MERCK SPECIALITIES PRIVATE LIMITED ,MUMBAI vs. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(1), MUMBAI

ITA number 3262/Mum/2022 is filed by Merck Specialities Private Limited (the assessee/ appellant) for A.Y. 2017-18 against the appellate order passed by the National faceless appeal Centre (NFAC), Delhi (the learned CIT – A) dated 9th November, 2022 wherein the appeal filed by the assessee against the assessment order

Assessee is aggrieved with the same and is in appeal before us raising following grounds “In the facts and circumstances of the case and in law the Ld. CIT (Appeal) erred in:

Brief facts of the case shows that assessee is a company engaged in pharmaceutical business. It filed its return of income on 29/3/2019 declaring a total income of ₹ 507,173,541/–. The return of income was picked up for scrutiny by issue of notice under section 143 (2) of the Act. During the course of assessment proceedings it was found that i. Assessee has incurred the sales promotion expenditure of ₹ 179,303,207/– against which the assessee has claimed deduction under section 37 of the Act. The learned assessing officer was of the view that the sales promotion expenditure of the assessee are hit by the circular number 5/2012 of 1st August, 2012 as well as the notification by the Medical Council of India dated 10th December 2009.

Accordingly, the assessment order was passed under section 143 (3) of the act on 25/12/2019 determining the total income of the assessee at ₹ 650,752,713 against the total income as per return of income of ₹ 507,173,541/–.

The assessee being aggrieved with the assessment order preferred an appeal before the learned CIT – A. The learned CIT – A as per appellate order dated 9th November, 2022 has confirmed the addition of ₹ 143,579,179/–. The learned CIT – A noted that the learned assessing officer has analyzed that the payments made under different sub heads in details and found in nutshell all the expenses were incurred for providing gifts, travel facilities and hospitalities like freebies to medical practitioners which compromise the professional autonomy of their and which is prohibited by regulation of Indian medical Council, therefore and more so for the reason of the same that the assessee could not furnish any evidence and/or the details of the end-users as were asked by the learned assessing officer.

Aggrieved by the above appellate order assessee is in appeal. The learned authorized representative submitted that all these expenses are held by the learned CIT – A as falling within the definition of the freebies prohibited by Indian medical Council without verifying any information. Assessee submitted that they had submitted all the details before the learned AO. The learned assessing officer has not disallowed the expenditure on the ground that these are the freebies but has disallowed proportion of that expenditure. The learned authorized representative further referred to the paragraph number

The learned authorized representative also placed before us an application dated 5th February 2024 for admission of additional evidence under rule 29 of The Income Tax (Appellate Tribunal) Rules, 1963 along with the affidavit of the director.

In the affidavit and application it was submitted that the substantial amounts were disallowed by the learned assessing officer on the ground that the said expenditure was incurred for doctors and medical professionals, which are covered as prohibited by the Medical Council of India's guidelines as well as circular of the CBDT. The disallowance was also confirmed by the learned CIT – A. Subsequently, the honourable Supreme Court of India in case of Apex laboratories (2022) 442 ITR 1 have held that certain expenses incurred by the doctors as mentioned therein are held as not allowable under section 37 (1) read with explanation 1. Assessee has prepared the details and information along with the supporting evidences explaining the nature and purpose of the expenditure and expenditure incurred for in connection with the doctors. The said details and information as also the supporting documents are submitted now as an additional evidence to substantiate and support the contention of the appellant about the allowability or otherwise of the sales promotion expenditure. Therefore it was submitted that these additional evidences may be admitted and matter may be restored to the file of the learned assessing officer to examine the

The learned departmental representative vehemently submitted that assessee is trying to wriggle out the case as issue is squarely covered against the assessee by the decision of the honourable Supreme Court. The additional evidences furnished by the assessee for admission does not support the case of the assessee.

We have carefully considered the rival contention and perused the orders of the lower authorities. We have also considered the application dated 5th February 2024 furnished by the assessee for admission of the additional evidences along with the affidavit of the director of the company. On careful consideration of the additional evidences we found that assessee has prepared a chart wherein it was submitted that there are certain expenditure incurred by the assessee, which are not hit by the provisions of guidelines of MCI and these payments are not prohibited and therefore those cannot be disallowed. It was also found that some of the expenditure which is incurred by the assessee on the employees of the company is also not covered by those guidelines. The chart also shows that certain advertisement expenses incurred by the assessee are printing and stationary charges as well as consultancy fees. The note on sales promotion is also submitted by the assessee showing the details of the total expenditure of ₹ 124,552,665 showing the end-user and the beneficiary of such expenditure. We find that because of the decision of the honourable Supreme Court in case of Apex laboratories Ltd, now the expenses which are incurred by the assessee in violation of the guidelines of the medical Council of India are not allowable at all. However, as that decision was not available at the time of

In view of the admission of the additional evidences furnished by the assessee admitted, we restore ground number 1 along with sub- grounds to the file of the learned Assessing Officer with a direction to the assessee to substantiate before the assessing officer that the amount of expenditure incurred by the assessee whether hit by the guidelines of MCI. On verification of the details, the learned assessing officer, may decide the issue afresh and disallow the expenditure which is covered by the decision of the honourable Supreme Court in case of Apex laboratories. We make it clear that it would be the sole responsibility and onus of the assessee to show before the Assessing Officer that particular amount of expenditure is not prohibited. Accordingly, ground number 1 of the appeal is allowed with above directions.

In the result appeal filed by the assessee is allowed for statistical purposes.