2019 (12) TMI 741 - AT - Income Tax

Pharma Co wins tax appeal case for doctor payments, expenses allowed as business promotion.

The Tribunal ruled in favor of the pharmaceutical company in the tax appeal case. It held that payments made to doctors for brand reminders and medical ... Disallowance of expenses on brand reminders and expenses incurred on purchase of medical books and journals provided to HealthCare Professionals ('HCPs') - violation of Indian Medical Council (Professional Conduct, Etiquette and Ethics) - allowable expenditure under Section 37(1) in view of the IMC Regulations and CBDT Circular No. 05/2012 - HELD THAT:- In the present case, the Medical Practitioners are not under any binding obligation after receiving the brand reminder from the assessee company bearing logo of the assessee. This fact clearly reveals that the distribution of articles by the assessee is unconditional and does not go against the public policy. Mere distribution of the articles and other items having logo of the company without casting any burden upon the person receiving the items is merely an advertisement expenditure incurred by the company to promote the brand of the assessee. AO has mentioned that free items might influence the decision of the Doctors. In this regard, we find that the articles are of nominal value and are not capable of influencing the decision of such highly skilled Medical Practitioners. There is no burden upon them. So this argument of the Assessing Officer has no substance. The expenditure incurred by the assessee is thus akin to advertisement and sales promotion expenditure incurred in any other businesses and cannot be disallowed for the reasons assigned by the Assessing Officer. AO misses the point that the advertisement expenditure, by its very nature, is not spent for a crystallized quid pro quo or against any services rendered to the payer. Once it is found that the expenditure is in the nature of advertisement expenditure, the question raised by the Assessing Officer loses significance. Un-reconciled amounts as per Individual Transaction Statement (“ITS”) - whether the un-reconciled amount of ITS / AIR can be added to the total income of the assessee when the assessee denies having carried out any such transaction ? - HELD THAT:- We find that the details in the ITS statement are uploaded by the third party and assessee does not exercise any control on the same. There is no authenticity of such details nor are such details verified by any independent authorities as to its correctness and truthfulness. In the present case, the assessee denied to have carried out the un-reconciled transactions of ITS. To prove its bona fide, the assessee also addressed letters to the concerned parties to get the details of the transactions which the other parties claim to have carried out by them with the assessee. However, none of the parties, except Bank of India, replied to the letters addressed by the assessee; the bank accepted the fact that there was human error and the PAN of the assessee was wrongly linked to other customer data and the transaction was not pertaining to the assessee. Factual position clearly raises the doubt on the authenticity and correctness of the data reported in the ITS. The Assessing Officer has also not brought on record any concrete evidence to establish that the contents of the ITS were correct. In this scenario, we do not find any reason why the contents of the ITS report should be relied upon to the hilt. We, accordingly, set-aside the order of the CIT(A) and direct the Assessing Officer to delete the addition on account of un-reconciled amount. Accordingly, this Ground of appeal is allowed. Issues Involved:1. Disallowance of payments made to doctors in alleged violation of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002.2. Addition of alleged unreconciled transactions appearing in the Annual Information Return (AIR).Issue-wise Detailed Analysis:1. Disallowance of Payments Made to Doctors:Facts and Background:The assessee, a pharmaceutical company, filed an appeal against the disallowance of Rs. 3,51,65,661/- made by the Assessing Officer (AO) under Section 37(1) of the Income Tax Act, 1961. This disallowance included Rs. 3,09,01,508/- for brand reminders and Rs. 42,64,153/- for medical books and journals provided to healthcare professionals (HCPs). The AO argued that these payments violated the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (IMC Regulations) and were disallowed per CBDT Circular No. 05/2012.Arguments by the Assessee:- Non-applicability of IMC Regulations to Pharmaceutical Companies: The assessee contended that the IMC Regulations apply only to medical practitioners and not to pharmaceutical companies.- Legal Validity of CBDT Circular: The assessee challenged the legal validity and applicability of CBDT Circular No. 05/2012 for the assessment year 2010-11.- Nature of Expenses: The assessee argued that the expenses were for advertising and business promotion, not gifts, and thus should be allowable.Findings:- Applicability of IMC Regulations: The Tribunal referred to the decision in DCIT vs. PHL Pharma (P.) Ltd., which clarified that the IMC Regulations are meant for medical practitioners and not for pharmaceutical companies. The Tribunal noted that the Medical Council of India (MCI) admitted its jurisdiction is limited to registered medical practitioners.- CBDT Circular: The Tribunal held that the CBDT Circular cannot enlarge the scope of IMC Regulations to include pharmaceutical companies without any enabling provision. The Circular was deemed not applicable retrospectively to the assessment year 2010-11.- Nature of Expenses: The Tribunal found that brand reminders and medical books/journals are not high-value items capable of influencing doctors' decisions and are more akin to advertisement and business promotion expenses.Conclusion:The Tribunal set aside the order of the CIT(A) and directed the AO to delete the disallowance of Rs. 3,51,65,661/-. The expenses were deemed allowable as advertisement and business promotion expenses under Section 37(1) of the Act.2. Addition of Alleged Unreconciled Transactions in AIR:Facts and Background:The AO added Rs. 8,10,370/- to the assessee's income based on unreconciled transactions appearing in the Individual Transaction Statement (ITS). The assessee contended that it could not reconcile these transactions due to the absence of details from third parties.Arguments by the Assessee:- Efforts to Reconcile: The assessee provided evidence of efforts made to reconcile the transactions by addressing letters to concerned parties.- Burden of Proof: The assessee argued that the AO did not carry out any exercise to prove that the transactions reflected in ITS belonged to the assessee.Findings:- Authenticity of ITS Data: The Tribunal noted that ITS data is uploaded by third parties and lacks authenticity and verification. The burden shifts to the AO to prove the correctness of the transactions if the assessee denies them.- Efforts by the Assessee: The Tribunal acknowledged the assessee's efforts to obtain details from third parties and noted that the Bank of India confirmed an error in reporting.Conclusion:The Tribunal set aside the order of the CIT(A) and directed the AO to delete the addition of Rs. 8,10,370/-. The unreconciled amounts were not proven to belong to the assessee, and the ITS data's authenticity was in doubt.Final Order:The appeal of the assessee was allowed, and the additions/disallowances made by the AO were directed to be deleted. The order was pronounced in the open court on 30th August 2019.