In various industries like FMCG, Pharma, e-commerce various items such as pen, diary, calendar, paper weight, lamp set, wall clock, pen drive, etc. with product logo/ brand name is given to customers as ‘brand reminders’. Generally, the cost of such products is not very high say, less than Rs. 1,000 per piece.
The brand reminders are low value items, it being the belief of the Company that the benefits of the recall value created by the product is more than its cost.
Question to examined
Whether such distribution of items as brand reminders to the customers can be considered as benefit or perquisite in the hands of customer and hence liable to TDS u/s 194R ?
Analysis of applicability of S. 194R
The overall intent of distributing brand reminders is to promote company’s products / advertisement and not be considered as a gift or benefit/perquisite in the hands of the recipient. The advertisement/brand recall would occur as and when the recipient uses the product and may also occur continuously on account of the product being visible to the recipient as also to other visitors in the premises.
The brand reminders distributed by the company to customers contain the logo/branding of the company and hence the recipient of the same will not be in a position to subsequently sell the same – it can only be sold for scrap value.
The Income Tax Act is silent on valuation of a benefit or perquisite. Wilkins (Inspector of Taxes) v. Rogerson  49 ITR 395 (CA) in the context of valuation of perquisite held as follows –
Suit which cost £15 was gifted to the employee. The employee never acquired any rights either against his employers or against the tailor supplying the suit and that only the value of the suit was includible in his hands which was £ 5 only. This value was determined on the basis that what he could get for it if he sold it as soon as he had received it.
As can be observed from the above extract of the court ruling, for determining the value of perquisite in the hands of the employee the emphasis is given to the price at which the item received as a perquisite can be sold. Since the brand reminders carrying logo of product or company, will not have any buyer and consequently, can only be sold at scrap value, the value of the benefit or perquisite would be nominal.
However, ignoring the principle of considering the fair value of the benefit or perquisite in the hands of the recipient CBDT has prescribed valuation principles, which states as follows –
Question 5 of the CBDT circular:
“How is the valuation of benefit/perquisite required to be carried out?
The valuation would be based on fair market value of the benefit or perquisite except in following cases: –
- The benefit/perquisite provider has purchased the benefit/perquisite before providing it to the recipient. In the case the purchase price shall be the value for such benefit/perquisite.
- The benefit/perquisite provider manufacture such items given as benefit/perquisite, then the price that it charges to its customers of such items shall be the value for such benefit/perquisite.
It is further clarified that GST will not be include for the purpose of valuation of benefit/ perquisite for TDS under section 194R of the Act.”
As can be observed from the above extract, the CBDT Circular requires adoption of purchase price for items purchased by the Company. The items distributed as brand reminders would be customized and made to order by third party vendors for the company and may be catagorised as purchased by the Company and consequently, following the Guidelines (CBDT Circular) the cost to the company of the brand reminders would be considered as value of the benefit or perquisite in the hands of the recipient.
The concept of considering cost to the company as fair value is logical when it comes to off the shelf items as the fair value of the benefit (viz. resale price in the hands of the recipient) is likely to be equivalent to price paid by the company. Whereas in the case of brand reminders, company may pay a premium for getting its name/logo printed on the product and it has a reverse impact on the price (resale value) of the product – once name/logo is printed nobody would purchase such a product (e.g. why will someone purchase a T-Shirt/ Pen/Mug with name of a company or product advertisement on it). The product can only be distributed by the company for brand promotion. Therefore, to consider cost to the company as the value of benefit or perquisite in the hands of customers would be unjustified.
194R(2) only empowers CBDT to prescribe guidelines to remove difficulties. However, specifying a valuation mechanism contrary to the principles applicable for determining the value of perquisites and benefits would be an unjustified method of resolving a possible difficulty. The specified valuation rules would have the effect of arbitrarily increase the value of benefit or perquisite multifold. To summarise, CBDT in the process of removing difficulties cannot expand the scope (in terms of quantum of benefit or perquisite) of S. 194R – specifying a valuation mechanism contrary to applicable principles and which leads to unjust result. It is for the legislature, if it so chooses, to specify a method of valuation which increases revenue – which is effectively, the levy of a tax.
Alternatively, in the context of CBDT circular prescribing valuation mechanism the word ‘purchase’ should be understood to refer to purchase of products that can be purchased off the shelf (general commodity available in the market) and would not include customised products made as per the specific needs and requirement of the Company, which has the name/logo of the company/brand embossed on it and consequently, significantly deteriorates its saleability and selling price. Therefore, in the context it should be held that brand reminders are not covered by specific valuation rules.
Further, the second limb of the specific valuation rules specified by CBDT only apply when the Company is manufacturing the products. In the present case, the brand reminders are not manufactured by the Company. Hence, the second limb should not apply. In any case, the second limb specifies the price charged to the customer as the value of benefit or perquisite. As the brand reminders are distributed free of cost the price charged from the customer would be nil and consequently, if this limb is applied the value of benefit or perquisite would be nil.
As both the methods specified by CBDT do not apply, the valuation has to be based on the residuary method for valuation prescribed by the CBDT Circular which is the fair market value of benefit or perquisite. As stated earlier, brand reminders can only be sold at scrap value i.e. nominal value and consequently, the fair market value in the hands of a recipient customer will be nominal, on this basis the Company distributing the brand reminders will be only liable to deduct TDS if the aggregate value so computed exceeds Rs. 20,000 per annum.
To summarise, the brand reminders are for advertisement of the company. The brand reminders are not intended to be a benefit or perquisite in any case and do not result in any material/tangible benefit or perquisite to the customers. Therefore, if at all the scrap value of the brand reminders should be considered as the value of benefit or perquisite for deduction of TDS u/s 194R and not the cost of the brand reminders to the Company.
Free Physician Samples
- Pharma Companies engages with different Healthcare professionals (Doctors, their staff, hospitals, etc. (“HCPs”)) for ethical promotion of their products and take various initiatives in disseminating medical knowledge/ information and updates to the HCPs in the area of their interest, which enables the HCPs to acquaint themselves with the new developments. This helps the HCPs to provide better service to the patients at large.
- As a part of said collection and dissemination of information, Pharma Companies distribute free samples to the As required by the regulations the said samples have to be and are labelled with the phrase ‘Physician’s Sample – Not to be sold’.
- The HCPs may be practising professionals, employees of a private/charitable hospital or employees of a government
Question to be examined
- Whether distribution of free samples to the HCPs can be considered as benefit or perquisite in the hands of HCPs and hence liable to TDS u/s 194R?
Analysis of applicability of S. 194R
Section 194R(1) states that tax is required to be deducted by a person providing any benefit or perquisite to a resident if that benefit or perquisite inter alia is arising from the exercise of a profession.
The phrase ‘benefit or perquisite’ is not a defined term. Mumbai Tribunal in the case of Helios Food Improvers (P.) Ltd. v. DCIT1 has defined benefit and perquisite as follows –
“Further, the words “benefit” or “perquisite” have been used in this sub-section, which have to be read together and would draw colour from each other. Normally, the term “perquisite” denotes meeting out of an obligation of one person by another person either directly or indirectly or provision of some facility or amenity by one person to another person and from the very beginning, the person providing such facilities or concessions knows that whatever is being done is irretrievable to him as it has been granted to a person as a privilege or right of that person. In this view of the matter, the word “benefit” has also to be interpreted in the same manner
i.e. at the time of execution of the business transaction, the one party should give to the other party some irretrievable benefit or advantage”
As can be observed from the above extract of the Tribunal Ruling, benefit is defined to mean certain advantage and perquisite to mean a certain advantage given as a right or privilege of the recipient. Therefore, if there is no advantage to the recipient, there would be no perquisite or benefit.
The question as to whether the sample provided by a pharma company results into any benefit or perquisite to the HCP depends upon the purpose of providing the sample to the HCP and also on whether the HCP can use or en-cash the same or not and if not whether it still results in some advantage to the recipient HCPs.
The primary reason for providing free physician samples by Pharma Companies as held by the Supreme Court2 is only for the purpose of advertising of the product and thereby enhancing the sale of the product in the open market. It has been shown by research that the market of a pharmaceutical company is enhanced substantially by the distribution of free physician samples. In other words, the distribution of such physician samples serves as a marketing tool in the hands of the pharmaceutical companies
As captured in the Supreme Court ruling, the benefit from the physician samples is to the pharma companies in the form of advertising and increase in sales. The pharma companies do not have any obligation to provide any perquisite or benefit to the HCPs and in fact, do not distribute free samples with the objective of providing perquisite or benefit.
The Supreme Court also records that, it is further contended that the physician samples of patent and proprietary medicines, at the time they are manufactured, are statutorily prohibited from being sold by virtue of Section 18 of the Drugs Act read with Rule 65(18) of the Drug Rules and the breach of the Drug Rules invites prosecution under Section 27(d) of the Drugs Act, and also invites penalty under Section 27(c) of the Drugs Act.
As per Rule 96(1)(ix) of the Drugs & Cosmetics Rules, 1995, every drug intended for distribution to the medical practitioners as a free sample is required to contain a label on the container with the words “physician’s sample Not to be Sold “. Further sale of physician sample is an offense as per Sections 18(a)(VI) and 27(d) of Drugs and Cosmetics Act, 1940 read with Rule 65(18) of Drugs and Cosmetics Rule, 1945. It can entail fine or imprisonment depending upon nature of offense.
Therefore, though the physician’s samples are distributed free of cost, they cannot contribute a benefit or perquisite for the HCPs? The HCPs is only an intermediary for distributing the samples free of cost, to the patients – to people who need and use the medicines. This helps the pharma company to advertise, increase sales, demonstrate the efficacy of the medicine, etc. However, distribution of free physician samples to the patients does not yield any benefit or perquisite to the HCPs and consequently, the receipt of physician sample cannot be held to be a benefit or perquisite provided to the HCPs.
Once it is accepted that provisions discussed above of the Drug and Cosmetics Rules prohibit the HCP from selling the sample it is evident that the sample cannot be sold by the HCP and considering the inherent nature of the product, viz. medicine nor can the same be consumed by the HCP (who is not a patient). Accordingly, the ingredients of benefit or perquisite which is having a right to use and/ or enjoy is not available in a physician’s sample and consequently, physicians samples should be outside the scope of S. 194R.
Analysis of CBDT Circular
CBDT has issued guidelines u/s 194R(2) for removing difficulties in implementation of Section 194R in Question and Answer form. As an obiter in reply to Query 4 Whether sales discount, cash discount and rebates are benefit or perquisite? – CBDT has stated that, the relaxation (non-deduction of TDS on discounts) will not apply when free samples are given. Further, CBDT has given illustrations of transactions covered by S. 194R and without providing any basis or reasoning has inter alia included a transaction when a person gives medicine samples free to medical practitioners as a transaction liable u/s 194R. In arriving at the conclusion of applying section 194R, there is no discussion about the aspects discussed above. In fact, there is no discussion at all.
For the reasons mentioned above, free medical samples to HCPs should not be treated as a benefit or perquisite for the HCPs. S. 194R only empowers CBDT to issue guidelines for removing difficulties and not for expanding the scope of the Section. Supreme Court in the case of Madeva Upendra Sinai v. Union of India3 has held that, the ‘difficulty’ contemplated by the clause must be a difficulty arising in giving effect to the provisions of the Act and not a difficulty arising aliunde or an extraneous difficulty. Further, the Central Government can exercise the power under the clause only to the extent it is necessary for applying or giving effect to the Act, etc., and no further. It may slightly tinker with the Act to round off angularities, and smoothen the joints or remove minor obscurities to make it workable, but it cannot change, disfigure or do violence to the basic structure and primary features of the Act. In no case, can it, under the guise of removing a difficulty, change the scheme and essential provisions of the Act.
With all due respect the observations of the CBDT about supply of physician’s samples, free of charge, are seen to be contrary to the correct legal position and as a result in as much as the observations have the effect of expanding the scope of section 194R are also in excess of the jurisdiction conferred on CBDT. The power to make law is that of the legislature. The power to interpret laws is that of the Courts. The powers of CBDT relates only to the implementation of the law. For these reasons merely because of the observations in the CBDT circular supply of physician’s samples should not held to be liable to TDS.
Analysis of valuation aspect
The Income Tax Act is silent on valuation of a benefit or perquisite. As stated earlier – Wilkins (Inspector of Taxes) v. Rogerson  49 ITR 395 (CA) in the context of valuation of perquisite held that price at which the suit can be sold for determining the value of perquisite in the hands of the employee. Since the physician samples cannot be sold, the resale price is zero.
Also, since the physician samples being not for sale, it may be contended that, the physician samples are not marketable and consequently, the normal valuation rules like cost of production, etc. should not apply.
In view of the above it is plausible to take a view that, even if the free samples are considered as benefit or perquisite in the hands of the HCP, the value of such benefit to HCP is Zero and hence there shall not be any liability to deduct tax.
The view is also supported by the valuation principles specified by the CBDT Circular (reproduced earlier).
The residuary method for valuation prescribed by the CBDT Circular is the fair market value of benefit or perquisite. As stated earlier, physicians samples cannot be sold and hence the fair market value of physician samples is zero. Also, there is no price that the manufacturer charges for the physician samples – as the samples are not sold. The Supreme Court and certain Tribunal rulings4 in the context of excise duty have held that, physician’s samples and the goods cleared for wholesale trade are not comparable and hence, the price charged for wholesale trade cannot be adopted for valuing physician samples. As the value is zero or in any case unascertainable the Company distributing physicians samples should not be liable to deduct TDS on supply of physician’s samples.
Even otherwise if healthcare professional is given a physician’s sample, if the same is considered as his income. The Healthcare professional will give these physicians sample free of cost to his patients for their use. The said expense (distribution) of physicians sample is incurred by healthcare professionals wholly and exclusively for the purposes of his profession and consequently, should be allowed as a deduction u/s 37(1) for computing his income chargeable under the head “Profits and gains of business or profession”. Hence, no additional tax incidence would be triggered even by bringing the free physician samples under the ambit of S. 194R.
In the context it would not be out of place to end with a quote from a celebrated ruling of the Bombay High Court [CIT v. Nagri Mills Co. Ltd. (33 ITR 681)] –
“We have often wondered why the Income-tax authorities, in a matter such as this where the deduction is obviously a permissible deduction under the Income-tax Act, raise disputes as to the year in which the deduction should be allowed.
one should have thought that the Department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the Department appears to delight in raising points of this character which do not affect the taxability of the assessee or the tax that the Department is likely to collect from him whether in one year or the other.”
- (2007) 14 SOT 546 (Mum)
- Medley Pharmaceuticals Ltd. Versus the Commissioner of Central Excise 2011 (2) SCC 601
Similar view – Eskayef Pharmaceuticals (India) Ltd. v. Commissioner of Income-tax  111 Taxman 561 (SC) – 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.
-  98 ITR 209 (SC)
- Commissioner Of C. Ex., Bangalore-I Versus Bal Pharma Ltd 2011 (2) SCC 620
Commissioner Of C. Ex., Calicut Versus Trinity Pharmaceuticals Pvt. Ltd. – 2005 (6) TMI 79 – CESTAT, Bangalore; Sun Pharmaceutical Industries v. CCE, Surat-II – 2005 (183) E.L.T. 42 (Tri. – Mumbai)