Gifting Freebies To Doctors Prohibited By Law ; Pharma Companies Cannot Claim It As Deduction U/Sec 37(1) Income Tax Act: Supreme Court

The Supreme Court held that 'pharmaceutical companies' gifting freebies to doctors is prohibited by law and they cannot claim it as a deduction under Section 37(1) of the Income Tax Act.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 bench comprising Justices Uday Umesh Lalit and S.Ravindra Bhat remarked.Section 37 provides that any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".The Explanation 1 clarifies that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.Regulation 6.8. of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 makes acceptance of freebies given by pharmaceutical companies by the medical practitioner, punishable with varying consequences.The Central Board of Direct Taxes ( "CBDT") issued a circular , which clarified that expenses incurred by pharmaceutical and allied health sector industries for distribution of incentives (i.e., "freebies") to medical practitioners are ineligible for the benefit of Explanation 1 to Section 37(1). It issued a notice to Apex Laboratories Pvt. Ltd. to explain why the expenditure of ₹ 4,72,91,159/- 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', should not be added back to the total income of Apex. The Deputy Commissioner of Income Tax partially allowed amounts claimed by Apex as 'business expenditure' under Section 37(1). The Commissioner of Income Tax (Appeals) partly allowed the appeal. The Madras High Court dismissed the challenge against this order passed by CIT(A). Before the Apex Court, the appellants contended that 2002 Regulations were not applicable to Apex, i.e., pharmaceutical companies were not bound by them. On the other hand, the Revenue authorities submitted that the act of pharmaceutical companies gifting freebies to medical practitioners for promotion of their products may not be classified as an 'offence' under any statue, it was squarely covered within the scope of Explanation 1 to Section 37(1) by use of the words "prohibited by law", as it was specifically prohibited by the amended 2002 Regulations.Referring to Section 37, the bench observed that Explanation 1 contains within its ambit all such activities which are illegal/prohibited by law and/or punishable. The court observed:"Section 37 is a residuary provision. Any business or professional expenditure which does not ordinarily fall under Sections 30-36, and which are not in the nature of capital expenditure or personal expenses, can claim the benefit of this 9 exemption. But the same is not absolute. Explanation 1, which was inserted in 1998 with retrospective effect from 01.04.1962, restricts the application of such exemption for "any purpose which is an offence or which is prohibited by law". The IT Act does not provide a definition for these terms. Section 2(38) of the General Clauses Act, 1897 defines 'offence' as "any act or omission made punishable by any law for the time being in force". Under the IPC, Section 40 defines it as "a thing punishable by this Code", read with Section 43 which defines 'illegal' as being applicable to "everything which is an offence or which is prohibited by law, or which furnishes ground for a civil action". It is therefore clear that Explanation 1 contains within its ambit all such activities which are illegal/prohibited by law and/or punishable."The court also noted that the 2002 regulations makes acceptance of freebies given by pharmaceutical companies is clearly an offence on part of the medical practitioner, punishable with varying consequences. While dismissing the appeal, the court made the following observations as well:Denial of the tax benefit cannot be construed as penalizing the assessee pharmaceutical company.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 (ex dolo malo non oritur action) 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. Doctors and pharmacists being complementary and supplementary to each other in the medical profession, a comprehensive view must be adopted to...

Gifting Freebies To Doctors Prohibited By Law ; Pharma Companies Cannot Claim It As Deduction U/Sec 37(1) Income Tax Act: Supreme Court

Ashok KM

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