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PETITIONER:

ESKAYEF NOW KNOWN AS SMITHKLINE BEECHAM PRARMACEUTICALS LTD.

Vs.

RESPONDENT:

COMMISSIONER OF INCOME TAX KARNATAKA-II BANGAALORE

DATE OF JUDGMENT: 20/07/2000

BENCH:

S.P.Bharucha, Ruma Pal

JUDGMENT:

Judgement

Bharucha. J.

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The appeal relates to the Assessment year 1980-81. It

is on a certificate of fitness to appeal granted by the High

Court. The certification was only in respect of one

question which read thus:

"Whether on the facts and in the circumstances of the

case, the liability to pay surtax is an admissible deduction

in computing the total income?"

The answer to this question is covered against the

assessee by the decision of this court in the assessee's own

case, 219 I.T.R. 581. The question is accordingly answered

in the negative and in favour of the Revenue.

The civil appeal is dismissed.

No order as to costs.

Civil Appeal Nos. 4545-4547 of 1996:

These are appeals from the judgment and order of the

Division Bench of the karnataka High Court in Income Tax

References. The questions that the High Court was called

upon to answer read thus:

"Question of law in ITRC 144 of 1993

(a) Whether on the facts and in the circumstances of

the case, the liability to pay surtax is an admissible

deduction in computing the total income?

(b) Whether on the facts and in the circumstances of

the case, the expenditure incurred on physician's samles is

in the nature of advertisement expenditure falling within

the restrictive provisions of Sec 37 (3A0 of the Income Tax

Act?

Question of law in ITRC 143 of 1993.

a) Whether on the facts and in the circumstances of

the case, the liability to pay surtax is an admissible

deduction in computing the total income?

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Question of law in ITRC 171 of 1994.

Whether on the facts and in the circumstances of the

case, the Tribunal was right in holding that the applicant

was not entitled to the deduction of surtax levied while

computing the total income of the applicant?"

It is common ground that the questions that relate to

surtax must be answered in the negative and in favour of the

Revenue by reason of the judgment of this Court in the case

of Smith Kline and French (India) Ltd. & Ors. V.

Commissioner of Income Tax 219 ITR 581. They are so

answered.

The issue that is canvassed at the bar relates to the

physician's samples that the assessee, a pharmaceutical

company, distributes to the medical profession. It is the

assessee's case that these are all samples of prescription

drugs, and we proceed upon that the distribution of

physician's samples to doctors did not amount to

advertisement or publicity or sales promotion and therefore

all the expenditure incurred by the appellants on such

distribution was exempt, under the provisions of sec. 37 of

the I.T.Act, 1961 (for short the Act) as expenditure

incurred wholly and exclusively for the purpose of the

appellants business and not subject to the restrictions on

allowability contained in sub-section (3A) thereof.

The submission did not find favour with the I.T

Appellate Tribunal and with the High Court. The High Court,

in the order under appeal, followed its earlier judgment in

the case of Smith Kline and Franch (India) Ltd. V.

Commissioner of Income Tax, 193 ITR 582, ( which also

concerned the assessee). The High Court there had said :

"We do not think that we should discuss the principle

pertaining to the interpretation of statutes referred to

above in detail because the idea behind the contention is to

convey that advertisement, publicity or sales promotion

should be confined to the act of media propaganda and a

direct approach to the consumers by publicising the product

through newspaper advertisements, posters or some other

similar methods, We do not think that such a limited meaning

should be given to the three words. The nature of the

advertisement or publicity depends upon the nature and

quality of the article in question. An inducement to the

public to buy a particular commodity may be formulated in a

mode somt suitable to the article in question.

The members of the public would not but a drug just

because it is advertised repeatedly or publicised through

posters or announced on the T.V. etc. The members of the

public should have confidence about the curative value of

the drug and such confidence could be created mainly by the

medical practitioners prescribing the said drug or when the

medical practitioners give the same to partients towards

treatment. The media through which the drug could get

publicised thd earn goodwill will practitioner. Further,

the real persons who could create a market for a particular

drug are the medical practitionsers themselves having regard

to the nature of the drug, when compared to other industrial

products. A drug is not an ordinary article of consumption.

It is consumed only to get rid of some ailment. Before the

drug gets circulated, its reputation will have to be

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confirmed to the medical practitioners and that is why free

samples are supplied to them.

If the object of supplying free samples is only to

find out the reaction of the medical practitioners about the

efficacy or curative value of the drug the supply of free

samples would have been confined during the initial stages

of production of a new drug. However, that is not the case

of the assessee here. The assessee nowhere contends that

free samples were given to the medical practitioners only at

the time when a drug is introduced for the first time.

Learned counsel for the Revenue also pointed out that

the assessee in its original return of income has included

these sums under the head Advertisement, publicity and sales

promotion. Therefore, the assessee's first impression about

the nature of the free samples was the correct approach and

the assessee has properly disclosed the same under an

appropriate head in the return. Subsequently, the assessee

sent a letter modifying the original return of incime and

offered to confine the claim under this head to a part of

the expenditure.

Learned counsel for the Revenue is justified in

pointing out the above circumstance as an additional factor

in support of the conclusion arrived at by the Appellate

Tribunal.

Each of the three words advertisement, publicity and

salas promotion cannot always be confined to distinct and

different concepts. Some aspects of one word could

naturally overlap with the meaning attributed to the other

word. No doubt, in a commercial sense, the purpose of these

activities is to gain goodwill and a market but the mode of

achieving this object cannot be confined to the limited

meaning attributed to them by learned counsel for the

assessee."

Learened counsel for the assessee submitted that the

physician's samples were distributed only to doctors and

therefore, the expenditure incurred thereon could not be

said to be for advertisement or publicity or sales

promotion. He submitted that the purpose of such

distribution was to obtain a feedback from the medical

profession as to the efficacy of the distributed drugs. As

to the first point, we are entirely in agreement with the

view taken in the judgment under appeal. Having regard to

the fact that these are prescription drugs, the traget for

any advertisement or publicity or sales promotion thereof

could only be the doctors who would prescribe them. The

object, we have no doubt, of distribution of the samples of

the drugs to the doctors is to make them aware that such

drugs are available in the market in relation to the cure of

a particular affliction and therefore, to persuade them to

prescribe the same in appropriate cases. So doing is, in

our view tantamount to publicity and sales promotion.

Regarding the submission that the distrubution of the

physician's samples of the drugs is meant only for obtaining

feedback from the doctors, we should have thought that the

assessee would have backed it up by the production of such

feedback in the form of filled up questionnaires or letters

as it might have received from doctors in the past, if any.

It is an eloquent answer to the submission that there has

been no such production.

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Learned counsel for the assessee drew our attention to

the provisions of the Drugs and Magic Remedies

(Objectionable Advertisements) Act, 1954. Sec 3 thereof

prohibits the publication fo any advertisement referring to

any drug the terms of which wuggest or are calculated to

lead to the use of that drug for "(d) the diagnosis, cure,

mitigation treatment or prevention of any disease, disorder

or condition specified in the Schedule, or any other

disease, disorder or condition .......". Learned counsel's

submission was that we should not decide in a manner which

would lead to the conclusion that the assessee had

advertised by means of physician's samples, drugs contrary

to the prohibition under the Drugs and Magic (Objectionable

Advertisements) Act 1954. We do not read the prohibition

therein as applicable to physician's samples. What is

barred thereby is publication and that is amply clear when

one refers to the difinition of "advertisement" in that Act.

Learned counsel for the assessee cited the judgment of

a division Bench of the A.P. High Court in the case of

Commissioner of Income-Tax V. Ampro food Products, 215 ITR

904. The judgment, substantially, takes the view the

karnataka High Court had taken in the assessee's case cited

above except that it said "Expenditure of the nature which

is essential to the running of the business-a bare minimum

to carry on the trade-would not fall within the meaning of

the three expressions, i.e., advertisement publicity and

sales promotion. The other expenditure, incurred under any

of the three heads, would be within the mischief of the

provisions of sub-section (3A) of sec 37 of the Act and

therefore, will have to be scaled down." The judgment in

Ampro Food Products (supra) was followed by the A.P. High

Court in Commissioner of Income-Tax V. J & J Dechana

Laboratories (P) Ltd. (1996) 222 ITR 11. This was a case

that related to physician's samples. The High Court said :

In the instant case, the assessee claimed expenditure

on distribution of physicians samples under sec 37 general

head. In view of the principles settled by this court in

the aforesaid decision, if the expenditure falls within the

bare minimum it will not be caught by sub-section (3A) of

sec 37, but if it is of the nature which is not essential to

the carrying of the business, it will be within the net of

sub-section (3A). Physicians' samples are necessary to

ascertain the efficacy of the medicine and to introduce it

in the market for circulation and it is only by this method

the purpose is achieved. In such cases giving physicians

samples for a reasonable period is essential to the business

of manufacture and sales of the medicine. But if a

particular medicine has been introduced into the market and

its uses are established, giving of free samples could only

be as a measure of sales promotion and advertisement and

would thus be hit by sub-section (3A). As in this case

there is a finding of the Commissioner (Appeals) and

confirmed by the Tribunal that the expenditure was incurred

to test the efficacy of the drug, the expenditure would be

within the ambit of bare minimum to carry on the business.

for these reasons, it has to be held that the expenditure on

physicians' samples distributed to doctors is outside the

scope of sub-section (3A) of section 37 of the Act.

Therefore, the appellante authority as exclusion of the

expenditure on free samples supplied to the doctors in

working out disallowance under section 37 (3A) of the Act."

We find it difficult to draw the distinction that the

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A.P. High Court made between expenditure that is essential

to the running of the business and other expendditure, all

this expenditure being incurred for the same purpose. If

all this expenditure on distribution of physician's samples

is incurred for the purposes of publicity or sales promotion

as we think it is it falls within the scope of sec 37 (3A)

of the Act and would be subject to the limitations as to

allowability therein contained. Further, it should be noted

that in the case of J & J Dechane Laboratories (P) Ltd.

(supra), the Commissioner (Appeals) and the the Tribunal had

found as a fact that some expenditure had been incurred to

test the efficacy of the concerned drug. There is no such

finging in the case before us.

In the result, we are not presuaded to take a view

other than that taken by the High Court. The question

relating to physician's samples is therefore, answered in

the affirmative and in favour of the Revenue. The appeals

are dismissed with costs.

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