Deep inside the big unregulated medical bazaar, it’s not just about how pharma giants slip in incentives for doctors to promote their products. It’s also about how they exploit cracks in India’s tax mechanism to claim benefits from it.
Records accessed by The Indian Express show that several pharmaceutical and medical devices manufacturers have claimed tax benefits on crores of rupees spent in buying gifts, sponsoring seminars and organising foreign trips for doctors.
And over the last decade, global giants Abbott, Medtronic and Johnson & Johnson were among several companies red-flagged by authorities for allegedly parking such expenses under accounting heads such as “invention”, “advertisement”, “publicity”, “propaganda” and “customer relationship”, to claim benefits under Section 37(1) — tax deduction for expenditure on business or profession — of the Income Tax Act.
Records show that in the absence of an effective regulatory code, the Income Tax Appellate Tribunal (ITAT) ruled in favour of the companies in most of these cases while questioning the applicability of a 2012 tax circular that sought to disallow rebates on expenses incurred for providing “freebies” to doctors.
In 2009, the then Medical Council of India (MCI) amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, prohibiting doctors and their associations from taking any gift, travel facility, hospitality, cash or monetary grant from the pharmaceutical and allied health sector industries.
Based on this guideline, the Central Board for Direct Taxes (CBDT) issued a circular in August 2012, barring a company from deducting expenses prohibited by the law — incentives for doctors — from its business income to claim tax benefits.
In 2014, however, in the case of Max Hospital versus MCI before Delhi High Court, the MCI admitted that the jurisdiction of its 2002 regulations was limited to medical practitioners and did not extend to the healthcare industry, records show.
Subsequently, barring a few notable exceptions, the courts and tribunals have held that the CBDT circular was not applicable since MCA guidelines did not cover the companies, records show. “The CBDT in its power cannot create a new impairment adverse to an assessee or to a class of assessee without any sanction of law,” said a bench of the Mumbai ITAT in its order on an appeal by Solvay Pharma (Abbott India Ltd) in January this year.
During the Implant Files investigation, in collaboration with the International Consortium of Investigative Journalists (ICIJ), which has uncovered, in an ongoing series of reports, how global majors lured doctors to push their products, The Indian Express tracked down three cases inside this regulatory grey zone:
* Solvay Pharma, which merged with Abbott India in 2009, appealed to Mumbai ITAT against the decision of the Commissioner of Income Tax (CIT) that the company’s Publicity and Propaganda Expenses, amounting to Rs 15.95 crore during 2011-2012, were not in the nature of freebies to the doctors.
In its January 2018 order, the ITAT said: “Here the maxim of ‘Expressio Unius Est Exclusio Alterius’ is clearly applicable, that is, if a particular expression in the statute is expressly stated for particular class of assessee then by implication what has not been stated or expressed in the statute has to be excluded for other class of assessee… If MCI regulation does not have any jurisdiction upon pharmaceutical companies… where is the violation of any of law/regulation?”
The tribunal ruled that the CBDT could not enlarge the scope of the MCI regulation to the pharmaceutical companies without an enabling legal provision. “The CBDT cannot provide casus omissus to a statute or notification or any regulation which has not been expressly provided therein,” the order said.
* Medtronic India had declared a total income of Rs 40.90 crore during 2011-12, and the Income Tax authority had made a disallowance of payments to doctors (convention expenses) amounting to Rs 17.23 crore. The company went to ITAT, which ruled in its favour in May 2018. During 2010-11, Medtronic had “debited Rs 13.6 crore” under the head “invention expenses” and the Income Tax department made a disallowance of Rs 6.02 crore. The company appealed before the ITAT, which held in February this year that it was “not a practising professional” and guidelines issued by MCI could not “decide the allowability or otherwise of an expenditure”.
* Synthes Medical Private Ltd, which merged with Johnson & Johnson in 2011, went to the Mumbai ITAT claiming that Rs 5.19 crore spent during 2011-12 “towards convention, education support, symposium expenses in the nature of seminars and conferences (both in India and overseas) for sponsoring the doctors and healthcare workers” was not “payment of commission” as treated by the Income Tax Assessing Officer (AO) and the DRP.
In its April 2018 order, the Mumbai ITAT held that “as far as corporate entities are concerned, MCI cannot issue any guidelines” and that the 2012 CBDT circular was applicable only from Assessment Year 2013-14.
Dr Jayshree Mehta, former president, MCI, said: “Regulation by the Council has to be within the boundaries set for it by Parliament. The conduct of companies and hospitals is subject matter of regulation under the Companies Act or Clinical Establishment Act or State Nursing Homes Act. So it is imperative upon authorities under these Acts to make ethical regulations on MCI model and curb such practices with an iron hand.”
On September 25, the Union Cabinet issued an ordinance to replace the MCI with a Board of Governors (BoG) that will run the Council till the time a Bill, which seeks to replace the body with a new commission, is passed by Parliament.
Dr V K Paul, member, Niti Aayog, and head of the BoG, said: “We are working towards ensuring high professional ethics and reducing temptations for dubious and questionable practices. We gave our inputs to the DoP (Department of Pharmaceuticals) on the matter.”
“Be it capping the price of drugs and (medical) devices or barring foreign trips, sponsorship and gifts for doctors, legal remedies are the only way out. Ultimately, the money comes from fleecing the patient and all the doctors get a bad name for a delinquent few. The government must bring appropriate laws to set the standard,” said Dr Ashwani Goyal, president, Delhi Medical Association.
“This grey area has existed for too long and fostered a chaos of interpretations, often leading to harassment. All it required was a reasonable and practical law enacted by Parliament. It’s six years since that (CBDT) circular was issued and we are still waiting for clarity,” said a senior legal officer with a company in the health sector on condition of anonymity.
The DoP of the Ministry of Chemicals and Fertilisers introduced a voluntary code of ethics for the industry — Uniform Code of Pharmaceuticals Marketing Practices (UCPMP) — in 2014. The voluntary code, which is also applicable to the medical devices industry, was to be reviewed in mid-2015.
However, given the poor compliance record, the government decided to redraft the code near 2015-end and make it mandatory with penal provisions. A fresh draft was ready by July 2017. Since then, the DoP and the Law Ministry are yet to agree on the draft Essential Commodities (Control of Unethical Practices in the Marketing of Drugs) Order 2017.
“We proposed an order under the EC Act but the Law ministry wanted it to be brought through an amendment to DPCO (drug price control order). It’s been about six months since the Niti Aayog gave its suggestions. The decision will be taken at the highest level,” said an official in the DoP.
* The “sum and substance” of the August 2012 CBDT circular was validated by the High Court of Himachal Pradesh in the case of Confederation of Indian Pharmaceutical Industry in December 2012.
* In 2016, the Mumbai ITAT in the case of Liva Healthcare Pvt Ltd held that both MCI regulations and the CBDT circular applied to the company, and ruled that expenses incurred on overseas tours “directed towards leisure and entertainment of doctors and their spouses” was not an allowable expenditure.
* In January 2018, the Chennai ITAT rejected the tax appeal of Apex Laboratories, holding that the 2002 MCI regulation “prohibits the distribution of gift to the doctors and medical practitioners” and expenditure incurred in providing incentives to doctors was not permissible business expenditure.