On 22 February, the Hon'ble Supreme Court dismissed the Special Leave Petition by Apex Laboratories Pvt. Ltd (the Appellant/Apex) to claim deduction on various freebies given to doctors. The bench comprising of Justice Uday Umesh Lalit and S. Ravindra Bhat upheld the decision of Madras High Court, stating that the pharmaceutical (pharma) companies' giving freebies to the doctors is clearly 'prohibited by law' and it cannot be claimed as a deduction under Section 37(1) of the Income Tax Act, 1961 (the Act).

The key arguments of both the parties and the verdict of the Hon'ble Supreme Court are captured hereunder:

Facts of the Case

  • The Appellant was issued a notice under Section 142(1) of the Act to explain why the expenditure of INR 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 their health supplement 'Zincovit,' should not be added back to the total income.
  • The notice was issued in light of the CBDT Circular1 issued on 1 Aug 2021, which stated that expenses incurred by pharma and companies and allied healthcare sector for distribution of incentives (i.e. freebies) to medical practitioners are inadmissible for deduction under Section 37(1) of the Act being an expense prohibited by law.
  • The tax authorities had partly allowed the expenditure since the amendment to the Indian Medical Council Regulations, 2002 (IMCR) was made on 14 December 2009, not allowing medical practitioners to accept compensation in the form of gifts, travel facilities, hospitality, cash or other monetary gains. The expenditure incurred post this amendment was disallowed.
  • Aggrieved by the decision, the Appellant filed the said appeal.

Contentions of the Appellant

  • The Appellant contended that the IMCR did not apply to Apex and did not bind the pharma companies. While medical practitioners were expressly prohibited from accepting freebies, no such corresponding prohibition in the form of any binding norm was imposed on pharma companies.
  • The Appellant relied on various High Court decisions2 to establish that the IMCR was enforceable only against the medical practitioners and not the donors.
  • The Appellant further relied on various judgments3 and submitted that it was not open to the revenue to deny a tax benefit on the nature of the expenses incurred.
  • The Memorandum4 to the Finance Bill, 1988 was brought to the Court's attention, explaining that the intention of the Parliament for inserting Explanation 1 to Section 37(1) of the Act was only to bring into its ambit the illegal activities which needs to be interpreted strictly and not in a comprehensive manner.
  • Finally, the Appellant submitted that the CBDT circular was enlarging the scope of IMCR and imposing its provisions even to the pharma companies, which is outside its purview. Without prejudice to the same, reliance was placed on various decisions5 to content that even if the CBDT circular was to bring into effect, it could be done so only prospectively and not retrospectively.

Contentions of the Revenue Authorities

  • The revenue contended that while the act of pharma companies gifting medical practitioners may not be classified as an 'offence', it was squarely covered under the category 'prohibited by law' as IMCR specifically prohibited it. In view of the same, while Apex could not be punished, it should not be allowed tax deduction on the freebies distributed.
  • The revenue placed its reliance on various decisions6 and submitted that the Parliament's intention to disincentivize the practice of receiving freebies was apparent from not only IMCR but also the Prevention of Corruption Act, 1988 and Indian Penal Code, 1860.
  • Furthermore, reliance was also placed on various decisions7 to contend that the scope of IMCR was not limited to the finite list of instances of professional misconduct but broad enough to cover other instances as well. The decision also referred to Section 23 of the Contract Act, 1872 to hold the consideration between the assessee and private doctors as unlawful and therefore treated the agreement as void since it was opposed to public policy.
  • Lastly, the revenue submitted that allowing Apex to claim the tax benefit would deprive the revenue of the tax leviable on such amount.


After considering the arguments of both the parties, the Supreme Court dismissed the appeal and made the following observations:

  • Explanation 1 was inserted in Section 37 in 1998 with retrospective effect from 1 April 1962 restricting the tax relief related to any expense incurred for 'any purpose which is an offence or which is prohibited by law'. It contains all such activities which are illegal/ prohibited by law and/or punishable within its ambit.
  • The CBDT circular being clarificatory in nature was in effect from the date of the amendment in the regulations of the IMCR i.e. 14 December 2009.
  • If acceptance of freebies is punishable as per the Medical Council of India (MCI), pharma companies cannot be granted the tax benefit for the same, thereby actively and with full knowledge enabling commission of such act.
  • A comprehensive view must be adopted, doctors and pharmacists are complementary and supplementary to each other in the medical profession. Therefore, its participation would be construed as an action prohibited by law, precluding the assessee from claiming it as deductible expenditure.
  • 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. The view was also supported by the Parliamentary Standing Committee on Health and Family Welfare8 and Report issued by US Department of Health and Human Services Office of the Assistant Secretary for planning and evaluation.
  • One arm of the law cannot be utilized to defeat the other arm of the law – doing so would be opposed to public policy and bring the law into ridicule.
  • It is crucial to note that the agreement between the pharma 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.
  • The well-established principle of interpretation of taxing statutes – that they need to be interpreted strictly – cannot sustain when it results in an absurdity contrary to the intentions of the Parliament.
  • Thus, pharma companies' gifting freebies to doctors, etc. is clearly 'prohibited by law', and not allowed to be claimed as a deduction under Section 37(1) of the Act. Doing so would wholly undermine public policy.

Our Comments

It is a common practice in the pharma industry to provide freebies to medical practitioners in the form of conference fees, hospitality, gifts, etc. for prescribing and promoting their medicines. Despite a code by the MCI and issuance of the CBDT circular, the practice of various pharma companies claiming such freebies as an allowable expenditure under Section 37 of the Act has continued as there is no law barring such activity.

This landmark Supreme Court judgment has put an end to the numerous ongoing litigations in the judicial system. It is important to note that Budget 2022 also proposed an explanation to clarify 'expenditure incurred by an assessee for any purpose which is an offence or prohibited by law' to avoid any misinterpretations.

Overall, with this judgement, it can be said the controversy on allowability of freebies to pharmaceutical companies has been put to rest unless it can be proved that the freebies are well within the MCI guidelines and the matter can be distinguished based on the facts of the case. It is also to be noted that based on the contention of the authorities that the freebies are not free but gets factored into the drug cost, it may now be added to the cost based on this decision.


1. CBDT Circular No. 5/2012 [F. No. 225/142/2012-ITA.II]

2. Max Hospital Pitampura v. Medical Council of India [W.P. (C) No. 1334/2014 / ILR (2014) 1 Delhi 620, dated 10.01.2014]; Dr. Anil Gupta v. Addl. Commissioner of Income Tax

[Appeal No. 485/2008, decided on 18.07.2017]

3. T.A. Quereshi v. Commissioner of Income Tax, Bhopal [(2007) 2 SCC 759]; Commissioner of Income Tax v. M/s Khemchand Motilal Jain [2011 (4) MPLJ 691]

4. Memorandum Explaining the Provisions of the Finance (No. 2) Bill, 1998, Section 15. Later adopted by CBDT Circular No. 772 ([1999] 235 ITR (St.) 35, 53), dated 23.12.1998.

5. Director of Income-tax v. S.R.M.B Dairy Farming (P.) Ltd., (2018) 13 SCC 239

6. Kanwarjit Singh Kakkar v. State of Punjab, (2011) 13 SCC 158.

7. Commissioner of Income-Tax v. Kap Scan and Diagnostic Centre P. Ltd (2012) 344 ITR 476 (P&H HC); Confederation of Indian Pharmaceutical Industry (SSI) v. Central Board of Direct Taxes (2013) 353 ITR 388 (HP HC)

8. 45th Report on Issues Relating to Availability of Generic, Generic-Branded and Branded Medicines, their Formulation and Therapeutic Efficacy and Effectiveness), dated 04.08.2010.

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