Mumbai: Through a recent judgement, the Income Tax Appellate Tribunal, Pune Bench has allowed a Pharmaceutical company to claim deductions on promotions to doctors. The tribunal also made some important observations about freebies, free samples and expenditure that is made by pharma companies on doctors in the country
The case concerned the returns filed by Emcure Pharmaceuticals for the year 2010-11, whereby the company filed a return of income declaring income of Rs.1,78,74,660/-. During the assessment proceedings, Assessment Officer (AO) noticed that the assessee claimed ‘Advertisement Sales Promotion’ expenses of Rs.2,07,99,694/-. While providing the breakup of the same, assessee submitted that Rs.50,70,963/- relates to the expenditure on account of Print and Promotion items and the balance of Rs.1,57,28,731/- on account of Sales Promotion expenses.
AO brought to the notice of the assessee regarding the applicability of the Circular of Medical Council of India dated 09-12-2009.
According to the same, the Medical practitioners and their professional associations are prohibited from taking any Gift, Travel Facility, Hospitality etc., from the Health and Pharmaceutical sector industries. Further, there is a reference to the CBDT Circular No.5/2012, dated 01-08-2012, which stipulates that the claim of such expenditure constitutes the violation of the circular issued by the said Medical Council of India. Therefore, such claim of expenditure is not allowable u/s.37(1) of the Act both in the hands of the donor as well as donee of the gifts.
In view of the above circulars, the AO proceeded to disallow the expenditure to the extent of Rs.76,28,622/-, i.e., the expenditure incurred on or after 09-12-2009. The same was added back as income to the pharma company’s account. Challenging the said assessment order, Emcure appealed to the Income Tax Tribunal
During the arguments, the AR for the pharma company submitted that the circular issued by the Medical Council of India (supra) does not indicate the violations of any code of conduct when it comes to the Pharmaceutical industries (the donor). The same is applicable only to the Doctors in medical profession. He quoted the relevant clauses from the Code of Medical Ethics 2002 stating that they are applicable to the code and conduct for Doctors and Professionals associations and in their relationship with Pharmaceutical and allied health sector industry and it does not relate to the Pharmaceutical and allied health care industries and their code of conduct.
Reiterating the clauses, he said
the Medical practitioners shall not receive any gift from any pharmaceutical and allied health care industry and their sales people or representatives. Therefore, the pharmaceutical industries are not barred from giving the gifts, if any.
The AR also quoted various decisions in favour of excluding the Pharmaceutical companies outside the scope of said Medical Council of India Notification despite the CBDT -circular that roped in the Pharmaceutical companies like the present assessee.
The DR for the Revenue submitted that the giver of the gifts also violates the code and conduct set by the CBDT Circular as well as Medical Council of India. Further, Ld. DR submitted that the said circulars were found valid in earlier cases.
After hearing the arguments the Tribunal observed that there is no dispute on the fact that claim of Rs.76,28,622/- was by the assessee on the gifts and other benefits passed on to the medical professionals. There is also no dispute on the taxability of the same in the hands of the said medical professionals. The only dispute relates to the correct legal position with regard to disallowability of the same u/s.37(1) of the Act in the cases of Pharmaceutical companies.
After going through the arguments the court observed
The intent of the applicability of the MCI Regulations was always to cover only individual medical practitioners, and not the pharmaceutical and medical device companies. Whether there is any contravention of the MCI Regulations or not is a matter which can be decided by the MCI itself and not by the Income-tax Department. Furthermore, the MCI has itself admitted that it has no jurisdiction whatsoever over any association/ society etc and its jurisdiction is confined only to the conduct of the registered medical practitioners. Furthermore, since the said MCI Regulations 2002 contains punitive “provisions, it has to be read strictly and consequently it can apply only to Medical Practitioners and Physicians and not to the pharmaceutical companies. Further, MCI Act, 1956 does not apply pharmaceutical companies and consequently MCI Regulations 2002 cannot apply to such companies.
On the issue of CBDT circular disallowing such expenditure, the tribunal stated
CBDT Circular no. 5 of 2012 seeks to disallow expenditure incurred by pharmaceutical companies inter-alia in providing ‘freebies’ to doctors in violation of the MCI Regulations. The term “freebies’ has neither been defined in the Income-tax Act nor in the MCI Regulations’. However, the expenditure so incurred by assessee does not amount to provision of ‘freebies’ to medical practitioners. The expenditure incurred by it is in the normal course of its business for the purpose of marketing of its products and dissemination of knowledge etc and not with a view to giving something free of charge to the doctors. The act of giving something free of charge is incidental to the main objective of product awareness. Accordingly, it does not amount to provision of freebies. Consequently, there is no question of contravention of the MCI Regulations and applicability of Circular no. 5 of 2012 for disallowance of the expenditure.
Quoting a previous Delhi High court in case of Max Hospital versus MCI , it stated
From the aforesaid decision, it is ostensibly clear that the Medical Council of India has no jurisdiction to pass any order or regulation against any hospital or any health care sector under its 2002 regulation. So once the Indian Medical Council Regulation does not have any jurisdiction nor has any authority under law upon the pharmaceutical company or any allied health sector industry, then such a regulation cannot have any prohibitory effect on the pharmaceutical company like the assessee. If Medical Council regulation does not have any jurisdiction upon pharmaceutical companies and it is inapplicable upon Pharma companies like assessee then, where is the violation of any of law/regulation? Under which provision there is any offence or violation in incurring of such kind of expenditure.
Regarding the CBDT circular on which reliance was placed by the revenue department, the Tribunal noted that the CBDT Circular dated 1-8-2012 (supra) in its clarification has enlarged the scope and applicability of ‘Indian Medical Council Regulation 2002’ by making it applicable to the pharmaceutical companies or allied healthcare sector industries. Such an enlargement of scope of MCI regulation to the pharmaceutical companies by the CBDT is without any enabling provisions either under the provisions of Income Tax Law or by any provisions under the Indian Medical Council Regulations.
The free sample of medicine is only to prove the efficacy and to establish the trust of the doctors on the quality of the drugs. This again cannot be reckoned as freebies given to the doctors but for promotion of its products. The pharmaceutical company, which is engaged in manufacturing and marketing of pharmaceutical products, can promote its sale and brand only by arranging seminars, conferences and thereby creating awareness amongst doctors about the new research in the medical field and therapeutic areas, etc. Every day there are new developments taking place around the world in the area of medicine and therapeutic, hence in order to provide correct diagnosis and treatment of the patients, it is imperative that the doctors should keep themselves updated with the latest developments in the medicine and the main object of such conferences and seminars is to update the doctors of the latest developments, which is beneficial to the doctors in treating the patients as well as the pharmaceutical companies.
Favouring the judgement in favour of Emcure Pharma, the court noted
The above judgmental laws are relevant for the proposition that the circular issued by the CBDT enlarging the scope of disallowance to the pharmaceutical companies is without any enabling notification or circular of the Medical Council of India. Considering the settled legal position on the issue, we are of the opinion that the issue now stands covered in favour of the assessee. The pharmaceutical company like the assessee is outside the scope of the circulars by the Medical Council of India or the CBDT. Therefore, the conclusions of the AO/CIT(A) in this regard are reversed. Thus, the grounds raised by the assessee are required to be allowed.