Context: The judgment by a two-judge Bench of the Supreme Court of India in M/s Apex Laboratories Pvt. Ltd. Vs. Deputy Commissioner of Income Tax, Large Tax Payer Unit-II, on February 22, 2022 has struck a blow for public good.
The SC bench dismissed the Special Leave Petition by Apex Laboratories to claim deduction on freebies given to doctors.
Upholding a decision by the Madras High Court, the Bench said that the act of pharmaceutical companies giving freebies to doctors is clearly ‘prohibited by the law’.
Further, it cannot be claimed as a deduction under Section 37(1) of the Income Tax Act, 1961.
The judgment will go a long way in checking unethical and illegal practices in the pharma sector which has become so out of reach for the common man.
A case of misuse
Pharmaceutical companies have misused a legislative gap to actively perpetuate the commission of an offence of giving freebies to doctors to promote their brands, even though this was prohibited in the law framed by the Medical Council of India (MCI).
In the said case, the company was giving out freebies to doctors in order for them to create awareness about a health supplement it was manufacturing called Zincovit.
Thus court upheld that 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).
A doctor’s prescription is considered as the final word on medication by the patient even if the cost of such medication is unaffordable.
The Court was conscious that the cost of such freebies is factored in the cost of medicines sold, in turn driving up their prices and perpetuating a publicly injurious cycle.
The issue of retail price
There is where a case of secret dealing that happens in the pharma world happens because drugs are invariably sold in pharmacist shops at MRP only.
This is what affects medical treatment.
Even though the Drug Price Control Order and Drugs and Cosmetics Act are there on the statute book, there is hardly any action to keep the sale price of medicines under control with due and proper investigation into their so-called research and development costs and keeping their profit margins within a prescribed limit.
There is an urgent need to check looting that is driven by drug manufacturers to distribute their products using freebies or ‘bribes’.
Way forward
This judgment can go far.
It should be debated and applied to other unethical practices and expenditure out of public funds.
The strategy here should be to use financial tools such as income-tax provisions for disallowing such expenditure and taxing the same as perquisites or taxable income in the hands of recipients viz. assurances and declarations in election campaigns by political parties by giving away free laptops, waived electricity charges, food grains, loan waivers, etc.
