Expenses involving Freebies to the Doctors to be Disallowed u/s 37 of Income Tax Act: ITAT Restores matter to AO for Re-adjudication [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal held that expenses involving freebies to the doctors given by pharmaceutical companies is subject to disallowance under Section 37(1) of the Income Tax Act,1961.

The assessee Troikaa Pharmaceuticals Ltd. is a public company and engaged in the business of manufacturing of Drugs & Pharmaceuticals. During the year, the assessee has claimed certain expenditures aggregating to Rs. 10,66,27,149 under the head business promotions.

The Assessing Officer (AO) was of the view that expenditures were incurred by the assessee under the head business promotions is violation of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulation 2002 and thus, the same needs to be disallowed as per the CBDT Circular. Accordingly, the AO purposed to disallow the same by issuing a show cause notice to the assessee.

The assessee in response to such show cause notice explained the nature of expenses incurred under each sub-head. The gist of assessee’s submission is that all the expenses were incurred to promote and spread the awareness about its products which were necessary for the growth of its business. The assessee accordingly contended that all these expenses were incurred wholly and exclusively for the purpose of the business and therefore, the same are allowable under Section 37 of the Income Tax Act.

The AO disagreed with the contentions of the assessee and after considering the facts in detail made the disallowance of certain expenses on ad hoc basis and some of the expenses in full which were falling under the head sales promotion expenses. As such the AO in aggregate made the disallowance of Rs,5,31,91,547.00 and added to the total income of the assessee.

Aggrieved by the order the assessee preferred an appeal to Commissioner of Income Tax (Appeals) [CIT(A)] who partly allowed relief to the assessee.

Against the finding of the CIT(A), both the revenue and the assessee are in appeal before the Tribunal. The revenue is in appeal against the relief granted by the CIT(A) for an amount of Rs. 2,42,73,068 whereas the assessee is in appeal against the confirmation of the addition by theCIT(A) for an amount of Rs. 2,89,18,509 and 1,06,925.00 only.

The Departmental Representative (DR) contended that the freebies given to the doctors are not allowable deduction under the provisions of explanation to Section 37 of the Income Tax Act. The DR in support of his contention has referred to the judgement of Supreme Court in the case of M/s Apex Laboratories (P.) Ltd. v. Dy. CIT

The Authorised Representative of the assessee (AR) contended that the issue regarding the freebies to the doctors has already been decided in its favour by the ITAT in its own case in the earlier assessment years. He further pointed out that disallowance on account of freebies to the doctors was brought under the statute by the Finance Act 2022 applicable from 01-04-2022.

The Bench comprising of observed that freebies given by pharmaceutical companies were allowed as a deduction under Section 37(1) of the Income Tax Act for all the expenditures which fall outside the ambit of Section 30 to 36 of the Income Tax Act. These expenses were considered to have been incurred wholly or exclusively for business or professional purposes.

It was further noted that the CBDT Circular No. 5 of 2012, forbids medical professionals and their professional associates from accepting any form of incentives or "freebies" from the pharmaceutical and allied health sector industries.

The Bench comprising of Waseem Ahmed, Accountant Member and T.R Senthil Kumar, Judicial Member relied on the decision of Supreme Court in M/s Apex Laboratories (P.) Ltd. (P.)Ltd. v. Dy. CIT where it was held that the Circular applicable on pharmaceutical companies and holding the judgment against the assessee, highlighted on the essence where the freebies or gifts have the potential to influence or manipulate the prescription of a medical practitioner which can be incentivize the doctor's intention to avail more luxurious and expensive freebies offered by the pharmaceutical companies.

Therefore the Tribunal held that only so much of the expenses involving freebies to the doctors shall be subject to disallowance. Thus set aside the issue to the file of the AO for fresh/ de-novo verification of the expenses falling under the category of freebies.

Hence, the grounds of appeal of the revenue and the assessee were allowed for statistical purposes.

To Read the full text of the Order CLICK HERE

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