ITAT larger bench to decide on the fate of pharma freebies to doctors

This came while the two-member bench of the Income-tax Appellate Tribunal (ITAT) was deliberating a case concerning Macleods Pharmaceuticals that was denied by the IT officer during an assessment, a significant sum of expenditure incurred towards freebies to doctors.

Pharmaceutical companies, large and small, typically spend marketing costs, with a significant portion of those costs consisting of 'freebies' to doctors, such as international vacations and hotel accommodations for doctors (ostensibly for a conference), corporate gifts, or expensive medical journal subscriptions.

The fallout of any disallowance of expenditure is that the taxable income goes up, resulting in a higher tax outgo.

The I-T department filed an appeal with the tax tribunal after the Commissioner (Appeals) ruled in favour of the pharma company in a case where the officer denied Macleods Pharmaceuticals a sum of Rs 111.11 crore for the financial year 2010-11 and Rs 137.62 crore the following year—these were expenses incurred on freebies to doctors. The total amount disallowed came to Rs 248.74 crore.

Medical Dialogues team had earlier reported that, the Central Board of Direct Taxes (CBDT) had clarified that the claim of any expense incurred in providing freebies in violation of the provisions of the 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 law.

However, this IMC's code of conduct applies only to medical practitioners and doctors, and not to pharmaceutical companies or the healthcare sector. Therefore, the Council's regulations could not be used to disallow a drug company's expense claims.

In the instant case, the Assessing Officer's grievance is one of the issues that has come up for court adjudication in each of the departmental appeals against the relief granted by the Commissioner of Income Tax (Appellant), and it raises the question of whether "the learned CIT(A) was erred "in deleting the disallowance made (of Rs 111,11,70,500 for the assessment year 2011-12 and of Rs 137,62,61,659 for the assessment year 2012-13- aggregating to Rs 248,74,32,259) on account of freebies to the doctors."

In light of the foregoing, the bench, which included judicial member Saktijit Dey and vice president Pramod Kumar, said it could not find error with the I-T officer's decision in refusing Macleods Pharmaceuticals a considerable sum of money spent on freebies to doctors during the evaluation.

However, in order to avoid judicial inconsistency, they urged that this challenging question be heard by a larger bench because the co-ordinate bench had taken opposing views on the same subject in prior cases.

For instance, in 2017, in the case of PHL Pharma, the ITAT held that disallowance of business expenditure in the hands of the pharma company could not be sustained as the Medical Council guidelines bind only the medical professionals and not the pharma companies.

On the other hand, in 2016, in the case of Liva Healthcare, the tax tribunal had held that the CBDT circular is merely a clarification and the bar on illegal payments always existed owing to the explanation to section 37 (1).

Noting the differing decisions on this issue by the coordinate benches, the issue is over to a larger bench to decide and lend a degree of finality.

The bench believed that the Assessing Officer deserves to win the instant case, and that a special bench of three or more members should be constituted to address the following question,

"Whether an item of expenditure on account of freebies to medical professionals, which is hit by rule 6.8.1 of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002- as amended from time to time, read with section 20A of the Indian Medical Council Act 1956, can be allowed as a deduction under section 37(1) of the Income Tax Act, 1961 read with Explanation thereto, in the hands of the pharmaceutical companies? "

The bench subsequently noted,

"It is, however, equally true", to borrow the words of Hon‟ble Supreme Courts as articulated in the case of Union of India Vs Paras Laminates Pvt Ltd [(1990) 186 ITR 722 (SC)], "that it is vital to the administration of justice that those exercising judicial power must have the necessary freedom to doubt the correctness of an earlier decision if and when subsequent proceedings being to light what is perceived by them as an erroneous decision in the earlier case" and that "in such ITA Nos. 5168 & 5169/Mum/2018 Assessment year: 2011-12 and 2012-13 circumstances, it is but natural and reasonable and indeed efficacious that the case is referred to a larger bench".

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

https://indiankanoon.org/doc/79108474/

Also Read: Expenses incurred in oversea workshops for doctors cannot be dubbed gift, freebies: ITAT relief to pharma firm