TaxTMI 
TaxTMI 
2023 (10) TMI 27
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....hics) Regulation, 2002, and CBDT Circular No. 5/2012 Dated 01/08/2012 is applicable and therefore not admissible as business expenditure under Section 37(1) of the I.T. Act 1961 even though commission paid is against the advisory service received regarding inventory and purchase of medicines by the assess." 3. The brief facts of the case are that the assessee is engaged in the business of trading of drugs and medicines. During the year under consideration, the assessee has shown gross sales of Rs. 4,62,10,464/- on which the assessee has earned gross profit of Rs. 1,01,85,353/-. During the course of assessment, the Ld. Assessing Officer observed that on verification of the profit and loss account for the year under consideration it was noticed that the assessee had debited an amount of Rs. 50,46,000/- on account of commission which was paid to the following Doctors namely (1) Dr. Ramanbhai S. Patel (ii) Dr. Ratilal G. Patel (Rs. 15,96,601/- plus Rs. 34,49,3991= Rs. 50,46,000). The Ld. Assessing Officer questioned the allowability of the aforesaid expenditure in view of the language of Circular issued by the Central Board of Direct Taxes being Circular No. 5 of 2012 dated 01.08.2012....
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....the assessee that payments were made to the doctors for advisory services provided to the assessee is not verifiable on facts. Accordingly, the Assessing Officer disallowed the payment of Rs. 50,46,000/- made by the assessee to the two doctors under Section 37(1) of the Act. 4. In appeal, Ld. CIT(Appeals) confirmed the additions with the following observations: "2.3. I have carefully considered the facts mentioned in the Assessment Order and submission filed by the Appellant. On verification of the profit and loss account for the year under consideration it was noticed by the AO that the assessee had debited an amount of Rs. 50,46,000/- on account of commission paid to the Doctors. The said commission was paid to the following Doctors:- (i) Dr. Ramanbhai S. Patel Rs. 15,96,601/- (ii) Dr. Ratilal G. Patel Rs. 34,49,399/- Total Rs. 50,46,000/- In view of the Circular issued by the Central Board of Direct taxes being Circular No. 5/2012 (F.No. 225/142/2012-ITAJI) dated 01 08/2012. The commission paid by the assessee is not an allowable expenses. Section 37(1) of I.T.Act,1961 provides for deduction of any revenue expenditure (other than those failing under Sec....
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....by law. 2.4. The assessee has submitted that the commission has been paid for giving guidance in respect of maintenance of stock of medicines and purchase of medicines. The doctors have also confirmed that they are giving guidance to sunflower pharmacy regarding purchase of medicines, quantity of medicines, name of medicines, location of suppliers of medicines, time of purchase etc. The appellant has submitted that it is not pharmaceutical and allied health care industries and the payment of commission to doctors is not freebies but against the services rendered by doctors. The commission paid for services received for the purpose of the business of the assessee have no correlation with the remuneration to partners and salary paid to staff. Further, it is submitted that the commission paid has also disclosed as income in the hands of doctors and over and above 10% of tax deducted, doctors have paid balance tax of 20% of fax i.e. tax on the said amount has been paid by the doctors at the same rate as rate of tax of firm. 2.5. After going through the facts of the case, it is seen that CBDT has issued circular number 5/2012 dated 01 08/2012 in respect of inadmissibility of expense....
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....is falling in the category of allied health sector industry. In the case of assesses the commission paid is not for such activities and as per the modalities laid down. Considering the fact as narrated above, it is clear that the Assessee has no requirement of any advice/guidance/service from doctors or no any evidence so as establish that the any service by way advice/guidance received from the doctors for which such payments of Rs. 50,46,000/- made to the doctors. In view of the above discussion and in view of Circular of the Board reproduced hereinabove, it is clear that the payment of commission made by the assessee to the above said two doctors namely (i) Dr. Ramanbhai S. Pate/ Rs. 15,96,601/- and (ii) Dr. Ratilal C. Pate/ Rs. 34,49,399/- totaling to Rs. 50,46,000/- is not allowable u/s. 37(1) of the Act. The addition of Rs. 50,46,000/- is confirmed. The grounds of appeal are dismissed. 3. In result, the appeal of the appellant is dismissed." 5. The assessee is in appeal before us against the aforesaid order passed by Ld. CIT(Appeals) confirming the additions made by the Assessing Officer. Before us, the Counsel for the assessee drew our attention to order passed by ITAT Ah....
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....ners would also be prohibited by law and thus, expenditure incurred in distribution of such freebies would not be allowed as a deduction in terms of Explanation 1 to Section 37(1)of the Act. In this case, the Assessee, a pharmaceutical company incurred expenditure towards gifting freebies to medical practitioners for promoting its health supplement and claimed exemption for said expenses under Section 37(1) of the Act. The Assessing Officer by placing reliance on Circular No. 05/2012, dated 01.08.2012 and circular issued on 14.12.2009 by Medical Council of India under MCI Regulations, 2002, held that only expenses incurred till 14.12.2009 would be eligible for deduction and thus, partially disallowed exemption claimed by assessee. It was noted that Explanation 1 to Section 37(1) contained within its ambit all activities which were illegal or prohibited by law. The Hon'ble Supreme Court held that since acceptance of freebies by medical practitioners was punishable by MCI, distribution of such freebies would also fall within purview of prohibited by law and therefore, expenditure incurred by assessee-pharmaceutical company in distribution of such freebies would not be granted as ....
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....and therefore are not admissible under Section 37 of the Act. In our considered view, the assessee has not been able to demonstrate rendering of any services by the doctors the pharmacy so as to justify that the aforesaid payments were made by the assessee towards advisory services. The fact that TDS was deducted by the assessee on such payments is immaterial for the purpose of deciding whether the payments were made by the assessee for receipt of advisory services or otherwise. In the instant facts, we observe that there is no formal agreement between the assessee and the doctors for providing any advisory services (refer page 10 of CIT order). Further, the Assessing Officer has made a specific noting that the assessee operated the pharmacy from within the premises of the hospital and hence, the sales of the pharmacy were dependent primarily on the prescriptions made by both the doctors to whom the commission was paid (refer page 10 of CIT order). It was further noted by the Assessing Officer that the assessee has not submitted any correspondence or communication between itself and the doctors so as to establish any advice / services given / rendered by the doctors to the assessee....
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....nce such payments are illegal or prohibited by law. 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. (supra) has been rendered on a different set of facts and would not apply to the assessee's facts. 10. The fourth issue for consideration before us is that 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 ....