The Supreme Court of India has put the controversy to rest regarding the deductibility of freebies gifted by Pharma Company to doctors. The Apex Court held that when acceptance of freebies is punishable under Indian Medical Council Regulations, pharmaceutical companies cannot be granted the tax benefit for providing such freebies.

Facts

The CBDT vide Circular No. 5/2012, dated 01-08-2012, had clarified that expenses incurred by pharmaceutical and allied health sector industries for the distribution of incentives (freebies) to medical practitioners are not eligible for deduction. The benefit of the deduction is denied in view of Explanation 1 to Section 37(1). Said explanation denies the deduction for an expenditure incurred for any purpose which is an ‘offence’ or ‘prohibited by law’.

The assessee contended that Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, prohibits medical practitioners from accepting freebies. No corresponding prohibition in the form of any binding norm was imposed on the pharmaceutical companies gifting them. Thus, the benefit of deduction shouldn’t be denied to the assessee being a pharmaceutical company. The matter reached the Supreme Court of India.

Ruling

The Supreme Court of India held that a narrow interpretation of Explanation 1 to Section 37(1) defeats the purpose for which it was inserted, i.e., to disallow an assessee from claiming a tax benefit for its participation in illegal activity. When acceptance of freebies is punishable, pharmaceutical companies cannot be granted the tax benefit for providing such freebies.

The 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 out of the economic reach of the patient. Such is the level of the trust reposed in doctors.

Therefore, 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 attending medical conferences.

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

It is crucial to note that the agreement between the pharmaceutical companies and the medical practitioners in gifting freebies for boosting sales of prescription drugs is also violative of Section 23 of the Contract Act, 1872.

In the present case, the freebies given by the assessee to the doctors directly resulted in 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 prohibited, as far as their receipt by the medical practitioners was concerned. The medical practitioners were forbidden from accepting such gifts or freebies that was no less a prohibition on the part of their giver or donor.

Thus, the freebies distributed by the assessee were squarely covered within the scope of Explanation 1 to Section 37(1) and accordingly not allowable as a deduction.