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Drug firms can’t claim tax benefit for freebies given to doctors: Supreme Court

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Drug firms can’t claim tax benefit for freebies given to doctors: Supreme Court

Assorted freebies given by pharmaceutical companies to doctors to influence their prescripton of medicines can’t be claimed by the firms as ‘business expenditure’ to reduce their tax outgo, the Supreme Court ruled on Tuesday. The court noted that acceptance of these freebies by doctors is punishable by the Medical Council of India.     

A Bench comprising justices UU lalit and S Ravindra Bhatt dismissed Apex Laboratories’s appeal against the Madras High Court’s judgement that upheld the I-T department’s decision to disallow the assessee’s claim seeking benefit of business expenditure towards gifting freebies to medical practitioners for creating awareness about the company’s health supplement ‘Zincovit’.

In pharmaceutical parlance, such freebies are called “drug promotional expenses”.   

“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 in lieu of such a quid pro quo exchange was taken cognizance of by the Parliamentary Standing Committee on health and family welfare,” the judges said.

The court added that denial of the tax benefit cannot be construed as penalising the assessee pharmaceutical company. “Only its participation in what is plainly an action prohibited by law, precludes the assessee from claiming it as a deductible expenditure,” the judgment added.

The Bench also pointed out  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 – such is the level of trust reposed in doctors,” it said.

The Central Board of Direct Taxes (CBDT) had in its August 1, 2012, circular clarified that expenses incurred by pharmaceutical and allied health sector industries for distribution of incentives 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’.

Pursuant to the CBDT circular, Apex was in November 2012 issued a notice under Section 142(1) of the IT Act to explain why the expenditure of around Rs 4.73 crore 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 its total income.

Senior counsel S. Ganesh, appearing for Apex, argued that it was not open to the revenue to deny a tax benefit on the ‘nature’ of expenses incurred on supply of such freebies under Section 37(1) as only medical practitioners were expressly prohibited from accepting freebies and not the pharma companies.

However, additional solicitor general Sanjay Jain submitted that Apex could not be ‘punished,’ but the assessee should not be allowed the benefit by claiming a tax exemption on the freebies distributed.

   

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