Ahmedabad ITAT Disallows Tax Deductions U/S 37(1) for Expenditures on Freebies to Doctors

Expenditures on freebies to doctors by the pharmaceutical sector violate Medical Council of India ( MCI ) regulations and disallow deductions u/s 37(1) of the Income Tax Act 1961, the Ahmedabad bench of the Income Tax Appellate Tribunal ( ITAT ) held.

Concerning the case the taxpayer is a public company, engaged in the business of manufacturing and marketing of pharmaceutical products. During the year under consideration the taxpayer claimed certain expenditures 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 expenditures made in the normal course of business to create its brand, goodwill, and trade relationship.

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The impugned expenditure comprises the expenses made on the distribution of distinct brochures, literature identifying its products, new development, and research activities.

The same comprises distinct sorts of gifts distributed to different stakeholders such as distributors, wholesalers, and retailers as well as doctors to promote its products. In other terms, the impugned expenditures were made wholly and exclusively for business and hence, the identical is permissible u/s 37 of the Income Tax Act, the taxpayer argued.

Under the provision of Section 37 of the Income Tax Act, the expenses incurred for the benefit of doctors cannot be allowed, AO revealed, since it was made in breach of a rule issued via the Indian Medical Council in the practice of power conferred u/s 33 of Indian Medical Council Act 1956. CBDT issued a circular that has the number 05/2012 on 01-08-2012 restricting the deduction of such expenses.

The taxpayer was unable to file any information for the amount not filed/failing beneath the category of advantage of the doctor.

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Hence in the absence of required information, the Assessing Officer (AO) proceeded to compute the expenditure for the benefit of the doctor included under the head “Business Advancement and Sales Promotion” at a 10% rate for these expenditures and as per that disallowed an amount of Rs. 5, 30, 61,002/- and Rs. 37, 78,978/- respectively.

The CBDT vide circular No. 05/2012 on 01-08-2012 clarified that expenses made via the pharmaceutical or allied health sector industries like freebies to doctors breach the aforesaid regulation of MCI and thus, such expenditure shall not be permitted as a 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 made for a purpose which is either an offence or restricted by law.

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The impugned circular was clarificatory and applicable with effect from 1st April 2009. Therefore, ITAT set aside the finding of the CIT (A) and ruled that the entire amount of expenses made at the time of the year under the head “Doctors Sponsorship” will be disallowed, the two-member bench of the tribunal Madhumitha Roy ( Judicial member) and Waseem Ahemed ( Accountant member) witnessed.

Case Title	Torrent Pharmaceuticals Ltd. Vs DCIT
Case Number	ITA.Nos.2369 and 2368/Ahd/2018
Date	26.02.2024
Counsel For Appellant	Shri Vartik Choksi, With Shri DhrunalBhatt, ARs.
Counsel For Respondent	Shri Ritesh Parmar, CIT-DR
Ahmedabad ITAT	Read Order