SC not happy at pharma cos' freebies to doctors, rules out tax exemption on this count

The Supreme Court on Tuesday expressed concern at freebies - including gold coins, fridges, LCD TVs, and funding international trips for vacations -offered by pharmaceutical companies to "manipulate" doctors' prescriptions and to recommend drugs produced by the firms.

Against this backdrop, the top court held that companies are not entitled to claim tax exemption on the expenditure incurred in giving incentives, and rather it would be considered as part of their income.

A bench of Justices U.U. Lalit and S Ravindra Bhat said: "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."

The top court did not entertain the plea of a company seeking exemption on expenditure of Rs 4.72 crore incurred for providing freebies to medical practitioners to create awareness on its health supplement.

Justice Bhat, who authored the judgment on behalf of the bench, said 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 top court upheld a 2012 circular issued by the Central Board of Direct Taxes clarifying such expenses incurred by pharmaceutical and allied health sector industries for distribution of incentives to medical practitioners are ineligible for the benefit of Section 37(1) pertaining to business deduction.

Freebies clearly prohibited

The bench 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 the Parliament."

Additional Solicitor General Sanjay Jain, representing the government, submitted though gifting freebies to doctors may not be classified as an 'offence' under any statute but it was specifically prohibited. He added that pharma companies should not be allowed to benefit by claiming a tax exemption on the freebies.

The bench added that the threat of prescribing medication that is significantly marked up, over effective generic counterparts in lieu of such a quid pro quo exchange was taken cognisance of by the Parliamentary Standing Committee on Health and Family Welfare.

It said that 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. "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," said Justice Bhat.

The bench said the conceded participation of the assessee - 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," it added.

The apex court made these observations while dismissing an appeal filed by Apex Laboratories Pvt Ltd challenging a Madras High Court verdict, declining to interfere with the Income Tax authorities' decision against the firm to claim benefit of business expenditure towards gifting freebies to medical practitioners for creating awareness about health supplement 'Zincovit'.

It said the denial of the tax benefit cannot be construed as penalising the assessee pharmaceutical company and only its participation in what is plainly an action prohibited by law, precludes the assessee from claiming it as a deductible expenditure.

"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", it added.