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TMI Blog2016 (9) TMI 607X X X X Extracts X X X X X X X X Extracts X X X X ..... th the Income Tax Appellate Tribunal, Mumbai (hereinafter called "the Tribunal") read as under:- "1. The learned C.I,T.(Appeals) is not justified in upholding the disallowance of Rs. 76,54,986/- under sec. 37 of the Income Tax Act,1961. 2. The learned CIT(Appeals) while disallowing the claim of expenditure incurred by the appellant on overseas travel of doctors has overlooked the fact of the commercial expediency and business necessity of such expenditure and that the expenditure was incurred by the assessee wholly and exclusively for the purpose of the business.." 3. The Brief facts of the case are that the assessee is engaged in the manufacturing of drugs and pharmaceutical. 4. The AO observed from the Profit and Loss Account of the assessee that the assessee has incurred Rs. 76,54,986/- for sponsoring the Doctors overseas Tour. The assessee on being asked to explain the same submitted that the said expenses are allowable u/s 37 of the Act being incurred wholly and exclusively for the business of the assessee and being revenue in nature and not capital nor personal in nature. The AO rejected the contentions of the assessee. The AO observed that the assessee had contended that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore the learned CIT(A) who dismissed the appeal of the assessee following the appellate order of the learned CIT(A) for immediately preceding assessment year 2008-09 wherein the learned CIT(A) had dismissed the appeal of the assessee for the assessment year 2008-09. The learned CIT(A) observed that the assessee is contending that the assessee is able to increase sales and profits due to these trips and therefore these expenses would need to be covered under sales promotions expenses and consequently allowed. The assessee also submitted that these expenses spread awareness about the assessee's business. The learned CIT(A) observed that general statement has been made which cannot be the basis of allowability of an expenses unless the nexus is directly established. The assessee has to establish nexus between the sales and the expenses incurred which the assessee failed to establish. It was also observed by the learned CIT(A) that allowability of these expenses are prohibited under the Circular of Indian Medical Council dated 10-12-2009 read with explanation to Section 37(1) of the Act and CBDT circular dated 01-08-2012. It was observed by learned CIT(A) that these circulars may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... organized but no such evidences were brought on record about seminars being conducted by the assessee overseas and the course contents of the said seminars and topics for deliberation in seminar for knowledge enhancement and sharing, except few photographs . The mandate of Section 37(1) of the Act being residuary clause covers expenses which are not covered by clauses of Section 30 to 36 of the Act of 1961 and that the expenses should be incurred wholly and exclusively for the purposes of the business of the assessee , the said expenditure should not be capital expenditure nor the same should be personal in nature. Further explanation has been inserted in Section 37 of the Act by Finance Act,1998 w.e.f. 01-04-1962 whereby if the expenses are incurred for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purposes of business or profession and no deduction on account of business expenditure shall be allowed w.r.t. such expenditure. Section 37 of the Act as applicable for the assessment year 2009-10 is reproduced hereunder: "General. 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ients for medical, surgical or other treatment. The said regulation 6.4.1. is reproduced hereunder: "6.4 Rebates and Commission: 6.4.1 A physician shall not give, solicit, or receive nor shall he offer to give solicit or receive, any gift, gratuity, commission or bonus in consideration of or return for the referring, recommending or procuring of any patient for medical, surgical or other treatment. A physician shall not directly or indirectly, participate in or be a party to act of division, transference, assignment, subordination, rebating, splitting or refunding of any fee for medical, surgical or other treatment." There was new regulation 6.8 inserted in the said regulation vide notification issued in official gazette on 14-12-2009 as under: The Clause No. 6.8, as under, is included in terms of Notification published on 14.12.2009 in Gazette of India . "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 medica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... freedom to publish the results of the research in the greater interest of the society by 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 interest 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. h) Endorsement: A medical practitioner shall not endorse any drug or product of the industry publically. Any study conducted on the efficacy or otherwise o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appended to this sub-section denies claim of any such expense, 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 deductable expense in its accounts against income. 4. It is also clarified that the sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner or professional associations is also taxable as business income or income from other sources as the case may be depending on the facts of each case. The Assessing Officers of such medical practitioner or professional associations should examine the same and take an appropriate action. This may be brought to the notice of all the officers of the charge for necessary action" T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 deductable expense in its accounts against income. 4. It is also clarified that the sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner or professional associations is also taxable as business income or income from other sources as the case may be depending on the facts of each case. The Assessing Officers of such medical practitioner or professional associations should examine the same and take an appropriate action." 2. It is apparent that the Medical Council of India in exercise of the powers vested in it under the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 imposed prohibition on any medical practitioner or their professional associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the expenditure is not in violation of the regulations framed by the medical council then it may legitimately claim a deduction, but it is for the assessee to satisfy the assessing officer that the expense is not in violation of the Medical Council Regulations referred to above. 4. We, therefore, find no merit in the petition, which is accordingly rejected. No costs. The Hon'ble Punjab and Haryana High Court has vide decision in CIT v. Kap Scan and Diagnostic Centre Private Limited (2012) 25 taxmann.com 92(P&H HC) has confirmed disallowance of commission as not allowable u/s 37(1) of the Act being against public policy prohibited by law . The relevant part of the judgment is as under: "10. We have given our thoughtful consideration to the submissions of learned counsel for the assessee but do not find any merit in the same. A perusal of the orders passed by the Assessing Officer, the Commissioner of Income-tax (Appeals) and the Tribunal shows that the issue was with regard to admissibility of deduction of the commission paid by the assessee to the doctors for having referred the business to its diagnostic centre. Once that is so, it cannot be said that the point with regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owable deduction in computation of income. 20.2 This amendment will take effect retrospectively from 1st April, 1962, and will, accordingly, apply in relation to the assessment year 1962-63 and subsequent years." 16. It, thus, emerges that an assessee would not be entitled to deduction of payments made in contravention of law. Similarly, payments which are opposed to public policy being in the nature of unlawful consideration cannot equally be recognized. It cannot be held that businessmen are entitled to conduct their business even contrary to law and claim deductions of payments as business expenditure, notwithstanding that such payments are illegal or opposed to public policy or have pernicious consequences to the society as a whole. 17. Now, we proceed to examine whether soliciting of business by the assessee by paying commission to the private doctors is unethical, against public policy and forbidden by law. 18. The Medical Council of India in exercise of powers conferred under section 20A read with section 33(m) of the Indian Medical Council Act, 1956 has made "The Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, which describes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration is unlawful is void." 21. The judgments relied upon by the assessee cannot be of any assistance to the assessee as they are prior to insertion of the Explanation to sub-section (1) of section 37 of the Act. Reference may also be made to the apex court judgment in Dr. T. A. Quereshi's case (supra) on which reliance has been placed by the learned counsel for the assessee. The hon'ble Supreme Court in that case was seized of the matter where heroin forming part of the stock of the assessee's trade was confiscated by the State authorities and the assessee claimed the same to be an allowable deduction. The hon'ble Supreme Court held that seizure and confiscation of such stock-in-trade has to be allowed as a business loss and Explanation to section 37 has nothing to do as that was not a case of business expenditure. Since the present case is not a case of business loss but of business expenditure, that judgment is distinguishable and does not help the assessee. 22. The issue with regard to the amount illegally paid to the police authorities for running their business came up for consideration before the Madhya Pradesh High Court in Gwalior Road Lines v. CIT [19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ittedly incurred by the assessee with an objective to keep doctors in good humor to seek favours from them by way of recommending the pharmaceutical products dealt within by the assessee to the patients so that sales and profitability of the assessee company increases more and more which clearly reflect that these are illegal gratification against public policy being unethical prohibited by law. The said regulation is reproduced below: "6.4.1 A physician shall not give, solicit, or receive nor shall he offer to give solicit or receive, any gift, gratuity, commission or bonus in consideration of or return for the referring, recommending or procuring of any patient for medical, surgical or other treatment. A physician shall not directly or indirectly, participate in or be a party to act of division, transference, assignment, subordination, rebating, splitting or refunding of any fee for medical, surgical or other treatment." The CBDT circular dated 01-08-2012 is merely clarificatory in nature and creates a bar on such illegal payments being against public policy , the said bar always existed in the statute by virtue of the existence of explanation to Section 37 of the Act which wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be legal or as per public policy. Undoubtedly, it is not a fair practice and has to be termed as against the public policy. It is well accepted and settled proposition that regulations are covered under the definition of 'law'. The definition in General Clauses Act, 1897 defines "Indian law" under Section 3(29) as : "3. Definition - In this Act , and in all Central Acts and Regulations made after the commencement of this Act , unless there is anything repugnant in the subject or context, - (29) " Indian law" shall mean any Act, Ordinance, Regulation, rule, (order, bye-law or other instrument which before the commencement of the Constitution had the force of law in any Province of India or part thereof, or thereafter has the force of law in any Part A State or Part C State or Part thereof, but does not include any Act of Parliament of the United Kingdom or any Order in Council, rule or other instrument made under such Act.." Similarly under Constitution of India the word 'law' in context of fundamental rights is defined under Article 13(3)(a) whereby it is defined as under: "Article 13(3) In this Article, unless the context otherwise requires, - (a) "law" includes any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered to be incurred wholly and exclusive for the purpose of the business as the same were incurred to create good relations with the doctors in lieu of expected favours from doctors for recommending to patients the pharmaceutical products dealt within by the company to generate more and more business and profits for the assessee company. For claiming the expenses u/s 37 of the Act which is a residuary section, it is essential that the expenses are not covered under clauses of Section 30 to 36 of the Act of 1961 and are incurred wholly and exclusive for the purposes of business and it is not sufficient that it has some connection with the business of the assessee. No details of the seminars conducted abroad are brought on record as also spouses of the Doctors also travelled overseas along with Doctors and the expenses of the spouse on air ticket as well stay abroad are charged as an business expenditure u/s 37 of the Act which cannot be called as being incurred wholly and exclusively for the purposes of business of the assessee. We keeping in view our foregoing detailed discussions and reasoning as set out above in preceding para's uphold the order of the learned CIT(A) and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elationship is created with the Doctor who may then buy or prescribe those medicines in preference to other similar products. Thus, in nutshell it was observed that the twin purpose of distributing free samples is to test the efficacy of the products as well advertisement, publicity or sales promotion. It was submitted by the assessee that the assessee has a well established internal control system to monitor distribution of such free samples. The assessee submitted that the assessee has purchased samples worth Rs. 126.75 lacs for its free distribution. The assessee submitted copies of invoices for the physician samples purchased during the relevant previous year. The assessee also submitted the information of date of dispatch , challan no. , name and location of the respective field officers, name of transporter , LR no. and sate, transporter invoice reference and copies of invoice raised by transporter in respect of physician samples and promotional material sent to various field staff for their necessary distribution to doctors . It was submitted that goods purchased for distribution to Doctors as samples are manufactured as "Physician samples not for sale" and the same is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellate orders passed by learned CIT(A) in the case of the assessee , vide appellate orders dated 08-11-2012 passed by learned CIT(A). 13. Aggrieved by the appellate orders dated 08-11-2012 passed by learned CIT(A) , the Revenue is in appeal before the Tribunal. 14. At the ouset learned counsel for the assessee submitted that the issue in this appeal is covered in favour of the assessee in assessee's own case in immediately preceding assessment year 2008-09 in ITA No. 847/Mum/2012 whereby the Tribunal decided the issue in favour of the assesee vide orders dated 31-08-2015 and the issues is squarely covered in favour of the assessee. The said order of the Tribunal is placed in the paper book page 1-6 filed with the Tribunal. The ld. DR supported the orders of the AO. We have observed that the Tribunal has decided the issue in assessee's own case in ITA No. 847/Mum/2012 vide orders dated 31-08-2015 for assessment year 2008-09 in assessee's favour as under: "First, we shall take up the Revenue's appeal in ITA No. 847/Mum/2012 for A.Y. 2008-09. 3. The sole issue taken by the Revenue in its appeal is regarding the deletion of the disallowance of 70% of expenses incurred by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the date of receipt. This register was substantiated by the delivery challans and invoice of the transporter and its bills which clearly mentioned the date of delivery, number of package, weight, freight charged etc. The assessee also demonstrated that the samples received were handled by the medical representative who maintained a daily report sheet recording the code no., name of the doctor, speciality and the medicines given to the doctor as physicians sample. These daily record sheets were used to be submitted by the medical representatives to the assessee company on daily basis, which constitute the record of the free physician sample distribution. Besides that the assessee had also submitted confirmations of doctors from Ahmedabad who had been beneficiaries of the free samples. The ld. CIT(A) observed that the A.O. had not doubted the genuineness of the distribution of samples carried out by the assessee. The A.O. only doubted the business expediency of the distribution of the free samples. The ld. CIT(A) further observed that the distribution of free samples were directly related to the business promotion activity of the assessee. The assessee had duly proved the genuinen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into the market and its uses are established, giving of free samples could only be as a measure of sales promotion and advertisement. The AO specifically asked the assessee to provide details as to date of introduction of products in order to establish whether the same was provided to test efficacy of the pharmaceutical products but assessee did not furnished the data which could facilitate the co-relation of the date of introduction of products with the quantity of samples provided(emphasis supplied by us). The decision of the Hon'ble Supreme Court in the case of Eskayef (Now Known as Smithkline Beecham) Pharmaceuticals (India) Limited v. CIT (2000) 111 Taxman 561(SC) was given in context of Section 37(3A) of the Act which stood omitted by Finance Act, 1985 w.e.f. 01-04-1986. But thereafter The Finance Act, 1998 had introduced an explanation to Section 37 of the Act that if the expenditure is incurred for the purposes which is an offence or prohibited under the law , the same shall not be allowable as deduction under the residuary provision of Section 37 of the Act. The mandate of Section 37(1) of the Act being residuary clause covers expenses which are not covered by clauses of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of protection money, extortion, hafta, bribes, etc., as business expenditure. It is well decided that unlawful expenditure is not an allowable deduction in computation of income. 20.2 This amendment will take effect retrospectively from 1st April, 1962, and will, accordingly, apply in relation to the assessment year 1962-63 and subsequent years." The expenditure if it is an offence or prohibited by law shall not be allowed as an expenditure u/s 37(1) of the Act by virtue of insertion of explanation to Section 37 of the Act of 1961 by Finance Act , 1998 w.e.f. 01-04-1962 . The Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002 prohibits vide regulation 6.4.1 the physician to receive any gifts, gratuity, commission or bonus in consideration or return for referring the patients for medical, surgical or other treatment. The said regulation 6.4.1. is reproduced hereunder: "6.4 Rebates and Commission: 6.4.1 A physician shall not give, solicit, or receive nor shall he offer to give solicit or receive, any gift, gratuity, commission or bonus in consideration of or return for the referring, recommending or procuring of any patient for medical, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court in the case of Eskayef (Now Known as Smithkline Beecham) Pharmaceuticals (India) Limited v. CIT (2000) 111 Taxman 561(SC) given in context of Section 37(3A) of the Act which was omitted by Finance Act, 1985 w.e.f. 01-04-1986 , wherein Hon'ble Supreme Court held as under " In the instant case, the assessee claimed expenditure on distribution of physicians' samples under section 37 general head. In view of the principles settled by this Court in the aforesaid decision, if the expenditure falls within the bare minimum it will not be caught by sub- section (3A) of section 37, but if it is of the nature which is not essential to the carrying of the business, it will be within the net of sub-section (3A). Physicians' samples are necessary to ascertain the efficacy of the medicine and to introduce it in the market for circulation and it is only by this method the purpose is achieved. In such cases giving physicians' samples for a reasonable period is essential to the business of manufacture and sales of the medicine. But if a particular medicine has been introduced into the market and its uses are established, giving of free samples could only be as a measure of s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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