2021 (5) TMI 753 - AT - Income Tax

Admissibility of expenditures incurred by the assessee (a pharmaceutical company) u/s 37 - disallowance of referral fees paid to doctors in violation of public policy and regulations formulated by the Medical Council of India ( MC ') - allowability of assessee's referral fees paid to various eye clinics/eye specialists in their business premises in lieu of rent and other advantages - HELD THAT - Assessee; a company engaged in eye care business has shared its revenue with the eye clinics and ophthalmologists inter alia in lieu of availing rent free premises without maintenance charges. We make it clear that the learned senior counsel has himself argued that it is an instance of the emerging business model only. We observe in these facts that no business model could be taken allowable of it since violate public policy as per the above stated CBDT Circular. As observed during the hearing that the learned senior counsel has filed paper book running into 193 pages containing various case law(s), he himself was fair enough that none of the said decisions would apply herein since they do not involve any such business model of revenue sharing. All the said decisions are distinguishable on the facts therefore as per the assessee's stand. These facts and circumstances make it apparent that the interest of general public patients is very much compromised by the assessee s revenue s sharing agreement. We accordingly uphold the lower authorities action treating the assessee's referral fees as commission payment not allowable in principle. Whether referral fees involves rental payment without being any maintenance charges etc? - As come on record that neither the assessee itself has placed on record the corresponding rent s market rate nor the lower authorities have made any such attempt. Faced this situation, we deem it appropriate that a lump sum disallowance of 1/3 rd of the assessee's impugned claim (including the rent and other miscellaneous charges on estimation basis) would be just and proper in the given facts and circumstances. The assessee gets relief to the extent of 2/3rd of the impugned services in other words. Necessary computation shall follow as per law. Very nature of payment stands accepted in earlier year we quote the honourable apex court s landmark decision in Radhasoami Satsang Vs. CIT 1991 (11) TMI 2 - SUPREME COURT holds that the principle of res judicata is not applicable in income tax proceedings. The assessee's corresponding argument stands declined therefore.

Issues Involved:
1. Disallowance of ?13,80,84,400 as referral fees paid to doctors.
2. Non-allowance of set-off of brought forward loss and unabsorbed depreciation.
3. Levy of interest under Section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of ?13,80,84,400 as Referral Fees Paid to Doctors:

The primary issue in this case revolves around the disallowance of ?13,80,84,400 claimed as referral fees paid to doctors by the assessee. The Assessing Officer (AO) disallowed this amount, alleging it was paid in violation of public policy and Medical Council of India (MCI) regulations. The CIT(A) upheld the AO's decision, rejecting the assessee's claim that the payments were for leasing premises and not referral fees.

The assessee contended that the payments were compensation for using designated space/infrastructure in various eye hospitals and were not in violation of any law or public policy. The Memorandum of Understanding (MoU) between the assessee and the doctors was presented as evidence, which the CIT(A) dismissed as a self-serving document. The assessee argued that MCI regulations were not binding on pharmaceutical and allied health sector companies and thus not applicable to them.

The AO noted that the payments were made at a rate of 30% of the profits under a revenue-sharing basis and were accounted for as referral fees in the books. The AO also pointed out that the payments were subject to TDS under sections 194H and 194J, indicating they were not for renting premises. The CIT(A) concluded that the payments were against public policy and MCI rules, thus disallowing them as business expenditure.

The Tribunal reviewed the facts and arguments, including the assessee's claim that the payments were for business purposes and not prohibited by law. The Tribunal noted that the payments were made in lieu of rent and other advantages, such as locational benefits within the eye clinics. However, the Tribunal observed that such business models could not be allowed if they violated public policy, as per the CBDT Circular No.772 and the precedent set by the Punjab & Haryana High Court in CIT Vs. Kap Scan and Diagnostic Centre.

Ultimately, the Tribunal upheld the lower authorities' decision to treat the referral fees as commission payments not allowable in principle. However, considering the lack of specific evidence on market rates for rent, the Tribunal deemed it appropriate to disallow only 1/3rd of the claimed amount, granting relief for the remaining 2/3rd.

2. Non-allowance of Set-off of Brought Forward Loss and Unabsorbed Depreciation:

The assessee also contested the CIT(A)'s decision not to allow the set-off of brought forward loss and unabsorbed depreciation. The Tribunal's judgment did not provide a detailed analysis of this issue, but it is implied that the disallowance of referral fees impacted the computation of losses and depreciation.

3. Levy of Interest under Section 234B of the Income Tax Act:

The assessee challenged the levy of interest under Section 234B of the Act. The Tribunal did not specifically address this issue in detail, but the partial relief granted on the disallowance of referral fees would affect the interest computation.

Conclusion:

The Tribunal partly allowed the assessee's appeal by reducing the disallowance of referral fees to 1/3rd of the claimed amount, providing relief for the remaining 2/3rd. The other issues regarding set-off of losses and levy of interest were not explicitly detailed in the judgment, but the overall relief granted would impact these computations. The judgment emphasized that business models violating public policy could not be allowed as deductible expenses.

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