MACLEODS PHARMACEUTICALS LTD,MUMBAI vs. ADDL CIT 8(2), MUMBAI

Common grievance of the assessee in both the years relate to disallowance on account of „sales promotion expenses‟.

Rival contentions have been heard on record and perused. Facts in brief are that the assessee is engaged in the business of manufacturing & dealing in pharmaceutical products, namely tablets, capsules, liquids, injectibles etc. The assessee company has manufacturing plant at Palghar, Daman Phase-I(3 Units), Daman Phase-II, Kabra, Dhanlaxmi, Sarigam, and Baddi. The assessee company also has one R&D unit at Mumbai. During the assessment year 2010-2011, the assessee has shown Gross Profit and Net Profit has been shown @47.86% and @15.55% respectively. Separate Balance Sheets and Profits & Loss Accounts for each plant and R&D unit have been obtained, examined and placed on record. From the record, we 2 ITANos.7404 & 7405/M/2014 found that during the assessment proceedings, the Ld. AO while going through the Profit & Loss Account of the assessee company for the A.Y.2010-11, found that the assessee has debited Sales Promotion Expenses. The Authorized Representative of the assessee was requested to inform about the nature and details of these expenses. The assessee filed details of these expenses and submitted that these expenses were incurred in the regular course of business and includes payments made for promotional items, freebies given to various medical practitioners in the country as well as abroad. It was further explained that these expenses also include amounts incurred on various field staff of the company which are spread throughout the country. During the course of assessment proceedings, the attention of the authorized representative of the assessee was drawn by AO towards amendment notification dated 10-12-2009 issued by Medical Council of India according to which in dealing with Pharmaceutical and allied health sector industry, a medical practitioner shall follow and adhere to certain stipulations. The AO stated that as mentioned in the Notification a medical practitioner has not been allowed to receive any gift, travel facility, hospitality and cash or monetary grants from any pharmaceutical or allied healthcare industry.

The AO referred CBDT Circular No.05/2012 dated 1-8-2012 issued by the Central Board of Direct Taxes, New Delhi vide F.No.225/142/2012-ITA-II and held that as per CBDT Circular dated 1-8-2012, these expenditure cannot be allowed as per Explanation to Section 37(1). By applying the said Circular, the AO disallowed part of the these sales promotional expenses.

By the impugned the CIT(A) confirmed the action of AO in both the years under consideration, against which, assessee is in further appeal before us.

Ld. AR appearing on behalf of the assessee filed copy of the decision of the coordinate bench in the case of Sycom Formulations India Ltd., order dated 23-12-2015 and contended that issue under consideration is squarely covered by this order of co-ordinate bench. It was 3 ITANos.7404 & 7405/M/2014 submitted that this decision of coordinate bench supports the proposition that CBDT Circular dated 1-8-2012 is prospective, therefore, applicable from assessment year 2013-14. As per ld. AR no disallowance can be made for the years under consideration i.e. 2010-11 & 2011-12 on the basis of CBDT Circular dated 1-8-12. Ld. AR drew our attention to the precise observation of the Tribunal with regard to nature of expenditure so incurred and applicability of CBDT Circular dated 1-8-2012, which was held to be applicable from the assessment year 2013-2014.

On the other hand, ld. DR relied on the order of lower authorities and conceded that the issue under consideration is squarely covered by the decision of coordinate bench in the case of Syncom Formulations (supra). However, no decision to the contrary was placed on record by ld. DR.

We have considered rival contentions and carefully gone through the orders of authorities below. From the record we found that assessee is engaged in manufacturing and dealing in pharmaceuticals products namely tablets, capsules, liquids and injectibles etc. During the years under consideration assessee has incurred expenditure on sales promotion, part of which was disallowed by AO by applying CBDT Circular dated 1-8-2012 on the plea that Explanation to Section 37(1) were applicable. Ld. AR has placed on record order of the coordinate bench in the case of Syncom Formulations (I) (supra) wherein exactly similar issue was considered by bench. We have also gone through the judicial pronouncement in the case of Syncom Formulations (supra), wherein the Tribunal held as under :- 2010-2011) 3. Rival contentions have been heard and record perused. Facts in brief are that the assessee is engaged in manufacturing of various pharmaceuticals products and having sales within and outside India. During the year under consideration, the assessee had debited an amount of Rs.4,32,11,406/- under the head ‘sales promotion expenses’. Accordingly the details were called for and noticed that an amount of Rs.22,45,000/- was relating to freebies given to medical practitioners. The AO disallowed Rs.22,45,000/- by invoking Explanation to Section 37(1) and CBDT Circular dated 1-8-2012.

5. We have considered rival contentions and found that receiving of gifts by doctors was prohibited by MCI guidelines, giving of the same by manufacturer is not prohibited under any law for the time being in force. Giving small gifts bearing company logo to doctors does not tantamount to giving gifts to doctors but it is regarded as advertising expenses. As regards sponsoring doctors for conferences and extending hospitality, pharmaceuticals companies have been sponsoring practicing doctors to attend prestigious conferences so that they gather contemporary knowledge about management of certain illness/disease and learn about newer therapies. We found that the disallowance was made by the AO by relying on the CBDT Circular dated 01.08.2012 onwards. However, the Circular was not applicable because it was introduced w.e.f.01.08.2012. i.e. assessment year 2013-2014, whereas the relevant assessment year under consideration is 2010-2011 and 2011-2012. Accordingly, we do not find any merit in the disallowance so made by the AO in both the assessment years under consideration.” We had carefully gone through the order of the Tribunal in the case of Syncom Formulations (I) Ltd.(supra) and also deliberated on the judicial pronouncements referred by lower authorities in their respective orders in the context of factual matrix of instant cases. From the record we found that during the course of assessment the AO asked the assessee to inform regarding nature and details of expenses. The assessee had supplied full details of expenditure duly indicating the nature of expenditure and business necessity for incurring these expenditure by pharmaceutical industries. The AO observed that expenditures debited on account of sales promotion are covered by Explanation to Section 37(1). By applying CBDT Circular dated 1-8-2012, the AO disallowed part of the expenses holding that Explanation to Section 37(1) will be applicable. 9. We had carefully gone through the details of expenditure so incurred under the head “sales promotion” expenses and found that expenditure so incurred was wholly and exclusively for the purpose of assessee‟s business. The relevant assessment years under consideration are A.Ys.2010-2011 & 2011-2012 during which there was no CBDT Circular as referred by AO for making disallowance by branding the expenditure as covered by Explanation to Section 37(1) of the Act. We found that the expenditures were incurred wholly and exclusively for the purpose of business, therefore, same cannot be 5 ITANos.7404 & 7405/M/2014 disallowed by applying CBDT Circular dated 1-8-2012 in respect of years under consideration. The Tribunal in the case of Syncom Formulations (I) Ltd.(supra) vide order 23-12-2015 have dealt with exactly similar issue wherein also assessee was engaged in manufacturing of various pharmaceutical products and having sales within and outside India. Exactly similar expenditure incurred under the head of sales promotion expenses was disallowed by the AO by applying CBDT Circular dated 1-8-2012, wherein Explanation to Section 37(1) was invoked, which was confirmed by the CIT(A). The assessee came before the Tribunal and the Tribunal held that CBDT circular dated 1-8- 2012 was applicable for A.Y.2013-14 and onwards and not applicable to prior assessment years. The Tribunal after observing that nature of expenses allowed the same. The Tribunal further observed that sponsoring doctors for conferences and extending hospitality by pharmaceuticals companies, to attend prestigious conferences so that they gather contemporary knowledge about management of certain illness/disease and learn about newer therapies, which can promote assessee‟s business as pharmaceutical manufacturer. Under these facts and circumstances the Tribunal held that no disallowance of such sales promotion expenses can be made by applying CBDT Circular dated 1-8-2012, insofar as CBDT Circular was effective from A.Y.2013-2014. In the instant case before us the relevant assessment years are A.Y.2010- 2011 & 2011-2012 during which this CBDT Circular was not applicable. As per the details of expenses placed on record, we found that same was in the nature of sales promotion. Neither the AO nor the CIT(A) had doubted genuineness of the expenses nor there is any allegation to the effect that expenses were not incurred for the purpose of business. Even the G.P. and N.P. rate shown by assessee nowhere indicates that assessee had claimed any excessive expenditure under the head sales promotion. However, no decision to the contrary was brought to our notice by ld. DR, under these circumstances, respectfully following the decision of the Tribunal in the case of Syncom Formulations (I) Ltd. (supra), we do not find 6 ITANos.7404 & 7405/M/2014