Larger ITAT bench to rule on pharma freebies

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A two-member bench of the Income-tax Appellate Tribunal (ITAT) in Mumbai has directed that a larger bench should decide whether the expenses on freebies to doctors incurred by pharma companies should be allowed as a business deduction. The fallout of any disallowance of expenditure is that the taxable income goes up, resulting in a higher tax outgo.

The bench comprising judicial member Saktijit Dey and vice president Pramod Kumar, in its order dated October 14, said it could not find fault with the action of the I-T officer who, during assessment, had denied a significant sum of expenditure incurred towards freebies to doctors in the hands of Macleods Pharmaceuticals.

Tax tribunal cites PM’s allusion to ‘unholy nexus’

However, owing to contrary views taken by the co-ordinate bench on the same issue in other cases, and to prevent judicial inconsistency, they recommended that this vexed issue be heard by a larger bench.

Typically, pharma companies, large or small, do incur marketing expenses, a significant portion of which constitutes ‘freebies’ to doctors.

Typically, it includes foreign trips and hotel stays for doctors (ostensibly to attend a conference), corporate gifts, or subscription to expensive medical journals.

In this case heard by the ITAT bench, the officer denied a sum of Rs 111.11 crore for financial year 2010-11 and Rs 137.62 crore in the subsequent year, in the hands of Macleods Pharmaceuticals these were expenses incurred on freebies to doctors. The cumulative sum disallowed aggregated to Rs 248.74 crore. As the Commissioner (Appeals) had decided in favour of the pharma company, the I-T department filed an appeal with the tax tribunal.

The tribunal members hearing the matter, drew reference to a statement by PM Narendra Modi, who had subtly hinted at the unholy nexus between doctors and pharma companies.

The PM had said: “…The person who writes the medicine also gets something. You must know that the doctors’ conference is sometimes in Singapore, sometimes it is in Dubai. It is not because someone is sick there; it is so because it is necessary for the pharmaceutical companies.”

The ITAT bench observed that the freebies come with strings attached. They cannot be lawfully accepted by medical professionals under the Medical Council Act. Therefore, an expenditure on such freebies is for a purpose prohibited by law. An explanation to Section 37(1) of the I-T Act denies claim of any such expense if the same has been incurred for a purpose which is either an offence or prohibited by law. This explanation was inserted by the Finance Act, 1998 with retrospective effect from April 1, 1962. Thus, the stand of the I-T officer cannot be faulted, the order stated.

A circular issued in 2012 by the Central Board of Direct Taxes (CBDT), provides that 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) will be disallowed in the hands of the company.

However, the ITAT bench noted the differing decisions on this issue by the coordinate benches.

For instance, in 2017, in the case of PHL Pharma, the ITAT held that disallowance of business expenditure in the hands of the pharma company could not be sustained as the Medical Council guidelines bind only the medical professionals and not the pharma companies.

On the other hand, in 2016, in the case of Liva Healthcare, the tax tribunal had held that the CBDT circular is merely a clarification and the bar on illegal payments always existed owing to the explanation to section 37 (1).

Now it is over to a larger bench to decide and lend a degree of finality to the vexed issue.

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