Last Updated on May 29, 2022 by The Health Master
The Finance Bill has pulled the plug on the practice adopted by pharmaceutical companies of claiming as a business deduction the cost of various freebies, including foreign trips provided to doctors.
In other words, since such expenditure can no longer be claimed as a business deduction, it will increase the taxable profits (or reduce the business loss) of a pharma company and is likely to make handing out freebies less attractive.
Diving deep into various contrary judicial decisions, the Explanatory Memorandum to the Finance Bill states:
“The legal position is clear that the claim of any expense incurred in providing various benefits in violation of the provisions of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, shall be inadmissible under section sub-section (1) of section 37 of the Act, being an expense prohibited by the law.”
TOI, in its edition dated October 16, 2021, had covered a related decision of the Mumbai Income-tax Appellate Tribunal (ITAT). The tax tribunal in the case of Macleods Pharmaceuticals had observed that the freebies from pharma companies came with strings attached. Freebies cannot be lawfully accepted by medical professionals under the Medical Council Act and its rules.
Therefore, expenditure on such freebies is for a purpose prohibited by law. An explanation to Section 37(1) of the I-T Act denies claim of any such expense if the same has been incurred for a purpose that is either an offence or prohibited by law. This explanation was inserted by the Finance Act, 1998, with retrospective effect from April 1, 1962.
The tax dispute related to two years and the cumulative sum of the freebie was Rs 248.7 crore. However, given a contrary ruling by a coordinate bench, where the cost of the freebie was allowed as a business deduction, it had referred the matter to a larger bench of ITAT.
The Finance Bill also nixes the claim as a deduction of expenses that are an offence under foreign law. The Explanatory Memorandum points out that, in some cases, the tax tribunals have accepted such a claim.
The exhaustive proposed legislative wording will now ensure that taxpayers cannot claim as a business deduction any expenditure incurred for any purpose that is an offence or is prohibited by any law, whether in India or overseas.
They can also not claim as expenditure anything in the nature of a benefit provided to another person (say a doctor), where acceptance of such a benefit was in violation of any law or rule governing his/her professional conduct.
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