TMI Blog1991 (12) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... e under section 37(3A), (3B) in respect of these samples claimed by the assessee. The CIT (Appeals) has confirmed that disallowance. Hence the appeal by the assessee. 5. On behalf of the assessee, it was submitted that the free samples are given to doctors not for the purpose of advertisement, publicity or sales promotion, but in order to obtain information from the doctors regarding the efficacy of the medicines and to ascertain whether any changes were necessary in those medicines to make them more effective or suitable for the patients. It was stated that this information was necessary even in the case of medicines which were already in the market for a long time. Shri Y.P. Trivedi, learned Counsel, pointed out that the medicines had to be tried out in the larger laboratory of society. He submitted that the samples were given free to the doctors in order that they may try them out in the treatment of their patients and inform the representatives about their results and their experience. On behalf of M/s John Wyeth Brother Ltd. learned Counsel, Shri Dastur, submitted that the medicines may have different effects on different human beings and it was the human factor which made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. He submitted that the basic object of distributing samples was to test the efficacy of the products and so, that could not be classified as an item of advertisement, publicity or sales promotion. 6. The second submission on behalf of the assessee was that what was intended to be disallowed under section 37(3A) and (3B) was extravagant and socially wasteful expenditure as shown by the Finance Minister's Budget Speech and the Memorandum explaining the provision of the Bill respectively as follows :--- "Extravagant and socially wasteful expenditure is often incurred on advertisement, publicity and sales promotion. In order to put a curb on such expenditure at the cost of the exchequer, I propose to provide for the disallowance of a part of such expenditure in the computation of taxable profits." "In order to place a curb on extravagant and socially wasteful expenditure on advertisement, publicity and sales promotion at the cost of the Exchequer, it is proposed to make a provision for the disallowance of apart of such expenditure in the computation of taxable profits." Counsel submitted that considering the turnover, the expenditure was very small and by no means extravagan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Counsel then relied upon the Tribunal's order, Ahmedabad Bench 'C' in the case of Miles India Ltd. v. ITO [1985] 20 Taxman 102 where according to them the Tribunal had allowed a similar claim. According to counsel, this expenditure could not come within the scope of the expression 'sales promotion'. It was argued by Shri Trivedi that every activity ultimately was for sales promotion, even manufacturing of the product. According to Counsel, that expression was to be understood in the context of the other words, i.e., advertisement and publicity. In that connection, they cited the decision of the Tribunal, Calcutta Bench 'B' in the case of Statesman Ltd. v. IAC [1990] 33 ITD 202 and also another decision in the same Report in the case of Hindustan Times Ltd. v. ITO [1990] 33 ITD 427 (Delhi), where the Tribunal had allowed the deduction of commission paid to sales agents and advertisement agents. Counsel also referred to similar decisions in ITO v. Meera Co. [1986] 15 ITD 227 (Chd.), Mopeds India Ltd. v. IAC [1984] 7 ITD 324 (Hyd.) which were relied upon in the above decision. In this connection, counsel relied upon the Board's Circular No. 240, dated 7-5-1978 which was also relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the samples were distributed or when the medicine was manufactured? He submitted that since the point of time of incurring of the expenditure was not identifiable, the year of its disallowance was not identifiable and consequently, it could not be disallowed. He relied upon the decision of the Supreme Court in the case of Indian Molasses Co. (P,) Ltd. v. CIT [1959] 37 ITR 66. He drew the analogy of section 43B under which the collection of sales-tax was not allowed as a deduction unless it was paid during the same accounting year in which it was collected. He also submitted that if the samples had not been distributed, they would have been part of the closing stock and by distributing the same, there was a reduction in the closing stock which was not an expenditure incurred and so, there was no question of disallowance. 7. The learned Standing Counsel, on behalf of the revenue, first of all submitted that it could not be said that there was no expenditure because there was no cash payment. According to him, expenditure could be in kind also. Regarding reference to the Budget Speech and the Memorandum to the Finance Bill, relied on by the Tribunal in the case of Miles India Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of that standard, it certainly resulted in obtaining information which was necessary for ascertaining the suitability of the product and improving it. He also said that the Tribunal decision in the case of Geoffrey Manners Co. Ltd. did not have an answer to Shri Dastur's argument that the reduction in the stock was not an expenditure. Shri Dastur, in rejoinder, stated that the decision in the case of Geoffrey Manners Co. Ltd. was regarding section 80-G and the cases relied on there in were overruled by the decision of the Supreme Court in H.H. Sri Rama Verma v. CIT [1991] 187 ITR 308. He also said that the Standing Counsel had wrongly stated that nothing has happened after information was obtained from the doctors. In one case, as he pointed out, the flavour of the medicine was changed and in another case, i.e., CIBA, the medicine was withdrawn from the market. He submitted that in any case, the expenditure was incurred for gathering information. 9. We shall now deal with the above arguments. The material parts of sub-sections (3A) and (3B) are reproduced below :--- "(3A): Notwithstanding anything contained in sub-section (1) but with out prejudice to the provisions of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y's products by the doctor such as occasional prescriber, buyer of Wyeth products, buyer' of competitive products, selected for Wyeth products or consistent prescriber (presumably of that company's products), There is a column which indicates the-average monthly RX support which means value of the medicines prescribed for a month. There is also a column for month-wise value of the orders booked. There is a space for the kind of practice of the doctor, i.e., whether general practitioner and his attitude during the visits. There is also a space with the heading 'clues' where the effect of various products of the company and the doctor's experience with his patients in that regard are recorded. There is a space called 'strategy for the next call' wherein it is recorded what the medical representative should do at the time of next call. Considering all these details which are to be obtained from the doctors, in our view, the aim of the assessee is two-fold. In the forms, space is provided for gathering the aforesaid information regarding the efficacy of the medicines and the scope for improvement, if any, as is seen from the space with the heading 'clues' and partly in the space with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prescribing the assessee's products and if so with what results. When the assessees give those samples, certain amount of good relationship is created with the doctor who may then be inclined to buy or prescribe those medicines; other things being equal and in preference to similar other products. Enquiring about doctor's opinion about the medicines, his experience in its use and suggestions, if any for its improvement also creates a good relationship with the doctor and so, this is a sophisticated way of canvassing for the sale of the assessee's products. It was said that without giving samples to doctors it is not possible to sell the medicines. We are unable to accept this contention. Medical representatives can speak about the efficacy, dosage etc. of the medicines to the doctors and give them the relevant literature. 12. Moreover, the changes made in the medicines are not substantial or frequent. A case where medicine was withdrawn from the market has been pointed out to us and we appreciate that it is only an instance but it has not been shown that there are many changes or that they are substantial. Therefore, it cannot happen that the assessees, who are doing business, wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... says is that the material may be referred to not that it should be imported into the statute. In taking this view, we are not ignoring the intention of the Legislature as shown in the Budget Speech and the Memorandum, but we are taking it into account as above. 14. Regarding Shri Dastur's argument that when expenditure on maintenance of an office for advertisement publicity and sales promotion was not to be disallowed, how could this expenditure be disallowed, the answer is not far to seek. Since the disallowance is not complete, but only partial, the assessee would be maintaining an office and paying the employees for the purpose and that has to be allowed. 15. In this connection, we may also consider the decision of the Ahmedabad Bench of the Tribunal in the case of Miles India Ltd. on which the assessee's counsel has relied. In that case, the Tribunal held that the disallowance under section 37(3A) could not be made in respect of the expenditure incurred by the assessee on the free distribution of samples of testing strips and kit to doctors. The Tribunal has relied upon the Budget Speech and the Explanatory Memorandum and held that the expenditure was not extravagant or wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ful expenditure. As stated above, the words extravagant or wasteful have a connection only with the extent or degree of anything and therefore, even in the case of beauty contest or fashion shows, if the expenditure does not exceed the limit of allowability specified in the section, it would not be extravagant or wasteful. Finally, the Board has no power of interpretation of a statute. That power is a judicial power. Therefore, for the purpose of interpretation, the Board's above circular cannot be relied upon. However, as stated above, the Circular does mention free samples. Even on the basis of this Circular, sub-sections (3A) and (3B) would be applicable to the present case. For the above reasons, we are unable to agree with the decision of the Tribunal in the case of Miles India Ltd. 16. The decision of the Tribunal in the case of Tyagi Anand Co. (P.) Ltd. on which Shri Trivedi had relied is not applicable here. That was a case where the Tribunal had held that the expenditure on distribution of free cinema tickets to policemen and journalists was not expenditure on entertainment, because the Tribunal had come to the conclusion that the purpose of the expenditure was to obta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this view by the decision of the Karnataka High Court in the case of Smith Kline French (India) Ltd. where it has been observed that :--- "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 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 in T.V. etc. The members of the public should have confidence about the curative value of the drug and such a confidence could be created mainly by the medical practitioners prescribing the said drug or when the medical practitioners give the same to the patient towards treatment. The media through which the drug could get publicised and earn goodwill will be the media of the prescription by the medical 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 the drug, when compared to other industrial products. A drug is not an ordinary article of consumption. It is consumed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act is prohibited. The Schedule mentions these diseases which are generally incurable. Here, we are not concerned only with those kinds of medicines. Further, even if advertisement regarding those medicines may not be permitted, advertisements or sales promotion may be made regarding those kinds of medicines, The fact that it is prohibited does not mean that if it is done, it is not advertisement or sales promotion. Whether an act amounts to publicity, advertisement or sales promotion is to be decided on the relevant facts. Just because an act is prohibited by law, that does not mean that if it is done, it is not done at all. Theft is punishable under the law, but that does not mean if a pocket is picked that is not theft. 19. We shall now deal with some of the other arguments of Shri Dastur. He had submitted that the samples were not produced separately and so their cost could not be separated or identified separately and so, there was no question of disallowing cost of these samples. He raised the question about the point of time at which the expenditure on the samples could be said to have been incurred. Manufacture of the samples could be in one year and their distribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of entertainment. It observed: "Here, the assessee has not incurred any expenditure. No cash has gone out of their till. What has happened is that their stock-in-trade has been reduced. This would be a loss under section 28. It cannot be considered as expenditure. The provisions of section 37(2B) either before or after the amendment would not be applicable." We are unable to accept this view. This is not merely a case of reduction of stock or of loss. The soft drinks or samples (here) are voluntarily given away free. Therefore, there is expenditure. The medicines are used as another commodity, i.e., samples. It so happens that the samples were a part of the medicine which was manufactured, but the moment a part thereof is separated as samples, it must be said that it was the samples which were manufactured. For the purpose of business the samples constitute another commodity not for sale but for promoting the sale of the medicines. The expenditure for the manufacture of that other commodity (samples) is like any other expenditure. Learned Counsel had relied upon the Supreme Court decision in Indian Molasses Co. (P.) Ltd.'s case but that decision lays down only that expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that the distribution of samples is both for obtaining information as well as for promoting the sales. That is a realistic, reasonable and balanced view in the facts of this case. Moreover, the Karnataka High Court has not considered the argument that supply of free samples is necessary even in the case of medicines which are in the market for some time. It would be fair and just, therefore, to hold that I/2 of the expenditure on the samples as worked out by the ITO would be covered by the said sub-section (3A). This ground is partly allowed. 23. We shall now deal with the other grounds in the assessee's appeal. First ground is:--- "The learned CIT(Appeals) erred in not holding that the assessment order under section 143(3) read with section 144B was bad in law and barred by limitation as it was completed by more than 6 months after the issue of the draft order on 28-2-1983." A time limit of 6 months, i.e., 180 days, is provided under Explanation 1 (iv) to section 153 which is as follows : --- "In computing the period of limitation for the purposes of this section --- (iv) the period not exceeding one hundred and eighty days commencing from the date on which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements. In the case of First ITO v. French Dyes Chemicals (I.](P.) Ltd. [1984] 10 ITD 240, (Bom.)(SB), it was held that it would be far-fetched to say that distribution of some articles would give a potential customer any indication of the excellence of the assessee's product so as to induce him to buy them. Therefore, this expenditure cannot be said to be on advertisement and accordingly it is allowed. Similar is the position regarding the expenditure of Rs. 36,801 in ground 4(a). The ITO has disallowed it under section 37(2A) and the CIT(Appeals) held that it would fall under Rule 6B of the Income-tax Rules. This amount is also allowable for the above reasons. Regarding the expenditure of Rs. 10,494, the assessee's plea that it was incurred as a matter of business hospitality and therefore, not entertainment. In view of the amendment to section 37(2A) by way of Explanation 2 with retrospective effect from 1-4-1976, expenditure on hospitality of every kind by the assessee to any person would be on entertainment. The disallowance is accordingly confirmed. 26. The fifth ground is : "The learned CIT(Appeals) erred in not accepting your appellant's plea that interest of Rs. 35, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment years 1981-82, 1982-83 and 1983-84 by the ITO himself. Even otherwise, the powers of the CIT (Appeals) are co-terminus and co-extensive with that of the ITO, the entire assessment is open before the CIT (Appeals) and in the light of the latest Supreme Court decision in the case of Jute Corporation of India Ltd. v. CIT [1991] 187 ITR 688, we are of the opinion that the CIT (Appeals) was not justified in declining to entertain the ground. He should have entertained the ground and decided the matter on merits. We, therefore, set aside the order of the CIT (Appeals) on this point and remit the matter back to his file for disposal of the case on merits, of course, after affording adequate opportunity of being heard to the parties. This ground is disposed of accordingly. 28. In revenue's appeal, the first ground is that the learned CIT (Appeals) erred in holding that the assessee was entitled to deduction under section 35 in respect of expenditure of Rs. 6,26,590. The assessee had incurred capital expenditure on construction of buildings. As recorded in the order of the CIT (Appeals) which fact has not been disputed by the revenue before us, there is no dispute that the buildin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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