TMI Blog2017 (1) TMI 771X X X X Extracts X X X X X X X X Extracts X X X X ..... tests and approvals. Unless the pharmaceutical companies make aware of such kind of products to key doctors or medical practitioners, then only it can successfully launch its products/medicines. This kind of expenditure is definitely in the nature of sales and business promotion, which has to be allowed. Coming to the gift articles and free samples of medicines, it is seen that the assessee gives various kind of articles like, diaries, pen sets, calendars, paper weights, injection boxes etc. embossed with bold logo of its brand name and the product name so that the doctors remembers the brand of the assessee and also the name of the medicine. All the gift articles, as pointed out by the assessee before the authorities below and also before us are very cheap and low cast articles which bears the name of assessee and it is purely for the promotion of its product, brand reminder, etc. These articles cannot be reckoned as freebies given to the doctors. Even the free sample of medicine is only to prove the efficacy and to establish the trust of the doctors on the quality of the drugs. This again cannot be reckoned as freebies given to the doctors but for promotion of its products. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that the prohibition by IMA is on medical practitioners and not applicable to Pharma companies without appreciating that the Prohibition of IMA is to curb the malpractices in the medical profession and equally binding on both medical practitioners and Pharma companies? 3. The appellant prays that the order of the CIT (A) on the above ground be set aside and that of the A.O. be restored. 2. The brief facts of the case qua the issue raised in the grounds of appeal are that, the assessee is a pharmaceutical company engaged in the business of providing Pharma marketing consultancy and detailing services to develop mass market for Pharma products. During the course of assessment proceeding, on perusal of the details of expenses debited by the assessee in the profit loss account, the AO noted that the assessee has debited advertisement expenses of ₹ 25,26,85,000/- and sales promotion expenses of ₹ 58,66,25,000/-, aggregating to ₹ 83,93,10,000/-. On further perusal of the details appearing in the ledger account furnished by the assessee, he further noted that there are certain expenses which has been debited by the assessee like, Customer Relations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2012 before AO. The relevant portion of the reply has been incorporated by the AO from pages 3 to 6 of the assessment order. Regarding the applicability of CBDT Circular No.5 of 2012 (supra), wherein the CBDT has referred to amendment to the Indian Medical Council Regulations, 2002 , brought from 10.12.2009, imposing prohibition of 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, the assessee submitted that firstly, cost of free samples, KAM expenses, CRM expenses are not prohibited under any law and, secondly, the CBDT Circular cannot have retrospective effect so as to be made applicable in the assessment year 2010-11 as the Circular is dated 01.08.2012. As required by the AO, the assessee also segregated expenses incurred after 10.12.2009, i.e., the date of amendment brought in the Indian Medical Council Guidelines. After segregating the expenses, AO disallowed the expenditure aggregating to ₹ 22,99,72,607/- (post 10.12.2009) on the ground that, firstly, the guidelines issued by the Medical Council of India is binding because it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MCI regulations, which assessee has done in the present case. iv) Most importantly, it was pointed out that MCI guidelines and amendment therein are meant only for the medical practitioners and not to Pharmaceutical or allied health care companies. Therefore, such expenses cannot be regarded as unlawful or illegal at least in the hands of the assessee company. v) Lastly, CBDT Circular cannot have retrospective effect in the A.Y. 2010-11. 4. The learned CIT (A) after analysing the submissions of the assessee as well as the reasoning given by the AO, completely agreed with the contention of the assessee and held that the expenses incurred by the assessee does not fall within the ambit of gift, travel facility, hospitality, cash or monetary grant which can be classified as freebies in violation of the amendment brought in Indian Medical Council Regulations, 2002 on 10.12.2009. The expenditure is in connection with advertisement of product and not for the purpose of granting gift or any other form of inducement to the doctors and all the distributed products bears the name of the assessee company and product name and therefore, these are purely promotional materials which a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EUTICAL AND ALLIED HEALTH SECTOR INDUSTRY Circular No. 5/2012 [F. No. 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 (Professional Conduct, 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 wholly or exclusively for the purpose of business or profession. However, the explanation append ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow 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 a any travel facility inside the country or outside, including rail, air, ship, cruise tickets, paid vacations etc. from any pharmaceutical or allied healthcare 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 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 shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 .[Emphasis added is ours] 6. On a plain reading of the aforesaid notification, which has been heavily relied upon by the department, it is quite apparent that the code of conduct enshrined therein is meant to be followed and adhered by medical practitioners/doctors alone. It illustrates the various kinds of conduct or activities which a medical practitioner should avoid while dealing with pharmaceutical companies and allied health sector industry. It provides guidelines to the medical practitioners of their ethical codes and moral conduct. Nowhere the regulation or the notification mentions that such a regulation or code of conduct will cover pharmaceutical companies or health care sector in any manner. The department has not brought anything on record to show that the aforesaid regulation issued by Medical Council of India is meant for pharmaceutical companies in any manner. On the contrary, before u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I need not go into the question whether the adequate infrastructure facilities for appropriate post-operative care were in fact in existence or not in the Petitioner hospital and whether the principles of natural justice had been followed or not while passing the impugned order. Suffice it to say that the observations dated 27.10.2012 made by the Ethics Committee do reflect upon the infrastructure facilities available in the Petitioner hospital and since it had no jurisdiction to go into the same, the observations were uncalled for and cannot be sustained. [Emphasis added is ours] From the aforesaid decision, it is ostensibly clear that the Medical Council of India has no jurisdiction to pass any order or regulation against any hospital or any health care sector under its 2002 regulation. So once the Indian Medical Council Regulation does not have any jurisdiction nor has any authority under law upon the pharmaceutical company or any allied health sector industry, then such a regulation cannot have any prohibitory effect on the pharmaceutical company like the assessee. If Medical Council regulation does not have any jurisdiction upon pharmaceutical companies and it is inappl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icable to an assessee claiming the expense then by implication, any impairment caused by Explanation1 will apply to that assessee only. Any impairment or prohibition by any law/regulation on a different class of person/assessee will not impinge upon the assessee claiming the expenditure under this section. 7. Before us the learned CIT DR strongly relied upon the fact that CBDT Circular, while clarifying the applicability of Explanation 1 to section 37(1) on medical practitioners and pharmaceutical companies have interpreted that Indian Medical Council Regulation is applicable for pharmaceutical companies also. He also brought to our notice that another notification was issued by Indian Medical Council which was published on 01.12.2016 which further prohibits such kind of embargo on medical practitioners and have added para 6.8.1 and also given instances of action which shall be taken upon medical practitioners. The relevant clause of the said notification as relied upon by him is reproduced hereunder: 6.8. Code of conduct for doctors in their relationship with pharmaceutical and allied health sector industry The Section 68.1(b) shall be substituted in terms of Notifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 10,000/-: Removal from Indian Medical Register or State Medical Register for 3 (three) months. Expenses for travel facilities more than ₹ 10,000/-to ₹ 50,000/-: Removal from Indian Medical Register or State medical Register for 6 (six) months. Expenses for travel facilities more than more than ₹ 50,000/- to ₹ 1,00,000/-: Removal from Indian Medical Register or State Medical Register for 1 (one) year. Expenses for travel facilities more than ₹ 1,00,000/-: Removal for a period of more than 1 (one) year from Indian Medical Register or State Medical Register c) Hospitality: A medical practitioner shall notaccept individually any hospitality like hotel accommodation for self and family members under any pretext. Expenses for Hospitality more than ₹ 1,000/-upto ₹ 5,000/-: Censure Expenses for Hospitality more than ₹ 5,000/-upto ₹ 10,000/-: Removal from Indian Medical Register or State Medical Register for 3 (three) months. Expenses for Hospitality more than ₹ 10,000/-to S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensure/action which has been suggested by it is only on medical practitioners and not for pharmaceutical companies or allied health sector industries. The violation of the aforesaid regulation would not only ensure a removal of a doctor from the Indian Medical Register or State Medical Register for a certain period of time and it does not impinge upon the conduct of pharmaceutical companies. This important distinction has to be kept in mind that regulation issued by Medical Council of India is qua the doctors/medical practitioners and not for the pharmaceutical companies. As a logical corollary to it, if there is any violation or prohibition as per MCI regulation in terms of section 37(1) r.w.Explanation1, then it is only meant for medical practitioners and not for pharmaceutical company (Assessee Company) for claiming the expenditure. 9. Adverting to the contention of the Ld. CIT DR that CBDT is well empowered to issue such clarification, it is seen that the CBDT Circular dated 01.08.2012 (supra) in its clarification has enlarged the scope and applicability of Indian Medical Council Regulation 2002 by making it applicable to the pharmaceutical companies or allied health care ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articipate in the seminars on a topic related to therapeutic area. It arranges lectures and sponsors knowledge upgrade course which helps pharmaceutical companies to make aware of the products and medicines manufactured and launched by it. Under Key Account Management, the assessee makes endeavour to create awareness amongst certain class of key doctors about the products of the assessee and the new developments taking place in the area of medicine and providing correct diagnosis and treatment of the patients. The said activities by the assessee are to make the doctors aware of its products and research work carried out by it for bringing the medicine in the market and its results are based on several levels of tests and approvals. Unless the pharmaceutical companies make aware of such kind of products to key doctors or medical practitioners, then only it can successfully launch its products/medicines. This kind of expenditure is definitely in the nature of sales and business promotion, which has to be allowed. Coming to the gift articles and free samples of medicines, it is seen that the assessee gives various kind of articles like, diaries, pen sets, calendars, paper weights, inj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t though upheld the validity of the said circular but with a rider that if the assessee satisfies the assessing authority that the expenditure is not in violation of the regulation framed by the medical council, then it may legitimately claim the deduction. The assessee has to satisfy the AO that the expenditure is not in violation of the Medical Council regulation. Thus, if the assessee brings out that the MCI regulation is not applicable to the assessee before the AO, the same cannot be applied blindly. 12. At the time of hearing, our attention was also drawn to the decision of Tribunal of our Co-ordinate Bench in the case of Liva Healthcare Limited ITA Nos. 904 945/Mum/2013 , decided vide order dated 12.09.2016. In counter, to this decision the learned counsel, Shri JD Mistry distinguished the said judgment and submitted that the facts of the case in the Liva Healthcare (supra) were substantially different from the facts of the present case. In the case of Liva Healthcare, the Hon ble Tribunal disallowed such expenses u/s. 37(1) of the Act on the ground that they were not incurred wholly and exclusively for the purpose of business as the same were incurred to create good r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 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. In view of the above, he pointed out that in the above decision for A.Y. 2009-10 in the case of Liva Healthcare, there was a specific finding of a fact that no details have been filed with respect to any seminar has been conducted for doctors and that the trips were directed towards leisure and entertainment of doctors and their spouses. This was a distinguishable feature for the Hon ble Tribunal to take a contrary view from A.Y. 2008-09. He further submitted that the Hon ble Tribunal in the case of Liva Healthcare Ltd. vs. ACIT (ITA No. 4791/Mum/2014) for A.Y. 2010-11 has followed the decision of Liva Healthcare (supra) for A.Y. 2008-09 and has decided this issue in favour of the assessee. This, further brings out the fact that the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself carves out a rider that assessee is free to demonstrate before the AO that this circular is not applicable on facts of the case; and secondly, CBDT circular which creates new impairment and imposes disallowbility not envisaged in any of the Act or regulation cannot be reckoned to be retrospective. Another strong reference has been made to the decision of Hon ble Punjab Haryana High Court in the case of CIT vs. Kap Scan and Diagnostic Centre (P.) Ltd. [2012] 25 taxmann.com 92, wherein commission was paid to the private doctors for referring the patients for diagnosis to the assessee company. In background of these facts and issues involved, the Hon ble High Court held that said payment of commission is wrong and is opposed to be a public policy. It should be discouraged as it is not a fair practice. The ratio of said decision cannot be applied on the facts of the present case because there is no violation of any law or anything which is opposed to public policy. Similarly, there is reference to 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), which was given in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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