Indian Kanoon - Search engine for Indian Law

IT(TP)A No.259/Bang/2022 M/s.Himalaya Wellness Company.

7.3 The Hon'ble Apex Court in the case of Apex Laboratories (P) Ltd. v. DCIT reported in (2022) 442 ITR 1 considered the issue of allowability of deduction for gifting of freebies by the pharmaceutical company to medical practitioners under Explanation 1 to section 37 of the I.T.Act. The relevant finding of the Hon'ble Apex Court reads as follows:-

22. This Court is of the opinion that such 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 an illegal activity. Though the memorandum to the Finance Bill, 1998 elucidated the ambit of Explanation 1 to include "protection money, extortion, hafta, bribes, etc.", yet, ipso facto, by no means is the embargo envisaged restricted to those examples. 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.

28. This Court also notices that 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. Therefore, 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. 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 Welfare26 which made the following observations:

7.4 The above judgment of the Hon'ble Apex Court was rendered in the context of pharmaceutical companies giving freebies such as hospitality, conference fees, gold coins, LCD TVs, fridges, laptops, etc. to medical practitioners for creating awareness about the health supplement 'Zincovit'. [Para 3 of the SC judgment]. The Hon'ble Supreme court was considering the MCI regulation prohibiting the allopathic doctors from taking freebies or gifts of more than Rs.1000. In the present case, the co-ordinate bench for the AY 2013-14 has held that it cannot be conclusively said that the notification issued by MCI shall apply to Ayurvedic doctors also, to whom the sales promotion items have been given by the assessee. It was held that MCI regulations prohibit giving gifts of more than Rs.1000 thereby it was interpreted that the gifts having value of less than Rs.1000/- could be given. The AOs view of considering cumulative value of gifts should have exceeded Rs. 1000/- and hence there is violation of MCI regulations was held to be a debatable one based on presumptions only. The expenditure incurred by the assessee was held to be for business purposes on commercial considerations and hence allowable as deduction. The action of the AO in disallowing only 20% accepting the balance 80% of expenditure as allowable deduction was not sustained.