Brand reminders, medical books, journals are like Freebies to doctors: ITAT denies Pfizer expense claim of Rs 11 crore

The ITAT bench, comprising Shri Prashant Maharishi, Accountant Member, and Shri Rahul Chaudhary, Judicial Member's decision was based on a Supreme Court ruling in the case of Apex Laboratories, which deemed any form of free gifts to medical professionals prohibited under IMC rules and not allowable under Section 37(1) of the Income Tax Act.

The dispute arose from Pfizer's claimed advertisement expenses amounting to Rs 48.26 crore, which included expenses for brand reminders, customer gifts, and the purchase of medical books and journals provided to healthcare professionals. The Revenue disallowed Rs 11.06 crore of these expenses under Section 37(1), considering them to be freebies compromising the professional autonomy of medical practitioners and institutions, in violation of IMC regulations.

Pfizer initially reported an income of Rs 3,422,546,530 in their tax return for the year on November 30, 2014. Later, they revised it to Rs 1,939,382,340 by November 30, 2015. However, during the assessment, the assessing officer made three additions to their total income:

1. Identified an un-reconciled amount of Rs. 544,579 in the company's transaction details.

2. Disallowed a portion of Rs 482,612,000 claimed as advertisement expenses related to brand reminders, customer gifts, and medical books and journals, totaling Rs 116,034,713/–.

3. Added the income of another company, Wyeth Limited, which had been amalgamated with Pfizer, resulting in a combined total income of Rs. 4,833,042,050/–.

The final assessment on December 31, 2016, determined the total income to be Rs 4,949,621,342, which differed from the revised income of Rs 1,939,382,340. Pfizer appealed this assessment, and the Commissioner of Income Tax (Appeals) (CIT–A) passed an appellate order on January 24, 2018.

CIT–A rejected the disallowance of Rs 87,953,773 related to brand reminders and Rs 28,080,941 spent on medical books and journals provided to healthcare professionals. This decision aligned with a prior case involving PHI Pharma Private Limited, stating that IMC regulations apply only to doctors and not pharmaceutical companies. The decision referred to a board circular (number 05/2012) and a Himachal Pradesh High Court decision, stating that if the assessee can demonstrate that the expenditure doesn't violate medical council regulations, they can claim the deduction.

The core of the case involved appeals and objections filed by both Pfizer and the Assistant Commissioner of Income Tax (ACIT) regarding expense deductions claimed by pharmaceutical firms related to providing material gifts or benefits to medical practitioners. The ACIT's appeal challenged the CIT–A's ruling concerning the disallowance of these expenses, questioning whether IMC regulations and relevant CBDT circulars apply to Pfizer.

In response, Pfizer filed a cross objection, contesting the disallowance of payments made to doctors allegedly violating the IMC regulations. The objection argued that certain expenditures related to brand reminders and the purchase of medical books and journals should be considered legitimate business expenses.

Throughout the legal proceedings, both parties presented their arguments, offering differing perspectives on the application of IMC regulations and their impact on expenses incurred by Pfizer.

Pfizer had contended that the medical books and journals were intended for knowledge dissemination and education. However, the ITAT pointed out that IMC regulations allow attendance at conferences and seminars, but they do not sanction acceptance of freebies such as books, journals, or related fees paid by pharmaceutical companies. The ITAT stressed that while continuing education is crucial, the cost should be borne by the professionals themselves and not provided as freebies by pharmaceutical companies.

Subsequently, the Tribunal upheld the disallowance made by the revenue authorities, emphasizing that brand reminders and the purchase of medical literature were explicitly prohibited gifts under the Indian Medical Council's rules, constituting freebies provided by Pfizer to doctors. It observed;

"Coming to the appeal of the learned assessing officer wherein the solitary issue is with respect to payment made for customer gifts etc. to Drs, the learned departmental representative submitted that assessee has debited a sum of Rs 482,612,000 as advertisement expenses in the ITA No.2108, 2132/Mum/2018 & CO 110/Mum/2019; A.Y. 2014-15 profit and loss account. On examination of the details are sum of Rs 87,953,773/– in respect of Brand reminder is and Rs 28,080,940 on purchase of medical books and journals provided to healthcare professional has been disallowed by the learned AO which is been deleted by the learned CIT – A. The learned CIT DR stated that despite the IMC regulation 2002, circular number 05/2012 dated 1/8/2012 issued by The Central Board Of Direct Taxes, the honourable Supreme Court in case of Apex laboratories private limited dated 22/2/2022 has categorically held that if any expenses prohibited by the law, the same cannot be allowed as deduction under section 37 (1) of the act he further stated that the honourable Supreme Court has held that doctors prescription can be manipulated and driven by the motive to avail the freebies offered to them by Pharma companies ranging from gifts such as gold coins fridges LCD TVs to funding international trips for vacation two or at what an medical conferences. He specifically referred to the various paragraphs of the decision it was therefore stated that the issue is squarely covered against the assessee by the decision of the honourable Supreme Court. He further stated that the above decision of the honourable Supreme Court held that any expenses incurred by the pharmaceutical company which is in violation of such guidelines is disallowable under section 37 (1) of the act. He submitted that there is no overall upper limit of such expenditure. Therefore, now the issue is squarely covered by the decision of the ITA No.2108, 2132/Mum/2018 & CO 110/Mum/2019; A.Y. 2014-15 honourable Supreme Court and accordingly now the order of the learned CIT – A on this ground is not sustainable. "

It further noted;

"The learned authorized representative vehemently submitted that the decision of the honourable Supreme Court does not apply to the facts of the case for the reason that assessee has merely given brand reminder and customer gifts and purchase of medical books and journals. It was submitted that nominal value of the such gifts are very low and therefore those expenditure amounting to Rs 87,953,773 does not violate the guidelines of Indian medical Council. With respect to the purchase of medical books and journals it was submitted that these are provided to the Drs with a view to disseminate knowledge and education and does not fall within the prohibited expenditure. It was further submitted that in the case of Apex Laboratories (P) Ltd [2022) 442 ITR I (SC), the Hon'ble Supreme Court proceeded with the admission of both parties to the said decision that 'there was violation of MCI regulations and the Board Circular' and the entire decision of the Hon'ble Supreme Court is based on this very admission Nowhere in that decision there appears any reference to the violation of law of IMC Regulations' to be in dispute The only dispute the Hon'ble Supreme Court was called upon to decide was whether IMC Regulations are applicable to pharmaceutical companies or not even prior to CBDT Circular i.e. from the date of amended IMC Regulations. We have carefully considered the rival contention and perused the orders of the lower authorities. We do not find ITA No.2108, 2132/Mum/2018 & CO 110/Mum/2019; A.Y. 2014-15 any reason to uphold the order of the learned and CIT – A which is now been decided by the honourable Supreme Court holding that any free gifts in any manner is prohibited by the provisions of Indian medical Council‟s rules and therefore same is not allowable under section 37 (1) of the act Brand reminder is in the purchase of medical books and journals for the medical professionals are specifically covered under the gift prohibited by the rules of Indian medical Council. Nobody can deny that it is not a free be given by assessee to those doctors. We also find that the decision of the honourable Supreme Court is a lot of land and decision is not at all narrow in its scope. Therefore, for this reason it needs to be applied to the facts of each case irrespective of its consequences. With respect to the claim of the assessee that purchase of medical books and journals are provided for dissemination of knowledge and education. There is no doubt about that that the profession of medical is always evolving. Therefore, the need of medical books and journals is imperative. Similarly is the purpose of attending conferences seminars et cetera by the Drs. We are also aware about the various clauses 1.2.2., 1.2.3. and 6.8.1 (g) of the IMC Regulations, wherein these are provided for. But those regulations does not provide that the Drs should accept freebies of books, journals, conference fees paid, seminar fees, registration charges, hotel charges et cetera paid by a pharmaceutical company. Nobody denies that every profession should have a continuing education program but the cost of such a continuing education ITA No.2108, 2132/Mum/2018 & CO 110/Mum/2019; A.Y. 2014-15 program should be borne by the professional himself and cannot be given as a free be by the other parties. The similarly, there is no bar in attending the conference and seminar purchasing books et cetera by the Drs, but footing of those bills defrayed by pharmaceutical companies is prohibited. Therefore, allowance of such expenditure in the hands of pharmaceutical company, which is required to be incurred by the Drs for their continuing professional education, is against the letter and spirit of the law as well as against decision of the honourable Supreme Court. It would always be unfair , improper to find escape routes from the decision of the honourable Supreme Court when it covers extensively all the possible outcomes. Undoubtedly, the decision of the honourable Supreme Court in case of Apex laboratories has strong binding precedent and serves as an authority on the facts with respect to the payment of freebies by the pharmaceutical companies and on all the legal issues arising out of such payment and its allowability in the hence of pharmaceutical companies. In view of this, we reverse the order of the learned and CIT – A deleting the disallowance of Rs 87,953,773 on account of brand reminders and customer gifts and Rs 28,080,940 of purchase of medical books and journals for the medical professionals i.e. doctors. Accordingly, ground number 1 – 3 of the appeal of the learned assessing officer is allowed."

The ruling further addressed several other tax-related issues, including the rate of dividend distribution tax (DDT) for non-resident shareholders, depreciation on goodwill arising from amalgamation, write-off of bad debts, and reconciling unreconciled transactions. The ITAT provided detailed observations and directions on each issue, emphasizing adherence to the law and established judicial principles.