Aristo Pharmaceuticals (P.) Ltd. Vs ACIT (ITAT Mumbai)
Conclusion: Assessee-pharmaceutical company was entitled to claim sales promotion expenses incurred on distribution of articles to the stockists, distributors, doctors etc and the same was not hit by the Explanation to Sec. 37(1) in view of circular issued by MCI and circular of CBDT vide Circular No. 5 of 2012.
Held: Assessee-pharmaceutical company engaged in manufacturing and sales of pharmaceuticals and allied products. During the year, it had debited an amount under the head ‘sales promotional article expenses’. During the assessment proceedings, AO after considering relevant submissions of assessee and also by taking note of the circular issued by the Medical Council of India (MCI, in short) under the Medical Council (Professional Conducts, Etiquettes and Ethics) Regulation Act, 2002 held that expenditure incurred under the head ‘sales promotional article expenses’ was not allowable as deduction u/s 37(1) because such expenditure had been incurred in violation of prescribed law. Therefore, the same could not be allowed as deduction. It was held in the absence of any sanction or authority of law on the basis of which it could safely be concluded that the assessee company which was engaged in the business of manufacturing and sale of pharmaceuticals and allied products, had in the garb of sales promotion expenses incurred expenditure in respect of articles distributed to the stockists, distributors, dealers, customers and doctors, for a purpose which was either an offence or prohibited by law, expenditure incurred by assessee would not be hit by the Explanation to Sec. 37(1). Moreover, in view of circular issued by MCI and also circular of CBDT vide Circular No. 5 of 2012 , assessee was entitled for claim of sales promotion expenses incurred on distribution of articles to the stockists, distributors, dealers, customers and doctors.
FULL TEXT OF THE ITAT JUDGEMENT
These cross appeals filed by the assessee and the revenue are directed against the order of the CIT(A)-4, Mumbai dated 14-07-2017 for the assessment year 2013-14.
2. The grounds raised by the respective parties are as under:-
ITA No.5807/Mum/2017
“1. For that the Ld. CIT(A) has erred in sustaining disallowance of sales promotion expense amounting to Rs.1,42,97,051/-.
2. For that the Ld. CIT(A) has erred in holding that expenditure incurred for distribution of costly articles (exceeding Rs.750/- each article) are freebies to doctors and professionals.
3. For that the Ld. CCT~(A) has erred in holding that the such expenditures (exceeding Rs.750/- 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.
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. 14,25,13,3807-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. The brief facts of the case are that the assessee is a pharmaceutical company engaged in manufacturing and sales of pharmaceuticals and allied products. During the year, the assessee has debited an amount of Rs.15,68,10,431 under the head ‘sales promotional article expenses’. During the assessment proceedings, the AO asked the assessee to submit the details of the same and allowability of the same u/s 37(1) of the Income-tax Act, 1961. In response, the assessee, vide letter dated 15-10-2015 submitted full particulars showing the party from whom said purchases were made, the particulars of gift articles purchased, details of the products which is printed / embossed on the articles so purchased, quantity, etc. The assessee further stated that the said gift articles are distributed amongst doctors, stockists and chemists through their medical representatives and also used during various medical camps conducted by the assessee. The AO, after considering relevant submissions of the assessee and also by taking note of the circular issued by the Medical Council of India (MCI, in short) under the Medical Council (Professional Conducts, Etiquettes and Ethics) Regulation Act, 2002 held that expenditure incurred under the head ‘sales promotional article expenses’ is not allowable as deduction u/s 37(1) because such expenditure has been incurred in violation of prescribed law. Therefore, the same cannot be allowed as deduction.
4. Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee has filed complete details of expenses and also argued how the same is incurred wholly and exclusively for the purpose of business and which qualifies for deduction u/s 37(1) of the Income-tax Act, 1961. The assessee also filed elaborate written submissions on the issue of applicability of circular issued by MCI and submitted that any circular issued by an authority restricting its members to prohibit themselves for not accepting certain gifts from 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.
5. 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. Predecessor had given detailed reasonings in his appeal order in para 5.3.4, 5.3.5, 5.3.6, 5.3.7, 5.3.8 and 5.3.9 (Refer CITA order for A.Y.2011-12 Page No.41-63 of paper book) wny such expenditure is allowable.
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For A.Y.2013-14 – Following my own decision for A.Y. 2012-13 the A.O. is to be directed to restrict the disallowance to the extent of Rs.1,42,97,051/- (for A.Y.2013-14) being expenditure which exceeds price of individual items Rs.750/-and delete the balance expenditure incurred on articles costing less than Rs.750/-each which amounts to Rs.14,25,13.380/-. The details of such expenditure has been given by the appellant at Pg. No.75 to 96 of the paper book. Further details of expenditure which exceeds Rs.750/- has been given at Pg. No 97-98 of the paper book. It is also pertinent to mention that at Pg No 105, appellant has given working of “Sales Promotion Expenses” with regard to overall sales of 3 years i.e. A.Y.2011-12 to 2013-14. It can be seen that “Sales Promotion Expenses: is only 1.22% of total sales of Rs.1,27,982.81 (lakhs). Thus the claim of the appellant about genuineness, of expenditure cannot be ignored. Thus in the facts and circumstances of the case, as pointed out earlier the disallowance of expenditure is restricted to Rs.1,42,97,051/-. The A.O. is therefore, directed to delete the balance disallowance of expenditure of Rs.14,25,13,380/-.”
6. Aggrieved by the order of Ld.CIT(A), assessee as well as the revenue are in appeal before us.
7. The Ld.DR submitted that the Ld.CIT(A) was erred in deleting disallowance of sales promotion expenses without considering circular No.5 of 2012 dated 01-08-2012 issued by the CBDT where it was categorically stated that any kind of freebies given to doctors and other medical professionals by a pharmaceutical company is not allowable u/s 37(1) of the Income-tax Act, 1961 in view of specific circular issued by MCI prohibiting medical professional from accepting freebies from pharmaceutical companies.
8. The Ld.AR for the assessee, on the other hand, submitted that this issue is covered in favour of the assessee by the decision of ITAT, Mumbai Bench “A” in assessee’s own case for AY 2011-12 in ITA No.5553/Mum/2014 & ITA No.5167/Mum/2015, 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 it was held that circular issued by MCI is not applicable to the pharmaceutical companies, then nothing can be taxguru.in disallowed by relying upon the said circular. The Tribunal, after considering all these facts has allowed total expenditure debited under the head ‘sales promotion expenses’ and hence, for the year under consideration, since there is no change in facts, therefore, the addition made by the AO should be deleted.
8. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The issue involved in the present appeal, i.e. whether freebies distributed to medical professionals by a pharmaceutical company is allowable u/s 37(1) of the Act or not in light of circular issued by MCI was subject matter of deliberations by the co-ordinate bench of ITAT, Mumbai Bench “A” in assessee’s own case for AY 2011-12. The co-ordinate bench, after considering various aspects including the circular issued by MCI and also circular of CBDT vide circular No.5 of 2012 held that the assessee was entitled for claim of sales promotion expenses incurred on distribution of articles to the stockists, distributors, dealers and doctors. The relevant findings of the Tribunal are as under:-
“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 conduct in respect of the doctors and other medical professionals registered with it, and are not applicable to the pharmaceuticals or allied health sector industries. Rather, a perusal of the provisions of the Indian Medical Council Act, 1956, reveals that the scope and ambit of statutory provisions relating to professional conduct of registered medical practitioners under the Indian Medical Council Act, 1956 is restricted only to the persons registered as medical practitioners with the State Medical Council and whose name are entered in the Indian Medical Register maintained under Sec. 21 of the said Act. We are of the considered view that the scheme of the Indian Medical Council Act, 1956 neither deals with nor provides for any conduct of any association/society and deals only with the conduct of individual registered medical practitioners. In the backdrop of the aforesaid facts, it emerges that the applicability of the MCI regulations would only 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 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 practitioners/doctors, and such a regulation or code of conduct would not cover the pharmaceutical 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, in the absence of any prohibition on the pharmaceutical companies in incurring of such sales promotion expenses, the latter cannot be held to have incurred an expenditure for a purpose which is an offence or is prohibited by law. In this regard we are reminded of the maxim “Expressio Unius Est Exclusio Alterius”, which provides that if a particular expression in the statute is expressly stated for a 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 assesses. Thus, now when the MCI regulations are applicable to medical practitioners registered with the MCI, then the same cannot be made applicable to pharmaceutical companies or other allied healthcare companies.
22. We shall now advert to the CBDT Circular No. 5/2012, dated 01.08.2012. We find that the aforesaid CBDT Circular reads as under:-
“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 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 prohibited by law.
Thus, the claim of any expense 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 industries to medical practitioners or their professional associations in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) regulations, 2002 shall be inadmissible under Sec. 37(1) of the Income Tax Act, 1961, as the same would be an expense prohibited by the law. We are of the considered view that as observed by us hereinabove, the code of conduct enshrined in the notifications issued by MCI though is to be strictly followed and adhered by medical practitioners/doctors registered with the MCI, however the same cannot impinge on the conduct of the pharmaceutical companies or other healthcare sector in any manner. We find that nothing has brought on record which could persuade us to conclude that the regulations or notifications issued by MCI would as per the law also be binding on the pharmaceutical companies or other allied healthcare sector. Rather, the concession made by the MCI before the Hon’ble High Court of Delhi 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 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 or the registered medical 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 circulars which are issued by the CBDT must confirm to the tax laws and though are meant for the purpose of giving administrative relief or for clarifying the provisions of law, but the same cannot impose a burden on the assessee, leave alone creating a new burden by enlarging the scope of a regulation issued under a different act so as to impose any kind of hardship or liability on the assessee. We thus, are unable to persuade ourselves to subscribe to the rigours contemplated in the CBDT Circular No. 5/2012, dated 01.08.2012, which we would not hesitate to observe, despite absence of anything provided by the MCI in its regulations issued under the Medical Council Act, 1956, contemplating that the regulation of code of conduct would also cover the pharmaceutical companies and healthcare sector, however provides that in case a pharmaceutical or allied health sector industry incurs any expenditure in providing any gift, travel facility, cash, monetary grant or similar freebies 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 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 reckoned retrospectively. 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 Vs. S.R.M.B Dairy Farming Pvt. 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 respondent, has to apply only prospectively and cannot be applied retrospectively. In other words, a beneficial circular has to be applied prospectively. Thus, when the circular is against the assessee they have a right to claim the enforcement of the same prospectively. It is further submitted that for the period in question, trade notices had been issued classifying the circuit breakers under heading No. 85.35 or 85.36. When the approved classification was proposed to be revised to reclassify the single panel circuit breakers under heading No.85.37 of the tariff, such re-classification can take effect only prospectively from the date of communication of the show-cause notice proposing reclassification.”
We find that the aforesaid CBDT Circular No. 5/2012, dated 01.08.2012 had came up for consideration before a coordinate bench of the Tribunal in the case of DCIT Vs. PHL Pharma (P) Ltd. (2017) 49 CCH 124 (Mum), wherein the Tribunal after deliberating at length 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:
