The Supreme Court has held that no Income Tax Deduction is payable on Pharmaceutical Companies gifting freebies to doctors.
The Central Board of Direct Taxes (CBDT) issued a circular5, 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), which denies the application of the benefit for any purpose which is an ‘offence’ or ‘prohibited by law’.
After the circular was issued Apex was issued a notice under Section 142(1) of the IT Act, 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 reason for only a partial allowance by the authorities below was that an amendment to the Medical Council Act, 1956 (now repealed) through the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, published in the Official Gazette on 14.12.2009, disallowed medical practitioners from accepting emoluments in the form of inter alia gifts, travel facilities, hospitality, cash or monetary grants.7 Acceptance of such freebies could result in a range of sanctions against the medical practitioners, from ‘censure’ for incentives received up to ₹ 5,000/-, to removal from the Indian Medical Register or State Medical Register for periods ranging from three months to one year.8 Therefore, only the expenses incurred till 14.12.2009 were eligible for the benefit of Section 37(1), and not for the entirety of the Assessment Year 2010-2011, as claimed by Apex.
The division bench of Justice Uday Umesh Lalit and Justice S.Ravindra Bhat has held 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 effects. 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. Those medical practitioners were forbidden from accepting such gifts, or “freebies” was no less a prohibition on the part of their giver, or donor, i.e., Apex.
M/s Apex Laboratories Pvt. Ltd. vs Deputy Commissioner of Income Tax
CITATION: 2022 TAXSCAN (SC) 117
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