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TMI Blog2019 (9) TMI 768X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant has used this mode to reduce tax incidence in the appellant company by entering into MOU of CCCPL unequivocally. We cannot accept the submissions made by the Learned Senior Counsel appearing for the assessee. We find that the fact of the instant case is entirely different from the fact available in the judgment passed by the Jurisdictional High Court. Thus this has no manner of application to the case in hand before us. Taking into consideration the entire aspect of the matter, we find that in the absence of any expenses shown by CCCPL incurred for research work or any assets to justify services rendered as research work, the order passed by the CIT(A) is just and proper and without any ambiguity in disallowing the impugned expenditure debited by the assessee as research expenditure, paid to CCCPL, treating the same as paper entry and/or bogus. Hence, assessee s this ground of appeal is dismissed. Disallowance made u/s 14A - HELD THAT:- We find that the infirmity in calculating the suo moto disallowance as made by the assessee has not been pointed out by the Learned AO. Neither the same has been taken into consideration by the first appellate authority. It is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer could not challenge payments made by assessee to doctors, who are admittedly seasoned and reputed professionals in their fields, on the basis of what other doctors are being paid in that area of expertise. We find that the explanation of the assessee are quite reasonable and worth being accepted and we do not find any infirmity in the order passed by the CIT(A) in the present facts and circumstances of the case in deleting the disallowance - Decided in favour of the assessee - I.T.A. No. 3213/Ahd/2016, 3299/Ahd/2016 (Assessment Year : 2012-13) - - - Dated:- 5-9-2019 - PRAMOD KUMAR (VICE PRESIDENT) Ms. MADHUMITA ROY (JUDICIAL MEMBER) Appellant by : Shri S. N. Soparkar Parin Shah, A.R. Respondent by : Shri Vinod Tanwani, Sr. D.R. ORDER Ms. MADHUMITA ROY. These two cross appeals (filed by the assessee and the revenue) are directed against the order dated 23.09.2016 passed by the Commissioner of Income Tax (Appeals)-1, Ahmedabad under section 143(3) of the Income Tax Act, 1961 (hereinafter referred as to the Act ) arising out of the order dated 04.03.2015 passed by the DCIT, Circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L to CCCPL s director. 5. During the course of assessment proceeding, it was found that the assessee has claimed payment of ₹ 2,65,10,492/- to CCCPL as research fees in support of which the assessee provided a copy of Memorandum of Understanding (MOU) entered into by and between the two corporate companies i.e. the assessee and the CCCPL. It further appears from the said MOU that CCCPL would render and conduct all their Health care and Clinical research services and engagements at CIMS. Upon verification of balance sheet and Profit and Loss account of CCCPL for A.Y. 2012-13 it was found that CCCPL has no asset for research work, neither has debited any research expenditure. The assessee, however, sought to justify such payment as reasonable only on the basis of the MOU. When the assessee was directed to clarify as to how the research work for which payment has been claimed to have been made by the assessee and that too for its business activity, following explanation was rendered by and under a letter dated 21.02.2015 by the assessee: It is to be noted that assessee has paid ₹ 26510492/- to Clinical Care Consultant Pvt. Ltd. for service re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not clarify the type of research work it would undertake. It may be pertinent to point out here that the assessee has entered into other MOU with CCCPL on the same date i.e. 02/08/2010 to carry out certain other health care services, the same has already been discussed in the issue of disallowance of diversion of income. The only difference the present MOU is certain words are included to add clinical research services . The duties of CCCPL in the research as per the agreement is as per 4(a) of agreement is as under: 4(a) CCCPL will fie providing Clinical research, services-,to CIMS and would be performing technical testing or analysis of newly developed drugs, devices, including vaccines as would be required on the walk-in patients of CIMS as well as on the patients who are referred to CIMS by professional Working under CCCPL or by any other physician haying no association to CCCPL or CIMS The following would be the duties of CIMs under the agreement; a) CIMS would provide various facilities without restriction of use to CCCPL and its affiliated persons; a. Operation Theatre Complex/Cathlab rooms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... research work. In consideration the assessee has given 65% of the fees income for research work to CCCPL after deducting tax at source. 2. The findings of the learned assessing officer for disallowing research fees paid to CCCPL are as under: (i) From the MOU, it can be seen that the CCCPL will render and conduct all their health care and clinical research services and engagement at CIMS. (ii) On verification of the balance sheet and profit loss account of CCCPL for assessment year 2012-13, it is seen that CCCPL neither has any assets/facilities for research work nor has debited any research expenditure. (iii) The MOU is prepared only on plain paper which can not be considered as having any legal binding on both the parties. (iv) The MOU does not clarify the type of research work it would undertake. (v) From the duties assigned to CCCPL it can be seen that there is no research work involved therein. (vi) How the CCCPL can analyze and develop new drugs without holding a valid license? (vii) The assessee failed to provide any documentary proof to prove that CCCPL is comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esearch work the CCCPL has not employed permanent employees. But it has hired the professional doctors to carry out research work at CIMS Hospital Pvt Limited. (vii) The assessee's infrastructure i.e. operation theatre, cath labs, patient rooms, Intensive care units, Critical care units, pathology laboratory, radiology department and the patients admitted for research etc are used for research work. 4. The so called agreement is not for diversion of the income. The assessee having huge carried forward losses of ₹ 51,79,33,611/- u/s 35AD available for set off against the current year's income. Therefore, non- payment of research fees to CCCPL would have resulted in the more set off of actual losses and non payment of taxes by the CCCPL and in turn doctors. Therefore, as a result of payment of research fees the department had got taxes from the CCCPL and doctors declaring the income received from the assessee and from the CCCPL respectively. 5. The learned assessing officer has taxed the entire research income, though the assessee has provided only infrastructure for research work. The assessee being an in-natural person, not ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CPL on the san date to carry out certain other health care services. Further, the appellant has failed provide any documentary proof and any manpower in respect of that CCCPL .competent to carry out any research work as provided in the MOU. Apart from above, after verified the balance sheet of CCCPL, it is found that CCCPL has not shown any assets research equipment. In view of the above, the appellant claim for expenditure of ₹ 2,65,40,195/- in respect of research expense is disallowed and added to the total income. On the other hand appellant has argued that the appellant being a hospital possesses necessary infrastructure facilities to carry out the research activities and CCCPL have manpower in the form of professional doctors having a research projects in their names. Further, the appellant has contended that assesses has entered into MOU with the CCCPL for providing professional doctors for research work. The appellant has given 65% of the fees income for research work to CCCPL after deducting tax at source. Further, appellant has submitted that appellant has necessary infrastructure facilities to carry out research work and doctors have formed a company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t CIMS Hospital Pvt. Limited. I am not convinced with the arguments of the appellant for the reason and find merit in the findings of the A.O. The findings are as under:- i) From the MOU, it can be seen that the CCCPL will render and conduct all their health care and clinical research services and engagement at CIMS. On verification of the balance sheet and profit loss account of CCCPL for assessment year 2012-13, it is seen that CCCPL neither has any assets/facilities for research work nor has debited any research expenditure. This type of situation is very unique and does not leave any confusion as what is the intention of the appellant company. (ii) The MOU is prepared only on plain paper which cannot be considered as having any legal binding on both the parties. This is technical aspect and even at the time of appellate proceedings, the appellant did not have any answer. (iii) The MOU does not clarify the type of research work it would undertake. This is quite vague and leaves much confusion as to what research to be undertaken. (iv) From the duties assigned to CCCPL it can be seen that there is no research work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was further found that no asset has been shown by the CCCPL in their balance sheet for research equipment though the MOU particularly envisaged that CCCPL would render and conduct all their health care and clinical research services and engagement at CIMS. Thus in the absence of necessary infrastructure facilities to carry out research work, the authority below has declined to accept such expenditure towards clinical research work rendered by CCCPL and, therefore, the Learned CIT(A) observed that the appellant has used this mode to reduce tax incidence in the appellant company by entering into MOU of CCCPL unequivocally. We have also carefully considered the judgment passed by the Jurisdictional High Court in the matter of Hemato Oncology Clinic (Ahmedabad) (P.) Ltd. but we are afraid, we cannot accept the submissions made by the Learned Senior Counsel appearing for the assessee. We find that the fact of the instant case is entirely different from the fact available in the judgment passed by the Jurisdictional High Court. Thus this has no manner of application to the case in hand before us. Taking into consideration the entire aspect of the matter, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sr. Counsel appearing for the assessee fairly submitted before us that the issue has been decided against the assessee and hence we confirm the order passed by the authorities below. Thus this ground of appeal preferred by the assessee is dismissed. 15. Ground No.5 The assessee has challenged the adjudication of the disallowance under section 14A while computing book profit u/s 115JB of the Act by the Revenue. 16. This additional ground has been agitated by the assessee though before the first appellate authority the same has not been adjudicated and hence the same has been raised before us. 17. The disallowance of section 14A while computing book profit u/s 115JB has been challenged by the assessee. In this regard, the assessee also relied upon the judgment passed by the Special Bench of Delhi ITAT. 18. We have heard the rival contentions of both the parties and perused the materials available on record. The AO in the instant case has made the disallowance u/s 14A r.w.r. 8D of the Income Tax Rules for ₹ 35825/- while determining the income under normal computation of income. Further, the AO while determining the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to change of jurisdiction. 22. During the course of assessment proceeding, it was observed that the assessee has debited a sum of ₹ 25,83,45,108/- as professional fees to consultant. It was further observed from the details mentioned at Clause-18 of Form No.3CD that out of the said amount a sum of ₹ 17,50,97,905/- was paid to Clinical Care Consultant Pvt. Ltd. (hereinafter referred as CCCPL ) a concern covered u/s 40A(2)(b) of the Act. Notice u/s 142(1) dated 13.08.2014 was served upon the assessee directing to furnish the details of professional fees and consultant charges paid to the persons covered u/s 40A(2)(b) of the Act. In response whereof by and under a letter dated 18.02.2015 the following details were furnished: CCCPL Income Assessment Year 2012-13 (I) Operative Income CIMS IPD CIMS 125600331 OPD CIMS 16195123 Project Fees 0 Visiting Fees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esearch services and engagements at CIMS. (iv) and also will render and conduct all their professional and clinical services and engagements at CIMS. The Learned AO was of the opinion that though the CCCPL will render and conduct healthcare, professional, clinical research and clinical services for which the assessee will pay necessary fees as agreed upon. But the MOU relied upon by the assessee is silent on such remunerations payable by CIMS for such services rendered by the professional of CCCPL. Therefore, according to the Learned AO, the memorandum has been prepared as a tool to divert the income from one entity to another to reduce tax incidence. Though this is a joint venture of two corporate entities the aspect of income sharing is lacking in the MOUs. He also made an observation that both the memorandum of understanding were signed by Dr. Milan Chag for and on behalf of CIMS and Dr. Anish Chandarana for and on behalf of CCCPL who are the common directors of both the companies. Further that, the MOU made on a plain paper instead of stamp paper; neither the same was notarized. The Learned AO, therefore, questioned the huge payment of ₹ 17.50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ix) The MOU has been signed by Dr. Milan Chag for and on behalf of CIMS and Dr. Anish Chandarana for and behalf of CCCPL who are common directors of CIMS CCCPL (x) The MOU is made in a plain paper and not even on a stamp paper or even not notarized. 24. Apart from that it was further observed that the MOU does not include any machinery or equipment through which it can carry out any research work. Neither it is available from the Balance Sheet of the CCCPL that it has shown any asset much less research equipment. No infrastructure to carry out any clinical research has been found in CCCPL, neither the same has been provided by the CIMS. Ultimately, the Learned AO opined that the entire payment was an arrangement to reduce the assessee s real income and thus the assessee s claim for expenditure of ₹ 2,65,10,495/- in the garb of research expenses was disallowed and added to the total income of the assessee. The total income of disallowance was worked out at ₹ 6,40,47,418/- (3,75,36,923 + 2,65,10,495). In appeal, the professional fees to the tune of ₹ 3,75,36,923 disallowed u/s 40A(2)(b) was reversed by the Learned CIT(A). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the previous year relevant to assessment year 2011-12. Therefore, the assessee is entitled to the deduction in respect of expenditure on specified business as per provisions of section 35AD of the Income Tax Act, 1961. Accordingly, the assessee has filed its return of income declaring loss of ₹ 51,79,33,611/- in respect of specified business for assessment year 2011-12. The copy of statement of total income and the assessment order passed u/s 143(3) of the IT. Act, 1961 for assessment year 2011-12 is enclosed herewith. (Refer Page no 62 to 72 of the paper book.) In short the assessee have carried forward losses of ₹ 51,79,33,611/- in respect of deduction u/s 35AD of the Income Tax Act, 1961. As per provisions of section 73A of the Income Tax Act, 1961the loss computed in respect of any specified business referred to in section 35AD can be set off against the profit of the specified business and any unabsorbed loss is to be carried forward and set off against profit of the specified business in succeeding assessment year. Therefore, in view of carried forward losses in respect of specified business, the assessee is not liable to tax under the normal provisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased on the rate that will be mutually decided by both the parties. The rate would be determined based on the collections made by CIMS from patients, type of procedure performed and nature of treatment that is availed by the patients at CIMS. The payment shall be made after considering the data maintained by CIMS as mentioned in point e) of graph 2 above. The rates as would be decided mutually are subject to revision on a timely basis as would be agreed by both the parties. On the basis of the same MOU payments had been made in immediate preceding year which has been accepted by then assessing officer while passing assessment order u/s 143(3) of the Income Tax Act, 1961. Therefore, it is not correct that the MOU is prepared as a tool to divert the income from one entity to another to reduce the tax incidence. 6. The disallowance has been made u/s 40A(2)(b) of the Income Tax Act, 1961. As per provisions of said section the assessing officer should have opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the services for which payment is made or the legitimate needs of the business of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 148587413 797960248 18.62 Clinical care Doctor's Research Payment 26510492 41726830 63.53 175097905 839687078 8. Thus the assessee has incurred 18.62% revenue on the doctor's services from CCCPL. As compared to the income earned by the assessee from the payment of relevant expenditure the quantum of expenditure is quite reasonable. The learned assessing officer has worked out disallowance to the extent of income not taxed in the hands of the director doctors due to expenditure incurred by the CCCPL and doctors for earning the income. It may be noted that the assessment of the CCCPL has been made u/s 143(3) and the payment to doctors have been accepted as reasonable and no disallowance has been made by invoking provisions of section 40A(2)(b). The copy of assessment order of the CCCPL is enclosed herewith. (Refer Page no 88 to 90 of the paper book.) Further in case of most of doctors, the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cular dated 06.07.1968 is concerned, it makes clear that provisions under section 40A(2) and particularly with regard to the transaction between the relatives and associates was concerned, the same shall be treated as bona fide case unless the officer finds it that one of them was trying to evade payment of tax. 27. While allowing the claim of the assessee towards professional fees paid to the doctors to the tune of ₹ 3,75,36,923/- the following relevant observation was made by the Learned CIT(A): 3.3. I have gone through the facts and the submission of the appellant carefully. In the assessment order A. O has observed that a sum of ₹ 17,50,97,905/- was paid to Clinical Care Consultant Pvt. Ltd. (CCCPL), a concern covered u/s. 40A(2)(b) of the Act. The appellant has provided the copy of the MOU between CCCPL and the appellant. A careful perusal of the so-called MOUs entered into between CIMS and CCCPL, it is seen by the A.O. that both the documents are signed by Dr. Milan Chag for and on behalf of CIMS and Dr. Anish Chandarana for and on behalf of CCCPL who are common directors of CIMS and CCCPL Further, it is seen that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the doctors, nature of services rendered, time given to attend the hospital, numbers of patients examined or treated, nature of treatment given to patients, revenue received from patients etc. The appellant has submitted that the assessment of the CCCPL has been made u/s 143(3) and the payment to doctors have been accepted as reasonable and no disallowance has been made by invoking provisions of section 40A(2)(b). The copy of assessment order of the CCCPL is enclosed herewith. (Refer Page no 88 to 90 of the paper book.) Further in case of most of doctors, the assessments are made under section 143(3) and the expenditure claimed by them has been accepted by the respective Assessing Officers. In other words the learned Assessing Officer has disallowed the payment of professional fees to the CCCPL to the extent of expenditure which have been accepted/allowed in case of the doctors by their respective Assessing Officer. It is also to be noted that in CCCPL and the assesses both corporate assesses and are paying tax @30% and there is no tax benefit to the assessee to transfer profit to CCCPL Further the assessee has huge carried forward loss u/s 35AD in respect of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of tax by the Doctors is not noticed in this case and on this point. It is seen that Hon'ble Gujarat High Court in case of CIT vs. Gujarat Gas Financial Services Ltd, reported at 233 Taxman 0532 (2015) has held that Assessee Company as well as parent company, both is assessed to income tax at the maximum marginal rate and, therefore it cannot be said that the service charge was paid by the assessee company at unreasonable rate to evade income tax. Further, Appellant's case is also covered by judgment of jurisdictional Hon'ble Gujarat High Court in the case PWS Engineers Limited v/s DCIT (Tax Appeal No. 209 of 2015) wherein it was held on grounds of revenue neutrality if once the income is being charged in the hands of the directors in the highest tax bracket, taxing the same in the hands of the company would amount to double taxation. The Appellant has submitted acknowledgment of return of income for AY 2012-13 of the two directors and other Doctors. It is evident from the same that all the employees/directors have paid taxes in the highest tax bracket of 30 percent This substantiates that both Appellant company as well as its Directors and emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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