Case Law Details
Explanation 1 to Section 37(1) of the Income-tax Act, 1961(for short ‘the Act’) which has been inserted w.e.f. 01.04.1962 incorporates that for the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.
Expenditure incurred by pharmaceutical companies in respect of physician sample etc. has remained controversial issue. The recent decision of the Mumbai ITAT in DCIT, Mumbai vs. PHL Pharma P. Ltd, Mumbai [ITA No.4605/Mum/2014 (AY: 2010-11), decided on 12 January, 2017], has thrown new light on the issue. It has cleared that the decision of Hon’ble Supreme Court in the case of Eskayef (Now Known as Smithkline Beecham) Pharmaceuticals (India) Limited vs. CIT (2000) 111 Taxman 561(SC), which was given in context of Section 37(3A) of the Act(which has been deleted by the Finance Act 1985, w.e.f. 01.04.1986), no way prohibited the nature of expenditure which has been incurred in the case of the assessee (before the Mumbai ITAT). The ITAT Mumbai has held that the CBDT in its power cannot create a new impairment adverse to an assessee or to a class of assessee without any sanction of law. The circular issued by the CBDT must confirm to tax laws and for purpose of giving administrative relief or for clarifying the provisions of law and cannot impose a burden on the assessee, leave alone creating a new burden by enlarging the scope of a different regulation issued under a different act so as to impose any kind of hardship or liability to the assessee. In any case, it is trite law that the CBDT circular which creates a burden or liability or imposes a new kind of imparity, same cannot be reckoned retrospectively. The beneficial circular may apply retrospectively but a circular imposing a burden has to be applied prospectively only.
The issue in brief of DCIT vs. PHL Pharma P. Ltd case(supra):
In the above-mentioned case, one of the question arose was that whether on the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the disallowance of Rs.22,99,72,607/- being freebies given by the assessee to doctors, ignoring the fact that such payments were specifically prohibited w.e.f. 10.12.2009 by the Medical Council of India (MCI), which is the competent authority, and therefore, the said expenses were illegal and consequently not allowable as per the Explanation to Section 37(1) of the Act.
The case of the Revenue was that the CIT(A) erred in deleting the disallowance of Rs.22,99,72,607/- being freebies given by the assessee to doctors observing that the prohibition by IMA is on medical practitioners and not applicable to Pharma companies without appreciating that the Prohibition of IMA is to curb the malpractices in the medical profession and equally binding on both medical practitioners and Pharma companies.
The assessee being a pharmaceutical company was engaged in the business of providing Pharma marketing consultancy and detailing services to develop mass market for Pharma products. During the course of assessment proceeding, on perusal of the details of expenses debited by the assessee in the profit & loss account, the AO noted that the assessee has debited ‘advertisement expenses‘ of Rs.25,26,85,000/- and ‘sales promotion expenses’ of Rs. 58,66,25,000/-, aggregating to Rs.83,93,10,000/-. On further perusal of the details appearing in the ledger account furnished by the assessee, he further noted that there were certain expenses which had been debited by the assessee like, ‘Customer Relationship & Management expenses’ (CRM) of Rs.7,61,96,260/-; ‘Key Account Management expenses’ (KAM)of Rs.2,56,68,509/-; gift articles of Rs.9,20,22,518/-; and cost of samples of Rs.3,60,85,320/-, which according to him were in the nature of freebies given to medical practitioners/doctors which were disallowable in terms of Explanation to section 37(1) as clarified by CBDT vide its Circular No.5/2012 dated 1.8.2012.
The assessee segregated expenses incurred after 10.12.2009 (the date of amendment brought in the Indian Medical Council Regulations, 2002). After segregating the expenses, AO disallowed the expenditure aggregating to Rs.22,99,72,607/- (post 10.12.2009) on the ground that, firstly, the guidelines issued by the Medical Council of India was binding because it is a statutory body having been set up under the Act of the Parliament; secondly, the amended notification dated 10.12.2009, according to AO clearly forbade medical practitioners to receive any kind of gift, travel facilities, hospitality and any kind of cash or monetary grants from any pharmaceutical or health care industries. Thus, such an expenses, he held was disallowable in terms of Explanation to section 37(1) of the Act.
The learned Members of the Mumbai ITAT observed that from the nature of expenditure incurred by the assessee, it is seen that under the head “Customer Relationship Management”, the assessee arranges national level seminar and discussion panels of eminent doctors and inviting of other doctors to participate in the seminars on a topic related to therapeutic area. It arranges lectures and sponsors knowledge upgrade course which helps pharmaceutical companies to make aware of the products and medicines manufactured and launched by it. Under Key Account Management, the assessee makes endeavour to create awareness amongst certain class of key doctors about the products of the assessee and the new developments taking place in the area of medicine and providing correct diagnosis and treatment of the patients. The said activities by the assessee are to make the doctors aware of its products and research work carried out by it for bringing the medicine in the market and its results are based on several levels of tests and approvals. Unless the pharmaceutical companies make aware of such kind of products to key doctors or medical practitioners, then only it can successfully launch its products/medicines. This kind of expenditure is definitely in the nature of sales and business promotion, which has to be allowed. In respect of the gift articles and free samples of medicines, the Members observed that it is seen that the assessee gives various kind of articles like, diaries, pen sets, calendars, paper weights, injection boxes etc. embossed with bold logo of its brand name and the product name so that the doctors remembers the brand of the assessee and also the name of the medicine. All the gift articles, as pointed out by the assessee before the authorities below and also before ITAT are very cheap and low cast articles which bears the name of assessee and it is purely for the promotion of its product, brand reminder, etc. These articles cannot be reckoned as freebies given to the doctors. Even the free sample of medicine is only to prove the efficacy and to establish the trust of the doctors on the quality of the drugs. This again cannot be reckoned as freebies given to the doctors but for promotion of its products. The pharmaceutical company, which is engaged in manufacturing and marketing of pharmaceutical products, can promote its sale and brand only by arranging seminars, conferences and thereby creating awareness amongst doctors about the new research in the medical field and therapeutic areas, etc. Every day there are new developments taking place around the world in the area of medicine and therapeutic, hence in order to provide correct diagnosis and treatment of the patients, it is imperative that the doctors should keep themselves updated with the latest developments in the medicine and the main object of such conferences and seminars is to update the doctors of the latest developments, which is beneficial to the doctors in treating the patients as well as the pharmaceutical companies. Further as pointed out and concluded by the learned CIT(A) there is no violation of law by the assessee in so far as giving any kind of freebies to the medical practitioners. Thus, such kind of expenditures by a pharmaceutical companies are purely for business purpose which has to be allowed as business expenditure and is not impaired by Explanation 1 to section 37(1) of the Act.
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