TaxTMI 
TaxTMI 
2019 (7) TMI 862
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....ar no. 5/2012 dated 01.08.2012 and are against regulations issued by Medical Counsel of India. 4. For that the Ld. CIT(A) has erred in holding that such expenditures are prohibited by law and thus hit by Explanation to section 37(1). 5. For that the sustenance of disallowance of Rs. 1,42,97,051/- is wrong, illegal and unjustified on the facts and in the circumstances of the appellant's case. 6. For that the whole order sustaining disallowance of Rs. 1,42,97,051/- is bad in fact and law of the case and is fit to be modified. 7. For that the whole order is bad in fact and law of the case and is fit to be modified." ITA No.6223/Mum/2017 "On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below: 1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of sales promotion expenses of Rs. 14,25,13,3807- without considering Circular No. 5/2012 (F.No. 225/142/2012-ITA.II) dated 01.08.2012. 2. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleti....
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....facturing pharmaceuticals and allowed to produce and also to promote its products through various means including publicity, materials, etc. 4. The Ld.CIT(A), after considering relevant submissions of the assessee and also by following his predecessor's appellate order for AY 2011-12, came to the conclusion that wherever the assessee has incurred expenditure, the price of each individual item is less than Rs. 750 which is not covered under the circular issued by MCI, therefore, the same is allowable as deduction u/s 37(1) of the Income-tax Act, 1961. However, wherever the price of individual item is above Rs. 750 per item, then the same is covered under the circular issued by MCI, therefore, the same cannot be allowed as deduction. Accordingly, out of total disallowance made by the AO of Rs. 15,68,10,431, sustained addition to the extent of Rs. 1,42,97,051 and deleted balance amount of Rs. 14,25,13,380. The relevant findings of the Ld.CIT(A) are as under:- "4.4. I have circumspected the facts and circumstances of the case and have carefully considered the findings and reasoning of the A.O, and rival submission of the appellant. In the Appellants own case for A.Y.2011-12 the Ld....
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....and CBDT vide circular No.5 of 2012 came to the conclusion that sales promotion expenditure incurred by pharmaceutical companies to be distributed to various medical professionals is not hit by circular issued by MCI and accordingly, the same is allowable as deduction u/s 37(1) of the Income-tax Act, 1961. The Tribunal while coming to the conclusion has considered various judicial precedents including those judgements which are against the assessee, more particularly, by Hon'ble Himachal Pradesh High Court in the case of Confederation of Indian Pharmaceutical Industry (SSI) vs CBDT (2013) 353 ITR 388 (HP) and also the decision of Hon'ble Punjab & Haryana High Court in the case of CIT vs Kap Scan & Diagnostic C entre Pvt Ltd (2012) 344 ITR 476 (P&H). The Ld.CIT(A), after considering relevant facts, has rightly deleted addition made towards sales promotion expenses, but sustained partial amount, wherever amount incurred by the assessee in respect of each item of sales promotion article is over and above Rs. 750 without appreciating the fact that once it was held that circular issued by MCI is not applicable to the pharmaceutical companies, then nothing can be disallowed by relying up....
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....f the applicability of the MCI regulations was looked into by the Hon'ble High Court of Delhi in the case of Max Hospital, Pitampura Vs. Medical Council of India (CWP No. 1334/2013, dated 10.01.2014). In the aforementioned case the MCI had filed an 'Affidavit' before the High Court, wherein it was deposed by the council that its jurisdiction is limited only to take action against the registered medical professionals under the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, and it has no jurisdiction to pass any order affecting the rights/interest of the petitioner hospital. We are of the considered view that on the basis of the aforesaid deposition of MCI that its jurisdiction stands restricted to the registered medical professionals, it can safely be concluded that the MCI regulations would in no way impinge on the functioning of the assessee company which is engaged in the business of manufacturing and sale of pharmaceutical and allied products. We thus, in the backdrop of our aforesaid deliberations are of the considered view that the code of conduct enshrined in the MCI regulations are solely meant to be followed and adhered by medical pra....
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.... has been brought to the notice of the Board that some pharmaceutical and allied health sector Industries are providing freebess (freebies) to medical practitioner and their professional associations in violation of the regulations issued by Medical Council of India (the 'Council') which is a regulatory body constituted under the Medical Council Act, 1956 2. The council in exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries. 3. Section 37(1) of Income Tax Act provides for deduction of any revenue expenditure (other than those failing under sections 30 to 36) from the business income if such expense is laid out/expended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this sub-section denies claim of any such expenses, if the same has been incurred for a purpose which is either an offence or prohib....
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....ical company or any healthcare sector. We further find that MCI had by adding Para 6.8.1 to its earlier notification issued as "Indian Medical Council Professional (Conduct, Etiquette and Ethics) Regulations, 2002" had even provided for action which shall be taken against medical practitioners in case they contravene the prohibitions placed on them. We find from a perusal of Para 6.8.1 that in case of receiving of any gift from any pharmaceutical or allied health care industry and their sales people or representatives, action stands restricted to the members who are registered with the MCI. In other words the censure/action as had been suggested on the violation of the code of conduct is only for the medical practitioners and not for the pharmaceutical companies or allied health sector industries. We are thus of the considered view that the regulations issued by MCI are qua the doctors/medical practitioners registered with MCI, and the same shall in no way impinge upon the conduct of the pharmaceutical companies. As a logical corollary to it, if there is any violation or prohibition as per MCI regulation in terms of Explanation to Sec. 37(1), then the same would debar the doctors o....
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....me shall be disallowed in the hands of such pharmaceutical or allied health sector industry. We are of the considered view that the burden imposed by the CBDT vide its aforesaid Circular No. 5/2012, dated 01.08.2012 on the pharmaceutical or allied health sector industries, despite absence of any enabling provision under the Income Tax law or under the Indian Medical Council Regulations, clearly impinges on the conduct of the pharmaceutical and allied health sector industries in carrying out its business. We thus, in the absence of any sanction or authority of law on the basis of which it could safely be concluded that the expenditure incurred by the assessee company on sales promotion expenses by way of distribution of articles to the stockists, distributors, dealers, customers and doctors, is in the nature of an expenditure which had been incurred for any purpose which is either an offence or prohibited by law, thus conclude that the same would not be hit by the Explanation to Sec. 37(1) of the Act. 24. Alternatively, we are of the considered view that it is a trite law that a CBDT Circular which creates a burden or liability or imposes a new kind of imparity, cannot be reckone....
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....the Indian Medical Council Regulations; and (ii). the prospective applicability of the circular, had observed as under: "5. We have considered the rival contentions made by ld. CIT DR as well as ld. Sr. Counsel, Mr J.D. Mistry, perused the relevant finding given in the impugned orders and material referred to before us. The entire controversy revolves around, whether the expenditures in question incurred by the assessee (a pharmaceutical company) is hit by Explanation 1 below section 37(1) in view of CBDT Circular dated 01.08.2012, interpreting the amendment dated 10.12.2009 brought in Indian Medical Council Regulation 2002 or not. The break-up of sales promotion expenses, which has been disallowed by the AO, are as under: Sr. No. Particulars of expenses Amount (in Rs.) 1 Customer Relationship Management expenses (CRM) 7,61,96,260 2 Key Account Management expenses(KAM) 2,56,68,509 3 Gift Articles 9,20,22,518 4 Cost of samples 3,60,85,320 Total 22,99,72,607 The nature of aforesaid expenses has already been explained above. Now whether the nature of such expenditure incurred by the assessee is to be disallowed in view of the CBDT Circular....
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....titioner or professional associations should examine the same and take an appropriate action. This may be brought to the notice of all the officers of the charge for necessary action." From the perusal of the aforesaid Board Circular, it can be seen that heavy reliance has been placed by the CBDT on the Circulars issued by the Medical Council of India, which is the regulatory body constituted under the 'Medical Council Act, 1956'. One such regulation has been issued is "Indian Medical Council Professional Conduct, Etiquette and Ethics) Regulations, 2002". The said regulation deals with the professional conduct, etiquette and ethics for registered medical practitioners only. Chapter 6 of the said regulation/notification deals with unethical acts, whereby a physician or medical practitioners shall not aid or abet or commit any of the acts illustrated in clause 6.1 to 6.7 of the said regulation which shall be construed as unethical. Clause 6.8 has been added (by way of amendment dated 10.12.2009) in terms of notification published on 14.12.2009 in Gazette of India. The said clause reads as under:- "6.8 Code of conduct for doctors and professional association of doctors in the....
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....search project(s). (vi) Ensure that undue animal experimentations are not done and when these are necessary they are done in a scientific and a humane way. (vii) Ensure that while accepting such an assignment a medical practitioner shall have the freedom to publish the results of the research in the greater interest of the society by inserting such a clause in the MoU or any other document / agreement for any such assignment. f) Maintaining Professional Autonomy: In dealing with pharmaceutical and allied healthcare industry a medical practitioner shall always ensure that there shall never be any compromise either with his / her own professional autonomy and / or with the autonomy and freedom of the medical institution. g) Affiliation: A medical practitioner may work for pharmaceutical and allied healthcare industries in advisory capacities, as consultants, as researchers, as treating doctors or in any other professional capacity. In doing so, a medical practitioner shall always: (i) Ensure that his professional integrity and freedom are maintained. (ii) Ensure that patients' interests are not compromised in any way. (iii) Ensure that such affiliations are withi....
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....t. The case of the Petitioner is that the Petitioner hospital is governed by the Delhi Nursing Homes Registration Act, 1953. It is urged that in fact, an inspection was also carried out on 22.07.2011 by Dr. R.N. Dass, Medical Superintendent (Nursing Home) under the Directorate of Health Services, Govt. of NCT of Delhi and the necessary equipments and facilities were found to be in order which negates the observations dated 27.10.2012 of the Ethics Committee of the MCI. It is also the plea of the Petitioner hospital that the Petitioner was not provided an opportunity of being heard and thus the principles of natural justice were violated. 7. In the counter affidavit filed by the Respondents, it is not disputed that the MCI under the 2002 Regulations has jurisdiction limited to taking action only against the registered medical practitioners. Its plea however, is that it has not passed any order against the Petitioner hospital therefore; the Petitioner cannot have any grievance against the impugned order. ........................................................................ 8. It is clearly admitted by the Respondent that it has no jurisdiction to pass any order against th....
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....of expenditure while computing his business income. The Explanation provides an embargo upon allowing any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law. This means that there should be an offence by an assessee who is claiming the expenditure or there is any kind of prohibition by law which is applicable to the assessee. Here in this case, no such offence of law has been brought on record, which prohibits the pharmaceutical company not to incur any development or sales promotion expenses. A law which is applicable to different class of persons or particular category of assessee, same cannot be made applicable to all. The regulation of 2002 issued by the Medical Council of India (supra), provides limitation/curb/prohibition for medical practitioners only and not for pharmaceutical companies. Here the maxim of "Expressio Unius Est Exclusio Alterius" is clearly applicable, that is, if a particular expression in the statute is expressly stated for particular class of assessee then by implication what has not been stated or expressed in the statute has to be excluded for other class of assessee. If the Medical Council regulation i....
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....000/- upto Rs. 10,000/- : Removal from Indian Medical Register or State Medical Register for 3 (three) months Gifts more than Rs. 10,000/ - to Rs. 50,000/- : Removal from Indian Medical Register or State Medical Register for 6(six) months. Gifts more than Rs. 50,000/- to Rs. 1,00,000/ - : Removal from Indian Medical Register or State Medical Register for 1 (one) year. Gifts more than Rs. 1,00,000/ - : Removal for a period of more than 1 (one) year from Indian Medical Register or State Medical Register (b) Travel facilities: A medical practitioner shall not accept any travel facility inside the country or outside, including rail, road, air, ship, cruise tickets, paid vacations etc. from any pharmaceutical or allied healthcare industry or their representatives for self and family members for vacation or for attending conferences, seminars, workshops, CME programme etc. as a delegate. Expenses for travel facilities more than Rs. 1,000/ - upto Rs. 5,000/ -: Censure Expenses for travel facilities more than Rs. 5,000/-upto Rs. 10,000/-: Removal from Indian Medical Register or State Medical Register for 3 (three) months. Expenses for travel facilities more than Rs. 10,00....
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....er. From the aforesaid notification, ld. CIT DR submitted that so many violations and censures have been prescribed for any expenditures/ or benefit given to doctors, thus, violation of such guidelines for incurring such kind of expenditures cannot be held to be allowable expenditure. CBDT is well within its power to clarify and interpret the law and prohibit allowance of any expenditure which violates any statute or is in nature of offence. 8. From a perusal of above amendment/notification in the MCI regulation, it is quite clear again that same is applicable for medical practitioners only and the censure/action which has been suggested by it is only on medical practitioners and not for pharmaceutical companies or allied health sector industries. The violation of the aforesaid regulation would not only ensure a removal of a doctor from the Indian Medical Register or State Medical Register for a certain period of time and it does not impinge upon the conduct of pharmaceutical companies. This important distinction has to be kept in mind that regulation issued by Medical Council of India is qua the doctors/medical practitioners and not for the pharmaceutical companies. As a log....
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....ideration before the co-ordinate Bench of the ITAT, Mumbai Bench in the case of Syncom Formulations (I) Ltd. (in ITA Nos. 6429 & 6428/Mum/2012 for A.Ys. 2010-11 and 2011-12, vide order dated 23.12.2015), wherein Tribunal held that CBDT circular would not be not be applicable in the A.Ys. 2010-11 and 2011-12 as it was introduced w.e.f. 1.8.2012. 10. From the perusal of the nature of expenditure incurred by the assessee, it is seen that under the head "Customer Relationship Management", the assessee arranges national level seminar and discussion panels of eminent doctors and inviting of other doctors to participate in the seminars on a topic related to therapeutic area. It arranges lectures and sponsors knowledge upgrade course which helps pharmaceutical companies to make aware of the products and medicines manufactured and launched by it. Under Key Account Management, the assessee makes endeavour to create awareness amongst certain class of key doctors about the products of the assessee and the new developments taking place in the area of medicine and providing correct diagnosis and treatment of the patients. The said activities by the assessee are to make the doctors aware of it....
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.... be allowed as business expenditure and is not impaired by EXPLANATION 1 to section 37(1). 11. Before us, the Ld. CIT DR has also much harped upon the decision of the Hon'ble Himachal Pradesh High Court in the case of Confederation of Indian Pharmaceutical Industry (SS) vs. CBDT (supra), in support of the argument that CBDT Circular has been approved and confirmed by the High Court and therefore, it has a huge binding precedence. From the perusal of the said judgment of the Hon'ble High Court, it is seen that in that case the validity of Circular No.5/12 dated 1.8.2012 was challenged. The Hon'ble High Court though upheld the validity of the said circular but with a rider that if the assessee satisfies the assessing authority that the expenditure is not in violation of the regulation framed by the medical council, then it may legitimately claim the deduction. The assessee has to satisfy the AO that the expenditure is not in violation of the Medical Council regulation. Thus, if the assessee brings out that the MCI regulation is not applicable to the assessee before the AO, the same cannot be applied blindly. 12. At the time of hearing, our attention was also drawn to the decisi....
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....t in the instant assessment year, we have observed that these overseas trips for Doctors and their spouses were organized by the assessee whereby no details of the contents of seminar, if any conducted by the assessee overseas has been brought on record and also even the spouses accompanied the Doctors to the overseas trip which included cruise visit to island, gala dinners, cocktail, gala entertainment etc. rather than being directed towards seminar for product information dissemination or directed towards knowledge enhancement or knowledge sharing oriented as no details of seminar and its course content is brought on record rather the trip is directed towards leisure and entertainment of Doctors and their spouses which in our view appears to be clearly a distinguishable feature in this year enabling us to take a divergent view and the expenses incurred by the assessee cannot be allowed as business expenditure u/s. 37 of the Act as it is clearly hit by explanation to Section 37 of the Act being against public policy as unethical prohibited by law. In view of the above, he pointed out that in the above decision for A.Y. 2009- 10 in the case of Liva Healthcare, there was a specif....
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....tes to doctors and medical practitioners and lists out the censures and fines imposed upon them. What has not been provided in the MCI regulation cannot be supplied either by the court or by the CBDT. There has to be express provision under the law whereby pharmaceutical companies are prohibited to conduct conferences or seminar or give free samples. In the Tribunal decision of Liva Healthcare, strong reference has been made to Hon'ble Himachal Pradesh High Court (supra), that the said CBDT circular has been upheld. On this aspect we have already discussed in detail herein above that, firstly, High Court itself carves out a rider that assessee is free to demonstrate before the AO that this circular is not applicable on facts of the case; and secondly, CBDT circular which creates new impairment and imposes disallowbility not envisaged in any of the Act or regulation cannot be reckoned to be retrospective. Another strong reference has been made to the decision of Hon'ble Punjab & Haryana High Court in the case of CIT vs. Kap Scan and Diagnostic Centre (P.) Ltd. [2012] 25 taxmann.com 92, wherein commission was paid to the private doctors for referring the patients for diagnosis to the....
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....ies or individuals other than the doctors. In the backdrop of the aforesaid observations, the Tribunal had observed that the MCI guidelines cannot decide the allowability or otherwise of an expenditure in the hands of such other entities under the Income-tax Act, 1961. It was further observed by the Tribunal that the Income tax Act is an independent code in itself and the business income of an assessee has to be assessed and taxed as envisaged under the provisions of the Act. On the basis of the limited scope of applicability of the MCI guidelines to a particular class of the society viz. doctors or medical practitioners registered with the council, the Tribunal had concluded that the guidelines issued by MCI would only regulate the code of conduct of the doctors and the medical practitioners registered with it and would not be applicable to other entities. 25. We thus, in the backdrop of the aforesaid settled position of law as regards the prospective applicability of an oppressive circular, are of the considered view that as the CBDT as per its Circular No. 5/2012, dated 01.08.2012 had enlarged the scope of Indian Medical Council Regulation, 2002, and had made the same applica....
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..... PHL Pharma (P.) Ltd. The Tribunal after considering the aforesaid judgment had observed that as held by the High Court, if the assessee was able to establish that the MCI regulation was not applicable to the assessee, then the same could not be blindly applied in its case. (iv) CIT Vs. Kap Scan and Diagnostic Centre (P.) Ltd. (2012) 344 ITR 476 (P&H): We find that the judgment in the aforesaid case was rendered in context of the commission paid by the assessee company which was running a scanning and a diagnostic centre to the private doctors for referring patients for diagnosis/scanning. Thus, the facts involved in the case before the High Court are distinguishable as against those in the case of the assessee before us. Still further, the said judgment was also considered by the Tribunal while passing the order in the case of DCIT-8(2), Mumbai Vs. PHL Pharma (P.) Ltd. 27. We thus, in terms of our aforesaid observations conclude that the assessee was duly entitled for claim of sales promotion expenses of Rs. 9,70,82,317/- incurred on the distribution of articles to the stockists, distributors, dealers, customers and doctors. Thus, the order of the CIT(A) sustaining the d....
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....ances of the case and in Law, the learned CIT(A) has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below: 1. The order of the CIT(A) is opposed to law and fact of the case. 2. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in allowing all sales promotion articles costing up to the cost price of Rs. 750/- each u/s. 37(1), on the ground that these are wholly and exclusively incurred for the assessee's business purposes when supporting evidences have not been furnished by the assessee. 3. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in allowing sales promotion expenses, without appreciating the prohibi tion imposed b the Medical Counci l of India on medical practitioners from accepting gifts, travel facilities, hospitality, cash or monetary grants (freebies) from pharmaceutical and allied healthcare sector Industry and the Circular no 5/2012 issued by CBDT not to allow such expenses which are prohibited by law." 31. Briefly stated, the assessee company had e-filed its return of income for A.Y. 2012-13 on 21.09.2012, declaring a total income of Rs. 270,6....
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....t the issue involved in the present case viz. disallowance of sales promotion expenditure remains the same, as was there before us in the assesses own case for the immediately preceding year viz. A.Y. 2011-12 as had been adjudicated by us hereinabove, except for the fact that in the present case the CBDT Circular No. 5/2012, dated 01.08.2012 had came into force during the year under consideration. Be that as it may, we are of the considered view that as deliberated by us at length hereinabove, the aforementioned CBDT Circular No. 5/2012, dated 01.08.2012 had enlarged the scope of MCI regulations and made the same applicable to the pharmaceutical companies, without any enabling provision either under the Income Tax Act or the Indian Medical Council Regulations. We are of the considered view that as observed by us hereinabove, the CBDT by extending the scope and gamut of the MCI Regulation had by so doing traversed beyond the scope of its jurisdiction and provided casus omissus to the regulation issued by MCI, which though had not been expressly provided therein. We thus, being of the view that as the CBDT is divested of its power to create a new impairment adverse to an assessee or ....