23 二月 2022

No tax exemption to pharma companies on gifts to doctors

The Supreme Court has held that pharmaceutical companies are not entitled to claim tax exemption on the expenditures in giving gifts/freebies to doctors to promote their respective medicines.

The Apex Court in its decision dated 22 February 2022 noted that the claim of any expense incurred in providing gifts/ freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under Section 37(1) of the Income Tax Act, 1961, being an expense prohibited by the law.

Observing that acceptance of freebies given by pharmaceutical companies is clearly an offence on part of the medical practitioner, punishable with varying consequences, the Court held that providing freebies in exchange for prescribing expensive branded medication over its equally effective generic counterparts was also violative of the Prevention of Corruption Act, 1988 and Section 23 of the Contract Act, 1872.

The Division Bench rejected the contention of the assessee, who argued that the rules barred doctors from accepting freebies but there is no such bar on pharma companies gifting them. The court remarked 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.” The Court was also of the view that there is no doubt that the actions of the pharma company fell within the purview of “prohibited by law” in Explanation 1 to Section 37(1).

The Supreme Court in this case - Apex Laboratories Pvt. Ltd. v. Deputy Commissioner also remarked that medical practitioners have a quasi-fiduciary relationship with their patients. 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.

The Apex Court observed 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. It held that thus, 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 an item of deductible expenditure.

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