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The article discusses the various judicial pronouncements relating to the allowability of freebies to doctors by Pharmaceutical Companies under section 37(1) of the Income-tax Act, 1961

Section 37(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) allows expenditure to be claimed as a business deduction while computing taxable Profit and Gains from Business or Profession provided the following condition are met:

1. The expenditure has been incurred in the accounting year.

2. The expenditure is not of a personal nature.

3. It is incurred wholly and exclusively for business.

4. It should not be in the nature of capital expenditure.

An explanation introduced by Finance (No. 2) Act, 1998 w.r.f. 01.04.1962 provides that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for business or profession. No deduction shall be allowed in respect of such expenditure. 

The Medical Council of India, vide notification dated 10.12.2009 (hereinafter referred to as “the Regulations”), introduced the following regulations, seeking to prohibit doctors from accepting freebies from pharmaceuticals and allied health sector industry such as:

• Gifts

• Travel facilities

• Hospitality

• Cash or monetary grants

The Regulations further provide ethical standards for maintaining professional independence. The Regulations provide that a medical practitioner shall not endorse any drug or product of the industry publically. Any study conducted on the efficacy or otherwise of such products shall be presented to and/or through appropriate scientific bodies or properly published in relevant scientific journals.

The aforesaid kinds of freebies were prohibited from being accepted by doctors. Therefore, the question comes up whether companies incurring expenses to provide such freebies were incurring such expenses, which is an offence or prohibited by law and therefore not allowable under section 37(1) of the Act.

The summary of Judicial precedents/circulars considering the Regulations is as under:

Max Hospital Vs. MCI (WP (C) 1334/2013)

The Delhi High Court while dealing with a case of medical negligence held that the Regulations do not apply to hospitals.

CIT Vs. Kap Scan & Diagnostic Centre Pvt. Ltd. (2012) (344 ITR 476) (P&H)

The Regulations provide that no physician shall give, solicit, receive, or offer to give, solicit or receive, any gift, gratuity, commission or bonus in consideration of a return for referring any patient for medical treatment. The Court held that commission paid to private doctors for referring patients for diagnosis could not be allowed as business expenditure.

While holding so, it observed that if demanding of such commission was bad, paying it was equally bad. Both were privies to a wrong. Therefore, such commission paid to private doctors as opposed to public policy and should be discouraged. The payment of commission by the assessee for referring patients to it could not, by any stretch of the imagination, be accepted to be legal or as per public policy. Undoubtedly, it was not a fair practice and had to be termed as against the public policy.

Circular 5/2012 dated 01-08-2012

The Circular states that any kind of freebies in violation of the Regulations given to doctors and other medical professionals by a pharmaceutical company was not allowable under section 37(1) of the Act.

Confederation of Indian Pharmaceutical Industry (SSI) Vs. CBDT (2014) (353 ITR 388) (HP)

The Himachal Pradesh High Court in the said decision upheld the validity of circular and further observed that it was for an assessee to satisfy the AO that the expense is not in violation of the Regulations.

ACIT Vs. Liva Healthcare Ltd. (ITA No. 847/Mum/2012)

The Tribunal held that giving free samples of new products to doctors to give necessary inputs and imparting information/knowledge to doctors about the new product/medicine being a genuine expenditure for business promotion would be an allowable expenditure.

As regards expenditure incurred on sponsorship of overseas travel of doctors for attending seminars which helped in promotion and sale of products of the assessee, it held that although the same was unethical for a doctor to accept such incentive, from the perspective of the assessee company, the expenditure was for the purposes of business and therefore allowable.

ACIT Vs. Geno Pharmaceuticals Ltd. (ITA No. 12/PNJ/2014)

It was held that the sale promotion expenses in the nature of travelling and conveyance, selling and distribution expenses, conference expenses incurred on the doctors for promoting sales, not shown by the AO as directly prohibited by law/CBDT circular, is allowable.

Eli Lily & Co. (India) Pvt. Ltd. Vs. ACIT (ITA No. 788/Del/2015)

Expenditure incurred towards the free sample to doctors / medical practitioners given on request by doctors not to influence the doctors' discretion of prescribing its medicine to the patients are not covered within “gift” and therefore such expenditure incurred is allowable.

Syncom Formulations (I) Ltd. Vs. DCIT (ITA No. 6429/Mum/2012)

Giving small gifts bearing company logo to doctors does not tantamount to giving gifts prohibited under the Regulations to doctors but it is regarded as advertising expenses and therefore allowable. The Tribunal further held that CBDT circular applies to AY 2013-14 and not applicable to AY 2010-11, 2011-12, the impugned year in question in the case.

India Medtronic (P.) Ltd. v. Dy. CIT [2018] (95 taxmann.com 21) (Mum.)

The Tribunal concluded that Regulations are only applicable to doctors, and cannot govern other tax entities like drug manufacturing companies and therefore genuine sales promotion expenditure incurred by such companies on gift articles, samples, etc. given to doctors is to be allowed.

Other decisions

• DCIT Vs. PHL Pharma (P.) Ltd. (2017) (78 taxmann.com 36) (Mum.)

• Aristo Pharmaceuticals (P.) Ltd. Vs. ACIT (2019) (107 taxmann.com 119) (Mum.)

• Medley Pharmaceuticals Ltd Vs. CIT (2020) (118 taxmann.com 44) (Mum.)

• ACIT Vs.  Dupen Laboratories Pvt. Ltd. (ITA No. 5195/Mum/2013)

• Aishika Pharma (P.) Ltd. Vs. ITO (2019) (177 ITD 238) (T.Del.)

• Peerless Hospitex Hospitals & Research Centre Ltd. Vs. DCIT (2020) (114 taxmann.com 583) (Kol.)

• Solvay Pharma India Ltd. Vs. PCIT (2018) (89 taxmann.com 249) (Mum.)

• Macleods Pharmaceuticals Ltd. Vs. ACIT (2016) (74 taxmann.com 250) (Mum.)