APEX LABORATORIES (P) LTD.,BANGALORE vs. DCIT, CHENNAI

आदेश / O R D E R PER GEORGE MATHAN, JUDICIAL MEMBER:

2. Mrs. S.Vijayaprabha, JCIT represented on behalf of the Revenue and Mr. K.V.Ningoji Rao, CA, represented on behalf of the assessee.

3. It was submitted by the Ld.AR that the assessee is a company which is doing business of manufacture of pharmaceutical formulations. It was a submission that in the course of the assessment for the relevant Assessment Year, the AO had by invoking the explanation to Sec.37(1) of the Act and disallowed the expenses claimed by the assessee to the extent of Rs.2,31,93,985/- under the head ‘Sales Promotion Expenses’ and Rs.2,40,97,174/- under the head ‘Other Selling Expenses’ on the ground that the same were with regard to providing gifts/freebies to Doctors and Medical Practitioners and the same was against the Medical Council Act, 1956 in view of the amendment made to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 imposing a prohibition on the Medical Practitioner and their Professional Associations from taking any gift, travel facility, hospitality, cash or monetary grant & 1343/Mds/2014 :- 3 -:

from the pharmaceutical and allied sector industries. It was a submission that on appeal, the Ld.CIT(A) had granted the assessee partial relief on the ground that the amendment to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 had been made w.e.f. 14.12.2009 and therefore till 14.12.2009, the amendment of the gifts/freebies to the Doctors and Medical Professionals did not fall within the purview of the explanation to Sec.37(1) of the Act. It was a submission that to the extent that the Ld.CIT(A) has granted relief to the assessee, the Revenue is on appeal, to the extent that the Ld.CIT(A) has confirmed the addition representing the expenditure incurred by the assessee from 14.12.2009 to 31.03.2010, the assessee is on appeal. It was submitted by the Ld.AR that the Medical Council Act, 1956 did not apply to the assessee and the expenditure incurred by the assessee on giving gifts to the Doctors and Medical Professionals were business expenditure incurred by the assessee. It was submitted by the Ld.AR that the decision of the Co-ordinate Bench of this Tribunal in the assessee’s own case for the AY 2011-12 in dated 15.03.2017 did not apply to the assessee’s case in so far as the Tribunal had not considered the fact that the Medical Council Act, 1956 did not apply to the assessee. The Ld.AR further placed reliance upon the decision of the Hon’ble ITAT Mumbai Benches in the case of M/s.Syncom Formulations (I)

Ltd., in & 6428/Mum/2012 dated 23.12.2015 to submit that the Co-ordinate Bench had held that the Circular issued by the CBDT explaining the decision in Circular No.5/2012 dated 01.08.2012 and & 1343/Mds/2014 :- 4 -: consequently, if at all any disallowance was called for, it can be considered only to be operative from the AY 2013-14. It was a submission that the gifts were purely for business purpose and the ‘Business Promotion Expenses’ could not be disallowed by applying the explanation to Sec.37(1) of the Act.

4. In reply, the Ld.DR submitted that the grounds raised by the assessee were not specific and the submissions before the Ld.CIT(A) were whether or not, the amendment made to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 w.e.f.

14.12.2009 was prospective in operation or retrospective. It was a submission that the amendment made by the Medical Council Act, 1956 being clarificatory in nature, the decision of the Hon’ble Himachal Pradesh High Court in the case of Confederation of Indian Pharmaceutical Industry (SSI) v. CBDT reported in 353 ITR 0388 (HP) was fully applicable and the disallowance as made by the AO was liable to be confirmed.

7.2 During the appellate proceedings, the assessee’s counsel submitted before the Ld.CIT(A) that the appellant company, during appellate hearings, submitted that the company was engaged in the manufacturing of mainly “Zincovit”, a healthcare supplement, but not a pharmaceutical product. In order to create awareness of the product and popularize it, the best persons were the medical practitioners only. The Company also claimed that the above sales promotions expenses and other selling expenses are mainly in the forms of refrigerators, LCD TVs, Laptops, gold coins etc, which are mainly intended to disseminate the information to the medical practitioners and from them to the ultimate consumers. Therefore, these expenses are essentially advertisement expenses for creating awareness and to promote sales. The appellant further claimed that it is neither engaged in the manufacturing of any pharmaceutical product nor prohibited by any law from incurring such expenses. Hence the appellant claimed that the above expenses, which are incurred wholly and exclusively for the purpose of business should be allowed as allowable expenses. The Ld.CIT(A) observed that One of the main submissions of the appellant is that it is not engaged in the manufacturing of any pharmaceutical product and hence the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations 2002, have no application in its case and therefore, this claim is not acceptable. According to Ld.CIT(A), the aforesaid prohibition is not only relating to the manufacturing of any pharmaceutical products, but also includes all allied products. The appellant’s product is a healthcare product and is covered by the second limb i.e. allied products. Further, the proviso to section 37(1) is relating the nature of the expenses which are paid to the doctors and medical practitioners. Any expenses paid by the manufacturers of any pharmaceutical products and allied products, to the doctors and medical practitioners, by way of freebies and gifts, are within the scope of the proviso. Therefore, this contention of the appellant stands rejected. Therefore, the Ld.CIT(A) confirmed the action of the ld. Assessing Officer and disallowance of expenditure incurred towards distribution of gold coins to the doctors and medical practitioners included in the above amount. Against the order of Ld.CIT(A), both the assessee and the Revenue is preferred appeal before us.

The judgment of the court was delivered by Shri Deepak Gupta.J:-

“2. The council in exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10.12.2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries.

3. Section 37(1) of Income Tax Act provides for deduction of any revenue expenditure (other than those falling under Sections 30 to 36) from the business Income if such & 1343/Mds/2014 :- 6 -:

expense is laid out/expended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this sub-section denies claim of any such expense, if the same has been incurred for a purpose which is either an offence or prohibited by law.

Thus, the claim of any expense incurred in providing above mentioned or similar freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under Section 37(1) of the Income Tax Act being an expense prohibited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector Industries or other assessee which has provided aforesaid freebees and claimed it as a deductable expense in its accounts against income.

“37(1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

(Explanation - For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.)”

4. We, therefore, find no merit in the petition, which is accordingly rejected. No costs.

& 1343/Mds/2014 :- 7 -:

8. A perusal of the decision of Co-ordinate Bench of this Tribunal in the assessee’s own case as also the decision of the Hon’ble Himachal Pradesh High Court clearly shows that the basic intention of the decision was that the receiving of the gifts/freebies by Professionals is against public policy as also against the law in so far as the amendment by the Medical Council Act, 1956 to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, once receiving of such gifts have been held to be unethical obviously the corollary to this would also be unethical, being giving of such gifts or doing such acts to induce such Doctors and Medical Professionals to violate the Medical Council Act, 1956.

Consequently, we are of the view that the expenditure incurred by the assessee which has resulted in the violation of the amendment to the Indian Medical Council (Professional Conduct, Etiquette and Ethics)

Regulations, 2002 under the Medical Council Act, 1956, is not an allowable expenditure and hit by the explanation to Sec.37(1) of the Act.

Consequently, the said amendment cannot be treated as operating retrospectively nor can it be treated as clarificatory in nature, clearly the & 1343/Mds/2014 :- 8 -: said amendment is prospective in nature and operative from 14.12.2009. A perusal of the decision of the Ld.CIT(A) clearly shows that the Ld.CIT(A) has granted the assessee the benefit of the expenditure till 14.12.2009 and has restricted the disallowance by invoking the explanation to Sec.37(1) of the Act for the period from 14.12.2009. This being so, we find no error in the findings of the Ld.CIT(A) which calls for any interference.