Now Known as Smithkline Beecham Prarmaceuticals Ltd Vs. Commissioner of Income
Tax Karnataka-Ii Bangaalore  INSC 370 (20 July 2000)
Ruma Pal Judgement
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:
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.
civil appeal is dismissed.
order as to costs.
Appeal Nos. 4545-4547 of 1996:
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:
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.
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? Question of
law in ITRC 171 of 1994.
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.
of Income Tax 219 ITR 581. They are so answered.
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)
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.
of Income Tax, 193 ITR 582, ( which also concerned the assessee). The High
Court there had said :
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.
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.
consumed only to get rid of some ailment. Before the drug gets circulated, its
reputation will have to be confirmed to the medical practitioners and that is
why free samples are supplied to them.
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.
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.
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
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.
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.
an eloquent answer to the submission that there has been no such production.
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.
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 :
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.
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.
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 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.
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.