TMI Blog2016 (9) TMI 607X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 37 of the Act being against public policy as unethical prohibited by law. Even otherwise, these expenses cannot be 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. - Decided against assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company in the memo of appeal filed with 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 ₹ 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assed by the AO u/s 143(3) of the Act, the assessee filed an appeal before 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee(page10/pb). It is the say of the assessee that seminars were 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .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, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne and when these are necessary they are done in a scientific and a humane way. (vii) Ensure that while accepting such an assignment a medical practitioner shall have the 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 / employmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded wholly or exclusively for the purpose of business or profession. However, the explanation 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the circular quoted hereinabove itself clarifies that the value of the freebies enjoyed by the medical practitioner is also taxable as business income or income from other sources depending on the facts of each case. Therefore, if the assessee satisfies the assessing authority that 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 Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and no deduction or allowance shall be made in respect of such expenditure. This amendment will result in disallowance of the claims made by certain assessees in respect of payments on account 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature that, if permitted, it would defeat the provisions of any law ; or is fraudulent ; or involves or implies, injury to the person or property of another ; or the court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egulation 6.4.1 of the Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002 which existed during the previous year 2008-09 which created bar on the physicians on receiving gifts , gratuities , commissions or bonus in consideration of or return for the referring , recommending or procuring of any patients for medical, surgical or other treatment. The expenditure has been admittedly 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 part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee company is unethical , opposed to public policy being prohibited by law and should be discouraged. The payment for overseas visit of Doctors and their spouses for entertainment by the assessee in lieu of expectation of getting patient referrals from doctors for assessee s pharmaceutical products to generate more and more business and profits for assessee by any stretch of imagination cannot be accepted 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 Sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wards 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. Even otherwise, these expenses cannot be 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales promotion. It was submitted that samples are given free of cost to Doctors so that they can try the same on patients and inform the medical representative of the assessee about their results and their experiences. It was submitted that the nature of the product sought to be sold is such that it could be done through the doctors and so , it is as much sales promotion also. It was submitted that when such samples are given to Doctors, certain amount of good relationship 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 ₹ 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the total expenditure of ₹ 1,26,75,000/- incurred by the assessee under this head and thence ₹ 31,68,750/- was disallowed by the AO and added to the income of the assessee vide assessment order dated 29-12-2011 passed by the AO u/s 143(3) of the Act. 12 Aggrieved by the assessment order dated 29-12-2011 passed by the AO u/s 143(3) of the Act, the assessee filed first appeal with the learned CIT(A) which appeal was allowed by the learned CIT(A) following preceding year appellate 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 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate and amount entered in the purchase register with that of the purchase bills. In the purchase register, the above stated goods were marked as Physician Sample . The receipts of the said sample were supported by delivery challans and invoices. Even, the samples were dispatched through courier/transport agency. The sample dispatch register carried the details of date, serial number, representative number, name of the medical representative, place, transport, weight of the case, freight LR number and 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d wholly and exclusively for the purposes of business to satisfy the mandate of Section 37 of the Act. We are of the considered view that 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 998 ([1999] 235 ITR (St.) 35, 53) as under : 20. Disallowance of illegal expenses. 20.1 Section 37 of the Income-tax Act is amended to provide 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 purposes of business or profession and no deduction or allowance shall be made in respect of such expenditure. This amendment will result in disallowance of the claims made by certain assessees in respect of payments on account 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 Eth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said pharmaceutical products in market by the assessee when its uses stood established . We have elaborately discussed the regulations as laid down by Indian Medical Council and its inter-play with explanation to Section 37 of the Act while adjudicating the appeal of the assessee in ITA no. 945/Mum/2013 for assessment year 2009-10 in preceding para s of this order which shall apply to the extent relevant to this appeal with equal force, although we have not repeated the same here in this appeal order. We are also guided by the decision of Hon ble Supreme 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 essent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble as deduction . The other decisions relied upon by the assessee as set out in the assessment order are all related to the assessment years prior to insertion of explanation to Section 37 of the Act of 1961 by Finance Act, 1998 w.e.f. 01-04-1962. Thus, keeping in view our detailed discussions and reasoning as set out above , we set aside and restore the issue to the file of the AO for de-novo determination of the issue on merits in accordance with our detailed reasoning and discussions as set out above. Needless to say proper and adequate opportunity of being heard shall be provided to the assessee in accordance with the principles of natural justice in accordance with law and the assessee will be provided sufficient and proper opportunity of being heard by the AO in accordance with principles of natural justice in accordance with law. The assessee shall be allowed by the AO to submit relevant evidences and explanations in support of its contentions. We order accordingly. 12. In the result, appeals filed by the assessee in ITA No. 945/Mum/2013 is dismissed and appeal by the Revenue in ITA no 904/Mum/2013 for the assessment year 2009-10 is allowed for statistical purposes as in ..... 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