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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SHRI RAJPAL YADAV & SHRI WASEEM AHMED
आदेश / O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeal has been filed at the instance of the assessee against the order of the Commissioner of Income Tax (Appeals)–2, Vadodara [CIT(A) in short] vide appeal no.CAB/(A)-2/278/15-16 dated 12/01/2017 arising in the assessment order passed under s. 143(3) of the Income Tax Act, 1961(here-in-after referred to as "the Act") dated 21/03/2016 relevant to Assessment Year (AY) 2013-14.
The assessee has raised the following grounds of appeal:-
ITA No.637/Ahd/2017 Shine Pharmaceuticals Ltd. vs. DCIT Asst.Year – 2013-14 - 2 - 1. The learned AO observed that the expenditure amounting to Rs.18,16,120/- was incurred for the purposes like distributing gifts, providing hospitality to the doctors/medical practitioners. The learned AO disallowed Rs.18,16,120/- by reasoning that the amount of Rs.13,16,120/- was incurred towards the purchase of laptop, mobile, watches, AC Machines, treadmill machines etc which is in the nature of gifts for doctors and practitioners, and an adhoc disallowance of Rs.5,00,000/- is made on account of having incurred on the lodging, boarding and travelling of the doctors/medical practitioners Explanation to section 37 of the IT Act, 1961 is invoked and Commissioner of Income tax (Appeal)-2 has dismissed the appeal.
Your Appellant submits that same is not justified and therefore be deleted. 2. The AO found that the assessee has not made the Employee’s Contribution payments towards ESIC before due date specified under section 36(1)(va) of the Act and hence made the addition of Rs.4,11,378/- to the total income of the assessee and commissioner of income tax upheld the decision of the AO.
Your Appellant submits that same is not justified and therefore be deleted.
The only issue raised by the assessee is that the Ld.CIT (A) erred in confirming the disallowance made by the Assessing Officer for Rs. 18,16,120/- on account of the gift given to the doctors and medical practitioners.
Briefly stated facts are that the assessee is a Limited Company and engaged in the business of manufacturing of pharmaceutical formulations. The assessee in the year under consideration has claimed
ITA No.637/Ahd/2017 Shine Pharmaceuticals Ltd. vs. DCIT Asst.Year – 2013-14 - 3 - sales promotion expenses for an amount of Rs. 19,58,01,210/- only. The details of the expenses stand as under:
Particulars Amount (in Rs.) Books and periodicals 6015785 Advertisement expenses 575642 Travelling exps 30536540 Printing and stationery 31669873 Sales promotion exps 125099386 Central excise on sample sales 1903986 � Total 195801210
The Assessing Officer noticed that the sales promotion expenses include the gift, freebies, and articles to the doctors and medical practitioners. Accordingly, the Assessing Officer was of the view that such expenses are not allowable as a deduction to the assessee as per CBDT Circular No. 5/2012 dated 01/08/2012 and the Circular issued by the Medical Council of India bearing No.6.8.1 dated 10/12/2009.
On a question by Assessing Officer, the assessee submitted that it had not incurred any expenses in contravention to the notification issued by the CBDT and Medical Council of India.
5.1. The assessee further submitted that there is cut-throat competition among the pharmaceutical companies, therefore to increase the sales, it
ITA No.637/Ahd/2017 Shine Pharmaceuticals Ltd. vs. DCIT Asst.Year – 2013-14 - 4 - uses to provide some incentive to the chemists/medical stores. These incentives include pen, pad, paper-weight, flower pots, vouchers, annual calendars, etc. which were printed with the product of the company.
5.2. The assessee further submitted that it has 527 Medical Representatives (MRs). Each MR is supervising approximately 170 medical shops/chemist shops. Thus, in effect, there were around 90000 chemists/medical stores to whom the assessee was selling its products. As such, these incentives were provided to the chemists/medical stores without the involvement of any doctor/medical practitioner. Therefore, there cannot be any disallowance as per the Circular issued by the CBDT and MCI.
5.3. The assessee also claimed that it was promoting its product by giving an incentive to the chemists/medical stores by way of providing Shopping Bags, BPL Solar Emergency Light, Multi-Choice Car Holder, Maxim Holder, Lap-Top bag, etc. Therefore, these expenses are categorized as sales promotion which boosts the sales of the product. Under no circumstances, any benefit has been extended to the doctors/medical practitioners.
5.4. However, the Assessing Officer found that there are certain expenses incurred by the assessee towards the purchase of laptops, wrist watches, mobile phones, and camera, etc. amounting to Rs. 13,16,620/- which were like the gifts to the doctors/medical practitioners. These gifts items cannot be categorized as sales promotion expenses. Therefore, the
ITA No.637/Ahd/2017 Shine Pharmaceuticals Ltd. vs. DCIT Asst.Year – 2013-14 - 5 - same cannot be allowed as deduction as per the CBDT Circular and Medical Council of India.
5.5. The AO also observed that the assessee has not furnished the necessary details depicting the benefits in monetary/non-monetary benefit extended to the doctors/medical practitioners. The Assessing Officer also noted that there were not sufficient details furnished in support of traveling expenses to justify that the doctors and medical practitioners did not incur these expenses. In the absence of necessary evidence, the Assessing Officer made the disallowance of Rs.5,00,000/- for benefit extended to the doctors/medical practitioners in contravention to the provisions of CBDT Circular/Medical Council of India as discussed above. Therefore, the Assessing Officer proposed to make a disallowance of Rs.5,00,000/- which was agreed by the ld. representative of the assessee and Managing Director of the assessee.
5.6. In view of the above, the Assessing Officer made the disallowance of Rs.18,16,120/- and added to the total income of the assessee.
The aggrieved assessee preferred an appeal to the Ld.CIT(A). The assessee before the Ld. CIT(A) submitted that the Circular issued by the CBDT dated 01/08/2012 which is prospective in nature. Therefore, there cannot be any disallowance of the expenses before the date of the issue of the Circular.
ITA No.637/Ahd/2017 Shine Pharmaceuticals Ltd. vs. DCIT Asst.Year – 2013-14 - 6 - 6.1. The necessary details were furnished to AO on account of sales promotion expenses. But the Assessing Officer without pointing out any specific defect has made the ad-hoc disallowance of Rs.5,00,000/- which is not permissible under the law.
6.2. The Circulars are binding on the Income Tax Authorities, but the same cannot be used against the assessee.
6.3. However, the Ld. CIT(A) confirmed the disallowance made by the Assessing Officer by observing that similar kind of disallowances was made in the earlier assessment years. The Managing Director of the assessee duly admitted the ad-hoc disallowance of Rs. 5,00,000/- during the hearing. Thus, the Ld. CIT(A) confirmed the order of the Assessing Officer.
Being aggrieved by the order of Ld. CIT(A), the assessee is in appeal before us.
The Ld.AR before us filed a paper book running from pages 1 to 25 and submitted that there was no benefit extended to the doctors/medical practitioners. All these expenses on the gift items were incurred to provide the benefit to the medical stores and chemist shops.
On the other hand, The Ld.DR submitted that the disallowance made by the lower authorities represent less than 1% of the total sales
ITA No.637/Ahd/2017 Shine Pharmaceuticals Ltd. vs. DCIT Asst.Year – 2013-14 - 7 - promotion expenses. The Ld.DR vehemently supported the orders of the authorities below.
We have heard the rival contentions and perused the materials available on record. In the instant case, the AO has made the addition to the total income of the assessee for two counts as discussed below.
i. The expenses incurred on the purchase of laptops, wrist watches, mobile phones, and cameras, etc. Rs.13,16,120/- was treated as gifts given to the doctors/medical practitioners by the AO, though the assessee claimed that these items were given to the dealers. But the AO disbelieved the contention of the assessee by observing that the assessee failed to furnish the documentary evidence. The assessee also failed to furnish any scheme under which these items were given to the dealers.
ii. There was no detail furnished by the assessee evidencing that the gift items were not given to the doctors/ medical practitioners. In the absence of the details of the actual recipient of the gift article, the AO made an ad-hoc disallowance of Rs. 5 lacs for which the assessee agreed. 10.1. The Ld. CIT-A subsequently confirmed the view taken by the AO. There is no dispute that the gifts, freebies and any other benefit to the doctors are prohibited as per explanation to section 37 of the Act. There is also a circular bearing number 5/2012 (F.No.225/142/2012-ITA.II) dated 1st August 2012 issued by the CBDT which prohibits such gifts of the doctors. According to the circular, the deduction to the pharmaceutical company in respect of such expenses will not be
ITA No.637/Ahd/2017 Shine Pharmaceuticals Ltd. vs. DCIT Asst.Year – 2013-14 - 8 - available. The Hon’ble Himachal Pradesh High Court also upheld the validity of the circular in the case of confederation of India pharmaceuticals Industry (SSI) Vs. CBDT reported in 353 ITR 388 wherein it was held as under: “Shri Vishal Mohan, Advocate, on behalf of the petitioner contends that the circular goes beyond the section itself. We are not in agreement with this submission. The explanation to Section 37(1) makes it clear that any expenditure incurred by an assessee for any purpose which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession. The sum and substance of the circulars also the same. In case the assessing authorities are not properly understanding the circular then the remedy lies for each individual assessee to file appeals under the Income-tax Act but the circular which is totally in line with Section 37(1) cannot be said to be illegal. In fact paragraph 4 of the circular quoted hereinabove itself clarifies that the value of the freebies enjoyed by the medical practitioner is also taxable as business income or income from other sources depending on the facts of each case. Therefore, 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.”
10.2. During the hearing the Ld. Counsel for the assessee has not agitated for the applicability of the circular issued by the CBDT as discussed above. Accordingly, there remains no confusion that any expense incurred by the assessee to extend the benefit to the doctors will not be allowed as a deduction by the explanation of section 37 of the Act as well as the circular issued by the CBDT the as discussed above.
10.3. The argument of the Ld. Counsel for the assessee is that these benefits were given to the medical store/chemist shops. As per the
ITA No.637/Ahd/2017 Shine Pharmaceuticals Ltd. vs. DCIT Asst.Year – 2013-14 - 9 - assessee, there were no benefits given by the assessee to the doctors/medical practitioner. However, from the order of the AO, we note that the assessee has not furnished sufficient documentary pieces of evidence suggesting that the dealers have not passed on these freebies to the doctors. Therefore the addition was made by the AO.
10.4. Even before us the Ld. Counsel for the assessee has not produced any evidence to prove that there was no benefit extended to the doctors/medical practitioners out of the purchases of laptops, wrist watches, mobile phones, cameras, etc. In the absence of any documentary evidence, we are not inclined to disturb the finding of the lower authorities.
10.5. Similarly, we also note that the assessee duly admitted the disallowance of Rs. 5 lacs made by the AO on an ad-hoc basis during the assessment proceedings. The AO made the addition by observing that the assessee failed to furnish the details of the actual recipient of these gift articles. The assessee has also incurred traveling expenses which were claimed by the assessee for the traveling of the medical representatives. But the assessee failed to file the requisite documents evidencing that there was no benefit extended to the doctors /medical practitioners out of such traveling expenses. Therefore the addition was made by the AO on an ad-hoc basis. In this regard, we also note that the Ld. Counsel for the assessee has also not produced any evidence before us to prove that the doctors were not the actual recipient of these gift articles. Thus in the absence of necessary documentary evidence the AO had no alternative
ITA No.637/Ahd/2017 Shine Pharmaceuticals Ltd. vs. DCIT Asst.Year – 2013-14
- 10 - except to make the disallowance on an ad-hoc basis. Thus we are inclined not to disturb the finding of the lower authorities. Accordingly, we dismiss the ground of appeal of the assessee.
In the result, the appeal of the assessee is dismissed.
This Order pronounced in Open Court on 01/02/2019
Sd/- Sd/- ( RAJPAL YADAV ) ( WASEEM AHMED ) JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 01/02/2019 ट�.सी.नायर, व.�न.स./T.C. NAIR, Sr. PS
आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-2, Vadodara �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation 12.1.2019 (dictation pad 17- pages attached at the end of this appeal-file) 2. Date on which the typed draft is placed before the Dictating Member 12.1.2019 3. Other Member… 4. Date on which the approved draft comes to the Sr.P.S./P.S … 5. Date on which the fair order is placed before the Dictating Member for pronouncement…… 6. Date on which the fair order comes back to the Sr.P.S./P.S…….1.2.19 7. Date on which the file goes to the Bench Clerk…………………1.2.19 8. Date on which the file goes to the Head Clerk…………………………………... 9. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. 10. Date of Despatch of the Order……………