TaxTMI 
TaxTMI 
2020 (1) TMI 777
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....t the Ld. CIT(A) has erred in sustaining disallowance of Rs. 23,63,65,631/- being expenditure incurred and debited under the head 'Medical Conference Expense. 4. For that the Ld. CIT(A) has erred in holding that the regulations dated 11/03/2002 and 10/12/2009 issued by MCI would fall within the meaning of 'Delegated Legislation' and hence the same is 'law' and does not require specific legislation by the legislature and its accent by the Hon'ble President of India. 5. For that the Ld. CIT(A) has erred in holding that the regulations issued by MCI have all the tenets of a valid law being a 'delegated legislation' and is required to be implemented as such. 6. For that the Ld. CIT(A) has erred in holding that expenditure incurred in violation of such regulation by anyone would constitute an offence and is prohibited by law and as such the expenditure would be hit by Explanation to Section 37(1). 7. For that the Ld. CIT(A) has erred in holding that the absence of punishment to entities other than medical practitioner cannot be a ground for not holding such expenditure as offence and/or prohibited by law in the hands of entity ....
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....e 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. 13,93,11,578/- 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 deleting the disallowance of sales promotion expenses of Rs. 13,93,11,578/- without appreciating the fact that the expenditure was incurred for providing freebies to medical practitioners and their professional associates in violation of regulation issued by Medical Council of India." 3. For these and other grounds that may be urged at the time of hearing, the decision of the CIT(A) may be set aside and that of the AO be restored. 2.1 Facts on record would reveal that the assessee being resident corporate assessee is stated to be engaged in manufacturing and sale of pharmaceuticals and allied products. The assessment for year under consideration was framed u/s 143(3) on 28/12/2016 w....
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....tion 37(1) and applying the same reasoning as applied while disallowing the expenditure on sales promotional articles, the said expenditure of Rs. 2363.65 Lacs was also disallowed and added back to the income of the assessee. 3.1 Aggrieved, the assessee contested both the disallowances before learned first appellate authority. With respect to disallowance of Sales promotion expenditure, the attention was drawn to appellate orders for AYs 2011-12 & 2012-13 wherein the assessee was saddled with similar disallowances by Ld. AO. However, upon further appeal, Ld. CIT(A) allowed expenditure on gift articles costing less than Rs. 750/- per article but confirmed disallowance on gift articles costing more than Rs. 750/- per article. At the same time, reliance was placed on various judicial pronouncements to support the argument that the MCI guidelines / notifications / Regulations were not applicable to pharma companies and the expenditure was an allowable deduction. Assailing CBDT Circular No.05/2012 dated 01/08/2012, it was submitted that CBDT had no power to levy tax through circular / notification and could not term particular expenditure to be prohibited by law or to be an offence. ....
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....ntly been followed by Tribunal in AY 2013-14, ITA No.5807/Mum/2017 order dated 28/06/2019. The copies of orders have already been placed on record, which we have considered. 4.2 It is evident from the quantum assessment order that Ld.AO has primarily gone by the stand taken by revenue in earlier AYs 2011-12 to 2013-14 while making the impugned disallowance. The learned first authority also granted partial relief to the assessee by following appellate orders of earlier years, which formed subject matter of cross-appeals before this Tribunal in AYs 2011-12 & 2012-13. The issue of allowability of expenditure on sales promotion articles u/s 37(1) as well as in the light of circular issued by CBDT / MCI was subject matter of elaborate deliberations by the co-ordinate bench in assessee's own case for AYs 2011-12 & 2012-13, wherein the issue was concluded in assessee's favor. The operative portion of the decision, for ease of reference, could be extracted in the following manner: - '21. We have deliberated at length on the issue under consideration and after perusing the regulations issued by the Medical Council of India, find that the same lays down the code of conduc....
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....al company or healthcare sector in any manner. We are further of the view that in the backdrop of our aforesaid observations, as the Medical Council of India does not have any jurisdiction under law to pass any order or regulation against any hospital, pharmaceutical company or any healthcare sector, then any such regulation issued by it cannot have any prohibitory effect on the manner in which the pharmaceutical company like the assessee conducts its business. On the basis of our aforesaid observations, we are unable to comprehend that now when the MCI has no jurisdiction upon the pharmaceutical companies, then where could there be an occasion for concluding that the assessee-company had violated any regulation issued by MCI. We thus, in terms of our aforesaid observations are of the considered view that even if the assessee had incurred expenditure on distribution of "freebies" to doctors and medical practitioners, the same though may not be in conformity with the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (as amended on 10.12.2009), however, as the same only regulates the code of conduct of the medical practitioners/doctors, therefore, ....
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....ense incurred in providing above mentioned or similar freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37(1) of the Income Tax Act being an expense prohibited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector Industries or other assessee which has provided aforesaid freebees and claimed it as a deductible expense in its accounts against income. 4. It is 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." We may herein observe that a perusal of the aforesaid CBDT Circular reveals that the "freebies" provided by the pharmaceutical companies or allied health sector ind....
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....al practitioners and not the pharmaceutical companies and the allied healthcare sector for claiming the same as an expenditure. 23. We find that the CBDT as per its Circular No. 5/2012, dated 01.08.2012 had enlarged the scope and applicability of Indian Medical Council Regulation, 2002, by making the same applicable even to the pharmaceutical companies or allied healthcare sector industries. We are of the considered view that such an enlargement of the scope of MCI regulation to the pharmaceutical companies by the CBDT is without any enabling provision either under the Income Tax Act or under the Indian Medical Council Regulations. We are of a strong conviction that the CBDT cannot provide casus omissus to a statute or notification or any regulation which has not been expressly provided therein. Still further, though the CBDT can tone down the rigours of law in order to ensure a fair enforcement of the provisions by issuing circulars for clarifying the statutory provisions, however, it is divested of its power to create a new impairment adverse to an assessee or to a class of assessee without any sanction or authority of law. We are of the considered view that the circular....
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....ctively. We are of the considered view that though a benevolent circular may apply retrospectively, but a circular imposing a burden has to be apply prospectively only. Our aforesaid view is fortified by the judgment of the Hon'ble Supreme Court in the case of Director of Income-tax V. S.R.M.B Dairy Farming (P.) Ltd. (2018) 400 ITR 9 (SC). The Hon'ble Apex Court in its aforesaid judgment has held that beneficial circulars had to be applied retrospectively, while oppressive circulars had to be applied prospectively, observing as under: "25. It is in this context, the question arises, when the instruction expressly states that the benefit of the said policy is prospective, still can the courts place a construction on such instruction so as to make it retrospective. In this context, the Apex Court in the case of CCE v. Mysore Electricals Industries Ltd. reported in [2006] 204 ELT 517 (SC) : [2007] 8 RC 1, dealing with the question how a beneficial circular is to be construed, has approached this question in the following manner. At paragraph 13 of the judgment, it is stated that the learned counsel further submitted that the circular being oppressive and against the r....
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.... disallowed in view of the CBDT Circular dated 01.08.2012. For the sake of ready reference, the said CBDT Circular No.5/2012 is reproduced hereunder: "INADMISSIBILITY OF EXPENSES INCURRED IN PROVIDING FREEBEES 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 freebees (freebies) to medical practitioners 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 Ta....
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....use reads as under:- "6.8 Code of conduct for doctors and professional association of doctors in their relationship with pharmaceutical and allied health sector industry. 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. (b) Travel facilities: A medical practitioner shall not accept a any travel facility inside the country or outside, including rail, 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. (c) Hospitality: A medical practitioner shall not accept individually any hospitality like hotel accommodation for self and family members under any pretext. (d) Cash or monetary grants: A medical practitioner shall not receive any cash or monetary grants from any pharmaceutical ....
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....s: (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 within the law. (iv) Ensure that such affiliations/employments are fully transparent and disclosed. (h) Endorsement: A medical practitioner shall not endorse any drug or product of the industry publically. Any study conducted on the efficacy or otherwise of such products shall be presented to and/or through appropriate scientific bodies or published in appropriate scientific journals in a proper way". 6. On a plain reading of the aforesaid notification, which has been heavily relied upon by the department, it is quite apparent that the code of conduct enshrined therein is meant to be followed and adhered by medical practitioners/doctors alone. It illustrates the various kinds of conduct or activities which a medical practitioner should avoid while dealing with pharmaceutical companies and allied health sector industry. It provides guidelines to the medical practitioners of their ethical codes and moral conduct. Nowhere the regulation or the noti....
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....he 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 the Petitioner hospital under the 2002 Regulations. In fact, it is stated that it has not passed any order against the Petitioner hospital. Thus, I need not go into the question whether the adequate infrastructure facilities for appropriate post-operative care were in fact in existence or not in the Petitioner hospital and whether the principles of natural justice had been followed or not while passing the impugned order. Suffice it to say that the observations dated 27.10.2012 made by the Ethics Committee do reflect upon the infrastructure facilities available in the Petitioner hospital and since it had no jurisdiction to go into the same, the observations were uncalled for and cannot be sustained. " [Emphasis added is ours] From the aforesaid decision, it is ostensibly clear that the Medical Council of India has no jurisdiction to pass any order or regulation against any hospital or any healthcare sector under its 2002 regulation. So once the Indian Medica....
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....cular 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 is applicable to medical practitioners then it cannot be made applicable to Pharma or allied health care companies. If section 37(1) is applicable to an assessee claiming the expense then by implication, any impairment caused by Explanation 1 will apply to that assessee only. Any impairment or prohibition by any law/regulation on a different class of person/assessee will not impinge upon the assessee claiming the expenditure under this section. 7. Before us the learned CIT DR strongly relied upon the fact that CBDT Circular, while clarifying the applicability of Explanation 1 to section 37(1) on medical practitioners and pharmaceutical companies have interpreted that Indian Medical Council Regulation is applicable for pharmaceutical companies also. He also brought to our notice that another notification was issued by Indian Medical Council which was published on 01.12.2016 which further prohibits such kind of embargo on medical practitio....
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.... 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. 10,000/-to Rs. 50,000/-: Removal from Indian Medical Register or State medical Register for 6 (six) months. Expenses for travel facilities 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. Expenses for travel facilities more than Rs. 1,00,000/-: Removal for a period of more than 1 (one) year from Indian Medical Register or State Medical Register. (c) Hospitality: A medical practitioner shall not accept individually any hospitality like hotel accommodation for self and family members under any pretext. Expenses for Hospitality more than Rs. 1,000/-upto Rs. 5,000/-: Censure Expenses for Hospitality more than Rs. 5,000/- upto Rs. 10,000/-: Removal from Indian Medical Register or State Medical Register for 3 (three) months. Expenses for Hospitality more than Rs. 10,000/- to Rs. 50,000/-: Removal from Indian Medica....
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....cal 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 logical corollary to it, if there is any violation or prohibition as per MCI regulation in terms of section 37(1) r.w. Explanation1, then it is only meant for medical practitioners and not for pharmaceutical company (Assessee Company) for claiming the expenditure. 9. Adverting to the contention of the Ld. CIT DR that CBDT is well empowered to issue such clarification, it is seen that the CBDT Circular dated 01.08.2012 (supra) in its clarification has enlarged the scope and applicability of 'Indian Medical Council Regulation 2002' by making it applicable to the pharmaceutical companies or allied health care sector industries. Such an enlargement of scope of MCI regulation to the pharmaceutical companies by the CBDT is without any enabling provisions either under the provisions of Income Tax Law or by any provisions under the Indian Medical Counc....
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....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 its products and research work carried out by it for bringing the medicine in the market and its results are based on several levels of tests and approvals. Unless the pharmaceutical companies make aware of such kind of products to key doctors or medical practitioners, then only it can successfully launch its products/medicines. This kind of expenditure is definitely in the nature of sales and business promotion, which has to be allowed. Coming to the gift articles and free samples of medicines, it is seen that the assessee gives various kind of articles like, diaries, pen sets, calendars, paper weights, injection boxes etc. embossed with bold logo of its brand name and the product name so that the doctors remembers the brand of the assessee and also the name of the medicine. All the gift articles, as pointed out b....
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.... 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 decision of Tribunal of our Coordinate Bench in the case of 'Liva Healthcare Limited ITA Nos. 904 & 945/Mum/2013', decided vide order dated 12.09.2016. In counter, to this decision the learned counsel, Shri JD Mistry distinguished the said judgment and submitted that the facts of the case in the Liva Healthcare (supra) were substantially different from the facts of the present case. In the case of Liva Healthcare, the Hon'ble Tribunal disallowed such expenses u/s. 37(1) of the Act on the ground that they were not incurred wholly and exclusively for the purpose of business as the same were incurred to create good relations with the doctors in lieu of expected favours from doctors for recommending to the patients the pharmaceutical products dealt with by the company to generate more and mo....
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....istinguishable 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 specific finding of a fact that no details have been filed with respect to any seminar has been conducted for doctors and that the trips were directed towards leisure and entertainment of doctors and their spouses. This was a distinguishable feature for the Hon'ble Tribunal to take a contrary view from A.Y. 2008-09. He further submitted that the Hon'ble Tribunal in the case of Liva Healthcare Ltd. v. ACIT (ITA No. 4791/Mum/2014) for A.Y. 2010-11 has followed the decision of Liva Healthcare (supra) for A.Y. 2008-09 and has decided this issue in favour of the assessee. This, further brings out the fact that the Hon'ble Tribunal disallowed the expenses u/s. 37(1) of the Act in the case of Liva Healthcare for A.Y. 2009-10 only on the ground that the s....
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.... 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 v. 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 assessee company. In background of these facts and issues involved, the Hon'ble High Court held that said payment of commission is wrong and is opposed to be a public policy. It should be discouraged as it is not a fair practice. The ratio of said decision cannot be applied on the facts of the present case because there is no violation of any law or anything which is opposed to public policy. Similarly, there is reference to the decision of Hon'ble Supreme Court in the case of Eskayef (Now Known as Smithkline Beecham) Pharmaceuticals (India) Limited v. CIT (2000) 111 Taxman 561(SC), which was given in context of Section 37(3A) of the Act. In the said case the assessee had claimed expenditure on distribution of ph....
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....sued 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 applicable to the pharmaceutical companies, thus the same cannot be reckoned to have a retrospective effect. We find that a coordinate bench of the Tribunal viz. ITAT, Mumbai in the case of Syncom Formulations (I) Ltd. v. DCIT-8(3), Mumbai (ITA No. 6428 & 6429/Mum/2012, dated 23.12.2015) for A.Ys 2010-11 and 2011-12 had concluded that the aforesaid CBDT Circular No. 5/2012, dated 01.08.2012 would not be applicable to the A.Ys 2010-11 and 2011-12, as the same was introduced w.e.f. 01.08.2012. We thus, in terms of our aforesaid observations are of the considered view that the aforementioned CBDT Circular No. 5/2012, dated 01.08.2012 would not be applicable to the case of the assessee before us for A.Y....
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....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 v. 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 disallowance of the sales promotion expenses to the extent of Rs. 66,49,685/- is set aside. In terms of our aforesaid observations the entire disallowance of the sales promotion expenses of Rs. 9,70,82,317/-made by the AO is deleted. 28. The appeal of the assessee viz. ITA No. 5553/Mum/2014 is allowed and the appeal of the revenue viz. ITA No. 6129/Mum/2014 is dismissed. ITA No. 5479 & 5747/Mum/2015 A.Y. 2012-13 29. We shall now take up the cross appeals filed by the assessee and the revenue for A.Y. 2012- 13. The assessee assailing the order passed by the CIT(A) to the extent he had sustained the disal....
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....rnished 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 prohibition imposed b the Medical Council 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. 270,68,80,787/-. The case of the assessee was thereafter taken up for scrutiny assessment under Sec. 143(2) of the Act. The A.O inter alia carrying out a disallowance of Rs. 11,37,45,179/- of sales promotion expenses assessed the income of the assessee-company under Sec. 143(3) at Rs. 282,06,25,970/-. The book profit of the assessee under Sec. 115JB was computed by the A.O at Rs. 365,71,93,685/-. The A.O while framing the assessment had disallowed the entire amount of sales promotion expenses of Rs. 11,37,45,179/- for the reason viz. (i) the....
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....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 to a class of assessee without any sanction or authority of law, therefore, are unable to persuade ourselves to subscribe to the rigours contemplated as regards the pharmaceutical companies or the allied healthcare sector in the CBDT Circular No. 5/2012, dated 01.08.2012. We would not hesitate to observe that despite an absence of enlargement of the scope of the regulations issued by the MCI under the Medical Council Act, 1956, therein bringing within the sweep of its code of conduct the pharmaceutical companies and allied hea....
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....id consistent view of the Tribunal, we hold that the entire expenditure of Rs. 1498.07 Lacs incurred by assessee on sales promotional article would be an allowable deduction. The grounds raised by the assessee, in this regard stand allowed whereas the grounds raised by revenue stand dismissed. The impugned order stand modified to that extent. 5.1 Regarding disallowance of medical conference expenditure, it is the submissions of Ld. Sr. Counsel that this expenditure was never disallowed in earlier years but the same has been disallowed for the first time in this year. Nevertheless, since the reasoning applied by revenue to disallow the same is pari-materia the same as applied while disallowing expenditure on sales promotional articles, the arguments as well as reliance on various judicial pronouncements as advanced to contest that expenditure, would equally apply to this issue also. For the said submissions, the Ld. Sr. Counsel drew our attention to the assessment orders passed u/s 143(3) for AYs 2008-09 to 2013-14 as placed in separate paper-book. It has further been submitted that Ld. CIT initiated proceedings u/s 263 for AYs 2012-13 & 2013-14 on the ground that these expenses ....