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Pharmaceutical companies gifting freebies to doctors “prohibited by law”; cannot claim tax deduction: Supreme Court

By Dolly Chhabda      23 February, 2022 04:07 PM      0 Comments
Pharmaceutical companies Supreme Court

The Supreme Court has held in the case Apex Laboratories Pvt Ltd vs Deputy Commissioner of Income Tax that pharmaceutical companies gifting freebies to doctors is clearly prohibited by law and it cannot, therefore, be claimed as a deduction under Section 37(1) of the Income Tax Act of 1961.

A bench comprising justice UU Lalit and S Ravindra Bhat dismissed the appeal of pharmaceutical firm Apex Laboratories Pvt. Ltd against the High Court (HC). In the verdict, the top court dealt with a tricky legal issue where tax deduction on account of granting freebies to doctors was claimed.

The pharma company Apex Laboratories Pvt. Ltd claimed that though medical practitioners are restrained under the regulations from accepting such gifts, it was not an offence under any law and hence, companies are entitled to the tax benefit. The pharmacy company, in its appeal, said the amended 2002 Regulations for doctors did not apply to pharmaceutical companies.

While medical practitioners were expressly prohibited from accepting freebies, no corresponding prohibition in the form of any binding norm was imposed on the pharmaceutical companies gifting them, and in the absence of any express prohibition by law, it could not be denied the benefit of seeking exclusion of the expenditure incurred on supply of such freebies under Section 37(1) of the IT Act.

Under the provision, any expenditure, such as payment of ‘hafta’, freebies, donations, protection, or extortion money will not be allowed as a deduction.

This court is of the opinion that such a narrow interpretation of Explanation 1 to Section 37(1) defeats the purpose for which it was inserted, i.e., to disallow an assessee from claiming a tax benefit for its participation in an illegal activity,” the judgement said.

The top court termed it as a “matter of great public importance and concern” the manipulation of doctors’ prescriptions in lieu of freebies offered to them by pharmaceutical companies. The freebies range from gifts such as gold coins, fridges, and LCD TVs to funding international trips for vacations or to attend medical conferences.

Analysing the law and regulations concerned, the verdict, penned by Justice Bhat stated, “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. The well-established principle of interpretation of taxing statutes – that they need to be interpreted strictly – cannot sustain when it results in an absurdity contrary to the intentions of Parliament.”

Deprecating the practice of giving freebies, the bench said medical practitioners have a quasi-fiduciary relationship with their patients and their prescriptions are 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 the trust reposed in doctors.

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 threat of prescribing medication that is significantly marked up, over effective generic counterparts,” it said and referred to reports on the issue.

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’s pharmaceutical company. Only its participation in what is plainly an action prohibited by law precludes the assessee from claiming it as a deductible expenditure,” it said.

In the present case, the incentives given by the company had a direct result of exposing the recipients to the odium of sanctions, leading to a ban on their practice of medicine, it said.

In pursuance of the IT circular, a notice was issued to the pharmaceutical firm asking as to why the expenditure of around Rs 4.7 Crore was incurred towards gifting freebies to medical practitioners for creating awareness about the health supplement ‘Zincovit’.

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