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IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘E’, NEW DELHI BEFORE SH. H.S. SIDHU, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER ITA No. 4114/Del/2009 Assessment Year : 2006-07 DCIT, Circle-13(1), Room No. Vs. M/s. OCHOA Laboratories Ltd., 406, C.R. Building, I.P. Estate, C-171, Hosiery Complex, New Delhi Phase-II, Noida PAN : AAACO1370J (Appellant) (Respondent) And ITA No. 1598/Del/2011 Assessment Year : 2007-08 ACIT, Circle-13(1), Room No. Vs. M/s. OCHOA Laboratories Ltd., 406, C.R. Building, I.P. Estate, C-406, Greater Kailash, Part-II, New Delhi New Delhi PAN : AAACO1370J (Appellant) (Respondent) And C.O. No. 289/Del/2012 [In ITA No. 1598/Del/2011] Assessment Year : 2007-08 M/s. OCHOA Laboratories Ltd., Vs. ACIT, Circle-13(1), Room No. E-406, Greater Kailash, Part-II, 406, C.R. Building, I.P. Estate, New Delhi New Delhi PAN : AAACO1370J (Appellant) (Respondent) And ITA No. 3809/Del/2011 Assessment Year : 2008-09 ACIT, Circle-13(1), Room No. Vs. 406, C.R. Building, I.P. Estate, New Delhi PAN : AAACO1370J (Appellant)

M/s. OCHOA Laboratories Ltd., B-86, Sector-60, Noida (Respondent)

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And C.O. No. 290/Del/2012 [In ITA No. 3809/Del/2011] Assessment Year : 2008-09 M/s. OCHOA Laboratories Ltd., Vs. B-86, Sector-60, Noida

ACIT, Circle-13(1), Room No. 406, C.R. Building, I.P. Estate, New Delhi

PAN : AAACO1370J (Appellant)

(Respondent)

Assessee by Department by

S/sh. Prem Nath Monga & Manu Monga, Advocates Sh. R.C. Danday, Sr.DR

Date of hearing Date of pronouncement

10.07.2017 25.08.2017

ORDER PER O.P. KANT, A.M.: These three appeals of the Revenue and two cross objection of the assessee, are directed against separate orders of the Commissioner of Income-tax (Appeals), New Delhi (in short the ‘CIT-(A)’]. In assessment years 2006-07, the assessee has not filed cross objection against the appeal of the Revenue, however, in assessment years 2007-08 and 2008-09, the assessee has filed cross objections against the appeal of the Revenue. Since common issues are involved in the appeals of the Revenue and Cross Objections of the assessee, same were heard together and disposed off by this consolidated order. ITA No. 4114/Del/2009 for AY: 2006-07 2.

First we take up the appeal of the Revenue for assessment year

2006-07 having ITA No. 4114/Del/2009. The grounds of appeal raised by the Revenue are reproduced as under:

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(1) On the facts and circumstances of the case as well as in law, the Ld CIT (A) has erred in deleting the addition of Rs 1,63,90,136/on account of disallowance of 50% of sales promotion expenses without appreciating that the assessee could not establish the allowability of its claim in spite of multiple opportunities granted to it by the A O and ignoring, inter alia, the following facts : (i)

Assessee’s failure to give the bifurcation of expenses related to business and non business purposes. (ii) Assessee’s failure to furnish the list of doctors invited by it and who attended the conference - Derma conference 2006- on it invitations. (iii) Assessee’s failure to furnish attendance sheet of doctors invited by it and who actually attended the conference. (iv) Assessee’s failure to furnish copy of agreement for sponsorship showing the rates payable for the same. (v) Assessee’s failure to furnish copy of invitation card printed and issued by it to the doctors. (vi) Assessee’s failure to furnish the details of expenses incurred on hotel booking, lodging and boarding, travelling and other heads incurred in respect of other than doctors and staff members. (vii) Assessee’s failure to justify the expenses incurred in respect of family members of doctors and non business associates. (viii) Assessee’s failure to justify as to how attending of conference by family members of doctors has resulted in increase in sales/business. (ix) Assessee’s failure to furnish even a single confirmation from the doctors attending the conference on its invitation. (x) Assessee’s failure to justify the expenses incurred by it on vigorous advertisement campaign to promote its products among the doctors though the same was not permitted by the Derma association. (xi) Assessee’s failure to prove the positive impacts on its sale/business as a results of incurring a huge expenditure of Rs 3.85 crores. Rather the sales showed the decline trends during the relevant period and even in subsequent years. (2) On the facts and circumstances of the case as well as in law. the Ld CIT (A) has erred in deleting the addition of Rs 1,63,90,136/on account of disallowance of 50% of sales promotion expenses by accepting the assessee’s plea that the company has to oblige

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doctors by sponsoring all their expenses regarding travelling, hotels, lodging and food etc., and that if such obligation are not done, the doctors may not prescrible the company’s products. The CIT (A) failed to appreciate that this amounted to bribing the doctors, which was against the public policy, and is an offence. Explanation below Section 3 required such expenses to be disallowed. 3.

The facts in brief of the case are that during the year under

consideration, the assessee company was engaged in the business of trading in pharmaceutical products by procuring the finished products as well as products manufactured through the loan licensing. The assessee filed return of income electronically on 28/11/2006 declaring total income of Rs.2,61,13,312/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short “the Act”) was issued and complied with. In the assessment completed under section 143(3) of the Act on 13/10/2008, the Assessing Officer disallowed sales and promotion expenses amounting to Rs.1,63,90,136/-. Aggrieved, the assessee filed appeal before the Ld. CIT-(A), who deleted the disallowance. Aggrieved, the Revenue is in appeal before the Tribunal raising the grounds as reproduced above. 4.

In the grounds raised, the Revenue is agitated with the deletion of

disallowance of sales promotion expenses. 4.1

Facts in respect of issue in dispute are that in assessment

proceeding, the Assessing Officer observed that the assessee debited sales promotion expenses of Rs.3,85,04,383/-. Details of expenses submitted by the assessee & reproduced in the assessment order, are extracted as under: Head of expenses Sales promotion

Dermacon Expenses:Travelling expenses

Amount Expenses incurred on 1,58,93,058 Hotel & traveling expenses for various conference sponsor to doctors to promote the products 74,89,596 Air tickets or railway tickets for doctors &

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staff and local taxi charges at Hyderabad 1,07,96,446 Hotel loading for doctors & stall at Hyderabad Conference 25,00,000 Registration fee paid to the Derma Registration charges Association for participation Other expenses 18,25,284 Misc. exp. Paid during the Dermacon 2005(hiring of sound system, catering chafges, designinig of stall etc. Total sales promotion 3,85,04,383 expenses Hotel Loading

4.2

The assessee company explained that out of the amount of

Rs.3,85,04,383/- an amount of Rs.2,26,11,325/- was incurred on “Dermacon conference” at Hyderabad, which included expenditure on Hotel stay, Air/railway travel, car expenses for doctors who attended the conference. The balance expenses were incurred on sales promotion for Hotel and travelling expenses of doctors to promote the products of the assessee company. According to the Assessing Officer, the assessee failed to produce name & confirmation of the doctors for whom the company incurred hotels stay, travel expenses etc. The Assessing Officer observed that expenses were also incurred on the family members of the doctors and other non-business associates. The Assessing Officer also observed that the assessee company was permitted by the “Derma Association” the activities like, hospitality inside auditorium, audiovisuals workshop, CME and conference, newsletters, CD for CME and conference and sponsoring of the Speaker from South Africa only and incurring expenses on Hotel or travel of the doctors, who participated the conference was not prerequisite for participation in the “Dermacon Conference”. The Assessing Officer also observed that no supporting evidences were furnished in respect of other expenses incurred by the assessee. The Assessing Officer was of the opinion that sales promotion expenses were not actually incurred wholly and exclusively for the purpose of business. The assessee submitted that objective of the expenses was to have corporate recognition amongst the

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doctors and to establish the company’s brand. The amount was incurred by way of commercial obligation in the business emanating from an express or implied contract. The assessee explained that it was spending the amount with the expectation that the doctor shall prescribe its product more often and this express or implied contract emerged from the long-standing customer in former trade. He further submitted that before the recommendation of the field force is accepted and approval were granted, the commitment of the doctors was obtained as to the quantum of prescription, he was giving in view of the sponsorship expenses to be incurred on him. According to the assessee, the expenses and sponsorship of the doctors and the expenditure incurred on the “Dermacon Conference” was admissible expenditure under section 37(1) of the Act. Regarding the expenses on spouse and family members of the doctors, the assessee submitted that when the doctors asked for sponsorship, they sometimes puts a condition that the company is to bear the expenses of his spouse including family and if that was not accepted by the company, the doctor stops prescription of the products of the company and therefore the expenditure was incurred as a result of business necessity and therefore an allowable expenditure. 4.3

The Assessing Officer was not convinced with the submission of

the assessee and according to him entire expenses incurred on sales promotion were not toward the business purpose. In absence of any bifurcation of the expenses given by the assessee towards business and non-business purposes, the Assessing Officer estimated 50% of the total sales promotion expenses claimed by the assessee, as not incurred wholly and exclusively for the purpose of business and computed the of disallowance amounting to Rs.1,92,52,191/-. The Assessing Officer further observed that during the year the assessee paid the Fringe Benefit Tax (FBT) on Hotel lodging/boarding charges etc., accordingly,

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amount of FBT paid of Rs.28,62,055/- was reduced out of the disallowance

amounting

to

Rs.1,92,52,191/-

and

he

made

net

disallowance of Rs.1,63,90,136/- out of the sales promotion expenses. 5.

Before the learned CIT-(A), the assessee submitted details of

“Dermacon Conference” expenses of Rs.2,26,11,325/-, which

is

extracted as under: Head of Expenses

Conference registration charges

Amount (Rs.)

Expenses Incurred on

Rs.25,00,000/- Amount paid to the Organizing Secretary DERMACON-2006 30th July 2005, Rs.5,00,000/- paid through CSA M/s. Sri Sai Krishna, Hyderabad.

16th August 2005 Cheque No. 8847579 Rs. 10,00,000/26th August 2005 Cheque 885748 Rs. 5,00,000/31st June 2006 amount paid through C.S.A. M/s. Sai Krishna Rs. 5,00,000/Booking of air tickets Rs. 30,43,970/- Amounts paid to travel agents:for doctors travel DERMACON- 2006 (i) Vamair Travel Agency, 505, Nirmal Tower, Barakhamba Road, New’ Delhi Rs. 25,82,826 through cheque for doctors. (ii) Paid to Vamair Travel Agency Rs. 74,304/- paid through cheque for office staff.

Booking of train tickets for doctors traveling.

(iii) Paid for Air ticket Rs. 3,86,990 paid through credit cardsRs. 6,62,959/- Paid to A.K. Tour and Travels, C-92, Madangir Village, New Delhi through cheque.

Payment of hotels bill Rs.1,07,96,446/- This amount represents bills of hotels at for the rooms booked Hyderabad for the rooms booked for for stay of doctors doctors and also some bills for hotels booked out in New Delhi, Sikandarabad & Kochi. All the payments of different amounts and to different hotels are made by the C.S.A. or credit cards.

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Payment for local travel of the doctors attending the conference, DERMACON 2006 at Hyderabad.

Rs. 37,82,67/- Payment are made through travel agent at Hyderabad, meanly, only, one payment of Rs.75,782/- is made to U.P. Taxi Services, G.K.-1I, New Delhi for local transport. All the payments are made for the travel at Hyderabad and one payment is Travel to Agent Kochi and all the payments are made through CSA our distributor Sri Sai Krishna at Hyderabad. Cafetaria and other Rs. 18,85,283/- Paid to the different parties. Payment are expenses made to different parties either directly or through C.S.A. our Agent. Total 2,26,11,325/-

6.

The learned CIT-(A) noted the claim of the assessee in his decision

on page 19 of the order that business thrives on recommendation of the doctors and due to prescription of companies product by the doctors, sales of the company had increased. The assessee also submitted that the sales representative of the assessee company regularly meets the doctor for generating more and more prescription for the company’s products and in view of that the company has to oblige doctors by sponsoring all their expenses regarding travelling, hotels lodging and fooding etc. The assessee claimed that if such obligations are not done, the doctor might not prescribe their products. 7.

The Ld. CIT-(A) also observed that the assessee has filed copies

of all the bills and address of the parties, to whom payment was made towards expenditure on Hotel booking, travel booking etc. The relevant finding of the Ld. CIT-(A) is reproduced as under: “In support of these expenses, the appellant company has filed bills of hotels where the doctors had stayed, local conveyance expenses incurred, details of the payments made towards air tickets, railway tickets and expenses incurred on food and lodging before the AO. During the course of appellant proceedings, the appellant also filed before me the copies of the bills through which the registration charges of Rs.25,00,000/- were paid, name and address of the parties through whom the air and railway tickets were booked and mode of the payments. The appellant also gave name of the hotels where the arrangement for stay for doctors were made and number of rooms booked and the bill amount paid to such hotel at

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Hyderabad, Kochi and Delhi. All these payments have been made by CSA by way of cheques or credit cards. Further, the appellant has filed details of travel agents through whom taxis or buses were arranged at Hyderabad, Secunderabad. New Delhi and Cochin and the payments made by way of cheques. It has also filed details of cafeteria and other expenses incurred for the purposes of this ‘Dermacon Conference’. All these details are part of the paper book filed before me. The appellant also filed copy of bill through whom Dermacon conference invitations were printed. The copies of letters through whom the hotels were booked and certain copies of the hotel bills, duty slip of the taxis, details of the travel desks arranged to received doctors at airport and railway station and vice versa. All these evidences filed by the appellant before AO as well as before me substantially prove that these expenses were incurred by the appellant for promotion sales and sponsoring ‘Dermacon Conference’ at Hyderabad. The purpose of incurring these expenses and sponsoring Dermacon conference was to establish the brand image of the company as well as its products.” 8.

Before the learned CIT-(A), the assessee submitted that it sales

has increased due to sponsoring of doctors in the conferences. Further the assessee submitted that sales promotion expenses during the year under consideration are 7% of the sales whereas in the previous year such sales promotion expenses were 5% of the sales of the company and which has been allowed by the Assessing Officer. The assessee also submitted that company owns Derma products like ‘Tobibact’, ‘Nobifer’, ‘Essvit’ , ‘Doloact’ etc., which it gets manufactured through third parties and therefore sponsoring of the “Dermacon Conference” was with a view to establish those products in the market and generate more and more sales of the company’s product. 9.

The Ld. CIT-(A) accepted the above submission of the assessee

and held that expenses incurred by the assessee on sales promotion and sponsoring of “Dermacon Conference” were wholly and exclusively incurred for the purpose of business, and accordingly after referring few case laws, he deleted the disallowance.

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10.

Before us, the Ld. Senior DR submitted that assessee has not

provided the list of the doctors whose, hotel, air/ train travel and local cars was sponsored by the assessee company and in absence of which it was not possible for the Assessing Officer to verify that the expenses have been incurred wholly and exclusively for the purpose of business. He particularly raised the issue that payments to hotels at New Delhi, Kochi etc has been made, whereas the “Dermocon Conference” was organized at Hyderabad and therefore it was very much required to establish that those expenses were incurred wholly and exclusively for the purpose of business. 11.

Further, he submitted that according to the guidelines of ‘Medical

Council of India’ (MCI) doctors were not authorized to avail such type of freebies in lieu of prescribing medicines to the patients. He accordingly submitted that the expenses incurred were in violation of the statutory provisions and therefore not allowed in view of the Explanation-1 to section 37 of the Act. In support he relied on the decision of the Hon’ble Punjab and Haryana High Court in the case of CIT Vs. Kap Scan and Diagnostic Centre (P) Ltd., 25 taxmann.com 92, wherein the payment of commission to doctors for referring the taxpayer products was held against public policy and not allowable under section 37 of the Act. 12.

On the other hand, the Ld. counsel relied on the finding of the Ld.

CIT-(A) on the issue in dispute and submitted that expenses were incurred on hotel stay, air/railway travel and local car travel work towards sponsoring of doctors for the “Dermacon Conference” and incurring of those expenses was in the interest of the business of the assessee. The Ld. counsel filed a paper book containing pages 1 to 160 and referred to page 96 to 127 containing the name of three doctors (along with documentary evidence of expenses), for whom the assessee incurred expenses on air travel , hotels stay and local travel during “Dermacon

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Conference” at Hyderabad. The learned counsel also referred to page 146 to 147 of the paper book containing detail of expenses of Rs. 1.58 crores under the head sales promotion expenses, other than the “Dermacon Conference” at Hyderabad, which included annual charges of membership of various Association like Federation of Drug Traders, Andhra Pradesh (AP) (Rs.3.90 Lacs), Maharashtra State chemical and druggist Association (Rs. 4.38 Lacs), all Kerala Chemist and Druggist Association (Rs.25,000/-), National Integrated Medical Association (Rs.48,000/-), Indian Association of Dermatologists (Rs.80,000/-). In view of the expenses mentioned, the Ld. counsel argued that sales promotion expenses were incurred wholly and exclusively for the purpose of business and allowable under section 37(1) of the Act. 13.

We have heard the rival submission and perused the relevant

material on record. The issue in dispute before us is whether the sales promotion expenses of Rs. 3.85 crores claimed by the assessee are in accordance with the provision of section 37 of the Act. The assessee has claimed expenses of Rs. 2.26 crores on “Dermacon Conference” at Hyderabad, which included expenses on the sponsoring of doctors as well as for registration and other advertising etc. during the conference. The assessee has also claimed expenses of Rs. 1.58 crores for sponsoring doctors for other conferences. The Ld. Senior DR has contested that 50% of the disallowance out of the sales promotion expenses was justified due to the two reasons. First reason stated by him is that part of the expenses were not incurred wholly and exclusively for the purpose of business. The second reason that part of expenses incurred were in prohibition of the law. Whereas, on the other hand, the Ld. counsel has contested that the expenses incurred were wholly and exclusively for the purpose of business.

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14.

For adjudicating the issue in dispute, it is relevant to reproduce the

section 37(1) of the Act alongwith Explanation-1 below the section: “37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Explanation 1.—For the removal of doubts, it is hereby declared that 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. 15.

From plain reading of the provision, it is clear that for an

expenditure to be allowable under section 37(1) of the Act, it is required that the expenditure is: - incurred during the previous year concerned and - not in the nature described under section 30 to 36 of the Act, - not capital expenditure or - not personal expenses of the assessee, but it should be - laid out or expended wholly and exclusive for the purpose of business 16.

There is no dispute that the expenditure was incurred in the

previous year concerned. The expenditure and sales promotion expenses being neither described under section 30 to 36 of the Act nor capital expenditure or personal expenses of the assessee and therefore, the only condition to be examined is whether the expenses was laid out or expended wholly and exclusively for the purpose of business.

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17.

The assessee has given list of the expenses of Rs. 2.26 crores on

“Dermacon Conference”, which have been reproduced by the Ld. CIT-(A) in the impugned order. On perusal of the said list, we find that payments of Rs. 25.00 lakhs has been made for registration of conference and balance expenses have been made towards booking of air tickets, train tickets, hotel bills, local travel cafeteria and other expenses. The dispute between the Revenue and the assessee is in respect of the expenses other than the registration expenses. The assessee has made payments to various agencies, like, ‘Vamadir Travels Agency’ for air Travels of ‘AK Tour and Travels’ for train travel, ‘CSA M/s Sri Sai Krichna’ for hotels bookings etc. The payments made and bills produced before the lower authorities from the vendors certainly confirmed that expenses were incurred by the assessee company. But the issue whether the expenses incurred were wholly and exclusively for the purpose of business. The Assessing Officer asked for the list of the doctors who has availed services of air travels, hotel bookings and local travels etc. but the assessee did not provide any list such of doctors. On the contrary, the assessee provided list of the all the doctors who participated that conference. All the doctors who participated in the conference were not sponsored by the assessee and therefore the list provided by the assessee was not relevant for verifying the expenses incurred by the assessee. Thus the assessee has though claimed that the expenses were towards sponsoring of doctors but no documentary evidence in support of this claim or confirmation from any doctor of availing the services of the assessee of providing air travel, hotel booking or local car facility have been filed by the assessee before the Assessing Officer. The Ld. Senior DR raised the issue that expenses for booking of hotels and Local Car at New Delhi, Cochin and Kochi have also been claimed under the head “Dermacon Conference” at Hyderabad. The learned

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counsel could not justify before us as how those expenses were incurred wholly and extremely for the purpose of business. Ld. senior DR also raised the issue that alongwith doctors their family members also travelled and stayed in the hotels, which in any manner, cannot be treated as expenses incurred wholly and exclusively for the purpose of the business of the assessee. The Ld. counsel also could not justify as how the expenses incurred on the family members of the doctors were incurred wholly and exclusive for the purpose of business. The learned counsel has argued that participation in conference by the doctors has increased awareness of the product of company and expenses on sponsoring of the doctors has resulted into higher sales volume, thus expenses being an essential part of the business of the assessee, were incurred wholly and exclusive for the purpose of business. At this stage, we are not going into the issue whether the participation by the doctors in conference has generated awareness of the products and as a result of which the doctors prescribed more and more medicines of the assessee. We find that the assessee has not given the list of doctors sponsored by the assessee company. Before us, the assessee referred to page No. 96 of the paper book which contained name of three doctors and total expenditure on air travel, hotel booking and local conveyance of these three doctors is of Rs.1,51,385/- only. No other list of doctors or their confirmations has been provided by the assessee either before the lower authorities or before us. Producing bills and vouchers of the parties to whom payments have been made, can establish that expenses were incurred but for establishing whether the expenses incurred are wholly and exclusively for the purpose of the business, the assessee was required to complete list of the doctors alongwith services availed by them, and the assessee has failed in discharging this onus. In absence of such a list, the Assessing Officer cannot verify that expenses were

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incurred on doctors only or incurred on their family members or other non-business persons. The assessee has failed to justify the expenses on hotels booking at New Delhi, Chochin or Kochi against “Dermacon Conference” at Hyderabad. In absence of required documentary evidence, in our opinion the disallowance of 50% of the expenses for the sales promotion under section 37(1) of the Act was justified. 18.

The second reason for disallowance cited by the learned DR is the

expenses being prohibited by the law. We find that according to Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulation, 2002 (MCA Regulations) which have been amended by notification dated 10th of December 2009, prohibits medical practitioners from receiving any kind of gift, travel facilities, hospitality and any kind of cash or a monetary grants from the pharmaceutical healthcare industry. Further, we note that the CBDT in Circular No. 5/2012 dated 1/8/2012 clarified that freebees mentioned in the MCA Regulations being an expense prohibited by the law, the disallowance shall be made in the hands of pharmaceutical industries also. We also note that in the case of CIT Vs. Kap Scan and Diagnostic Centre (Pvt.) Ltd. (supra) that the assessee was a private limited company doing the business of CT Scan, Ultra Sound and X-rays and filed its return for the assessment year 1997-98 declaring loss of Rs.24,40,650/-. During the assessment proceedings, it was found that the assessee had debited a sum of Rs.3,68,400/- to the P&L account as expenditure on account of commission stated to have been paid to the practising doctors who referred the patients to the assessee for various tests. The Assessing Officer vide order dated 31.12.1999 disallowed the claim of such commission to the assessee. The CIT-(A) and ITAT allowed the claim of the assessee. The question of law raised before the Hon’ble High Court by the Revenue in the case was as under: “Whether, on the facts and in the circumstances of the case and in law, the ITAT was right in holding that the commission paid by the

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assessee to the doctors was allowable as it was in keeping with a trade practice and thus ignoring the fact that it was an illegal payment not allowable as per Explanation to section 37(1) of the Act?" 19.

Hon’ble High Court held the commission paid by the assessee is

against the public policy and reversed the order of the Tribunal. The finding of the Hon’ble High Court is reproduced as under: “17. Now we proceed to examine whether soliciting of business by the assessee by paying commission to the private doctors is unethical, against public policy and forbidden by law. 18. Medical Council of India in exercise of powers conferred under Section 20A read with Section 33(m) of the Indian Medical Council Act, 1956 has made "The Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulation, 2002 which describes Unethical Acts under Chapter 6 of the said regulations. Regulations 6.4 provides that no physician shall give, solicit, receive, or offer to give, solicit or receive, any gift gratuity, commission or bonus in consideration of a return for referring any patient for medical treatment. Regulation 6.4 reads thus:"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 any fee for medical, surgical or other treatment. 6.4.2 Provisions of para 6.4.1 shall apply with equal force to the referring, recommending or procuring by a physician or any person, specimen or material for diagnostic purposes or other study/work. Nothing in this section, however, shall prohibit payment of salaries by a qualified physician to other duly qualified person rendering medical care under his supervision." 19. If demanding of such commission was bad, paying it was equally bad. Both were privies to a wrong. Therefore, such commission paid to private doctors was opposed to public policy and should be discouraged. The payment of commission by the assessee for

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referring patients to it cannot by any stretch of imagination be accepted to be legal or as per public policy. Undoubtedly, it is not a fair practice and has to be termed as against the public policy. 20. Further, Section 23 of the Contract Act equates an agreement or contract opposed to public policy, with an agreement or contract forbidden by law. Section 23 of the Contract Act reads thus:"23. What consideration and objects are lawful, and what not.The consideration or object of an agreement is lawful, unless- it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void." 21. The judgments relied upon by the assessee cannot be of any assistance to the assessee as they are prior to insertion of Explanation to sub section (1) of Section 37 of the Act. Reference may also be made to the Apex Court Judgment in Dr. T.A. Quereshi's case (supra) on which reliance has been placed by the learned counsel for the assessee. The Hon'ble Supreme Court in that case was seized of the matter where heroin forming part of the stock of the assessee's trade was confiscated by the State authorities and the assessee claimed the same to be an allowable deduction. The Hon'ble Supreme Court held that seizure and confiscation of such stock in trade has to be allowed as a business loss and Explanation to Section 37 has nothing to do as that was not a case of business expenditure. Since the present case is not a case of business loss but of business expenditure, that judgment is distinguishable and does not help the assessee. 22. The issue with regard to the amount illegally paid to the police authorities for running their business came up for consideration before the Madhya Pradesh High Court in Gwalior Road Lines v. Commissioner of Income-tax, [1998] 234 ITR 230 (MP) wherein it was held that after insertion of Explanation to Section 37(1) by the Finance Act, 1998 w.e.f. 1.4.1962, the assessee could not claim such payment as expended for commercial exigency and, therefore, the same was not an allowable deduction.

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23. Allahabad High Court in Pt. Vishwanath Sharma's case (supra) while considering the issue relating to commission paid to Government doctors for prescribing assessee's medicines to patients held it to be contravening public policy and an inadmissible expenditure. However, no distinction can be made in respect of Government doctors and private doctors as has been canvassed by the learned counsel for the assessee. 24. Thus, the Commission paid to private doctors for referring patients for diagnosis could not be allowed as a business expenditure. The amount which can be allowed as business expenditure has to be legitimate and not unlawful and against public policy. 25. Consequently, the order passed by CIT(A) and the Tribunal whereby deduction had been allowed to the assessee cannot be sustained.” 20.

In the instant case also the assessee has argued before the lower

authorities that commitment from the doctors are obtained as to the quantum of prescription he was giving in view of the sponsorship expenses to be incurred by the assessee on him. For clarifying, how the assessee is justifying the expenses, one para of the submission of the assessee reproduced in the order of the Ld. CIT-(A) on page 5, is extracted below: “3) It is submitted with respect that the amount incurred on account of Derma Conference of the Doctors is by way of commercial obligation in the business emanating from an express of implied contract. The reason is obvious that the assesses Company is spending this amount with the expectation that the Doctors shall prescribe its product more often. This express or implied contract emerges from the long standing custom in this pharma trade. It is difficult to quote a solitary case where company is not incurring this kind of expenditure but still getting the prescription from the doctors. Because of the long standing customary practice in the trade, any at, done in pursuance to the discharge of such obligation is a legitimate allowable expenditure. Though, there is no legal obligation on the doctors to prescribe the product but it is a moral obligation for the doctors to honors its commitment to prescribe the product of the company as the company had sponsored their conference.”

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21.

Providing free air travel, stay and food in hotels, local car

conveyance etc. for prescribing medicines of the assessee is akin to giving commission and certainly in contravention of the public policy. Thus, respectfully following the decision of the Hon’ble Punjab and Haryana High Court in the case of CIT Vs. Kap Scan and diagnostics Centre (p) Ltd (supra), the 50% expenses out of the sales promotion expenses disallowed by the Assessing Officer was justified. Here we find that the expenses toward sponsoring to doctors appears to be exceeding 50% of the sales promotion expenses and therefore the Assessing Officer is more than liberal in disallowing 50% of the sales promotion expenses of the assessee. 22.

In view of above, we set aside the order of learned CIT(A) on the

issue in dispute and reverse the finding of the learned CIT-(A) and restore the order of the Assessing Officer. The grounds of appeal raised by the Revenue are allowed. 23.

In the result, appeal of the Revenue is allowed.

ITA No. 1598/Del/2011 & C.O. No. 289/Del/2012 24.

Now, we take up appeal of the Revenue having ITA No.

1598/Del/2011 for assessment year 2007-08. The grounds raised in the appeal are as under: 1. That on the facts and circumstances of the case and in law the learned CIT(A) has erred in deleting the disallowance of Rs.59,57,045/- made by the A.O. on account of sales promotion expenses as it could not be proved by the assessee that the expenditure was incurred wholly and exclusively for the purpose of its business. 2. That the appellant craves to be allowed to add any fresh grounds of appeal and/or delete or amend any of the grounds of appeal.

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25.

The facts and circumstances of the case in the year under

consideration are identical to the facts of the case in assessment year 2006-07. The Ld. CIT-(A) has also deleted the addition following the finding of her predecessor in assessment year 2006-07. Thus, following our finding in ITA No. 4114/Del/2009 for assessment year 2006-07, we set aside the order of the learned CIT-(A) on the issue in dispute and restore the order of the Assessing Officer. The sole ground of the appeal is allowed. 26.

In cross objection having No. 289/Del/2012 for the assessment

year 2007-08, the assessee has raised following grounds: 1. That the learned CIT(A) has erroneously sustained the disallowance of Rs.5,94,741/- made by the Assessing Officer on account of claim of the assessee for contribution made by it towards Provident Fund Payments. 2. That the learned CIT(A) has erred in sustaining the addition of Rs.57,038/- being the depreciation claimed by the assessee on UPS, rack, switch and battery. The explanation offered and decisions cited by the assessee has been wrongly brushed aside by the learned CIT(A) sustaining the erroneous order of the A.O. 27.

In ground no. 1 of the Cross Objection, the assessee has

challenged the sustenance of the disallowance of Rs.5,94,741/- made by the Assessing Officer regarding the contribution made towards Provident Fund Payment. 27.1 In the assessment proceedings completed under section 143(3) of the Act on 20/04/2009, the Assessing Officer disallowed the delayed payment of employee’s share of Provident Fund (PF) in terms of section 36(1)(va) of the Act for the month of July, 2006 (Rs.2,90,613/-) and January, 2007(Rs.3,04,128/-), totalling to Rs.5,94,741/- being paid after the prescribed due date. The learned CIT-(A) upheld the disallowance with following finding:

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“3.2 I have considered the submissions made by the authorized representative of the appellant company. The payment by an employer of employees’ contributions to Provident Fund are not governed by the provisions of section 43B as stated by the appellant. Rather, the employees’ contributions to PF are included in the income of an assessee as per the provisions of section 2(24)(x) of the Act and only if an employer deposits these contributions received by him, by the specified date given in the Provident Fund Act (which is the 20th of the month following the month to which the contributions pertain) are these payments allowed as a deduction from the income in view of the provisions of section 36(1 )(va) of the Act. Since the appellant has not paid the employee’s contribution to PF by the date specified in the PF Act (Rs.2,90,613/- being contribution for July, 2006 was paid on 21st August,2006 & Rs.3,04,128/- being contribution for January,2007 was paid on 22nd February,2007) although the same may have been paid before the due date of filing the return, such payments cannot be allowed as deduction from the income as per the discussion above. The disallowance of Rs.5,94,741/- made by the Assessing Officer is, accordingly, upheld. This ground of appeal is dismissed.” 27.2 Before us, the Ld. counsel of the assessee relied on the decision of the Hon’ble High Court of Punjab and Haryana in the case of CIT Vs. Lakhani Rubber Works, (2010) 232 CTR 350 (P & H) and submitted that late deposits of employee’s and employer’s contribution to PF beyond due dates could not be disallowed. 27.3 The Ld. Senior DR, on the other hand, relied on the order of the Ld. CIT-(A). 27.4 We have heard the rival submission and perused the relevant material on record. In the case of CIT Vs. Lakhani Rubber Works (supra), the question of law raised by the Revenue was as under: “1. Whether on the facts and in the circumstances of case, the learned Tribunal was right in law in confirming the order of the learned CIT(A) in deleting the addition of Rs.13,01,730/- made by the AO on account of late deposit of employees' contribution to PF disregarding the fact that the payments were made beyond the due dates and were, therefore, not allowable under s. 36(l)(va) and were to be treated as

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income under s. 2(24)(x) of the IT Act, 1961, in contravention of the decision in the case of CIT v. Pamwi Tissues Lid. [2008] 215 CTR (Bom) 150 : [2008] 3 DTR (Bom) 66 ? 2. Whether, on the facts and in the circumstances of the case, the learned Tribunal was right in law in confirming the order of the learned CIT(A) in deleting the addition of Rs. 12,86,353 made by the AO on account of late deposit of employer's contribution to PF and administration charges of Rs. 52,584 and Rs. 240 as inspection charges without appreciating the fact that payments were not made by the assessee within the prescribed 'due dates' by which the assessee was required to make payments, in contravention of the decision in the case of CIT v. Pamwi Tissues Ltd. (supra) ? 3. Whether, on the facts and in the circumstances of the case, the learned Tribunal was right in law in confirming the order of the learned CIT(A) in deleting the addition of Rs. 1,22,964 made by the AO on account of expenditure incurred in connection with load extension (P&E) and purchase of distribution panel (R&M) even though the benefits flowing from extension of load and replacement of old panel were of enduring nature, therefore, the same were capitalized ?" 27.5 Before the Hon’ble High Court, the Revenue did not press the question of law in view of the decision of the Hon’ble Supreme Court in the case of CIT Vs. Alom Extrusions Limited (2009) 227 CTR 417(SC) and accordingly the question of law was decided against the Revenue. The issue in dispute before us, being identical to the question of law raised before the Hon’ble High Court of Punjab and Haryana in the above case, respectfully following the decision of the Hon’ble High Court, we allow the ground No. 1 of the cross objection. 28.

In ground No. 2 of the cross objection, the assessee has

challenged

upholding

of

disallowance

of

depreciation

amount

Rs.57,038/- claimed on the UPS, Rack, switch and battery etc. 28.1 In the assessment completed, the Assessing Officer did not accept the contention of the assessee that the UPS, rack, switch and battery etc. as part of the computer and held that these are part of “plant and

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machinery” and eligible for depreciation at the rate of 15% as against the depreciation at the rate of 60% claimed by the assessee. The Assessing Officer computed the disallowance of Rs.57,038/- as under: “6.2 The submissions advanced by the assessee company have duly been considered. However, the argument of the assessee that UPS, Rack, Switch and Battery are also part of computer was not found acceptable as the basic function of the UPS is merely to provide uninterrupted power supply to the computer and by no means, as per Section 32 of the I.Tax Act, 1961, it can be termed as part of the block of asset i.e. "computer". Similarly, Rack, Switch and Battery cannot be classified under the head “Computer”. Therefore, the rate of depreciation charged on UPS, Rack, Switch and Battery @ 60% is restricted to 15% treating the same as "Plant and Machinery" and the depreciation claimed by the assessee on UPS, Rack, Switch and Battery at Rs. 76,050/- (60% on Rs. 1,20,000/being put to use for more than 180 days and 30% of Rs. 13,500/being put to use for less than 180 days) is restricted to Rs. 19,012/(15% of Rs. 1,20,000 and 7.5% of Rs. 13,500). Accordingly, the excess depreciation claimed on UPS, Rack, Switch and Battery amounting to Rs. 57,038/- (Rs. 76,050 - Rs. 19,012) is disallowed u/s 32 of I. Tax Act and added back to the total income of the assessee company.” 28.2 Before the learned CIT-(A), the assessee relied on the decision of the Hon’ble Delhi High Court in the case of CIT Vs BSES Yamuna Powers Ltd. in ITA 1267/2010 wherein it is held that computer accessories and peripherals such as printers, scanners and server etc form an integral part of the computer system and cannot be used without the computer, thus, these are part of the computer system and eligible for depreciation at the rate of 60% percent. However, the Ld. CIT-(A) following the decision of the Tribunal in the case of Nestle India Ltd (2009) 27 SOT 9 ( Delhi), held that UPS is not eligible for depreciation at the rate of 60%. The relevant finding of the Ld. CIT extracted as under: “5.2 I have considered the submissions of the appellant company. In the case of CIT vs.3SES Yamuna Power Ltd., the honorable Delhi High Court discussed the issue of depreciation on printers, scanners, etc. and not on UPS. The issue whether the UPS

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is to be treated as part of computer or as plant & machinery and to get depreciation accordingly has been dealt with in the case of Nestle India Ltd. (2009) 27 SOT 9 (Delhi)(URO), by the ITAT, Delhi ‘F’ Bench, New Delhi wherein the Hon’ble Bench specifically discussed the issue about the allowance of rate of depreciation to UPS which are attached to computers and held as follows:“We have heard the parties and perused the record of the case. The assessee is engaged in the business of manufacturing of various food products and beverages. During the year, the assessee company had purchased UPS for a sum of Rs. 68,55,814/- and claimed depreciation on UPS @ 60 per cent treating it as part of computer. However, the AO has treated the same as plant and machinery and allowed depreciation @ 12.5% on UPS ………………………The expression ‘computer’ has not been defined in the Act. However, it has been defined by section 2(l)(i) of the Information Technology Act, 2000. As per the said Act, ‘computer’ means any electronic, magnet, optical or other high speed data processing device or system which performs logical, arithmetic and memory functions by manipulation of electronics or magnetic or optical impulses and include all inputoutput processing, storage, computer software or communication facilities which are connected or related to the computer in a computer system or computer network. It may be mentioned that there is no inbuilt system of power supply in the computer. Therefore, it works on electric power supply. The UPS, as defined by Webopedia Computer Dictionary, stands for uninterruptible power supply. The UPS keeps the computer running for several minutes after a power outage enabling to save data i.e. in RAM and shuts down the computer gracefully…………………….. It is, thus, a source of alternative supplier of power to the computer and applying the functional tests also, it is part of power supply system and not the computer system…………….It merely gives external aid to the computer system by ensuring the uninterrupted power supply in emergency and in regulating the flow of power. It is worthwhile to note here that the computer system can function independently without the UPS and even the UPS generally can be used to ensure uninterrupted power supply to other equipments besides computer. It is, thus, not the integral part of the computer system like printer and scanner, which being output devices of the computer system are its integral part and, thus, are included in the definition of a computer as given in Section 2(l)(i) of the Information Technology Act, 2000. It is also pertinent to note

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here that a higher rate of depreciation is provided on computers mainly because the technology used in the making of computer is rapidly developing and the same becomes obsolete very fast. Applying these criteria also, the UPS cannot be treated as a part of computer since the technology which goes into making UPS is not developing so rapidly to make it obsolete in the short span. Keeping in view all these relevant and material aspects, we find it difficult to accept the contention of the learned counsel for the assessee that UPS is a part of computer and is entitled to a higher depreciation rate of 60 per cent and rejecting the same, we uphold the impugned order of the learned CIT (A) confirming the disallowance made by the AO by restricting the claim of the assessee for depreciation on UPS treating the same as plant and machinery. Ground No. 2 of the assessee’s appeal is accordingly dismissed’’. As the issue has been discussed thoroughly and in great detail in the case of M/s Nestle India Ltd. (supra), I have no hesitation to follow the said decision of M/s Nestle India Ltd.(supra) and reject the contention of the appellant company seeking depreciation on UPS on higher rate of 60%. This ground of appeal is accordingly dismissed. 28.3 Before us, the Ld. counsel of the assessee relied on the decision of the Tribunal Delhi bench in the case of Steel Authority of India Vs. Addl. CIT in ITA No. 751 and 1488/Del/2011 for assessment year 2007-08 and submitted that Tribunal has allowed depreciation at the rate of 60% on UPS. 28.4 The Ld. Sr. DR, on the other hand, supported the order of the Ld. CIT-(A) on the issue in dispute. 28.5 We have heard the rival submission and perused the relevant material on record. We find that the Tribunal in the order of Steel Authority of India Vs. Addl. CIT (supra) considered the decision of Nestle India Ltd (supra) and observed that the said judgment was very old as compared to the decision of the Delhi High Court in the case of BSES Yamuna Power Ltd (supra). The finding of the Tribunal in the case of Steel Authority of India Vs. Addl.CIT (supra) is reproduced as under:

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“36. In his rejoinder, the Ld AR submitted that fibre optic cannot work independently. In this respect he relied upon the case laws of Karnataka Power Corporation 247 ITR 268 (supra) wherein Hon'ble Supreme Court held that building constructed for power plant was eligible for depreciation allocable to plant & machinery. Similarly, reliance was placed on the judgment of DCIT v. Data Craft India Ltd. 133 TTJ 377 wherein router and switches were held to be part of computers and were held to be eligible for depreciation @ 60%. As regards judgment of Nestle India Ltd. relied upon by the Ld DR he argued that this was a very old judgment as compared to Hon'ble Delhi High Court judgment relied upon by him. In view of above, he argued that computer fibre networking and UPS/Inverters were eligible for depreciation @ 60%. 37. We have heard the rival submissions of the parties and have gone through the material available on record. We hold that the computer peripherals such as UPS system/inverter are essentially part of computer system and computer in the modern age cannot work independently without these basic peripherals. Therefore, following various judgments of Hon'ble Courts we hold that UPS/Inverters/Printers are eligible for depreciation @ 60%. Therefore, grounds No.3 of assessee's appeals is allowed. 28.6 In view of above, respectfully following the decision of the Tribunal in the case of Steel Authority of India (supra), we reverse the finding of the Ld. CIT-(A) on the issue in dispute and allow the cross objection of the assessee. 29.

In the result, both the Revenue’s appeal and the assessee’s cross

objection are allowed. ITA No. 3809/Del/2011 & C.O. No. 290/Del/2012 30.

Now we take up the appeal of the Revenue in ITA No.

3809/Del/2011 and the cross objection of the assessee having C.O. No. 290/Del/2012 for assessment year 2008-09. The grounds raised by the Revenue are reproduced as under: “(1) That on the facts and circumstances of the case and in law the learned CIT(A) erred in deleting the disallowance of Rs.40,56,310/-

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made by the AO out of sales promotion expenses on account of nonbusiness purposes. (2) The appellant craves to be allowed to add, delete or amend any other grounds of appeal. 31.

Cross objection raised by the assessee is reproduced as under:

1. That the learned CIT(A) has erred in sustaining the addition of Rs.2,58,429/- being the depreciation claimed by the assessee on UPS, rack, switch and battery. The explanation offered and decisions cited by the assessee has been wrongly brushed aside by the learned CIT(A) sustaining the erroneous order of the A.O.” 32.

Facts and circumstances of the year under consideration being

identical to the facts and circumstance of the assessee for assessment year 2007-08, following our of finding in ITA No. 1598/Del/2011 and cross objection No. 289/Del/2012, the ground of appeal of the Revenue as well as cross objection of the assessee in the year under consideration are allowed. 33.

In the result, both the Revenue’s appeal and the assessee’s cross

objection are allowed. 34.

To sum up, all the three appeals of the Revenue and both the

Cross Objections of the assessee are allowed. The decision is pronounced in the open court on 25th August, 2017.

Sd/(H.S. SIDHU) JUDICIAL MEMBER Dated: 25th August, 2017.

Sd/(O.P. KANT) ACCOUNTANT MEMBER

RK/-(D.T.D)

Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi