DCIT Vs Macleods Pharmaceuticals Ltd. (ITAT Mumbai)
ITAT recommends constitution of larger bench to decide allowability of freebies to medical professionals as a deduction
In this case ITAT Mumbai has recommended constitution of a larger bench to decide on whether expenditure for providing freebies to medical professionals can be allowed as a deduction in accordance with Section 37(1) of the Income Tax Act, 1961 (the Act).
Macleods Pharmaceuticals Ltd. (“the Respondent”) had preferred an appeal before the Commissioner of Income Tax (Appeals) (“the CIT (A)”) against the order of the Assessing Officer whereby a deduction of Rs 111,11,70,500 for the assessment year 2011-12 and of Rs 137,62,61,659 for the assessment year 2012-13 was disallowed on account of the expenditure being for providing freebies to the doctors. The CIT (A) had overturned the said order and had allowed the expenditure as a deduction. As a result, the Assessing Officer preferred the present Appeal.
The Assessing Officer had based his decision to deny deduction on the basis of Central Board of Direct Taxes (“the CBDT”) Circular No. 05/2012 dated 01.08.2012, the amendment in the Medical Council of India regulations vide Gazette notification dated 10.12.2009, and the Explanation 1 to Section 37(1) of the Act. It was stated that a combined reading of the Explanation 1 to Section 37 of the Act, the guidelines issued by Medical Council of India and the Circular issued by the Central Board of Direct Taxes explain that the sales promotion expenses made by the Respondent are prohibited in law as the medical practitioners have been barred from accepting freebies and consequentially, these expenses shall be deemed to have been not incurred for the purpose of business and profession making them non-deductible.
The stand of the Respondent was that a coordinate bench, in the Respondent’s own case, had allowed such expenditure by accepting the plea that “no disallowance of such sales promotion expenses could be made by applying the CBDT circular dated 01.08.2012 insofar as the CBDT circular was effective from Assessment Year 2013-14”, and that, in view of the decision of another coordinate bench in the case of DCIT Vs PHL Pharma Pvt Ltd [(2017) 163 ITD 10 (Mum)] the disallowance could not be sustained as the Medical Council of India regulations vide Gazette notification dated 10.12.2009 bind only the medical professionals and not the pharmaceutical companies.
The coordinate bench of the Hon’ble ITAT Mumbai reiterated that in the present Appeal, they are of the view that the Assessing Officer deserves to succeed on this issue. However, as there are several decisions of coordinate benches in favour of the Respondent on this issue, the coordinate bench of the Hon’ble ITAT Mumbai observed that the present Appeal is a fit case for the constitution of a special bench of three or more members of the ITAT Mumbai to decide on the issue of whether expenditure for providing freebies to medical professionals can be allowed as a deduction in accordance with Section 37(1) of the Act. Accordingly, the registry was ordered to place the case records of the present Appeal for consideration by the Hon’ble President of the ITAT Mumbai.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
One of the issues which have come up for our adjudication in both of these departmental appeals, against the relief granted by the CIT(A), is the Assessing Officer‟s grievance, which raises the question as to whether “the learned CIT(A) was erred “in deleting the disallowance made (of Rs 111,11,70,500 for the assessment year 2011-12 and of Rs 137,62,61,659 for the assessment year 2012-13- aggregating to Rs 248,74,32,259) on account of freebies to the doctors.” While, for the detailed reasons we will set out in a short while, are of the considered view that the Assessing Officer deserves to succeed on this issue, we are alive to the fact that there are several decisions of coordinate benches, in favour of the assessee, on this issue. It is in this backdrop that we proceed to place on record our reasons as to why the Assessing Officer, in our considered view, deserves to succeed on this issue and as to why it is a fit case for the constitution of a special bench of three or more members, to consider the following question:
Whether an item of expenditure on account of freebies to medical professionals, which is hit by rule 6.8.1 of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002- as amended from time to time, read with section 20A of the Indian Medical Council Act 1956, can be allowed as a deduction under section 37(1) of the Income Tax Act, 1961 read with Explanation thereto, in the hands of the pharmaceutical companies?
2. When the grievances raised by the Assessing Officer, as referred to in paragraph 1 above, came up for our consideration, we noticed that the related material facts are like this. By way of these appeals, the Assessing Officer has challenged correctness of a consolidated order dated 27th June 2018, passed by the learned CIT(A), in the matter of assessment under section 143(3) r.w.s. 153A of the Income Tax Act, 1961 for the assessment years 2011-12 and 2012-13. The only grievance raised in these two appeals, as noted earlier, is by raised by way of a question requiring our adjudication, as to whether “the learned CIT(A) was erred “in deleting the disallowance made (of Rs 111,11,70,500 for the assessment year 2011-12 and of Rs 137,62,61,659 for the assessment year 2012-13- aggregating to Rs 248,74,32,259) on account of freebies to the doctors.” The assessee before us is a company engaged in the business of manufacturing pharmaceutical products, such as tablets, capsules, liquids and injectables etc. This is a case in which the assessee company was subjected to a search and seizure operation on 28th January 2016. It was in this backdrop that the assessments were reopened, and the present assessment proceedings under section 153A r.w.s 143(3) were initiated. During the course of these assessment proceedings, the Assessing Officer noted that while the assessee has Rs 221.25 crores on sales promotion so far as the assessment year 2012-13 is concerned, and Rs 139.07 crores so far as the assessment year 2011-12 is concerned, the amounts spent to the extent of Rs 137.62 crores for the assessment year 201213 and Rs 111.11 crores for the assessment year 2011-12 pertains to payments of freebies to doctors. These amounts, according to the Assessing Officer, included “payments made for gifts, promotion items, facilities etc given to various medical practitioners within the country as well as abroad”. As for the details of expenses in question, for example, the breakup of expenses on account of freebies to doctors for the assessment year 2012-13 is, as given at page 47 of the paper-book, as follow:
