Income Tax bitter pill for the business of prescription of medicines

[Vivek Jalan]

Not every doctor is corrupt and not every pharmaceutical firm resorts to unethical means to sell their products. However, there is no denying that a large number of doctors and medical companies adopt unfair means. Even the Supreme Court frowned at the expenses incurred on sales promotion of certain medicines. The Hon’ble Supreme Court in the case of M/S APEX LABORATORIES PVT. LTD. VERSUS DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAX PAYER UNIT - II - 2022 (2) TMI 1114 - SUPREME COURT vide order dated February 22, 2022, held that since acceptance of freebies by medical practitioners was punishable as per Circular issued by Medical Council of India under MCI regulations, 2002, gifting of such freebies by assessee pharmaceutical company to medical practitioners would also be prohibited by law and thus, expenditure incurred in distribution of such freebies would not be allowed as a deduction in terms of Explanation 1 to Section 37(1)of the Income Tax Act.

Now consider a case of pharma trading assessee –

A. Sales of assessee - Rs.4.6 Crs

B. GP - Rs.1 Cr

C. Amount paid as commission to doctors - Rs.50 Lakhs.

The figures tell a story and The Circular No. 5 of 2012 dated 01.08.2012, prohibits the aforesaid commission payments since they are in violation of the provision of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulation, 2002 and therefore are not admissible under Section 37 of the Act. Nonetheless, lets understand the argument of the assessee -

A. The Circular speaks about freebies and the same is not applicable to the case of assessee as the commission expenditure cannot be termed as freebies to doctors from pharmaceutical retail stores.

B. The aforesaid Circular is applicable to pharmaceutical industry and hence, the assessee is not covered within the scope of the aforesaid Circular.

However, it needs to be noted that cash or monetary expense, which is not for any research, study, etc. through approved Institutions, paid by “allied health sector” also is included in the ambit of the Circular. Further the question is ‘what is the consultancy service rendered by the doctor’ to the pharma trading taxpayer. The mere fact of calling an activity a consulting activity and deducting TDS on the payment serves no purpose. On the contrary, the fact that the sales of the pharmacy being dependent primarily on the prescriptions made by the doctors to whom the commission was paid, point to the fact that the payment was in substance a sales promotion payment. Hence, it was held in the case of SUNFLOWER PHARMACY VERSUS INCOME TAX OFFICER, WARD-3 (3) (9) , AHMEDABAD - 2023 (10) TMI 27 - ITAT AHMEDABAD that It was apparent that the Medical Council of India in exercise of the powers vested in it under the Indian\ Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 imposed prohibition on any medical practitioner or their professional associates from accepting any gift, travel facility, hospitality, cash or monetary grant from any pharmaceutical and allied health sector Industries. This regulation was a very salutary regulation which is in the interest of the patients and the public and hence once this comes into play, disallowance u/s 37 of Income Tax Act is invoked. These payments would thus be disallowed.