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The Assistant Commissioner of Income Tax, Circle 6 (3) , Mumbai Versus Liva Healthcare Limited And Vice-Versa

2016 (9) TMI 856 - ITAT MUMBAI

Expenditure allowable u/s 37 - expenses on Doctor overseas tours - 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 directed towards seminar for product information diss .....

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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 .....

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road 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 - I.T.A. No. 904/Mum/2013, I.T.A. No. 945/Mum/2013 - Dated:- 12-9-2016 - Shri Mahavir Singh, Judicial Member And Shri Ramit Kochar, Accountant Member Revenue by Shri A. Ramachandran Revenue by : Shri B.V.Jhaveri ORDER Per Ramit Kochar, Accountant Member These cross appeals , filed by the Revenue an .....

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called the Act ). 2. First we shall take up the assessee appeal in ITA No 945/Mum/2013. The grounds of appeal raised by the 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 ap .....

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tors 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 the real persons who create the market for a particular drug are the Medical Practitioners and for this purpose the assessee o .....

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be medicines. Thus, it was observed by the AO from reply of the assessee that it is trying to keep the Doctors in good humour who may then buy or prescribe medicines . Thus, these trips are organized to lure the doctors to buy/prescribe the medicines and to allure the Doctor the assessee company is trying to sponsor their travel program. Thus, the Doctors have undertaken the trip which is merely sponsored by the assessee and this does not substantiate the fact that it was incurred wholly and exc .....

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o evidences had been given. Thus, the AO held that keeping in view the facts and circumstances of the case, since the assessee has not been able to prove that these sponsorships of the Doctors of the overseas tours was incurred wholly and exclusively for the purposes of the business, the assessee cannot be allowed this sum of ₹ 76,54,986/- as a deduction u/s 37 of the Act as claimed by the assessee and the same was disallowed by the AO as not being incurred wholly and exclusively for the p .....

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he 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 .....

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previous year but the contents of these circulars are not new but just a formalization of the principles already existing u/s 37(1) of the Act since 1998 wherein explanation was inserted w.e.f. 01-04-1962 by Finance Act,1998. Thus, learned CIT(A) confirmed/sustained the additions made by the learned AO vide appellate order dated 08-11-2012 passed by learned CIT(A). 6. Aggrieved by the appellate order dated 08-11-2012 passed by learned CIT(A), the assessee filed second filed second appeal with th .....

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are placed in paper book/page 18-37 which also included few photographs of the program abroad. 7. The learned DR relied upon the orders of learned CIT(A). 8. We have heard the rival parties and considered the material available on record. We have observed that the assessee has incurred expenditure of ₹ 76,54,986/- towards Doctors foreign tours to Istanbul and Hongkong. It is the contention of the assessee that the same was organized to keep the doctors in good humor and to create awareness .....

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assessee increase its business volume and thereby earning increased profits. It is admittedly submitted in the same reply dated 21-12-2011 by the assessee before the AO that such sponsorship strengthen relation between the doctors and the assessee and which in turn generates more and more business 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 cour .....

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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 exp .....

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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 such expenditure.] (2) [* * *] [ (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.] The purpose for incorporation of this E .....

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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." .....

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er 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, subordinatio .....

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th Pharmaceutical and allied health sector industry, a medical practitioner shall follow and adhere to the stipulations given below:- a) Gifts: A medical practitioner shall not receive any gift from any pharmaceutical or allied health care industry and their sales people or representatives. b) Travel facilities: A medical practitioner shall not accept any travel facility inside the country or outside, including rail, air, ship , cruise tickets, paid vacations etc. from any pharmaceutical or alli .....

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pose in individual capacity under any pretext. Funding for medical research, study etc. can only be received through approved institutions by modalities laid down by law / rules / guidelines adopted by such approved institutions, in a transparent manner. It shall always be fully disclosed. e) Medical Research: A medical practitioner may carry out, participate in, work in research projects funded by pharmaceutical and allied healthcare industries. A medical practitioner is obliged to know that th .....

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t fulfils all the legal requirements prescribed for medical research. (iv) Ensure that the source and amount of funding is publicly disclosed at the beginning itself. (v) Ensure that proper care and facilities are provided to human volunteers, if they are necessary for the research project(s). (vi) Ensure that undue animal experimentations are not done 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 pract .....

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ion. 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 / .....

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tion published on 01.02.2016 in Gazette of India as under:- 6.8 Code of conduct for doctors in their relationship with pharmaceutical and allied health sector industry" The Section 6.8.1(b) shall be substituted in terms of Notification published on 01.02.2016 in Gazette of India, as under:- (b) Travel Facilities : A medical practitioner shall not accept any travel Facility inside the country or outside, including rail, road, air, ship, cruise tickets, paid vacation, etc. from any pharmaceut .....

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225/142/2012-ITA.II], DATED 1-8-2012 It has been brought to the notice of the Board that some pharmaceutical and allied health sector Industries are providing freebees (freebies) to medical practitioners and their professional associations in violation of the regulations issued by Medical Council of India (the 'Council') which is a regulatory body constituted under the Medical Council Act, 1956. 2. The council in exercise of its statutory powers amended the Indian Medical Council (Profe .....

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/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 .....

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ources 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 The afore-stated circular of CBDT is clarificatory and clarifies that any expenses incurred in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 .....

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said circular dated 01-08-2012 issued by the CBDT was subject to challenge in writ petition filed in Hon ble Himachal Pradesh High Court in writ petition no. 10793 of 2012-J in the case of Confederation of Pharmaceutical Industry v. CBDT where in validity of the said CBDT was challenged , the Hon ble Himachal Pradesh High Court held that the said circular is valid and the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 governing professional ethics of Doctor .....

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posing 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 falling 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 exp .....

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l 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 su .....

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tor Industries. This regulation is a very salutary regulation which is in the interest of the patients and the public. This Court is not oblivious to the increasing complaints that the medical practitioners do not prescribe generic medicines and prescribe branded medicines only in lieu of the gifts and other freebies granted to them by some particular pharmaceutical industries. Once this has been prohibited by the Medical Council under the powers vested in it, Section 37(1) of the Income-tax Act .....

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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 such expenditure.) 3. Shri Vishal Mohan, Advocate, on behalf of the petitioner contends that the circular goes beyond the section itself. We are not in agreement with this submission. The explanation to Section 37(1) makes it clear that any expenditure inc .....

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ed 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 M .....

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sideration 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 to section 37(1) of the Act was never .....

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ss which has not been expressly covered by any other specific provision of the Act. 13. In order to be eligible for an allowance under this residuary provision, the following conditions are required to be fulfilled : "(i) The expenditure must not be governed by the provisions of sections 30 to 36. (ii) The expenditure must have been laid out wholly and exclusively for the purposes of the business of the assessee. (iii) The expenditure must not be personal in nature. (iv) The expenditure mus .....

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ct of such expenditure." 15. 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 .....

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y 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 p .....

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tiquette and Ethics) Regulations, 2002, which describes unethical acts under Chapter 6 of the said regulations. Regulation 6.4 provides that no physician shall give, solicit, receive, or offer to give, solicit or receive, any gift gratuity, commission or bonus in consideration of a return for referring any patient for medical treatment. Regulation 6.4 reads thus : "6.4.1 A physician shall not give, solicit, or receive nor shall he offer to give solicit or receive, any gift, gratuity, commis .....

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erson, specimen or material for diagnostic purposes or other study/ work. Nothing in this section, however, shall prohibit payment of salaries by a qualified physician to other duly qualified person rendering medical care under his supervision." 19. If demanding of such commission was bad, paying it was equally bad. Both were privies to a wrong. Therefore, such commission paid to private doctors was opposed to public policy and should be discouraged. The payment of commission by the assesse .....

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an agreement is lawful, unless- it is forbidden by law ; or is of such a nature 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 .....

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s 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 pol .....

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le considering the issue relating to commission paid to Government doctors for prescribing the assessee's medicines to patients held it to be contravening public policy and an inadmissible expenditure. However, no distinction can be made in respect of Government doctors and private doctors as has been canvassed by the learned counsel for the assessee. 24. Thus, the commission paid to private doctors for referring patients for diagnosis could not be allowed as a business expenditure. The amou .....

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are incurred for the purposes of keeping the doctors in good humor so that they can prescribe pharmaceutical products of the assessee company to their patients which will promote more and more sales and profitability for the assessee. The assessee company has admittedly claimed that by incurring expenses on overseas tours of the Doctors their sales and profitability has actually increased and hence these expenses as claimed by the assessee have direct nexus with the increased sales and profitabi .....

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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 giv .....

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s 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 was inserted by Finance Act,1998 w.e.f. 01-04- 1962 and in our considered view based on factual matrix of the case as emerging from the records, the expenses of ₹ 76,54,986/- incurred by the assessee company are directly hit by explanation to Section 37 of the Act . There .....

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ul of spouses of Doctors also , and also the arrangements included cruise travels to island, gala dinners, cocktails, gala entertainment etc. which clearly reflect that these overseas trips are merely to entertain doctors abroad and lure doctors to solicit business for the assessee by unethical , illegal and prohibited means which is an offence under the regulation 6.4.1 as it existed during the relevant previous year under the Indian Medical Council (Professional conduct, Etiquette and Ethics) .....

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and their spouses in good humour to get favours in return from Doctors by way of referral of patient to the pharmaceutical products dealt with by the assessee to generate more and more business and profits for 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 phar .....

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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 Kingdo .....

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tiquette and Ethics) Regulations, 2002 has force of law as it was promulgated in exercise of the powers conferred under section 20A read with section 33(m) of the Indian Medical Council Act, 1956 (102 of 1956), the Medical Council of India, with the previous approval of the Central Government, made the regulations relating to the Professional Conduct, Etiquette and Ethics for registered medical practitioners, namely the Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulati .....

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to be maintained ( Hon ble Supreme Court decision in Radha Soami Satsang v. CIT (1992) 193 ITR 321 (SC)) but in the instant assessment year , we have observed that these 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 .....

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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 mo .....

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ed 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 dismiss the appeal of the assessee on this ground for the detailed reasons and discussion .....

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-hoc disallowance of 25% of ₹ 1,26,75,000/- i.e. ₹ 31,68,750/- expenses incurred on physicians sample as claimed . 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of 25% of expenses incurred on physicians samples ignoring the facts that the assessee had not been able to substantiate its claim for the allowability of the expenses as business expenses in the form of confirmation from the doctors to whom these samples we .....

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sicians. The samples are distributed free of cost under the pretext that it is necessity of business requirement of the assessee. The assessee submitted before the AO that the samples are given free of cost to doctors in order to obtain information regarding efficacy of the medicine and thereby for the purposes of advertisement, publicity and 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 represent .....

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tributing 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 assesse .....

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same is also marked in suppliers invoices as Physician Samples only. It was submitted by the assessee that the expenditure incurred on distribution of free samples is purely on account of advertisement and business promotion expenses incurred during the course of the business only. The assessee relied upon the following decisions : 1. Smithkline and French (India) Limited v. CIT (1992) 193 ITR 582(Kar.) 2. CIT v. J & J Dechane Laboratories Private Limited (1996) 222 ITR 11(AP) 3. Eskayef Li .....

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whom physicians samples were distributed through medical representative of the assessee. The 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), nor the assessee provided the list of recipients of samples and amount and monthly break-up of data , which would facilitate the enquiry to prove that the free samples distributed was wholly and exclusively for the purposes of i .....

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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 .....

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he 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 t .....

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rpose of the assessee. He observed that the assessee could not provide the list of Doctors and the confirmations from them regarding the receipt of physician s sample. He, therefore, disallowed 70% of the total expenditure on this account and added the same to the total income of the assessee. In appeal, the ld. CIT(A), however, observed that the assessee had been engaged in the business of manufacture and marketing of pharmaceutical formulations, mainly skin care products. In the course of its .....

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DRP in the above stated two cases. He, therefore, analysed the facts of the case of the assessee independently. He observed that the details of purchase made by the assessee from the manufacturers of the product which constituted free samples, were furnished by the assessee. The entries relating to the name of the product, quality/quantity, rate, date, and amount were entered in its register and along with the invoices. The assessee had co- related the name of the product, the quality/quantity, .....

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R 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 .....

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ion 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 genuineness of the expenses, proper recording in its books of account and the relationship of the expense with the business of the assessee. He, therefore, deleted the additions so made by the A.O. 4. We have gone through the well reasoned order passed by the ld. CIT(A). It is a known fact that th .....

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oned order passed by the ld. CIT(A) holding that the expenses were incurred for the business promotion activity of the assessee. We therefore do not find any merit in the appeal filed by the Revenue and accordingly dismiss the same. We are principally in agreement with the decision of Tribunal in assessee s own case in ITA No. 847/Mum/2012 for assessment year 2008-09 vide orders dated 31-08-2015 so far as free samples are distributed to test the efficacies of the pharmaceutical products dealt wi .....

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about efficacy of the pharmaceutical products , then the expenses could be said to be incurred 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 t .....

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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 ex .....

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xpenditure 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 200 .....

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nditure 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 such expenditure.] (2) [* * *] [ (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a pol .....

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ession 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 th .....

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or 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 a .....

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to doctors/physicians after the products are introduced in the market and its uses are established , giving of free samples will be a measure of sales promotion which will be hit by regulation 6.4.1 of The Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002 which regulation has force of law and the said receipt of free samples will tantamount to receiving gifts and being gratuitous in nature in consideration of or return for referring patients and being prohibi .....

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ical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002 and the expenses cannot be allowed as deduction while computing income from business or profession to the extent the same are given after introduction of the 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 o .....

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t, 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-se .....

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and advertisement and would, thus, be hit by sub-section (3A). As in this case, there is a finding of the Commissioner (Appeals) and confirmed by the Tribunal that the expenditure was incurred to test the efficacy of the drug, the expenditure would be within the ambit of bare minimum to carry on the business. For these reasons, it has to be held that the expenditure on physicians' samples distributed to doctors is outside the scope of sub-section (3A) of section 37 of the Act. Therefore, th .....

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he test of free samples being considered as the stage of introduction of the medicine to test its efficacy being incurred wholly and exclusively for the purposes of business and grant of free samples at the stage after introduction of the medicine in the market when its uses are established , to be treated as advertisement and sales promotion expenses remains very much relevant . The said distinction laid down by Hon ble Supreme Court read in conjunction with explanation to Section 37 of the Act .....

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