Tribunal allows appeals for sales promotion expenses, directs verification of cess deduction

The Tribunal allowed the appeals for A.Y. 2016-17 and 2015-16, overturning the disallowance of sales promotion expenses. It directed the A.O to verify and consider the deduction for cess paid. The Tribunal clarified that MCI regulations do not apply to pharmaceutical companies and that the CBDT circular cannot extend these regulations without statutory backing.

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Issues Involved:
1. Deduction for Sales Promotion Expenses incurred on doctors prescribing the appellant company’s products.
2. Application of Explanation-1 to Section 37(1) to disallow sales promotion expenses.
3. Consistency in claiming deductions for similar expenses in different years.
4. Deduction of cess paid by the appellant under the Act.

Issue-wise Detailed Analysis:

1. Deduction for Sales Promotion Expenses incurred on doctors prescribing the appellant company’s products:
The assessee claimed a deduction for sales promotion expenses, which included freebies given to doctors. The Assessing Officer (A.O) disallowed this deduction based on CBDT Circular No. 5/2012, which deemed such expenses inadmissible under Section 37(1) as they were considered in violation of the Indian Medical Council (Professional conduct, etiquette, and ethics) regulations, 2002. The CIT(A) upheld this disallowance, stating that the regulations applied to doctors and not pharmaceutical companies. However, the CIT(A) rejected the assessee's claim that the expenses should be allowed as business promotion expenses. The Tribunal, referencing various ITAT decisions, including PHL Pharma Pvt. Ltd., concluded that the Medical Council of India (MCI) regulations apply only to medical practitioners and not to pharmaceutical companies. Therefore, the sales promotion expenses were not in violation of any law applicable to the assessee, and thus, the disallowance was not justified.

2. Application of Explanation-1 to Section 37(1) to disallow sales promotion expenses:
The CIT(A) applied Explanation-1 to Section 37(1) to disallow the sales promotion expenses, stating that the CBDT Circular No. 5/2012 rendered such expenses inadmissible. The Tribunal, however, observed that the circular could not impose an obligation adverse to the assessee without any enabling provision under the Income Tax Act or the Indian Medical Council Regulations. The Tribunal noted that the CBDT circular extended the scope of MCI regulations to pharmaceutical companies without any statutory backing, which was not permissible. Therefore, the Tribunal held that the sales promotion expenses were not hit by Explanation-1 to Section 37(1).

3. Consistency in claiming deductions for similar expenses in different years:
The CIT(A) held that since the assessee had disallowed similar expenses in earlier years, it was not open to the assessee to claim a deduction in the relevant year. The Tribunal disagreed, stating that the assessee is entitled to raise new claims if they are based on facts available on record and do not require new facts to be looked into. The Tribunal cited the judgment of the Hon’ble Supreme Court in National Thermal Power Co. Ltd. Vs. CIT, which allows the Tribunal to entertain new legal issues based on existing facts. Therefore, the Tribunal allowed the assessee's claim for the sales promotion expenses.

4. Deduction of cess paid by the appellant under the Act:
The assessee claimed a deduction for cess paid, which was raised for the first time before the Tribunal. The A.O and CIT(A) did not consider this claim as it was not part of the original return. The Tribunal, referencing the judgment of the Hon’ble High Court of Bombay in Sesa Goa Ltd. vs. JCIT, held that education cess and higher education cess are not disallowable under Section 40(a)(ii) of the Act. The Tribunal restored the matter to the A.O for verification of the factual position and directed the A.O to consider the claim in light of the judgment.

Conclusion:
The Tribunal allowed the appeals filed by the assessee for both A.Y. 2016-17 and A.Y. 2015-16, setting aside the disallowance of sales promotion expenses and directing the A.O to consider the deduction for cess paid, subject to verification of facts. The Tribunal emphasized that MCI regulations do not apply to pharmaceutical companies and that the CBDT circular cannot extend the scope of these regulations without statutory backing.

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