The Circular disallowing benefit of expenditure incurred by Pharmaceutical and Allied Health Sector Industry for granting freebies to the doctors and medical practitioners will apply from date of circular (A.Y. 2013-14). [Sunflower Pharmacy ITAT order]

A. Facts of the case

The Assessee is in the business of supply of medicines. During the relevant assessment year i.e. 2011-12, the Assessee paid certain sums to two doctors, alleged as commission for the purposes of advising for purchase of medicines from time to time. The assessee claimed the amount as expenditure in its profit and loss account for A.Y. 2011-12. The said expenditure was disallowed by the Revenue Authorities relying on Circular No. 5/2012 dated 01/08/2012 issued by the Central Board of Direct Taxes (“the Circular”).

B. Contentions of the taxpayer

  • Circular does not apply to the taxpayer as it is not pharmaceutical industry and mere supplier of medicines.
  • Circular is dated 01/08/2012 and is prospective in nature therefore doesn’t apply to relevant A.Y. being 2011-12.
  • Even if the circular applies it does not cover commission.

C. Contentions of the revenue authorities:

  • The amount was paid in violation of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (“the Regulations”) and, the same is inadmissible by virtue of the Circular and section 37(1) of the Income-tax Act, 1961 (“the IT Act”).
  • Circular deals not only with freebies. Commission is covered under ‘cash or monetary grant’ mentioned in the circular and the same cannot be said to have been incurred for any research, study, etc., through approved institutions by the modalities laid down is in violation of the Regulations.
  • The Circular is applicable to taxpayer as it falls in the ambit of term ‘allied health sector’..
  • There is no evidence of any further services having been rendered by the doctors. The MoU between Assessee and the doctors referred to payment of professional fee and not commission so the same cannot be relied upon to claim deduction of commission.

D. Judgment of the Tribunal

  • Prospective application of the Circular

The Tribunal held that the Circular is prospective in nature and will be applicable from A.Y. 2013-14 onwards. The Tribunal relied on the judgment of the Mumbai Bench of the Tribunal in Syncom Formulations (I) Ltd. v. DCIT1 where it was held that the Circular wasintroduced with effect from 01.08.2012 and will be applicable prospectively from A.Y. 2013-14 only.

The Tribunal held that since the relevant assessment year involved in the instant case is A.Y. 2011-12, the Circular will not be applicable and the disallowance of commission by the assessing officer was set aside.

E. Our Comments

  • While this decision, affirms the view, taken by other Benches of the Tribunal2 that the said Circular was introduced with effect from August 1, 2012 and therefore, will apply prospectively i.e. from assessment year 2013-14 onwards, it fails to take note of the decision of Hon’ble Himachal Pradesh High Court in the case of Confederation of Indian Pharmaceutical Industry (SSI) v. CBDT3 wherein the court had held that the circular merely applies the provisions of Section 37 in the light of the Regulations and does not go beyond the enactment. Therefore, in view of this decision it can be contended that even without the Circular the disallowance would have operated on conjoint reading of section 37 and the Regulations, and the Circular being merely clarificatory explains the legal position which exists from the date of introduction of the Regulations.

In view of above, the taxpayers need to exercise caution before placing reliance on these decisions of Tribunal.

  • The Assessee, did not raise the argument that the said Regulations prohibit only doctors and medical practitioners from receiving freebies and do not prohibit the pharmaceutical industry or allied health sector from giving the same.

The non-applicability of the Circular to Pharmaceutical Companies has been upheld by the Hon’ble Mumbai Bench of Tribunal in Deputy Commissioner of Income-tax v. PHL Pharma4 where the Tribunal had held that the 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. The same view was taken by the Jaipur Bench of the Tribunal in D.D. Pharmaceutical Pvt. Ltd. v. ACIT5 relying on the judgement of the High Court of Rajasthan in Anil Gupta v. ACIT6 where the Court had held that Regulations apply only to medical professionals and not to hospital. However, it is also significant to note that the Punjab and Haryana High Court in CIT v. Kap Scan & Diagnostic Centre (P.) Ltd.7 had held that the Regulations are also applicable to Pharmaceutical Companies as both the doctor and company are privy to the wrong.