- The Hon’ble Supreme Court (SC or Court),in the case of Apex Laboratories v DCIT, Large Payer Unit - II,has held that supplying freebies to doctors and medical practitioners is prohibited and hence the same shall also stand disallowed under Section 37(1) of the Income-tax Act, 1961 (Act).
- The appeal was filed against the order of the Madras High Court (HC), which upheld the order of the Deputy Commissioner of Income-tax (DCIT). The DCIT had disallowed the Appellant’s expenditure incurred towards gifting freebies to medical practitioners.
- In 2012, the Central Board of Direct Taxes (CBDT) clarified that expenses incurred by pharmaceutical and allied health sector industries for distribution of incentives (ie, freebies) to medical practitioners will be ineligible for deduction under Section 37(1) of the IT Act. The reason for this disallowance was the sanctions imposed on doctors, including removal from the Indian Medical Register on acceptance of freebies in 2009.
- The Appellant’s argument was that regulations imposing sanctions were not applicable to pharmaceutical companies. It was only the medical practitioners who were barred from accepting freebies and in the absence of any corresponding norm imposed on them, the company could not be denied the benefit of claiming an allowance under Section 37(1). The Appellant placed reliance on the Max Hospital Pitampura v Medical Council of India and Dr. Anil Gupta v Addl. Commissioner of Income Tax.
- The Appellant brought the Court’s attention to the memorandum explaining the introduction of Explanation to Section 37(1). The Appellant submitted that the intention of introducing the said explanation was to disallow tax payers from claiming protection money, extortion, hafta, bribes, etcas business expenditures.
- Section 37 of the IT Act provides that any expenditure, not being an expenditure covered under Sections 30-36 and of capital nature or personal expenditure of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the business income of the assessee. Explanation to the section clarifies that any expenditure which is prohibited by law shall not be deductible.
- Regulation 6.8 of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (2002 Regulations) puts a bar on acceptance of freebies given by pharmaceutical companies by the medical practitioner. Contravention of the regulation is punishable with varying consequences.
- The Counsel for the Respondent submitted that giving away freebies was squarely covered under the phrase ‘prohibited by law’ under the scope Explanation to Section 37(1). It was also submitted that the 2002 Regulations were introduced to disincentivize the practice of receiving extravagant freebies in exchange for prescribing expensivebranded medication over its generic counterparts, thereby burdening patients with unnecessary costs.
- To elucidate its claims, the Respondent relied on the case of Commissioner of Income-Tax v Kap Scan and Diagnostic Centre P. Ltd and Confederation of Indian Pharmaceutical Industry (SSI) v Central Board of Direct Taxes.
- Analysing the provisions and rulings relied on by both sides, the Court opined that even if the Appellan;t contention that it gifting freebies did not amount to indulging in illegal activities were to be accepted, there was no doubt that its actions fell within the purview of “prohibited by law” in Explanation 1 to Section 37(1).
- The Court also observed that it was 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 and denial of the tax benefit on such grounds must be construed as penalizing the assessee. The Appellant is precluded from only claiming such expenditure as deductible, which is prohibited by law.
- The Court also remarked that medical practitioners have a quasi-fiduciary relationship with their patients. Their prescription is considered as final word on the medication irrespective of the cost affordability of the patient’s kin.
- Further, the Court noted that 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. The Court went on record to say that such freebies were technically not 'free' – their cost is usually factored into the drug, driving prices up, thus creating a perpetual publicly injurious cycle
- Lastly, the Court observed that the 2002 Regulations placing sanctions are mandated by law, as they are embodied in the code of conduct and ethics, which are normative, and have legally binding effect. Such sanction was no less a prohibition on the part of their giver, or donor; Appellant in the instant case.
- Based on the observations made above, the Court dismissed the Appellant’s appeal and upheld the order of the earlier Court.
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