No tax deduction on freebies to doctors: Pharma company disallowed booking Rs 21 lakh as expense by ITAT
Chennai: Holding that freebies to medical practitioners are prohibited by law, the Chennai bench of the Income Tax Appellate Tribunal (ITAT) has disallowed expenditure of over Rs 21 lakh incurred by Chennai-based private drug manufacturing company for freebies as deduction in terms of section 37(1) of the Income Tax Act,1961.
According to section 37(1) of the Income Tax Act,1961 (the Act), any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".
The assessee company, Fourrts(India) Labs Pvt. Ltd., engaged in the business of manufacturing of harmless medicines filed its return of income for assessment year 2014-15 in November 2014, declaring total income of Rs. 9,35,97,686. The assessment was completed in December 2016 and determined total income of Rs. 13,46,47,790 by making various additions including additions towards sales promotion expenses, towards freebies paid to doctors amounting to Rs. 21,08,795.
As per the grounds of appeal raised by the assessee, "The Commissioner of Income Tax (Appeals) 6 erred in confirming the addition of Rs.21,08,795/- being sales promotion expenses incurred doctors, without appreciating the fact that the expenditure incurred for the purpose of advertising the products and not for inducing the doctor."
The petitioner added that the Commissioner failed to distinguish the judgment in the case of PHL Pharma (P) Ltd. ITA 4605/Mum./2014 and failed to relate this case to that of appellant, and summarily accepted the order of assessing officer with detailing any reasons to justify the same."
The assessee had carried the matter in appeal before the first appellant authority, but could not succeed. The learned Commissioner of Income-tax (A), for the reasons stated in their appellant order dated 27.12.2016 rejected ground taken by the assessee and sustained additions made by the AO towards various expenses and also upheld re-computation of book profit.
The assessee's appeal before Chennai bench of ITAT is disallowance of sales promotion expenses being payments made to doctors. The AO has disallowed sale promotion expenses in the nature of freebies distributed to Doctors and other medical professionals on the ground that said expenditure is not deductable.
After hearing the parties, the bench perused materials available on record and went through orders of the authorities below. It noted;
"The issue of deductions towards sales promotion expenses in the nature of freebies given to medical practitioners by Pharma companies is deductable or not u/s. 37(1) has been examined by the Hon'ble Supreme Court in the case of Apex Laboratories Pvt Ltd vs DCIT (2002), 286 Taxmann 200 (SC), where it has been held that since acceptance of freebies by medical practitioners was punishable as per circular issued by Medical Counsel of India under MCI Regulations, 2002, gifting of such freebies by assessee Pharma Companies to medical practitioners would also be prohibited by law and thus, expenditure incurred for such freebies would not be allowed as deduction in terms of section 37(1) of the Act. Therefore, respectfully following the decision of Hon'ble Supreme Court in the case of Apex Laboratories Pvt Ltd vs DCIT, (supra) we are inclined to uphold the finding of the ld. CIT(A) and reject the ground taken by the assessee."
To view the original order, click on the link below:
