Gifting Freebies To Doctors Prohibited By Law ; Pharma Companies Cannot Claim It As Deduction U/Sec 37(1) Income Tax Act: Supreme Court

The Supreme Court held that 'pharmaceutical companies' gifting freebies to doctors is prohibited by law and they cannot claim it as a deduction under Section 37(1) of the Income Tax Act.

These freebies are technically not 'free' – the cost of supplying such freebies is usually factored into the drug, driving prices up, thus creating a perpetual publicly injurious cycle, the bench comprising Justices Uday Umesh Lalit and S.Ravindra Bhat remarked.

Section 37 provides that any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".

The Explanation 1 clarifies that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law 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.

Regulation 6.8. of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 makes acceptance of freebies given by pharmaceutical companies by the medical practitioner, punishable with varying consequences.

The Central Board of Direct Taxes ( "CBDT") issued a circular , which clarified that expenses incurred by pharmaceutical and allied health sector industries for distribution of incentives (i.e., "freebies") to medical practitioners are ineligible for the benefit of Explanation 1 to Section 37(1). It issued a notice to Apex Laboratories Pvt. Ltd. to explain why the expenditure of ₹ 4,72,91,159/- incurred towards gifting freebies such as hospitality, conference fees, gold coins, LCD TVs, fridges, laptops, etc. to medical practitioners for creating awareness about the health supplement 'Zincovit', should not be added back to the total income of Apex. The Deputy Commissioner of Income Tax partially allowed amounts claimed by Apex as 'business expenditure' under Section 37(1).  The Commissioner of Income Tax (Appeals) partly allowed the appeal. The Madras High Court dismissed the challenge against this order passed by CIT(A). 

Before the Apex Court, the appellants contended that 2002 Regulations were not applicable to Apex, i.e., pharmaceutical companies were not bound by them. On the other hand, the Revenue authorities submitted that the act of pharmaceutical companies gifting freebies to medical practitioners for promotion of their products may not be classified as an 'offence' under any statue, it was squarely covered within the scope of Explanation 1 to Section 37(1) by use of the words "prohibited by law", as it was specifically prohibited by the amended 2002 Regulations.

Referring to Section 37, the bench observed that Explanation 1 contains within its ambit all such activities which are illegal/prohibited by law and/or punishable. The court observed:

"Section 37 is a residuary provision. Any business or professional expenditure which does not ordinarily fall under Sections 30-36, and which are not in the nature of capital expenditure or personal expenses, can claim the benefit of this 9 exemption. But the same is not absolute. Explanation 1, which was inserted in 1998 with retrospective effect from 01.04.1962, restricts the application of such exemption for "any purpose which is an offence or which is prohibited by law". The IT Act does not provide a definition for these terms. Section 2(38) of the General Clauses Act, 1897 defines 'offence' as "any act or omission made punishable by any law for the time being in force". Under the IPC, Section 40 defines it as "a thing punishable by this Code", read with Section 43 which defines 'illegal' as being applicable to "everything which is an offence or which is prohibited by law, or which furnishes ground for a civil action". It is therefore clear that Explanation 1 contains within its ambit all such activities which are illegal/prohibited by law and/or punishable."

The court also noted that the 2002 regulations makes acceptance of freebies given by pharmaceutical companies is clearly an offence on part of the medical practitioner, punishable with varying consequences. While dismissing the appeal, the court made the following observations as well:

Denial of the tax benefit cannot be construed as penalizing the assessee pharmaceutical company.

It is also a settled principle of law that no court will lend its aid to a party that roots its cause of action in an immoral or illegal act (ex dolo malo non oritur action) meaning that none should be allowed to profit from any wrongdoing coupled with the fact that statutory regimes should be coherent and not self-defeating. Doctors and pharmacists being complementary and supplementary to each other in the medical profession, a comprehensive view must be adopted to regulate their conduct in view of the contemporary statutory regimes and regulations. Therefore, denial of the tax benefit cannot be construed as penalizing the assessee pharmaceutical company. Only its participation in what is plainly an action prohibited by law, precludes the assessee from claiming it as a deductible expenditure.

Freebies are technically not 'free' – the cost of supplying such freebies is usually factored into the drug, driving prices up, thus creating a perpetual publicly injurious cycle.

This Court also notices that medical practitioners have a quasi-fiduciary relationship with their patients. A doctor's prescription is considered the final word on the medication to be availed by the patient, even if the cost of such medication is unaffordable or barely within the economic reach of the patient – such is the level of trust reposed in doctors. Therefore, it is a matter of great public importance and concern, when it is demonstrated that a doctor's prescription can be manipulated, and driven by the motive to avail the freebies offered to them by pharmaceutical companies, ranging from gifts such as gold coins, fridges and LCD TVs to funding international trips for vacations or to attend medical conferences. These freebies are technically not 'free' – the cost of supplying such freebies is usually factored into the drug, driving prices up, thus creating a perpetual publicly injurious cycle. 

Doing so would wholly undermine public policy

"The pharmaceutical companies' gifting freebies to doctors, etc. is clearly "prohibited by law", and not allowed to be claimed as a deduction under Section 37(1). Doing so would wholly undermine public policy....

..In the present case too, the incentives (or "freebies") given by Apex, to the doctors, had a direct result of exposing the recipients to the odium of sanctions, leading to a ban on their practice of medicine. Those sanctions are mandated by law, as they are embodied in the code of conduct and ethics, which are normative, and have legally binding effect. The conceded participation of the assessee- i.e., the provider or donor- was plainly prohibited, as far as their receipt by the medical practitioners was concerned. That medical practitioners were forbidden from accepting such gifts, or "freebies" was no less a prohibition on the part of their giver, or donor, i.e., Apex.", the court said.

Headnotes

Case details: Apex Laboratories Pvt. Ltd. vs Deputy Commissioner of Income Tax, Large Tax Payer Unit - II | SLP(C) 23207 OF 2019 | 22 Feb 2022
Citation: 2022 LiveLaw (SC) 195
Coram: Justices Uday Umesh Lalit and S. Ravindra Bhat
Counsel: Sr. Adv S. Ganesh for appellants, ASG Sanjay Jain for respondents

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