Freebies to Doctors Illegal: ITAT disallows Rs 1 crore business promotion expenses by Mankind Pharma on gift cards

New Delhi: Denying relief to drugmajor Mankind Pharma Ltd., the Income Tax Appellate Tribunal(ITAT), Delhi has rejected its plea with respect to the disallowance of sale promotion expenses of more than Rs 1 crore to doctors by way of gift cards noting that freebies given to doctors are illegal and does not fall under the head “Business Promotion Expenses”.

The bench comprising Anil Chaturvedi and Challa Nagendra Prasad, heard the appeal filed by Mankind Pharma against the order of the Deputy Commissioner of Income Tax. The drug maker submitted that no justification was given by the department in denying the sales promotion expenses incurred by the drug maker (assessee) in the form of freebies given to doctors.

Mankind originally filed its return of income for annual year 2014-15 on 30.11.2014 declaring total income of Rs4,19,43,77,124/-. The drug maker thereafter revised return of income on 19.05.2015 declaring total income of Rs.4,18,92,68,457/-. The case was selected for scrutiny and thereafter assessment was framed u/s 144C(13) r.w.s 143(3) of the Act vide order dated 12.09.2018 and the total income was determined at Rs.4,20,50,55,730/-. Aggrieved by the order of Assessing Officer (AO), Mankind raised the appeal the following grounds:

1. “That under the facts and circumstances, there is no legality as well as justification on merits for disallowance of the sales promotion expenses of Rs.1,06,78,600/- by holding the same as hit by explanation to Section 37(1) of the Act.

2. “The appellant carves to add/amend/alter any or all grounds of appeal at the time of hearing.”

It has to be noted that earlier this year, Supreme Court had announced its verdict clarifying on freebies to doctors. Medical Dialogues team had earlier reported about the apex court clarifying that gifting “freebies” to doctors by such companies is “prohibited by law” and it cannot be claimed as a deduction under the Income Tax Act. The observation was made by the top court bench comprising of justices U U Lalit and S Ravindra Bhat while dealing with the case where Apex Laboratories Pvt. Ltd had spent Rs 4,72,91,159 on gifts to doctors for creating awareness about the health supplement ‘Zincovit’.

Also Read: Pharma Freebies To Doctors: Supreme Court Announces Its Verdict

In the instant case, the Tribunal considered the nature of promotion expenses to decide whether the addition by the Assessing Officer(AO) was justified.The AO, during the assessment proceedings had noticed that Mankind Pharma had made payments to the doctors by way of gift cards which could be exchanged for cash/merchandise from various locations and the same was debited to “Business Promotion Expenses”.

The AO was of the view that payment of all gratification money by Pharmaceutical Companies to the Doctors is prohibited as per the guidelines issued by Medical Council of India (MCI).

It was also noticed by the AO that such expenses were covered under Explanation to Section 37(1) of the Income Tax Act, 1961, making such transactions illegal and any deductions so claimed, disallowable as such expenses shall not be deemed to have been incurred.

The Tribunal identified that the recent ruling in Apex Laboratories Pvt. Ltd. vs. DCIT (2022) by the Supreme Court of India was squarely applicable in this matter. Placing reliance on the said case, the Tribunal eventually dismissed the appeal by Mankind Pharma and held;

We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the disallowance of sale promotion expenses of Rs.1,06,78,600/- by holding it to be covered by Explanation of Section 37(1) of the Act. We find that Hon’ble Apex Court in the case of Apex Laboratories Pvt. Ltd. (supra) has held that acceptance of freebies by medical practitioners was punishable as per Circular issued by Medical Council of India under MCI Regulations, 2022, gifting of such freebies to medical practitioners would also be prohibited by law and therefore expenditure incurred in distribution of freebies would not be allowed as deduction in view of Explanation – 1 to Section 37(1) of the Act. Before us, no contrary binding decision in its support has been placed by assessee. Further, before us, Learned AR has also admitted that the issue in the present appeal is covered against the assessee by the decision of aforesaid Apex Court. In such a situation, we do not find any reason to interfere with the order of CIT(A). Thus the grounds of assessee is dismissed.

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