Expenses incurred in oversea workshops for doctors cannot be dubbed gift, freebies: ITAT relief to pharma firm
Mumbai: In a major relief to a Mumbai-based distributor of ortho implants, Evolutis India, the Income-Tax Appellate Tribunal (ITAT) has allowed an expense of Rs 12.79 lakh incurred towards a workshop for doctors held by it in France as tax deduction.
Often the subject of tax litigation, expenses incurred by a pharma company in providing "freebies" to doctors continues to be bone of contention.
In the instant case, relying on a circular issued in 2012 by the Central Board of Direct Taxes (CBDT), an income tax officer disallowed a sum of Rs 12.79 lakh, incurred by the pharma firm in 2014-15 largely towards the workshop attended by the doctors including their travel and hotel bills.
As per the CBDT circular, any expenses incurred by a pharma company in providing "freebies" to doctors in violation of the regulations issued by the Medical Council of India (MCI) (now National Medical Commission) will be disallowed in the hands of the company.
It has to be noted that with any disallowance of expenditure the taxable income goes up, resulting in a higher tax outgo.
Challenging the decision of the income tax officer, Evolutis India moved the Tribunal.
Deliberating the issue, the ITAT bench was of the opinion that the travel, hotel and honorarium fees paid to doctors to participate in the overseas workshop could not be dubbed a gift or freebies and brought within the scope of the CBDT circular.
Medical Dialogues Team had earlier reported that, the Central Board of Direct Taxes 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 the 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 its September 23 order, the bench commented that the tax tribunal in the earlier decision had incorporated the MCI regulations but not elaborated or dwelt upon the issue as to how the MCI regulation, meant strictly for medical practitioners and doctors, could apply to pharma companies and others in the health sector industry, reports TOI.
Significantly, the bench pointed out that it is the medical doctors registered with the MCI who are bound by its code of conduct. The CBDT is divested of its powers to enlarge the scope of the MCI regulation by extending the same to pharmaceutical companies without any enabling provision either under the Income Tax Act or the Indian Medical Regulations. If it does so, it impinges on the conduct of pharma companies in carrying out their business.
The bench also relied on decisions passed by various high courts and subsequently, held that the income-tax officer was not justified in disallowing this expense of Rs 12.79 lakh. It noted,
The expense by the pharma company was, "wholly and exclusively in the normal course of its business" and should be allowed as a business deduction.