Full Judgment Text
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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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