Pharma Freebies to Doctors: Supreme Court announces its verdict

Such observations were made by the top court bench comprising of justices U U Lalit and S Ravindra Bhat while dealing with the case where the pharma company had spent Rs 4,72,91,159 on gifts to doctors for creating awareness about the health supplement 'Zincovit'.

Opining pharma freebies to be a matter of "public importance and concern", the bench observed, "A doctor's prescription is 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 trust reposed in doctors. Therefore, 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, fridges and LCD TVs to funding international trips for vacations or to attend medical conferences."

"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," clarified the top court at this outset.

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The case concerned the appellant pharmaceutical company who had approached the top court challenging the Madras High Court order denying tax relief to the company for the cost spent on freebies offered to doctors.

Back in 2012, the Central Board of Direct Taxes had issued a circular and had 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) of the Income Tax Act, which denies the application of the benefit for any purpose which is an 'offence' or 'prohibited by law'.

After the issuance of the circular, the petitioner pharma company had received a notice under Section 142(1) of the IT Act, to explain why the expenditure of Rs 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 the company.

The authorities had referred to the Medical Council Act, 1956 (now repealed) through the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (hereinafter, "2002 Regulations"), which was published in the Official Gazette on 14.12.2009, and disallowed medical practitioners from accepting emoluments in the form of inter alia gifts, travel facilities, hospitality, cash or monetary grants.

However, it was the contention of the petitioner pharma company that the amended 2002 regulations were not applicable to the pharma companies as they 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 pharmaceutical companies gifting them. In the absence of any express prohibition by law, the petitioner pharma company could not be denied the benefit of seeking exclusion of the expenditure incurred on supply of such freebies under Section 37(1), it had been argued.

After referring to several relevant judgments to make his case, the counsel for the pharma company brought the top court's attention to the Memorandum Explaining the Provisions of the Finance (No. 2) Bill, 1998 which stated that the introduction of Explanation 1 to Section 37(1) would disallow tax payers from claiming "protection money, extortion, hafta, bribes, etc." as business expenditures, from which it could be inferred that the intention of the Parliament was to only bring into the ambit of Explanation 1 'illegal' activities which were deigned as 'offences' under relevant statutes. The IT Act not being a social reform statute, needed to be interpreted strictly, and not in a wide 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 public law.

Further, the counsel for the pharma company submitted that the CBDT circular dated 01.08.2012 enlarged the scope of the 2002 Regulations and made it operable beyond medical practitioners i.e. to pharma companies and allied health sector industries, which, in the absence of any enabling provision, was outside its dominion.

On the other hand, the Additional Solicitor General appearing for the respondent revenue authorities, submitted that while 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. While Apex could not be 'punished', it should not be allowed to benefit by claiming a tax exemption on the freebies distributed.

It was further argued that in this present case, the medical practitioners were provided expensive gifts such as hospitality, conference fees, gold coins, LCD TVs, fridges, laptops, etc. by Apex to promote its nutritional health supplement 'Zincovit'.

It was argued that receiving these, clearly - in letter and spirit, constituted professional misconduct on part of the medical practitioner. The scope of the 2002 Regulations was not limited to a finite list of instances of professional misconduct, but broad enough to cover those instances not specifically enumerated as well. The menace of prescribing expensive branded medication as a quid pro quo arrangement had a direct bearing on public policy, which was implicit in the 2002 Regulations itself, contended the revenue authorities.

After taking note of the submissions, the top court bench examined the Section 37 of the IT ACT and noted, "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 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 top court bench also perused Regulation 6.8 of the 2002 Regulations, CBDT circular dated 01.08.2012, Section 20A of the Medical Council Act, 1956 etc. and noted, "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."

Noting that medical practitioners have a quasi-fiduciary relationship with their patients and the doctor's prescription is the final word on medication the bench termed pharma freebies to be a matter of "great public importance and concern" and opined that, "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."

Further, referring to the observations made by the Parliamentary Standing Committee on Health and relevant judgments of the High courts, the Apex Court observed, "Thus, 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 the Parliament."

Dismissing the appeal by the pharma company the bench clarified that, "the incentives (or "freebies") given by Apex, 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 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. That medical practitioners were forbidden from accepting such gifts, or "freebies" was no less a prohibition on the part of their giver, or donor."

To read the top court order, click on the link below.