[Freebies to Doctors] Take note of corruption in medical field by allied healthcare industry: Calcutta High Court

The Calcutta High Court recently asked the Central and State governments to take note of corruption in the medical field in the form of hospitals or allied healthcare industries providing commissions or freebies to doctors for referring patients to them [Peerless Hospitex Hospital and Research Center Limited v. Principal Commissioner of Income Tax-1, Kolkata]..Justice Md Nizamuddin said that poor and middle class patients needed to be protected from bearing the burden of the unnecessary hidden costs which arose from providing these freebies.“...unnecessary cost of these nature which is prohibited by the aforesaid regulations, to be incurred by the patients will make the treatment costlier and unaffordable to the poor and middle class patients who can’t afford these unnecessary hidden costs towards commissions/bonus/freebies to doctors for referring the patients to the hospitals and other health care unit,” recorded the order..- The High Court was moved by a company running a multi-speciality hospital against Income Tax notices relating to assessment years 2011-12 and 2012-13;- The dispute related to a payment made as ‘referral to doctors’ which was claimed as a business expense;- The Assessment Officer recorded that ‘referral to doctors’ was an expense prohibited by law and was disallowable under explanation 1 to Section 37 (1) of the Income Tax Act;- The Court held that the expense was not entitled to deduction under Section 37 (1) as a business expenditure since offering or payment to doctors for referring patients was opposed to public policy;- However, the notices were quashed for being bad in law..The issue arose when the income tax assessment of the petitioner for the years 2011-12 and 2012-13 was reopened, and notices were issued after the expiry of 4 years from the end of the relevant assessment year. The petitioner company engaged in the business of running a multi-speciality hospital stated that the dispute related to the payment of ₹51,76,992 for ‘referral to doctors’ which was claimed as a business expense in the income tax return. The Assessing Officer had, at the time, allowed such deduction after due consideration of the relevant materials.Therefore, the petitioner contended that the reopening was merely on a change of opinion and there was no new material or case made out by the Assessing Officer.The Assessing Officer recorded that the expenditure was prohibited by law and therefore, disallowable under explanation 1 to Section 37 (1) of the Income Tax Act in light of the amended Indian Medical Council Regulation, 2002 and a circular issued by the Central Board of Direct Taxes (CBDT).The petitioner, however, said that the opinion was misconceived as the CBDT circular was dated August 1, 2012, and could not apply retrospectively to the assessment years..The High Court recorded an that the judgment of the Supreme Court in Apex Laboratories Pvt Ltd v. Deputy Commissioner of Income Tax was an important development that took place after the conclusion of arguments in the present dispute. It was stated that the issue of claiming deduction of expenses incurred on freebies/payment of commission to doctors by the allied healthcare industry was discussed in this judgment. Therefore, arguments were heard in this context and discussed at length by Justice Nizamuddin..Essentially, the Supreme Court had held that pharmaceutical companies gifting freebies to doctors was clearly prohibited by law. Therefore, these freebies could not be claimed as a deduction under Section 37(1) of the Income Tax Act..Pharmaceutical companies gifting freebies to doctors “prohibited by law”; cannot claim tax deduction: Supreme Court.After considering the facts, the Court concluded that the petitioner was not eligible to get a deduction on expenditure by way of commission to doctors for referring patients to its hospital as a business expenditure under Section 37 (1) of the Income Tax Act..The Court emphasised that the ultimate object of the Indian Medical Council Regulations was to protect the interest of the patients and for prevention of corruption in the medical profession.It was the Court’s stand that allowing a deduction of such nature would encourage and cause proliferation of corruption in the medical field, thus frustrating the very purpose and object of the Regulations and the Circular of the CBDT..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.Calcutta High Court.Further, it was observed that such expenditures were immoral and opposed to public policy, since acceptance of the same by medical practitioners was prohibited by law.The Court also rejected the contention of the petitioner that offering commission to doctors was not punishable, but only accepting the same was prohibited.“...if such contention or interpretation of the petitioner is accepted it would amount to justify and legalise their action like legalizing bribe giving in spite of the legal position that the bribe taking or accepting is clearly prohibited and is a punishable offence,” the judge reasoned..Therefore, the Court asked the State and Centre to take note and prevent the misuse of the legislative gap by bringing in an appropriate legislation, since receiving payments for ‘referral to doctors’ had been held to be prohibited and unethical.“...only disallowance of such nature of expense under the Income Tax Act would not deter them from indulging and participating in these nature of prohibited, unethical and immoral act,” the Court opined..However, providing some relief to the petitioner, the Court said that the initiation of proceedings after the expiry of four years from the end of the relevant assessment years was bad in law and was liable to be quashed. Therefore, the notices were quashed..Senior Advocate Abhijit Chatterjee and Advocate Gopal Ram Sharma appeared for the petitioner while the respondent was represented by Advocates PK Bhowmick and Radhamohan Roy..Pertinently, the Supreme Court recently issued notice to the Central government in a public interest litigation (PIL) seeking directions to make pharmaceutical companies liable for giving freebies to doctors as an incentive to prescribe their drugs.The PIL said that the right to health is a part of the right to life and pharmaceutical companies adhering to ethical marketing practices is essential to that..[Read Judgment]