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Income Tax Appellate Tribunal, “SMC-C” BENCH : BANGALORE
Before: SHRI ARUN KUMAR GARODIA
O R D E R
Per Shri A.K. Garodia, Accountant Member
This appeal is filed by the assessee which is directed against the order of ld. CIT(A) – 6, Bangalore dated 10.03.2017 for Assessment Year 2012-13.
The grounds raised
by the assessee are as under.
1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
2. The learned CIT[A] is not justified in upholding the disallowance of Rs. 30,86,429/- in respect of sales promotion expenses incurred by the appellant holding that these expenses incurred by the appellant were in violation of the law being the MCI guidelines and therefore, the same were hit by the provisions of Explanation 1 to section 37[1] of the Act, under the facts and in the circumstances of the appellant's case.
2.1 The learned CIT[A] ought to have appreciated that the MCI guidelines specified a code of conduct for doctors and as such these guidelines were not binding on the appellant company and hence, it cannot be considered that the appellant had incurred expenditure that was prohibited by law and thus, the disallowance sustained by the learned CIT[A] is on an erroneous appreciation of law and the facts of the appellant's case and the same deserves to be deleted.
3. Without prejudice to the above, the learned CIT[A] ought to have appreciated that a sum of Rs. 16,61,439/- out of the total sales promotion expenditure of Rs. 30,86,429/- was incurred by the appellant company on the distribution of free samples to their own distributors, who in turn gives these goods as part of offer to Chemist and such of this expenditure was not related to any freebees given to Doctors and prohibited by the MCI guidelines and thus, the disallowance of the expenses on free samples is opposed to law and the facts of the appellant's case and therefore, the same requires to be deleted.
4. Without prejudice to the right to seek waiver with the Hon'ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s 234-A, 234-C and 234-D of the Act, which under the facts and in the circumstances of the appellant’s case deserves to be cancelled.
5. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.”
Brief facts as noted by the AO in the assessment order are that the assessee has claimed expenses in respect of expenditure for distribution of samples of Rs. 16,61,439/-, expenses on hotel bills of boarding and lodging of various doctors of Rs. 12,07,180/- and travelling expenses of doctors amounting to Rs. 2,17,810/- total of Rs. 30,86,429/- The AO has referred to Board Circular No. 5/2012 dated 01/08/2012 and also MCI regulations amended w.e.f. 10.12.2009 as per which there is a prohibition imposed on the doctors from accepting gift, travel facilities, hospitality and cash or monetary gifts. The AO made disallowance of these expenses by invoking the provisions of Explanation 1 to section 37(1) of the Act. Being aggrieved, the assessee carried the matter in appeal before CIT (A) but without success. Now the assessee is in further appeal before the Tribunal.
At the very outset, it was submitted by ld. AR of assessee that the issue in dispute is squarely covered in favour of the assessee by the Tribunal order rendered in the case of DCIT Vs. PHL Pharma P. Ltd. in ITA No.
4605/Mum/2014 dated 12.01.2017 copy available on pages 25 to 58 of the paper book. He pointed out that as per para no. 8 of this Tribunal order, it is held that from the said amendment / notification in the MCI regulation, it is quite clear that same is applicable for medical practitioners only and the censure / action which has been suggested by it is only on medical practitioners and not for pharmaceutical companies or allied health sector industries. The violation of the aforesaid regulation would only ensure removal of a doctor from the Indian Medical Register or State Medical Register for a certain period of time but it does not impinge upon the conduct of pharmaceutical companies. He submitted that It is also held by the tribunal that this important distinction has to be kept in mind that regulation issued by Medical Council of India is qua the doctors / medical practitioner and not for the pharmaceutical companies. As a logical corollary to it, if there is any violation or prohibition as per MCI regulation in terms of section 37(1) r.w. Explanation 1, then it is only meant for medical practitioners and not for pharmaceutical company (i.e. the present assessee Company) for claiming the expenditure.
He also submitted that It is further pointed out in para no. 9 of this Tribunal order that the Tribunal has also considered the argument of ld. DR of revenue that CBDT is well empowered to issue such clarification and the Tribunal observed that CBDT Circular dated 01.08.2012 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. He further pointed out that in para 9 of this Tribunal order, the Tribunal has referred to another Tribunal order of Mumbai Bench rendered in the case of Syncom Formulations (I) Ltd. in & 6428/Mum/2012 for A.Ys. 2010-11 & 2011-12 dated 23.12.2015, wherein the Tribunal held that the CBDT Circular would not be applicable in the A.Ys. 2010-11 and 2011-12 as it was introduced w.e.f. 01.08.2012. He submitted that in the present case also, the assessment year is 2012-13 which started from 01.04.2012 and therefore, this circular is not applicable in the present case also because the rule applicable on the first day of relevant Assessment Year has to be applied in that Assessment Year. His alternative contention was this that even if it is held that the disallowance is justified under explanation 1 to section 37(1) then also, only the expenses incurred on hotel bills of boarding and lodging and travelling expenses of doctors amounting to Rs. 12,07,180/- and Rs. 2,17,810/- respectively may be affected but not the expenditure of Rs. 16,61,439/- in respect of distribution of free samples because as per MCI regulations amended w.e.f. 10.12.2009, there is prohibition imposed on the doctors from accepting gift, travel facilities, hospitality and cash or monetary gifts and distribution of free samples is not hit by these regulations. The ld. DR of revenue supported the orders of authorities below and he submitted that this Tribunal order is in respect of Assessment Year 2010-11 and 2011-12 and in the present case, the expenses is for Assessment Year 2012-13 and therefore, this Tribunal order is not applicable in the present case.
I have considered the rival submissions. First of all, I reproduce para nos. 9 and 10 of this Tribunal order as per pages 47 to 51 of paper book. “9. Adverting to the contention of the Ld. CIT DR that CBDT is well empowered to issue such clarification, it is seen that the CBDT Circular dated 01.08.2012 (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 'contemporaneaexpositio' 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 same CBDT circular had come up for consideration before the co-ordinate Bench of the ITAT, Mumbai Bench in the case of Syncom Formulations (I) Ltd. (in & 6428/Mum/2012 for A.Ys. 2010-11 and 2011-12, vide order dated 23.12.2015), wherein Tribunal held that CBDT circular would not be not be applicable in the A.Ys. 2010-11 and 2011-12 as it was introduced w.e.f. 1.8.2012.
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. Coming to the gift articles and free samples of medicines, it is seen that the assessee gives various kind of articles like, diaries, pen sets, calendars, paper weights, injection boxes etc. embossed with bold logo of its brand name and the product name so that the doctors remembers the brand of the assessee and also the name of the medicine. All the gift articles, as pointed out by the assessee before the authorities below and also before us are very cheap and low cast articles which bears the name of assessee and it is purely for the promotion of its product, brand reminder, etc. These articles cannot be reckoned as freebies given to the doctors. Even 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. Further as pointed out and concluded by the learned CIT(A) there is no violation by the assessee in so far as giving any kind of freebies to the medical practitioners. Thus, such kind of expenditures by a pharmaceutical companies are purely for business purpose which has to be allowed as business expenditure and is not impaired by EXPLANATION 1 to section 37(1).”
From the above paras reproduced from the Tribunal order rendered in the case of DCIT Vs. PHL Pharma P. Ltd. (supra), it is seen that as per this Tribunal order, the CBDT Circular No. 5/2012 dated 01.08.2012 has to be applied prospectively only and it cannot have retrospective effect and this circular is dated 01.08.2012 and therefore, in my considered opinion, this circular can be applied w.e.f. Assessment Year 2013-14 only and not prior to that. Respectively following this Tribunal order, I hold that disallowance made by the AO and confirmed bythe CIT (A) in the present case on the basis of Circular No. 5/2012 dated 01.08.2012 is not justified and hence, I delete the same.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on the date mentioned on the caption page.