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TMI Blog2018 (4) TMI 1749X X X X Extracts X X X X X X X X Extracts X X X X ..... in this regard.The AO observed that the items were freebies which were prohibited by the Govt. of India.Vide his order sheet noting,dated 19/3/2013,he asked the assessee to showcause as to why the expenditure related to healthcare professionals should not be disallowed as per Circular No. 5/2012 and Gazette notification issued regarding code of conduct for doctors and professional association of doctors in their relationship with pharmaceutical allied health sector industries.After considering the submission of the assessee,the AO held that all the expenses incurred by the assessee were not allowable. He allowed expenses incurred towards employees.Finally, a disallowance of Rs. 1,01,46,962/- was made. 2.1.Aggrieved by the order of the AO the assessee preferred an appeal before the First Appellate Authority (FAA) and made detailed submissions and relied on certain case laws.After considering available material,he held that the assessee had incurred certain expenses in the form of gift and freebies distribution to the doctors/medical practitioners, that same were not medicine samples which could add to the knowledge of doctors and professi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 10/01/ 2014), Khemchand Motilal Jain Tobacco Product (P) Ltd.(340 ITR 99),Syncom Formulations (I) Ltd. (ITA 6429,6428/Mum/2012 dated 23/12/2015), UCB India (P.) Ltd (ITA 6681/ Mum/20l3 dated 29/07/2016)and Macleods Pharmaceutical Ltd. (161 ITD 291) Shree Ganesh Steel Rolling Mills [AIR 1989 Cal 230]and Gestetner Duplicators P. Ltd. (117 ITR 1). 2.3.The Departmental Representative (DR) supported the order of Departmental Authorities and relied upon the case of LIVA Healthcare Ltd.(161ITD63).In his rejoinder,the AR stated that the Tribunal had considered the case of Liva Healthcared Ltd.,while deciding the appeal in the case of Solvay Pharma India Ltd. 2.4.We have heard the rival submissions and perused the material before us.We find that the assessee had incurred expenditure of more than Rs. 1 crore towards advertisement and publicity,that the AO had observed that it had gifted freebies to the medical practitioners, that the departmental authorities were of the view that expenditure incurred by the assessee in violation of MCI Guidelines was not allowable. We find that issue of applicability of MCI guideline and Board Circular had been del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; XXXXX 8. It is clearly admitted by the Respondent that it has no jurisdiction to pass any order against the Petitioner hospital under the 2002 Regulations. In fact, it is stated that it has not passed any order against the Petitioner hospital. Thus, I need not go into the question whether the adequate infrastructure facilities for appropriate post-operative care were infact 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." We would also like to refer to the order of the Tribunal,delivered in the case of PHL Pharma P Ltd.(supra),wherein following grounds of appeal were raised by the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ures or sponsoring knowledge upgrade course, wherein eminent doctors are invited to speak on the selected topic related to the therapeutic area and also share their research and other latest knowledge updates; subscription of costly journals, information books etc.; and sponsoring travel and accommodation expenses of doctors for such important conferences. Under the KAM services, the assessee promotes ICCU range of products, which normally focuses on either single brand or a group of brands in one particular therapy area. This is done for certain key doctors, who are opinion leaders and has larger potential for sale of brands. Regarding gift articles, it was stated that this includes expenses for small value items given across the entire pool of doctors in India so as to maintain brand memory on a continuous basis. These small items include diaries, pen sets, injection boxes, calendars, table weights, postcard holders, stationery items, etc., wherein logo of the assessee company and the name of the medicine is advertised. This is important because in the same generic drug there are more than 40 to 60 brands, therefore, brand promotion is done through small value items. Lastly, for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company) is hit by Explanation 1 below section 37(1) in view of CBDT Circular dated 01.08.2012, interpreting the amendment dated 10.12.2009 brought in Indian Medical Council Regulation 2002 or not. The break-up of sales promotion expenses, which has been disallowed by the AO, are as under: SN. Particulars of expenses Amount (in Rs.) 1 Customer Relationship Management expenses (CRM) 7,61,96,260 2 Key Account Management expenses(KAM) 2,56,68,509 3 Gift Articles 9,20,22,518 4 Cost of samples 3,60,85,320 Total 22,99,72,607 The nature of aforesaid expenses has already been explained above. Now whether the nature of such expenditure incurred by the assessee is to be disallowed in view of the CBDT Circular dated 01.08.2012.For the sake of ready reference, the said CBDT Circular No.5/2012 is reproduced hereunder: xxxx From the perusal of the aforesaid Board Circular, it can be seen that heavy reliance has been placed by the CBDT on the Circulars issued by the Medical Council of India, which is the regulatory body constituted under the 'Medical Council Act, 1956'. One such regulation has been issued is "Indian Medical Council Professional Conduct, Etiquette and Ethics) Regulation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maceutical company like the assessee. If Medical Council regulation does not have any jurisdiction upon pharmaceutical companies and it is inapplicable upon Pharma companies like assessee then, where is the violation of any of law/regulation? Under which provision there is any offence or violation in incurring of such kind of expenditure. The relevant provision of section 37(1)reads as under: xxxxx The aforesaid provision applies to an assessee who is claiming deduction of expenditure while computing his business income.The Explanation provides an embargo upon allowing any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law. This means that there should be an offence by an assessee who is claiming the expenditure or there is any kind of prohibition by law which is applicable to the assessee. Here in this case, no such offence of law has been brought on record, which prohibits the pharmaceutical company not to incur any development or sales promotion expenses. A law which is applicable to different class of persons or particular category of assessee, same cannot be made applicable to all. The regulation of 2002 iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 sector industries. Such an enlargement of scope of MCI regulation to the pharmaceutical companies by the CBDT is without any en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich 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, injection boxes etc. embossed with bold logo of its brand name and the product name so that the doctors remembers the brand of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rity 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 relations with the doctors in lieu of expected favours from doctors for recommending to the patients the pharmaceutical p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Hon'ble Tribunal disallowed the expenses u/s. 37(1) of the Act in the case of Liva Healthcare for A.Y. 2009-10 only on the ground that the same were not incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich 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 context of Section 37(3A) of the Act. In the said case the assessee had claimed expenditure on distribution of physician's samples u/s. 37. In the background of suc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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