2022 (6) TMI 1146 - AT - Income Tax

Allowable business expenditure u/s 37 - deductibility of freebies etc to medical practitioners - referral commission paid to doctors is in violation of the professional conduct under the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations 2002 - Whether authorities below erred in holding that referral commission paid to doctors is in violation of the professional conduct under the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations 2002, and, as such, inadmissible as a tax deduction under section 37? - HELD THAT - The expression allied healthcare industry is required to be interpreted in the context in which appears in the code of conduct for the medical practitioners, and not on the basis of how this expression has been defined in some other context in a journal or on website guidelines. We are unable to see any justification for excluding a medical service provider, like the assessee before us, from the segment of the pharmaceutical and allied healthcare industry in the present context. When an unsuspecting client walks into the consulting chamber of a dentist who advises him to go for stem banking from his dental plump, one cannot be sure whether it is the doctor s genuine advice on its merits of what the doctor actually believes to be beneficial to the client or it is a piece of advice influenced by the financial inducement by way of referral fee that the doctor will get for his client being referred to the service provider in question. Such a situation de facto amounts to receipt of cash or monetary grant by the medical professional from the allied healthcare industry, on the pretext of referral fees- in clear violation of rule 6.8.1(d) of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002. The true consideration for this referral fee is the advice given to the doctor s patient, and a potential customer of the service provider, in favour of stem cell banking. The fiduciary relationship between the doctor and patient is, or has the potential of being, compromised as such by the extraneous considerations. That is clearly contrary to the letter, as also the spirit, of the code of conduct for the medical practitioners. The acceptance of such a referral fee by a medical practitioner is thus forbidden by the legally enforceable code of conduct, which renders it an expense for a purpose that is prohibited by law depriving the assessee company to claim a tax deduction in respect of the said expenditure. We, therefore, approve the conclusions arrived at by the learned Commissioner (Appeals) on this issue, and decline to interfere in the matter. Ground dismissed. Additional receipts having been brought to tax in the hands of the assessee - HELD THAT - Assessee has now got some material to demonstrate that this receipt was already accounted for, but he fairly admits that this material was not available earlier, and, as such, authorities below had no occasion to deal with the same. Learned Departmental Representative also fairly accepts that this issue can be remitted to the file of the Assessing Officer for fresh examination, and taking an appropriate call in the light of such fresh examination. With the consent of the parties, therefore, the matter stands restored to the file of the Assessing Officer. Ground no. 3 is thus allowed for statistical purposes in the terms indicated above.

Summary

Issues Involved:
1. Tax-deductibility of referral commission paid to doctors under section 37 of the Income Tax Act, 1961.
2. Additional receipts of Rs 75,000 brought to tax.

Issue 1: Tax-deductibility of Referral Commission Paid to Doctors

The appellant challenged the correctness of the order disallowing the referral commission paid to doctors as a tax-deductible expense under section 37 of the Income Tax Act, 1961. The authorities held that the referral commission violated the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, and was thus inadmissible.

The appellant, a company engaged in stem cell banking, paid referral fees to doctors to recommend their services to potential customers. The Assessing Officer disallowed this expense, asserting it violated the professional code of conduct for medical practitioners and was prohibited by law. The appellant's appeal to the CIT(A) was unsuccessful, leading to the present appeal.

The Tribunal noted that the Hon’ble Supreme Court in Apex Laboratories Pvt Ltd [(2022) 442 ITR 1 (SC)] emphasized the quasi-fiduciary relationship between medical practitioners and their patients. The Court held that any inducement influencing a doctor’s advice to a patient is unethical and violates the fiduciary duties of the medical practitioner. This principle was applied to the present case, where the referral fee was seen as an inducement affecting the doctor’s advice.

The appellant's argument that it was not part of the 'allied healthcare industry' was rejected. The Tribunal held that the term 'allied healthcare industry' should be interpreted in the context of the code of conduct for medical practitioners. The Tribunal also dismissed the argument that the referral fee was not a freebie but a payment for services, noting that the fee was intended to influence the doctor’s advice, thus breaching fiduciary duties.

The Tribunal referenced the Hon’ble Supreme Court’s observation that any financial inducement compromising the unbiased performance of a medical practitioner’s duties is forbidden and not tax-deductible under section 37(1). The Tribunal also cited the Calcutta High Court's judgment in Peerless Hospitex Hospital & Research Centre Pvt Ltd Vs PCIT [(2022) 137 taxmann.com 359 (Cal)], which supported the disallowance of referral fees as a business expenditure.

The Tribunal concluded that the referral fee paid by the appellant to doctors was a violation of the code of conduct and thus not tax-deductible. The conclusions of the CIT(A) were upheld, and ground nos. 1 and 2 were dismissed.

Issue 2: Additional Receipts of Rs 75,000

The appellant contested the addition of Rs 75,000 to its taxable income. The appellant's counsel presented new material indicating that this receipt was already accounted for, but acknowledged that this material was not previously available to the authorities.

The Tribunal, with the consent of both parties, remitted the matter to the Assessing Officer for fresh examination in light of the new material. Ground no. 3 was allowed for statistical purposes.

Conclusion

The appeal was partly allowed for statistical purposes, with ground nos. 1 and 2 dismissed and ground no. 3 remitted to the Assessing Officer for further examination. The judgment was pronounced on May 20, 2022.