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| DATE: | February 20, 2013 (Date of publication) |
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| Click here to download the judgement (CBDT_Circular_freebies_disallowance.pdf) |
CBDT Circular disallowing expenditure on freebies to medical practitioners is valid
The CBDT issued Circular No. 5/2012 dated 1.8.2012 stating that as the Indian Medical Council had imposed a prohibition on medical practitioners taking any Gift, Travel facility, Hospitality, Cash or monetary grant from pharmaceutical and allied health sector Industries, the expenditure incurred by the assessee in providing such “freebies” had to be regarded as incurred “for a purpose which is either an offence or prohibited by law” and disallowed under the Explanation to s. 37(1) of the Act. The assessees challenged the validity of the Circular on the basis that it went beyond s. 37(1) and was invalid. HELD by the High Court rejecting the contention:
The regulation of the Medical Council prohibiting medical practitioners from availing of freebies is a very salutary regulation which is in the interest of the patients and the public. This Court is not oblivious to the increasing complaints that the medical practitioners do not prescribe generic medicines and prescribe branded medicines only in lieu of the gifts and other freebies granted to them by some particular pharmaceutical industries. Once this has been prohibited by the Medical Council under the powers vested in it, s. 37(1) comes into play. The Petitioner’s contention that the circular goes beyond the section is not acceptable. In case the assessing authorities are not properly understanding the circular then the remedy lies for each individual assessee to file an appeal but the circular which is totally in line with s. 37(1) cannot be said to be illegal. If the assessee satisfies the assessing authority that the expenditure is not in violation of the regulations framed by the medical council then it may legitimately claim a deduction, but it is for the assessee to satisfy the AO that the expense is not in violation of the Medical Council Regulations.
With due respect, the Court seems to have been moved by the noble intention of the Board to curb the unethical practice adopted by pharma companies in bribing doctors in a way. However, the fundamental issue is that the act alleged to be an offence should have been committed by the person who claims deduction under s 37, which in the present case are pharma companies. The question that should be posed is:are pharma companies committing a crime under the MCI Regulations? The answer is no for the reason that the MCI Regulations do not apply to pharma companies. They apply to doctors. Thus, the offence in this case is committed by the receiver of income , not by the person incurring expenditure. Though the intention of the Board is noble it is firing the wrong target. With due respect it must be said that the HC has not consudered the applicability of the MCI Regulations to pharma companies.
Pharma Companies whether small or big, who manufacture low cost generic medicines will continue to give the periodical gifts to the Doctors irrespective of the IMC Regulations. They will do so for their survival. Only difference is that till now they were honest in telling that the gifts are given to Doctors who give some time and patient hearing to their Medical Representatives for presentation of their products. However hereafter they will account it in such a way without disclosing the Doctors.
What is the difference? Unethical Pharma Companies will continue to thrive and the generic pharma manufacturers are turned in to liars henceforth.
K.Y.Ningoji Rao