus Rs. 34,49,3991= Rs. 50,46,000). The Ld. Assessing Officer questioned the allowability of the aforesaid expenditure in view of the language of Circular issued by the Central Board of Direct Taxes being Circular No. 5 of 2012 dated 01.08.2012, which prohibits the aforesaid commission payments since they are in violation of the provision of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulation, 2002 and therefore are not admissible under Section 37 of the Act. The Ld. Assessing Officer was of the view that in view of the said Circular of the Board, any expense incurred in providing gifts, travel facility, hospitality, cash or monetary grant from pharmaceutical and allied health sector industry or similar freebees in violation of the provision of Indian Medical Council (Professiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s noticed by the AO that the assessee had debited an amount of Rs. 50,46,000/- on account of commission paid to the Doctors. The said commission was paid to the following Doctors:- (i) Dr. Ramanbhai S. Patel Rs. 15,96,601/- (ii) Dr. Ratilal G. Patel Rs. 34,49,399/- Total Rs. 50,46,000/- In view of the Circular issued by the Central Board of Direct taxes being Circular No. 5/2012 (F.No. 225/142/2012-ITAJI) dated 01 08/2012. The commission paid by the assessee is not an allowable expenses. Section 37(1) of I.T.Act,1961 provides for deduction of any revenue expenditure (other than those failing under Sections 30 to 36) from the business Income if such expense is paid out/expended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this subSection denies claim of any such expense, if the same has been incurred for a purpose which is either an offence or prohibited by law. The claim of the assessee for commission payment to the Doctors as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The appellant has submitted that it is not pharmaceutical and allied health care industries and the payment of commission to doctors is not freebies but against the services rendered by doctors. The commission paid for services received for the purpose of the business of the assessee have no correlation with the remuneration to partners and salary paid to staff. Further, it is submitted that the commission paid has also disclosed as income in the hands of doctors and over and above 10% of tax deducted, doctors have paid balance tax of 20% of fax i.e. tax on the said amount has been paid by the doctors at the same rate as rate of tax of firm. 2.5. After going through the facts of the case, it is seen that CBDT has issued circular number 5/2012 dated 01 08/2012 in respect of inadmissibility of expenses incurred in providing freebees to medical practitioner by pharmaceutical and allied health sector industry . According to that circular the claim of expenditure incurred in providing gift, travel facility, hospitality, cash or monetary grant from pharmaceutical and allied health sector industry or similar freebees in violation of the provision of Indian Medical Council (Professi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guidance received from the doctors for which such payments of Rs. 50,46,000/- made to the doctors. In view of the above discussion and in view of Circular of the Board reproduced hereinabove, it is clear that the payment of commission made by the assessee to the above said two doctors namely (i) Dr. Ramanbhai S. Pate/ Rs. 15,96,601/- and (ii) Dr. Ratilal C. Pate/ Rs. 34,49,399/- totaling to Rs. 50,46,000/- is not allowable u/s. 37(1) of the Act. The addition of Rs. 50,46,000/- is confirmed . The grounds of appeal are dismissed . 3. In result, the appeal of the appellant is dismissed . 5. The assessee is in appeal before us against the aforesaid order passed by Ld. CIT(Appeals) confirming the additions made by the Assessing Officer. Before us, the Counsel for the assessee drew our attention to order passed by ITAT Ahmedabad in assessee s own case for Assessment Year 2011-12 and also for Assessment Year 2014-15. Further, the Ld. Counsel for the assessee reiterated the argument taken before Ld. CIT(Appeals) that the assessee is a pharmacy engaged in trading of medicines and hence is not covered by the provisions of the Circular, which is only applicable to pharmaceutical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed exemption for said expenses under Section 37(1) of the Act. The Assessing Officer by placing reliance on Circular No. 05/2012, dated 01.08.2012 and circular issued on 14.12.2009 by Medical Council of India under MCI Regulations, 2002, held that only expenses incurred till 14.12.2009 would be eligible for deduction and thus, partially disallowed exemption claimed by assessee. It was noted that Explanation 1 to Section 37(1) contained within its ambit all activities which were illegal or prohibited by law. The Hon'ble Supreme Court held that since acceptance of freebies by medical practitioners was punishable by MCI, distribution of such freebies would also fall within purview of prohibited by law and therefore, expenditure incurred by assessee-pharmaceutical company in distribution of such freebies would not be granted as deduction in terms of Explanation 1 to Section 37(1)of the Act. In the case of Mead Johnson Nutrition (India) (P.) Ltd. 149 taxmann.com 298 (Mumbai - Trib.) , the ITAT held that where assessee-company was engaged in trading of infant and children nutrition food, expenses incurred on account of conference and seminar of doctors and healthcare/medical p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is immaterial for the purpose of deciding whether the payments were made by the assessee for receipt of advisory services or otherwise. In the instant facts, we observe that there is no formal agreement between the assessee and the doctors for providing any advisory services (refer page 10 of CIT order). Further, the Assessing Officer has made a specific noting that the assessee operated the pharmacy from within the premises of the hospital and hence, the sales of the pharmacy were dependent primarily on the prescriptions made by both the doctors to whom the commission was paid (refer page 10 of CIT order). It was further noted by the Assessing Officer that the assessee has not submitted any correspondence or communication between itself and the doctors so as to establish any advice / services given / rendered by the doctors to the assessee (refer page 10 of CIT order) and further, out of the gross profit of Rs. 1,01,84,353/- earned by the assessee, the assessee has made payments amounting to Rs. 50,46,000/- by way of commission to the two doctors (refer page 10 of CIT order). Accordingly, looking into the totality of facts in the instant case, we are of the considered view that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would not apply in cases the payments have been held to be illegal or are prohibited by law. Accordingly, we are of the considered view that decision of Gujarat Gas Financial Service Ltd. (supra) has been rendered on a different set of facts and would not apply to the assessee s facts. 10. The fourth issue for consideration before us is that whether it can be stated that the assessee being a pharmacy engaged in trading of medicines, is not covered by the provisions of the Circular, which is only applicable to pharmaceutical industry. We observe that the CBDT has issued Circular No. 5/2012 dated 01.08.2012 in respect of inadmissibility of expenses incurred in providing freebies to medical practitioners by pharmaceutical and Allied health sector industry . In our considered view, the assessee is falling in the category of Allied health sector industry and hence covered within the scope of the Circular referred to above. In the case of in the case of Confederation of Pharmaceutical Industry vs. CBDT in Writ Petition No. 10793 of 2012 , the HP High Court made the following pertinent observations in this regard: 2. It is apparent that the Medical Council of India in exerc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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