Holding

The Court held that surtax liability is not deductible under section 37 and that distribution of free samples to doctors is deemed advertisement/publicity/sales promotion falling within section 37(3A), rendering such expenditure non‑deductible.

Summary

The appellant, a pharmaceutical company, claimed deduction for the liability to pay surtax and for expenditure incurred on distributing free samples of prescription drugs to doctors. The Revenue argued that surtax liability is not deductible under section 37 and that the sample distribution is a form of advertisement, publicity or sales promotion covered by the restrictive clause of section 37(3A). The Court affirmed the earlier rulings that surtax cannot be deducted and held that the purpose of supplying free samples is to create awareness among doctors and persuade them to prescribe the drugs, which amounts to publicity and sales promotion. Consequently, the expenditure on the samples falls within section 37(3A) and is not allowable as a deduction. The Court also clarified that the prohibition in the Drugs and Magic Remedies (Objectionable Advertisements) Act, 1954 applies only to publication, not to the distribution of physician's samples. Both appeals were dismissed with costs.

Issues considered

Whether liability to pay surtax is an admissible deduction under section 37 of the Income Tax Act, 1961.
Whether expenditure incurred on distribution of free samples of prescription drugs to doctors constitutes advertisement, publicity or sales promotion within the ambit of section 37(3A).

Legislation cited

Income Tax Act, 1961s. 37, s. 37(3A)

Subjects

Income TaxDeductionSurtaxSection 37Section 37(3A)AdvertisementPublicitySales promotionPhysician's samplesPharmaceuticalsDrugs and Magic Remedies Act

Judgment

A ESKA YEF (NOW KNOWN AS SMITHKLINE BEECHAM
PHARMACEUTICALS (INDIA) LTD. ETC.
v.
COMMISSIONER OF INCOME TAX, KARNA TAKA-11,
BANGALORE.

B JULY 20, 2000

[S.P. BHARUCHA AND MS. RUMA PAL, JJ.]

C Income Tax Act, 1961-Section 37-Liability to pay surtax-Whether
an admissible deduction in computing total income-Held, not deductible.

Section 37(3A)-Expenditure incurred on distribution of free samples
of prescription drugs to doctors-Whether in the nature of advertisement or
publicity or sales promotion falling within the restrictive provisions of the
D section-Held yes.

Drugs and Magic Remedies (Objectionable Advertisements) Act, 1954-
Section 3-Prohibition of publication of advertisement of a drug-Held,
prohibition not applicable to physician's samples.

E In these appeals, the following two questions were raised:

I. Whether the surtax liability is an admissible deduction under
section 37 of the Income Tax Act, 1961?

2. Whether ex.penditure incurred on distribution of free samples of
prescription drugs to doctors is in nature of advertisement falling
F within the restrictive provisions of section 37(3A) of the Act?

Appellant-assessee contended that the expenditure incurred on
distribution of free samples of prescription drugs to doctors did not amount
to advertisement or publicity or sales promotion and thereby not subjected to
G restrictions under sub-section 3A of section 37. The Income Tax Appellate
Tribunal and the High Court rejected the contention of the assessee.

In appeal to this Court, the assessee submitted that the purpose of the
distribution of drugs was to obtain a feedback from the medical profession as
to the efficacy of the distributed drugs. The assessee further submitted that
H section 3 of the Drugs and Magic Remedies (Objectionable Advertisements)
634
ESKA YEF (NOW KNOWN AS SMITHKLINE BEECHAM PHARMACEUTICALS(INDIA) LTD. ETC."· C.I. T. 635
Act, 1954, prohibits the publication of any advertisement of the drugs. A
Dismissing the appeals, this Court

HELD: 1. With regard to the first question, i.e. whether the surtax
liability is an admissible deduction, the master is no longer res integra.
1636-GI B
Smith Kline and French (India) ltd & Ors. v. Commissioner of Income
Tax, (1996) 219 ITR 581, relied on.

2. The target for any advertisement or publicity or sales promotion of C
the drugs could only be the doctors who would prescribe them. The object 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 tantamount to publicity and sales promotion.
The assessee has not produced filled up questionnaires or letters from doctors D
in support of its claim that the free samples of prescription drugs were
distributed to doctors for obtaining feedback from them. 1639-D-El

3. The prohibition under the Drugs and Magic Remedies (Objectionable
. Advertisements) Act, 1954 is not applicable to physician's samples. What is
barred thereby is publication and that is amply clear when one refers to the E
definition of"advertisement" in the Act.1639-H; 640-AI

Smith Kline and French (India). Ltd v. Commissioner of Income Tax,
(1992) 193 ITR 582, approved.

Commissioner of Income Tax v. J & J Dechane laboratories (P) ltd., F
(1996) 222 ITR 11, distinguished.

Commissioner of Income Tax v. Ampro Food Products, (1995) 215 ITR
904, referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2717of1996. G
From the Judgment and Order dated 11.3.91 of the Kamataka High Court
in l.T.R.C. No. 182of1985.

WITH
Civil Appeal Nos. 4545-4577/1996. H
636 SUPREME COURT REPORTS [2000] SUPP. I S.C.R.

A D.A. Dave, Ms. Pratibha M. Singh, Ms. Kavita Wadia, Ramesh Singh,
Maninder Singh and S. Syal for the Appellant.

M.L. Venna, G. Venkatesh Rao and Ms. Sushma Suri for the Respondent.

The Judgment of the Court was delivered by
B BHARUCHA, J. Civil Appeal No. 2717 of 1996 :

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:

C "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, 2191.T.R. 581. The question
D is, accordingly, answered in the negative and in favour of the Revenue.

The civil appeal is dismissed.

No order as to <:osts.

E Civil Appeal Nos. 4545-4547 of 1996:
These are appeals from the judgment and order of the Division Bench
of the Kamataka High Court in Income Tax References. The questions that
the High Court was called upon to answer read thus:

F "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
G expenditure incurred on physician's samples is in the nature of
advertisement expenditure falling within the restrictive provisions of
Section 37 (3A) of the Income Tax Act?

Question of law in ITRC 143 of 1993.
H (a) Whether on the facts and in the circumstances of the case, the
ESKAYEF(NOW KNOWN AS SMITHKLINE BEECHAM PHARMACEUTICALS(INDIA) LTD. ETC. v. C.l.T. (BHARUCHA. J. I 637

liability to pay surtax is an admissible deduction in computing the A
total income?

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 B
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 C
and Ors. v. Commissioner of Income Tax, (1996) 219 !TR 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 D
drugs, and we proceed upon that basis. Learned counsel for the assessee
submitted 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 section 37 of the Income-Tax Act, 1961 (for short 'the E
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 Income-Tax 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 French (India) F
ltd v. Commissioner of Income Tax, 193 !TR 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 G
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 H
638 SUPREME COURT REPORTS [2000) SUPP. I S.C.R.

A 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 most suitable to the article in question.

The members of the public would not buy a drug just because it
is advertised repeatedly or publicised through posters or announced
B on the T. V. etc. The members of the public should have confidence
about the curativ1: 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 patients towards
treatment. The media through which the drug could get publicised and
earn goodwill will be the media of prescription by the medical
c practitioner. Further, the real persons who could create a market for a
particular drug are the medical practitioners themselves having regard
to the nature of th1: 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
D will have to be 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
E confmed 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
F 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 income and
G 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.

H Each of thP. three words "advertisement, publicity and sales
ESKAYEFtNOW KNOWN AS SMITHKLINE BEECHAM PHARMACEUTICALS{INDIA) LTD. ETC v C.1.T. (BHARUCHA. J.1639

promotion" cannot always be confined to distinct and different A
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." B
Learned 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 C
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 target 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 D
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
distribution 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 E
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.

Learned counsel for the assessee drew our attention to the provisions F
of the Drugs and Magic Remedies (Objectionable Advertisements) Act, 1954.
Sec 3 thereof prohibits the publication of any advertisement referring to any
drug the terms of which suggest 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, G
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 H
640 SUPREME COURT REPORTS (2000] SUPP. I S.C.R.

A one refers to the definition of "advertisement" in that Act.

' Learned counsel for the assessee cited the judgment of a division
Bench of the Andhra Pradesh High Court in the case of Commissioner of
Income-Tax v. Ampro Food Products, 215 !TR 904. The judgment, substantially,
takes the view the kamataka High Court had taken in the assessee's case
B 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
C sec 37 of the Act and therefore, will have to be scaled down." The judgment
in Ampro Food Products (supra) was followed by the Andhra Pradesh High
Court in Commissioner of Income-Tax v. J & J Dechane Laboratories (P)
ltd, (1996) 222 !TR 11. This was a case that related to physician's samples.
The High Court said :

D "In the instant ca.se, 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
E 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 n1anufacture and sales of the medicine. But if a particular medicine
F 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
G
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 appellate authority as well as the Tribunal are right
in directing the exclusion of the expenditure on free samples supplied
H to the doctors in working out disallowance under section 37 (3A) of
ESKAYEF (NOW KNOWN AS SMITHKLINE BEECHAM PHARMACEUTICALS(INDIA) l TD. ETC. v. C.l.T. (BHARUCHA. J.I 641
J
the Act." A
We find it difficult to draw the distinction that the Andhra Pradesh High
Court made between expenditure that is essential to the running of the
business and other expenditure, 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 B
it falls within the scope of Section 3 7 (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 Tribunal had found as a fact that some
expenditure had been incurred to test the efficacy of the concerned drug. C
There is no such finding in the case_ before us.

In the result, we are not persuaded 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. D
B.S. Appeals dismissed.

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