By TIOL News Service

NEW DELHI, SEPT 05, 2017: THE ISSUE BEFORE THE TRIBUNAL IS - Whether freebies provided to doctors in relation to their participation in medical conference for prescribing medicines, being in contravention of public policy, can be claimed as allowable expenses by a drug company. NO is the answer.

Facts of the case:

The assessee company was engaged in the trading of pharmaceutical products by procuring the finished products as well as products manufactured through the loan licensing. The assessee claimed expenses of Rs.2.26 crores on "Dermacon Conference" at Hyderabad, which included expenses on the sponsoring of doctors as well as for registration and other advertising etc. during the conference. The assessee has also claimed expenses of Rs.1.58 crores for sponsoring doctors for other conferences. On assessment, the AO disallowed sales and promotion expenses, opining that expenses incurred on sales promotion were not toward the business purpose. The AO further observed that during the year the assessee paid the Fringe Benefit Tax (FBT) on Hotel lodging/boarding charges etc., and accordingly, amount of FBT paid was reduced out of the disallowance of the sales promotion expenses. The AO also stated another reason for making such disallowances, namely that the expenses incurrec on sponsoring doctors was prohibited in law. However, such disallowance was set aside by the CIT(A).

ITAT held that,

++ there is no need to delve into the issue as to whether the participation by the doctors in such conference has generated awareness of the products and as a result of which the doctors prescribed more and more medicines of the assessee. The assessee has not given the list of doctors sponsored by the assessee company. The assessee submitted the name of three doctors and total expenditure on air travel, hotel booking and local conveyance of these three doctors is of Rs.1,51,385/- only. No other list of doctors or their confirmations has been provided by the assessee either before the lower authorities or before the Tribunal. Producing bills and vouchers of the parties to whom payments have been made, can establish that expenses were incurred, but for establishing whether the expenses incurred are wholly and exclusively for the purpose of the business, the assessee was required to complete list of the doctors along with services availed by them. However, the assessee has failed in discharging this onus. In absence of such a list, the AO cannot verify that expenses were incurred on doctors only or incurred on their family members or other non-business persons. The assessee has failed to justify the expenses on hotels booking at New Delhi, Chochin or Kochi against "Dermacon Conference" at Hyderabad. In absence of required documentary evidence, in our opinion the disallowance of 50% of the expenses for the sales promotion u/s 37(1) was justified;

++ now w.r.t. the disallowance of expenses on grounds of their being prohibited by law, the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (MCA Regulations) prohibit medical practitioners from receiving any kind of gift, travel facilities, hospitality and any kind of cash or a monetary grants from the pharmaceutical healthcare industry. Moreover, the CBDT in Circular No. 5/2012 clarified that free bees mentioned in the MCA Regulations, being expenses prohibited by law, would be disallowed in the hands of pharmaceutical industries also. Hence, providing free air travel, stay and food in hotels, local car conveyance etc. for prescribing medicines of the assessee is akin to giving commission and certainly in contravention of the public policy. Thus, following the decision of the Punjab and Haryana High Court in CIT Vs. Kap Scan and diagnostics Centre (p) Ltd, 50% expenses out of the sales promotion expenses disallowed by the AO was justified. In the present case the expenses towards sponsoring to doctors appears to be exceeding 50% of the sales promotion expenses and therefore the AO is more than liberal in disallowing 50% of the sales promotion expenses of the assessee. Hence the order of the CIT(A) merits being set aside and the order of the AO is restored.

(See 2017-TIOL-1212-ITAT-DEL)