Setback to Pharma Companies: Freebies to Doctors are Ilegal, No Deduction allowed, clarifies Finance Bill, 2022

In a major setback to the pharma companies, the Finance Bill, 2022 clarified that the gifts and freebies to doctors shall not be treated as business expenditure under section 37 of the Income Tax Act, 1961. CBDT, vide circular No. 5/2012 dated 1.8.2012, noted that the Indian Medical Council in the exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10.12.2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector industries. Accordingly, CBDT clarified that the claim of any expense incurred in providing above mentioned or similar benefits in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section subsection (1) of section 37 of Act being an expense prohibited by the law. This disallowance was directed to be made in the hands of such pharmaceutical or allied health sector Industries or another assessee which has provided aforesaid benefits and claimed it as a deductible expense in its accounts against income. In the light of the contradictory verdicts pronounced by the High Courts and various Tribunals, the Finance Bill, 2020 clarified that the claim of any expense incurred in providing various benefits in violation of the provisions of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section subsection (1) of section 37 of Act being an expense prohibited by the law. “Further, some taxpayers are seen to be claiming the deduction on expenses incurred for a purpose which is an offence under foreign law or for compounding of an offence for violation of foreign law, claiming that provisions of Explanation 1 to subsection (1) of section 37 of the Act applies only to offences which are prohibited by the domestic law of the country. In some case, this view has also been accepted by the tribunal. These judgments are also against the intention of the legislation as the legislation does not say that Explanation 1 applies only to the violation of domestic law,” the memorandum issued by the Government on Tuesday said. In order to make the intention of the legislation clear and to make it free from any misinterpretation, the Finance Bill inserted a another Explanation to sub-section (1) of section 37 to further clarify that the expression “expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law”, under Explanation 1, shall include and shall be deemed to have always included the expenditure incurred by an assessee, — i. for any purpose which is an offence under, or which is prohibited by, any law for the time being in force, in India or outside India; or ii. to provide any benefit or perquisite, in whatever form, to a person, whether or not carrying on a business or exercising a profession, and acceptance of such benefit or perquisite by such person is in violation of any law or rule or regulation or guidelines, as the case may be, for the time being in force, governing the conduct of such person; or iii. to compound an offence under any law for the time being in force, in India or outside India. Support our journalism by subscribing to Taxscan AdFree. Follow us on Telegram for quick updates.

Setback to Pharma Companies: Freebies to Doctors are Ilegal, No Deduction allowed, clarifies Finance Bill, 2022

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