The Mumbai bench of the Income Tax Appellate Tribunal recently confirmed disallowance of expenditure incurred by the Pharmaceutical company on account sponsoring overseas tour to doctors. Earlier, both the lower authorities were disallowed the claim of the assessee by holding that the same does not amount to business expenditure and thus, do not fall within the ambit of section 37 of the Income Tax Act, 1961.The Tribunal confirmed the impugned orders and observed that the said activity is illegal and unethical and thus expenditure cannot be allowed.
The assessee-company is engaged in the business of manufacturing of drugs and pharmaceutical. The issue involved in the case was that the Assessing Officer has disallowed the expenditure incurred by the assessee on account of sponsoring the Doctors overseas Tour. The assessee claimed that the said expenditure is revenue in nature and therefore, is allowable as expenditure under section 37 of the Act. The assessee contended that they used to organize used various seminars and group visits at various places in order to create certain amount of relationship with the Doctors, who are the real persons create the market for their products. However, the Assessing Officer disallowed the claim on ground that the assessee failed to substantiate that the expenditure was incurred by them wholly and exclusively for the purpose of business.
Though the assessee has approached the Commissioner of Income Tax (Appeals) on first appeal, the authority has confirmed the impugned order. Being aggrieved, the assessee preferred a second appeal before the Appellate Tribunal.
The Tribunal found that the CBDT Circular dated 01-08-2012 bars allowing deductions in respect of payments made in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002.It was observed that “payments made for overseas trip to keep private doctors 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 pharmaceutical products to generate more and more business and profits for assessee by any stretch of imagination cannot be accepted to be legal or as per public policy. Undoubtedly, it is not a fair practice and has to be termed as against the public policy.”
While confirming the order of the CIT(A), the Tribunal observed that “in our considered view, principles of Res judicata is not applicable to income tax proceedings although we are fully agreeable that principles of consistency is to be 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 entertainment etc. rather than being directed towards seminar for product information dissemination or directed towards knowledge enhancement or knowledge sharing oriented as no details of seminar and its course content is brought on record rather the trip is directed towards leisure and entertainment of Doctors and their spouses which in our view appears to be clearly a distinguishable feature in this year enabling us to take a divergent view and the expenses incurred by the assessee cannot be allowed 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 more and more business and profits for the assessee-company. For claiming the expenses u/s 37 of the Act which is a residuary section, it is essential that the expenses are not covered under clauses of Section 30 to 36 of the Act of 1961 and are incurred wholly and exclusive for the purposes of business and it is not sufficient that it has some connection with the business of the assessee. No details of the seminars conducted abroad are brought on record as also spouses of the Doctors also travelled 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.”
In another appeal filed by the Revenue, the order of the Commissioner of Income Tax (Appeals)was challenged on ground that the CIT (A) erred in deleting the disallowance of samples distributed to the physicians. The assessee maintained 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 further submitted that that goods purchased for distribution to Doctors as samples are manufactured as
“Physician samples not for sale” and the same is also marked in suppliers invoices as “Physician Samples” only.However, the AO disallowed as sum of 25% of the total expenditure of Rs.1,26,75,000/- incurred by the assessee under the above head. On appeal, the CIT(A)accepted the contentions raised by the assessee.
The Tribunal found that if the free samples of pharmaceutical products are distributed to physicians / doctors at the initial stage of introduction to test the efficacy of the products , the same are incurred wholly and exclusively for the purposes of the business of the assessee. On the other hand, if the free samples of pharmaceutical products are distributed 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.
In connection with this, the Tribunal referred the decision of the Apex Court in Eskayef Pharmaceuticals (India) Limited v. CIT.While invalidating the said order, the Tribunal opted to remand the matter to the AO with a direction to reconsider the matter afresh by following the principles of natural justice.
Read the full text of the order below.
