Stare decisis is a principle of policy, requiring adherence to binding precedents, without in any manner, disturbing the questions that have been put to rest.  It is undoubtedly an essential feature of the rule of law and administration of justice, since it fosters predictability, certainty and finality.  However, this principle, that the exposition of law ought to be adhered to and applied unreservedly, without any deviations therefrom, is not entirely rigid or inflexible.  The latitude within the legal framework, to apply a different result or to depart from a binding precedent, is based on various factors, targeted at the need to balance equities.  This is precisely where judicial discretion comes into play and assumes utmost significance.  Judicial discretion refers to the freedom to decide on a matter without strictly being bound by a precedent, owing, inter-alia, to a distinction being carved out in the facts or questions of law fairly arising.  Therefore, principle of stare decisis is not absolute or universal and in that, it cannot curtail judicial discretion to determine whether any moderation or complete departure from binding precedent, in light of facts and circumstances, is warranted.

In India, the principle of stare decisis is embodied in Article 141 of the Constitution.  In terms thereof, the law declared by the Supreme Court is binding on all Courts within the territory of India.  The present article is an attempt to highlight that pronouncements by the Supreme Court ought not to be viewed as a straitjacket formula for ready application, without examining the factual background and the applicable law^[1].  This will be exemplified through the instance of the judgment of the Supreme Court in Apex Laboratories Private Limited vs. DCIT, [2022] 7 SCC 98 (Supreme Court).

In Apex Laboratories (Supra), the Supreme Court was confronted with the question of allowability of expenditure incurred by a pharmaceutical or allied healthcare company after 14 December, 2012^[2], towards “freebies” in the nature of hospitality conference fee, gold coins, LCD TVs, fridges, laptops, etc., provided to medical practitioners for creating awareness about the health supplement, “Zincovit”.  The said expenditure was sought to be disallowed by the Revenue Authorities under Explanation 1 to section 37(1) of the Income-tax Act, 1961 (“Act”), by relying on Circular No. 5/ 2012 dated 01 August, 2012, issued by the Central Board of Direct Taxes (“CBDT Circular”).  Relevant extracts from the decision, concerning the facts before the Supreme Court, are reproduced as under:

“3. 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.

…

13. 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’…”

At this juncture, since allowability of expenditure is required to be adjudged from the lens of section 37(1) of the Act, it is relevant to take note of the said section, which is reproduced as under:

“37.      (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenditure of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

 Explanation 1.—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure…”

Simply put, as per section 37(1) of the Act, expenditure (not in the nature of expenditure falling under sections 30 – 36 of the Act or capital expenditure) incurred wholly and exclusively for the purpose of business, is a permissible deduction for the purposes of computation of total income, chargeable to tax under the provisions of the Act.  Accordingly, at the outset, it is required to be ascertained whether expenditure claimed has any nexus with the business of the company concerned.  If the answer is in the negative, then the claim of allowability of expenditure is, in any event, unsustainable.  If, however, the answer is in the affirmative, then, the second threshold is a determination of whether the expenditure is for a purpose, which is an offence or prohibited by law^[3].  Thus, the claim of allowability of expenditure under section 37(1) of the Act is sustainable, only if the expenditure is for a purpose, which is not an offence or is not prohibited by law, so as to fall outside the contours of Explanation 1 to section 37(1) of the Act.

As far as the judgment in Apex Laboratories (Supra) is concerned, there was no dispute therein that the expenditure in question was expended wholly and exclusively for the purpose of the business of the Appellant and that therefore, section 37(1) of the Act, strictly speaking, stood satisfied.  The sole point of contention therein was whether the said expenditure was for a purpose, which was an offence or prohibited by law, so as to trigger Explanation 1 to section 37(1) of the Act and consequently, warrant its disallowance.  Specifically, the Supreme Court was required to determine the legality of expenditure incurred towards “freebies” after the coming in force of the IMC Regulations and on the touchstone of the CBDT Circular.  By way of background, the CBDT Circular is based on clauses 6.8.1 (a) to (d) of the IMC Regulations, enforced by the Medical Council of India (“MCI”) with effect from 14 December, 2012, in exercise of power under section 20A read with section 33(m) of the Indian Medical Council Act, 1956 (“MCI Act”) read with Notification No. MCI-211(1)/2010(Ethics)/163013 issued thereunder.  The relevant clauses 6.8.1 (a) to (d) of the IMC Regulations are reproduced as under:

“6.8. Code of conduct for doctors in their relationship with pharmaceutical and allied health sector industry.

6.8.1 In dealing with Pharmaceutical and allied health sector industry, a medical practitioner shall follow and adhere to the stipulations given below:—

• Gifts: A medical practitioner shall not receive any gift from any pharmaceutical or allied health care industry and their sales people or representatives.

• Travel facilities: A medical practitioner shall not accept any travel Facility inside the country or outside, including rail, road, air, ship, cruise tickets, paid vacation, etc. from any pharmaceutical or allied healthcare industry or their representatives for self and family members for vacation or for attending conferences, seminars, workshops, CME Programme, etc. as a delegate.

• Hospitality: A medical practitioner shall not accept individually any hospitality like hotel accommodation for self and family members under any pretext.

• Cash or monetary grants: A medical practitioner shall not receive any cash or monetary grants from any pharmaceutical and allied healthcare industry for individual purpose in individual capacity under any pretext.”

It is also relevant to point out that breach by a medical practitioner of clauses 6.8.1 (a) to (d) of the IMC Regulations has the consequence of imposition of sanctions on the medical practitioner based on the value of stipulation transgressed.  The sanction may be in the nature of a penalty or a ban imposed on the medical practitioner.  Therefore, acceptance of “freebies” envisaged under clauses 6.8.1 (a) to (d) of the IMC Regulations, is undoubtedly an offence as far as medical practitioners are concerned.

At this juncture, it is also relevant to dwell into the relevant CBDT Circular, which is reproduced as under:

“1.        It has been brought to the notice of the Board that some pharmaceutical and allied health sector Industries are providing freebees (freebies) to medical practitioners and their professional associations in violation of the regulations issued by Medical Council of India (the ‘Council’) which is a regulatory body constituted under the Medical Council Act, 1956.

2. The council in exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-12-2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries.

3. Section 37(1) of Income Tax Act provides for deduction of any revenue expenditure (other than those failing under sections 30 to 36) from the business Income if such expense is laid out/expended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this sub-section denies claim of any such expense, if the same has been incurred for a purpose which is either an offence or prohibited by law.

 Thus, the claim of any expense incurred in providing above mentioned or similar freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37(1) of the Income Tax Act being an expense prohibited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector Industries or other assessee which has provided aforesaid freebees and claimed it as a deductible expense in its accounts against income.

4. It is also clarified that the sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner or professional associations is also taxable as business income or income from other sources as the case may be depending on the facts of each case. The Assessing Officers of such medical practitioner or professional associations should examine the same and take an appropriate action.

 This may be brought to the notice of all the officers of the charge for necessary action.”

The import of the CBDT Circular is that owing to a prohibition contained in clauses 6.8.1 (a) to (d) of the IMC Regulations, concerning acceptance of “freebies” in the nature of gifts, travel facilities, hospitality or cash or monetary grants by medical practitioners, corresponding expenditure incurred by a pharmaceutical or an allied healthcare company for facilitation thereof, also ought not to be allowed under section 37(1) of the Act.  Therefore, if it is sufficiently evidenced that a “freebie”, in terms of clauses 6.8.1 (a) to (d) of the IMC Regulations, has been facilitated to a medical practitioner by a pharmaceutical or an allied healthcare company, then, the expenditure incurred by such pharmaceutical or allied healthcare company as regards the facilitation of “freebie”, would not be an allowable expenditure under section 37(1) of the Act.

Having taken a note of the relevant provisions and the IMC Regulations, the Supreme Court in Apex Laboratories (Supra), in the context of the facts before it, observed as under:

• Explanation 1 to section 37(1) of the Act, purposively interpreted, gives credence to the logic that when acceptance of “freebies” has been made punishable by the MCI, a pharmaceutical or allied healthcare company cannot be granted any tax benefit for provision of such “freebies”. Though provision of “freebies” may not qualify as an “offence” absent specific sanctions, such action still stands to be one which is “prohibited by law”.
• Since medical practitioners and pharmaceutical or allied healthcare companies are complementary and supplementary to one another, a comprehensive view of their conduct should be adopted. In this regard, denial of a tax benefit should not be viewed as a mechanism to penalise a pharmaceutical or allied healthcare company, but that said, its participation in an action “prohibited by law”, should preclude it from claiming expenditure in connection with such action as a deductible expenditure.
• Provision of “freebies” by a pharmaceutical or allied healthcare company is “prohibited by law”, being against public policy, for the following reasons:

a.) Since medical practitioners have a quasi-fiduciary relationship with their patients, it is a matter of great public importance and concern when a medical practitioner is capable of manipulating prescriptions, driven solely by the motive to avail “freebies” offered by a pharmaceutical or allied healthcare company.

b.) “Freebies” are not technically free, since the cost of supplying “freebies” is factored into the drug, thereby driving up prices and consequently, creating a perpetual publicly injurious cycle.

c.) An action pursuant to which one arm of law is utilised to defeat the other, brings law into ridicule and accordingly, such action being opposed to public policy, should not be condoned.

• An arrangement between a pharmaceutical or allied healthcare company and medical practitioners for facilitation of “freebies” by the former to the latter, in lieu of boost in sales of prescription drugs of the former, is an arrangement in violation of section 23 of the Indian Contract Act, 1872. This is because such an arrangement is immoral or opposed to public policy; or unlawful; or of such a nature that if permitted, it would defeat the provisions of IMC Regulations.
• The well-established principle of interpretation of a taxing statue is that it needs to be interpreted strictly. However, the said principle is not capable of being sustained if the results of strict interpretation are absurd, contrary to the Legislative intent.  Where strict interpretation does not shed any light on or give shape to the Legislative intent, it is the responsibility of a Court to discern the social purpose subserved by the provision in question and thereafter, to give effect to the same.

In conclusion, the Supreme Court, while stating that the Appellant cannot misuse a Legislative gap to actively perpetuate commission of an offence, held that provision of “freebies” to medical practitioners is “prohibited by law”, since it has the direct result of exposing medical practitioners to an odium of mandatory sanctions embodied in the code of conduct and ethics, which are normative in nature and have a legally binding effect.  In view thereof, the Supreme Court concluded that expenditure incurred by the Appellant, in connection with provision of “freebies” to medical practitioners, cannot be allowed to be claimed as a permissible deduction under section 37(1) of the Act.

The judgment in Apex Laboratories (Supra) was rendered in the factual context and legal position relevant to that case, where the dispute was restricted to allowability of expenditure incurred in contravention of clauses 6.8.1 (a) to (d) of the IMC Regulations read with the CBDT Circular.  Therefore, it ought to be seen as a precedent on its own facts, nothing further.  While it is the cardinal feature of common law that binding precedents should be followed, however, Courts cannot remain static by taking shelter of such binding precedents, in complete isolation to the necessary facts or the applicable law.  Deference to the principle of judicial discipline should not curtail the power to exercise judgment basis facts and/ or the applicable law and consequently, to apply a different result than what may otherwise have applied.  Where a binding precedent is ostensibly narrow in its scope, then, alternatives may appropriately be applied in the interest of equity, justice and fair play.

In this regard, it would be pertinent to point out that owing to the nature of their profession, medical practitioners are expected to contribute to improving the quality of life of their patients, such that the patients get the right treatment at the right time.  The science of treating patients is dynamic and ever-evolving.  Therefore, to keep up and to ensure that the most effective and efficient approach is adopted to treat ailments, forums for participation in Continuing Medical Education Programs, such as, trainings, lectures, seminars, workshops, conferences, etc., have not only assumed significance, but have also been mandated by and under the applicable law.  In this regard, attention is directed at clauses 1.2.2., 1.2.3. and 6.8.1 (g) of the IMC Regulations, which are reproduced as under:

“1.2.2 Membership in Medical Society: For the advancement of his profession, a physician should affiliate with associations and societies of allopathic medical professions and involve actively in the functioning of such bodies.

1.2.3 A physician should participate in professional meetings as part of Continuing Medical Education programmes, for at least 30 hours every five years, organized by reputed professional academic bodies or any other authorized organisations. The compliance of this requirement shall be informed regularly to Medical Council of India or the State Medical Councils as the case may be. 

6.8.1 (g) Affiliation: A medical practitioner may work for pharmaceutical and allied healthcare industries in advisory capacities, as consultants, as researchers, as treating doctors or in any other professional capacity. In doing so, a medical practitioner shall always:

• Ensure that his professional integrity and freedom are maintained.

• Ensure that patients interest are not compromised in any way.

• Ensure that such affiliations are within the law.

• Ensure that such affiliations / employments are fully transparent and disclosed.”

In view thereof, participation by medical practitioners in Continuing Medical Education Programs is a statutorily recognized practice.  That said, it is incomprehensible as to how dispensation of knowledge by medical practitioners in such Continuing Medical Education Programs, for overall advancement of science, can be said to be in conflict with any of the IMC Regulations.  That apart, the Draft Uniform Code for Medical Device Marketing Practices^[4], seeks to govern the practice of medical practitioners entering into consulting and/ or proctorship arrangements with pharmaceutical or allied healthcare companies.  The said Code sets out, inter-alia, guidelines concerning payments to medical practitioners in lieu of facilitation by them of consulting and/ or proctorship services.  This includes guidelines concerning expenditure on honorariums, travel, boarding or lodging, in connection with facilitation of consulting or proctorship services by medical practitioners.  Therefore, an inference that every payment made by a pharmaceutical or allied healthcare company to a medical practitioner is prohibited by law, is a fallacy, against the letter and spirit of law^[5].

The judgment in Apex Laboratories (Supra), dwelling into the issue of allowability of expenditure having a direct nexus with the prohibitions contained in clauses 6.8.1.(a) to 6.8.1.(d) of the IMC Regulations, cannot by any stretch of logic, be construed to be an appropriate guidance concerning cases that plainly fall within the fold of Clauses 1.2.2., 1.2.3. and 6.8.1.(g) of the IMC Regulations.  Such construction, absent any question or stipulation of a benefit or a “freebie”, would be a blatant and incorrect application of law enunciated by the Supreme Court in Apex Laboratories (Supra).  At this juncture, the following observations of the Supreme Court^[6], though rendered in a different context, may be taken a note of:

“The courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. Observations of the courts are neither to be read as Euclid’s theorems nor as provisions of the statute and that too taken out of their context. These observations must be read in the context in which they appear to have been stated. Judgments of the courts are not to be construed as statutes.”

It would also be pertinent to point out that Income Tax Appellate Tribunals pan-India have set aside and remanded the matter back to the file of the Assessing Officers for de-novo adjudication, upon being confronted with cases of blanket applicability of the Apex Laboratories (Supra), in utter disregard to the fact pattern or applicable law before them^[7].

In view of the position propounded upon in the foregoing parts of this article, the judgment in Apex Laboratories (Supra) serves as an authority on facts and legal issues litigated thereunder, nothing further.  It cannot be stretched as far as to condone a hands-off judicial approach on the issue of legality or illegality of every payment made by a pharmaceutical or allied healthcare company to a medical practitioner, de-hors of the actual nature of such payment.

Footnotes:

[1]       Reliance is placed on the judgments in Deena Dayal vs. UOI, 1984 SCR (1) 1 (Supreme Court); and CIT vs. Sun Engineering Works Pvt. Ltd., [1992] 198 ITR 297 (Supreme Court), to the effect that a precedent is an authority only for what it actually decides.  Further, reliance is placed on the judgment in Padmasundra Rao vs. State of T.N., [2002] 255 ITR 147 (Supreme Court), to the effect that absent any discussion on how the facts fit with the facts of a judgment sought to be relied on, reliance on such judgment is wholly unsustainable.

[2]        i.e., after the coming in force of the Indian Medical Council (Professional Conduct Etiquette and Ethics) Regulations, 2002 (“IMC Regulations”).

[3]         As per section 2(38) of the General Clauses Act, 1897, “offence” refers to an act or omission made punishable under any law for the time being in force.  Further, as per section 40 read with section 43 of the Indian Penal Code, 1860, “illegal” refers to everything which is an offence or which is prohibited by law or which furnishes ground for a civil action.  Therefore, all actions that are illegal, prohibited by law and/ or punishable, fall within the rigours of Explanation 1 to section 37(1) of the Act.

[4]      Published by the Ministry of Chemicals and Fertilizers, Department of Pharmaceuticals, Government; available at: https://pharmaceuticals.gov.in/sites/default/files/DoP_Public%20Notice_Dated%2016032022.pdf.

[5]      Recently, the Hon’ble Delhi High Court has, in Boston Scientific India Private Limited vs. CIT, appeal bearing ITA No. 309/2023, vide order dated 26.06.2023, issued notice to the Revenue Authorities and vide a subsequent order dated 14.09.2023, granted stay on the operation of the judgment of the Income Tax Appellate Tribunal in Boston Scientific India Private Limited vs. DCIT, appeal bearing ITA No. 871/Del/2021, judgment dated 13.03.2021 (Bangalore – Trib.).  In the said case, the case of the Assessing Officer was that every payment made by a pharmaceutical or allied healthcare company to a medical practitioner is prohibited by law, being in violation of the CBDT Circular and is consequently, not allowable under section 37(1) of the Act.  The case has next been listed for hearing on 09.02.2024.  Boston Scientific India Private Limited was represented by AZB & Partners.

[6]       UOI vs. Major Bahadur Singh, [2006] 1 SCC 368 (Supreme Court).

[7]        Refer in this regard, judgments in Merk Ltd. vs. DCIT, [2023] 128 taxmann.com 209 (Mumbai – Trib.); Himalaya Wellness Company vs. DCIT, appeal bearing IT(TP)A No. 259/Bang/2022, judgment dated 14.06.2022 (Bangalore – Trib.); Leeford Healthcare Ltd. vs. PCIT, [2022] 146 taxmann.com 284 (Chandigarh – Trib.); DCIT vs. Serum Institute of India Ltd., [2022] 145 taxmann.com 507 (Pune – Trib.); ACIT vs. AstraZeneca Pharma India Ltd., [2023] 146 taxmann.com 11 (Bangalore – Trib.) and Alcon Laboratories (India) (P.) Ltd. vs. DCIT, [2023] 146 taxmann.com 437 (Bangalore – Trib.).