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Before: Shri Duvvuru RL Reddy & Shri G. Manjunatha
O R D E R
PER DUVVURU RL REDDY, JUDICIAL MEMBER:
This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 6, Chennai, dated 29.12.2017 relevant to the assessment year 2014-15. The effective grounds raised in the appeal of the assessee are with regard to the confirmation of disallowance of travelling expenses & business promotion expenses claimed under section 37(1) of the Income Tax Act, 1961 [“Act” in short].
Brief facts of the case are that the assessee has filed the return of income for the assessment year 2014-15 declaring total income of ₹.
51,42,260/- and the case of the assessee was selected for scrutiny. After considering the details filed against statutory notices, the assessment under section 143(3) of the Act was completed by assessing total taxable income of the assessee at ₹.1,22,60,200/- after making various additions/ disallowances. On appeal, the ld. CIT(A) partly allowed the appeal of the assessee.
3. On being aggrieved, the assessee is in appeal before the Tribunal against confirmation of disallowance of travelling expenses & business promotion expenses claimed under section 37(1) of the Act by the ld. CIT(A).
4. We have heard both the sides through video conferencing, perused the materials available on record and gone through the orders of authorities below. The assessee has claimed an expenditure of ₹.1,84,37,714/- towards travelling expenses and ₹.27,23,286/- towards business promotion expenses. After considering the submissions of the assessee, the Assessing Officer noticed that against the total claim of travelling expenses, an amount of ₹.1,36,87,437/- was incurred in making payment to employees who visits various doctors and also an amount of ₹.7,35,273 incurred by the directors and ₹.11,99,204/- for car rental used for assessee’s business. Since the assessee could not file any evidence or justification for the expenses of ₹.22,40,596/- and moreover the assessee has violated the Medical Council of India Notification dated 11.03.2002 of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, the above expenditure was brought to tax, which was confirmed by the ld. CIT(A) on further appeal. Before us, the ld. Counsel for the assessee has submitted that the assessee is a pharmaceuticals company engaged in the business of marketing of pharmaceutical products and has to necessarily incur travel expenses for directors, field staff, office staffs and in few cases, travel expenses are incurred for eminent doctors. It was further submission that the assessee has furnished the ledger account copy of travel expenses met through credit cards before the first appellate authority and the same were not considered before confirming the disallowance by the ld. CIT(A).
4.1 Similarly, with regard to the claim of business promotion expenses at ₹.27,23,286/-, the Assessing Officer observed that the assessee has incurred an amount of ₹.14,10,500/- in giving gift items to the doctors. Since the assessee has violated the Medical Council of India Notification dated 11.03.2002 of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, the above expenditure was brought to tax. On the other hand, the ld. DR supported the orders of authorities below. On perusal of the appellate order as well as assessment order, we find that the authorities below have dutifully followed the CBDT circular No. 5/2010, in which guidelines of Indian Medical Council (Profession Conduct, Etiquette and Ethic) Regulation, 2002 in relating to the Doctors and others wherein gifts given to doctors is not allowable expenditure in terms of explanation to sub-section 1 of section 37 of the Act by ignoring the judicial precedent. First of all, we are of the considered opinion that any guidelines issued by any Council such as Indian Medical Council, etc. shall not be binding on the pharma companies or other companies dealing with similar activities, until and unless, the Legislature pass any Bill and the Indian medical Council guidelines are exclusively binding on the Doctors only.
4.2 The AR of the assessee has relied on the decision of the Mumbai Benches of the Tribunal in the case of DCIT v. PHL Pharma (P) Ltd [TS-12- ITAT-2017(Mum)] before the ld. CIT(A) and besides without controverting the above decision of the Tribunal, the ld. CIT(A) simply following the CBDT circular confirmed the addition.
5. Various decisions of the Coordinate Benches of Tribunal/other High Court(s) both against and in favour of the assessee on the issue of sales promotion expenses incurred on doctors, legal view pronounced are discussed hereunder: 1. In the case of Johnson & Johnson Ltd v. Addl. CIT [TS-6551- ITAT-2014(MUMBAI)] the issue was whether expenses expended on the sponsorship of various doctors for attending various training programmes can be disallowed. The Mumbai Tribunal, in para 44, Ground No 9 of the Order, held that by spending this amount, the assessee-company had invested for future benefits and, therefore, disallowance of 10% of such expense treating them for non-business purposes was not justified. Similarly, in the case of ACIT v. Geno Pharmaceuticals Ltd (2014) [TS-6616-ITAT-2014(PANAJI)], a decision delivered post CBDT Circular No. 5/2012, dated 1/8/2012, sales promotion expenses paid to / incurred on doctors including travelling and conveyance, selling and distribution expenses, conference expenses were held to be against the ethics of doctors. The A.O. held that the MCI Regulations Act, 2002, prohibited doctors from accepting any gift for any kind of services from pharmaceutical companies and, therefore, such expenditure was to be disallowed. The Tribunal found that when any product is launched by the assessee, the assessee has to publish the material and it has to make the doctors aware of the medicine manufactured by the assessee. When any new product is launched, there is a lot of conference and for arranging the conference the industry has to incur the expenses for travelling and other expenses. Therefore, we are of the view that such expenditure is admissible under sec 37.
2. In the case of Apex Laboratories (P.) Ltd v. ACIT (2017) [TS- 5503-ITAT2017 (CHENNAI)] the Chennai Tribunal held that in view of Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, expenditure incurred by the taxpayer by way of freebies and gifts to doctors and medical practitioners was not allowable business expenditure under sec 37(1) of the Income tax Act. The company claimed that in order to create awareness its product and popularize them it incurred sales promotions expenses mainly in the form of refrigerators, LCD TVs, Laptops, gold coins, etc. The company claimed that these expenses were mainly intended to disseminate the information to the medical practitioners and from them to the ultimate consumers. Therefore, these expenses were essentially advertisement expenses for creating awareness and to promote sales. The company also claimed that the provisions of MCI Regulations 2002, apply to doctors only. However, the CIT(A), the said regulations equally apply to a pharma or allied industry. Further, gifts and other expenses were covered by Explanation to section 37(1) of the Income tax Act. Any expenses incurred on doctors and medical practitioners, by way of freebies and gifts, are within the scope of the said proviso. The Tax Tribunal held that Medical Council (professional Conduct, Etiquette and Ethics) Regulations, 2002 prohibits distribution of gift to the doctors and medical practitioners and accordingly, rejected the tax appeal of the company. The Chennai Tribunal did not consider or refer to the decisions in the case of DCIT v. PHL Pharma (P) Ltd [TS-12- ITAT-2017(Mum)] [case favourable to the taxpayer] and ACIT v. Liva Healthcare Ltd [case against the taxpayer] TS-6132-ITAT- 2016(MUMBAI).
The Punjab & Haryana High Court in the case of CIT v. KAP Scan and Diagnostic Center (P.) LtdTS-5878-HC-2010(PUNJAB & HARYANA)-O held that Commission paid by the diagnostic center to private doctors for referring patients for diagnosis could not be allowed as a business expenditure. The High Court observed that provide that no physician shall give, solicit, receive, or offer to give, solicit or receive, any gift, gratuity, commission or bonus in consideration of a return for referring any patient for medical treatment. If demanding of such commission was bad, paying it was equally bad. Both were privies to a wrong. Therefore, such commission paid to private doctors was opposed to public policy and should be discouraged.
In ACIT v. Liva Healthcare Ltd [TS-6132-ITAT-2016 (MUMBAI)] the Mumbai Tribunal held that (a) expenses incurred by the taxpayer pharmaceutical company on overseas tours of doctors to increase their sales and profitability was not an allowable expenditure as overseas trip were directed towards leisure and entertainment of doctors and their spouses rather than being directed towards seminar for product information dissemination as no details of seminar and its course content were brought on record; and (b) expenses incurred towards free samples distributed to physicians will be allowable only if free samples of pharmaceutical products are distributed to physicians/doctors at initial stage of introduction to test efficacy of products and same are incurred wholly and exclusively for purposes of business. The Tribunal held both CBDT Circular and MCI Guidelines applied in the case of taxpayer.
In the case of DCIT v. PHL Pharma (P) Ltd, the Mumbai Tribunal after considering the adverse / contrary decision of ACIT v. Liva Healthcare Ltd held that expenditure incurred by assessee Pharma Company for customer relationship management (CRM), key account management, small value or cheap / low cost gift articles (these items included diaries, pen sets, injection boxes, calendars, table weights, postcard holders, stationery items, etc., wherein logo of the company and name of the medicine was printed so as to maintain brand memory on a continuous basis). Smaller size free medicine samples (marked as “physician sample not for sale”) were given only to prove the efficacy and to establish the trust of the doctors on the quality of the drugs. Advertisement and sales promotion could not be considered as freebies given to doctors, they were purely for brand recognition; allowable as business expenditure and were not impaired by Explanation 1 to section 37(1) of the Income tax Act. The Tribunal held that CBDT Circular No. 5 of 2012, dated 1/8/2012 applied prospectively and the MCI Guidelines were meant only for the medical practitioners and not for 7 I.T.A. No. 913/Chny/18 pharmaceutical or allied healthcare companies. Therefore, these expenses cannot be regarded as unlawful or illegal at least in the hands of the pharma company. In the above case, expenses have not been incurred for the purpose personal benefit/enjoyment of the doctors or their spouses. In the case of Liva Healthcare, the question as to whether such IMC Regulations can be applicable to Pharma Companies was not argued before the Tribunal. The Delhi High Court in the case of Max Hospital v. MCI [(WPC No. 1334 (Delhi) of 2013, dated 10/1/2014] and the Jurisdictional Tribunal in the case of Syncom (supra) have held that such IMC Regulations apply only to medical practitioners. the Hon'ble Delhi High Court in the case of Max Hospital (supra) and the Jurisdictional Tribunal in the case of Syncom Formulations (I.) Ltd. [IT Appeal Nos. 6429 & 6428 (Mum.) of 2012, dated 23-12- 2015] have held that such IMC Regulations apply only to medical practitioners. Similar issue of allowance of such expenditure in the case of pharmaceutical companies has been decided in favour of the assessee, in the case of UCB India (P.) Ltd. v. ITO [IT Appeal No. 6681 (Mum.) of 2013, dated 13-05-2016], wherein it was held that CBDT circular cannot have a retrospective effect. This judgment was lost sight of by the Mumbai Tribunal Liva Healthcare. The Mumbai Tax Tribunal has not elaborated or dwell upon as to how this MCI regulation which is strictly meant for medical practitioners and doctors can be made applicable to pharmaceutical companies. There has to be some enabling provision or specific clause in the said regulation whereby the pharmaceutical companies are barred from conducting seminars or conferences by sponsoring the doctors. The entire conduct relates to doctors and medical practitioners and lists out the censures and fines imposed upon them. What has not been provided in the MCI regulation cannot be supplied either by the court or by the CBDT. There has to be express provision under the law whereby pharmaceutical companies are prohibited to conduct conferences or seminar or give free samples.
Most recently, the Hyderabad Tribunal was also seized of a similar issue in the case of Dr. Reddy’s Laboratories Ltd v. Addl. CIT [TS-5033- ITAT2017(HYDERABAD)] wherein the Tribunal after referring to the decisions in the case of ACIT v. Liva Healthcare TS-6132-ITAT- 2016(MUMBAI) and DCIT v. PHL Pharma (P) Ltd, accepted the arguments of the taxpayer that sales promotion expenses were not opposed to public policy despite the fact that expenditure towards gifts, hospitality, etc., was in violation of MCI Regulations but so far as the company was concerned, there was no infraction of any law. The said guidelines are applicable to medical practitioners / doctors only and the CBDT Circular No. 5/2012, dated 1/8/2012, cannot be applied retrospectively. However, the Tribunal remanded / send the matter back to the ITO to verify the nature of sales promotion expenses and disallow them only, if such expenditure was not incurred for the business purposes of the company. From the above decisions of the Coordinate Benches of the Tribunal, it is clear that the expenses towards gifts given to the doctors by the assessee are nothing but sales promotion, which, are allowable under section 37(1) of the Act and thus, the guidelines of the Indian Medical Council is not applicable to the pharma companies as has been held by the Mumbai Benches of the Tribunal in the case of DCIT v. PHL Pharma (P) Ltd(supra) as has also been held by the Hyderabad Benches of the Tribunal in the case of Dr. Reddy’s Laboratories Ltd v. Addl. CIT [TS-5033-ITAT2017 (HYD)] that there was no infraction of any law for incurring the above expenditure. The Delhi High Court in the case of Max Hospital v. MCI [(WPC No. 1334 (Delhi) of 2013, dated 10/1/2014] and the Jurisdictional Tribunal in the case of Syncom (supra) have held that such IMC Regulations apply only to medical practitioners. Since three case law are in favour of the assessee and there is a decision against the assessee, the law laid down by the Hon’ble Supreme Court in the case of CIT v. Vegetable Products Ltd. 88 ITR 192 stands applied to take a view in favour of the assessee. Moreover, the authorities below have not disputed the expenses incurred by the assessee. Accordingly, we set aside the orders of authorities below and direct the Assessing Officer to delete the addition.
6. So far as disallowance of travelling expenses are concerned, as contended by the assessee and reproduced the written submissions of the assessee, ld. CIT(A) has not obtained any remand report from the Assessing Officer on furnishing of ledger account copy of travel expenses met through credit cards. It is also not clear as to whether the travel expenses already allowed by the Assessing Officer, which, include the payments through credit cards or not. Thus, the Assessing Officer is directed to verify the above facts and allow the travel expenses and allow if the assessee has incurred the expenses through credit cards since, by respectfully following the spate of various decisions, it has been held hereinabove that the Medical Council of India Notification dated 11.03.2002 of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 is not applicable to the pharma and allied companies.