TMI Blog2021 (10) TMI 794X X X X Extracts X X X X X X X X Extracts X X X X ..... 992 (6) TMI 13 - ANDHRA PRADESH HIGH COURT] wherein Their Lordships has observed that a precedent ceases to be a binding precedent (iii) when it is inconsistent with the earlier decisions of the same rank; and (iv) when it is rendered per incuriam . Clearly, therefore, the decisions which disregard earlier binding decisions on the same issue, cease to be a binding judicial precedent , and the coordinate bench decision in assessee s own case thus ceases to be a binding precedent. As the regulations prohibiting the acceptance of freebies by the medical professionals provide, under section 20A of the Indian Medical Council Act 1956 read with rule 6.8 of Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002, as amended from time to time, that such freebies cannot be lawfully accepted by medical professionals, and, therefore, any expenditure incurred for extending these freebies to the medical professionals is for a purpose which is prohibited by law . On these facts, therefore, Explanation to Section 37(1) is clearly attracted. It is an open secret, secret if it is, that all these freebies extended by the pharmaceutical companies to the medic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al professionals, which is hit by rule 6.8.1 of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002- as amended from time to time, read with section 20A of the Indian Medical Council Act 1956, can be allowed as a deduction under section 37(1) of the Income Tax Act, 1961 read with Explanation thereto, in the hands of the pharmaceutical companies. Matter referred to larger bench. - ITA Nos. 5168 And 5169/Mum/2018 - - - Dated:- 14-10-2021 - Pramod Kumar (Vice President), And Saktijit Dey (Judicial Member) For the Revenue : Mamta Bansal, Commissioner (DR) For the Assessee : Ashok Bansal, CA SPECIAL BENCH REFERENCE PER PRAMOD KUMAR, VP: 1. One of the issues which have come up for our adjudication in both of these departmental appeals, against the relief granted by the CIT(A), is the Assessing Officer s grievance, which raises the question as to whether the learned CIT(A) was erred in deleting the disallowance made (of ₹ 111,11,70,500 for the assessment year 2011-12 and of ₹ 137,62,61,659 for the assessment year 2012-13- aggregating to ₹ 248,74,32,259) on account of freebies to the doctors. While, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has ₹ 221.25 crores on sales promotion so far as the assessment year 2012-13 is concerned, and ₹ 139.07 crores so far as the assessment year 2011-12 is concerned, the amounts spent to the extent of ₹ 137.62 crores for the assessment year 2012-13 and ₹ 111.11 crores for the assessment year 2011-12 pertains to payments of freebies to doctors. These amounts, according to the Assessing Officer, included payments made for gifts, promotion items, facilities etc given to various medical practitioners within the country as well as abroad . As for the details of expenses in question, for example, the breakup of expenses on account of freebies to doctors for the assessment year 2012-13 is, as given at page 47 of the paper-book, as follow: Category Amount ( In Rs) Corporate Gifts ₹ 60,12,56,051 Customer Relation Management- sponsor ₹ 18,42,07,762 Gift Cards ₹ 54,11,77,227 Journals, Books and Magazines ₹ 1,24,22,482 Medical I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly or exclusively for the purpose of business or profession. 3. 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. 4. Thus, the claim of any expense incurred in providing freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall not be admissible under section 370) of the Income Tax Act being an expense prohibited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector industries or other assessee which has provided aforesaid freebies and claimed it as a deductible expense in its accounts against income. 5. Once this has been prohibited by the Medical Council under the powers vested in it, Section 37(1) of Income Tax Act comes in to play. The amendment to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 would only be clarificatory in nature. 6. Further, the explanation inserted to the section 37(1) by the Finance Act (No.2), 1998 is with retrospective effect from 01.04.1962. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermed as against the public policy. 9. In the case of Confederation of Indian Pharmaceutical Industry (Supra), the Hon'ble High Court of Himachal Pradesh has observed that MCI has imposed certain prohibition on medical practitioners as mentioned above under The Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations 2002. The Court held that this regulation is a very salutary regulation which is in 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 comes into play. The Court further held that the explanation to Section 37 (1) makes it clear that any expenditure incurred by 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. Therefore, if the assessee satisfies the assessing authority that the expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 476 (P H)], and in the light of his analysis about the scope of Explanation to Section 37(1) read with the provisions of the Medical Council of India Regulations. None of these issues were dealt with in the judicial precedent relied upon by the learned CIT(A). Ironically, however, learned CIT(A) proceeded as if the disallowance is on the basis of the CBDT circular simpliciter, and he simply, as he put it in the absence of any change in facts or changes in the law in this regard , followed an earlier order in assessee s own case, which, inter alia, observed as follows: We had carefully gone through the details of expenditure so incurred under the head sales promotion expenses and found that expenditure so incurred was wholly and exclusively for the purpose of assessee s business. The relevant assessment years under consideration are A.Ys. 2010-2011 and 2011-2012 during which there was no CBDT Circular as referred by AO for making disallowance by branding the expenditure as covered by Explanation to Section 37(1) of the Act. We found that the expenditures were incurred wholly and exclusively for the purpose of business, therefore, same cannot be disallowed by applying CBDT Cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us. 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 7. We find that there is no dispute about the foundational factual position that the assessee has extended freebies to the medical professionals such as Corporate Gifts, sponsoring the medical professionals, presenting them with gift cards which are as good as cash at the related commercial establishments, costs of journals, books and magazines for the medical professionals, and medical instruments and books. These expenses aggregate to as much as ₹ 111,11,70,500 for the assessment year 2011-12 and of ₹ 137,62,61,659 for the assessment year 2012-13. There is also no dispute that so far as the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 are concerned, medical professionals are forbidden from accepting such freebies; learned counsel did not even dispute this position, and rightly so perhaps. Yet, notwithstanding Explanation to Section 37 (1) as it then was [Explanation 1 to Section 37(1) now], the deduction for these expenses has been allowed. The reasoning ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income tax authorities such as Commissioner (Appeals), leave aside this Tribunal and Hon ble Courts above as Income Tax Appellate Tribunal and the Hon ble Courts are well beyond the limited class of persons to which Section 119 applies- i.e. income-tax authorities which are defined under section 116. There is also no doubt about the fundamental legal position that no CBDT circular, by itself, can put an assessee to any disadvantage vis- -vis the provisions of the Act, inasmuch while these circulars can tone down the rigour of law , these circulars cannot be adverse to the assessee , and, as noted by Hon ble Supreme Court, A circular cannot even impose on the tax-payer a burden higher than what the Act itself on a true interpretation envisages . The judicial precedents in support of this proposition, if needed, are UCO Bank Vs CIT [(1999) 237 ITR 889 (SC)], Navnitlal C Jhaveri Vs K K Sen [(1965) 56 ITR 198 (SC)]. As noted by Hon ble Supreme Court, in the case of Keshavji Ravji Co Vs CIT [(1990) 183 ITR 1 (SC)]. Nothing, therefore, turns on the CBDT circular, so far as validity of disallowance in question is concerned. Whether the circular is retrospective or is prospecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 paragraph 4 of the circular quoted hereinabove itself clarifies that the value of the freebies enjoyed by the medical practitioner is also taxable as business income or income from other sources depending on the facts of each case. Therefore, if the assessee satisfies the assessing authority that the expenditure is not in violation of the regulations framed by the medical council then it may legitimately claim a deduction, but it is for the assessee to satisfy the assessing officer that the expense is not in violation of the Medical Council Regulations referred to above [Emphasis, by underlining, by us]. What is thus stated to be the interpretation of Explanation to Section 37(1) assigned in the CBDT circular in question is also the understanding of Hon ble Himachal Pradesh High Court in the case of Confederation of Indian Pharmaceutical Industry (supra). 11. Once a judicial forum higher than this Tribunal, as Hon ble High Court indeed is, holds that the interpretation to the scope of Explanation t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of a jurisdictional High Court decision to the contrary, could not be faulted for following the same. Their Lordships observed that, It should not be overlooked that the Income-tax Act is an All-India statute . Until a contrary decision is given by any other competent High Court, which is binding on a Tribunal in the State of Bombay, it has to proceed on the footing that the law declared by the High Court, though of another State, is the final law of the land . Of course, these observations were in the context of a provision being held to be unconstitutional, an issue on which the Tribunal could not have adjudicated anyway, as evident from the observation Actually, the question of authoritative or persuasive decision does not arise in the present case because a Tribunal constituted under the Act has no jurisdiction to go into the question of constitutionality of the provisions of that statute but nevertheless the respect for the higher judicial forum was unambiguous. In Tej International Pvt Ltd v. DCIT [(2000) 69 TTJ 650 (Del)], a coordinate bench has, on this issue, observed that In the hierarchical judicial system that we have, better wisdom of the Court below has to yie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nate bench, and thus disregard the esteemed views expressed by a higher judicial forum. 13. When we put our above understanding to learned counsel for the assessee, he makes several submissions, in defence, on this point. 14. Learned counsel submits that firstly, in the text of the judgment in the case of Confederation of Indian Pharmaceutical Industry (supra), in the case of it is specifically states that this judgment it is specifically stated that this judgment has not been cleared by Their Lordships for publication, that in any case a judgment in the writ jurisdiction, as is this case, has a much lesser evidentiary value vis- -vis a judgment in appellate jurisdiction, and, finally, since Hon ble Delhi High Court in the case of Max Hospital Vs Medical Council of India (WP No. 1334 of 2013; judgment dated 10th January 2014), has categorically held that the provisions of Medical Council of India only bind the medical professionals and not the others, such as hospitals and pharmaceutical companies, Hon ble Delhi High Court is presumed to have consciously departed from the view taken by Hon ble Himachal Pradesh High Court in the case of Confederation of Indian Pharmaceutical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ics) Regulations, 2002 (the Regulations) have been framed in exercise of the power conferred under Section 20-A read with Section 33 (m) of the Indian Medical Council Act, 1956, these regulations do not govern or have any concern with the facilities, infrastructure or running of the Hospitals and secondly, that the Ethics Committee of the MCI acting under the Regulations had no jurisdiction to pass any direction or judgment on the infrastructure of any hospital which power rests solely with the concerned State Govt and (ii) that the Petitioner was not provided an opportunity of being heard and thus the principles of natural justice were violated . While dealing with these grievances, Hon ble Delhi High Court has held, in its operative portion of the judgment- which is reproduced below is entirety, as follows: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake note of such violation of law and suitably punish is another for such a violation is another. Hon ble Delhi High Court judgment in Max Hospital s case (supra) has no bearing on the question as to whether giving freebies to the medical professionals is in violation of law or not. This is also well settled in law, including by Hon ble jurisdictional High Court in the case of CIT v. Sudhir Jayantilal Mulji [(1995) 214 ITR 154 (Bom)], a judicial precedent is only an authority for what it actually decides and not what may come to follow from some observations which find place therein . The propositions which are assumed by the Court to be correct for the purpose of deciding the same are, according to this judgment of the Hon'ble jurisdictional High Court, lack precedence. In any case, it is not even relevant for deciding the issue before us. Nothing, therefore, turns on Hon ble Delhi High Court s judgment in the case of Max Hospitals (supra). 17. Learned counsel has then submitted that Medical Council of India regulations bind the medical professionals and not the pharmaceutical companies, and, therefore, these regulations cannot be pressed into service for disallowing the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rce . It is under powers vested under section 20A of the Indian Medical Council Act 1956 that the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 have been framed and under rule 6.8 thereof, as it came into effect vide Gazette Notification dated 14th December 2009, it is inter alia provided as follows: 6.8.1 In dealing with 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 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 pretex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, any expenditure incurred for extending these freebies to the medical professionals is for a purpose which is prohibited by law . On these facts, therefore, Explanation to Section 37(1) is clearly attracted. 20. It is an open secret, secret if it is, that all these freebies extended by the pharmaceutical companies to the medical professionals, more often than not, come with strings attached, and that is what makes the expenditure in question for a purpose which is, as discussed earlier, prohibited by law . The plea of the learned counsel that these regulations do not bind pharmaceutical companies, and, therefore, extending these freebies to medical professionals canot be treated as prohibited by law is thus wholly irrelevant in the present context. What is material is that the expenditure in question is incurred for the purposes which are prohibited in law, and that is what disqualifies the expenditure in question from deduction under section 37(1) by virtue of Explanation thereto. The freebies from pharmaceutical companies cannot, under section 20A of the Indian Medical Council Act 1956 read with rule 6.8 of Indian Medical Council (Professional conduct, Etiquett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er coordinate bench decision. These observations thus are more of an obiter dictum and not binding in nature. 23. In any event, this decision refers to another coordinate bench decision, which decision, in turn, refers to and relies upon yet another coordinate bench decision in the case of DCIT Vs PHL Pharma Pvt Ltd [(2017) 163 ITD 10 (Mum)]. Incidentally, PHL Pharma decision (supra) was the first decision dealing with the period post insertion of rule 6.8.1 in the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 and the reasoning adopted therein is also followed by a large number of other coordinate bench decisions- including many decisions cited at the bar as well. All these decisions primarily bank on Hon ble Delhi High Court s judgment in the case of Max Hospital (supra) in support of the stand that the MCI regulations does not come in the way of the pharmaceutical companies extending freebies to the medical professionals, and, therefore, Explanation to Section 37(1) [now Explanation 1 to Section 37(1)] cannot be invoked. We have reservations on this proposition, and we have discussed our reservations at considerable length in paragraphs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or following the line of reasoning in the said decision- as discussed above. However, in all fairness, while we may or may not agree with a coordinate bench decision, it cannot be open to us to disregard the same, lest such judicial inconsistency should shake public confidence in the administration of justice and lest one of the fundamental legitimate expectations of the stakeholders, i.e. those exercising judicial functions will follow the reason or ground of the judicial decision in the earlier cases on identical matters, will stand declined. It is, however, equally true , to borrow the words of Hon ble Supreme Courts as articulated in the case of Union of India Vs Paras Laminates Pvt Ltd [(1990) 186 ITR 722 (SC)], that it is vital to the administration of justice that those exercising judicial power must have the necessary freedom to doubt the correctness of an earlier decision if and when subsequent proceedings being to light what is perceived by them as an erroneous decision in the earlier case and that in such circumstances, it is but natural and reasonable and indeed efficacious that the case is referred to a larger bench . Taking a cue from the path so guided by Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X
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