Distribution of samples of infant milk substitutes, feeding bottles etc. is prohibited under law

Mead Johnson Nutrition (India) Pvt. Ltd. Vs ACIT (ITAT Mumbai)

ITAT Mumbai held that distribution of samples of infant milk substitutes, feeding bottles and infant foods is prohibited under section 4 of Infant Milk Substitutes, Feeding Bottles and Infant Foods (Regulation of Production, Supply and Distribution) Act, 1992. Accordingly, the same is not allowable as business expenditure.

Facts- The assessee company is engaged in the business of trading of ‘infant& ‘children nutrition food’. For the year under consideration, the assessee filed return of income on 30.11.2012 declaring total income of Rs.3,67,59,810/ – u/s. 139(1) of the Income-tax Act, 1961. The return of income filed by the assessee was selected for scrutiny and statutory notices under the Act were issued and complied with. In the scrutiny assessment completed u/s 143(3) of the Act, AO made disallowance of expenses on account of free samples amounting to Rs.1,66,083/ – and disallowance of conference & seminar expenses of Rs.44,66,926/ -. On further appeal, the Ld. CIT(A) also upheld the disallowance. Aggrieved, the assessee is before the Tribunal.

Conclusion- On perusal of section 4 of the Infant Milk Substitutes, Feeding Bottles and Infant Foods (Regulation of Production, Supply and Distribution) Act, 1992, we find that distribution of samples of Infant Milk Substitutes, Feeding Bottles and Infant Foods has been prohibited under the Act. In view of the same, the contention of the assessee that this expenditure was for the purpose of its business is not accepted as the distributing of free samples to healthcare personnel is prohibited.

The section 4 of the Infant Milk Substitutes, Feeding Bottles and Infant Foods (Regulation of Production, Supply and Distribution) Act, 1992, strictly prohibit offer of inducement of any other kind for the purpose of promoting the use or sale of the infant milk substitutes or infant foods for taking part in promoting of the infant milk substitutes, feeding bottles and infant foods. Therefore, though the assessee is claiming that the expenses on conference and seminars were for his business, however, same falls under prohibited activity and therefore, expenses incurred thereon have been validly disallowed of the Assessing Officer and confirmed by the Ld. CIT(A) invoking Explanation to section 37(1) of the Act.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal by the assessee is directed against order dated 30.08.2022 passed by the Ld. Commissioner of Income-tax (Appeals)-National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2012-13, raising following grounds:

1. That, the Impugned Order dated 30.08.2022 under Section 250 of the Income Tax Act (“IT Act”) passed by the Commissioner of Income-tax (Appeals) National Faceless Appeal Centre (in short “Ld. CIT(A)), is illegal, arbitrary, based on extraneous consideration, without jurisdiction, violative of principles of natural justice, contrary to well-settled principles of law, based on unsubstantiated presumptions and erroneous interpretation of provisions of law. Thus, the Impugned Order is likely to be set aside by this Hon’ble Tribunal;

2. That, the Ld. CIT (A) while passing the Impugned Order has assumed jurisdiction, outside the scope of its jurisdiction under the IT Act and has rendered a ‘conclusive and a sweeping finding that the Appellant Company is in violation of “all related laws” pertaining to sales and marketing of infant and child nutrition food traded by the Appellant, including the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (IC Regulations’) and the Infant Milk Substitutes, Feeding Bottles and Infant Foods (Regulation of Production, Supply and Distribution) Act (in short ‘IMS Act’):

3. That, the Ld. CIT (A) ought to have exercised jurisdiction and confined the scope of its enquiry limited to its powers conferred upon it under the IT In the present case, the Ld. CIT (A) has illegally assumed jurisdiction under the IMC Regulations and IMS Act and has illegally rendered erroneous finding that the Appellant company is in violation of “all related laws” including the IMC Regulations and IMS Act, which are ex-facie without jurisdiction and uncalled for;

4. That, the Ld. CIT (A) ought to have confined its enquiry and findings limited only to as to whether the order dated 15.03.2016 passed by the Ld. Assistant Commissioner of Income Tax under Section 143 (3) of the IT Act disallowing certain costs and expenses incurred by the Appellant Company is correct or not as per the provisions of the IT Act. However, the Ld. CIT (A), while passing of the Impugned Order, has rendered ‘conclusive finding on an erroneous interpretation of provisions of the IMC | Regulations and IMS Act, which are beyond its powers and without jurisdiction;

5. That, it is well settled that a statutory authority, performing administrative or quasi–judicial duty(s), must exercise its jurisdiction within the four corners of the statute and any action taken which is not within the domain of the said authority would be illegal and without jurisdiction;

6. That, the Ld. CIT (A) being an authority established under the IT Act, ought to have confined itself within the four corners of the IT Act and ought not to have acted in excess of its authority vested by law. In the present case, the Ld CIT’ (A) has clearly transgressed the boundary of its jurisdiction and rendered findings which are beyond its jurisdiction and thus, the Impugned Order is illegal and bad in law;

7. That, the Ld. CIT (A) is not an authority designated enquire, consider or ‘conclusively’ render a finding as to whether or not the Appellant company has violated the provisions of the IMC Regulations or IMS Act or any other related law;

8. That, the Appellant company was never issued any notice/ show cause notice either by the Ld. Assistant Commissioner of Income Tax or by the Ld. CIT (A) to state its response in relation to the violations, if any, of the IMC Regulations or IMS Act or any other law pertaining to sale and marketing of infant and child nutrition food traded by the Appellant company. In fact, the Appellant company could not have been put to notice to answer the said violations, even if any, in the proceedings before the Ld. CIT (A) under the IT Act. Despite the said fact, the Ld. CIT (A) has rendered findings which are not only beyond the scope of its jurisdiction but violative of the principles of natural justice as the Appellant company was never given any opportunity to answer the alleged violations under the IMC Regulations or IMS Act or any other related law:

9. That, it is well–settled position in law that an order of a quasi–judicial authority given in violation of the principles of natural justice is an order without jurisdiction and a nullity;

10. That the finding of the Ld. CIT (A) that the Appellant company had violated all related laws pertaining to sales and marketing of infant and child nutrition food traded by it including the IMC Regulations and IMS Act is erroneous, based on wrongful interpretation of the provisions of the IMC Regulations and IMS Act by the Ld. CIT (A) in its own subject wisdom;

2. Briefly stated, facts of the case are that the assesseecompany is engaged in the business of trading of ‘infant& ‘children nutrition food’. For the year under consideration, the assessee filed return of income on 30.11.2012 declaring total income of Rs.3,67,59,810/ – under section 139(1) of the Income-tax Act, 1961 (in short ‘the Act’). The return of income filed by the assessee was selected for scrutiny and statutory notices under the Act were issued and complied with. In the scrutiny assessment completed u/s 143(3) of the Act, the Assessing Officer made disallowance of expenses on account of free samples amounting to Rs.1,66,083/ – and disallowance of conference & seminar expenses of Rs.44,66,926/ -. On further appeal, the Ld. CIT(A) also upheld the disallowance vide impugned

3. Aggrieved, the assessee is before the Tribunal by way of raising grounds as reproduced above.

4. Before us, the Ld. Counsel of the assessee has filed a Paperbook containing paged 1 to 144 interaliaInfant Milk Substitutes, Feeding Bottles and Infant Foods (Regulation of Production, Supply and Distribution) Act, 199 2, Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002. In the ground raised, the assessee is aggrieved with both the additions sustained by the Ld. CIT(A) . The assessee is also agitated with the observation of the Ld. CIT(A) in para 9 of the impugned Most of the grounds raised are in respect of making those observation without providing any opportunity to explain.

5. We have heard rival submission of the parties on the issue-in-dispute and perused the relevant material on record. As far as the first issue of disallowance of free samples is concerned, the Ld. CIT(A) observed that due to failure on the part of the assessee in providing list of the name and address of the recipient of free samples/products before the Assessing Officer, he made disallowance for 50% of the total expenses which was worked out to 1,60,083/-. The Ld. CIT(A) has observed that such list of name and address was not provided before him also therefore, he upheld disallowance observing as under:

“6.2. The appellant in its reply dated 08.01.20 has argued that distribution of such free samples is a part of regular practice. The appellant also relied on the case of PHL (Pharma) (P) Ltd., 146 DTR 0149 (Mum).

6.3. While considering the argument of the appellant it is imperative tonote its failure to supply relevant names & addresses for verification by the AO. Even while admitting such requisition from the AO in its reply under consideration, no attempt was made to provide slightest particulars of the recipients of the impugned free samples. It is needless to add that the appellant would not be distributing such free samples to all and sundry. If free samples were actually distributed, those must have been given to the appellant’s traders, dealers, distributor etc. having definite names and addresses. Failure to provide even relevant names either before AO or at this stage poses serious doubts regarding veracity of the claim. Evidently, the appellant is consciously trying to escape verification in this regard.

6.4. Therefore, in the case of the appellant authenticity or genuineness ofthe claim was put in question by the AO. In conclusion, what remained unproven or dubious is reliability of expenses incurred, not its legitimacy. In this way, in absence of any verifiable data regarding expenditure incurred on distribution of free samples, estimated addition made by the AO appears to be justified. This ground of appeal is thus, decided against the appellant.

6.5 Before departing from this issue, it is pertinent to refer that referenceto the case of PHL (Pharma) (P) Ltd. will not come to the rescue of the appellant, as this decision no longer holds good after the decisions in the cases of Apex Laboratories (P.) Ltd., [2022] 135 taxmann.com 286 (SC) and Peerless Hospitex Hospital and Research Center Ltd., [2022] 137 taxmann.com 359 (Calcutta). discussed herein below. Therefore, on both counts addition made by the AO is upheld.”

5.1 Before us, also no such list of recipients of free samples has been provided by the assessee. Further, on perusal of section 4 of the Infant Milk Substitutes, Feeding Bottles and Infant Foods (Regulation of Production, Supply and Distribution) Act, 1992, we find that distribution of samples of Infant Milk Substitutes, Feeding Bottles and Infant Foods has been prohibited under the Act. For ready reference, the relevant section is reproduced as under:

“Section 4 – Prohibition of incentives for the use or sale of infant milk substitutes or feeding bottles

No person shall—

a. Supply or distribute samples of infant milk substitutes or [feeding bottles or infant foods] or gifts of utensils or other articles; or

b. Contact any pregnant woman or the mother of an infant ; or

c. Offer inducement of any other kind,

for the purpose of promoting the use or sale of infant milk substitutes or [feedings bottles or infant foods].”

5.2 In view of above, the contention of the assessee that this expenditure was for the purpose of its busine, ss is not accepted as the distributing of free samples to healthcare personnel is prohibited. In view of provisions of reproduce above, we do not find any error in the order of the Ld. CIT(A) in upholding the disallowance made by the Assessing Officer following the ratio in the case of M/s Apex Laboratories Pvt. Ltd. v. DCIT (supra).

5.3 The next issue is in respect of disallowance of expenses of Rs.42,66,926/- on account of organizing conference and seminars for the doctors and healthcare professionals. The contention of the assessee that said expenses have been incurred for conference and seminar, travel facility of the healthcare professionals etc. The assessee has justified the business expediency of the expenses by submitting that the expenses enable the healthcare professional to gather technical knowledge and commercial insights about the products. The assessee submitted that incurring conference/seminars expenses indirectly enhance sale of healthcare products in the field of infant and child nutrition products. The Ld. CIT(A) however, rejected the contention of the assessee that assessee is not covered under the allied healthcare services and Regulation of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 are not applicable on the assessee. The Ld. CIT(A) extensively discussed the provisions of Indian Medical Council (supra) and the decision of the Hon’ble Apex Court (supra) and decision of the Hon’ble Calcutta High Court in the case of in Peerless Hospitex Hospital and Research Center Ltd. [2002] 137 taxmann.com 359 (Calcutta). The Ld. CIT(A) also found the activity of the assessee in violation of provisions of Infant Foods (Regulation of Production, Supply and Distribution) Act, 1992. The relevant observations are reproduced as under:

“8. As the appellant company has argued that being a trader of infant and child nutrition products it is not covered under “allied healthcare”, let me briefly discuss the Infant Milk Substitutes, Feeding Bottles, and Infant Foods (IMS) Act. In 1992, India adopted the Infant Milk Substitutes, Feeding Bottles, and InfantFoods (IMS) Act. It was further amended in 2003 to strengthen certain provisions and close any loopholes infant formula companies had found. The IMS Act comprehensively bans all forms of promotion of foods marketed to children up to two years of age. It also bans sponsorship to health care professionals and health organizations by these infant formula companies. Violation of the IMS act is a criminal offense and may result in fines and imprisonment.

8.1 Thus, IMS Act prohibits:

1. Advertising and promotion of infant milk substitutes, feeding bottles, or infant foods.

2. Unauthorized labelling of products, including complementary foods, such as the use of images of mothers and children or words that imply superiority to breastmilk.

3. Supply and distribution of infant milk substitutes, feeding bottles, or infant foods.

4. Educational materials, including advertists, emen that promote infant milk substitutes, feeding bottles, and infant

5. Sponsorships, gifts, fellowships, and financial benefits to health care providers and their associations.

8.2 Violation of IMS Act, therefore, occurs when a manufacturer breachessection 3 to 10 of the said Act in any of the following manners:

1. Gives any kind of incentives like discounts or free gifts etc for the use or sale of infant milk substitutes, feeding bottles or infant foods to anyone.

2. Distributes information and educational material related to promotion of infant milk substitutes, feeding bottles and infant foods to mothers, families etc. (They can give educational material to health professionals like doctors, nurses etc provided it has information prescribed in clause 7 of the IMS Act, 2003. The education material should have only factual information and should not promote the products of the company).

3. Labels tins, cartons, accompanied leaflets of these products with pictures of mothers or babies, cartoons, phrases or any other such images.

4. Displays placards, posters in a hospital, nursing home, chemist shop etc for promoting infant milk substitutes, feeding bottles or infant foods

5. Makes financial inducements or gifts to health workers or to any members of his family for the purpose of promoting the use of infant milk substitutes, feeding bottles or infant

6. Demonstrates to mothers or their family members how to feed these products.However, a doctor can demonstrate this to the mother.

7. Gives pecuniary benefits to doctors, nurses or associations like IAP, IMA, NNF etc, for example, funds for organizing seminars, meeting, conferences, contest, fee of educational course, sponsoring for projects, research work or tours.

8. Fixes any commission for employees on the basis of volume of sales of these, products.”

5.4 Further, the Ld. CIT(A) also made a comment in para 9 wherein he has observed that assessee conclusively had violated all related laws pertaining to sales and marketing of infant and child nutrition food traded by it and under the relevant laws, the assessee’s action invites for penalty/prosecution. The relevant observation of the Ld. CIT(A) is reproduced as under:

“9. The appellant company conclusively had violated all related lawspertaining to sales and marketing of infant and child nutrition food traded by it.Whether it is violation of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (‘IMC Regulations’) or the Infant Milk Substitutes, Feeding Bottles, and Infant Foods (IMS) Act, the appellant’s action calls for penalty &/or prosecution

9.1. This once again brings us to the judgment in the case of PeerlessHospitex Hospital and Research Center Ltd., [2022] 137 taxmann.com 359 (Calcutta), wherein the Hon’ble High court, after going through a plethora of case laws, including that of Apex Laboratories (P.) Ltd. (supra), held, 26…….. In my considered opinion petitioner being a participant in an actwhich is an offence and is prohibited by law is not entitled for any deduction under section 37(1) of the In- come tax Act, 1961″.

Similar views were expressed by the Hon’ble Supreme Court whiledealing with the case of Apex Laboratories (P.) Ltd., [2022] 135 taxmann.com 286 (SC), as noted above.

9.2 Consequently, disallowance of the payments made by the appellant tothe doctors and healthcare professionals amounting to Rs. 44,66,926/ -, on account of travelling and other incidental expenses under the veil of organizing conference seminars and symposiums, appears to be justified. These grounds of appeal are thus, decided against the appellant.”

5.5 As far as disallowance of conference and seminars expenses is concerned, though the assessee has contested that same is a part of research and development activity which aids the as sessee to gain knowledge, remain updated of development of related fields ,and enables the assessee to innovate andimprove products line, however, we find that the Hon’ble Supreme Court in the case of Apex Laboratories (supra) has also considered the expenses on conference as disallowable in the form of freebies given to the healthcare practitioner/medical practitioners. In the instant case, the assessee has not supplied any name and address of the healthcare personnel, to whom the conference or travel expenses have been reimbursed. The se ction 4 of the Infant Milk Substitutes, Feeding Bottles and Infant Foods (Regulation of Production, Supply and Distribution) Act, 1992, strictly prohibit offer of inducement of any other kind for the purpose of promoting the use or sale of the infant milk substitutes or infant foods for taking part in promoting of the infant milk substitutes , feeding bottles and infant foods. Therefore, though the assessee is claiming that the expenses on conference and seminars were for his business,however, same falls under prohibited activity and therefore, expenses incurred thereon have been validly disallowed of the Assess ing Officer and confirmed by the Ld. CIT(A) invoking Explanation to section 37(1) of the Act , following Hon’ble Supreme Court in Apex Laboratories Ltd. (supra).

5.6 The Ld. Counsel of the assessee submitted before us that comments made in para 9 of impugned order are beyond the jurisdiction of the Ld. CIT(A) and without application of mind as held in the Hon’ble Supreme court in the case of V.K. Ashokan v. Asst. Excise Commissioner &Ors. [(2009) 14 SCC 85]. The Ld. Counsel also relied on the decision of the Hon’ble Supreme Court in the case of Uma Nath Pandey and Ors v. State of U.P. and Ors. [MANU/SC/0401/2009:AIR 2009 SC 2375] that assessee should not be condemned un heard. As far as the grievance of the assessee regarding the comment the Ld. CIT(A) in para 9 of the impugned order is concerned, we are of the opinion that the said comments without providing opportunity of being heard are not justified. To levy penalty or filing prosecution for violation of provisions of the Infant Milk Substitutes, Feeding Bottles and Infant Foods (Regulation of Production, Supply and Distribution) Act, 1992, is within the domain of the relevant authority under said Act, following due procedure of law and Ld CIT(A) was not required to express his conclusion in said matters, that too without providing any opportunity of being heard. However, we also note the recognized principle of Criminal Jurisprudence that anyone can set or put the criminal law into motion except where the statue enacting or creating offence indicate to the contrary. We accordingly restore this matter back to ld CIT (A) for considering evidence on record and after providing due opportunity of being heard, express his opinion, if so, required in the matter. The relevant grounds of the appeal of the assessee are accordingly allowed for statistical purpose.

6. In the result, the appeal of the assessee is allowed partly for statistical purpose.

Order pronounced under Rule 34(4) of the ITAT Rules, 1963 on 13/02/2023.