Pharma company gets tax relief on Rs 23crore freebies to doctors

MUMBAI: Deviating from an earlier ruling which refused to endorse the doling out of freebies and expensive gifts to doctors as a legitimate business expense, the Income-tax Appellate Tribunal (ITAT) has now allowed a pharma company to claim tax benefits against funds spent on sponsoring trips for doctors, providing them with costly medical journals, and buying them stationery and pens.

The recent decision dated January 12 was in the case of PHL Pharma. The ITAT has allowed the firm to deduct a sum of Rs 23 crore for expenses incurred towards various 'freebies' for doctors. These range from travel and accommodation expenses for medical seminars, subscriptions for journals, gifts such as pens and stationery bearing the logo of the pharma company and lastly free samples.

The decision has been explained over 34 pages and examines various issues and legal positions. It also distinguishes the facts in this case as opposed to the facts in the earlier order, which had enthused patients and consumer activists because it was viewed as nipping in the bud the practice of distributing gifts in return of favours from the medical fraternity.

Two key takeaways emerge from the ITAT's order. First, the ITAT held that the code of conduct laid down by the Medical Council of India (MCI) in its regulations which debar or limit freebies are meant to be followed by the medical fraternity alone. It does not cover pharma companies in any manner. Reference was also drawn by the ITAT to a Delhi High Court decision, which made a similar observation.

Second, the ITAT also examined a circular dated August 1, 2012, issued by the Central Board of Direct Taxes (CBDT), which said that any expense in providing freebies in violation of the MCI's code shall not be allowed as a business deduction. The ITAT in its decision pointed out that as the code of conduct did not cover the pharma company, the expenditure of Rs 23 crore did not violate this code.

The decision is being hailed as a shot in the arm for pharma companies by tax experts. But consumer activists would view it as a handle for unscrupulous firms, allowing them to offer inducements to doctors and hospitals for promoting their products.

PHL Pharma's benefits in this case pertain to expenses incurred in the financial year 2009-10. The ITAT was categorical that the CBDT circular cannot have retrospective effect.