TaxTMI 
TaxTMI 
2019 (7) TMI 862
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....each articles) have been incurred in violation of CBDT circular 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. ....
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....m the pharmaceutical companies cannot be extended to an assessee, which is engaged in the business of manufacturing 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 a....
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....15, where under identical set of facts, the Tribunal, after considering various aspects of the case, including circular issued by MCI 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 i....
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....ly cover individual medical practitioners and not the pharmaceutical companies or allied health sector industries. Interestingly, the scope of 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 ar....
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....bees to medical practitioner by pharmaceutical and allied health sector industry Circular No. 5/2012 [F.No. 225/142/2012-ITA.II], dated 1-8-2012 It 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 prof....
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....elhi in the case of Max Hospital Vs. MCI (CWP No. 1334/2013, dated 10.01.2014) fortifies our aforesaid view that MCI has no jurisdiction to pass any order or regulation against any hospital, pharmaceutical 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 ....
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....ebies to medical practitioners or their professional associations in violation of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, the expenditure incurred on the same 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 ....
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....on two aspects viz. (i) validity of the circular in the backdrop of enlargement of scope of MCI regulation to the pharmaceutical companies by the CBDT, without any enabling provisions either under the Income Tax Law or under 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 ....
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....s also clarified that the sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner or professional associations is also taxable as business income or income from other sources as the case may be depending on the facts of each case. The Assessing Officers of such medical practitioner 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 ....
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....ance of national/ state / institutional ethics committees / bodies. (iii) Ensure that it fulfils all the legal requirements prescribed for medical research. (iv) Ensure that the source and amount of funding is publicly disclosed at the beginning itself. (v) Ensure that proper care and facilities are provided to human volunteers, if they are necessary for the research 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 wo....
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....ercise of the power conferred under Section 20-A read with Section 33 (m) of the Indian Medical Council Act, 1956, these regulations do not govern or have any concern with the facilities, infrastructure or running of the Hospitals and secondly, that the Ethics Committee of the MCI acting under the Regulations had no jurisdiction to pass any direction or judgment on the infrastructure of any hospital which power rests solely with the concerned State Govt. 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 und....
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....me chargeable under the heads "profits and gains of business or profession" Explanation 1 - For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure." The aforesaid provision applies to an assessee who is claiming deduction 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....
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.... as amended vide notification dated 10/12/2009, shall be prescribed by further amending the Section 6.8.1 as under:- SECTION ACTION 6.8.1 In dealing with pharmaceutical and allied health sector industry, a medical practitioner shall follow and adhere to the stipulations given below: - (a) Gifts: A medical practitioner shall not receive any gift from any pharmaceutical or allied health care industry and their sales people or representatives; Gifts more than Rs. 1,000/ - upto Rs. 5,000/- : Censure Gifts more than Rs. 5,000/- 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, ....
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....han Rs. 5,000/-upto Rs. 10,000/-: Removal from Indian Medical Register or State Medical Register for months. Cash or monetary grants more than Rs. 10,000/-to Rs. 50,000/-: Removal from Indian Medical Register or State Medical Register for 6 (six) months. Cash or monetary grants more than more than Rs. 50,000/-to Rs. 1,00,000/-: Removal from Indian Medical Register or State Medical Register for 1 (one) year. Cash or monetary grants more than Rs. 1,00,000/-: Removal for a period of more than 1 (one) year from Indian Medical Register or State Medical Register. 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/ac....
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....ility to the assessee. In any case, it is trite law that the CBDT circular which creates a burden or liability or imposes a new kind of imparity, same cannot be reckoned retrospectively. The beneficial circular may apply retrospectively but a circular imposing a burden has to be applied prospectively only. Here in this case the CBDT has enlarged the scope of 'Indian Medical Council Regulation, 2002' and made it applicable for the pharmaceutical companies. Therefore, such a CBDT circular cannot be reckoned to have retrospective effect. The same CBDT circular had come up for consideration 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 t....
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....nts, it is imperative that the doctors should keep themselves updated with the latest developments in the medicine and the main object of such conferences and seminars is to update the doctors of the latest developments, which is beneficial to the doctors in treating the patients as well as the pharmaceutical companies. Further as pointed out and concluded by the learned CIT(A) there is no violation by the assessee in so far as giving any kind of freebies to the medical practitioners. Thus, such kind of expenditures by a pharmaceutical companies are purely for business purpose which has to 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....
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....ver, in A.Y. 2009-10, Hon'ble Tribunal while noting the fact that consistency has to be adopted, distinguished the order of A.Y. 2008-09 as under: "The assessee has contended that in the immediately preceding assessment year the Tribunal has decided the issue in favour of the assessee in ITA NO. 388/Mum/2012 for assessment year 2008-09. In our considered view, principles of Res judicata is not applicable to income tax proceedings although we are fully agreeable that principles of consistency is to be maintained (Hon'ble Supreme Court decision in Radha Soami Satsang v. CIT (1992) 193 ITR 321 (SC) but 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 semi....
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....case on careful perusal of the Tribunal order in the case of Liva Healthcare (supra) we find that the Tribunal though has incorporated the relevant provisions and clauses of the 'Indian Medical Council Regulation 2002', however, has not elaborated or dwell upon as to how this MCI regulation which is strictly meant for medical practitioners and doctors can be made applicable to pharmaceutical companies. There has to be some enabling provision or specific clause in the said regulation whereby the pharmaceutical companies are barred from conducting seminars or conferences by sponsoring the doctors. The entire conduct relates 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 h....
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....nal is clearly distinguishable and cannot be held to be applicable and also we have already given our independent finding as to allowability of expenses in the hands of the assessee as business expenditure." Still further, the coordinate bench of the Tribunal in the case of India Medtronic Pvt. Ltd. Vs. DCIT (2018) 52 CCH 43 (Mum), following the view taken by the Tribunal in the case of PHL Pharma Pvt. Ltd. (supra), had concluded that the MCI guidelines are only applicable to the doctors and the medical professionals registered with the council, and cannot govern the other tax entities like drug manufacturing companies 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 particula....
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....ses were incurred by the assessee for creating good relations with the doctors in lieu of expected favours from them for recommending to the patients the pharmaceuticals products of the company. We find that the Tribunal while adjudicating the case of DCIT-8(2), Mumbai Vs. PHL Pharma (P.) Ltd. had considered the aforesaid order of the Tribunal. (iii) Confederation of Indian Pharmaceutical Industry (SSI) Vs. The Central Board of Direct Taxes (CWP No. 10793 of 2012, dated 26.12.2012)(HP): We find that the aforesaid judgment of the Hon'ble High Court of Himachal Pradesh was considered by the ITAT, Mumbai Bench "C", Mumbai in the case of DCIT-8(2), Mumbai Vs. 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 scannin....
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....r sustaining disallowance of Rs. 77,42,4161- 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. 8. For that the other grounds, if any, shall be urged at the time of hearing of the appeal" 30. The revenue on the other hand has assailed the order of the CIT(A) for A.Y. 2012-13 on the ground that he had erred in deleting the disallowance of sales promotion expenses of Rs. 10,60,02,763/-by restricting the disallowance of the same only in respect of the expenditure incurred by the assessee on sales promotion articles costing more than Rs. 750/- per article, by raising before us the following grounds appeal : ""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. 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....
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....ed by the order passed by his predecessor while disposing off the appeal of the assessee for the immediately preceding year viz. A.Y. 2011-12. The CIT(A) following the view taken by his predecessor, thus restricted the disallowance of the sales promotion expenditure to the extent of Rs. 77,42,416/- i.e the expenditure which was incurred by the assessee on sales promotion articles costing more than Rs. 750/- per article. In the backdrop of his aforesaid observations the CIT(A) restricted the disallowance to the extent of Rs. 77,42,416/- and deleted the balance addition/disallowance of Rs. 10,60,02,763/- [Rs. 11,37,45,179/- (-) Rs. 77,42,416/-]. 33. That both the assessee and the revenue being aggrieved with the order of the CIT(A) has carried the matter by way of cross appeals before us. We find that 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 un....