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CBDT circular directs disallowance of such expenses for pharma businesses & taxing the same as income of doctors!

     This time it is the medical profession and the pharma & allied health sector business that have been targeted by the Taxman. The Central Board of Direct Taxes (CBDT) has, vide its recent Circular No. 5/2012 dated 1-8-2012, directed all Assessing Officers to disallow expenses incurred by such businesses in the nature of providing freebies to medical professionals. Officers have also been asked to treat the value of such freebies enjoyed by the Doctors as their taxable income.

     In the above context, the Board has noted that some pharmaceutical and allied health sector industries are providing freebies to medical practitioners and their professional associations in violation of the regulations issued by Medical Council of India, which is the regulatory body constituted under the Medical Council Act, 1956. The Council, in exercise of its statutory powers, had amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 and under its Notification dated 10-12-2009 imposed a prohibition on medical practitioners and their professional associations from taking any gift, travel facility, hospitality, cash or monetary grant from the pharmaceutical and allied health care industry or their sales people or representatives.

     Section 37(1) of Income-tax Act provides for deduction of any revenue expenditure in the computation of business income if such expense is laid out or expended wholly or exclusively for the purpose of business or profession. However, the explanation under this sub-section clarifies that claim of any such expense shall not be allowed, if the same has been incurred for a purpose, which is either an offence or prohibited by law.

     Referring to the above, the CBDT has opined that the claim of any expense for providing any gift, travel facility, hospitality, cash or monetary grant or similar freebies to medical practitioners in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible expenditure under section 37(1), being an expense prohibited by law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector industry or other entity, which has provided such freebees and claimed it as a deductible expense in its accounts against income.

     Under the aforesaid Circular, the Board has also clarified that the sum equivalent to the value of such freebies enjoyed by the medical practitioner or professional association is also taxable as business income or income from other sources as the case may be, depending on the facts of each case. The CBDT has accordingly directed that the Assessing Officers of such medical practitioners or professional associations should examine the same and take appropriate action.

     In the above regard, a careful note needs to be taken of Section 28(iv) of the Income-tax Act, which prescribes that “the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession” shall be chargeable to tax as income from business or profession. Similarly, Section 56(2)(vii) of the Income-tax Act provides for taxing gifts of money or specified gifts in kind, aggregating to Rs.50,000 or more, received during the financial year from a person who is not a relative, as taxable income under the head ‘income from other sources’ in the hands of the recipient individual or HUF. As per the directions of the CBDT, Assessing Officers of doctors are likely to invoke the above provisions, keeping in view the facts of the case.


    An interesting question in the above context is whether the expenditure incurred by a pharma or healthcare company through distribution of free samples to doctors would be hit by the above Circular? At the outset, it needs to be noted that the receipt of free samples by doctors is not prohibited by the Medical Council Regulations referred to hereinabove.

Moreover, as held by the Hon’ble Supreme Court in the case of Eskayef Pharmaceuticals (245 ITR 116), “the object of distribution of the samples of the drugs to the doctors is to make them aware that such drugs are available in the market in relation to the cure of a particular affliction and, therefore, to persuade them to prescribe the same in appropriate cases and this is tantamount to publicity and sales promotion.” Accordingly, such expenditure should be allowable as business promotion expenditure u/s. 37(1) of the Income-tax Act in the hands of the pharma companies distributing such free samples to doctors. As regards the doctors who receives the free samples, the same cannot be treated as being in the nature of any benefit or perquisite or gift in their hands so as to attract any tax liability.

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