Providing Free Things To Health Professionals Is Considered To Be Prohibited By Law: Apex Laboratories Pvt Ltd Vs Deputy Commissioner Of The Income Tax

DATE OF JUDDGEMENT:
22/02/2022

BENCH:
JUSTICE MR. UDAY UMESH LALIT AND JUSTICE MR. S. RAVINDRA BHAT

PARTIES:
PETITIONER: APEX LABORATORIES PVT. LTD.
RESPONDENT: DEPUTY COMMISSIONER OF THE INCOME TAX DEPARTMENT, LARGE TAX

SUBJECT

The Supreme Court ruled that 'pharm companies' cannot seek a deduction under Section 37(1) of the Income Tax Act since they are banned by law from giving freebies to physicians.

OVERVIEW

1. The Central Board of Direct Taxes (hereinafter, "CBDT") released a circular on August 1, 2012, clarifying that expenditures incurred by pharma and affiliated health industries for the transfer of rewards, also known as free things,to healthcare professional are unsuitable for the advantage of Elaboration to Section 37(1), which provides that the benefit cannot be availed for an illegal activity.
2. The Supreme Court issued notices under Section 142(1) of the IT Act on November 22, 2012, to explain why the expenditure of Rs. 4,72,91,159/- accumulated on presenting free stuff to medical practitioners such as hospitality, conference fees, gold coins, LEDTVs, refrigerator and laptops, and other items to raise the understanding of the health booster 'Zincovit' which was told ought to be not applied retroactively to overall revenue.
3. The Indian Medical Advisory Board Specialist Conduct, Good manners, and Ethics Regulations, 2002, which was later known as 2002 Regulations, issued on 14.12.2009, restricted doctors from acknowledging remunerations in the form of donations, transportation infrastructure, accommodation, cash or financial grants.
4. Accepting such freebies could lead to a variety of penalties, spanning from 'reprimand' for rewards of up to 5,000/- to expulsion from the Indian Medical Board or State Medical Register for time scales from three months to one year. As a result, only expenditures spent until December 14, 2009, were entitled for section 37 benefits.

LEGAL PROVISION

SECTION 37, SECTION 142(1)

ISSUES

Whether gifting freebies to doctors is considered prohibited by law?

JUDGEMENT

1. The court noted a bequest clause in Section 37 which basically talks about the exception which can be used for any professional business expense that does not normally fall under Sections 30-36 that is not in the type of capital investment or incidental costs.
2. However, that wasn't always the case. Explanation 1, which was added in 1998 and took effect on April 1, 1962, limits the use of such an exclusion to any reason that is an offence or is banned by law.
3. There was no description for these words in the IT Act. The court stated that any conduct made penal by any law for the time will be in effect, according to Section 2(38) of the General Clauses Act of 1897.
4. Section 40 of the Indian Penal Code described it as an item punishable by this Code, whereas Section 43 described it as anything that constitutes an offence or was forbidden by law, or that gives foundation for a civil action.
5. As a result, it was evident that Explanation 1 encompassed all actions that were inappropriate by law and/or penalised. Giveaways were essentially not 'free' because the cost of delivering them was frequently incorporated into the drug's cost, driving rising prices and perpetuating a public-harming loop.
6. Health professionals had a quasi-fiduciary relationship with a patient, according to the Court.
7. The amount of trust reposed in doctors is such that a doctor's prescription was considered the final word on the drug to be acquired by the person, even if the price of such drug was exorbitant or scarcely within the patient's economic reach.
8. When it was proved that a doctor's prescription can be manipulated and led by the desire to take advantage of the freebies supplied to them, it was a topic of major public relevance and concern.
9. In this case, too, the Supreme Court held that rewards to physicians had the direct impact of subjecting the receivers to a slew of fines, culminating in a restriction on their ability to practise medical. Those consequences were required by law, as they were enshrined in a prescriptive standard of ethics and morals with contractually enforceable impact.

CONCLUSION

The court then stated that any expense, other than those mentioned in Sections 30 to 36 but not in the essence of capital costs or incidental costs of the payee, arranged or exerted entirely and solely for the aims of the trade or activity, would therefore be granted in calculating the revenue charged under the head according to Section 37.

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