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M/s Apex Laboratories P. Ltd. vs The Deputy Commissioner of Income Tax, Large Tax Payer Unit-II

SLP(C) · 2022 INSC 216Decided 22 Feb 2022
SLP(C) No. 23207 of 2019
Uday Umesh Lalit · S. Ravindra Bhat

Background

Apex Laboratories, a pharmaceutical company, gave doctors expensive "freebies" (including gold coins, LCD TVs, fridges, laptops, hospitality and conference sponsorships) to promote its health supplement "Zincovit," and claimed the roughly Rs. 4.73 crore spent on this as a deductible business expense under Section 37(1) of the Income Tax Act. The tax department disallowed the deduction, relying on Medical Council of India regulations (effective December 2009) that bar doctors from accepting such gifts from pharmaceutical companies, and a 2012 CBDT circular clarifying that such expenditure is not deductible. The Income Tax Appellate Tribunal, the Commissioner (Appeals), and the Madras High Court all ruled against the company, so it appealed to the Supreme Court.

Decision Breakdown

The Supreme Court dismissed the appeal, holding that although the Medical Council regulations technically bind only doctors (not pharma companies), Explanation 1 to Section 37(1) denies a tax deduction for any expenditure incurred for a purpose "prohibited by law", and since the acceptance of such freebies by doctors was itself prohibited and punishable, a company that knowingly supplied those freebies to induce doctors to prescribe its drugs was facilitating a legally prohibited act, so it could not separately profit from a tax deduction for enabling that prohibited conduct. The Court reasoned that allowing the deduction would let "one arm of the law" undercut another, was contrary to public policy, and that the practice of pharma companies incentivizing doctors to prescribe costlier branded drugs over cheaper generics causes real harm to patients and the public exchequer. It rejected the company's argument that the CBDT circular improperly expanded the ethics regulations to a class (pharma companies) not directly covered by them, holding the regulation and its underlying rationale extended by clear implication to those who supply the prohibited freebies.

Lesson Learnt

A business cannot claim a tax deduction for expenses spent enabling someone else to break the law. If the recipient's acceptance of a benefit is legally prohibited, the giver cannot treat the cost of providing that benefit as an ordinary, deductible cost of doing business.

Official source (sci.gov.in)View Judgment (PDF)

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