Tribunal Allows Veterinary Medicine Sample Expenses under Section 37(1)

The Tribunal upheld the CIT(A)'s decision, ruling that the expenses incurred by the assessee on distributing free samples of veterinary medicines were allowable under Section 37(1) of the Act. The Tribunal found that the samples were distributed to end users and stockists, not to veterinary doctors, for the purpose of promoting the products. The Tribunal concluded that these expenses were essential for marketing the products and increasing sales, in line with previous case law judgments. Consequently, the Revenue's appeal was dismissed on 01.02.2021.

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Issues Involved:
1. Deletion of addition of Rs. 6,10,76,573/- by CIT(A) as made by the AO by disallowing the claim of the assessee on account of expenses incurred in giving free samples of veterinary medicines.

Issue-Wise Detailed Analysis:

1. Deletion of Addition of Rs. 6,10,76,573/- by CIT(A):

The Revenue appealed against the CIT(A)'s order dated 28.03.2019, which pertained to the assessment year 2013-14, challenging the deletion of an addition of Rs. 6,10,76,573/-. This amount was disallowed by the Assessing Officer (AO) as the claim of the assessee for expenses incurred in distributing free samples of veterinary medicines.

Facts and AO's Observations:

The assessee, engaged in the business of manufacturing, trading, and exporting animal health care products, filed a return of income declaring Rs. 96,15,700/-, later revised to Rs. 96,02,250/-. During the assessment proceedings, the AO noted that the assessee charged Rs. 6,10,76,573/- as sample distribution cost under "Marketing Development Cost" in the profit & loss account. The AO observed that these expenses were primarily for distributing free samples to veterinary doctors, who would then distribute them to their patients. The AO issued a show cause notice to the assessee, referring to a notification by the Veterinary Council of India and Circular No. 5/2012 issued by the CBDT, which prohibits pharmaceutical companies from providing incentives to doctors. The AO concluded that these expenses were not allowable under Section 37(1) of the Act, as they were prohibited by the Medical Council of India Act, and added the amount to the income of the assessee.

CIT(A)'s Decision:

Upon appeal, the CIT(A) allowed the assessee's appeal, stating that the distribution of free samples was a necessary activity to promote the product and ascertain the efficacy of the medicine. The CIT(A) noted that the samples were distributed directly to farmers and end customers without the involvement of veterinary doctors, and thus did not constitute freebies or gifts to doctors. The CIT(A) emphasized that the regulations and circulars cited by the AO were applicable to medical professionals, not to the companies manufacturing and marketing these products. The CIT(A) relied on several case laws, including the judgment of the Delhi High Court in Max Hospital vs. MCI and the Supreme Court decision in Eskayef Pharmaceuticals (India) Ltd. vs. CIT, which supported the assessee's claim.

Tribunal's Analysis:

The Tribunal reviewed the submissions of both parties and the material on record. It confirmed that the assessee was engaged in the manufacturing and marketing of veterinary products and had distributed free samples worth Rs. 6,10,76,573/- to promote its business. The Tribunal agreed with the CIT(A) that these samples were distributed to end users and stockists, overseen by medical representatives, without any involvement of veterinary doctors. The Tribunal upheld that these expenses were incurred wholly and exclusively for the purpose of increasing the company's sales and were not in violation of any guidelines issued by the Veterinary Council of India or Medical Council of India. The Tribunal also noted that the cited regulations and circulars were applicable to medical professionals, not to the assessee company.

Conclusion:

The Tribunal upheld the CIT(A)'s order, concluding that the sample distribution expenses were necessary for promoting the product and introducing it to the market. The Tribunal dismissed the Revenue's appeal, affirming that the expenses were allowable under Section 37(1) of the Act.

Result:

The appeal of the Revenue was dismissed. The order was pronounced in the open court on 01.02.2021.

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