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Income Tax Appellate Tribunal, MUMBAI BENCH “A” MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI N.K. PRADHAN
ORDER PER N.K. PRADHAN, A.M. This is an appeal filed by the Revenue. The relevant assessment year is 2010-11. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-16, Mumbai and arises out of the order u/s 143(3) of the Income Tax Act 1961, (the ‘Act’). 2. The solitary ground raised by the Revenue is against the order passed by the Ld. CIT(A) deleting the addition of Rs.34,09,720/- made by the Assessing Officer (AO) in respect of freebies provided by the M/s Agio Pharmaceuticals Ltd. Indian Medical Counsel (IMC) Regulations.
3. Briefly stated, the facts of the case are that the assessee-company is a manufacturer, importer, exporter and trader in pharmaceuticals, chemical and jeweller. During the course of assessment proceedings, the AO found that the assessee-company has made the following payments:
Sl. Category Amount (Rs.) No.
Payment made to Medical 17,28,728 Practitioners (from 11.12.2009 to 31.03.2010) 2. Sample (from 11.12.2009 to 15,59,766 31.03.2010) 3. Other sale promotion expenses 18,02,219 (from 10.12.2009 to 31.03.2010) The AO found that expenses at Sl. no. 1 as above were incurred for seeking professional advice from doctors. He observed that the professional autonomy of the medical practitioners was compromised by accepting the above receipts from the assessee. The AO thus concluded that the above expenses of Rs.17,28,728/- come within the mischief of the IMC Regulations. In respect of expenses mentioned at Sl. No. 2 as above, the AO found that the samples of Rs.15,59,766/- were given to medical practitioners, druggists and stockist. Considering the fact that the recipients are stockists and retail chemists, the AO restricted the disallowance to 50% of the sample cost. Thus he made a disallowance of Rs.7,79,883/-.
M/s Agio Pharmaceuticals Ltd. In respect of expenses at Sl. No. 3 as above, the AO found that these were incurred towards other sale promotion expenses. The AO made a disallowance of 50% of these expenses on the reason that these fall within the mischief of MCI Regulations. The AO has relied on the CBDT Circular No. 05/2012 dated 01.08.2012. To sum up the AO made the following disallowances; Sl. Category Amount (Rs.) No.
1. Payment made to Medical 17,28,728 Practitioners (from 11.12.2009 to 31.03.2010) 2. Sample (from 11.12.2009 to 7,79,883 31.03.2010) 3. Other sale promotion expenses 9,01,109 (from 10.12.2009 to 31.03.2010) Total 34,09,720 4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). We find that the Ld. CIT(A) has observed that since the assessee-company has operations in 18 states with more than 800 stockists operating in different areas, the said expenditure can be considered as reasonable. The Ld. CIT(A) also agreed with the contentions of the assessee that distribution of free samples is not in violation of IMC Regulations since the tag of ‘sample not for sale’ render the said products valueless. Therefore, the Ld. CIT(A) deleted the disallowance of Rs.34,09,720/- made by the AO.
Before us, the Ld. DR relies on the order of the AO whereas the Ld. counsel of the assessee relies on the order passed by the Ld. CIT(A).
M/s Agio Pharmaceuticals Ltd.
We have heard the rival submissions and perused the relevant materials on record. We find that the same CBDT Circular had come up for consideration in the case of Syncom Formulations (I) Ltd. IT Appeal Nos. 6429 & 6428 (Mum.) of 2012, dated 23.12.2015, wherein the Tribunal held that CBDT Circular was not be applicable in the AYs 2010- 11 and 2011-12 as it was introduced w.e.f. 01.08.2012. Similar issue of allowance of such expenditure in the case of pharmaceutical companies had been decided in favour of the assessee, in the case of UCB India (P.) Ltd. vs. ITO, IT Appeal No. 6681 (Mum.) of 2013, dated 13.05.2016, wherein it was held that the CBDT Circular could not have a retrospective effect. We are of the considered view that the said CBDT Circular was not to be applicable in the AY 2010-11 as it was introduced w.e.f. 01.08.2012. The CBDT Circular could not have a retrospective effect. 6.1 We find that without elementary scrutiny the AO has disallowed payment made to medical practitioners amounting to Rs.17,28,728/- on the presumption that these come within the mischief of IMC Regulations. Also without elementary scrutiny the AO has disallowed 50% of Rs.15,59,766/- (samples from 11.12.2009 to 31.03.2010) and 50% of Rs.18,02,219/- (other sale promotion expenses from 10.12.2009 to 31.03.2010). The above disallowance made by the AO is based on general propositions. It is a settled position of law that general propositions do not decide concrete cases. The AO has failed to pinpoint how these expenses fall within the mischief of IMC Regulations.