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Income Tax Appellate Tribunal, DELHI BENCH:‘E’ NEW DELHI
Before: SHRI J.S. REDDY & SMT. BEENA PILLAI
Date of Hearing 15/02/2016 Date of Pronouncement 15/03/2016 ORDER PER BENCH: These are group of appeals filed by the Revenue, cross objections by the Assessee and a cross appeal filed by the Assessee for assessment years 2008-09, 2009-10 & 2010-11. 2. At the outset the ld. AR submitted as under; • Ground nos. 1 to 3 of the departmental appeals being 2137 & 2136/Del/2013 and ground no. 1 of cross objections filed by the assessee in 149 & 157/Del/2013 relates to the disallowance of expenses incurred on account of payment made to Doctors for sales promotion. • Ground no. 4 of the departmental appeals in 2138 & 2137, ground no. 5 of Departmental appeal in and ground no. 2 of the cross objections filed by the assessee in 149 & 157/Del/2013, relates to addition on account of royalty receivable by the assessee. For the sake of convenience, these appeals are disposed off together; 3. The ld. DR has filed an application, requesting for yet another adjournment, on the ground that these appeals are to be argued by CIT(D/R). It is pertinent to mention at this stage that, these appeals were listed on 17/12/2015, wherein the ld. DR had filed a similar adjournment application. This application was strongly objected to the ld. AR, on the ground that the issues are covered. Considering the request the Bench adjourned the appeals for 02/02/2016. On this date also the revenue filed an application for adjournment on the ground that the CIT(DR) is on leave. There is no information as to who is the CIT(DR) entrusted to argue the case, when the leave was taken and for how long. However the bench adjourned the bunch of cases to 11.02.2016. On this day also the CI T (DR) was not ready. The Ld.AR objected to the adjournment as the grounds of the case was covered. When the bench wanted to proceed ex parte, both parties sought short adjournment and the case was fixed on15.02.2016. There has been no effort on behalf of the department to make arrangement for appointing a CIT(DR), to argue these matters. For the last couple of weeks, the bench has been adjourning matters as the department is often unable to make an alternative arrangement for the CIT(DR), who is to argue these cases. Last week, the bench collapsed on a couple of days due to adjournment applications filed by the Revenue. We had made it clear on those days that, we will not allow such state of affairs to continue. 3.1. Both parties were informed that no further adjournments will be given in these cases, as these have been coming up for hearing from past 3 years. The cases were adjourned to 15.02.2016. Copies of the case law relied upon by the assessee were given to the DR. 3.2. Again today the Revenue casually files an application for adjournment. The ld.AR, submitted that these matters are covered by the orders of the coordinate benches of this Tribunal, and hence the cases may be proceeded with. Under these circumstances, we reject the adjournment application filed by the ld. DR today and take up these matters for being disposed off on merits.
Ground nos. 1 to 3 of 2138, 2137 & 2136/Del/2013 and ground no. 1 of CO Nos. 149 & 157 for A.Y. 2008-09, 2009-10 and 2010-11. 4.1. The issue taken up by the Revenue in these grounds are regarding the deletion of disallowance of expenses, incurred by the assessee towards sales promotion. During the year under consideration, the assessee had incurred certain expenses on payment to the Doctors, and for renovation of their hospitals/clinics etc. directly for sales promotion. The Assessing Officer observed that the amount spent by the assessee was prohibited by law and, therefore, disallowed the same as per Explanation 1 to section 37(1) of the Act. The ld. Assessing Officer also observed that the payment was contrary to the guidelines issued by MCI which came in the year 2002 and the same was amended by notification in the gazette dated 10/12/2009. 4.2. Aggrieved by the order of the ld. Assessing Officer the assessee preferred an appeal before the ld. CIT(A). The ld. CIT(A) relying upon the judgment of the jurisdictional High Court in the case of CIT vs. Pandit Vishwanath Sharma reported in 316 ITR 419 (All) and the decision of ITAT Ahmedabad in the case of Life Sight Surgicals P. Ltd. vs. DCIT (TTJ)(Ahd.)(UO) (27), deleted the additions in all assessment years vide separate orders. The Ld.CIT(A) has also relied upon the CBDT Circular dated 01/08/2012, which was consequent to the amendment made by MCI Regulations vide gazette notification dated 10/12/2009. The ld. CIT(A) held that the said circular issued by the CBDT is prospective in nature and would be applicable from assessment year 2013-14 onwards. He also held that the MCI Regulations as amended on 10/12/2009 would be applicable to Doctors in respect of any payments received by them from Pharmaceutical Companies, after 10/12/2009 and that the earlier regulation of MCI do not warrant disallowances u/s 37(1 ) for the period prior upto 10/12/2009. He submitted that since the period under consideration in all the assessment years were much before the said date i.e. on 10/12/2009, expenditure made during the years under consideration, cannot be disallowed by invoking provision of section 37(1) vide Explanation 1.
4.3. Aggrieved by the order of the ld. CIT(A) the Revenue is in appeal before us. 4.4. Before us, the ld. AR submitted that the code of Medical Ethics Regulations, 2002 as stood before amendment dated 10/12/2009 did not prohibit the Doctors from accepting payments from Pharma Companies. He submitted that the Assessing Officer has abstracted Chapter VI of the said regulation which has been reproduced at pages 8 to 9 of the assessment order, which no where mentions dealings of Doctors with Pharma Companies. He submitted that it was only after the amendment vide notification dated 10/12/2009 (placed at page 11 of the paper book), that MCI prohibited Doctors from accepting any money from Pharmaceutical Companies. 4.5. He further referred to the CBDT issued a Circular No. 5/2012 (F.No. 225/142/2012-ITA.II) M, dated 1st August, 2012, as MCI amended the Indian Medical Council (professional conduct, etiquette and ethics) Regulations, 2012 on 10/12/2009 imposing a prohibition on the medical practitioner and their professional associations from taking any travel facility, hospitality, cash or monetary ground from the pharmaceutical and allied health sector industries. The ld. AR submitted that the CBDT Circular is dated 1st August, 2012 and, therefore, the same would be applicable after 1st August, 2012 only. He submitted that since the period under consideration in all these appeals are prior to the date of 1st August, 2012, the disallowance cannot be made under the facts and circumstances of the case. He further argued that the circular is not binding on the assessee and argued that the assessee has incurred expenses for the purpose of its business and as long as there is no law prohibiting the expenditure, no disallowance can be made. He raised a number of objections on this issue, which we would be dealing with, wherever required. The ld. AR placed his reliance upon the decision of coordinate Mumbai Bench in the case of Syncom Formulations India Ltd. vs. DCIT in and 6428/Mum/2012, in support of his preposition that the said CBDT Circular dated 1.08.2012, cannot be retrospectively applied.
We have perused the paper book placed before us, submissions and the judgments relied upon by the assessee. At the outset, we do not find any infirmity with the findings of the ld. CIT(A) which is supported by the judgement of the jurisdictional High Court. The decision of the coordinate bench of Mumbai in Syncom Formulations India Ltd. (supra) vide order dated 23/12/2015 goes further to support the argument of the assessee that no disallowance can be made of the expenditure prior to 1.08.2012. We find that the disallowance has been made by the ld. Assessing Officer, relying upon the CBDT Circular dated 1st August, 2012. The said circular cannot be applied to the years under consideration as it has been issued from 1st August, 2012, which is relevant for assessment year 2013-14. The years under consideration before us are 2008-09, 2009-10 & 2010-11. The Hon’ble Jurisdiction High Court of Allahabad in the case of CIT Vs. Pt. Vishwanath Sharma reported in (2008)216 CTR 281, has held as follows:
“ … A distinction has already been made by the authorities while allowing deduction to the assessee in respect to commission which the assessee has paid to private doctors since in their case, the payment of commission cannot be said to be an offence under any statute but in respect to Government doctors such payment could not have been allowed as it is as offence under the statutes as stated above.” 5.1. The Jurisdictional High Court has approved the finding of the authority that the payments made to private doctors cannot be disallowed under section 37(1) of the act by relying upon the guidelines of MCI issued in the year 2002. Respectfully, following the judgment of the jurisdictional High Court as well as the decision of the coordinate bench in Syncom Formulations India Ltd. (supra), we to the extent confirmed by the Ld. CIT(A). 5.1. We, therefore, uphold the order of the ld. CIT(A). Accordingly, the ground nos. 1 to 3 of the departmental appeals in 2137 and 2136 and ground no. 1 of cross objection filed by the assessee in CO No. 149 & 157 for assessment years under consideration are being disposed off in lieu of the above discussion.
Ground no. 4 of Departmental appeals being 2138, 2137 & 2136 And ground no. 2 of Cross Objections being 149 & 157 for A.Y. 2008-09, 2009-10 and 2010-11. 6.1. The next common issue in the appeals filed by the Revenue and the Cross Objections filed by the assessee is whether any addition in total income of the assessee could be made on account of notional royalty from M/s Relax Pharmaceutical. 6.2. The ld. Assessing Officer has observed that M/s Relax Pharmaceuticals (a sister concern of the assessee) should have paid royalty to the assessee for manufacturing, medicines on behalf of the assessee. During the assessment proceedings, the ld. Assessing Officer treated certain amount as deemed to be receivable by assessee as royalty in the hands of the assessee. The ld. Assessing Officer has added these amounts in the case of the assessee, on protective basis. 6.3. Aggrieved by the order of the ld. Assessing Officer the assessee preferred an appeal before the ld. CIT(A). The ld. CIT(A) observed that in the case of Relax Pharmaceutical, the ld. Assessing Officer has made addition on substantive basis the same has been deleted by the then CIT(A) vide a separate order dated 07/02/2013. The relevant findings of the ld. CIT(A) in the case of Relax Pharmaceuticals are recorded at page 35 to 36 of the ld. CIT(A)’s order in the assessee’s case. To avoid repetition, the same is not reproduced herewith. The ld. CIT(A) accordingly deleted the said addition made by the ld. Assessing Officer on the issue of royalty. 6.4. Aggrieved by the order of the ld. CIT(A) the Revenue is in appeal before.
The ld. AR submitted that the addition has been made on protective basis and the substantive addition has been deleted in the hands of Relax Industries which supplies manufactured medicines to the assessee, as the medicines were manufactured under the trade mark and brand name of the assessee as per the agreement entered into between the party. The ld. AR placed reliance upon the decision of this Tribunal in the assessee’s own case for A.Y. 2004-05 and 2007-08 in and 2139/Del/2013.
We have perused the records before us and the judgment relied upon by the ld. AR. 8.1. We find that there is no basis to assume the receipt of royalty in the hands of the assessee from Relax Pharmaceuticals. The ld. CIT(A) has deleted the addition made on account of alleged royalty payment by Relax Pharmaceuticals of the same amount. Further in the case of the assessee there is no evidence on record to support such an allegation of payment being received by the assessee. It is observed from the order of the ld.CIT(A) that, even in the remand report called for at the time of appellate proceedings in Relax Pharmaceuticals, the A.O had accepted that there has been no incriminating material or information found during the search that could suggest that any Royalty has been paid to the assessee. 8.3. We do not find any infirmity in the addition being deleted by the ld. CIT(A). Respectfully following the order dated 14/02/2014 of the coordinate bench in assessee’s own case for A.Y. 2004-05 & 2007-08, ground no. 4 of the Departmental appeals in ITA No. 2138 & 2137 and ground no. 5 of Departmental appeal in ITA No. 2136 ace dismissed and ground no. 2 of the cross objections in consideration are disposed off in lieu of the above discussion.
9.Ground no. 4 in ITA No. 2136. This ground relates to the ground filed by the revenue against the deletion of GP addition on excess stock. The ld. Assessing Officer observed that there is excess stock inventory found during the survey. The ld. Assessing Officer, estimated the gross profit on the excess stock as the same will rise as and when the sales take place. The ld. Assessing Officer, therefore, made an addition of Rs. 6,71,268/-as GP profit on the excess stock available with the assesee. 9.1. Aggrieved by the order of the ld. Assessing Officer the assessee preferred an appeal before the ld. CIT(A), wherein the ld. CIT(A) recorded that the Assessing Officer’s theory of likely sale of excess stock and estimation of GP, is baseless and meaningless. He, therefore, deleted the addition made by the Assessing Officer on gross profit. 9.2. Aggrieved by the order of the ld. CIT(A) the Revenue is in appeal before us. It is not a case that the Assessing Officer has found any evidence of unrecorded sales made out of such excess stock found during the. It is only in cases, where there is deficit in physical stock balance, as compared to book stock balance, that there arises a presumption of unrecorded sale, and not vice-versa. We, therefore, do not find any infirmity with the order of the ld. CIT(A) in deleting the addition made by the Assessing Officer. This ground of Revenue, therefore, stands dismissed.
Assessee’s appeal No. 1390/Del/2013 for A.Y. 2010-11. Ground no. 1: This ground has been raised by the assessee in respect of the addition made by the AO and confirmed by the ld. CIT(A) made on alleged excess stock found during the course of survey. The ld. Assessing Officer had observed that the value of the stock at the premises of the assessee worked out by the survey team at Rs. 2,17,31,05,239/- and the value of the stock as worked out by the assessee as on 09/10/2009 was Rs. 48,17,29,063/-. After calling for an explanation from the assessee, the ld. Assessing Officer, made an addition of Rs. 12,41,968/-u/s. 69 of the act. 10.1. Aggrieved by the order of the ld. Assessing Officer the assessee preferred an appeal before the ld. CIT(A). The ld. CIT(A) confirmed the additions on the ground that the assessee was unable to reconcile the quantity of stock as shown in the books. He recorded that the assessee has failed to give precise tally as to how the stock inventory available in the assessment records are tallying with the stock record maintained by the assessee. He also noted that the inventory of excess stock as worked out by the ld. Assessing Officer was signed and accepted by the assessee’s representative which tantamount to directly admitting that there was discrepancy in the stock to the extent of Rs. 12,41,986/-. 10.2. Aggrieved by the order of the ld. CIT(A) the assessee is in appeal before us. We have perused the orders of the authorities below and we do not find any infirmity in the findings of the ld. CIT(A). Even before us the assessee is unable to reconcile the stock inventory. We, therefore, uphold the findings of the ld. CIT(A) and the addition made by the ld. Assessing Officer stands confirmed.
Ground No.2 In respect of ground no. 2 in the assessee’s appeal which relates to addition in part in respect of the expenditure disallowed by the assessee u/s 37(1) read with Explanation 1 of the Act. The ld. CIT(A) has restricted the addition to an extent of Rs. 49,71,900/- viz-a-viz the total addition made by the Assessing Officer amounting to Rs. 3,58,02,818/-. 11.1. The brief facts and the legal background of the issues under consideration has been dealt with at length in ground nos. 1 to 3 of Departmental appeals in 2137 & 2136 for assessment years 2008-09, 2009-10 & 2010-11. To avoid repetition of the same, we rely and refer to the discussions, made in the aforesaid paragraph. It is observed from the ld. CIT(A)’s order that the payment made by the assessee during the year under consideration are in two parts: - Expenses paid from 01.04.2009 to 09.12.2009 Rs. 3,08,30,918/- (Before MCI Notification) Expenses made from 10.12.2009 to 31.03.2010 Rs. 49,71,900/- (After MCI Notification) 11.2. The issue before us a the payment made after the MCI notification dated 10/12/2009 but before the CBDT circular dated 1st August, 2012. The judgment of the Coordinate Mumbai Bench in the case of Syncom Formulation India Ltd. (supra) would be squarely applicable and cover the issue. Relying upon the aforesaid judgment in Syncom Formulation (supra) we delete this addition confirmed by the ld. CIT(A).
In lieu of the above findings in respect of all the assessment years under consideration the Departmental appeals are dismissed for all the assessment years. Accordingly, the cross objections being 149 and 157 filed by the assessee stands infructuous. In respect of the appeal filed by the assessee in 1390/Del/2013 the grounds raised by the assessee stands partly allowed. 12.1. In the result, the appeals filed by the Revenue, assessee and cross objections filed by the assesseeare accordingly disposed off. The order is pronounced in the open court on 15.03.2016