Medley Pharmaceuticals Ltd Vs CIT (ITAT Mumbai)
The issue under consideration is whether the freebies paid to pharmaceutical companies will be allowed u/s 37(1) or not?
ITAT states the code of conduct prescribed by the Medical Council is applicable only to medical practitioners/ doctors registered with the MCI and does not apply to pharmaceutical companies & the healthcare sector in any manner. The issue as regards the applicability of the MCI regulations to the pharmaceutical industry was not gone into. Also, the aspect 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, which thus clearly impinges on the conduct of the pharmaceutical and allied health sector industries in carrying out its business, was also not deliberated upon. ITAT thus are of the considered view, that the expenditure incurred by the assessee towards sales promotion expenses like freebies would not be hit by the “Explanation” to Sec. 37 of the Act. Accordingly, on the basis of our aforesaid observations, they are of the considered view, that the A.O even otherwise on merits was not justified in disallowing the sale promotion expenses by bringing the same within the realm of the “Explanation” to Sec. 37(1) of the Act. Hence the appeal filed by the assessee allowed.
FULL TEXT OF THE ITAT JUDGEMENT
The present appeals filed by the assessee are directed against the respective orders passed by the CIT(A)-51, Mumbai, dated 31.12.2018 and 20.02.2018, which in turn arises from the respective orders passed by the A.O under Sec.143(3) of the Income Tax Act, 1961 (for short „Act‟), dated 27.03.2015 AND under Sec.143(3) r.w.s 147, dated 20.12.2017. As certain issues involved in the present appeals are inextricably interlinked or in fact interwoven, the same are being taken up and disposed off together by way of a consolidated order. We shall first advert to the appeal filed by the assessee against the order of the CIT(A), which in turn arises from the assessment framed by the A.O under Sec.143(3) r.w.s 147, dated 20.12.2017. The assessee has assailed the impugned order on the following grounds of appeal before us:
“GROUND NO. 1 RE-OPENING ASSESSMENT U/S. 147
i. ‘Subject matter of original assessment proceedings’
a. The learned CIT(A) erred in not treating the re -assessment proceedings as invalid, although during the original assessment proceedings, detailed documents were furnished to substantiate the ‘Sales Promotion expenses’, which only after examining all the facts and explanations and application of mind did the AO disallow Rs.5.37 crores as expenses related to Doctor’s Gifts/Expenses.
b. The learned CIT(A) failed to take into consideration that the re -opening proceedings was nothing but a change of opinion.
c. The learned CIT(A) erred in holding that the information provided during the original assessment proceedings was not complete in terms of its nature, however the same was not substantiated with any evidence.
d. The learned CIT(A) failed to take into consideration that the AO himself in his reasons for re-opening has stated in Para 2 : “On perusal of the details of sale promotion expenses of Rs. 15,91,18,528/- filed by Assessee . . . “, which shows that the re -assessment proceedings are nothing but a change of opinion regarding the break -up of sales promotion expenses, which was already furnished to AO during original assessment proceedings.
e. The learned CIT(A) failed to take into consideration that a change of opinion, cannot be regarded as information within the meaning of Sec.147 and does not confer jurisdiction upon the AO for valid initiation of re-assessment proceedings.
f. The learned CIT(A) erred in confirming the reassessment on the basis of similar disallowance being made in AY 2013 -14, although there was no mention of the same in the Reasons for Re-opening provided by the AO.
ii. No failure to disclose material facts’
The learned CIT(A) erred in re-opening assessment, although he has not made any finding that there was a failure to disclose primary facts at the time of original assessment proceedings.
iii. No ‘New Tangible material’ – Change of opinion
a. The learned CIT(A) erred in re-opening assessment for this year, without substantiating valid ‘reasons to believe” that income chargeable to tax had escaped assessment.
b. The learned CIT(A) failed to show any ‘new tangible material’ to justify the conclusion that income had escaped assessment.
c. The learned CIT(A) failed to take into consideration that no new material has come on record, no new information has been received and there is no change in fact or legal position; it is merely change of opinion by fresh application of mind on the same set of facts.
Without prejudice
GROUND NO. 2: SALES PROMOTION EXPENSES OF RS. 6,25,53,800/-.
i. The learned CIT(A) erred in making an addition of Rs. 6,25,53,800/ -, on the ground that that they related to Doctor’s gifts/expenses, although the expenses were in the nature of ‘Sales Promotion’, wholly and exclusively incurred for the purpose of business, the break-up of which is as under:-
