By TIOL News Service

MUMBAI, SEPT 20, 2016: THE issue is - Whether sum spent to keep doctors in good humour so that they recommend assessee's pharma products to patients amounts to illegal gratification and same is not allowable expenditure. YES is the answer.

Facts of the case

The assessee is engaged in manufacturing of drugs and pharmaceutical. The AO observed from the P&L Account of assessee that it had incurred a certain amount for sponsoring the Doctors overseas Tour. The assessee claimed that the said expenses are allowable u/s 37 of the Act being incurred wholly and exclusively for the business of the assessee and being revenue in nature and not capital nor personal in nature. Assessee further claimed that the real persons who create the market for a particular drug are the Medical Practitioners and for this purpose the assessee had organized various seminars, group visits at various places. However, since he failed to produce any records to show that whether any seminar was conducted during these trips, therefore, AO rejected the contentions of the assessee and disallowed the expenditure. Upon appeal before the CIT(A), the additions made by the AO were confirmed. Aggrieved assessee preferred an appeal.

Further, the AO observed that assesseee had claimed expenses towards free samples distributed to the physicians. It was submitted that the twin purpose of distributing free samples is to test the efficacy of the products as well as advertisement, publicity or sales promotion. It was also submitted that the assessee had a well established internal control system to monitor distribution of such free samples. He submitted copies of invoices for the physician samples purchased during the relevant previous year. The assessee claimed that the expenditure incurred on distribution of free samples is purely on account of advertisement and business promotion expenses incurred during the course of the business only. The assessee did not furnish the data which could facilitate the co-relation of the date of introduction of products with the quantity of samples provided , nor the assessee provided the list of recipients of samples and amount and monthly break-up of data , which would facilitate the enquiry to prove that the free samples distributed was wholly and exclusively for the purposes of its business activity. Accordingly, AO disallowed the same. Upon appeal, CIT(A) allowed the expenses. Aggrieved Revenue preferred an appeal.

Having heard the parties, the Tribunal held that,

++ these expenses are clearly hit by regulation 6.4.1 of the Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002 which existed during the previous year 2008-09 which created bar on the physicians on receiving gifts , gratuities, commissions or bonus in consideration of or return for the referring , recommending or procuring of any patients for medical, surgical or other treatment. The expenditure has been admittedly incurred by the assessee with an objective to keep doctors in good humor to seek favours from them by way of recommending the pharmaceutical products dealt within by the assessee to the patients so that sales and profitability of the assessee company increases more and more which clearly reflect that these are illegal gratification against public policy being unethical prohibited by law. The CBDT circular in this regard is merely clarificatory in nature and creates a bar on such illegal payments being against public policy, the said bar always existed in the statute by virtue of the existence of explanation to Section 37 of the Act and in our considered view based on factual matrix of the case as emerging from the records, the expenses incurred by the assessee company are directly hit by explanation to Section 37 of the Act;

++ there is one more fact which had come to our notice on perusal of the invoices raised by K.V.Travels Private Limited and the invoice which pertained to air tickets and hotel arrangements of Doctors for Istanbul Trip that spouses of the Doctors also accompanied the Doctors to overseas trip to Istanbul and these expenses claimed by the assessee as revenue/business expenditure included the costs incurred for travel overseas to Istanbul of spouses of Doctors also, and also the arrangements included cruise travels to island, gala dinners, cocktails, gala entertainment etc. which clearly reflect that these overseas trips are merely to entertain doctors abroad and lure doctors to solicit business for the assessee by unethical , illegal and prohibited means which is an offence under the regulation 6.4.1 as it existed during the relevant previous year under the Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002 and hence is clearly hit by explanation to Section 37 of the Act and is not allowable as revenue/business expenditure in the hands of the assessee;

++ the decision rendered in the case of Eskayef (Now Known as Smithkline Beecham) Pharmaceuticals (India) Limited v. CIT in context of Section 37(3A) of the Act and the assessment year involved therein are prior to insertion of explanation to Section 37 of the Act by Finance Act, 1998 but the ratio of law laid down by Supreme Court w.r.t. to the test of free samples being considered as the stage of introduction of the medicine to test its efficacy being incurred wholly and exclusively for the purposes of business and grant of free samples at the stage after introduction of the medicine in the market when its uses are established , to be treated as advertisement and sales promotion expenses remains very much relevant. The said distinction laid down by Supreme Court read in conjunction with explanation to Section 37 of the Act and regulation 6.4.1. of The Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002 makes it clear that such free samples granted post introduction of pharmaceutical products in market when its end use stood established will be hit by explanation to Section 37 of the Act and shall not be allowable as deduction.

(See 2016-TIOL-1681-ITAT-MUM)