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Whether an item of expenditure on account of freebies to medical professionals, which is hit by rule 6.8.1 of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002- as amended from time to time, read with section 20A of the Indian Medical Council Act 1956, can be allowed as a deduction under section 37(1) of the Income Tax Act, 1961 read with Explanation thereto, in the hands of the pharmaceutical companies?

2. When the grievances raised by the Assessing Officer, as referred to in paragraph 1 above, came up for our consideration, we noticed that the related material facts are like this. By way of these appeals, the Assessing Officer has challenged correctness of a consolidated order dated 27th June 2018, passed by the learned CIT(A), in the matter of assessment under section 143(3) r.w.s. 153A of the Income Tax Act, 1961 for the assessment years 2011-12 and 2012-13. The only grievance raised in these two appeals, as noted earlier, is by raised by way of a question requiring our adjudication, as to whether "the learned CIT(A) was erred "in deleting the disallowance made (of Rs 111,11,70,500 for the assessment year 2011-12 and of Rs 137,62,61,659 for the assessment year 2012-13- aggregating to Rs 248,74,32,259) on account of freebies to the doctors." The assessee before us is a company engaged in the business of manufacturing pharmaceutical products, such as tablets, capsules, liquids and injectables etc. This is a case in which the assessee company was subjected to a search and seizure operation on 28th January 2016. It was in this backdrop that the assessments were reopened, and the present assessment proceedings under section 153A r.w.s 143(3) were initiated. During the course of these assessment proceedings, the Assessing Officer noted that while the assessee has Rs 221.25 crores on sales promotion so far as the assessment year 2012-13 is concerned, and Rs 139.07 crores so far as the assessment year 2011-12 is concerned, the amounts spent to the extent of Rs 137.62 crores for the assessment year 2012- 13 and Rs 111.11 crores for the assessment year 2011-12 pertains to payments of freebies to doctors. These amounts, according to the Assessing Officer, included "payments made for gifts, promotion items, facilities etc given to various medical practitioners within the country as well as abroad". As for the details of expenses in question, for example, the breakup of expenses on account of freebies to doctors for the assessment year 2012-13 is, as given at page 47 of the paper-book, as follow:

17. Learned counsel has then submitted that Medical Council of India regulations bind the medical professionals and not the pharmaceutical companies, and, therefore, these regulations cannot be pressed into service for disallowing the bonafide business expenses incurred by the pharmaceutical companies. This contention is only fit to be noted and rejected. The relevant question is not whether pharmaceutical companies are allowed to incur such an expenditure or not, the relevant question is whether the purpose of which the expenditure is incurred is prohibited by law or not, and if the purpose is unlawful, as to what are the inevitable corollaries of incurring expenses for „any purpose.......which is prohibited by law‟, and one of these corollaries, under Explanation to Section 37(1) is that such an expense is that it "shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure". If there is a prohibition for incurring an item of expenditure by the pharmaceutical companies, such expenditure cannot be incurred at all and the discussions about its admissibility as deduction are wholly academic. The true test, therefore, is whether the expense is incurred for any ITA Nos. 5168 & 5169/Mum/2018 Assessment year: 2011-12 and 2012-13 purpose which is prohibited by law or not. When acceptance of freebies by the doctors is prohibited by law, as undisputedly is the position, can it be said that extending these freebies does not constitute expenditure for a purpose that is prohibited by law. It may be perfectly legal for a corporate to send free first-class tickets and hotel vouchers for vacations abroad to anyone but when they extend such freebies to the public servants, who are forbidden under the law from accepting the same, it cannot be said that the expenditure is made for a purpose not prohibited by law. The true test, therefore, is whether such a transaction is legally permissible in principle. When it is not permissible in law, for whatever reasons, the purpose of the transaction is required to be treated as „prohibited by law‟. Let us in this light, look at Section 20A(1) and (2) of the Indian Medical Council Act 1956, which provides that "The Council may prescribe standards of professional conduct and etiquette and a code of ethics for medical practitioners" and that "(Regulations made by the Council under sub- section (1) may specify which violations thereof shall constitute infamous conduct in any professional respect, that is to say, professional misconduct, and such provision shall have effect notwithstanding anything contained in any law for the time being in force". It is under powers vested under section 20A of the Indian Medical Council Act 1956 that the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 have been framed and under rule 6.8 thereof, as it came into effect vide Gazette Notification dated 14th December 2009, it is inter alia provided as follows:

19. In view of the above discussions, it is clear that the regulations prohibiting the acceptance of freebies by the medical professionals provide, under section 20A of the Indian Medical Council Act 1956 read with rule 6.8 of Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002, as amended from time to time, that such freebies cannot be lawfully accepted by medical professionals, and, therefore, any expenditure incurred for extending these freebies to the medical professionals is for a ITA Nos. 5168 & 5169/Mum/2018 Assessment year: 2011-12 and 2012-13 "purpose which is prohibited by law". On these facts, therefore, Explanation to Section 37(1) is clearly attracted.

20. It is an open secret, secret if it is, that all these freebies extended by the pharmaceutical companies to the medical professionals, more often than not, come with strings attached, and that is what makes the expenditure in question for a purpose which is, as discussed earlier, „prohibited by law‟. The plea of the learned counsel that these regulations do not bind pharmaceutical companies, and, therefore, extending these freebies to medical professionals canot be treated as „prohibited by law‟ is thus wholly irrelevant in the present context. What is material is that the expenditure in question is incurred for the purposes which are prohibited in law, and that is what disqualifies the expenditure in question from deduction under section 37(1) by virtue of Explanation thereto. The freebies from pharmaceutical companies cannot, under section 20A of the Indian Medical Council Act 1956 read with rule 6.8 of Indian Medical Council (Professional conduct, Etiquette and Ethics) Regulations, 2002, as amended from time to time, be lawfully accepted by medical professionals and, therefore, an extension of such freebies is for a purpose „prohibited by law‟. The stand of the Assessing Officer cannot, therefore, be faulted.