2019 (10) TMI 731 - AT - Income Tax

Tribunal Overturns Disallowances, Pharmaceutical Company Expenses Deemed Legitimate Business Expenditures

The Tribunal allowed the appeal, overturning the disallowances made by the AO and upheld by the CIT(A). It held that expenses incurred by the ... Expenditure incurred towards business convention - Allowable revenue expenditure u/s 37 - HELD THAT:- Expenses were incurred by the assessee for accommodation of doctor. Similarly, MCM expenditure was incurred for conference. The stand of the assessee was that conferences were being organized for the purpose of business. When a large number of doctors assembled, they share their experience in day-to-day professional life and what type of hurdles they faced while treating patients, either by use of equipments or by pharma products. If a pharma-company wants to organize such type of conference or seminars then it will be quite reasonable to understand the deficiency in its products, and if the doctors were required to pay from their pockets, then probably some of them would not like to participate. At this stage, it is pertinent to visualize the provisions under the Income Tax Act for allowance of business expenditure. In order to claim expenditure under section 37(1) of the Income tax Act, the assessee is required to fulfill certain conditions viz. (a) there must be expenditure, (b) such expenditure must not be of the nature described in sections 30 to 36, (c) the expenditure must not be in the nature of capital expenditure or personal expenditure of the assessee, and (d) expenditure must be laid out or expended wholly and exclusively for the purpose of business or profession. The expression “wholly” employed in section 37 refers to quantification of expenditure while expression “exclusively” refers to the motive, objective and purpose of the expenditure. Thus, if the nature of this expenditure is being viewed with angle of commercial organization, then it would reveal that these were essential expenditure for the purpose of a pharmaceutical industry. The only caveat for their non-disallowance is Explanation 1 appended to section 37, which is applicable on the expenditure which are incurred for infringement of any law. This aspect has been elaborately discussed by the Co-ordinate Bench in the above cases, and therefore, respectfully following the decision of the ITAT in the case of Aristo Pharmaceuticals P.Ltd. [2019 (7) TMI 862 - ITAT MUMBAI] we allow the appeal of the assessee, and delete the disallowances. - Decided in favour of assessee. Issues Involved:1. Disallowance under Section 37(1) of the Income Tax Act for expenses classified as freebies.2. Disallowance of expenditure claimed as 'Non-freebies' under Section 37(1) of the Income Tax Act under various heads.Detailed Analysis:1. Disallowance under Section 37(1) of the Income Tax Act for expenses classified as freebies:The primary issue revolves around the disallowance of Rs. 3,55,20,081/- under Section 37(1) of the Income Tax Act, which the AO classified as freebies given to doctors. The AO's stance was based on the CBDT Circular No. 5/2012 dated 01.08.2012, which stated that expenses incurred on freebies provided to medical practitioners violate the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, and are thus inadmissible under Section 37(1) as they are considered expenses prohibited by law.The Tribunal, however, noted that the Medical Council of India (MCI) regulations apply to medical practitioners and not to pharmaceutical companies. The Tribunal cited several decisions, including the case of Aristo Pharmaceuticals P.Ltd. Vs. ACIT, where it was held that the MCI regulations do not impinge on the conduct of pharmaceutical companies. The Tribunal emphasized that the CBDT Circular cannot retrospectively impose a burden on pharmaceutical companies, and the disallowance based on this circular was not justified.2. Disallowance of expenditure claimed as 'Non-freebies' under Section 37(1) of the Income Tax Act under various heads:The assessee also contested the disallowance of Rs. 1,00,67,842/- under various heads such as business convention expenses, CME expenses, MCM expenses, promotional material, and sales promotion expenses. The AO had equated these expenditures to freebies and disallowed them. The CIT(A) concurred with the AO, emphasizing that such expenses, even if not classified as freebies, were against public policy and thus not allowable.The Tribunal, however, analyzed each category of expenditure and concluded that these expenses were incurred for legitimate business purposes. The Tribunal referenced the decision in the case of Aristo Pharmaceuticals P.Ltd., where it was established that the circular issued by the CBDT cannot be applied retrospectively. The Tribunal observed that the expenses were essential for the business operations of a pharmaceutical company and did not fall under the category of expenses prohibited by law.Conclusion:The Tribunal allowed the appeal of the assessee, deleting the disallowances made by the AO and confirmed by the CIT(A). The Tribunal's decision was based on the interpretation that the MCI regulations and the CBDT Circular No. 5/2012 do not apply retrospectively to pharmaceutical companies, and the expenses incurred were legitimate business expenditures under Section 37(1) of the Income Tax Act.Order:The appeal of the assessee is allowed, and the disallowances are deleted. The order was pronounced in the Court on 15th October 2019 at Ahmedabad.