TMI Blog2021 (11) TMI 701X X X X Extracts X X X X X X X X Extracts X X X X ..... l Member For the Appellant : Shri. J.D. Mistry. AR For the Respondent : Shri. V. Sreekar. DR, Shri. Sanjay Sethi. DR ORDER PER PAVAN KUMAR GADALE, JM: The assessee has filed the appeal against the order of the Commissioner of Income Tax (Appeals) -47, Mumbai, order passed u/s 148 r.w.s 147 and 250 of the Act. The assessee has raised the following grounds of appeal. 1. Merger of Order u/s 143(3) into order u/s 147 for issues which were already a part of order u/s 143(3) of the Act where there is a fresh material on same issue. The CIT(A) erred in holding that the AO has power to assess or reassess income that has escaped assessment involving matters which are the subject maters of proceedings referred to in the third proviso to Sec. 147 if any fresh materials have emerged in the course of the proceedings initiated u/s 147. 2. Without prejudice, individual issues on material which were already a subject matter of order u/s 143(3) of the Act and again added back in the order u/s 147 of the Act, were not required to be dismissed. The Ld. CIT(A) erred in dismissing the individual issues on merits which were subject matter of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of bulk drugs and pharmaceutical products namely formulations, tablets Capsules, aerosols, injections / sterile solutions etc. The assessee company has filed the return of income electronically on 15.10.2010 for the A.Y 2009-10 declaring a total income of ₹ 611,84,99,609/. Further, the assessee has filed the revised return of income on 09.12.2011 and the assessing officer has completed Assesseement u/sec143(3) of the Act assessing the total income of ₹ 1027,15,13,280/- and passed order dated 27/02/2012. Subsequently, there was survey u/s 133A of the Act was conducted on the assessee company on 06.03.2014. The A.O found that the assessee company has claimed expenses incurred by way of gifts, freebies, travel allowance, monetary grants or advantage in kind from pharmaceutical companies in contravention of MCI guidelines in 2009 amounting to ₹ 8,68,24,374/-. Hence the A.O. has issued notice u/s 148 of the Act. In compliance the assessee has filed a letter dated 15.04.2015, to treat the return of income filed on 09.12.2011 as due compliance. The assessee has further requested for copy of the reasons recorded for the reopening of assessment u/s 147 of the Act a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar in the background of amendment in MCI guidelines. The MCI guidelines which was there since 2002 was amended in 2009.The medical professionals and their professional associations were barred from taking any gifts, freebees, travel allowance, money grants or any advantage in kind from pharmaceutical companies by the fresh amendment issued in Dec. 2009. So, any expenses incurred by the way of gifts, freebees, travel allowance, monetary grants or any advantage in kind from pharmaceutical companies are in contravention to be MCI guidelines in 2009 and so these expenses are hit by explanation of Sec 37 and became non allowable expenses. To further clarify the same Hon ble CBDT issued a circular. So, the circular issued by the Hon ble CBDT is clarificatory in nature and which clarified that the expenses incurred on doctors will not be allowed in the hands of pharmaceutical companies. As the MCI guidelines are amended from Dec. 2009, so the circular is effective from Dec. 2009. Accordingly the expenses claimed by the assessee company in different years at ₹ 269,57,57,193/- in respect of freebies given to the doctors is not allowable as deduction in the respective years. The said e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maceuticals Pvt Ltd, ITA No. 6222/M/2018. 6. Contra, the Ld. DR, on the other hand, relied on the order of the CIT(A). 7. We have heard the submissions of both the parties and perused the material on record. At the time of hearing the Ld. AR of the assessee has not pressed the ground of appeal Nos. 1 to 3, therefore the said grounds of appeal are dismissed as not pressed. The sole crux of the disputed issue is with regard to disallowance of ₹ 8,68,24,374/- by relying on CBDT Circular No. 5/2012 r.w explanation 1 to Sec. 37(1) of the Act. We observed that identical issue has been decided by the Coordinate Bench of the Hon ble Tribunal in favour of the assessee in the case of M/s. Aristo Pharmaceuticals Pvt Ltd Vs. ACIT in ITA No.5807/Mum/2017, dated 28.06.2019 has observed at para 8 of the Hon ble Tribunal order which is read as under: 8. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The issue involved in the present appeal, i.e. whether freebies distributed to medical professionals by a pharmaceutical company is allowable u/s 37(1) of the Act or not in light of circular issued by MC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal. We are of the considered view that on the basis of the aforesaid deposition of MCI that its jurisdiction stands restricted to the registered medical professionals, it can safely be concluded that the MCI regulations would in no way impinge on the functioning of the assessee company which is engaged in the business of manufacturing and sale of pharmaceutical and allied products. We thus, in the backdrop of our aforesaid deliberations are of the considered view that the code of conduct enshrined in the MCI regulations are solely meant to be followed and adhered by medical practitioners/doctors, and such a regulation or code of conduct would not cover the pharmaceutical company or healthcare sector in any manner. We are further of the view that in 9 Aristo Pharmaceuticals P Ltd the backdrop of our aforesaid observations, as the Medical Council of India does not have any jurisdiction under law to pass any order or regulation against any hospital, pharmaceutical company or any healthcare sector, then any such regulation issued by it cannot have any prohibitory effect on the manner in which the pharmaceutical company like the assessee conducts its business. On the basis of our afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries. 3. Section 37(1) of Income Tax Act provides for deduction of any revenue expenditure (other than those failing under sections 30 to 36) from the business income if such expense is laid out/expended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this sub-section denies claim of any such expenses, if the same has been incurred for a purpose which is either an offence or prohibited by law. Thus, the claim of any expense incurred in providing above mentioned or similar freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37(1) of the Income Tax Act being an expense prohibited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector Industries or other assessee which has provided aforesaid freebees and claimed it as a deductible expense in its accounts against income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the members who are registered with the MCI. In other words the censure/action as had been suggested on the violation of the code of conduct is only for the medical practitioners and not for the pharmaceutical companies or allied health sector industries. We 12 Aristo Pharmaceuticals P Ltd are thus of the considered view that the regulations issued by MCI are qua the doctors/medical practitioners registered with MCI, and the same shall in no way impinge upon the conduct of the pharmaceutical companies. As a logical corollary to it, if there is any violation or prohibition as per MCI regulation in terms of Explanation to Sec. 37(1), then the same would debar the doctors or the registered medical practitioners and not the pharmaceutical companies and the allied healthcare sector for claiming the same as an expenditure. 23. We find that the CBDT as per its Circular No. 5/2012, dated 01.08.2012 had enlarged the scope and applicability of Indian Medical Council Regulation, 2002, by making the same applicable even to the pharmaceutical companies or allied healthcare sector industries. We are of the considered view that such an enlargement of the scope of MCI regulation to the pha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrying out its business. We thus, in the absence of any sanction or authority of law on the basis of which it could safely be concluded that the expenditure incurred by the assessee company on sales promotion expenses by way of distribution of articles to the stockists, distributors, dealers, customers and doctors, is in the nature of an expenditure which had been incurred for any purpose which is either an offence or prohibited by law, thus conclude that the same would not be hit by the Explanation to Sec. 37(1) of the Act. 24. Alternatively, we are of the considered view that it is a trite law that a CBDT Circular which creates a burden or liability or imposes a new kind of imparity, cannot be reckoned retrospectively. We are of the considered view that though a benevolent circular may apply retrospectively, but a circular imposing a burden has to be apply prospectively only. Our aforesaid view is fortified by the judgment of the Hon ble Supreme Court in the case of Director of Income-tax Vs. S.R.M.B Dairy Farming Pvt. Ltd. (2018) 400 ITR 9 (SC). The Hon ble Apex Court in its aforesaid judgment has held that beneficial circulars had to be applied retrospectively, while op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eutical company) is hit by Explanation 1 below section 37(1) in view of CBDT Circular dated 01.08.2012, interpreting the amendment dated 10.12.2009 brought in Indian Medical Council Regulation 2002 or not. The break-up of sales promotion expenses, which has been disallowed by the AO, are as under: Sr.No Particulars of expenses Amount (in Rs.) 1 Customer Relationship Management expenses (CRM) 7,61,96,260 2 Key Account Management expenses(KAM) 2,56,68,509 3 Gift Articles 9,20,22,518 4 Cost of samples 3,60,85,320 Total 22,99,72,60 7/- The nature of aforesaid expenses has already been explained above. Now whether the nature of such expenditure incurred by the assessee is to be disallowed in view of the CBDT Circular dated 01.08.2012. For the sake of ready reference, the said CBDT Circular No.5/2012 is reproduced hereunder: INADMISSIBILITY OF EXPENSES INCURRED IN PROVIDING FREEBEES TO MEDICAL PRACTITIONER BY PHARMACEUTICAL AND ALLIED HEALTH SECTOR INDUSTRY Circular No. 5/2012 [F. No. 225/142/2012-ITA.II], dated 1-82012 It has been brought to the notice of the Board that some pharmaceutical and allied health sector Industries are providing freebees (freebies) to medical pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1956 . One such regulation has been issued is Indian Medical Council Professional Conduct, Etiquette and Ethics) Regulations, 2002 . The said regulation deals with the professional conduct, etiquette and ethics for registered medical practitioners only. Chapter 6 of the said regulation/notification deals with unethical acts, whereby a physician or medical practitioners shall not aid or abet or commit any of the acts illustrated in clause 6.1 to 6.7 of the said regulation which shall be construed as unethical. Clause 6.8 has been added (by way of amendment dated 10.12.2009) in terms of notification published on 14.12.2009 in Gazette of India. The said clause reads as under:- 6.8 Code of conduct for doctors and professional association of doctors in their relationship with pharmaceutical and allied health sector industry. 6.8.1 In dealing with Pharmaceutical and allied health sector industry, a medical practitioner shall follow and adhere to the stipulations given below: a) Gifts: A medical practitioner shall not receive any gift from any pharmaceutical or allied health care industry and their sales people or representatives. b) Travel facilities: A med ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inserting such a clause in the MoU or any other document / agreement for any such assignment. f) Maintaining Professional Autonomy: In dealing with pharmaceutical and allied healthcare industry a medical practitioner shall always ensure that there shall never be any compromise either with his / her own professional autonomy and / or with the autonomy and freedom of the medical institution. g) Affiliation: A medical practitioner may work for pharmaceutical and allied healthcare industries in advisory capacities, as consultants, as researchers, as treating doctors or in any other professional capacity. In doing so, a medical practitioner shall always: (i) Ensure that his professional integrity and freedom are maintained. (ii) Ensure that patients interests are not compromised in any way. (iii) Ensure that such affiliations are within the law. (iv) Ensure that such affiliations / employments are fully transparent and disclosed. 18 Aristo Pharmaceuticals P Ltd h) Endorsement: A medical practitioner shall not endorse any drug or product of the industry publically. Any study conducted on the efficacy or otherwise of such products shall be presented to and / or through app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CT of Delhi and the necessary equipments and facilities were found to be in order which negates the observations dated 27.10.2012 of the Ethics Committee of the MCI. It is also the plea of the Petitioner hospital that the Petitioner was not provided an opportunity of being heard and thus the principles of natural justice were violated. 7. In the counter affidavit filed by the Respondents, it is not disputed that the MCI under the 2002 Regulations has jurisdiction limited to taking action only against the registered medical practitioners. Its plea however, is that it has not passed any order against the Petitioner hospital therefore; the Petitioner cannot have any grievance against the impugned order. 8. It is clearly admitted by the Respondent that it has no jurisdiction to pass any order against the Petitioner hospital under the 2002 Regulations. In fact, it is stated that it has not passed any order against the Petitioner hospital. Thus, I need not go into the question whether the adequate infrastructure facilities for appropriate post-operative care were in fact in existence or not in the Petitioner hospital and whether the principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to the assessee. Here in this case, no such offence of law has been brought on record, which prohibits the pharmaceutical company not to incur any development or sales promotion expenses. A law which is applicable to different class of persons or particular category of assessee, same cannot be made applicable to all. The regulation of 2002 issued by the Medical Council of India (supra), provides limitation/curb/prohibition for medical practitioners only and not for pharmaceutical companies. Here the maxim of Expressio Unius Est Exclusio Alterius is clearly applicable, that is, if a particular expression in the statute is expressly stated for particular class of assessee then by implication what has not been stated or expressed in the statute has to be excluded for other class of assessee. If the Medical Council regulation is applicable to medical practitioners then it cannot be made applicable to Pharma or allied health care companies. If section 37(1) is applicable to an assessee claiming the expense then by implication, any impairment caused by Explanation1 will apply to that assessee only. Any impairment or prohibition by any law/regulation on a 7. Before us the learned CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod of more than 1 (one) year from Indian Medical Register or State Medical Register b) Travel facilities: A medical practitioner shall not accept any travel facility inside the country or outside, including rail, road, air, ship, cruise tickets, paid vacations etc. from any pharmaceutical or allied healthcare industry or their representatives for self and family members for vacation or for attending conferences, seminars, workshops, CME programme etc. as a delegate. Expenses for travel facilities more than ₹ 1,000/ - upto ₹ 5,000/ -: Censure Expenses for travel facilities more than ₹ 5,000/-upto ₹ 10,000/-: Removal from Indian Medical Register or State Medical Register for 3 (three) months. Expenses for travel facilities more than ₹ 10,000/-to ₹ 50,000/-: Removal from Indian Medical Register or State medical Register for 6 (six) months. Expenses for travel facilities more than more than ₹ 50,000/- to ₹ 1,00,000/-: Removal from Indian Medical Register or State Medical Register for 1 (one) year. Expenses for travel facilities more than ₹ 1,00,000/-: Removal for a period of more than 1 (one) year from Indian Medical Register or St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure. CBDT is well within its power to clarify and interpret the law and prohibit allowance of any expenditure which violates any statute or is in nature of offence. 8. From a perusal of above amendment/notification in the MCI regulation, it is quite clear again that same is applicable for medical practitioners only and the censure/action which has been suggested by it is only on medical practitioners and not for pharmaceutical companies or allied health sector industries. The violation of the aforesaid regulation would not only ensure a removal of a doctor from the Indian Medical Register or State Medical Register for a certain period of time and it does not impinge upon the conduct of pharmaceutical companies. This important distinction has to be kept in mind that regulation issued by Medical Council of India is qua the doctors/medical practitioners and not for the pharmaceutical companies. As a logical corollary to it, if there is any violation or prohibition as per MCI regulation in terms of section 37(1) r.w.Explanation1, then it is only meant for medical practitioners and not for pharmaceutical company (Assessee Company) for claiming the expenditure. 9. Adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circular would not be not be applicable in the A.Ys. 2010-11 and 201112 as it was introduced w.e.f. 1.8.2012. 10. From the perusal of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h High Court in the case of Confederation of Indian Pharmaceutical Industry (SS) vs. CBDT (supra), in support of the argument that CBDT Circular has been approved and confirmed by the High Court and therefore, it has a huge binding precedence. From the perusal of the said judgment of the Hon ble High Court, it is seen that in that case the validity of Circular No.5/12 dated 1.8.2012 was challenged. The Hon ble High Court though upheld the validity of the said circular but with a rider that if the assessee satisfies the assessing authority that the expenditure is not in violation of the regulation framed by the medical council, then it may legitimately claim the deduction. The assessee has to satisfy the AO that the expenditure is not in violation of the Medical Council regulation. Thus, if the assessee brings out that the MCI regulation is not applicable to the assessee before the AO, the same cannot be applied blindly. 12. At the time of hearing, our attention was also drawn to the decision of Tribunal of our Co-ordinate Bench in the case of Liva Healthcare Limited ITA Nos. 904 945/Mum/2013 , decided vide order dated 12.09.2016. In counter, to this decision the learned c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f any conducted by the assessee overseas has been brought on record and also even the spouses accompanied the Doctors to the overseas trip which included cruise visit to island, gala dinners, cocktail, gala entertainment etc. rather than being directed towards seminar for product information dissemination or directed towards knowledge enhancement or knowledge sharing oriented as no details of seminar and its course content is brought on record rather the trip is directed towards leisure and entertainment of Doctors and their spouses which in our view appears to be clearly a distinguishable feature in this year enabling us to take a divergent view and the expenses incurred by the assessee cannot be allowed as business expenditure u/s. 37 of the Act as it is clearly hit by explanation to Section 37 of the Act being against public policy as unethical prohibited by law. In view of the above, he pointed out that in the above decision for A.Y. 2009- 10 in the case of Liva Healthcare, there was a specific finding of a fact that no details have been filed with respect to any seminar has been conducted for doctors and that the trips were directed towards leisure and entertainment of doctors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or by the CBDT. There has to be express provision under the law whereby pharmaceutical companies are prohibited to conduct conferences or seminar or give free samples. In the Tribunal decision of Liva Healthcare, strong reference has been made to Hon ble Himachal Pradesh High Court (supra), that the said CBDT circular has been upheld. On this aspect we have already discussed in detail herein above that, firstly, High Court itself carves out a rider that assessee is free to demonstrate before the AO that this circular is not applicable on facts of the case; and secondly, CBDT circular which creates new impairment and imposes disallowbility not envisaged in any of the Act or regulation cannot be reckoned to be retrospective. Another strong reference has been made to the decision of Hon ble Punjab Haryana High Court in the case of CIT vs. Kap Scan and Diagnostic Centre (P.) Ltd. [2012] 25 taxmann.com 92, wherein commission was paid to the private doctors for referring the patients for diagnosis to the assessee company. In background of these facts and issues involved, the Hon ble High Court held that said payment of commission is wrong and is opposed to be a public policy. It should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cide the allowability or otherwise of an expenditure in the hands of such other entities under the Income-tax Act, 1961. It was further observed by the Tribunal that the Income tax Act is an independent code in itself and the business income of an assessee has to be assessed and taxed as envisaged under the provisions of the Act. On the basis of the limited scope of applicability of the MCI guidelines to a particular class of the society viz. doctors or medical practitioners registered with the council, the Tribunal had concluded that the guidelines issued by MCI would only regulate the code of conduct of the doctors and the medical practitioners registered with it and would not be applicable to other entities. 25. We thus, in the backdrop of the aforesaid settled position of law as regards the prospective applicability of an oppressive circular, are of the considered view that as the CBDT as per its Circular No. 5/2012, dated 01.08.2012 had enlarged the scope of Indian Medical Council Regulation, 2002, and had made the same applicable to the pharmaceutical companies, thus the same cannot be reckoned to have a retrospective effect. We find that a coordinate bench of the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as held by the High Court, if the assessee was able to establish that the MCI regulation was not applicable to the assessee, then the same could not be blindly applied in its case. (iv) CIT Vs. Kap Scan and Diagnostic Centre (P.) Ltd. (2012) 344 ITR 476 (P H): We find that the judgment in the aforesaid case was rendered in context of the commission paid by the assessee company which was running a scanning and a diagnostic centre to the private doctors for referring patients for diagnosis/scanning. Thus, the facts involved in the case before the High Court are distinguishable as against those in the case of the assessee before us. Still further, the said judgment was also considered by the Tribunal while passing the order in the case of DCIT8(2), Mumbai Vs. PHL Pharma (P.) Ltd. 27. We thus, in terms of our aforesaid observations conclude that the assessee was duly entitled for claim of sales promotion expenses of ₹ 9,70,82,317/- incurred on the distribution of articles to the stockists, distributors, dealers, customers and doctors. Thus, the order of the CIT(A) sustaining the disallowance of the sales promotion expenses to the extent of ₹ 66,49,685 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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