EMCURE PHARMACEUTICALS LTD,,PUNE vs. DEPUTY COMMISSIONER OF INCOME TAX,,

आयकर अपीलीय अिधकरण “ए” �यायपीठ पुणे म� । IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, PUNE �ी डी. क�णाकरा राव, लेखा सद�य एवं �ी िवकास अव�थी, �याियक सद�य के सम� BEFORE SHRI D. KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM आयकर अपील सं. / ITA No.226/PUN/2017 िनधा�रण वष� / Assessment Year : 2011-12 Emcure Pharmaceuticals Ltd., Bhosari, Pune-411026. .......अपीलाथ� / Appellant PAN : AAACE4574C बनाम / V/s. DCIT, Central Circle-2(1). ……��यथ� / Respondent Pune. Assessee by : Shri Nikhil Pathak Revenue by : Shri S. B. Prasad सुनवाई क� तारीख / Date of Hearing : 19.08.2019 घोषणा क� तारीख / Date of Pronouncement : 27.08.2019 आदेश / ORDER PER D. KARUNAKARA RAO, AM: This appeal is filed by the assessee against the order of CIT(A)-12, Pune dated 24.11.2016 for the Assessment Year 2011-12. 2. In this appeal, the assessee raised mainly two issues by way of various grounds of appeal. The first issue relates to the disallowance of marketing and sales promotion expenses and the second issue relates to the claim of credit for foreign TDS of Rs.73,72,181/-. 3. We shall now take up the issue-wise adjudication for disposing of the appeal of the assessee.

2 ITA No.226/PUN/2017 Regarding the first issue i.e. disallowance of marketing and sales 4. promotion expenses, ld. Counsel for the assessee filed a written submission and the same is extracted hereunder :- “1.1] The assessee is a pharmaceutical company engaged in the business of manufacturing of Generic Drugs. The assessee had claimed expenditure on account of marketing and sales promotion. The details of the expenses incurred by the assessee are given on page 17 of the asst. order. The learned A.O. has disallowed the expenditure incurred by the assessee company on print and promotion items amounting to Rs. 73,11,537/- and on sales promotion amounting to Rs. 1,17,82,480/-. Thus, he has disallowed total expenditure of Rs. 1,90,94,018/-. According to the learned A.O., such expenditure is not allowable u/s 37(1). He has stated that the circular issued by Medical Council of India is applicable to a pharmaceutical company. He further refers to the CBDT Circular No. 5 / 2012 dated 01.08.2012 which states that the claim of such expenditure constitutes violation of the circular issued by Medical Council of India. Accordingly, the disallowance has been made by the learned A.O. 1.2] The learned CIT(A) has confirmed the said disallowance. He has discussed this issue in paras 4 to 4.4 of his order. He has relied upon the order passed by him in assessee’s own case for A.Y. 2010 - 11. 1.3] The assessee submits that similar disallowance was made in its own case for A.Y. 2010 - 11. The matter travelled before Hon'ble ITAT. It has been held by Hon'ble ITAT that the circular issued by Medical Council of India is not applicable to pharmaceutical companies. Accordingly, it has been held that no such disallowance can be made in the hands of a pharmaceutical company. The relevant discussion is in paras 8 and 9 of the order of Hon’ble ITAT. Accordingly, the claim of the assessee was allowed. The assessee submits that the disallowance made in the year under consideration may kindly be deleted in view of the decision of Hon’ble ITAT for A.Y. 2010 - 11.”

3 ITA No.226/PUN/2017 6. On the other hand, ld. DR for the Revenue heavily relied on the orders of the revenue authorities. 7. After hearing both the sides and considering the material available on record, we find it relevant to extract the contents of para 8 and 9 of the order of Tribunal and the same are extracted hereunder :- “8. We heard both the parties on the issue of requirement of making disallowance u/s.37(1) of the Act in respect of the companies, the giver of the gifts and the articles and others to the medical professionals. There is no dispute on the fact that claim of Rs.76,28,622/- was by the assessee on the gifts and other benefits passed on to the medical professionals. There is also no dispute on the taxability of the same in the hands of the said medical professionals. The only dispute relates to the correct legal position with regard to disallowability of the same u/s.37(1) of the Act in the cases of Pharmaceutical companies. We find this issue is now squarely covered by the decisions of Mumbai Bench of the Tribunal in the case of DCIT Vs. PHL Pharma Pvt. Ltd. decided on 12-01-2017 and in the case of M/s. Solvay Pharma India Ltd. Vs. Pr.CIT decided on 11-01-2018. For the sake of completeness of the order, we proceed to extract the operational finding from the aforesaid orders of the Tribunal. Finding from PHL Pharma Pvt. Ltd. “6. On a plain reading of the aforesaid notification, which has been heavily relied upon by the department, it is quite apparent that the code of conduct enshrined therein is meant to be followed and adhered by medical practitioners/doctors alone. It illustrates the various kinds of conduct or activities which a medical practitioner should avoid while dealing with pharmaceutical companies and allied health sector industry. It provides guidelines to the medical practitioners of their ethical codes and moral conduct. Nowhere the regulation or the notification mentions that such a regulation or code of conduct will cover pharmaceutical companies or health care sector in any manner. The department has not brought anything on record to show that the aforesaid regulation issued by Medical Council of India is meant for pharmaceutical companies in any manner........ The aforesaid provision applies to an assessee who is claiming deduction of expenditure while 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...........

4 ITA No.226/PUN/2017 10. From the perusal of the nature of expenditure incurred by the assessee, it is seen that under the head "Customer Relationship Management", the assessee arranges national level seminar and discussion panels of eminent doctors and inviting of other doctors to participate in the seminars on a topic related to therapeutic area. It arranges lectures and sponsors knowledge upgrade course which helps pharmaceutical companies to make aware of the products and medicines manufactured and launched by it. Under Key Account Management, the assessee makes endeavour to create awareness amongst certain class of key doctors about the products of the assessee and the new developments taking place in the area of medicine and providing correct diagnosis and treatment of the patients. The said activities by the assessee are to make the doctors aware of its products and research work carried out by it for bringing the medicine in the market and its results are based on several levels of tests and approvals. Unless the pharmaceutical companies make aware of such kind of products to key doctors or medical practitioners, then only it can successfully launch its products/medicines. This kind of expenditure is definitely in the nature of sales and business promotion, which has to be allowed...... Finding from M/s. Solvay Pharma India Ltd. “17. We have considered rival contentions and carefully gone through the orders of the authorities below. We had also deliberated on the judicial pronouncements cited by learned AR and DR during the course of hearing before us as well as referred by CIT in his order passed u/s.263 of the IT Act, in the context of factual matrix of the case. In this case, we found from record that the assessee is engaged in the manufacturing of pharmaceutical products. In the course of its business it has incurred expenditure on advertisement and publicity. While framing the assessment, AO has called for the detail of expenditure so incurred and examined the nature of expenditure and thereafter only AO has allowed the expenditure as having been incurred for the purpose of business. We had also carefully gone through the notification dated 11/03/2002 notifying the regulations issued by the Medical Council of India (MCI). The code of conduct laid down in the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 ('MCI Regulations’) issued with effect from 10th December 2009 applies only to doctors and not to Pharmaceutical and Medical device companies. Accordingly, MCI Regulations are not applicable to assessee, the question of assessee incurring expenditure in alleged violation of the regulations does not arise. 18. On the plain and simple reading of the provision of the Indian Medical Council Act, 1956, it is apparent that the ambit of statutory provisions relating to professional conduct of registered medical practitioners under the Indian Medical Council Act, 1956 is restricted only to persons registered as medical practitioners with the State Medical Council and whose names are entered into the Indian Medical Register maintained u/s 21 of the Act. 'Under the scheme of the Act. 19. Furthermore, there is no ambiguity of any kind in the scheme of the Indian Medical Council Act, 1956 that it neither deals with nor provides for any conduct of any association / society and deals only with the conduct of individual registered medical practitioners. There is no other interpretation, which is possible under the Act. 20. The intent of the applicability of the MCI Regulations was always to cover only individual medical practitioners, and not the pharmaceutical and medical device companies. Whether there is any contravention of the MCI Regulations or not is a matter which can be decided by the MCI itself and not by the Income-tax Department. Furthermore, the MCI has itself admitted that it has no jurisdiction whatsoever over any association/

5 ITA No.226/PUN/2017 society etc and its jurisdiction is confined only to the conduct of the registered medical practitioners. Furthermore, since the said MCI Regulations 2002 contains punitive "provisions, it has to be read strictly and consequently it can apply only to Medical Practitioners and Physicians and not to the pharmaceutical companies. Further, MCI Act, 1956 does not apply pharmaceutical companies and consequently MCI Regulations 2002 cannot apply to such companies. 21. CBDT Circular no. 5 of 2012 seeks to disallow expenditure incurred by pharmaceutical companies inter-alia in providing 'freebies' to doctors in violation of the MCI Regulations. The term "freebies' has neither been defined in the Income-tax Act nor in the MCI Regulations'. However, the expenditure so incurred by assessee does not amount to provision of 'freebies' to medical practitioners. The expenditure incurred by it is in the normal course of its business for the purpose of marketing of its products and dissemination of knowledge etc and not with a view to giving something free of charge to the doctors. The act of giving something free of charge is incidental to the main objective of product awareness. Accordingly, it does not amount to provision of freebies. Consequently, there is no question of contravention of the MCI Regulations and applicability of Circular no. 5 of 2012 for disallowance of the expenditure. 22. The department has not brought anything on record to show that the aforesaid regulation issued by Medical Council of India is meant for pharmaceutical companies in any manner. On the contrary, the assessee has brought to the notice of the bench the judgment of the Delhi High Court in the case of Max Hospital v. MCI in [WPC 1334 of 2013, dated 10-1- 2014], wherein the Medical Council of India admitted that the Indian Medical Council Regulation of 2002 has jurisdiction to take action only against the medical practitioners and not to health sector industry. From the aforesaid decision, it is ostensibly clear that the Medical Council of India has no jurisdiction to pass any order or regulation against any hospital or any health care sector under its 2002 regulation. So once the Indian Medical Council Regulation does not have any jurisdiction nor has any authority under law upon the pharmaceutical company or any allied health sector industry, then such a regulation cannot have any prohibitory effect on the pharmaceutical company like the assessee. If Medical Council regulation does not have any jurisdiction upon pharmaceutical companies and it is inapplicable upon Pharma companies like assessee then, where is the violation of any of law/regulation? Under which provision there is any offence or violation in incurring of such kind of expenditure. 23. Now coming to the Explanation to Section 37(1) invoked by the CIT, 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 medical practitioners then it cannot be made applicable to Pharma or allied health care companies. If section 37(1) is applicable to an assessee claiming the expense then by

6 ITA No.226/PUN/2017 implication, any impairment caused by Explanation 1 will apply to that assessee only. Any impairment or prohibition by any law/regulation on a different class of person/assessee will not impinge upon the assessee claiming the expenditure under this section. 24. We observe that the CBDT Circular dated 1-8-2012 (supra) in its clarification has enlarged the scope and applicability of 'Indian Medical Council Regulation 2002' by making it applicable to the pharmaceutical companies or allied health care sector industries. Such an enlargement of scope of MCI regulation to the pharmaceutical companies by the CBDT is without any enabling provisions either under the provisions of Income Tax Law or by any provisions under the Indian Medical Council Regulations. The CBDT cannot provide casus omissus to a statute or notification or any regulation which has not been expressly provided therein. The CBDT can tone down the rigours of law and ensure a fair enforcement of the provisions by issuing circulars and by clarifying the statutory provisions. CBDT circulars act like 'contemporanea expositio' in interpreting the statutory provisions and to ascertain the true meaning enunciated at the time when statute was enacted. However the CBDT in its power cannot create a new impairment adverse to an assessee or to a class of assessee without any sanction of 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 free sample of medicine is only to prove the efficacy and to establish the trust of the doctors on the quality of the drugs. This again cannot be reckoned as freebies given to the doctors but for promotion of its products. The pharmaceutical company, which is engaged in manufacturing and marketing of pharmaceutical products, 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.” 9. The above judgmental laws are relevant for the proposition that the circular issued by the CBDT enlarging the scope of disallowance to the pharmaceutical companies is without any enabling notification or circular of the Medical Council of India. Considering the settled legal position on the issue, we are of the opinion that the issue now stands covered in favour of the assessee. The pharmaceutical company like the assessee is outside the scope of the circulars by the Medical Council of India or the CBDT. Therefore, the conclusions of the AO/CIT(A) in this regard are reversed. Thus, the grounds raised by the assessee are required to be allowed.”

7 ITA No.226/PUN/2017 8. Considering the above and following of the rule of consistency, we find the said issue i.e. disallowance of marketing and sale promotion expenses should be allowed in favour of the assessee. The Circulars issued by the Medical Council of India read with Circular issued by the CBDT do not cover the Drug making companies like the present assessee. Following the parity of reasoning, the said issue is decided in favour of the assessee. Thus, the relevant grounds on this issue are allowed. Regarding the second issue i.e. claim of credit for foreign TDS of 9. Rs.73,72,181/-, ld. Counsel for the assessee filed a written note and the same is extracted hereunder :- “2.1] The assessee company had advanced unsecured loan to its subsidiary company Emcure Pharmaceuticals, USA [now known as Heritage Pharma Labs, Inc.] The assessee company had offered interest income of Rs.4,91,47,872/- in respect of the said unsecured loan on accrual basis even though, no interest was received by the assesse in the year under consideration. Now, in F.Y. 2014 - 15, Emcure USA paid the full amount of accrued interest which was booked as income by the assessee company for the FY 2007-08 to FY 2014-15 relevant to AY 2008-09 to AY 2015- 16 and also deducted TDS as per US Tax laws. The copy of the TDS certificate is given on page 6 of the paper book. It is to be noted that the interest was paid for A.Ys. 2008 — 09 to 2015 — 16 and the TDS thereon for the said asst, years amounting to USD 8,13,873 was deducted by Emcure USA. The assessee on a pro rata basis claimed the amount of Rs.73,72,181/- as the TDS relating to the interest offered to tax in A.Y. 2011-12. 2.2] The assessee in appeal before the learned CIT(A) claimed credit of the TDS amount relating to the interest pertaining to A.Y. 2011 - 12. The learned CIT(A) has discussed this issue in para 6 - 6.2 of his order. According to him, Emcure USA had paid TDS during F.Y. 2014 — 15 and the assessee cannot be granted pro rata credit of the said TDS in A.Y. 2011-12. He has stated that the assessee by making such a claim is claiming credit for the TDS amount which was not paid during the concerned financial year by Emcure USA. Accordingly, he denied the claim of the assessee. 2.3] The assessee submits that the denial of foreign tax credit by the learned CIT(A) is not justified. As stated above, the assessee has already offered the interest income of Rs.4,91,47,872/- on accrual basis in A.Y.

8 ITA No.226/PUN/2017 2011 — 12 even though, no interest was received during the year under consideration. Now, subsequently, Emcure USA has deducted TDS on the said interest in F.Y. 2014 — 15. The assessee has claimed the credit on pro rata basis of the TDS deducted by Emcure USA. The assessee has also given a written undertaking / statement that if the credit for the aforesaid foreign TDS is granted, the assessee will not claim interest on the refund arising on account of grant of the aforesaid foreign tax credit. 2.4] It is submitted that as per Article 25 of the DTAA between India and USA, the credit for tax deducted in USA is to be allowed while computing the tax liability of the Indian company in India. It is also to be noted that as per Article 25 of the said DTAA, the credit for the foreign tax is to be restricted to the amount of income tax payable by the Indian company in respect of the said income in India. For example, if an Indian Company has earned income in USA of Rs. 1000/- and it has paid tax in USA of Rs. 200/-, while in India, the tax payable on the said income is Rs. 125/-, in that event, the credit for the foreign tax is to be restricted to Rs. 125/-. Accordingly, the assessee submits that there is a clear co relation of taxability of income in India and the amount of foreign tax credit to be allowed since the quantum of foreign tax credit to be allowed directly depends upon the taxability of the said income in India. 2.5] The assessee would also like to state that from 01.04.2017, Rule 128 has been inserted which gives the procedure for allowing foreign tax credit. As per the said rule, the credit for the foreign tax paid is to be allowed in the year in which the corresponding income has been offered to tax. The proviso to Rule 128(1) clearly states that in a case where income on which foreign tax has been paid or deducted, is offered to tax in more than one year, credit of foreign tax shall be allowed across those years in the same proportion in which the income is offered to tax or assessed to tax in India. Hence, as per the said rules also, the credit is to be allowed in the year in which the said income has been offered to tax. 2.6] The assessee would further like to state that even as per the provision of section 199 r.w. Rule 37BA(3)(i), the credit for the TDS is to be allowed in the year in which the corresponding income is offered to tax. Further as per Rule 37BA(3)(ii), where tax has been deducted at source and paid to the Central Government and the income is assessable over a number of years, credit for tax deducted at source shall be allowed across those years in the same proportion in which the income is assessable to tax. Now, the learned CIT(A) has stated that the claim on the assessee is resulting in an absurd situation since it is claiming credit for the foreign tax which was paid in the subsequent year. However, even in the context of the TDS deducted in India, if the income is offered in year I and the TDS has been paid by the deductor in year III, the credit for the same is to be granted in year I because the income was offered in year I. Applying the same principle to foreign TDS, the assessee submits that there is no absurdity in its claim. 2.7] The assessee would further like to place reliance on the decision in the case of Petroleum India International [2008] 26 SOT 105. In that case, the assessee had claimed credit of the taxes paid in Kuwait in A.Y. 1996 - 97, since the income was offered in that year. The actual taxes were paid in the subsequent year in five equal instalments. The claim for foreign tax credit was disallowed since the tax was not paid in the concerned year but in the subsequent year. Hon'ble ITAT held that ultimately the tax has been

9 ITA No.226/PUN/2017 in the subsequent year and the credit for the said taxes is allowable in the year in which the income was offered to tax. This issue travelled before Hon'ble Bombay H.C. [reported in 29 Taxmann.com 250] wherein it has been held that the credit for the foreign tax credit is not dependent upon the payment of tax in the said previous year. Once, the taxes are paid in the subsequent year credit has to be allowed in the year in which the income was offered. Considering the above decision of Hon'ble Bombay H.C., the assessee submits that its claim is justified. 2.8] It is also to be noted that for A.Y. 2014 - 15, the assessee had also claimed credit of the foreign tax on pro rata basis in respect of the interest income offered to tax. The learned A.O. has allowed the claim of credit in the said asst. year. The copy of the asst, order is enclosed herewith. 2.9] The assessee submits that the Rule 128 introduced from 01.04.2007 clearly states that the credit for foreign taxes is to be allowed in the year in which the corresponding income was offered to tax. Even though, the said rule is inserted from 01.04.2017, the principle laid down clearly supports the claim of the assessee and the legal proposition laid down by Hon'ble Bombay H.C. In view of the above facts and the legal position explained, the assessee submits that the learned CIT(A) is not justified in denying the claim of foreign tax credit. Accordingly, the same may kindly be allowed.”

10 ITA No.226/PUN/2017 12. On the other hand, ld. DR for the Revenue relied heavily on the orders of the revenue authorities. 13. After hearing both the sides and considering the material available on record, we find it relevant to extract the contents of para 12 of the order of Tribunal and the same are extracted hereunder :- “12. We have considered the rival submissions carefully. We find that the language of s. 91(1) of the Act is unambiguous on the issue, which provides that where the assessee proves that in respect of his income which accrued or arose during that previous year outside India and he has paid in any country with which there is no agreement under s. 90 for the relief or avoidance of double taxation, he shall be entitled to deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income. We find that nowhere in the provision of s. 91(1) of the Act, it is provided that the payment of taxes outside India shall be during the relevant previous year itself. The purpose of this provision of s. 91(1) of the Act is to provide relief in a case where the assessee has paid the taxes outside the country, not to subject such assessee to double taxation on the same income. If the interpretation put forward by the learned CIT–Departmental Representative is accepted, it shall render the provision of s. 91(1) itself as redundant. We find that the assessee has discharged its onus of proving that it has in fact made the payment of taxes in Kuwait in subsequent periods. The CIT(A) has recorded the dates and amount of payment of taxes in Kuwait by the assessee and has recorded that the assessee has furnished before him the original documents evidencing these payments and the same have also been furnished before the AO and has been verified by him. There is no material before us to controvert these findings of the CIT(A). In these facts of the case, we hold that the assessee is entitled to relief under s. 91(1) of the Act and the order of the CIT(A) is confirmed and the ground of appeal of Revenue is dismissed.”

11 ITA No.226/PUN/2017 in favour of the assessee. Following the parity of reasoning, the said issue is decided in favour of the assessee. Thus, the relevant grounds on this issue are allowed. 16. In the result, the appeal of the assessee is allowed. Order pronounced on 27th day of August, 2019. Sd/- Sd/- (िवकास अव�थी /VIKAS AWASTHY) (डी. क�णाकरा राव/D. KARUNAKARA RAO) �याियक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER पुणे / Pune; �दनांक / Dated : 27th August, 2019. Sujeet आदेश क� �ितिलिप अ�ेिषत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT(A)-12, Pune. 4. The Pr. CIT, Central, Pune. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “ए” ब�च, 5. पुणे / DR, ITAT, “A” Bench, Pune. गाड� फ़ाइल / Guard File. 6. आदेशानुसार / BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune.