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The Assistant Commissioner of Income Tax, Circle 6 (3) , Mumbai Versus Liva Heal thcare Limi ted and Vica-Versa

Allowable business expenditure u/s 37 - overseas trips for Doctors and their spouses - expenditure on seminars - Held that:- Overseas trips for Doctors and their spouses were organized by the assessee whereby no details of the contents of seminar, if 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 directe .....

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e 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 asse .....

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es 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. - Expenses towards free samples distributed to the physicians - Held that:- Explanation to Section 37 of the Act and regulation 6.4.1. of The Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002 makes it clear that su .....

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s 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 n .....

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essee company, being ITA No. 904/Mum/2013 and 945/Mum/2013, are directed against the appellate order dated 8th November, 2012 passed by learned Commissioner of Income Tax (Appeals)- 12, Mumbai (hereinafter called the CIT(A) ), for the assessment year 2009-10, the appellate proceedings before the learned CIT(A) arising from the assessment order dated 29th December, 2011 passed by the learned Assessing Officer (hereinafter called the AO ) u/s 143(3) of the Income Tax Act,1961 (Hereinafter called t .....

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n 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 over .....

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various seminars , group visits at various places. The assessee , however, did not brought before the AO anything on record to show that whether any seminar was conducted during these trips. Thus, as per AO that the assessee has not proved that the expenditure were incurred wholly and exclusively for the purposes of business. It was submitted by the assessee that by conducting such trip/tour programs , it is creating certain amount of relationship with the Doctors who may buy or prescribe medici .....

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for the purposes of the business of the assessee. The assessee submitted before the AO that these doctors nor the tour operators are related to the assessee. Thus, it is was observed by the AO that neither the doctor, nor the tour operator nor the expenses are related to the business of the assessee. The assessee submitted few photographs of the visits which as per AO did not establish that the expenditure was incurred wholly and exclusively for the purposes of the business, for which no evidenc .....

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f the business and was added back to the income of the assessee by the AO vide assessment order dated 29-12-2011 passed u/s 143(3) of the Act. 5. Aggrieved by the assessment order dated 29-12-2011 passed 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 assess .....

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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 issued after the end of previous .....

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l. The learned counsel for the assessee submitted at the outset that the issue is covered in favour of the assessee by the decision of the Tribunal in assessee s own case in ITA No 388/Mum/2012 for the assessment order dated 2008-09 vide Tribunal order dated 31-08-2015. It was submitted that the said expenses be allowed as expenses u/s 37(1) of the Act. It was submitted that the assessee has incurred expenses on tours of the Doctors to Istanbul and Hongkong. The details of the expenses are place .....

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ctors about the assessee s products so that the Doctors can write prescription for the assessee s pharmaceutical products to the patients which will lead to increased sales and profitability. The assessee vide its replies dated 21-12- 2011 filed before the AO (paper book/page 9-10) clearly stated and admitted that by organizing such sponsored travel programs , certain amount of good relationship is created with the doctors who may then buy or prescribe those medicines and thus help the assessee .....

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ts 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 e .....

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(not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the businessor profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . [Explanation.-For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an off .....

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n had been explained by the Central Board of Direct Taxes in Circular No. 772, dated December 23, 1998 ([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 o .....

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diture 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 treatm .....

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ng, 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 Pharma .....

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care industry or their representatives for self and family members for vacation or for attending conferences, seminars, workshops, CME programme etc as a delegate. c) Hospitality: A medical practitioner shall not accept individually any hospitality like hotel accommodation for self and family members under any pretext. d) Cash or monetary grants: A medical practitioner shall not receive any cash or monetary grants from any pharmaceutical and allied healthcare industry for individual purpose in i .....

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ment of the following items (i) to (vii) will be an imperative for undertaking any research assignment / project funded by industry - for being proper and ethical. Thus, in accepting such a position a medical practitioner shall:- (i) Ensure that the particular research proposal(s) has the due permission from the competent concerned authorities. (ii) Ensure that such a research project(s) has the clearance of national/ state / institutional ethics committees / bodies. (iii) Ensure that it fulfils .....

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hall 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) A .....

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nts 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 of such products shall be presented to and / or through appropriate scientific bodies or published in appropriate scientific journals in a proper way . The title of Section 6.8 shall be further amended by deleting the words "and professional association of doctors" in terms of Notification publ .....

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llied healthcare industry or their representatives for self and family members for vacation or for attending conferences, seminars, workshops, CME Programme, etc. as a delegate. The CBDT brought a circular no. 5/2012 dated 01-08-2012 as under: SECTION 37(1) OF THE INCOME TAX ACT, 1961 - BUSINESS EXPENDITURE - ALLOWABILITY OF - 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/ .....

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onduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009 imposing a prohibition on the 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 .....

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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 .....

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inadmissible under section 37(1) of the Income Tax Act being an expense prohibited by the law. The law as stood during relevant previous year as per provisions of Section 37(1) of the Act read with explanation inserted by Finance Act , 1998 w.e.f. 01-04-1962 clearly stipulates that if an expenditure is incurred for any purpose which is an offence or which is prohibited under law shall not be allowed as deduction due to restriction contained u/s 37 of the Act read with explanation. The said circ .....

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is salutary which is in the interest of public and patient. The Hon ble Himachal Pradesh held as under: The petitioner by means of this petition has prayed that Circular No. 5/2012 dated 1.8.2012 issued by the Central Board of Direct Taxes be quashed. The relevant portion of the circular reads as follows:- 2. The council in exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10.12.2009 imposing a .....

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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 .....

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l 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 associates from accepting any gift, travel facility, hospitality, cash or monetary grant from any pharmaceutical and allied health sector Indus .....

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to play, which reads as follows:- 37(1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . (Explanation - For the removal of doubts, it is hereby declared that any expenditu .....

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an assessee for any purpose which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession. The sum and substance of the circular is also the same. In case the assessing authorities are not properly understanding the circular then the remedy lies for each individual assessee to file appeals under the Income-tax Act but the circular which is totally in line with Section 37(1) cannot be said to be illegal. In fact para 4 of the circular quoted herein .....

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uncil 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 consideratio .....

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ough it was only under the said provision. The argument, thus, does not carry any weight. 11. Adverting to the second and third arguments, the payment of commission to the private doctors for having referred the business for diagnosis to its centre requires examination with reference to section 37 of the Act. 12. Section 37 is a residuary provision. An assessee is entitled to deduction of all expenditure which is wholly and exclusively laid out or expended for the purposes of the business which .....

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capital in nature." 14. The Explanation to sub-section (1) was inserted by the Finance (No. 2) Act, 1998, with retrospective effect from April 1, 1962, which reads thus : "Explanation.-For the removal of doubts, it is hereby declared 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 purpose of business or profession and no deduction or allowance shall be made in respect of suc .....

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ss 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 rela .....

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re 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 .....

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onus 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. 6.4.2 The provisions of para. 6.4.1 shall apply with equal force to the referring, recommending or procuring by a physician or any person, sp .....

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erring patients to it cannot by any stretch of imagination 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. 20. Further, section 23 of the Contract Act equates an agreement or contract opposed to public policy, with an agreement or contract forbidden by law. Section 23 of the Contract Act reads thus : "23. What consideration and objects are lawful, and what not.- The consideration or object of an agree .....

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ssessee 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 .....

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rities for running their business came up for consideration before the Madhya Pradesh High Court in Gwalior Road Lines v. CIT [1998] 234 ITR 230 wherein it was held that after insertion of the Explanation to section 37(1) by the Finance Act, 1998, with effect from April 1, 1962, the assessee could not claim such payment as expended for commercial exigency and, therefore, the same was not an allowable deduction. 23. The Allahabad High Court in Pt. Vishwanath Sharma's case (supra) while consid .....

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can be allowed as business expenditure has to be legitimate and not unlawful and against public policy. 25. Consequently, the order passed by the Commissioner of Income-tax (Appeals) and the Tribunal whereby deduction had been allowed to the assessee cannot be sustained. 26. In view of the above, the appeals are allowed and the substantial question of law is answered in favour of the Revenue and against the assessee. The assesese has contended that the expenses on Doctor overseas tours are incur .....

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se expenses are against public policy being unethical as prohibited by law. These expenses are clearly hit by regulation 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 expe .....

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t, 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 .....

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ore fact which has come to our notice on perusal of the invoices raised by K.V.Travels Private Limited no. I0803192 dated 24-11- 2008 and invoice no. M0802580 dated 24-11-2008 which pertained to air tickets and hotel arrangements of Doctors for Istanbul Trip(pb/page18-25) that spouses of the Doctors also accompanied the Doctors to overseas trip to Istanbul and these expenses claimed by the assessee as revenue/business expenditure included the costs incurred for travel overseas to Istanbul of spo .....

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ns, 2002 and hence is clearly hit by explanation to Section 37 of the Act and is not allowable as revenue/business expenditure in the hands of the assessee. If demanding or receiving of gifts, gratuity , commission or bonus by doctors is bad by virtue of regulation 6.4.1 of Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002, paying it was equally bad. Both were privies to a wrong. Therefore, such payments made for overseas trip to keep private doctors and their .....

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l 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 A .....

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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 ordinance, order, bye-law, rule, regulation, notification, custom or usage having in the territory of India the force of law. Thus, the Indian Medical Council (Professional conduct, Etiquette .....

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and hence these regulations shall be covered under the definition of law and hence is covered under explanation to Section 37 of the Act. The assessee has contended that in the immediately preceding assessment year the Tribunal has decided the issue in favour of the assessee in ITA No. 388/Mum/2012 for assessment year 2008-09. In our considered view, principles of Res judicata is not applicable to income tax proceedings although we are fully agreeable that principles of consistency is to be mai .....

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nment 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 .....

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re 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 overse .....

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cated above. We order accordingly. 9. This disposes of the appeal of the assessee in ITA No.945/Mum/2013 for assessment year 2009-10 which is dismissed as indicated above. 10. In the Revenue Appeal No. ITA No. 904/Mum/2013 for the assessment year 2009-10 filed with the Tribunal , the Revenue has raised following grounds of appeal in the memo of appeal filed with the Tribunal as under: 1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the ad-hoc disa .....

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buted . 3. On the facts and in the circumstances of the case and in law , the Ld. CIT(A) erred in not appreciating that identical issue is also pending for adjudication in other similar pharmaceuticals companies before the ITAT . 4. The appellant prays that the order of Ld. CIT(A) on the above ground be set aside and that of the Assessing Officer be restored . 11. The AO observed that the assesseee has claimed expenses of ₹ 1,26,75,000/- towards free samples distributed to the physicians. .....

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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 .....

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bmitted 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 .....

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CIT (2000) 245 ITR 116(SC) 4. CIT v. Wochardt Private Limited (2001) 250 ITR 118(Bom.) 5. Ethnor Limited v. CIT (2003) 260 ITR 401(Bom.) The AO rejected the contentions of the assessee and the AO relied upon the assessment order of the earlier years wherein the then AO had made detailed enquiry and analysis of the free samples distributed by the assessee to physician. It was observed by the AO that the assessee is unable to provide the complete list of doctors and their confirmation to whom phys .....

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ss activity . The reasonableness of the expenditure and the benefit accruing to the assessee thereof was not furnished. Thus, as per AO the assessee failed to prove the genuineness of these expenses as well that these expenses are incurred wholly and exclusively for the purposes of its business. The assessee failed to bring on record that these samples were received by the Doctors. The AO disallowed as sum of 25% of the total expenditure of ₹ 1,26,75,000/- incurred by the assessee under th .....

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ated 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 .....

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e in its appeal is regarding the deletion of the disallowance of 70% of expenses incurred by the assessee on physician s samples. The assessee is engaged in the business of manufacturing of drugs and pharmaceuticals. During the course of assessment proceedings, the A.O. noticed that the assessee had claimed expenses in relation to free samples distributed to physicians. The A.O., however, observed that the assessee could not prove that the amount expensed was exclusively for business purpose of .....

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it distributed physician s sample to various doctors all over the country. He further observed that the A.O. while disallowing the expenditure, relied on the orders of the DRP (Dispute Resolution Panel) in the case of two other companies namely, (i) Glaxo Pharma and Merck Pharma. However, it had not been pointed out by the A.O. how the above cases were identical to the case of the assessee. The A.O., had not discussed how the case of the assessee was covered by the findings of the ld. DRP in th .....

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e 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 .....

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re 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 th .....

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mple of medicines supplied to the doctors is done for the promotion of the product of the company. Even when a new product is launched, the doctors are given necessary inputs regarding the use and effects etc. of the product and which also contributes imparting knowledge to the doctors about the new medicine/product coming into the relevant for practice of their profession. The genuineness of the transactions has not been doubted by the A.O. We do not find any infirmity in the well reasoned orde .....

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assessee as distinguished by and in accordance with the ratio laid down by 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) which requires verification by the AO that so far as the said samples are distributed by the assessee free of cost to the physicians/doctors to test the efficacy of the pharmaceutical products at the initial stage of introduction of the said products to get feed back about ef .....

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iness 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-re .....

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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 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 expenditur .....

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eproduced hereunder: General. 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the businessor profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . [Explanation.-For the removal of doubts, it is hereby declared that any expenditure i .....

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rty.] The purpose for incorporation of this Explanation had been explained by the Central Board of Direct Taxes in Circular No. 772, dated December 23, 1998 ([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 an .....

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ent 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 referr .....

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ision, transference, assignment, subordination, rebating, splitting or refunding of any fee for medical, surgical or other treatment. Thus, in our considered view, if the free samples of pharmaceutical products are distributed to physicians / doctors at the initial stage of introduction to test the efficacy of the products , the same are incurred wholly and exclusively for the purposes of the business of the assessee , while if the free samples of pharmaceutical products are distributed to docto .....

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regulation 6.4.1 of The Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002 as the stated objective by the assessee of giving free samples to the doctors and physicians is to induce them to write prescriptions of the said pharmaceutical products to the patients in order to generate more and more business and profits for the assessee and hence explanation to Section 37 of the Act will be hit as being in infringement to regulation 6.4.1 of The Indian Medical Coun .....

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essee 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 .....

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). 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 adve .....

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te authority, as well as the Tribunal are right in directing the exclusion of the expenditure on free samples supplied to the doctors in working out disallowance under section 37(3A) of the Act." (p. 15) The above decision was rendered in context of Section 37(3A) of the Act and the assessment year involved therein are prior to insertion of explanation to Section 37 of the Act by Finance Act, 1998 w.e.f. 01-04-1962 but the ratio of law laid down by Hon ble Supreme Court w.r.t. to the test o .....

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