ITAT: Pharma co’s expenses towards freebies for docs can be claimed as deductions

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Tax issues surrounding the ‘nexus’, between pharma companies and doctors, where the latter are sponsored for conferences, at times replete with sightseeing and gala dinners, or expensive gifts, refuse to die down. Judicial precedents, in several cases, have been in favour of pharma companies with the costs relating to such freebies being allowed as business deductions.

The Mumbai bench of the Income-tax Appellate Tribunal (ITAT) recently passed an order in favour of Medley Pharmaceuticals, an Andheri based company. The crux of the tax issue dealt with the re-opening of the assessment for the FY 2011-12, owing to a change of opinion by the succeeding I-T officer. Based on technicalities such as no fresh ground material available on record, the re-opening was quashed by the ITAT.

However, the ITAT also went on to analyse the allowability of sales promotion expenses aggregating to Rs 6.2 crore for the pharma company. A break-up showed that Rs 2.4 crore was towards product reminders; conference expenses and travel costs ran into Rs 2.7 crore and additional doctors’ expenses were of Rs 1.1 crore. The ITAT made some pertinent observations regarding the code of conduct issued by the Medical Council of India (MCI) and a circular issued by the Central Board of Direct Taxes (CBDT).

It said that the MCI code of conduct, which debars freebies, is meant to be followed by the medical fraternity alone and does not apply to pharma companies. Amended on December 10, 2009, the code prohibits medical practitioners and their professional associations from taking any gift, travel facility, hospitality, cash or monetary grant from the pharmaceutical and allied health sector industries. The CBDT circular dated August 1, 2012 says that any expense in providing freebies in violation of the Medical Council’s code shall not be allowed as a business deduction.

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