The Supreme Court Tuesday held that granting freebies to doctors by pharmaceutical companies to boost sales of medicines is “clearly prohibited by law and dismissed a plea of a firm seeking deduction under the Income Tax Act on account of giving incentives to medical practitioners.
The top court termed as a matter of great public importance and concern the manipulation of doctors’ prescriptions in lieu of 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.
A bench comprising justices U U Lalit and S Ravindra Bhat dismissed the appeal of M/s Apex Laboratories Pvt. Ltd against the order of the high court and in the verdict, it also dealt with a tricky legal issue where tax deduction on account of granting freebies to doctors was claimed saying 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.
Analysing the law and regulations concerned, the verdict, penned by Justice Bhat, said, 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.
The firm, 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 hapta’, 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.
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 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, it said. 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, 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 company asking as to why the expenditure of around Rs 4.7 crore was 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’ and why it should not be added back to the total income of the company. PTI