DCIT 9(1)(1), MUMBAI V. AGIO PHARMACEUTICALS LTD, MUMBAI

ITA 3416/MUM/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 9845 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-07-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 20-04-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 04-06-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M C OMI NINGSHEN
• Assessee Lawyers: M SUBRAMANIAN
• Keywords: Bogus purchase; Gift; Business income; Retrospective amendment; Accommodation entries; Revenue expenditure
• Section: 143(3); 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H MUMBAI BEFORE SHRI D.T. GARASIA (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO.3416/MUM/2015 ASSESSMENT YEAR: 2011 - 12 DCIT - 9(1)(1) ROOM NO. 260A, 2 ND FLOOR, AAYAKARBHAVAN, M.K. ROAD, MUMBAI - 400020. VS. M/S AGIO PHARMACEUTICALS LTD. A - 38, NANDJYOT INDUSTRIAL ESTATE, ANDHERI KURLA ROAD, ANDHERI (E), MUMBAI - 400072 PAN NO. AABCA8426A (APPELLANT) (RESPONDENT) CROSS OBJECTION NO. 5/MUM/2017 ASSESSMENT YEAR: 2011 - 12 M/S AGIO PHARMACEUTICALS LTD. A - 38, NANDJYOT INDUSTRIAL ESTATE, ANDHERI KURLA ROAD, ANDHERI (E), MUMBAI - 400072 VS. ITO - 9(1)(1), MUMBAI. PAN NO. AABCA8426A (APPELLANT) (RESPONDENT) REVENUE BY : MR. M.C. OMI NINGSHEN, D R ASSESSEE BY: SHRI M. SUBRAMANIAN, A R DATE OF HEARING : 20/04/2017 DATE OF PRONOUNCEMENT: 12/07/2017 ITA NO. 3416/MUM/2015 2 ORDER PER N.K. PRADHAN, A.M THIS IS AN APPEAL FILED BY THE REVENUE . THE RE LEVANT ASSESSMENT YEAR IS 2011 - 12 . THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMIS SIONER OF INCOME TAX (APPEALS) - 16 , MUMBAI AND ARISES OUT OF THE ASSESSMENT COMPLETED U/S 143(3) OF THE INCOME TAX ACT 1961, (THE ACT). 2. THE GROUNDS OF APPEAL FILED BY THE REVENUE READ AS UNDER: - I) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN HOLDING THAT THE PAYMENTS MADE TO MEDICAL PRACTITIONERS AND MEDICAL REPRESENTATIVES DOES NOT FALL IN THE AMBIT OF CIRCULAR OF MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ET IQUETT E AND ETHICS) REGULATION. II) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN DELETING THE ADDITION FOR PAYMENTS MADE TO MEDICAL PRACTITIONERS AND MEDICAL REPRESENTATIVES WITHOUT GOING INTO THE MERITS AND DELETING THE ADDITIO N ON THE GROUND THAT THE PAYMENTS MADE TO THEM ARE VERY MEAGRE AS COMPARED TO THE TURNOVER OF THE ASSESSEE WHICH HAS NO RATIONALE AS THE QUANTUM OF PAYMENT MADE IS IMMATERIAL IF THE PAYMENTS MADE ARE NOT ALLOWABLE IN PRINCIPLE IN VIEW OF THE ABOVE CIRCULAR AND ALSO CBDT CIRCULAR NO. 5 OF 2012 DATED 01.08.2012 AND ALSO NOT ALLOWABLE AS PE R EXPLANATION TO SECTION 37(1). III) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN DELETING THE ADDITION ON ACCOUNT OF SAMPLES GIVEN TO MEDI CAL PRACTITIONERS, DRUGGISTS AND STOCKISTS BY HOLDING THAT IT DOES NOT FALL IN THE AMBIT OF CIRCULAR OF MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ETIQUET TE AND ETHICS) REGULATION 2002. IV) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT - (A) ERRED IN DELETING THE ADDITION ON ACCOUNT OF SAMPLES GIVEN TO MEDICAL ITA NO. 3416/MUM/2015 3 PRACTITIONERS, DRUGGISTS AND STOCKISTS AND GRANTING DEDUCTION UNDER SECTION 37(1) OF THE ACT THEREBY IGNORING CLAUSE (F) AND (H) OF THE ABOVE CIRCULAR AND ALSO CBDT CIRCULAR NO. 5 OF 20 12 DATED 01.08.2012. V) W HE THER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT - (A) ERRED IN DELETING THE ADDITION MADE ON ACCOUNT OF BOGUS PURCHASES BY HOLDING THAT THE GENUINENESS OF THE TRANSACTION STOOD EXPLAINED IGNORING THE FACT THAT 133( 6) SENT BY THE AO CAME BACK UNSERVED AND RUMEET ENTERPRISES HAS BEEN CLASSIFIED AS A HAWALA DEALER BY THE SALES TAX DEPARTMENT, MAHARASHTRA AND ITS DIRECTOR / PROPRIETOR HAS UNDER OATH CONFIRMED THAT NO TRANSACTION HAS BEEN ENTERED WITH THE ASSESSEE AND ON LY ACCOMMODATION ENTRIES WERE PROVIDED. 3 . BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSING OFFICER (AO) OBSERVE D DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT THE ASSESSEE HAD INCURRED EXPENSES OF RS.2,06,08,794/ - TOWARDS SALE PROMOTION. TH E BREAK - UP OF THE ABOVE EXPENDITURE IS GIVEN BELOW: PARTICULARS AMOUNT (RS.) COMMISSION AND BROKERAGE 1,11,27,851 PRODUCT DEVELOPMENT 3,74,037 TRADEMARK 9,000 ADVERTISEMENT 4,08,542 SALES PROMOTION EXPENSES FOR FIELD STAFF AND STOCKIEST 82,04,626 SALES PROMOTION EXPENSE FOR DOCTORS 4,04,626 TOTAL 2,06,08,794 3 .1 THE AO RELIED ON (I) CLAUSE 6.8 OF THE INDIAN MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) R EGULATION 2002 INSERTED W.E.F. 10.12.2009, (II) CBDT CIRCULAR NO. 5/2012 DATED 01.08.2012. ALSO RELIANCE IS PLACED BY HIM INTER ALIA ON THE JUDGMENT OF THE HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF CIT VS. KAP SEAN AND DIAGNOSTIC CENTRE PVT. LTD. ITA NO. 3416/MUM/2015 4 (2012) 344 ITR 476. THE AO THUS DISALLOWED RS. 1,71,45,768/ - INCURRED BY THE ASSESSEE FOR PROVIDING FREEBIES TO MEDICAL PRACTITIONERS/THEIR PROFESSIONAL ASSOCIATIONS. 4 . AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE FILED A N APPEAL BEFORE THE LD. CIT(A). THE LD. CIT(A) HAS HELD THAT (I) CONSIDERING T HE VOLUME AND NATURE OF THE BUSINESS OF THE ASSESSEE, THE PAYMENT MADE TO THE DOCTORS IS VERY MEAGRE, (II) THE SAID EXPENSES WERE INCURRED ON STATIONERY ITEMS AND GIFTS GIVEN TO FIELD STAFF AND STOCKIST WHO ARE A VITAL COG IN THE DISTRIBUTION AND MARKETING CHANNEL OF THE ASSESSEE , (III) THE SAID PAYMENTS WERE NOT IN VIOLATION OF THE IMC REGULATIONS AND HENCE DISALLOWANCE U/S 37(1) IS NOT WARRANTED, (IV) SINCE THE ASSSESSEE HAS OPERATIONS IN 18 STATES WITH MORE THAN 800 STOCKISTS OPERATING IN DIFFERENT AREAS, THE SAID EXPENDITURE CAN BE CONSIDERED AS REASONABLE, (V) THE DISTRIBUTION OF FREE SAMPLE IS NOT IN VIOLATION OF IMC REGULATIONS SINCE THE TAG OF S AMPLE NOT FOR SALE RENDER THE SAID PRODUCTS VALUELESS. THEREFORE, THE LD. CIT(A) DELETED THE ABOVE ADDITION MADE BY THE AO. 5 . BEFORE US, THE LD. DR RELIES ON THE ORDER OF THE AO. ALSO HE REFERS TO CLAUSE 6.8 INSERTED IN THE INDIAN MEDICAL COUNCIL (PROF ESSIONAL CONDUCT, ETIQUETTE AND ETHICS) R EGULATION, 2002 INSERTED W.E.F. 10.12.2009. RELIANCE IS ALSO PLACED BY HIM ON THE CBDT CIRCULAR NO. 5/2012 DATED 01.08.2012. ALSO THE LD. DR RELIES ON THE ORDER OF THE ITAT A BENCH MUMBAI IN THE CASE OF ACIT VS. L IVA HEALTHCARE LTD . (ITA NO. 904/MUM/2013) . ITA NO. 3416/MUM/2015 5 6 . ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSESSEE RELIES ON THE ORDER OF THE TRIBUNAL IN THE CASE OF (I) MACLEODS PHARMACEUTICALS LTD. VS. ADDL. CIT (ITA NO. 7404 & 7405/MUM/2014) ITAT B BENCH MUMBAI, (II ) DCIT VS. PHL PHARMA P. LTD . (ITA NO. 4605/MUM/2014) ITAT C BENCH MUMBAI. 7 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. MEDICAL COUNCIL OF INDIA IS CONSTITUTED UNDER THE MEDICAL COUNCIL ACT, 1956 WITH THE OBJECT OF GOVERNING AND REGULATING THE PRACTICE OF MEDICINES IN INDIA. IT HAS BEEN EMPOWERED TO FORMULATE RULES AND REGULATIONS FOR EFFECTIVELY CARRYING OUT ITS OBJECTIVES. THE SAID COUNCIL, EMPOWERED UNDER THE SAID ACT, HAS FORMULATED THE INDIA MEDICAL COUNCIL ( PROFESSIONAL CONDUCT ETIQUETTE AND ETHICS) REGULATIONS, 2002 WHICH WAS AMENDED IN 2009 AND THE AMENDMENT WAS NOTIFIED ON 10.12.2009 BY THE COUNCIL. THE SAID REGULATIONS VIDE AMENDED CLAUSES 6.4 AND 6.8 PROVIDE FOR RULES THAT PROHIBIT RECEIPT OF THE FREEBIE S AND MANY RELATED ACTS AND ITEMS AND THINGS BY THE MEDICAL PRACTITIONERS. VIDE REGULATION 6.4.1, A PHYSICIAN IS PROHIBITED TO RECEIVE ANY GIFTS, GRATUITY, COMMISSION OR BOGUS IN CONSIDERATION OR RETURN FOR REFERRING THE PATIENTS FOR MEDICAL, SURGICAL OR O THER TREATMENT. IT READS AS: 6.4 REBATES AND COMMISSION: 6.4.1 A PHYSICIAN SHALL NOT GIVE, SOLICIT, OR RECEIVE NOR SHALL HE OFFER TO GIVE SOLICIT OR RECEIVE, ANY GIFT, GRATUITY, COMMISSION OR BONUS IN CONSIDERATION OF OR RETURN FOR THE REFERRING, RECOMMENDING OR PROCURING OF ANY PATIENT FOR MEDICAL, SURGICAL OR OTHER TREATMENT. A PHYSICIAN SHALL NOT DIRECTLY OR INDIRECTLY, PARTICIPATE IN OR BE A PARTY TO ACT OF DIVISION, TRANSFERENCE, ASSIGNMENT, SUBORDINATION, REBATING, SPLITTING OR REFUNDING OF A NY FEE FOR MEDICAL, SURGICAL OR OTHER TREATMENT. ITA NO. 3416/MUM/2015 6 SUBSEQUENT TO THE NOTIFICATION OF THE SAID REGULATIONS, THE CBDT HAS ISSUED THE CIRCULAR NO. 5 DATED 01.08.2012 DIRECTING THE INCOME - TAX AUTHORITIES TO DISALLOW THE EXPENDITURE INCURRED ON DISTRIBUTION OF FREEBIES ON APPLICATION OF EXPLANATION 1 OF SECTION 37(1) OF THE INCOME - TAX ACT. T HE RELEVANT PART READS AS UNDER: IT HAS BEEN BROUGHT TO THE NOTICE OF THE BOARD THAT SOME PHARMACEUTICAL AND ALLIED HEALTH SECTOR INDUSTRIES ARE PROVIDING FREEBEES (FREEBIES ) TO MEDICAL PRACTITIONERS AND THEIR PROFESSIONAL ASSOCIATIONS IN VIOLATION OF THE REGULATIONS ISSUED BY MEDICAL COUNCIL OF INDIA (THE COUNCIL) WHICH IS A REGULATORY BODY CONSTITUTED UNDER THE MEDICAL COUNCIL ACT, 1956. 2. THE COUNCIL IN EXERCISE OF ITS STATUTORY POWERS AMENDED THE INDIA MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002 (THE REGULATIONS) ON 10.12.2009 IMPOSING A PROHIBITION ON THE MEDICAL PRACTITIONERS AND THEIR PROFESSIONAL ASSOCIATIONS FROM TAKING ANY GIFT, TRAVEL FACILITY, HOSPITALITY, CASH OR MONETARY GRANT FROM THE PHARMACEUTICAL AND ALLIED HEALTH SECTOR INDUSTRIES. 3. SECTION 37(1) OF INCOME TAX ACT PROVIDES FOR DEDUCTION OF ANY REVENUE EXPENDITURE (OTHER THAN THOSE FAILING UNDER SECTIONS 30 TO 36) FROM THE BUSINESS INCOME IF SUCH EXPENSE IS LAID OUT/EXPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSION. HOWEVER, THE EXPLANATION APPENDED TO THIS SUB - SECTION DENIES CLAIM OF ANY SUCH EXPENSE, IF THE SAME HAS BEEN INCURRED FOR A PURPOSE WH ICH IS EITHER AN OFFENCE OR PROHIBITED BY LAW. THUS, THE CLAIM OF ANY EXPENSE INCURRED IN PROVIDING ABOVE MENTIONED OR SIMILAR FREEBEES IN VIOLATION OF THE PROVISIONS OF INDIAN MEDICAL COUNCIL (PROFESSIONAL CONDUCT, ETIQUETTE AND ETHICS) REGULATIONS, 2002 SHALL BE INADMISSIBLE UNDER SECTION 37(1) 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 H AS ITA NO. 3416/MUM/2015 7 PROVIDED AFORESAID FR EEBEES AND CLAIMED IT AS A DEDUCTABLE EXPENSE IN ITS ACCOUNTS AGAINST INCOME. 7.1 THE SAME CBDT C IRCULAR HAD COME UP FOR CONSIDERATION IN THE CASE OF SYNCOM FORMULATIONS (I) LTD . IT APPEAL NOS. 6429 & 6428 (MUM.) OF 2012, DATED 23.12.2015, WHEREIN THE TR IBUNAL HELD THAT CBDT C IRCULAR WAS NOT BE APPLICABLE IN THE AYS 2010 - 11 AND 2011 - 12 AS IT WAS INTRODUCED W.E.F. 01.08.2012. SIMILAR ISSUE OF ALLOWANCE OF SUCH EXPENDITURE IN THE CASE OF PHARMACEUTICAL COMPANIES HAD BEEN DECIDED IN FAVOUR OF THE ASSESSEE, I N THE CASE OF UCB INDIA (P.) LTD. VS. ITO , IT APPEAL NO. 6681 (MUM.) OF 2013, DATED 13.05.2016, WHEREIN IT WAS HELD THAT THE CBDT C IRCULAR COULD NOT HAVE A RETROSPECTIVE EFFECT. 7.2 WE ARE OF THE CONSIDERED VIEW THAT THE SAID CBDT C IRCULAR WAS NOT TO BE AP PLICABLE IN THE AY 2011 - 12 AS IT WAS INTRODUCED W.E.F. 01.08.2012. THE CBDT C IRCULAR COULD NOT HAVE A RETROSPECTIVE EFFECT. 7.3 THE AO HAS MENTIONED IN THE ASSESSMENT ORDER THAT THE ASSESSEE - COMPANY IS A MANUFACTURER, IMPORTER, EXPORTER AND TRADER IN PHARM ACEUTICALS, CHEMICAL AND JEWELRY . WE FIND THAT THE AO HAS FAILED TO BRING IN NECESSARY DETAILS IN THE ASSESSMENT ORDER TO JUSTIFY THE DISALLOWANCES AS PER CLAUSE 6.8 INSERTED IN THE INDIA MEDICAL COUNCIL (PROFESSIONAL CONDUCT , ETIQUETTE AND ETHICS) RE GULATIONS, 2002 AND THE CBDT CIRCULAR NO. 05/2012 DATED 01.08.2012. A FORTIORI T HE AO HAS RESORTED TO GENERAL PROPOSITIONS. IT IS A SETTLED POSITION OF LAW THAT GENERAL PROPOSITIONS DO NOT DECIDE CONCRETE CASES. THUS THE CASE OF THE ASSESSEE IS DISTINGUIS HABLE FROM THE AUTHORITIES AND DECISIONS RELIED ON BY THE LD. DR. ITA NO. 3416/MUM/2015 8 8. IN VIEW OF THE ABOVE, WE UPHOLD THE ORDER OF THE LD. CIT(A) AND DISMISS THE APPEAL FILED BY THE REVENUE. 9 . CROSS OBJECTION FILED BY THE ASSESSEE READ AS UNDER: I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN SUSTAINING THE DISALLOWANCE TO THE EXTENT OF 10% OF PURCHASE VALUE FROM RUMEET ENTERPRISES WHILE OBSERVING THAT THE PURCHASES CANNOT BE TERMED BOGUS. 1 0 . WE FIND THAT THE LD. CIT(A) HAS HELD THAT THE SAID PURCHASE CANNOT BE TERMED AS BOGUS. THEREFORE, THE DISALLOWANCE OF RS.13,072/ - (10% OF THE TRANSACTION VALUE) CONFIRMED BY THE LD. CIT(A) IS DELETED. THUS, THE CROSS OBJECTION RAISED BY THE ASSESSEE IS ALLOWED. 1 1 . TO SU M UP, THE APPEAL FILED BY THE REVENUE IS DISMISSED. THE CROSS OBJECTION FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN C OURT ON 12/07/2017. SD/ - SD/ - ( D.T. GARASIA ) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED: 12/07/2017 RAHUL SHARMA, SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - ITA NO. 3416/MUM/2015 9 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI