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1. This Special Bench of the Tribunal has been constituted to decide the following question :

" Whether the expenses in the nature of free samples distributed by a pharmaceutical company to the members of the medical profession are to be regarded as expenses on 'advertisement, publicity and sales promotion ' within the meaning of Section 37(3A)/(3B) of the Income-tax Act, 1961?"

2. It is the principal question in the appeal of the appellant-assessee and those of the interveners.

3. Briefly stated, the business of the assessee is to manufacture and sell medicines. In the course of that business, they distribute samples of their products free of charge to doctors through their representatives who record in certain forms information regarding their use by the doctor and his experience in that regard.

4. The Income-tax Officer made a partial disallowance of the expenditure under Section 37(3A) and 3(B) in respect of these samples claimed by the assessee. The Commissioner of Income-tax (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 the 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 the 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 constant testing of the medicines necessary. This, according to him, was an ongoing process. He pointed out, as an example, from a copy of one form filled up by a medical representative containing suggestions regarding flavour of a certain medicine samples of which were given to a doctor by the assessee. He submitted that this gave the company information for improving its products. He also pointed out from a copy of the letter dated July 6, 1974, from the J.J. Group of Hospitals, Bombay, which showed that the assessee, M/s. John Wyeth & Brother Ltd., had supplied certain injections free of charge as samples to obtain the clinical response and cost benefit. He submitted that the reasons for giving samples were that the doctors wished to certify the usefulness and the therapeutic effect in their own practice through clinical evaluation and, therefore, requested for samples of the product --(Ref: assessee's note on sampling). Learned counsel submitted that the samples were given to doctors to gather information which otherwise could not be obtained. Shri Pooran, learned counsel for M/s. Roche Products Ltd., submitted that although this activity did not involve any fundamental research, it did mean research regarding the suitability to the patients, conditions for prescribing, etc., and was necessary for the proper development in the use of the medicine. Counsel further submitted that the difference in environment also made a difference in the efficacy of the medicine. He also submitted that the information obtained from the doctors was used by the manufacturers and cited an incident of a medicine called "Enterovioform" which was withdrawn by the manufacturer, CIBA, when it was found that it had an adverse effect on the eyes. He submitted that no medicine could be regarded as perfect and it had to be evaluated by gathering information regarding its use by the doctors. He also said that the medical representatives inform the doctors regarding the proper use of the medicines in question and also submitted that the doctors were not influenced by the samples being given free of charge. The learned advocate appearing on behalf of M/s. Baver (I) Ltd. submitted that pesticides were distributed to farmers who ascertain their effect on farming and rubber chemicals were given to industrial laboratory for testing purposes in the same manner as medicines produced were given to doctors as free samples. 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.

16. Moreover, changes made in the medicines are not substantial or frequent. A case where a 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 assessees who are doing business would spend large sums of money only for the sake of obtaining this kind of information for improving their products. The sums may not be large compared to the turnover, but by themselves they are large. To queries from the Bench, it was clarified that the medicines were fully tested in laboratories before being put into the market and the doctors were given the samples only thereafter. Therefore, the normal inference would be that the samples are distributed also for promoting sales. Shri Dastur had argued that, without giving these free samples, the assessees could not obtain relevant information. We may say that this is not entirely correct. It may be possible to obtain information regarding the efficacy of medicines even without giving the samples by finding out which doctors use particular medicines and asking them about their efficacy. It may be true that the work is made easier by giving samples free of charge, but it would not be correct to say that, without giving free samples information cannot be obtained. Moreover, we have taken the view that free samples are distributed also for canvassing and not only for canvassing.

19. Regarding Shri Dastur's argument that when expenditure on maintenance of an office for advertisement publicity and sales promotion was not to be disallowed, this expenditure also could not 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 this purpose and that has to be allowed.

20. In this connection, we may also consider the decision of the Ahmedabad Bench of the Tribunal in the case of Miles India Ltd. [1985] 20 Taxman 102 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, testing strips and kits to doctors. The Tribunal has relied upon the Budget Speech and the Explanatory Memorandum and held that the expenditure was not extravagant or wasteful, because the free samples were distributed in order to help persons suffering from diabetes. It has relied upon the Board's Circular No. 240, dated May 17, 1978 (see [1979] 117 ITR (St.) 24) as follows :