Interesting Issue on deduction towards Gifts to doctors by pharmaceutical company : Prohibition imposed by Indian Medical Council against acceptance of gift was on the medical practitioner/doctor, and not on the pharmaceutical companies

Short Overview: Prohibition imposed by Indian Medical Council against acceptance of gift was on medical practitioner/doctor, and not on pharmaceutical companies, therefore, where assessee incurred expenditure towards gifts, which were bearing logo and name of the assessee, the expenditure were only for sales promotion, therefore, disallowance made by AO in respect of the expenditure was unjustified.

AO found that assessee claimed expenditure towards gift/sales promotion expenses, but the expenditure was incurred for providing gift to doctors/medical practitioners. The AO made disallowance of 40% of expenditure as per CBDT Circular, as doctors/medical practitioners were prohibited from accepting gifts from pharmaceutical companies as per Indian Medical Council Regulation, which was confirmed by CIT(A). The assessee’s contention was that prohibition was not imposed upon pharmaceutical companies.

It is held that regulation issued by Medical Council of India as well as the CBDT Circular clearly revealed that prohibition imposed by Indian Medical Council against acceptance of gift was on the medical practitioner/doctor, and not on the pharmaceutical companies. Further that, the expenditure was incurred for distributing gift items bearing the logo and name of the assessee, which were only for sales promotion. Thus, the assessee’s claim of expenditure was allowed and the disallowance made by the AO was deleted.

Decision: In assessee’s favour.

Referred: DCIT v. PHL Arma Pvt. Ltd. (2017) 55 ITR (Trib.) 168 (Mum.) : 2017 TaxPub(DT) 0192 (Mum-Trib); Solvay Pharmaceutical India Ltd. v. PCIT (2018) 163 DTR 249 (Mum) : 2018 TaxPub(DT) 0234 (Mum-Trib).

IN THE ITAT, MUMBAI BENCH

SAKTIJIT DEY, J.M. & MANOJ KUMAR AGGARWAL, A.M.

ACIT v. J.B. Chemicals & Pharmaceuticals Ltd.

ITA No. 6075/Mum/2014, ITA No. 6317/Mum/2014

16 April, 2019

Assessee by: Sanjay R. Parikh

Revenue by: T. Roumuan Paite

Saktijit Dey, J.M.

The aforesaid cross appeals arise out of Order, dated 22-7-2014, passed by the learned Commissioner (Appeals)-15, Mumbai, for the assessment year 2009-10.

ITA no. 6317/Mum/2014 Assessee’s Appeal

2. In ground no. 1, the assessee has challenged part disallowance out of expenditure incurred towards gift and sales promotions.

3. Brief facts are, the assessee company is engaged in manufacturing and domestic as well as export sales of pharmaceutical products and bulk drugs. For the assessment year under dispute, the assessee filed its return of income on 30-9-2009, declaring total income of Rs. 48,68,55,740. In the course of assessment proceedings, the assessing officer noticed that the assessee had debited an amount of Rs. 2,26,34,864, to the Profit & Loss account towards gift/sales promotion expenses. On calling for and verifying the details furnished by the assessee, he found that the expenditure incurred was for providing gift to Doctors/Medical Practitioners.

Therefore, being of the view that as per CBDT Circular no. 5/2012, dated 1-8-2012, Medical Practitioners are prohibited from accepting gift, travel facility, hospitality, cash or monetary grant from pharmaceutical companies as per Indian Medical Council Regulation dated 10-12-2009, called upon the assessee to justify the claim. In response, it was submitted by the assessee that the expenditure was incurred for distributing gift items bearing the logo and name of the assessee company and they were distributed to customers, Doctors, delegates at conferences both in India and abroad. Therefore, it was submitted, it is allowable as sales promotion expenses. The assessing officer, however, did not find merit in the submissions of the assessee. From the details furnished, he found that out of the total expenditure incurred towards gift/sales promotion, an amount of ` 1,00,90,141, was debited to units enjoying deduction under section 10A/10B of the Act. Stating that any disallowance of such expenditure would only enhance the deduction under the aforesaid provisions, the assessing officer allowed the same. Insofar as the balance amount of Rs. 1,25,44,723, is concerned, he found that it was for purchase of Shirts, Siyaram Suits, Powders, Electronic items like Camera, Printers, etc. Out of the aforesaid amount, the assessing officer on ad–hoc basis considered 40% to have been spent for presenting gift articles to doctors in India. Accordingly, he disallowed an amount of Rs. 50,17,890.

4. The assessee challenged the aforesaid disallowance before the first appellate authority. learned Commissioner (Appeals), however, endorsing the view of the assessing officer confirmed the addition.

5. The learned Authorised Representative submitted, the prohibition imposed by the Indian Medical Council as referred to in the CBDT Circular no. 5 of 2012, is only in respect of Doctors/Medical Practitioners and not applicable to pharmaceutical companies. Further, he submitted, the CBDT circular referred to by the assessing officer is applicable prospectively, hence, cannot be applied to the impugned assessment year. In support of his contention, the learned Authorised Representative relied upon the following decisions :–

(i) DCIT v. PHL Arma Pvt. Ltd. (2017) 55 ITR (Trib.) 168 (Mum.) : 2017 TaxPub(DT) 0192 (Mum-Trib).

(ii) Solvay Pharmaceutical India Ltd. v. PCIT (2018) 163 DTR 249 (Mum) : 2018 TaxPub(DT) 0234 (Mum-Trib).

6. The learned Departmental Representative relied upon the observations of the assessing officer and the learned Commissioner (Appeals).

7. We have considered rival submissions and perused material on record. Undisputedly, the assessee has incurred expenditure of Rs. 2,26,34,864, towards gifts, travel facilities and hospitality provided to doctors, customers and medical practitioners in medical conferences held both in India and abroad. Out of the aforesaid amount, the assessing officer has segregated an amount of Rs. 1,25,44,723, for computing disallowance towards expenditure incurred in India. As could be seen from the assessment order, the gift items provided by the assessee are T-shirts, suit lengths, umbrella, electronic goods, etc.

It is the contention of the assessee that the aforesaid gift items bearing assessee’s name and logo are only for sales promotion. The aforesaid factual position has not been controverted by the assessing officer. The only reason for making an ad-hoc disallowance of 40% is, CBDT Circular no. 5/2012, dated 1-8-2012, wherein, the prohibition imposed by Indian Medical Council with regard to acceptance of gift by medical practitioner/doctor was imposed with effect from 10-12-2009. Thus, as could be seen, the prohibition imposed by Indian Medical Council against acceptance of gift is on the medical practitioner and doctor and not on the pharmaceutical companies. The applicability of the aforesaid CBDT Circular as well as prohibition imposed by Indian Council on Pharmaceutical companies came up for judicial scrutiny before the Tribunal in DCIT v. PHL Pharma Pvt. Ltd. (supra). The Co-ordinate Bench after examining the regulation issued by the Medical Council of India as well as the CBDT Circular referred to above, ultimately concluded that the prohibition imposed by the Indian Medical Council Regulation are not applicable to pharmaceutical companies. Further, the said view was again reiterated by the Co-ordinate Bench in Solvay Pharma India Ltd. (supra). The Co-ordinate Bench has also held that the CBDT Circular referred to by the Departmental Authorities will not apply retrospectively. No contrary decision on the issue has been brought to our notice by the learned Departmental Representative. In view of the aforesaid, following the ratio laid down by the Co-ordinate Bench in the decisions referred to above, we allow assessee’s claim of expenditure. Consequently, the disallowance made of Rs. 50,17,890, is deleted. This ground is allowed.

8. In ground no. 2, the assessee has challenged disallowance of Rs. 7,36,702, under section 14A of the Act.

9. Brief facts are, during the assessment proceedings, the assessing officer noticed that though the assessee has earned exempt income of Rs. 21,50,732, by way of dividend, however, it has not made any disallowance under section 14A read with rule 8D towards expenditure incurred for earning exempt income. He, therefore, called upon the assessee to explain why such disallowance should not be made under section 14A of the Act. After considering the submissions of the assessee, the assessing officer proceeded to compute the disallowance under section 14A read with rule 8D for an amount of Rs. 7,36,702, comprising of interest disallowance of Rs. 5,85,47337 under rule 8D(2)(ii) and administrative expenses of Rs. 1,51,22862. The assessee challenged the aforesaid disallowance before the first appellate authority.

10. Learned Commissioner (Appeals), however, sustained the addition made by the assessing officer.

11. The learned Authorised Representative submitted, major investment made by the assessee is in foreign subsidiaries and dividend on such investment is taxable. Further, he submitted, no disallowance of interest expenditure can be made as the assessee had sufficient interest free funds available with it to take care of the investment. In this context, he drew our attention to the Balance Sheet as at 31-3-2009, a copy of which is placed at Page-46 of the paper book. In support, he relied upon the following decisions :–

(i) CIT v. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom.) : 2014 TaxPub(DT) 3351 (Bom-HC) and

(ii) HDFC Bank Ltd. v. DCIT (2016) 383 ITR 529 (Bom.) : 2016 TaxPub(DT) 1316 (Bom-HC).

12. As regards disallowance of administrative expenditure under rule 8D(2)(iii), the learned Authorised Representative submitted, these are old investments, hence, the assessee does not have to incur any administrative expenditure with regard to such investment.

13. The learned Departmental Representative relied upon the observations of the assessing officer and the learned Commissioner (Appeals).

14. We have considered rival submissions and perused material on record. No doubt, the provisions of rule 8D are applicable to the impugned assessment year. However, on a perusal of the Balance Sheet of the company as at 31-3-2009, it is noticed that as against interest free funds of Rs. 52205.45 lakh available with the assessee, the investments made by the assessee stood at Rs. 4559.44 lakh. Thus, from the aforesaid facts, it is evident that the assessee had sufficient interest free funds available with it to take care of the investments. That being the case, disallowance of interest expenditure under rule 8D(2)(ii) cannot be made. However, to keep track of its investments and manage the funds, the assessee must be incurring certain administrative expenditure. Therefore, reasonable disallowance under section 14A read with rule 8D(2)(iii) has to be made. Accordingly, we direct the assessing officer to compute the disallowance of administrative expenditure under rule 8D(2)(iii) after excluding from the average value of investment, the investments which have not yielded any exempt income during the financial year relevant to assessment year under dispute. This ground is partly allowed.

15. In ground no. 3, the assessee has challenged the addition of Rs. 17,18,941, on account of determination of arm’s length price of corporate guarantee given to the AE.

16. Brief facts are, in course of assessment proceedings, the Transfer Pricing Officer noticed that the assessee has provided corporate guarantee to its overseas AE without charging any fees. He, therefore, issued a show cause notice to the assessee to explain why arm’s length price of corporate guarantee fee should not be determined.

Though, the assessee objecting to the proposed determination of arm’s length price of corporate guarantee fee submitted that the provision of corporate guarantee is not in the nature of international transaction, however, the Transfer Pricing Officer rejecting the objection of the assessee determined the arm’s length price of the corporate guarantee fee @ 1.5% per annum. Applying the said rate, he ultimately determined the arm’s length price of corporate guarantee fee at Rs. 17,18,941. On the basis of the aforesaid adjustment made by the Transfer Pricing Officer, the assessing officer added back the amount to the income of the assessee.

17. Though, the assessee challenged the aforesaid decision before the learned Commissioner (Appeals), however, he refused to interfere with the decision of the Transfer Pricing Officer.

18. The learned Authorised Representative reiterating the stand taken before the Departmental Authorities submitted, the provision of corporate guarantee does not come within the definition of international transaction under section 92B of the Act. In support, he relied upon some decisions of the Tribunal as submitted in the paper book.

19. The learned Departmental Representative relied upon the observations of the assessing officer and the learned Commissioner (Appeals).

20. We have considered rival submissions and perused material on record. Insofar as the issue whether the provision of corporate guarantee comes within the purview of international transaction as defined under section 92B of the Act is concerned, there is a cleavage in the view expressed by different Benches of the Tribunal on the issue. While some Benches have held that provision of corporate guarantee does not come within the meaning of international transaction, however, there are many decisions which have held that it comes within the definition of international transaction as provided under article 92B of the Act. In fact, in many of the cases, the assessee’s have accepted provision of corporate guarantee as international transaction under section 92B of the Act. In one of such cases viz. Everest Kanto Cylinders Ltd. (2015) 58 taxmann.com 254 (Bom.) : 2015 TaxPub(DT) 2547 (Bom-HC), the Hon’ble Jurisdictional High Court has upheld the decision of the Tribunal in computing the arm’s length price of corporate guarantee fee @ 0.5%. Following the aforesaid decision of the Hon’ble Jurisdictional High Court, we direct the assessing officer to determine the arm’s length price of corporate guarantee fee by applying the rate of 0.5%. This ground is partly allowed.

21. Ground no. 4, the assessee has sought relief with regard to deduction claimed under section 10B of the Act on the turnover of scrap sales.

22. Brief facts are, during the assessment proceedings, the assessing officer noticing that the assessee has claimed deduction under section 80IB as well as 10B of the Act in respect of scrap sales of Rs. 3,92,091 and Rs. 51.51.738 respectively called upon the assessee to explain why the deduction claimed should not be disallowed. After considering the submissions of the assessee the assessing officer, however, held that the assessee is not eligible to claim deduction under section 80IB/10B of the Act on the turnover of scrap sale and reduced the same for the purpose of computing deduction under the aforesaid provisions.

23. The assessee challenged the aforesaid decision of the assessing officer before the first appellate authority. After considering the submissions of the assessee, learned Commissioner (Appeals) though ultimately directed the assessing officer to allow deduction under section 80IB/10B on the turnover of scrap sales, however, he quantified such turnover at Rs. 3,92,091.

24. The learned Authorised Representative submitted, the amount of Rs. 3,92,091, is only in respect of scrap sales of 80IB unit. Therefore, learned Commissioner (Appeals) should have quantified the turnover of 10B unit. The learned Authorised Representative further submitted, the issue has been decided by the Tribunal in its favour in assessment years 2002-03 to 2006-07. In this context, he drew our attention to the orders of the Tribunal placed at paper book.

25. The learned Departmental Representative relied upon the observations of the assessing officer.

26. We have considered rival submissions and perused material on record. Notably, while deciding similar issue in assessee’s own case for the preceding assessment years, the Tribunal has held that since the sale of scrap is integrally connected to the business activity of the assessee, it should form part of the turnover for computing deduction under section 80IB/10B of the Act. In fact, learned Commissioner (Appeals) accepting the aforesaid legal position has directed the assessing officer to allow deduction under section 80IB/10B of the Act. However, he has wrongly quantified the amount at Rs. 3,92,091, which is the scrap sales relating to 80IB unit, while leaving out the scrap sales of 10B unit amounting to Rs. 51,51,738. In view of the aforesaid, we direct the assessing officer to allow assessee’s claim of deduction under section 10B/80IB on the respective sales turnover of scrap relating to the aforesaid units. This ground is allowed.

27. In the result, appeal is partly allowed.

ITA no. 6075/Mum/2014 Revenue’s Appeal

28. The only issue arising in the aforesaid appeal is with regard to allowance of assessee’s claim of deduction under section 10B/80IB of the Act in respect of sale of scrap.

29. While deciding ground no.4 of assessee’s appeal, supra, we have held that the assessee is eligible to claim deduction under section 80IB/80B in respect of scrap sale. That being the case, ground raised by the Revenue deserves to be dismissed.

30. In the result, Revenue’s appeal is dismissed.

31. To sum up, assessee’s appeal is partly allowed and Revenue’s appeal is dismissed