Recently, a spate of decisions have come from Tax Tribunals both against and in favour of

the taxpayer on the issue of sales promotion expenses incurred on doctors. Legal view
pronounced by the Tribunals in these decisions are discussed in Annexure B.

1.In the case of Johnson & Johnson Ltd v. Addl. CIT [TS-6551-ITAT-2014(MUMBAI)-O]the
issue was whether expenses expended on the sponsorship of various doctors for attending
various training programmes can be disallowed. The Mumbai Tribunal, in para 44, Ground
No 9 of the Order, held that by spending this amount, the assessee-company had invested for
future benefits and, therefore, disallowance of 10% of such expense treating them for non-
business purposes was not justified. Similarly, in the case of ACIT v. Geno Pharmaceuticals
Ltd (2014) [TS-6616-ITAT-2014(PANAJI)-O], a decision delivered post CBDT Circular No.
5/2012, dated 1/8/2012, sales promotion expenses paid to / incurred on doctors including
travelling and conveyance, selling and distribution expenses, conference expenses were held
to be against the ethics of doctors. The A.O. held that the MCI Regulations Act, 2002,
prohibited doctors from accepting any gift for any kind of services from pharmaceutical
companies and, therefore, such expenditure was to be disallowed. The Tribunal found that
when any product is launched by the assessee, the assessee has to publish the material and it
has to make the doctors aware of the medicine manufactured by the assessee. When any new
product is launched, there is a lot of conference and for arranging the conference the
industry has to incur the expenses for travelling and other expenses. Therefore, we are of the
view that such expenditure is admissible under sec 37.

2. In the case of Apex Laboratories (P.)Ltd v. ACIT (2017) [TS-5503-ITAT-

2017(CHENNAI)-O] the Chennai Tribunal held that in view of Medical Council
(Professional Conduct, Etiquette and Ethics) Regulations, 2002, expenditure
incurred by the taxpayer by way of freebies and gifts to doctors and medical
practitioners was not allowable business expenditure under sec 37(1) of the Income
tax Act. The company claimed that in order to create awareness its product and
popularize them it incurred sales promotions expenses mainly in the form of
refrigerators, LCD TVs, Laptops, gold coins, etc. The company claimed that these
expenses were mainly intended to disseminate the information to the medical
practitioners and from them to the ultimate consumers. Therefore, these expenses
were essentially advertisement expenses for creating awareness and to promote
sales. The company also claimed that the provisions of MCI Regulations 2002, apply
to doctors only. However, the CIT(A), the said regulations equally apply to a pharma
or allied industry. Further, gifts and other expenses were covered by Explanation to
section 37(1) of the Income tax Act. Any expenses incurred on doctors and medical
practitioners, by way of freebies and gifts, are within the scope of the said proviso.
The Tax Tribunal held that Medical Council (professional Conduct, Etiquette and
Ethics ) Regulations, 2002 prohibits distribution of gift to the doctors and medical
practitioners and accordingly, rejected the tax appeal of the company. The Chennai
Tribunal did not consider or refer to the decisions in the case of DCIT v. PHL Pharma
(P) Ltd [TS-12-ITAT-2017(Mum)] [case favourable to the taxpayer] and ACIT v. Liva
Healthcare Ltd [case against the taxpayer] TS-6132-ITAT-2016(MUMBAI)-O

3.The Punjab & Haryana High Court in the case of CIT v. KAP Scan and Diagnostic
Center (P.) LtdTS-5878-HC-2010(PUNJAB & HARYANA)-O held that Commission
paid by the diagnostic center to private doctors for referring patients for diagnosis
could not be allowed as a business expenditure. The High Court observed that
provide that no physician shall give, solicit, receive, or offer to give, solicit or receive,
any gift, gratuity, commission or bonus in consideration of a return for referring any
patient for medical treatment. If demanding of such commission was bad, paying it
was equally bad. Both were privies to a wrong. Therefore, such commission paid to
private doctors was opposed to public policy and should be discouraged.

4. In ACIT v. Liva Healthcare Ltd [TS-6132-ITAT-2016(MUMBAI)-O] the Mumbai

Tribunal held that (a) expenses incurred by the taxpayer pharmaceutical company on
overseas tours of doctors to increase their sales and profitability was not an
allowable expenditure as overseas trip were directed towards leisure and
entertainment of doctors and their spouses rather than being directed towards
seminar for product information dissemination as no details of seminar and its course
content were brought on record; and (b) expenses incurred towards free samples
distributed to physicians will be allowable only if free samples of pharmaceutical
products are distributed to physicians/doctors at initial stage of introduction to test
efficacy of products and same are incurred wholly and exclusively for purposes of
business. The Tribunal held both CBDT Circular and MCI Guidelines applied in the
case of taxpayer.

5. In the case of DCIT v. PHL Pharma (P) Ltd, the Mumbai Tribunal after
considering the adverse / contrary decision of ACIT v. Liva Healthcare Ltd held that
expenditure incurred by assessee Pharma Company for customer relationship
management (CRM), key account management, small value or cheap / low cost gift
articles (these items included diaries, pen sets, injection boxes, calendars, table
weights, postcard holders, stationery items, etc., wherein logo of the company and
name of the medicine was printed so as to maintain brand memory on a continuous
basis). Smaller size free medicine samples (marked as “physician sample not for
sale”) were given only to prove the efficacy and to establish the trust of the doctors
on the quality of the drugs. Advertisement and sales promotion could not be
considered as freebies given to doctors, they were purely for brand recognition;
allowable as business expenditure and were not impaired by Explanation 1 to
section 37(1) of the Income tax Act. The Tax Tribunal held that CBDT Circular No. 5
of 2012, dated 1/8/2012 applied prospectively and the MCI Guidelines were meant
only for the medical practitioners and not for pharmaceutical or allied healthcare
companies. Therefore, these expenses cannot be regarded as unlawful or illegal at
least in the hands of the pharma company.

In the above case, expenses have not been incurred for the purpose personal
benefit/enjoyment of the doctors or their spouses. In the case of Liva Healthcare, the
question as to whether such IMC Regulations can be applicable to Pharma
Companies was not argued before the Tribunal. The Delhi High Court in the case
of Max Hospital v. MCI [(WPC No. 1334 (Delhi) of 2013, dated 10/1/2014] and the
Jurisdictional Tribunal in the case of Syncom (supra) have held that such IMC
Regulations apply only to medical practitioners. the Hon'ble Delhi High Court in the
case of Max Hospital (supra) and the Jurisdictional Tribunal in the case of Syncom
Formulations (I.) Ltd. [IT Appeal Nos. 6429 & 6428 (Mum.) of 2012, dated 23-12-
2015] have held that such IMC Regulations apply only to medical practitioners.
Similar issue of allowance of such expenditure in the case of pharmaceutical
companies has been decided in favour of the assessee, in the case of UCB India
(P.) Ltd. v. ITO [IT Appeal No. 6681 (Mum.) of 2013, dated 13-05-2016], wherein it
was held that CBDT circular cannot have a retrospective effect. This judgment was
lost sight of by the Mumbai Tribunal Liva Healthcare. The Mumbai Tax Tribunal has
not elaborated or dwell upon as to how this MCI regulation which is strictly meant for
medical practitioners and doctors can be made applicable to pharmaceutical
companies. There has to be some enabling provision or specific clause in the said
regulation whereby the pharmaceutical companies are barred from conducting
seminars or conferences by sponsoring the doctors. The entire conduct relates to
doctors and medical practitioners and lists out the censures and fines imposed upon
them. What has not been provided in the MCI regulation cannot be supplied either by
the court or by the CBDT. There has to be express provision under the law whereby
pharmaceutical companies are prohibited to conduct conferences or seminar or give
free samples.

6. Most recently, the Hyderabad Tribunal was also seized of a similar issue in the
case of Dr. Reddy’s Laboratories Ltd v. Addl. CIT [TS-5033-ITAT-
2017(HYDERABAD)-O] wherein the Tribunal after referring to the decisions in the
case of ACIT v. Liva Healthcare TS-6132-ITAT-2016(MUMBAI)-O and DCIT v. PHL
Pharma (P) Ltd, accepted the arguments of the taxpayer that sales promotion
expenses were not opposed to public policy despite the fact that expenditure
towards gifts, hospitality, etc., was in violation of MCI Regulations but so far as the
company was concerned, there was no infraction of any law. The said guidelines are
applicable to medical practitioners / doctors only and the CBDT Circular No. 5/2012,
dated 1/8/2012, cannot be applied retrospectively. However, the Tribunal remanded /
send the matter back to the ITO to verify the nature of sales promotion expenses and
disallowe them only, if such expenditure was not incurred for the business purposes
of the company.