The judgement by pronounced by Hon’ble Supreme court in case of M/s Apex Laboratories Pvt. Ltd. Versus Deputy Commissioner of Income Tax, Large Tax Payer Unit – II vide order Dt. 22.02.2022
Facts of the case:
On 01.08.2012, the Central Board of Direct Taxes (hereinafter, “CBDT”) issued a circular, which clarified that expenses incurred by pharmaceutical and allied health sector industries for distribution of incentives (i.e., “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.
After the circular was issued, on 22.11.2012, Apex was issued a notice under Section 142(1) of the IT Act, to explain why the expenditure of ₹4,72,91,159/- 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 of Apex.
The reason for only a partial allowance by the authorities below was that an amendment to the Medical Council Act, 1956 (now repealed) through the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (hereinafter, “2002 Regulations”), published in the Official Gazette on 14.12.2009, 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.8 Therefore, only the expenses incurred till 14.12.2009 were eligible for the benefit of Section 37(1), and not for the entirety of the Assessment Year 2010-2011, as claimed by Apex.
It was argued by the counsel for Apex, Mr. S. Ganesh, Senior Advocate, 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).
Counsel placed reliance on rulings by different High Court to establish that the 2002 Regulations were enforceable only against medical practitioners and not the donors, i.e., pharmaceutical companies. In Max Hospital Pitampura v. Medical Council of India (hereinafter, “Max Hospital”) the Delhi High Court held that the Medical Council of India (hereinafter, “MCI”) had no jurisdiction to pass any orders against the appellant hospital, and adverse observations made against the hospital by MCI were quashed.
The Counsel urged that as these decisions were not challenged by the revenue authorities, and thereby accepted by them, the present matter was not open for reconsideration.
The Counsel further submitted that it was not open to the revenue to deny a tax benefit on the ‘nature’ of expenses incurred. This Court, in T.A. Quereshi v. Commissioner of Income Tax, Bhopal (hereinafter, “T.A. Quereshi”) allowed the appellant to deduct the cost of heroin seized as a business loss, holding that:
““In our opinion, the High Court has adopted an emotional and moral approach rather than a legal approach. We fully agree with the High Court that the assessee was committing a highly immoral act in illegally manufacturing and selling heroin. However, cases are to be decided by the court on legal principles and not on one’s own moral views. Law is different from morality, as the positivist jurists Bentham and Austin pointed out.”
It was argued that similarly, in Commissioner of Income Tax v. M/s Khemchand Motilal Jain, a Division Bench of the Madhya Pradesh High Court allowed ransom money paid to the kidnappers of an employee of the respondent company on a business trip as business expenditure under Section 37(1), holding that:
“The aforesaid section provides that kidnapping a person for ransom is an offence and any person doing so or compelling to pay is liable for the punishment as provided in the Section, but nowhere it is provided that to save a life of the person if a ransom is paid, it will amount to an offence. No provision is brought to our notice that payment of ransom is prohibited by any law. In absence of it, the Explanation of sub-section (1), section 37 will not be applicable in the present case.”
“Sukhnandan Jain remained in custody for a period of nearabout 20 days. The police were also informed and after waiting 20 days for the police action. If the respondents to save his life paid the aforesaid amount, then the aforesaid amount cannot be treated as an action, which prohibited under the law. No provision could be brought to our notice that payment of ransom is an offence. In absence of which, the contention of the petitioner that it is prohibited under Explanation of section 37(1) of the Income Tax Act has no substance. The entire tour of Sukhnandan Jain was for purchase of Tendu leaves of quality and for this purpose, he was on business tour and during his business tour, he was kidnapped and for his release the aforesaid amount was paid.”
Counsel brought this Court’s attention to the Memorandum Explaining the Provisions of the Finance (No. 2) Bill, 1998 which stated that the introduction of Explanation 1 to Section 37(1) would disallow tax payers from claiming “protection money, extortion, hafta, bribes, etc.” as business expenditures, from which it could be inferred 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.
Finally, Counsel submitted that the CBDT circular dated 01.08.2012 enlarged the scope of the 2002 Regulations, and made it operable beyond medical practitioners, i.e., to pharmaceutical companies and allied health sector industries, which, in the absence of any enabling provision, was outside its dominion. Arguendo, 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 on 01.08.2012, and not the date of publication of the 2002 Regulations on 14.12.2009. Reliance was placed on various decisions of this Court to show that beneficial circulars had to be applied retrospectively, however oppressive circulars could only be applied prospectively.
Mr. Sanjay Jain, Additional Solicitor General 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.
Further, the ASG submitted that 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”).
In the present instance, the medical practitioners were provided expensive gifts such as hospitality, conference fees, gold coins, LCD TVs, fridges, laptops, etc. by Apex to promote its nutritional health supplement ‘Zincovit’. It was argued that receiving these, clearly – in letter and spirit, constituted professional misconduct on part of the medical practitioner. The scope of the 2002 Regulations was not limited to a finite list of instances of professional misconduct, but broad enough to cover those instances not specifically enumerated as well. The menace of prescribing expensive branded medication as a quid pro quo arrangement had a direct bearing on public policy, which was implicit in the 2002 Regulations itself.
Section 37 is a residuary provision. Any business or professional expenditure which does not ordinarily fall under Sections 30-36, and which are not in the nature of capital expenditure or personal expenses, can claim the benefit of this exemption. But the same is not absolute. Explanation 1, which was inserted in 1998 with retrospective effect from 01.04.1962, restricts the application of such exemption for “any purpose which is an offence or which is prohibited by law”.
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.
Observation and decision of Supreme Court:
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.
It is also a settled principle of law that no court will lend its aid to a party that roots its cause of action in an immoral or illegal act (ex dolo malo non oritur action) meaning that none should be allowed to profit from any wrongdoing coupled with the fact that statutory regimes should be coherent and not self defeating. 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. Therefore, denial of the tax benefit cannot be construed as penalizing 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.
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.
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.
In view of the foregoing discussion, the impugned judgment cannot be faulted with. The appeal is dismissed without order on costs.
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