Freebies by Pharma Companies to Doctors- shutter down?
(Section 37 disallowance, Medical code of conduct- Supreme Court Judgment)
Part – I – Impact of the case
Background-:
1) It is a routine practice that Pharmaceutical and health sector companies provide freebies such as hospitality, conference fees, gold coins, LCD TVs, fridges, laptops, etc. to medical practitioners for creating awareness about the health supplement ‘ABC’.
2) For many years, there has been a difference of opinion as to whether the said expenditure is covered by explanation to section 37 of the Income Tax Act, 1961 (the Act)
Entering the subject
3) February 2022 has witnessed significant development in this area in terms of both, legislative enactment and judicial pronouncement as follows;
a. Budget 2022 i.e. the Finance Act, 2022 proposing significant amendment to explanation to section 37 and memorandum to Finance Bill, 2022 providing very elaborate reasons for the amendment i.e. the judicial pronouncements that were not in consonance with intent of the Parliament.
b. Supreme Court, on February 22, 2022, in the case of Apex Laboratories Pvt. Ltd. (Apex) V DCIT SLP-Civil No. 23207 of 2019 observed as follows;
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36. In the present case too, 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 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. That 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.
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Take away points / author’s view
4) Now with the decision of Apex by Apex Court of India, judiciary is also in tune with the intent of Parliament.
5) This decision will definitely have significant impact on pharma and health care Industry because it may prohibit them from making the marketing and selling expenses.
6) The author has given his opinion on the decision of SC at the end of the article.
PART – II – case explained elaborately.
Facts
7) It is a routine practice that Pharmaceutical and health sector companies prove freebies such as hospitality, conference fees, gold coins, LCD TVs, fridges, laptops, etc. to medical practitioners for creating awareness about the health supplement ‘ABC’.
8) For many years, there has been a difference of opinion among various judicial forums including that of high courts as to whether the freebies are covered by explanation to section 37 of the Income Tax Act, 1961 (the Act).
9) There is (was) a substantial difference of opinion on this aspect among various benches of various judicial forums.
10) Proposed Explanation to Section 37 of the Act prohibits deduction of any expenditure incurred which is an offence and the language has been made more explicit which otherwise was implicit.
Question and answer
Question. Whether on facts, and in the circumstances of the case, and in law Madras High Court was correct in dis-allowing distribution of incentives (i.e., “freebies”) to medical practitioners
Answer = Yes
Governing Law
11) Refer Annexure containing relevant portion of legislative enactments and judicial pronouncements which includes.
a. Finance (No. 2) Bill, 1998
b. Memorandum Explaining the Provisions of the Finance (No. 2) Bill, 1998
c. Clause 12 of the Finance Bill, 2022
d. Relevant portion of Memorandum to the Finance Bill, 2022
e. Regulation 6.8. of the 2002 Regulations states as follows:
f. The CBDT circular dated 01.08.2012
g. Relevant Paragraphs of Supreme Court judgement in the case of Apex Laboratories Pvt. Ltd. Vs DCIT SLP-Civil No. 23207 of 2019 dated February 22, 2022
Download Extract of Law governing Freebies to Doctors
Contention of assessee
12) The argument of pharma and health sector companies was that, the Indian Medical Council Regulations disallowed medical practitioners from accepting emoluments in the form of inter alia gifts, travel facilities, hospitality, cash or monetary grants is applicable to doctors and not to the company.
13) Counsel placed reliance upon decisions of various high courts to substantiate above argument.
a. Delhi High Court – Max Hospital Pitampura v. Medical Council of India W.P. (C) No. 1334/2014 / ILR (2014) 1 Delhi 620, dated 10.01.2014.
b. Rajasthan High Court Dr. Anil Gupta v. Addl. Commissioner of Income Tax, a Division Bench of the Income Tax Appeal No. 485/2008, decided on 18.07.2017.
Contention of Revenue
14) Parliament’s intention to disincentivize the practice of receiving extravagant freebies in exchange for prescribing expensive branded medication over its equally effective generic counterparts, thereby burdening patients with unnecessary costs, was apparent not only from the amended 2002 Regulations, but also the Prevention of Corruption Act, 1988 (hereinafter, “PC Act”). A government doctor receiving any illegal gratification amounting to malpractice or any other offence was liable to be charged under PC Act and the Indian Penal Code, 1860 (hereinafter, “IPC”).
15) The IT Act does not provide a definition for these terms. Section 2(38) of the General Clauses Act, 1897 defines ‘offence’ as “any act or omission made punishable by any law for the time being in force”. Under the IPC, Section 40 defines it as “a thing punishable by this Code”, read with Section 43 which defines ‘illegal’ as being applicable to “everything which is an offence or which is prohibited by law, or which furnishes ground for a civil action”. It is therefore clear that Explanation 1 contains within its ambit all such activities which are illegal/prohibited by law and/or punishable.
16) The illogicality and completely misconceived nature of such an interpretation was dealt with in a similar interpretation of the provisions of PC Act, by a Constitution Bench of this Court in P.V. Narasimha Rao v. State (CBI/SPE)21. Prior to the 2018 amendment, the PC Act only punished the bribe-taker who was a public servant, and not the bribe-giver.
17) When the statute does not provide the path and the precedents abstain to lead, then sound logic, rational reasoning, common sense and urge for public good play as guides of those who decide.
18) 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.
19) 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 making the agreement to be void.
Conclusion
20) The Court upheld the reasoning of the Revenue and decided the matter in favour of the assessee by observing as follows:
In the present case too, 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 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. That 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.
Author’s conclusion
Functioning of Pharma companies
21) One has to understand that it is very very difficult (rather impossible) for pharma companies to explain the benefit of medicines to the end user i.e. current patients or potential patients.
22) In the present case, the SC has compared the analogy of provisions of income tax which is a civil law for collecting a levy on income with a criminal law firstly Prevention of Corruption Act which is there to prevent “Corruption” and Indian Penal Code, a general criminal law addressing various criminal offences.
Opinion on Decision of SC
First View
23) Now, Income Tax Dept. will work with much more vengeance.
24) One has to ask a question whether the comparison is para materia i.e. whether these two sets of law are comparable for interpretation.
25) Secondly, if it is so, which appears to be, as per judgement of supreme court, then the logical fall-out is that, every medical practitioner should be prosecuted for any “freebie” received by him under Prevention of Corruption Act and the pharma companies as well who have acted party to the crime.
26) SC has assumed a quid-pro-quo between the medical practitioner receiving freebies above Rs. 5000/- vis-à-vis the said medical practitioner recommending medicine of that particular Pharma company.
27) The observations of SC appears to be very wide. This is so because SC has ignored all other factors i.e. timing of receipt of freebie, its value, relevance to the personal benefit, element of human probability, susceptibility that a medical practitioner will fall pray to this bribe etc.
Second View
28) There is another way to look at it. SC has several times explained as to how to read a decision which is law of land as per Article 141. The law declared is the principle(s) culled out on reading of a judgment as a whole in the light of the questions raised, upon which the case is decided (#).
29) The question posed before SC in this case was “deductibility or otherwise of freebies distributed among medical practitioners’? under the Income Tax Act, 1961. The judgement may be read in the context of this question. It may mean that, with the mention of criminal laws, SC has tried to indicate importance of this action.
Indispensable situation – Pharma companies
30) The pharma and health care companies will have to find out a way for incurring AMP (Advertisement, Marketing and Promotion) expenses as the SC decision will have an adverse impact of cutting their freedom of advertising and consequentially right to conduct business.
31) Legislature should come out with some balance enabling pharma companies to conduct their business in a reasonable manner.
(#) Supreme Court of India – Fida Hussain & Ors vs Moradabad Dev. Authority & Anr on 19 July, 2011 CIVIL APPEAL NO. 5448 OF 2006
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