Drug firms can claim deductions on `freebies’ to doctors: IT tribunal

July 16, 2018 0 By CH Unnikrishnan

The judgement contradicts MCI code, which restricts gifts to medical practitioners

Pharmaceutical companies can claim tax deductions on their promotional expenditure targeted at doctors, the Pune Bench of the Income Tax Appellate Tribunal has ruled.

Since pharmaceutical companies do not come under Medical Council of India, they are free to claim income tax deductions on sales promotions on doctors, it said.

The tribunal’s remarks came on a case concerning the returns filed by Emcure Pharmaceuticals for the year 2010-11. The tax assessment officer (AO) noticed that the company claimed ‘Advertisement Sales Promotion’ expenses.

According to the Circular of Medical Council of India dated 09-12-2009, medical practitioners and their professional associations are prohibited from taking any gift, travel facility, hospitality etc., from health and pharmaceutical sector industries. Therefore, such claim of expenditure is not allowable under section 37(1) of the Act, both in the hands of the donor as well as the receiver of such gifts, the AO argued.

Further, there is a reference to the CBDT Circular No.5/2012, dated 01-08-2012, which stipulates that the claim of such expenditure constitutes the violation of the circular issued by MCI.

The pharma company submitted that the circular issued by MCI does not indicate the violations of any code of conduct when it comes to the pharmaceutical industries. The code is applicable only to the doctors in the medical profession.

The court observed that the intent of the MCI Regulations was always to cover individual medical practitioners, not pharmaceutical and medical device companies.

Furthermore, the MCI itself has to decide whether there is any contravention of the regulations, not the income-tax department.

Further, MCI Act, 1956 does not apply to pharmaceutical companies and hence MCI regulations 2002 cannot apply to such companies, the tribunal added.

On the issue of CBDT circular disallowing such expenditure, the tribunal stated CBDT Circular no. 5 of 2012 seeks to disallow expenditure incurred by pharmaceutical companies inter-alia in providing ‘freebies’ to doctors in violation of the MCI regulations. However, it noted, the term “freebies’ has neither been defined in the income-tax Act nor in the MCI regulations, the bench noted.

It ruled that the promotional expenditure incurred by assessee does not amount to provision of ‘freebies’ to medical practitioners. The expenditure incurred by it is in the normal course of its business for the purpose of marketing of its products and dissemination of knowledge etc., and not with a view to give something free of charge to the doctors.

The act of giving something free of charge is incidental to the main objective of product awareness. Accordingly, it does not amount to provision of freebies, the bench ruled Hence, there is no question of contravention of the MCI regulations and applicability of Circular no. 5 of 2012 for disallowance of the expenditure.

Quoting a previous Delhi High court order in case of Max Hospital versus MCI, it stated that it is ostensibly clear that the Medical Council of India has no jurisdiction to pass any order or regulation against any hospital or any health care sector entity under its 2002 regulation.