ITAT disregards MCI regulations, allows exemption to Pharma Co on freebies to doctor

A bench comprising judicial member Ravish Sood and accountant member G Manjunatha pronounced the same while deliberating a case related to tax returns filed by the Mumbai-based drugmaker in September 2012, declaring total income of Rs 29.29 crore. An income tax official assessed the company's income at Rs 49.23 crore in March 2015, after disallowing expenses of Rs 5.37 crore in freebies to doctors as a deduction.

The Circular No. 05/2012 dated 01.08.2012 issued by the Central Board of Direct Taxes, New Delhi vide F.No. 225/142/2012-ITA-II clarified that the claim of any expense incurred in providing above mentioned or similar freebies in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under Sec. 37(1) of the Income-tax Act being an expense prohibited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health section industries or another assessee which has provided aforesaid freebies and claimed it as a deductible expense in its account against income. 

Moreover, the bench noted that IMC's code of conduct applies only to medical practitioners and doctors and not to pharmaceutical companies and the healthcare sector, adding that the Council's regulations could not be relied upon to disallow a drug company's expenditure claims.

The bench observed;

"The CBDT has no power to extend the scope of the IMC regulation to pharmaceutical companies without any enabling provision either under the Income Tax Act or the IMA regulations."

The ITAT further added that CBDT circulars cannot impose a burden on an assessee, let alone create a new burden, by enlarging the scope of a regulation issued under another act.

The scope and ambit of statutory provisions in the Indian Medical Council Act, 1956, related to professional conduct are restricted to medical practitioners registered with the State Medical Council, and those whose names are entered in the Indian Medical Register, the bench noted.

The scheme of the Indian Medical Council Act, 1956, deals only with the conduct of individual registered medical practitioners, the ITAT mentioned in the order.

ITAT further elaborated that even otherwise, the enlargement of the scope of MCI regulation to the pharmaceutical companies by the CBDT is dehors (outside the scope of) any enabling provision either under the Income Tax Act or under the Indian Medical Council regulations.

The ITAT also clarified that though the CBDT can tone down the rigors of law in an order to ensure fair enforcement of the provisions by issuing circulars for clarifying statutory provisions, "it is divested of its powers to create a new impairment adverse to an assessee, or to a class of assesses, without any sanction or authority of law."

Subsequently, ITAT held;

"We shall now advert to the sustaining of the disallowance of Rs.5,37,46,137/-, that was incurred by the A.O in respect of the gifts items/freebies given by the assessee to doctors. As we have dealt with this issue at length while disposing of the Ground of appeal No. 2 of the assessee in ITA No. 2344/Mum/2018, therefore, our order therein passed shall apply mutatis mutandis in context of the issue under consideration. Accordingly, on the same terms, the addition of Rs.5,37,46,137/- made by the A.O cannot be sustained and is thus deleted. The ground of appeal No. III is allowed in terms of our aforesaid observations."

"As the disallowance of Rs. 5,37,46,137/- had been vacated by us on merits, as hereinabove, therefore the Ground of appeal No. IV having been rendered as infructuous, is dismissed, as such The appeal of the assessee is partly allowed," it added.