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TMI Blog2002 (10) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... he expenditure of Rs. 8,61,010 incurred by the assessee on what has termed a 'sales, literature and miscellaneous promotional aids' was expenditure on advertisement, publicity and sales promotion and as such includible for disallowance under sub-section (3A) of section 37 of the Income-tax Act, 1961? (b) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that clause (vii) of sub-section (3B) of section 37 of the Income-tax Act, 1961, did not apply to the said expenditure? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the estimated expenditure of Rs. 2,00,000 on samples distributed free of cost to medical practitioners by the assessee was expenditure on advertisement, publicity and sales promotion and as such includible in computing disallowance under sub-section (3A) of section 37 of the Income-tax Act, 1961?" I.T.R. No. 31 of 1989: "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the surtax payable by the assessee was not deductible in arriving at its total income for the year under consideration? 2. Whether, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1996] 219 ITR 644 in favour of the Revenue. To answer questions Nos. 2 and 3, in I.T.R. No. 170 of 1987, question No. 3 in I.T.R. No. 31 of 1989 and the common question raised in I.T.R. No. 460 of 1987 and I.T.R. No. 323 of 1988 it would be necessary to set out a few relevant facts. Since the facts in all the references are more or less similar, for the sake of convenience, we have taken the facts in I.T.R. No. 170 of 1987 for answering the aforesaid questions. Facts in I.T.R. No. 170 of 1987: The assessment year involved in the present reference is the assessment year 1979-80, corresponding to the accounting year ending on December 31, 1978. The assessee-company is engaged in the manufacture of pharmaceutical drugs. The assessee had filed a return of income for the assessment year 197980 on June 28, 1979, showing expenditure of Rs. 20,22,841 as publicity expenses out of which Rs. 8,61,010 was claimed as sales literature expenditure, which according to the assessee, was covered under section 37(3B) of the income-tax Act (the "Act" for short). The Assessing Officer held that the said sales literature expenses did not fall under any of the clauses of section 37(3B) of the Act an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Rs. 2,00,000, the Commissioner of Income-tax (Appeals) held that the assessee has not given the exact expenses involved in the manufacture of free samples with its brand name, which were distributed to the doctors and, therefore, the estimated costs of the samples determined by the Assessing Officer was held to be justified. On further appeal by the assessee, the Tribunal held that the various pharmaceutical products manufactured by the assessee are prescribed as medicines by the doctors to their patients and the patients would normally purchase these products from the chemist only on the basis of the doctor's prescription. It was held that with a view to promote the sales of these products, it was necessary for the assessee to supply literature about its products to the medical practitioners. Accordingly, the Tribunal held that the expenditure was covered within the meaning of advertisement, publicity and sales promotion. As regards the applicability of section 37(3B)(vii) is concerned, the Tribunal held that they have verified the medical literature and brochures of the assessee containing information about their products and found that it only gives information as to how the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Laboratories v. CIT [2001] 249 ITR 538 and the decision of this court in the case of CIT v. Allana Sons (P.) Ltd. [1995] 216 ITR 690, it was submitted that the medical literature printed by them does not fall within the ambit of the phrase "advertisement, publicity or sales promotion". Mr. Mistry then contended that in any event expenditure of Rs. 8,61,010 would fall within the exception set out in section 37(3B)(vii) of the Act, being expenditure on a journal or catalogue. According to him, the dictionary meaning of the words "journal and catalogue" show that what is meant by catalogue is an enumeration or list of materials printed in whole or part and hence the exception to section 37(3A) given in section 37(3B)(vii) will apply in the instant case. He submitted that the reasoning given by the Tribunal for rejecting the assessee's contention is erroneous, without basis and hence unsustainable. As regards cost of physician's samples, Mr. Mistry submitted that the assessee in the instant case, since inception had claimed that the samples were distributed to medical practitioners for the purpose of feedback. In this connection, he referred to a letter dated August 18, 1983, issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we have not permitted the assessee to raise the above contention. Now, turning to the facts of the case, section 37(1) of the Act provides for deduction of any expenditure (not covered under sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of the business or profession while computing the income chargeable under the head "Profits and gains of business or profession". Section 37(3) provides that notwithstanding anything contained in section 37(1), any expenditure incurred by the assessee after March 31, 1964, on advertisement, shall be allowed only to the extent and subject to such conditions, if any, as may be prescribed. Sub-sections (3A) to (3D) were introduced to section 37 of the Act by the Finance Act, 1978, with effect from April 1, 1979, and are accordingly applicable to the assessment years 1979-80 and 1980-81. Sub-section (3A) provides that notwithstanding anything contained in sub-section (1) but without prejudice to the provisions of [sub-section (2B) or] sub-section (3), where the aggregate expenditure incurred by the assessee on advertisement, public ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation....helps avoid long term hospitalisation. --Versatility of dosage forms....permits easy switchover from I M to oral administration. --Broad dosage range permits aggressive titration to effective levels for optimal control. --Common side effects (EPs) easily controlled. --Minimal risk of hypotension, oversedation, or troublesome anticholinergic effects." The information further gives a chart showing results of a comparative trial of triperidol with trifluperazine and states as follows: "Trifluderidol (triperidol) was found to be an effective drug in the treatment of schizopherenia...it showed distinct advantages over trifluperazine, particularly in the degree of control and speed of action." From the aforesaid literature printed and given by the assessee to the doctors, it is abundantly clear that the entire literature printed is aimed at promoting sale of the assessee's product by setting out its salient features and its superiority in all respects. These medical literature containing curative value of the drugs are given to the doctors with free samples clearly aimed at instilling confidence, publicise and promote their product and such expenditure would constitute " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 fell within the scope of section 37(3B)(vii) of the Act. Secondly, even before the Commissioner of Income-tax (Appeals) the assessee did not precisely give the details of the expenditure covered under section 37(3B)(vii) of the Act and considering the facts of the case, the Commissioner of Income-tax (Appeals) estimated the expenditure of Rs. 10,000 on catalogues and price lists. Thirdly, even before the Tribunal, the assessee could not establish that the above estimation was wrong or that, apart from catalogues and price lists the assessee had spent any amount on publication and distribution of journals. Let us now consider whether even on the merits the medical literature printed by the assessee can be said to be falling within the meaning of publication and distribution of journals set out under section 37(3B)(vii) of the Act. In our opinion, printing and distribution of journals ordinarily involves publication of article/articles on any subject written by one or many. A journal is ordinarily published periodically and would contain information in general on any topic or any research work done in a particular field. Taking a concrete example, in the instant case, if the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore the Assessing Officer. The petitioner has produced the feedback allegedly received from Dr. J. Balasubramaniam which is undated. From the aforesaid facts, it is clear that the claim of the assessee that the samples were given to the doctors with a request to give feedback regarding the efficacy of the drug is clearly an afterthought and is not borne out by the facts on record. Thirdly, the apex court in the case of Eskayef [2000] 245 ITR 116 has considered the decision of the Andhra Pradesh High Court in the case of CIT v. J. and J. Dechane Laboratories (P.) Ltd. [1996] 222 ITR 11 wherein the similar contention was upheld by the Andhra Pradesh High Court and the expenditure incurred to test the efficacy of the drug was held to be outside the scope of section 37(3A). Overruling the said decision of the Andhra Pradesh High Court, the apex court in the case of Eskayef [2000] 245 ITR 116, held that the entire expenditure on distribution of physicians' samples is incurred for the purposes of publicity or sales promotion and, therefore, the expenditure incurred to test the efficacy of the drug falls within the scope of section 37(3A) of the Act and would be subject to the limitatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We hold that the expenditure incurred by the assessee on medical literature was expenditure on advertisement, publicity and sales promotion and as such includible for disallowance under section 37(3A). Accordingly, the question is answered in the affirmative, i.e., in favour of the Reve nue and against the assessee. Question 2(b): We hold that the medical literature printed by the assessee was not in the nature of publication and distribution of journals within the meaning of section 37(3B)(vii) of the Act. Accordingly, the question is answered in the affirmative, i.e., in favour of the Revenue and against the assessee. Question 3: The issue is concluded by the decision of the apex court in the case of Eskayef v. CIT [2000] 245 ITR 116. Accordingly, the question is answered in the affirmative, i.e., in favour of the Revenue and against the assessee. Income-tax Reference No. 31 of 1989: Question 1: In the light of the decision of the apex court in the case of Smith Kline and French (India) Ltd. v. CIT [1996] 219 ITR 581, the question is answered in the affirmative, i.e., in favour of the Revenue and against the assessee. Question 2: The issue is concluded by the decision of the ..... 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