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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI KULDIP SINGH & SHRI GAGAN GOYAL
Present for: Assessee by : Shri. Ajay Kumar Rastogi & Ms.Shilpi Keshri Revenue by : Smt. Shailja Rai(CIT-DR) Date of Hearing : 20. 04. 2023 Date of Pronouncement : 19. 07. 2023 O R D E R Per : Kuldip Singh, Judicial Member: Since common question of law and facts have been raised in both the inter-connected appeals, the same are being disposed of by way of composite order to avoid repetition of discussion.
The appellant, M/s. Aristo Pharmaceuticals Pvt. Ltd. (hereinafter referred to as ‘the assessee’) by filing present appeals pertaining to A.Y. 2016 – 17 and 2017-18 sought to set aside the & 310/M/2023 2 M/s. ARISTO PHARMACITICEULAS LTD.
impugned orders both dated 05.12.2022 on the identically worded grounds except the variation in amount of addition (grounds of A.Y.2016-17 are taken for the disposal of present appeals for the sake of brevity) inter-alia that: “1. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in holding that there is no prohibition by law within the meaning of Explanation 1 to section 37 (1) of the Income Tax Act on claiming Product Advertisement Expenses as deduction u/s. 37(1) without appreciating the fact that providing freebies by pharmaceutical companies is a natural corollary violation of the provisions of MCI Regulations 2002? (Tax Effect: Rs.11,56,19,327/- @34.60 % = Rs.400,13,537/-) 2. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of Medical conference expenses of Rs.36,35,66,504/- without appreciating the fact that The Medical Conference expenses paid to the doctors clearly fall within the classification of medical freebies and therefore not allowable in view of Explanation 1 to Section 37 of the LT. Act.? (Tax Effect: Rs.36,35,66,504/- @34.60% = Rs. 12,58,23,096/-) 3. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of Medical conference expenses of Rs.36,35,66,504/- without appreciating the decision of the Hon'ble Apex Court in the case of M/s Apex Laboratories Pvt. Ltd v/s PCTT in SLP(C) 23207 OF 2019 dated 22 Feb 2022 and that of Himachal Pradesh High Court in CWP No. 10793 of 2012 which clearly lays down that if the assessee does not satisfy the Assessing authority, that the expenditure is not in violation of the regulation framed by the MCL, then such deduction is not an allowable deduction? (Tax Effect: Rs.36,35,66,504/- @34.60 % = Rs. 12,58,23,096/-)”
Briefly stated facts necessary for consideration and adjudication of the issues at hand are : the assessee is into the business of manufacture and sales of pharmaceuticals and allied products. The assessee’s return of income declaring total income of Rs. 5,56,62,39,390/- under normal provisions of the Income Tax Act, 1961 (for short 'the Act') and book profit at Rs.6,40,32,06,351/- under section 115 JB of the Act was subjected & 310/M/2023 3 M/s. ARISTO PHARMACITICEULAS LTD.
to scrutiny. During the scrutiny proceedings the Assessing Officer (AO) noticed that the assessee company has debited an amount of Rs.11,56,19,327/- and Rs.23,92,69,458/- towards product advertisement expenses in A.Y. 2016-17 and A.Y. 2017–18 respectively. On queries raised by the AO the assessee filed necessary details stating therein inter-alia that these gift items are distributed amongst Doctors, Stockiest and Chemists through their Medical Representatives and also used during various medical camps conducted by the assessee. Declining the contentions raised by the assessee company by placing reliance on order passed by Tribunal in case of DCIT 8(2), Mumbai vs. PHL Pharma Pvt. Ltd., the AO proceeded to hold that the entire amount incurred by the assessee for purchasing gift articles to the tune of Rs.11,56,19,327/- and Rs.23,92,69,458/- for A.Y. 2016 – 17 and 2017 – 18 respectively is not allowable on the ground that the Medical Council of India (MCI) has imposed prohibition on medical practitioners from accepting gifts, travelling facilities, hospitality, cash or monetary grants from pharmaceutical and allied healthcare industry and Central Board of Direct Taxes (CBDT) also issued a circular highlighting the expenditure incurred for providing "freebies" by the pharmaceutical and allied healthcare industry shall be inadmissible under section 37(1) of the Act being an expenditure prohibited by the law. AO also noticed from the details filed by the assessee that the assessee company has debited an amount of Rs.36,35,66,505/- on account of medical conference expenses which have been prohibited by MCA vide notification dated December 10, 2009. The AO after examining the details filed by the assessee that the expenditure has been incurred by the assessee company and under various heads like registration fee for doctors & 310/M/2023 4 M/s. ARISTO PHARMACITICEULAS LTD. attending conferences, travelling expenses in form of air/train, accommodation charges, food charges, gift articles i.e. LED TV, mobile, washing machine, air conditioner, I-Pad, treadmill, microwave oven, refrigerator, laptop, water purifier, furniture, computer, inverter, music system, camera, flower bed, projector, battery, generator, chair, printer, PVC flooring etc. reached the conclusion that these expenditures have been incurred in violation of the notification issued by MCI and thereby disallowed the same. The AO framed the assessment under section 143(3) of the Act for A.Y. 2016-17 and 2017-18.
The assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has deleted most of the expenses by partly allowing the appeal. Feeling aggrieved with the impugned order passed by the Ld. CIT(A) the Revenue has come up before the Tribunal by way of filing present appeals.
We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto.
Ground No.1 of & 310/M/2023 for A.Y. 2016 – 17 & A.Y. 2017-18
The AO made an addition of Rs.11,56,19,327/- debited by the assessee towards product advertisement expenses having been fallen within the classification of medical "freebies" being not allowable. & 310/M/2023 5 M/s. ARISTO PHARMACITICEULAS LTD.
The Ld. D.R. for the Revenue challenging the impugned deletion of addition made by the Ld. CIT(A) contended that since these expenses fall under the category of “freebies” prohibited by the MCI Regulation, 2002 and not allowable as per decision rendered by the Hon’ble Supreme Court of India in case of Apex Laboratories (P.) Ltd. vs. DCIT [2022] 135 taxmann.com 286 (SC) the Ld. CIT(A) has erred in deleting the same.
We have perused para 5.1 of the impugned order passed by Ld. CIT(A) who has deleted the addition made by the AO by relying upon the order passed by co-ordinate bench of Tribunal in assessee’s own case bearing for A.Y. 2014-15 dated 15/01/2020. However at the same time the Ld. A.R. for the assessee fairly conceded that the order passed by Ld. CIT(A) is prior to the decision rendered by Hon’ble Supreme Court in case of Apex Laboratories (P.) Ltd. (supra) and further contended that expenditure claimed by the assessee under the head “product advertisement expenditure” amounting to Rs.11,56,19,327/- was incurred in purchasing various items like ball pens, Soap, Leather Key Chains, Air Freshener, Jute Bags, Umbrella, pads, Paper Weight, Leather Wallet, lunchbox, weighing scale, Table Lamp, ECG Roll Set, Highlighter, Water Bottle, Savings Lotion, Facial Tissue, Towel, Honey, Glass Set, Candle Set, Chocolate & Watches etc. which were distributed between stockiest, chemist and doctors.
By now it is settled principle of law that small gift articles costing less than Rs.1000/- are allowable on account of product advertisement expenses by the pharmaceutical companies. When & 310/M/2023 6 M/s. ARISTO PHARMACITICEULAS LTD.
we examine the details of these articles given by Ld. CIT(A) on page 4 these articles are apparently appears to be of the cost of less than Rs.1000/-. This proposition of law was also not disputed by Ld. D.R. for the Revenue. In these circumstances we are of the considered view that AO is to delete the addition by verifying the record qua the articles which are of the value of less than Rs.1000/- and to make the addition of rest of the articles gifted by the assessee company having value of more than Rs.1000/-. So ground No.1 of A.Y. 2016-17 and 2017-18 raised by the Revenue are partly allowed.
Ground No.2 & 3 of A.Y. 2016-17 & 2017-18 10. The AO made a disallowance of Rs.36,35,66,505/- and Rs.43,82,00,778/- in A.Y. 2016 – 17 and 2017-18 respectively under the head “medical conference expenses” which are further bifurcated under different sub heads viz. registration fee for doctors attending conference to the tune of Rs.2,94,14,149/-, travelling expenses for attending conferences to the tune of Rs.3,11,85,858/-, accommodation and food and snacks expenses while attending conferences to the tune of Rs.12,26,98,820/- and Rs.1,31,05,946/- respectively, medical camp expenses to the tune of Rs.1,12,24,212/-, gift articles of Rs.13,59,90,299/- and stall and other promotional activities to the tune of Rs.1,99,47,220/-.
At the very outside the Ld. A.R. for the assessee fairly conceded that expenses incurred by assessee company on account of registration fee for doctors attending conferences, travelling expenses for attending conferences, accommodation, food & snacks expenses while attending conferences and gift articles to the tune of & 310/M/2023 7 M/s. ARISTO PHARMACITICEULAS LTD.
Rs.2,94,14,149/- & Rs.3,11,85,858/- (total of Rs.3,14,80,007/-) respectively are not allowable in view of the law laid down by Hon’ble Supreme Court in case of Apex Laboratories (P.) Ltd. (supra). So out of total expenses of Rs.36,35,66,505/- aforesaid expenses are ordered to be disallowed by the AO.
However, at the same time Ld. A.R. for the assessee contended that out of total medical conference expenses of Rs.36,35,66,505/- expenses made by assessee company for organising medical camp and organising stall and other promotional activities to the tune of Rs.11,24,212/- and Rs.1,99,47,220/- were incurred for detection and awareness of disease among the general public and no part of these expenses except the fee paid to the doctors against the services rendered to the patients in these camps pertains to the doctors and further contended that the assessee company in order to advertise its products along with technical literature, setup stall in the medical conferences, managed field staff of the company and again part of these expenses are given to the doctors. Rather these payments are made to the associations holding such conferences and is akin to the rent for utilising the space during conferences.
However on the other hand the Ld. D.R. for the Revenue contended that these expenses are also not allowable in view of the decision rendered by Hon’ble Supreme Court in case of Apex Laboratories (P.) Ltd. (supra).
We have examined the details qua these expenses explained by Ld. CIT(A) in the impugned order which appears to be incurred for detection and awareness of the disease among the general public & 310/M/2023 8 M/s. ARISTO PHARMACITICEULAS LTD.
as well as stalls and other promotional activities carried out by the other associations and these expenses are not incurred for making any payment to the doctors. However, to examine these expenses the issue is required to be examined by the AO after verifying the records prepared by the assessee company in the light of the decision rendered by the Hon’ble Apex Court (supra).
So the AO is directed to re-examine the issue as to medical camp expenses, stall and other promotional activity expenses by duly verifying the records. So ground Nos.2 & 3 of A.Y. 2016 – 17 and 2017 – 18 are partly decided in favour of the Revenue.
In view of what has been discussed above aforesaid appeals filed by the Revenue for A.Y. 2016 – 17 and 2017-18 are partly allowed.
Order pronounced in the open court on 19.07.2023.