Rs 9.81 crore expenditure on Conference fees, accommodation to doctors, Business Promotion done by Sun Pharma disallowed: IT Tribunal

The case concerns Sun Pharma Labs Ltd. (assessee) and the Deputy Commissioner of Income Tax (Revenue) for the assessment year 2014-15. The expenditure was scrutinized by tax authorities, arguing these expenses to be gifts or freebies, not legitimate business expenses, and should be categorized as non-business expenses.

Sun Pharma has incurred various expenditure being accommodation, Business Promotion Expenses, Conference Fees aggregating to Rs.9,81,46,332/= and freebies and gifts paid to Doctors of Rs.2,26,07,758/-. The AO referred to CBDT Circular wherein it is stated that expenditure incurred for providing freebies of the above nature by pharmaceutical and allied healthcare sector is inadmissible expenditure u/s. 37(1) of the Income Tax Act, 1961.

The Revenue department disallowed these expenses as gifts and freebies to doctors, prohibited by the Medical Council of India (MCI). The AO partially allowed the claim, while Commissioner of Income Tax (Appeals)/CIT(A) disallowed conference and sponsorship expenses.

While passing the assessment order, the AO verified the ledger account of such expenditure and found that such expenditure are freebies that include sponsorship for attending conferences, medical equipment, travel facilities and hospitality to be distributed to such medical practitioners, which is prohibited by erstwhile Medical Council of India (MCI), now National Medical Commission (NMC).

It was found that CIT(A) confirmed the expenditure in nature of accommodation and business promotion but deleted Conference and Sponsorship expenses incurred for Doctors on the ground that same are incurred for sharing the knowledge in the medical field, which is not hit by Circular and amended MCI guidelines. The Commissioner of Income Tax (Departmental Representative)/CIT DR on the other hand placed reliance on the decision of the Supreme Court in the case of Apex Laboratories cited supra.

The revenue department contended that the expenses were essentially promotional gifts to doctors, which do not qualify for tax deductions under the law. These were seen as marketing tools rather than business necessities, leading to their disallowance.

Sun Pharma, on the other hand, defended the expenditure, arguing that it was necessary for business promotion and provided benefits to patients by fostering awareness of their products.

Senior Counsel S.N. Soparkar argued that, “such expenditure is allowable business expenditure u/s. 37 of the Act as the assessee is aided through this expenditure in determining new scope for research and development for its products and eventually attaining better product standards.”

He further pointed out that the facts in the case before the Apex court were completely different. He added that in the case of Apex Laboratories, it had given costly personal gifts/benefits like Gold coins, LCD TV, Laptops, etc. to medical practitioners and thereby it had solicited favourable prescriptions at the cost of patients. The Hon'ble Supreme Court also observed that there was an 'quid pro quo' arrangement between the parties requiring the medical practitioners to prescribe the products of the company in lieu of receiving the freebies. Accordingly, the ratio of the said decision should not be made applicable in the case.

Alternatively, he also submitted that in order to avoid litigation and uncertainty, Assessee Company out of abundant caution would like to NOT PRESS the ground on allowability of said expenditure for the years under consideration. Thereby the Counsel specifically requested the Bench not to make this decision binding on subsequent years and any other years as facts in every year shall vary.

Senior counsel also argued that any disallowance of such expenditure if relatable and attributable to the Undertaking eligible for deduction u/s.80IB/IE of the Act, it should be increased to that extent.

After studying the case, the tribunal, on this issue, sided with the tax authorities, finding insufficient justification for the expenses and deeming them promotional in nature. The disallowance was upheld. However, the ITAT directed the Assessing Officer (AO) to re-examine the disallowance based on specific facts and legal provisions. It held;

“We find that since the Senior Counsel appearing for the assessee has not pressed this ground of appeal for the year under consideration, the Ground no.2 raised by assessee becomes infructuous and dismissed. However, this finding should not be considered as a binding precedent for all the subsequent years and it goes without saying that the assessee company has the right to bring out relevant facts so as to allow claim of expenditure u/s. 37(1) of the Act. So far as alternate claim of the assessee that it is entitled for higher deduction u/s. 80- IB/80-IE on the above disallowance is concerned, claim of assessee is allowable as per CBDT Circular No. 37 of 2016, dated 2nd November, 2016. Thus the Ld. AO is directed to verify that if above referred expenditure is part of profit & loss account for Unit eligible for deduction under Section 80-IB/80-IE, the assessee would be entitled for higher deduction and re-compute the same accordingly. Thus, Ground of Appeal no.2 ( Disallowance of expenditure incurred for doctors for promotion of business - Rs.9,81,46,332/-) raised by assessee is dismissed and relevant ground no.4 in Revenue's appeal is allowed.”

“Ground No. 4 of Department's appeal related to disallowance of business/conference fee and sponsorship expenses under the gift and freebies to doctors of Rs.2,26,07,758/-. Vide paragraph 6.2. of this order the above disallowance was confirmed and the Ld. AO is directed to verify that if above referred expenditure is part of profit & loss account for Unit eligible for deduction under Section 80-IB/80-IE, the assessee would be entitled for higher deduction and re-compute the same accordingly. Thus, Ground no. 4 in Revenue's appeal is partly allowed.”

While some disallowances were upheld, the company secured favorable rulings on book profit calculations, interest on late payments, and wealth tax inclusion.

It was additionally ruled that the AO had wrongly classified fair valuation as revaluation, which was not allowed under Section 115JB, making the AO's addition incorrect. Sun Pharma’s claim for Long-Term Capital Loss (LTCL) was dismissed since it wasn't filed in the original returns. The ITAT also ruled that Wealth Tax should not be included in book profit calculations. Sun Pharma's deduction for interest paid to a related party was allowed, while the outcome on McKinsey consultancy fees remained unclear. Overall, Sun Pharma received partial relief.

To view the original order, click on the link below:

https://indiankanoon.org/doc/191570684/