Case summary, Income Tax

Applicability of MCI circular (prohibiting the medical practitioners from taking any gift) to pharmaceutical companies: Consistency of the MCI circular with the circular issued by CBDT on this subject

Case: DCIT CIR 7(3)(2) vs. Piramal Enterprise Ltd

Outcome: Remand


  • The Assessee had debited advertisement and business promotion expenses broadly under three heads, i.e (i) key accountant manager expenses (ii) customer relation manager expenses (iii) gift articles. The Assessing Officer had disallowed 50% of the said expenses for the reasons that the expenses were not incurred wholly and exclusively for the purpose of business and were being in the nature of expenses incurred for any purpose which was prohibited by any law in force and hence inadmissible under section 37(1).
  • The Assessing Officer had taken support from circular of CBDT No.05/2012 and provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 and held that any expenditure in violation of the above Act was in the nature of expenditure incurred for the purpose, which was prohibited by law.

Key Points

  • The Tribunal placed reliance on the co-ordinate bench’s decision in Assessee’s own case for a different assessment year wherein it was concluded that the burden imposed by the CBDT vide its Circular No. 5/2012, dated 01.08.2012 on the pharmaceutical or allied health sector industries, despite the absence of any enabling provision under the Income Tax law or under the Indian Medical Council Regulations, clearly impinged on the conduct of the pharmaceutical and allied health sector industries in carrying out its business.
  • In the absence of any sanction or authority of law on the basis of which it could safely be concluded that the expenditure incurred by the Assessee company on sales promotion expenses by way of the distribution of articles to the stockists, distributors, dealers, customers and doctors was in the nature of an expenditure which was incurred for any purpose which was either an offence or prohibited by law the same would not be hit by the Explanation to Section 37(1) of the Act.
  • Therefore, it was held that the Medical Council Regulations, 2002 had no application to the Assessee and accordingly, expenditure incurred towards advertisement and promotion expenses was deductible under section 37(1) of the Income Tax Act, 1961.

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