Expenditure on free samples/ gifts to doctors allowed by Tribunal- Circular is not retrospective

[CA DEV KUMAR KOTHARI]

Relevant references and links:

Section 37 (1) of Income-tax Act, 1961.

Circular No. 5/2012  Dated 1-8-2012 found on https://www.taxmanagementindia.com/Print/print_circular.asp?ID=11763

Judgment holding circular valid:

Confederation of Indian Pharmaceutical Industry (SSI) Versus Central Board of Direct Taxes and Union of India  2013 (7) TMI 387 - HIMACHAL PRADESH HIGH COURT

Recent judgment of ITAT:

Syncom Formulations (I) Ltd. Versus DCIT-8 (3) , Mumbai and Vica-Versa [2016 (2) TMI 263 - ITAT MUMBAI]

General discussion:

Pharmaceutical companies and companies engaged in business of manufacturing / trading of medicines, equipment’s, and allied goods required in medical care provide samples to doctors for information to doctors and to get feedback from doctors on effectiveness of such products. This also creates brand image and help in brand recall. In case of newly launched products, sample distribution is very much required to provide information to doctors.

Therefore, providing such samples to doctors is very important and are measures of dissemination of information and to promote sale.

When competitors are providing samples, it becomes imperative to provide samples otherwise, the product will gradually forgotten by doctors who prescribe medicines.

Therefore, distribution of samples to doctors is as per trade practices and are out of commercial expediency.

Sample are not for sale:

On such samples it is clearly written that these are not for sale. Therefore, doctors use them for testing, and even as gift to poor patients in need of medicines. There cannot be element of income in hands of doctors.  

Other freebies like sponsorship of conference etc. are also related with medical profession and business of medicines and equipment’s. Attending of conference by doctors is therefore not for pleasure and entertainment. Though there can be some personal benefit derived by them by having a chance of site seeing or meeting relatives and friends in city of conference. But that does not make such freebies as illegal or improper. Though there must be some check and balances to avoid mal practices.  

Circular of Board:

The CBDT has issued circular (supra)  instructing disallowance of  cost of samples and other gifts provided to doctors by medicine manufacturers ,equipment manufacturers. The Board took view that as per law applicable to professional ethics applicable to doctors they cannot accept such gifts. The Himachal Pradesh High Court has held the circular valid and dismissed petition of Applicant Association holding that the receiving of gifts etc. by doctors is not permitted by Medical Council of India.(MCI).

MCI guidelines- should be updated:

Guidelines issued by Medical Council of India (MCI) are very old and can be called outdated for some aspects. On consideration of changes in business circumstances these guidelines need to be reviewed and updated according to present time needs. There was a time when any doctor (even a Vaidya  was considered to treat all ailments. Now time is of specialisation and research and development.

There are more new products, and also increased obsolescence of ole products. Therefore, more information need to be exchanged. 

There is also intense competition at worldwide level, for this reason also more advertisement and publicity is required. In case of medicines and allied products for medical treatment, in fact consumption and sale is based on prescriptions of doctors.  Therefore, the guidelines of MCI need to be reviewed to suit changed times.

Recent judgment of ITAT Mumbai:

In the judgment in case of Syncom Formulations (I) Ltd (supra) the honourable Tribunal, considered the matter of allowability of costs of free samples and gifts to doctors made by assessee. Tribunal allowed deduction observing inter alia as follows:

1. Receiving of gifts by doctors was prohibited by MCI guidelines.
2. giving of the  such gifts,(popularly called freebies given to medical practitioners) by manufacturer is not prohibited under any law for the time being in force.
3. Giving small gifts bearing company logo to doctors does not tantamount to giving gifts to doctors but it is regarded as advertising expenses.
4. Sponsoring doctors for conferences and extending hospitality, pharmaceuticals companies have been sponsoring practicing doctors to attend prestigious conferences so that they gather contemporary knowledge about management of certain illness/disease and learn about newer therapies.
5. The disallowance was made by the AO by relying on the CBDT Circular dated 01.08.2012. However, the Circular was not applicable because it was introduced w.e.f.01.08.2012. i.e. assessment year 2013-2014,and onwards, whereas the relevant assessment year under consideration is 2010-2011 and 2011-2012

Conclusion:

The judgment of Tribunal is well reasoned. Besides, as discussed in general discussion, author feels that MCI guidelines should also be revised to make them suitable according to changing times. Guidelines should be practical and not impractical. If any such guidelines are not keeping pace with time, they will find violation and concerned people may be forced to find out some routes and indirect ways to give and receive gifts.

Other aspects:

TV Serial  Ek Nayi Ummeed – Roshni  - showed malpractices in private hospitals:

In this regard author recalls that a TV Serial  Ek Nayi Ummeed – Roshni  was started  [premiered on 13 July 2015 and broadcast on Life OK  TV channel ]. The serial  showed world of doctors, in India and abroad. However, it was soon discontinued after  it started to show many such malpractices adopted in private hospitals to promote sale. Any valid  reason for stopping such a good serial is not available on websites as to why this serial was  abruptly and very soon closed (The last episode on November 13,2015) after it aired some episodes which included clear message about  serious malpractices prevailing in private hospitals.

Public is well aware of such malpractices, still many have to visit such hospitals , merely for some reasons like less cleanliness, less attention at government hospitals and psychological reasons as to what others will say, if he is noticed at a government hospital. The wrong mind set is that government hospitals is not for well to do people and there is no medical treatment in government hospitals. These people ignore fact that more than 95% of medical treatment is still done in government hospitals and private hospitals caters only 5% of total medical requirements.  

Family of author had very bad experience at few private hospitals and now consider that if we want medical treatment we must go to a government hospital as a general public (and not VIP), and if you want to get VIP treatment then only go to private hospitals, where there is every possibility that un-necessary complications may be created by consortium of private hospitals, diagnostic centre and private practicing doctors and it is likely that you may be made sick of many more ailments.

 Commission culture should be checked:

Market grapevine and public feeling that pharmaceutical companies, diagnostic centres, private hospitals etc. pay commission to doctors as referral fees or as part of professional fees based on sale of goods / services achieved through prescription/ reference of doctors is a serious aspect. It is also felt that due to such practices, unnecessary medicines and diagnosis are prescribed. Even cases of wrong reporting are experienced which are simple devices to increase supply of medicines and diagnostic services and occupancy of hospital beds. It is learnt that targets are given to Medical Representatives (MR), and other executives to achieve set targets. As a result, culture of commission is increasing. This really need to be checked. Will government department including Income-tax Department help poor patients from such malpractices?