This Tax Alert summarizes a recent Supreme Court (SC) ruling in the case of Apex Laboratories Pvt. Ltd. (Taxpayer) dated 22 February 2022 on the issue of tax deductibility of expenses incurred by the Taxpayer for providing freebies (such as hospitality, conference fees, gold coins, LCD TVs, fridges, laptops etc.) to medical practitioners to promote sales of a healthcare supplement.
The Tax Authority invoked the Explanation to Section (s.) 37(1) of the Indian Tax Laws (ITL) which disallows expenses incurred for any purpose, which is an offence or which is prohibited by law. The lower appellate authorities upheld such disallowance since the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (MCI Regulations) prohibited medical practitioners from accepting such freebies. The Taxpayer’s principal argument against the disallowance was that MCI Regulations applied only to medical practitioners and not to pharma companies and, hence, it was not an offence or prohibited by law for pharma companies.
The Supreme Court (SC) dismissed the Taxpayer’s appeal and upheld the disallowance on the ground that, since acceptance of such freebies by medical practitioners is in violation of MCI Regulations, the Taxpayer cannot be granted tax deduction. As per the SC, if accepting freebies is prohibited by law for the recipient, giving freebies is also impliedly prohibited by law for the payer. Further, the SC held that granting deduction of such expenses would undermine public policy.
