Analysis, Income Tax

Madras High Court takes on Pharmaceutical Firms

A legal and ethical issue has been brought before the Madras High Court by the tax department raising a conflict in the applicability of the laws applicable to the pharmaceuticals company and the allied health industry. The developments are almost Shakespearean.

In Shakespeare’s play – Macbeth – Macbeth asks the three witches to predict his future. One of the prophecies says that:

Be brave like the lion and proud. Don’t even worry about who hates you, who resents you, and who conspires against you. Macbeth will never be defeated until the Birnam Wood marches to fight you at Dunsinane Hill.

This foretelling makes Macbeth supremely confident about his fate as he thinks there is no way a forest will come to fight him. Foretelling is a device much used in literature to help readers get a sense of what’s about to come and still surprise them. You might think that’s also the case with CBDT circulars that are yet to become the law.

While we won’t spoil the Macbeth story for you by revealing the end, I am sure we all want to know how the Madras HC story will evolve.

Section 37(1) of the Income Tax Act

Section 37 (1) of the Income Tax Act provides that deduction can be claimed for all the business expenditure incurred by the assessee. However, Explanation 1 to the section makes it impermissible if the expenditure is on illegal activities or activities prohibited by law.

The Question of Law

So the question is:

Can the gifts: free medicine samples, travelling allowances, hospitality benefits etc., provided to doctors in return of subscribing their drugs to the patients, which the companies claim to be business expenditure for sale, development and marketing, be allowed or are they rendered impermissible under Explanation 1 to sec 37(1)?

MCI Regulation

Many Income Tax cases argue that the while the code of conduct guidelines in the MCI regulation prohibit doctors and medical professionals from accepting gifts and other monetary benefits it cannot be applied to pharmaceutical companies as they fall outside the purview of the MCI.

CBDT Circular No. 5/2012

Further, circular passed by CBDT no. 5/ 2012 is an instruction of sorts to the Revenue department to ensure pharmaceutical companies are not claiming the deduction for what the MCI regulation classifies as “gifts” to medical professionals.

Pre Madras High Court

Prior to Madras HC taking cognisance of this issue, the issue was at the core of 800+ cases, and most judgments were in favour of the pharmaceutical company. And a gist of what they said is:

  • What is expressly applied to one type of assessee cannot be applied to another. MCI being applicable to doctors and not pharmaceutical companies.
    Expressio unius est exclusio alterius prinicple
  • CBDT circular is not a statute or regulation and hence can be governed by case law or new judge-made law.
    Casus omissus principle

Proceedings at Madras HC

Madras High Court suo moto invoked Article 226 of the Constitution of India to consider the larger issues of bribing of doctors and overpricing of drugs by Pharmaceutical Companies after a tax appeal was filed by the tax department against the order passed by the ITAT in favour of the assessee viz., M/s. Fourrts (India) Labs Pvt Ltd.

The High Court has suo moto impleaded Union of India, MCI and National Pharmaceuticals Pricing Authority as respondents and framed 12 questions relating to the activities undertaken by the doctors and the pharmaceutical companies demanding answers for the same on urgent basis. The Tax department has provided a record of 8667 companies have claimed a tax deduction under section 37(1) of the Income Tax Act so far. 

What Next?

The journey for this issue will certainly be interesting, and possibly a long one. Will it mean that the forest has come marching to the doorstep of Macbeth? There’s no better way to be in the loop than following this issue on Riverus Telescope.

Written by Anushree Jugade, Product Manager @ Riverus

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