As the Supreme Court is expected to resume deliberations later this month on a Public Interest Litigation (PIL) related to presumably unethical practices, such as freebies to doctors by pharmaceutical companies, the Central Board of Direct Taxes (CBDT) has underlined provisions of Finance Act 2022 disallowing such expenses by businesses.

This case hit headlines after the lawyer for the petitioner submitted in the Court that the CBDT has alleged that makers of paracetamol tablet, Dolo-650 distributed freebies worth about ₹1,000 crore to doctors as consideration for prescribing the tablet. This case is expected to be listed for next hearing on November 15.

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In a circular dated November 3, explaining various provisions of the Finance Act 2022, CBDT said the legal position is clear that the claim of any expense incurred in providing various benefits is in violation of the provisions of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002. Accordingly, the claim will be inadmissible under the Income Tax Act as such an expense is prohibited by the law.

Further, some taxpayers claim deduction on expenses incurred for a purpose, which is an offence under foreign law or for compounding of an offence for violation of foreign law, claiming that provisions of “Explanation 1 to subsection (1) of section 37 of the Act applies only to offences, which are prohibited by the domestic law of the country.” This view was accepted by some benches of the Income Tax Appellate Tribunal. However, the CBDT is of a different view. “These judgments are also against the intention of the legislation as the legislation does not say that Explanation 1 applies only to the violation of domestic law,” the CBDT said.

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In order to make the intention of the law clear and to make it free from any misinterpretation, another Explanation has been inserted into sub-section (1) of section 37 of the Income Tax Act by the Finance Act. Explaining this, Anita Basrur, Partner (Direct Taxes) with Sudit K Parekh & Co, says, “this aims to clarify the intent of the legislation to avoid litigation due to misinterpretation in the matter of allowability of expenditure incurred by an assessee for any purpose, which is an offence or which is prohibited by law.” This amendment came into effect from April 01, 2022.

Basrur explained that here, expenditure means for any purpose, which is an offence under, or which is prohibited by any law for the time being in force, in India or outside India. Or it could be “to provide any benefit or perquisite, in whatever form, to a person, whether or not carrying on a business or exercising a profession, and acceptance of such benefit or perquisite by such person is in violation of any law or rule or regulation or guidelines, as the case may be, for the time being in force, governing the conduct of such person.”

Now, the important thing is that there are Indian Medical Council’s regulations, which prescribe a code of conduct for doctors in their relationship with pharma and allied health sector, and bar them from accepting gifts and entertainment, travel facilities, hospitality, cash, etc., which does not apply to drug companies. So, doctors’ licences are cancelled for misconduct that is actuated, encouraged, aided, and abetted by pharma companies.