2022 (1) TMI 740 - HC - Income Tax

High Court affirms non-retrospective tax law for pharmaceutical companies, clarifies medical expenses interpretation.

The High Court upheld the Tribunal's decision, emphasizing the non-retrospective application of Circular No.5 of 2012 to pharmaceutical companies and the ... Disallowance of expenses u/s 37(1) - Pharmaceutical Companies - proportionate expenditure incurred on medical practitioners - Disallowance in view of Circular No.5 of 2012 as well as regulations framed by the Medical Council of India - applicability of the Medical Council of India Regulations dated 10.12.2009 and the C.B.D.T. Circular No.5 of 2012 to pharmaceutical companies like the assessee - ITAT deleted the addition - HELD THAT:- In the present case, the Assessment Year is 2010-11. If it is found that the Circular cannot be given retrospective effect it would not be necessary to then go into the question of its applicability to pharmaceutical companies from 01.08.2012 onwards. It is seen that the Tribunal through its various benches has consistently held that C.B.D.T. Circular No.5 of 2012 would not have any retrospective effect but would operate prospectively from 01.08.2012. C.B.D.T. Circular No.5 of 2012 which creates a burden or liability or imposes a new kind of imparity has thus to be applied prospectively, reliance has been placed by the Tribunal on the decision of SRMB Dairy Farming Pvt. Ltd. [2017 (11) TMI 1494 - SUPREME COURT] It has been held therein that while beneficial circulars have to be applied retrospectively, oppressive circulars would have prospective application. In view of this it is clear that C.B.D.T. Circular No.5 of 2012 imposes a new kind of imparity and thus the view taken in the aforesaid decisions by the Tribunal is in consonance with the law laid down by the Hon’ble Supreme Court. It is thus clear that the said Circular could not have been applied retrospectively and especially to Assessment Year 2010-11 in the present case. On this count it is not necessary to interfere with the impugned order passed by the Tribunal in this appeal. Substantial question of law no.(i) is answered accordingly by holding that the Tribunal was justified in deleting the dis-allowance as made by the Commissioner of Income Tax (Appeals). Issues:1. Disallowance of expenditure on tour and travel expenses by pharmaceutical companies.2. Applicability of Circular No.5 of 2012 and Medical Council of India regulations to pharmaceutical companies.3. Retrospective application of Circular No.5 of 2012.4. Justification of the Tribunal's decision.Analysis:Issue 1: Disallowance of expenditure on tour and travel expenses by pharmaceutical companiesThe appellant, a pharmaceutical company, incurred expenses on medical practitioners attending conferences. The Assessing Officer disallowed a portion of these expenses, leading to an appeal. The Commissioner of Income Tax (Appeals) upheld the disallowance, which was partially reversed by the Income Tax Appellate Tribunal. The Revenue challenged this decision, arguing that the disallowance was justified under Section 37(1) of the Income Tax Act, 1961, and Circular No.5 of 2012. The appellant contended that the expenses did not involve direct payments to medical practitioners, and the Medical Council of India regulations did not apply to pharmaceutical companies.Issue 2: Applicability of Circular No.5 of 2012 and Medical Council of India regulationsThe Tribunal considered the applicability of Circular No.5 of 2012 and the Medical Council of India regulations to pharmaceutical companies. The regulations prohibited medical practitioners from accepting gifts or hospitality from pharmaceutical companies. The Circular deemed expenses violating these regulations as inadmissible under Section 37(1) of the Act. The Tribunal analyzed whether these regulations were binding on pharmaceutical companies and concluded that they were not, as the regulations only applied to medical practitioners.Issue 3: Retrospective application of Circular No.5 of 2012The Tribunal examined the retrospective application of Circular No.5 of 2012, issued on 01.08.2012, to the Assessment Year 2010-11. It was established that the Circular operated prospectively from 01.08.2012, as consistent Tribunal decisions held that it had no retrospective effect. The Tribunal relied on the Supreme Court's stance that oppressive circulars should have prospective application, aligning with the non-retrospective application of Circular No.5 of 2012.Issue 4: Justification of the Tribunal's decisionThe Tribunal's decision to delete the disallowance was upheld, as it correctly interpreted the law regarding pharmaceutical companies' expenses on tour and travel. The Tribunal's consistent application of Circular No.5 of 2012 and the Medical Council of India regulations to pharmaceutical companies was deemed appropriate, leading to the dismissal of the Revenue's appeal. The judgment emphasized that the Circular could not be applied retrospectively, affirming the Tribunal's decision.In conclusion, the High Court upheld the Tribunal's decision, emphasizing the non-retrospective application of Circular No.5 of 2012 to pharmaceutical companies and the lack of legal prohibition on such expenses. The judgment provided clarity on the interpretation of tax laws concerning pharmaceutical companies' expenditures on medical practitioners, setting a precedent for future cases.