No deduction for expenditure on Freebies given to doctors by Pharmaceutical Companies

Many pharmaceutical companies have a strategy to distribute their promotional materials to various medical practitioners. These include small quantities of medications given to doctors by pharmaceutical companies to be provided to patients, branded pens, notepads, calendars, or other office supplies with the pharmaceutical company’s logo or medical equipments etc.

There are concerns that freebies could influence medical practitioner’s decisions, potentially leading to conflicts of interest. 

Such pharma companies many times claims the deduction of such expenses on freebies given for the purpose of reducing profits and ultimately leading to lesser taxes. However, Ahmedabad bench of ITAT has disallowed such expenses.

Issues involved:
The assessee company has claimed deduction of certain business advancement expenses incurred in the form of promotional expenses for its manufactured pharmaceutical products. Assessing officer found that such expenses are expenses prohibited by law to be allowed as deductions under section 37 of The Income Tax Act. Whether assessing officer is right in disallowing such expenses?

Facts of the case explained:
The assessee company torrent pharmaceutical limited is engaged in manufacturing and marketing of pharmaceutical products. The assessee company had claimed certain expenses under the head selling and distribution expenses which were originally incurred for distribution of various brochures, literature specifying its products, new development, research activities, gifts distributed to doctors, wholesalers or retailers etc.. Assessing officer stated that such expenses are in violation of Indian Medical Council of India regulations in exercise of power conferred under Section 33 of Indian Medical Council Act 1956.

Three types of expenses were claimed by the assessee company which are:

(1) Business Advancement Expenses Rs. 53,06,10,021/-
(2) Sales Promotion Expenses Rs. 3,77,89,705/-
(3) Doctor’s Sponsorship Rs. 19,63,90,203/-

As per the assessee, these expenditures were incurred in the ordinary course of business to create its brand, goodwill, and trade relationship.

On the other hand, AO found that the expenses incurred for the benefits of doctor cannot be allowed under the provision of section 37 of the 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.

This was supported with a circular of CBDT no.05/2012 dated 01/08/2012 prohibiting the deduction of such expenses. Therefore, the AO disallowed 100% of the expenditure incurred under the head “Doctor’s Sponsorship” amounting to Rs. 19,63,90,203/- only. Likewise, the AO found that the assessee failed to establish that the expenses incurred under the head “Business Advancement and Sales Promotion” do not include the expenditure in connection with doctor benefit.

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 sector industries in the nature of freebie to medical professionals are in violation of above mentioned regulation of MCI and therefore, such expenditure will not be allowed as deduction to the pharmaceutical 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.

Maintaining the values which do not violate conflict of interest are of the utmost importance to professionals from medical field. Pharma sector companies providing such professionals with gifts or freebies to promote their business do not fall under allowable expenses as per income tax act.

Therefore, AO disallowed 100% of such expenses and an estimated 10% amount of business promotion and selling expenses where assessee failed to submit any documentary evidence in its support.

About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.

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