2019 (9) TMI 1000 - AT - Income Tax

Pharma Co's Business Promotion Expenses Deemed Allowable under Income Tax Act

DCIT, Circle-1 Thane Versus M/s. Bayer Pharmaceuticals Pvt. Ltd.

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order that deleted the addition made by the AO. It was held that the expenditure ... Addition on account of giving freebies to the doctors in violation to Medical Counsel of India (MCI) circular as it amounts to inducement by assessee - Allowable revenue expenditure u/s 37(1) - HELD THAT:- Physicians samples are necessary to ascertain the efficacy of medicine and introduce it in the market for circulation and it is only by this method the purpose is achieved. In such cases giving a physician samples for reasonable period is essential to the business of manufacture and sale of medicine. It is only if a particular medicine has been introduced by the market and its uses are established then giving of free samples could only be the measure of sale/ promotion and development would thus be hit by subsection (3A). Said decision no way prohibits the nature of expenditure which has been incurred in the case of the assessee. Therefore, such a reference to a Hon’ble Apex Court decision is not germane to the issue involved. Thus, in our opinion, the aforesaid decision of this Tribunal PHL PHARMA P LTD. [2017 (1) TMI 771 - ITAT MUMBAI] is clearly distinguishable and cannot be held to be applicable and also we have already given our independent finding as to allowability of expenses in the hands of the assessee as business expenditure. Issues Involved:1. Deletion of addition made by AO on account of giving freebies to doctors in violation of MCI circular.2. Applicability of Explanation 1 to Section 37(1) of the Income Tax Act.3. Whether the expenditure incurred by the assessee was for purposes prohibited by law.Detailed Analysis:1. Deletion of Addition Made by AO on Account of Giving Freebies to Doctors:The Revenue challenged the order of the Commissioner of Income Tax (Appeals) [CIT(A)], which deleted the addition made by the Assessing Officer (AO) on account of giving freebies to doctors. The AO argued that the expenditure of Rs. 2,22,44,555/- incurred by the assessee was for purposes prohibited by law, specifically citing the Medical Council of India (MCI) guidelines. The AO added this expenditure to the assessee's income, claiming it was not allowable under the provisions of the Income Tax Act.2. Applicability of Explanation 1 to Section 37(1) of the Income Tax Act:The main contention was whether the expenditure incurred by the assessee, a pharmaceutical company, was hit by Explanation 1 to Section 37(1) of the Income Tax Act, which disallows any expenditure incurred for purposes that are an offence or prohibited by law. The CIT(A) had deleted the addition, and the Tribunal had to decide if this deletion was justified. The Tribunal referred to the decision in the assessee's own case for the Assessment Year 2010-11, where it was held that the expenditure was not disallowable under Explanation 1 to Section 37(1).3. Whether the Expenditure Incurred by the Assessee was for Purposes Prohibited by Law:The Tribunal examined the nature of the expenditure, which included Customer Relationship Management (CRM) expenses, Key Account Management (KAM) expenses, gift articles, and cost of samples. The AO had disallowed these expenses, arguing they were freebies given to doctors, which is prohibited under the MCI guidelines. However, the Tribunal noted that the MCI guidelines are applicable only to medical practitioners and not to pharmaceutical companies. The Tribunal cited the Delhi High Court's decision in Max Hospital vs. MCI, which clarified that the MCI regulations do not govern pharmaceutical companies. The Tribunal also referred to the CBDT Circular No. 5/2012, which was not applicable retrospectively.The Tribunal concluded that the expenditure incurred by the assessee was for business promotion and not prohibited by any law applicable to the assessee. The Tribunal upheld the CIT(A)'s order, stating that the expenditure was allowable as it was incurred wholly and exclusively for business purposes. The Tribunal found no violation of law or public policy by the assessee in incurring these expenses.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order that deleted the addition made by the AO. The Tribunal reiterated that the MCI guidelines are not applicable to pharmaceutical companies and that the expenditure incurred by the assessee was allowable under Section 37(1) of the Income Tax Act. The decision was pronounced in the open court on 18th September 2019.