DCIT Vs Troikaa Pharmaceuticals Ltd. (ITAT Ahmedabad)
ITAT Ahmedabad held that the assessee (pharmaceutical company) is not entitled for claiming deduction under section 37(1) of the Income Tax Act on account of freebies given to the doctors.
Facts- The assessee is a public company and engaged in the business of manufacturing of Drugs & Pharmaceuticals. During the year, the assessee has claimed certain expenditures aggregating to Rs. 10,66,27,149/- under the head business promotions.
AO was of the view that expenditures were incurred in violation of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulation 2002 and thus, the same needs to be disallowed as per the CBDT Circular. Accordingly, the AO purposed to disallow the same by issuing a show cause notice to the assessee.
AO not being satisfied with the contentions of the assessee, AO disallowed Rs. 5,31,91,547/- and added to the total income of the assessee. CIT(A) partly allowed the appeal. Being aggrieved, both revenue and assessee has preferred the present appeal.
Conclusion- CBDT Circular No. 5 of 2012, forbids medical professionals and their professional associates from accepting any form of incentives or “freebies” from the pharmaceutical and allied health sector industries. In the said circular, it was also made clear that any costs incurred in providing the freebies or those like them would be considered illegal expenses in violation of Regulation 6.8.1 of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the Regulations) in pursuance to the explanation attached to section 37(1) of the Act. Accordingly, the deductions for having supplied freebies and written them off as business expenses by the companies in the pharmaceutical and allied health industries, as well as any other assesses will be denied.
Hon’ble Supreme Court, in the case of M/s. Apex Laboratories (.) Ltd., making the Circular applicable on pharmaceutical companies and holding the judgment against the assessee, highlighted on the essence where the freebies or gifts have the potential to influence or manipulate the prescription of a medical practitioner which can be incentivize the doctor’s intention to avail more luxurious and expensive freebies offered by the pharmaceutical companies.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The captioned appeals and CO have been filed at the instance of the Revenue and the assessee against the separate orders of the Learned Commissioner of Income Tax (Appeals)-8, Ahmedabad (in short “Ld. CIT(A)”) arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as “the Act”). The assessee has filed the Cross Objection in the Revenue’s appeals bearing ITA No. 107/AHD/2020 for the Assessment Year 2013-14.
2. First, we take up ITA No. 107/AHD/2020, an appeal by the Revenue for A.Y 2013-14. The Revenue has raised following grounds of appeal:
1. Whether the Ld.CIT(A), has erred in law and on facts in deleting the disallowance of promotion expenses amounting to Rs.2,42,73,068/- u/s. 37(1) of the IT Act.
2. Whether the Ld. CIT(A) has erred in law and on facts in deleting the disallowance of depreciation on electric installation of Rs.1,36,285/-
3. Whether the Ld. CIT(A) has erred in law and on facts in deleting the disallowance of foreign commission expenses of Rs.1,37,26,983/-
4. Whether the Ld. CIT(A), has erred in law and on facts in deleting the disallowance of claim amounting to Rs.1,22,29,000/- incurred outside the approved facility u/s.35(2AB) ?
5. Whether the Ld. CIT(A) has erred in law and on facts in deleting the disallowance of deduction u/s.80IC of the Act amounting to Rs.37,44,802/- in respect of R & D expenses?
3. The first issue raised by the Revenue is that the learned CIT-A erred in deleting the addition of Rs. 2,42,70,068/- on account of disallowances of promotion expenses under section 37(1) of the Act.
3.1 The facts in are brief that the assessee is a public company and engaged in the business of manufacturing of Drugs & Pharmaceuticals. During the year, the assessee has claimed certain expenditures aggregating to Rs. 10,66,27,149/-under the head business promotions. The details of the same stand as under:
