http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 5  

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. L.....I.........T.......T.......T.......T.......T.......T..J

     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?

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 5  

     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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 5  

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.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 5  

     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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 5  

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. .UP 10 2; Draft, printer 1; -n -PA4 -dFX-NORMAL -y -e; dumbp L.......T.......T.......T.......T.......T.......T.......T.......T....R