Income Tax Appellate Tribunal - Hyderabad
Arvind Kumar Sharma, Hyderabad, ... vs Ito, Ward-5(3), Hyderabad, Hyderabad on 23 May, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA No. 841/Hyd/2017
Assessment Year: 2013-14
Arvind Kumar Sharma, vs. Income-tax Officer,
Hyderabad Ward - 5(3), Hyderabad.
PAN - ALNPS 6702 P
(Assessee) (Respondent)
Assessee by : Shri Bhupesh Kumar Dand
Revenue by : Smt. B. Vishnu Priya
Date of hearing 15/05/2018
Date of pronouncement /05/2018
O RDE R
PER S. RIFAUR RAHMAN, A.M.:
This appeal filed by the assessee is directed against the order dated 26/12/2016 of CIT(A) - 10, Hyderabad for AY 2013-14.
2. Brief facts of the case are, assessee is in the business of distribution of pharmaceuticals and is a proprietor of two concerns, namely, i) Pharma Centre and Sain Marketing. Assessee filed his return of income for the AY 2013-14 on 27/09/2013 admitting income of Rs. 5,84,240/-. The return was processed u/s 143(1) and subsequently, the case was selected for scrutiny under CASS. Notices u/s 143(2) and 142(1) were issued and served on the assessee.
2.1 During assessment proceedings, AO noted that assessee has debited Rs. 29,21,364/- in "Pharma Centre' and Rs. 13,23,223/- in 2 ITA No. 841/Hyd/17 Arvind Kumar Sharma, Hyd.
'Sain Marketing' under the head 'sales promotion expenses'. The total sales promotion expenses comes to Rs. 42,44,587/-. On examination, the break-up of the expenses are given below:
Pharma Centre
i) Gifts and compliments Rs. 39,222
ii) Gifts Paul Rs. 1,45,049
iii) Sales promotion Orissa Rs. 9,000
iv) SSP Sales promotion paul Rs.27,28,093 Rs.29,21,364
-========== Sain Marketing
i) Gifts & compliments Rs. 1,08,250
ii) SSPS sales promotion Rs. 12,14,973 Total Rs. 13,23,223 =========== 2.2 During the course of assessment proceedings, the assessee produced bills/vouchers for an amount of Rs. 2,83,521/- and for the balance, assessee stated that there are no bills/vouchers. However, assessee submitted that all the payments were made through bank account only and the signatures of person, who was in receipt of the said commission was not available. In response to the show cause letter dated 22/01/2016, the assessee filed his explanation on 15/02/2016, which is as under:
All the expenses that is debited to sales promotion expenses is not towards medical professionals. As seen from above, gifts and compliments expenses incurred by me, is for staff, clients and other creditors with whom we do day to day work. The expenses includes small items such as pens, calendars, key chains, biscuits, lunch to clients etc. for promoting the products. Hence, Rs.3,0l,521 (Rs.184271 +Rs.9000 + Rs.l08250) do not form part of expense incurred towards freebies to doctors. As per Circular No.5;2012(F.No.225/142/2012-ITA.II) dated Ol.08.2012 any freebies to doctors is not allowable as deductible expenditure. As the circular is applicable from 01.08.2012, expenses incurred before this date can be allowed as deductible expenditure. Hence, in Pharma Centre Rs. 8,27, 857 and in the case of Sain Marketing Rs.3,86,413, the 3 ITA No. 841/Hyd/17 Arvind Kumar Sharma, Hyd.
expenses were incurred before the circular came into effect, as such Rs.12,14,270 can be allowed as deductible expenditure. The balance expenditure of Rs.27,28,796 was incurred towards sales promotion and paid to doctors. The nature of the business demands that the such expenses must be incurred otherwise the it is very difficult to dispose off the product; medicine trading is a consumer oriented industry having vast base of the consumer. It has a lot of competition in the market and without publishli7g material and makli7g the doctors aware of about the medicine, we will not be able to sell the product. I am not a retailer who sell's directly to consumers. This is the major road block for our firm as such we have to incur expenditure towards promoting our products, which is the only way to generate and increase the turnover.
When any product is launched, there are lots of conference has to be arranged and for arranging the conference we have to incur the travelling expenses and other related expenses. Further many a times, doctors conduct free medical camps with various philanthropic organization in which we supply medicines free of cost, all such expenses are debited to sales promotion. The sales promotion expenditure has been incurred for the purpose of the business only and are not the capital expenditure or the personal expenses of ourselves or doctors. Therefore, requesting you to kindly allow the sales promotion expenses as business expenses and complete the assessment."
In the explanation submitted by the assessee, assessee submitted threefold argument; first being sales promotion expenses includes small items, such as, Pens, calendars, etc. to the extent of Rs. 3,01,521/-, which do not form part of expenses incurred towards freebees to Doctors. Second argument is, CBDT Circular No. 5/12, dated 01/08/2012, issued is applicable with effect from 01/08/12, assessee has incurred Rs. 12,14,270/- prior to the issue of Circular, hence, this expenditure should be allowed as the Circular is applicable prospectively. The third contention is, the balance of expenditure was incurred toward sales promotion, accordingly, paid to Doctors. In this line of business, assessee has incurred certain expenditures like arrangement of conference, travelling expenses to the conference, etc., whenever any project is launched. The sales promotion expenditure was incurred only for the purpose of business and it is not capital in nature or any personal expenses are involved.
4 ITA No. 841/Hyd/17Arvind Kumar Sharma, Hyd.
2.3 The AO rejected the above submissions of the assessee by holding that invoices produced by the assessee are in the name of Sai Nursing Home and another is in the name of Doctor Briz Bhushan. These invoices are not relating to the assessee, accordingly, first contention of the assessee was dismissed. With regard to second and third contention, the AO rejected the same by observing as under:
" b) The second contention of the assessee that the Circular No.5/2012 issued by the CBDT is applicable w.ef.01.08.2012.
Hence, expenditure incurred prior to 01.08.2012 of Rs.8,27,857 is allowable is devoid of any merit for the following reasons:
As per the explanation to Section 37(1) of the I.T. Act, any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. This provision is in the statute w.e.f. 01.04.1962. The CBOT Circular cited supra brings to the notice of all concerned that expenditure incurred towards freebies to doctors by the Pharma Agencies is disallowable u/s.37( 1) of the I.T.Act as the Medical council of India (statutory body) imposed prohibition on medical practitioners inter alia accepting gifts etc. from pharma agencies on 10.12.2009. Hence, any expenditure incurred w.e.f.l0.12.2009 towards freebies. to doctors is disallowable ujs.37(1) of the I.T.Act. The CBDT Circular only highlights the same. Hence the explanation is applicable for the entire financial year under consideration.
c) The other arguments of the assessee that the business of the assessee warrants incurring of such expenditure is not acceptable as the statute provides for disallowance of such expenditure.
d) Attention is invited to the Hon'ble Punjab & Haryana High Court decision in the case of CIT 'Is KAP Scan and Diagnostic Centre (P) Limited (2012) reported in 344 ITR 476 wherein admissibility of commission paid to doctors for referring patients for diagnosis was dealt. The High Court considered the Indian Medical Council (Professional Conduct Etiquette and Ethics) Regulations 2002 and concluded therefrom that such payment of commission was opposed to public policy and consequently disallowed the expenditure."
3. Aggrieved with the above order, assessee preferred an appeal before the CIT(A).
5 ITA No. 841/Hyd/17Arvind Kumar Sharma, Hyd.
4. After considering the submissions of the assessee and relying on the decision in the case of Dr. Reddy's Laboratories Ltd. Vs. Addl. CIT, 30 ITR 393, the CIT(A) observed that the assessee did not produce any bills or vouchers for an amount of Rs. 39,43,076/-, admittedly they are not available and the main contention was that the amount paid through bank and merely contending that it is sales promotion and no other details are available on record. Accordingly, he supported the views of the AO.
5. Aggrieved by the order of the CIT(A), the assessee is in appeal before us raising the following grounds of appeal:
"1. The order of the Learned Commissioner of Income Tax (Appeals) is against law, Height of evidence and probabilities of the case.
2. The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs,42,44,587/- (Rs.29,21,364 + Rs.13,23,223) made by the Assessing Officer u/s.37(1) of the I.T Act treating the said amount as representing expenditure towards freebies to medical professionals.
3. The learned Commissioner of Income Tax (Appeals) failed to appreciate that a portion of the impugned expenditure to the extent of Rs.3,01,521/- was incurred on sales promotion which does not represent expenditure on provision of freebies to medical professionals.
4. The learned Commissioner of Income Tax (Appeals) erred in confirming disallowance of the balance amount of Rs.39,43,066/- disregarding the explanation offered by the assessee before the A.O as well as before the C.I.T(Appeals) and the case law relied upon by the assessee.
5. For the above grounds and such other grounds that may be urged at the time of hearing, the appellant prays that the appeal be allowed. The appellant craves leave to add to, amend or modify the above grounds of appeal either before or at the time of hearing of the appeal, if it is considered necessary."
6. Ld. AR made similar arguments as made before the CIT(A) and AO. In the paper book, assessee has filed copies of the bills and vouchers in support of gifts and articles purchased for the purpose of sales promotion. He submitted that these are of small items purchased for the purpose of gifts and promotion of the business and 6 ITA No. 841/Hyd/17 Arvind Kumar Sharma, Hyd.
incentives to certain employees, therefore, this expenditure is allowable u/s 37(1) of the Act. With regard to other expenditure, for which payments were made through banking channel, ld. AR submitted similar arguments, which were made before the CIT(A) and AO. In support of his contention, he relied on the following case law:
1. DCIT Vs. PHL Pharma (P) Ltd., 78 Taxmann;.com 36 Mum.ITAT)
2. ACIT Vs. Geno Pharmaceuticals Ltd., ITA No. 12/PNJ/2014, dtd. 30/05/2014
3. TTK Healthcare Ltd. Vs. DCIT, 78 Taxmann.com 86 (Chennai ITAT)
4. Dr. Reddy's Laboratories Ld., Vs. Addl. ACIT, 81 Taxmann.com 398 (Hyd ITAT)
5. Dr. Reddy's Laboratories Ltd. Vs. Add. CIT, 51 Taxmann.com 136 (Hyd ITAT)
6. Macleods Pharmaceuticals Ltd. Vs. Addl. CIT, Taxmann.com 250 (Mum. ITAT).
7. DCIT Vs. Ochoa Laboratories Ltd., 85 Taxmann.com 168
7. Ld. DR, on the other hand, submitted that, no doubt, CBDT Circular was issued on 01/08/2012, however, the Circular was issued acknowledging the amendment to the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, which was issued on 10/12/2009 imposing a prohibition on the medical practitioner and their professional associates from taking any gift, travel facility, hospitality, cash or monetary grant from the pharmaceutical and allied health sector industries. She submitted that this amendment is in existence since 2009, practice of giving gifts to doctors is an offence or prohibited by law as per the explanation to section 37(1) of the act, and, therefore, these payments are not allowable as deduction u/s 37(1) of the Act. She further submitted that the case of DCIT Vs. PHL Pharma (P) Ltd. (supra) is distinguishable on facts.
7 ITA No. 841/Hyd/17Arvind Kumar Sharma, Hyd.
8. Considered the rival submissions and perused the material on record as well as the cases cited by the ld. AR. We find that assessee has made sales promotion expenditure and a portion of sales promotion expenditure was incurred by giving small gifts like Pens, diary etc. and to this effect a copy of the bills/vouchers were filed in support of such purchases. The AO noted that the vouchers are not relating to assessee. However, majority of the vouchers submitted by the assessee in the paper book are belonging to the assessee. We do not see any reason not to allow these expenses as sales promotion expenditure. These are small gifts in promoting business not to any specific doctor or for any special favour. With regard to other expenditure, which is not supported by any vouchers/bills, but, paid through bank and assessee has not submitted any details for whom and for what purpose the expenditure is incurred. It is only the claim of the assessee that it has paid to Doctors for promotion of the business in order to promote the products of the specific brands or company. Ld. AR submitted that these are blunt favours done by the assessee to Doctors in order to promote the business, but, he could not substantiate the nature of payment or for what purpose these payments were made to Doctors. He submitted that the case law relied in support of the contention that CBDT circular is prospective in nature and whatever the expenditure was incurred prior to the Circular is allowable as expenditure and also the CBDT Circular is applicable to practicing Doctors and it will not be applicable to pharmaceutical companies by relying on the case of CIT Vs. PHL Pharma (supra). In the case of PHL Parma (supra), the assessee has submitted various details of expenditure and nature of expenditure, which was incurred to facilitate the Doctors in order to promote its business. Whereas, in the case before us, assessee has not submitted any details. Further, ld. AR relied on the decision in the case of Dr. Reddy Laboratories (supra), in which, various details of expenditure and nature of expenditure are submitted, which was incurred to facilitate the Doctors in order to promote its business. Whereas, in the case before us, assessee has not submitted any 8 ITA No. 841/Hyd/17 Arvind Kumar Sharma, Hyd.
details. Further, ld. AR relying on the decision in the case of Dr. Reddy Laboratories (supra), submitted that the issue may be remitted back to AO for verification of the details of expenditure. In the case of Dr. Reddy's Laboratories Ltd. (supra), the coordinate bench has observed as under:
"43. This ground pertains to disallowance of various payments towards:
i) Business promotion expenditure: Rs. 8,25,910
ii) Gifts & compliments: Rs. 68,62,136
iii) Local Doctors meet expenses: Rs. 1,03,29,388
iv) Individual Doctor services: Rs. 8,84,41,258
44. During the year the assessee has incurred expenditure towards sales promotion which comprise of Business promotion expenditure, gifts and compliments, local doctors meet expenses, individual doctor service. It was submitted that the expenditure were incurred in the course of business and wholly and exclusively for the purpose of business. The AO/DRP disallowed the expenditure stating that the expenditure is not incurred in the course of the business of the assessee.
45 This issue was a recurring one having been considered by ITAT in assessment year 2003-04 in ITA No.655/Hyd/07 dated 29/10/2010 in AY 2003-04. Business promotion expenditure was stated to be payments to the Doctors, hospitals in cash amount and also like gifts. The contention of the assessee was that this expenditure was incurred wholly and exclusively for the purpose of business, whereas AO/DRP was of the opinion that the assessee can not explain said payments as related to business. Similar issue was examined by Assessing Officer and CIT(A) in assessment year 2003-04 in the above order (supra). ITAT also upheld the disallowance of these items vide para-39 of the order. Accordingly, the addition on this account stands confirmed. Likewise the expenditure of gifts and compliments and other expenditure of similar nature was also not allowed in the order of ITAT (supra). Respectfully following, we uphold the order of AO/DRP on various expenditures.
In the above case, the dispute was that the expenditure was incurred wholly and exclusively for the purpose of business, whereas, AO/DRP were of the opinion that the assessee did not explain the said payments are related to business. By following the order of ITAT in AY 2003-04, the addition was confirmed and it was remitted back to AO for verification only in the case of expenditure relating to individual doctor services. In the given case, since assessee has not 9 ITA No. 841/Hyd/17 Arvind Kumar Sharma, Hyd.
given any details of nature of expenditure, we are not in a position to classify the expenditure as individual doctors services or otherwise. We further notice that assessee was not in a position to explain the details, like, nature of payment and details of individual recipients of the payments before the lower authorities and even before us. Merely making payment through bank does not justify that the payment was made to Doctors for promotion of business only. Therefore, we cannot accept that the payments made by the assessee are towards business purpose in the light of the CBDT Circular No. 5/12. Accordingly, we are in agreement with the findings of the CIT(A) in confirming the addition made by the AO for the reason that no details were filed to substantiate the claim and, hence, upholding the order of the CIT(A), we dismiss the grounds raised by the assessee.
9. In the result, appeal of the assessee is dismissed.
Pronounced in the open Court on 23 rd May, 2018.
Sd/- Sd/-
(P. MADHAVI DEVI) (S. RIFAUR RAHMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 23 rd May, 2018
kv
Copy to:-
1) Arvind Kumr Sharma, Prop.: Pharma Centre & Sain Marketing H.No. 5-8-617, 1 st Floor, Abids, Hyd. - 500 001
2) ITO, Ward - 5(3), T. Towers, AC Guards, Hyderabad.
3) CIT(A) - 10, Hyderabad.
4) Pr. CIT - IV, Hyd.
5) The Departmental Representative, I.T.A.T., Hyderabad.
6) Guard File