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TMI Blog2021 (1) TMI 557X X X X Extracts X X X X X X X X Extracts X X X X ..... e consultancy fees or freebees. AO has proceeded with the view that there are regular consultancy fees and accepted the submissions of assessee. AO did not discuss anything in his order. The department taking clue from audit query, they are presuming that the payments are relating to freebees. There is no evidence brought on record by the revenue authorities to substantiate that there were actually freebees. Mere presumption without any cogent material to indicate that these payments are actually freebees is far fetched. In our view, Ld. PCIT has not determined the other condition how it is prejudicial to the interest of revenue. As discussed above, the payments were made to doctors, is it freebees or not is the issue. If it is freebees, it is the duty of Ld. PCIT to bring on record that these payments are in fact disallowable under section 37 of the Act. There are various decisions submitted before us by Ld. AR that the payment made to doctors by the pharmaceutical companies and allied healthcare industries are not in violation of Circular No. 5 of 2012. It is applicable only to the practicing doctors. As discussed above, Ld. PCIT has not clearly brought on record that the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide letter dated 22.02.16 and 08.03.16. It was submitted by the assessee that disallowance of expenditure u/s 14A vide letters dated 01.02.2016 and 08.03.2016 and was further submitted by the assessee that these aspects were already examined by the AO during the course of assessment and jurisdiction u/s 263 cannot be exercised by Ld. PCIT. 4. Further, assessee explained to Ld. PCIT vide letter dated 22.12.2017 that it also offers wellness packages, pre job and post job health check-ups, etc. to its corporate clients and has made payment to dentists and general physicians for their respective services, assessee denied that the payments made by them are not in violation of the Circular No. 5 of 2012. It was submitted that the payments made to professionals is allowable deduction and it is incurred for the sole purpose of its business. 5. Further, Assessee explained to Ld. PCIT with regard to the disallowance u/s 14A of the Act that it had invested into equity shares of DDRC SRL Diagnostics Pvt. Ltd as well as preference shares of DDRC. It was argued by the assessee that investments in preference shares would not lead to earning of any exempt income and therefore, it is rightl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al payments of expenses covered u/s 43B of the Act. 9. Aggrieved with the above order, assessee is in appeal before us raising the following grounds of appeal;- A. GROUNDS IN RELATION TO INITIATION OF 263 PROCEEDINGS: 1. The Ld. Principal CIT erred in seeking to exercise jurisdiction u/s 263 of the Act on the premise that payments by the assessee to dentists/general physician is by itself hi violation of Circular 5 of 2012 issued by CBDT and thus forming an incorrect belief that the order passed u/s 143(3) by the AO is erroneous in so far as it is prejudicial to the interests of the revenue. 2. The Ld. Principal CIT erred in seeking to exercise jurisdiction u/s 263 of the Act on the premise that considering 'net asset value' in deleting disallowance u/s 14A read with rule 8D by itself makes the order passed u/s 143(3) by the AO as erroneous in so far as it is prejudicial to the interests of the revenue. B. GROUNDS IN RELATION TO EXERCISE OF JURISDICTION U/S 263: 3. The Ld. Principal CIT erred in exercising jurisdiction u/s 263 of the Act in relation to expenditure claim for payments to doctors, without establishing any error in the order passe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring assessment proceeding. ii) In determining dis-allowance u/s 14A of the Act, value of average investments has been determined, considering the net value of investments as against the gross value of investment as required in the section. 12. Further assessee appeared before the Pr.CIT on 22ndDecember, 2017 and filed its detailed objections to the exercise of jurisdiction u/s 263 of the Act. However, without appreciating the submissions of the Assessee, the PCIT vide order dated 20thFebruary, 2018 held that the assessment order passed by the AO is erroneous and prejudicial to the interest of the revenue. In the said order, the PCIT inter alia made the following observations i) The claim of the Assessee that the details of payment of professional fee amount to ₹ 70.89 Crores paid to doctors were filed before the AO during the course of original assessment is factually incorrect and false. Therefore, the further claim of the Appellant that it had explained the nature of the professional fees paid to doctors during the course of assessment proceedings to AO is also erroneous and untenable on the records ii) The AO had failed to examine as to whether any of these ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for early hearing of an appeal for A.Y. 2014-15 pending before CIT (A). In that context, A.O vide letter No. DCIT 7(3)(1)/Appeal/SRL/2019-20 dated 22.5.2019 addressed the Ld. PCIT. He brought to our notice the letter dated 22.05.2019, which is reproduced below; xxx iii. In Assessee 's own case, revenue audit party raised the objection for AY 2013-14 vide objection No ITRA/PA On Hosp. ETC/ DCIT - 7(3)(1)/AB/ Mumbai AQ No. 126 dt. 16.11.2016 and the same is reproduced below; In the assessment of the assessee completed under 115JB determining the income of rupees 4,74,98,996, it was seen that the assessee was involved in running chain of pathological laboratories. It was seen that apart from paying the salary of 31,87,87,001 62 it has also debited the sum of rupees 70,89,37,290 as professional fees to doctors to other expenditure schedule. The details of professional fees paid to each doctor were available on file. Random search revealed that these payments were made to dentist general physician etc. among others and not to pathologists, to be disallowed 15.4. He brought to our notice the relevant portion of show cause notice dated 07thDecember, 2017 issued b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itoring screening tests on human being. The AO was thus very well aware about the business activities of the Assessee. 17.2. He submitted that the tests are to be conducted by pathologists who are qualified doctors as well. A pathologist is a doctor who specializes in diagnosing diseases by examining tissue samples. A pathologist is a medical healthcare provider who examines bodies and body tissues. He or she is also responsible for performing lab tests. 17.3. He submitted that the Assessee had engaged the pathologists/ doctors to undertake testing activities and to provide their opinion/ reports to individuals who approach the Assessee. The consideration paid by the Assessee to the pathologist/doctors are for services rendered by them to the Petitioner. The Assessee had furnished a copy of its financial statements to the AO, which elaborately describe the business activities of the Assessee. 17.4. He submitted that the payment to pathologist and doctors is the single largest expenditure by the Assessee. This is so because the services of the pathologist and doctors are the foundation on which the Assessee s laboratory functions. No Pathologist/ doctor is on the payroll of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical codes and moral conduct. Nowhere the regulation or the notification mentions that such a regulation or code of conduct will cover health care sector or pathological labs in any manner. 18.4. He submitted that before the Delhi High Court in the case of Max Hospital v. MCI in [WPC 1334 of 2013, dated 10-1-2014], the Medical Council of India filed an affidavit to the effect that the Indian Medical Council Regulation of 2002 has jurisdiction to take action only against the medical practitioners and not to health sector industry. 18.5. The Circular No.5 of 2012 of CBDT dated 1-8-2012 has solely based on the guidelines issued by the Medical Council of India. Evidently, Circular of the CBDT is founded on erroneous basis. 19. Fifth Submission: 19.1. He submitted that the correctness of Circular No 5 of 2012 was dealt with by this Hon'ble Tribunal in Solvay Pharma India Ltd v. PCIT E20181 192 TTJ 394 (Mum).Again, the Mumbai Tribunal in DCIT v. PHL Pharma (P.) Ltd [2017] 163 ITD 10 (Mum) held that Circular No 5 of 2012 is applicable for medical practitioners only and the censure/action which has been suggested by it is only on medical practitioners and not for pharma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20.2. He submitted that Solvay Pharma case 2018 192 ITJ 384 (Mumbai) relate to exercise of revision under Section 263 itself. Hence, that decision fully covers the present matter. 21. Seventh Submission 21.1. Ld AR Submitted that during this year, the assessee had incurred ₹ 70.82 Crores towards professional services availed by it. For internal accounting and management purposes, the assessee classified its business under three different heads, Drs. Tribedi and Roy Labs at Kolkata, Dr. Phadke Labs at Mumbai and other independent labs across India, including Mumbai. The details of expenditure has been given in line with the above classification. 21.2. He submitted that out of ₹ 70.82 Crores, ₹ 6.90 Crores was incurred by the assessee at its Kolkata lab. The assessee maintains its lab in Kolkata under the brand name of Drs. Tribedi Roy (Lab). The lab has been serving the people of Kolkata and its surrounding areas. The lab providing services in the various fields of pathology like the Clinical Biochemistry, Serology, Haematology and Immunohematology. The lab offer modern and up-to-date laboratory facilities to help in the diagnosis and treatment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors) 74-76 4. Payment to professionals Payment to CAs, accountant, ESI consultant, etc. 77-84 5. Payment to Classicare Diagnostics Service provider for collection of sample and delivery of reports 85-94 21.4. He submitted that out of ₹ 70.82 crore, ₹ 49.99 crore was incurred by the assessee at its other labs. The other labs are mainly Pathology and Radiology lab at various locations such as Jhankaria Imagine center Mumbai, Mysore Lab, Gurmeet Lab Mumbai, Delhi, Coimbatore, Indore, Surat, Vadodara, Guwahati etc. Pathology Business refers to business related to blood samples. Radiology Business refers refer to the business of X-rays, Ultrasound, MRI and CT to the walk in client. The break up of these is as under: Sr. No. Particulars Remarks Page No.-Paper book II 1. Payment to doctors functioning as Center heads These doctors manage the 5 Centers in M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sts like diabetic screening, cardiac risk screening, general physical examination and review and dental consultation as well (specific scope of general physical check up and dental check up are contained in page 8 of the paperbook Volume III, as part of agreement with A T Kearny Ltd, and at page 13 of Volume III in relation to agreement with the Primal Group), 22.5. He submitted, the wellness packages offered by the Assessee which includes general physical checkup and dental checkup can be seen from the brochure of the Assessee ('page 16 to 29 of paperbook Volume III).These evidences were furnished by the Assessee to the PCIT. These evidences clearly establish that the consideration paid by the Assessee to dentists and general physicians were in the course of conducting its business, for the services rendered by the said dentists and general physicians. He submitted that the PCIT however completely ignored these evidences while passing the impugned order, and without giving any independent finding but remanded the entire matter to the AO. 22.6. He submitted, it is now a well settled principle of law that, when the PCIT alleges that there is failure on the part of the AO t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termining to what extent the depreciation was claimed in excess has not been undertaken by the Principal Commissioner of Income-tax. 22.8. In the above case, Mr. Asheesh Jain then volunteered that the Principal Commissioner of Income-tax had exercised the second option available to him under section 263(1) of the Act by sending the entire matter back to the Assessing Officer for a fresh assessment. That option, in the considered view of the court, can be exercised only after the Principal Commissioner of Income-tax undertakes an inquiry himself in the manner indicated hereinbefore. He submitted that this aspect is missing in the present case. 22.9. Further, he submitted that the Tribunal in Sadhana Stocks Securities (P.) Ltd. vs. PCIT [2018] 168 ITD 499 (Kolkata - Trib.) has also held that the PCIT has to form a prima facie view that claim of assessee is erroneous before setting aside order of Assessing Officer. In holding so, the Tribunal made the following observation; 9. ... ... It is observed that although the ld. Principal CIT in his impugned order passed under section 263 reproduced the submission made by the assessee, he did not give any finding or observation t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enclosed as Annexure 7. In this regard, it is further submitted that according to Section 14A, for the purpose of computing the total income under this chapter, is that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Whereas the fact is that the Company has invested in Zero Coupon preference Shares which means that there will not (be) any income exempt from tax., therefore the cost incurred in relation to said investment can't he disallowed u/s 14A of the Act. 23.3. He brought to our notice, Page 69 of Volume I contains the computation of disallowance made under Section 14A, as filed before A.O. He submitted that in view of these detailed and cogent submission and A.O having invoked and disallowed under Section 14A, there is no scope for invoking Section 263 in the present matter. 23.4. He brought to our notice, in Para 8 of the order u/s 263 of the Act, the Ld. PCIT has held that the Ld. AO has failed to examine the nature of the assets held by the Assessee and exclude fictitious assets if any, for the purpose of disallowance u/s 14A of the Act. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iolation of Circular 5 of 2012 and (b) dis-allowance of expenditure u/s 14A. being lesser. The assessee appeared before the PCIT on only one occasion and even on during that hearing, no notice, either written or oral, was given on seeking to exercise jurisdiction on any other ground. It is the foundation of natural justice that the assessee should be put to notice about the aspects on which an order is sought to be passed against him. When no such notice is given to the Assessee, the ground for exercising jurisdiction is clearly in violation of principles of natural justice and hence has to be set aside. 24.2. The assessee relies upon the judgment of the Punjab and Haryana High Court in CIT v. Roadmaster Industires of India Ltd [2014]223 Taxmann 13 (P H) (page 285 to 287 of paperbook V, relevant part at page 287 para (4) wherein the High Court has clearly observed that the PCIT will not have jurisdiction to revise the order of the AOon a ground other than the ground communicated to the assessee. In the facts of the above referred judgment, a show cause notice was issued by the CIT, seeking to revise the assessment order in relation to claims made u/s 32AB and 80 HHC of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gro Suppliers vrs. ITO (2005) 95 ITD 326 (Pune) 26. He submitted that from the above decisions, it clearly shows that AO must have inquired and applied his mind. Therefore in the given case, no such enquiry was made and nothing is coming out of assessment order that AO has applied his mind on this issue of allowing expenditure which is allowable or not in line with the directions contained in the circular no 5/2012. 27. On merits, Ld. DR submitted that CBDT Circular No 5 of 2012 binds the AO, and hence payments made by the Assessee to doctors are to be dis-allowed. In this regard, he placed reliance on the following decisions:- a. ACIT v. Liva Healthcare Ltd [2016] 73 taxmann.com 171 (Mumbai - Trib.) b. CIT v. Kap Scan and Diagnostic Centre (P.) Ltd [2012] 25 taxmann.com 92(P H). and finally he submitted that all the cases relied by Ld. AR are before the amendment to section 263 of the Act. With regard to disallowance u/s 14A, he relied in the decision of Hon ble Supreme Court in the case of Maxopp Investment Ltd. vrs. CIT (Civil Appeal No. 104-109 of 2015). 28. In rejoinder, Ld AR submitted that Ld DR in his submission submitted, CBDT circular binds the AO and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arayan Tatu Rave v. PCIT [ITA 2690/Mum/ 2016, decision dated 06.05.2016]. 33. He further submitted that the judgment in Solvay Pharma India Ltd v. PCIT [2018] 192 TTJ 394 (Mum) was infact related to an order passed by the PCIT after introduction of Explanation 2 to Section 263. The order of the AO for the AY 2011-12 was passed in the said case on 19.02.2015 and the order of the PCIT was passed on 30.03.2016. The claim of the Ld. DR that the order in Solvay Pharma (supra) pertained to a period prior to Explanation 2 to Sec. 263, is incorrect. 34. He further submitted, Ld DR mentioned in his argument that AO has not examined the claim of the Assessee on allowability of deduction for payment of professional fee to doctors. The PCIT has therefore rightly exercised jurisdiction u/s 263 and Ld. DR placed reliance on the following decisions:- a. Rajmandir Estates (P.) Ltd v. PCIT [2016] 70 taxmann.com 124 (Calcutta) -para 28 (affirmed by SC in [2017] 77 taxmann.com 285 (SC)) b. CIT v. Ballarpur Industries Ltd [2017] 85 taxmann.com 10 (Bombay) c. Jagdish Kumar Gulati v. CIT [2004] 139 TAXMAN 369 (ALL.) d. Malabar Industrial Co. Ltd. v CIT [2000] 109 Taxman 66 (SC) 35. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08.03.16 was not found in the assessment records and observed that these letters were never filed during the assessment proceedings. Drawing the conclusion from the above observation, Ld. PCIT observed that AO has failed to exercise due diligence to examine the nature of professional fees paid to doctors and further allowability of the expenses as deduction in the computation of income has not been examined and in particular in view of guidelines contained in Circular No. 5 of 2012. Apart from the above critical observations of Ld. PCIT, he also observed that AO failed to examine the nature of all assets held for the purpose of disallowance u/s 14A of the Act. 39. We observe that the above said issues based on which Ld. PCIT has quashed the assessment order and gave direction to AO to carry out the verification of the nature of professional fees paid to the doctors and disallowance u/s 14A and also gave another direction to AO to examine the allowability of expenses u/s 43B of the Act. 40. With the above said background, we observe that Ld. AR brought to our notice several alternative submissions highlighting that all the relevant information to claim the expenditure relatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees. It is the duty of Ld. PCIT to establish that these payments were in fact freebees and not regular consultation fees, without actually finding that these are freebees and payments are in violation of conditions specified in Circular No. 5 of 2012, he proceeded to annul the assessment order. 43. In our view, the issue involved in this appeal is, whether payments are consultancy fees or freebees. AO has proceeded with the view that there are regular consultancy fees and accepted the submissions of assessee. AO did not discuss anything in his order. The department taking clue from audit query, they are presuming that the payments are relating to freebees. There is no evidence brought on record by the revenue authorities to substantiate that there were actually freebees. Mere presumption without any cogent material to indicate that these payments are actually freebees is far fetched. 44. Therefore, in our view, Ld. PCIT has not determined the other condition how it is prejudicial to the interest of revenue. As discussed above, the payments were made to doctors, is it freebees or not is the issue. If it is freebees, it is the duty of Ld. PCIT to bring on record that these paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertakes an inquiry himself in the manner indicated hereinbefore. That is missing in the present case. 45. Further we notice that there are various decisions submitted before us by Ld. AR that the payment made to doctors by the pharmaceutical companies and allied healthcare industries are not in violation of Circular No. 5 of 2012. It is applicable only to the practicing doctors. As discussed above, Ld. PCIT has not clearly brought on record that the payments were actually in contravention of circular and provision of section 37(1) of the act. 46. Even on disallowance under section 14A, from the records submitted before us, clearly indicate that the relevant information was submitted before AO and AO has accepted the submissions made by assessee and AO came to conclusion and taken one of the views, which may not be acceptable to Ld. PCIT. 47. In our considered view, Ld. PCIT has come to conclusion that the order passed by AO is erroneous, but has not verified nor investigated to determine the other condition i.e. how it is prejudicial to the interest of revenue. As held in numerous case law and it is settle position of law that to initiate proceedings under section 263 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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