The Ahmedabad bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that expenditures on freebies to doctors by the pharmaceutical sector violate Medical Council of India ( MCI ) regulations and disallows deductions under Section 37(1) of the Income Tax Act.1961
The facts in brief are that the assessee, a public company, engaged in the business of manufacturing and marketing of pharmaceutical products. The assessee during the year under consideration claimed certain expenditure under the head selling and distribution expenses are Business Advancement Expenses Rs. 53,06,10,021/, Sales Promotion Expenses Rs. 3,77,89,705/- and Doctor’s Sponsorship Rs. 19,63,90,203/- these expenditures were incurred in the ordinary course of business to create its brand, goodwill, and trade relationship
The impugned expenditure includes expenses incurred on distribution of various brochures, literature specifying its products, new development, and research activities. It also includes various types of gifts distributed to different stakeholders such as distributors, wholesalers, and retailers as well as doctors to promote its products. In nutshell, the assessee contended that the impugned expenditures were incurred wholly and exclusively for the purposes of business and therefore, the same are allowable under Section 37 of the Income Tax Act.
The AO found that the expenses incurred for the benefits of doctors cannot be allowed under the provision of Section 37 of the Income Tax Act, as the same were incurred in violation of regulation issued by the Indian Medical Council in exercise of power conferred under Section 33 of Indian Medical Council Act 1956. Further, the CBDT also issued circular bearing number 05/2012 dated 01-08-2012 prohibiting the deduction of such expenses.
The assessee also failed to furnish any detail specifying the amount not incurred/ falling under the category of doctor benefits. Thus, the AO in absence of necessary details proceeded to estimate the expenditure for doctor’s benefit included under the head “Business Advancement and Sales Promotion” @ 10% of such expenditures and accordingly disallowed an amount of Rs. 5, 30, 61,002/- and Rs. 37, 78,978/- respectively.
The CBDT vide circular No. 05/2012 dated 01-08-2012 clarified that expenditure incurred by the pharmaceutical or allied health sector industries in the nature of freebie to doctors is in violation of above mentioned regulation of MCI and therefore, such expenditure will not be allowed as deduction to the pharmaceutical or allied health sector industries under the provision of explanation to Section 37(1) of the Income Tax Act being expenses incurred for a purpose which is either an offense or prohibited by law.
The two member bench of the tribunal comprising Madhumitha Roy ( Judicial member) and Waseem Ahemed ( Accountant member) observed that the impugned circular was clarificatory in nature and applicable with retrospective effect from 1st April 2009. Hence, ITAT set aside the finding of the CIT (A) and held that the entire amount of expenses incurred during the year under the head “Doctors Sponsorship” shall be disallowed.
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