2018 (4) TMI 1898 - AT - Income Tax

Disallowance of sale promotion expenses u/s 37(1) - disallowance was made on the ground that the payment made by assessee is covered by Circular No.5/2012 issued by CBDT - Assessee Company is engaged in the business of manufacturing of Pharmaceuticals product and in Oral care products - - HELD THAT - 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. Hon ble Delhi High Court in Max Hospital v. MCI 2014 (1) TMI 1829 - DELHI HIGH COURT held the Medical Council of India admitted that the Indian Medical Council Regulation of 2002 has jurisdiction to take action only against the medical practitioners and not to health sector industry. The High Court further held that it is ostensibly clear that the Medical Council of India has no jurisdiction to pass any order or regulation against any hospital or any health care sector under its 2002 regulation. So once the Indian Medical Council Regulation does not have any jurisdiction nor has any authority under law upon the pharmaceutical company or any allied health sector industry then such a regulation cannot have any prohibitory effect on the pharmaceutical company like the assessee. Thus considering the above factual and the legal position we are of the view that expenditure incurred by assessee on distributing glass face mask pen writing pad towel set wall clock paper cups except Voltas Cooler and stabilizer cannot be regarded as freebies given to the Doctors. Hence except the cost of the Voltas Cooler and stabilizer we allow all the remaining expenditure incurred by the assessee on account of sale promotion expenses. Therefore the ground of appeal raised by the assessee is partly allowed.

Summary

Issues Involved:
1. Disallowance of sales promotion expenses under Section 37(1) of the Income Tax Act.
2. Applicability of CBDT Circular No. 5/2012 to pharmaceutical companies.
3. Jurisdiction of the Medical Council of India (MCI) regulations over pharmaceutical companies.

Detailed Analysis:

1. Disallowance of Sales Promotion Expenses under Section 37(1) of the Income Tax Act:
The primary issue in these appeals was the disallowance of sales promotion expenses amounting to Rs. 33,76,162/- by the Assessing Officer (AO) under Section 37(1) of the Income Tax Act. The AO disallowed these expenses on the grounds that they were in violation of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, and CBDT Circular No. 5/2012. The expenses included items such as sets of glasses, disposable face masks, pens, doctor writing pads, towels, wall clocks, and a Voltas cooler and stabilizer. The assessee argued that these expenses were for brand recognition and not high-value gifts, asserting they were allowable business expenditures.

2. Applicability of CBDT Circular No. 5/2012 to Pharmaceutical Companies:
The assessee contended that the CBDT Circular No. 5/2012, which prohibits the allowance of expenses incurred in providing freebies to medical practitioners, was not applicable to pharmaceutical companies. The assessee relied on various judicial precedents, including the Delhi High Court's decision in Max Hospital Vs Medical Council of India and Mumbai Tribunal's decisions in DCIT Vs PHL Pharma Ltd and Sanjay Pharma India Ltd Vs PCIT. The Tribunal noted that the CBDT Circular, while clarifying the applicability of Explanation 1 to Section 37(1), had enlarged the scope of the Indian Medical Council Regulation 2002 by making it applicable to pharmaceutical companies, which was beyond its jurisdiction.

3. Jurisdiction of the Medical Council of India (MCI) Regulations over Pharmaceutical Companies:
The Tribunal examined whether the MCI regulations, which prohibit medical practitioners from accepting gifts, could be applied to pharmaceutical companies. The Tribunal referred to the Delhi High Court's decision in Max Hospital Vs Medical Council of India, which clarified that the MCI regulations were applicable only to medical practitioners and not to pharmaceutical companies. The Tribunal concluded that the MCI regulations do not have jurisdiction over pharmaceutical companies, and therefore, the expenses incurred by the assessee could not be disallowed under Section 37(1) based on these regulations.

Conclusion:
The Tribunal concluded that except for the cost of the Voltas cooler and stabilizer amounting to Rs. 29,990/-, all other sales promotion expenses incurred by the assessee were allowable as business expenditures. The Tribunal held that these expenses were for brand recognition and did not constitute freebies to doctors. The appeals for both assessment years 2012-13 and 2013-14 were thus partly allowed, with the disallowance limited to the cost of the Voltas cooler and stabilizer.

Final Judgments:
1. Assessment Year 2012-13: The appeal was partly allowed, with the Tribunal allowing the sales promotion expenses except for the cost of the Voltas cooler and stabilizer.
2. Assessment Year 2013-14: Following the principles of consistency, the appeal was allowed with similar observations as in the assessment year 2012-13.

Order pronounced in the open court on this 20th day of April, 2018.