Pharmaceutical companies gifting freebies to doctors “prohibited by law”; cannot claim tax deduction: Supreme Court

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The Supreme Court has held that pharmaceutical companies gifting freebies to doctors is clearly prohibited by law and it cannot, therefore, be claimed as a deduction under Section 37(1) of the Income Tax Act [Apex Laboratories Pvt Ltd vs Deputy Commissioner of Income Tax].

A bench of Justices UU Lalit and S Ravindra Bhat held that if such pharmaceutical companies are allowed to claim tax exemption for the same, “it would wholly undermine public policy”.

“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 judgment said.

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, the Court added


By way of background, the Central Board of Direct Taxes (CBDT) had issued a circular on August 1, 2012 which clarified that expenses incurred by pharmaceutical and allied health sector industries for distribution of incentives (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’.

The appellant, Apex Laboratories, was issued a notice under Section 142(1) of the IT Act, to explain why the expenditure of ₹ 4.72 crores 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 for calculating income tax,

The reason was that an amendment to the Medical Council Act, 1956 (now repealed) through the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (2002 Regulations), which came into force in 2009, disallowed medical practitioners from accepting emoluments in the form of inter alia gifts, travel facilities, hospitality, cash or monetary grants.

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.

The Deputy Commissioner of Income Tax which partially allowed amounts claimed by Apex as ‘business expenditure’ under Section 37(1) of the Income Tax Act, 1961.

The Commissioner of Income Tax (CIT) partly allowed the revenue’s appeal against the same. The decision of the CIT was upheld by the Income Tax Appellate Tribunal and the Madras High Court, leading to the present appeal before the top court by Apex Laboratories (appellant).


The appellant contended that the amended 2002 Regulations were not applicable to Apex, i.e., pharmaceutical companies 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, Apex could not be denied the benefit of seeking exclusion of the expenditure incurred on supply of such freebies under Section 37(1), it was argued.

Specifically with regard to Explanation 1 to Section 37(1), it was submitted 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.

It was also argued that if the CBDT circular had to be brought into effect, it could be done so only prospectively and not retrospectively, i.e., from the date of publication of the CBDT circular in Augist 2012 and not the date of publication of the 2002 Regulations in December 2009.

Additional Solicitor General Sanjay Jain 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, he submitted.

Supreme Court judgment

The Supreme Court held that a narrow interpretation of Explanation 1 to Section 37(1) as canvassed by the appellants would defeat the purpose for which it was inserted – to disallow an assessee from claiming a tax benefit for its participation in an illegal activity.

The Court said that 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.

“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 judgment stated.

Thus, these freebies are technically not ‘free’, the Court said.

“The cost of supplying such freebies is usually factored into the drug, driving prices up, thus creating a perpetual publicly injurious cycle,” the judgment stated.

Such 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,” the top court stated.

Thus, the bench dismissed the appeal concluding that medical practitioners being forbidden from accepting such gifts, or freebies was no less a prohibition on the part of their giver, or donor, i.e., Apex.

“It is but logical that when acceptance of freebies is punishable by the MCI (the range of penalties and sanction extending to ban imposed on the medical practitioner), pharmaceutical companies cannot be granted the tax benefit for providing such freebies, and thereby (actively and with full knowledge) enabling the commission of the act which attracts such opprobrium,” the Bench concluded.

Read Judgment here:

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