2023 (10) TMI 27 - AT - Income Tax

Commission payments to doctors deemed non-deductible business expenditure under Income Tax Act.

Sunflower Pharmacy Versus Income Tax Officer, Ward-3 (3) (9), Ahmedabad

The Tribunal upheld the decision that commission payments to doctors were not allowable as business expenditure under Section 37(1) of the Income Tax Act, ... Acceptance of freebies by medical practitioners - Payment made to two doctors disallowed u/s 37(1) - commission paid treated as freebees in violation of provision of Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulation, 2002 - reliance on decisions rendered in assessee own case for prior period - HELD THAT:- Now this issue has been conclusively decided / adjudicated by the Hon’ble Supreme Court and accordingly, any freebies given by the assessees to doctors for sales promotion etc. are liable to be disallowed. Accordingly, in light of the observations made by the Hon’ble Supreme Court in the Apex laboratories decision [2022 (2) TMI 1114 - SUPREME COURT] any reliance on decisions rendered by ITAT in assessee’s own case for prior years shall stand superseded, in case the assessee comes within the four corners of the provisions of Circular No. 5 of 2012 dated 01.08.2012. Whether the doctors had provided any professional advice to the pharmacy and hence the payments were falling outside the purview of Circular issued by the Central Board of Direct Taxes being Circular No. 5 of 2012 dated 01.08.2012? - The assessee has not been able to establish that the aforesaid payments were made by the assessee to the doctors for rendition of any professional / advisory services, and hence, in our considered view, the payments essentially qualify as commission payments made to doctors for promoting the sale of medicines. In the instant facts, the payments have been denied in the hands of the assessee on the ground that in view of Circular No. 5/2012 dated 01.08.2012 read with Explanation 1 to Section 37(1), the aforesaid payments are prohibited by law. In our respectful view, the principles of tax neutrality would not apply in cases the payments have been held to be illegal or are prohibited by law. Accordingly, we are of the considered view that decision of Gujarat Gas Financial Service Ltd. [2015 (7) TMI 743 - GUJARAT HIGH COURT] has been rendered on a different set of facts and would not apply to the assessee’s facts. Whether it can be stated that the assessee being a pharmacy engaged in trading of medicines, is not covered by the provisions of the Circular, which is only applicable to pharmaceutical industry? - We observe that the CBDT has issued Circular No. 5/2012 dated 01.08.2012 in respect of inadmissibility of expenses incurred in providing freebies to medical practitioners by pharmaceutical and “Allied health sector industry”. In our considered view, the assessee is falling in the category of Allied health sector industry and hence covered within the scope of the Circular referred to above. Thus in our considered view, Ld. CIT (Appeals) has not erred in facts and in law in holding that the aforesaid payments made by the assessee to two doctors qualify as commission paid for promoting sale of medicines and hence are not allowable under Section 37(1) of the Act. Appeal of the assessee is dismissed. Issues Involved:1. Classification of the assessee's business.2. Allowability of commission paid to doctors as business expenditure under Section 37(1) of the Income Tax Act, 1961.3. Applicability of CBDT Circular No. 5/2012.4. Principle of tax neutrality.Summary:Issue 1: Classification of the Assessee's BusinessThe assessee argued that it is in the business of a retail medical store and not an allied healthcare industry. However, both the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the assessee falls within the scope of the 'allied health sector' as per CBDT Circular No. 5/2012.Issue 2: Allowability of Commission Paid to DoctorsThe AO disallowed the commission payments made to two doctors, amounting to Rs. 50,46,000/-, under Section 37(1) of the Income Tax Act, 1961. The AO reasoned that such payments are in violation of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulation, 2002, and thus not admissible as business expenditure. The CIT(A) upheld this disallowance, stating that the payments were not for any verifiable advisory services but were essentially commission payments to promote the sale of medicines.Issue 3: Applicability of CBDT Circular No. 5/2012The assessee contended that the Circular is applicable only to the pharmaceutical industry and not to a retail medical store. However, the CIT(A) and the Tribunal held that the Circular applies to the 'allied health sector industry,' which includes the assessee. The Tribunal referenced the Supreme Court's decision in Apex Laboratories (P.) Ltd., which clarified that expenses on freebies to medical practitioners are prohibited by law and thus not deductible under Section 37(1).Issue 4: Principle of Tax NeutralityThe assessee argued that since the doctors had declared the commission as income and paid taxes, the principle of tax neutrality should apply. The Tribunal rejected this argument, stating that tax neutrality typically applies to transactions between associated enterprises and not to payments prohibited by law. The Tribunal emphasized that the disallowance was due to the payments being illegal under the CBDT Circular and the Indian Medical Council regulations.Conclusion:The Tribunal dismissed the appeal, upholding the CIT(A)'s decision that the commission payments to doctors were not allowable as business expenditure under Section 37(1) of the Income Tax Act, 1961, and confirming that the assessee falls within the 'allied health sector industry' as per CBDT Circular No. 5/2012.