Supreme Court rules against pharma firms gifting freebies to doctors

Supreme Court rules against pharma firms gifting freebies to doctors

It is punishable under the Indian Medical Council Act

The Supreme Court has held that pharmaceutical companies gifting freebies to doctors were clearly "prohibited by law." Therefore, they had no right to claim a deduction under the Income Tax Act.

A bench of Justice UU Lalit and Justice S Ravindra Bhat held that if pharma companies were allowed to claim tax exemption for the same, "it would wholly undermine the public policy."

The well-established principle of interpretation of the taxing statutes was that they needed to be interpreted strictly. It could not sustain when resulting in an absurdity contrary to the intentions of the Parliament, the court added

The case relates to 2012 when the Central Board of Direct Taxes (CBDT) issued a circular. It clarified that the expenses incurred by pharma and allied health sector industries for the distribution of incentives (freebies) to the medical practitioners were ineligible for the benefit under the IT Act.

The appellant, Apex Laboratories, was issued a notice under the Act and was asked to explain why the expenditure of Rs.4.72 crores, incurred towards gifting freebies such as hospitality, conference fee, gold coins, LCD TV, fridge and laptops to the medical practitioners for creating awareness about the health supplement 'Zincovit', should not be added to the total income for calculating the income tax,

The reason was that an amendment to the Indian Medical Council Act, 1956 (now repealed) through the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 that came into force in 2009, disallowed medical practitioners from accepting emoluments in the form of inter alia gifts, travel facilities, hospitality, cash or monetary grants.

The acceptance of such freebies could result in a range of sanctions against the medical practitioners, from 'censure' for incentives received up to Rs.5,000, to the removal from the Indian Medical Register or the State Medical Register for periods ranging from three months to one year.

The Deputy Commissioner of Income Tax partially allowed the amounts claimed by Apex Labs as 'business expenditure' under the IT Act. But the Income Tax Appellate Tribunal (ITAT) and the Madras High Court upheld the decision, leading to the present appeal before the top court.

The appellant contended that the amended 2002 Regulations were not applicable to Apex Labs, as pharma companies were not bound by them. While medical practitioners were expressly prohibited from accepting freebies, no corresponding prohibition in the form of any binding norm was imposed on the pharma companies gifting them.

Thus, in the absence of any express prohibition by law, Apex Labs could not be denied the benefit of seeking exclusion of the expenditure incurred on the supply of such freebies, it was argued.

It was specifically submitted the intention of the Parliament was to only bring into the ambit the 'illegal' activities, which were termed as 'offences' under the relevant statutes. The IT Act not being a social reform statute, needed to be interpreted strictly, and not in a wider manner so as to include in its scope an act by a pharmaceutical company not recognized as 'illegal' by any statute. Doing so would be against the canons of the public law.

The appellant also argued that if the CBDT circular had to be brought into effect, it could be done so only prospectively and not retrospectively. It would be from the date of publication of the CBDT circular in 2012 and not the date of the publication of the 2002 Regulations in December 2009.

Appearing for the respondent revenue authorities, Additional Solicitor General Sanjay Jain submitted that while the act of the pharmaceutical companies gifting freebies to medical practitioners for promotion of their products might not be classified as an 'offence' under any statute, it was squarely covered within the scope of the words 'prohibited by law.'

He further submitted that it was specifically prohibited by the amended 2002 Regulations. While Apex Labs could not be 'punished', it should not be allowed to benefit by claiming a tax exemption on the freebies distributed.

The Supreme Court, however, held that a narrow interpretation of the Act, as canvassed by the appellants, would defeat the purpose for which it was inserted. It was actually meant to disallow an assessee from claiming a tax benefit for its participation in 'illegal' activity.

The top court said that 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.

"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, fridge and LCD TV to funding international trips for vacations or to attend medical conferences," the judgment stated.

Thus, these freebies are technically not 'free', the court said, adding, "The cost of supplying such freebies is usually factored into the drug, driving prices up, thus creating a perpetual publicly injurious cycle."

Such freebies given by Apex Labs 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 a 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," the court stated.

Thus, the bench dismissed the appeal concluding that medical practitioners being forbidden from accepting such gifts, or freebies was no less a prohibition on the part of their giver, or donor.