M/s SRL Diagnostics Pvt. Ltd. Vs PCIT (ITAT Mumbai)
Mere finding the assessment order is erroneous does not give power to Ld. PCIT to annul the assessment order. It is duty imposed by the provision of section 263 that Ld. PCIT has to determine and satisfy both the conditions that the order passed by AO is erroneous in so far as it is prejudicial to the interest of revenue. It is settle position as per legal precedents that to initiate proceedings under section 263, both conditions i.e. order is erroneous and also it should be prejudicial to interest of revenue. Therefore, in the given case, even the information submitted by the assessee are not found place in the assessment order, Ld. PCIT has called for the information under notice u/s 263. Ld. AR submitted that all the informations were once again submitted before Ld. PCIT. However, Ld. DR denied that assessee has not filed any information.
We do not agree with the conclusion of the Ld. PCIT that he had concluded that the order was erroneous, but has not made further investigation to determine, whether the order passed by AO is prejudicial to the interest of revenue. Instead, he remitted this issue back to AO to verify and investigate the issue once again and finalize the assessment order. As discussed above, Ld. PCIT should have verified or investigated the issue afresh by asking the assessee to submit all relevant information. We also notice that assessee claims the payments were made to doctors on regular consultancy fees and not relating to freebees. 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.
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.
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 payments are in fact disallowable under section 37 of the Act.
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.
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.
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, twin conditions has to be satisfied. In the given case, Ld. PCIT has not fulfilled second condition before initiating proceedings under section 263 of the Act. Therefore, we are inclined to set aside the order passed under section 263. Accordingly, the grounds raised by assessee are allowed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present Appeal has been filed by the assessee against the order of Ld. Pr. Commissioner of Income Tax (Appeals) – 7 in short referred as ‘Ld. PCIT(A)’, Mumbai, dated 20.02.18 for Assessment Year (in short AY) 2013-14 passed u/s 263 of the Act.
2. The brief facts of the case are, Ld. PCIT called for the assessment records and examined the same. He noticed that the original assessment order was passed on 22.03.2016. He observed that the assessment order passed but failed to carry out enquiries as warranted by the facts and circumstances of the case, the assessment was completed without examining all the aspects which required to be looked into for arriving at the correct taxable income of the assessee. He observed in his order that the omissions which rendered the assessment order as erroneous and prejudicial to the interest of revenue were mentioned in the show cause letter dated 07.12.2017 issued to the assessee.
3. In response, assessee filed written submission alongwith enclosures on 22.12.17. Ld. PCIT observed from the submission made by assessee on 22.12.2017 that the assessee had submitted details of payments made to professionals including dentists and general physicians during assessment proceedings 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 rightly not included in the working of disallowance u/s 14A of the Act.
6. Ld. PCIT considered the submission of the assessee and he found not to be acceptable. He observed that the claim of the assessee company that it had submitted the complete details of the professional fees amounting to Rs. 70.89 crore paid to doctors during the course of assessment proceedings vide letters dated 22.02.2016 and 08.03.2016 is factually incorrect and false. He further observed that no such details were found in the assessment records and never filed during the course of assessment proceedings. He further observed that the claim of the assessee that it had explained the nature of these professional fees paid to the doctors during the course of assessment to the AO, is also erroneous and not tenable on the records.
7. Ld. PCIT further observed that it is quite clear from above observation that AO has failed to exercise due diligence to examine the nature of the professional fees paid to doctors amounting to Rs. 70.89 crores debited to the P & L account. He observed that the allowability of these expenses as deduction in the computation of business income was not examined bythe AO and AO failed to examine as to whether any of these expenses are in the nature of expenses not allowable as deduction u/s 37 of the Act in general and also in view of guidelines contained in Circular No. 5 of 2012. He further observed that assessee was not able to provide the details of all such expenses during 263 proceedings and merely claimed that expenses are not in the nature of expenses in contravention of the guidelines contained in Circular No. 5 of 2012.
8. He further observed that AO has also failed to examine the nature of all the assets held by the assessee and has failed to exclude fictitious assets (if any) for the purpose of disallowance u/s 14A. Accordingly, He directed the AO to examine in detail the nature of professional fees paid to doctors amounting to Rs. 70.89 crores and allowability under the provision of Income Tax Act especially keeping in view the guidelines contained in Circular No. 5of 2012 issued by the CBDT. He also directed the AO to examine the nature of all the assets held by the assessee and work out the disallowance u/s 14A of the Act. Further, he directed the AO to examine the disallowance made u/s 43B of the Act after obtaining details of actual 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 passed u/s 143(3) of the Act, merely on the erroneous presumption that the claims made by the Appellant was not examined during the course of assessment and on the erroneous presumption that the payments to doctors would be against the law.
4. The Ld. Principal CIT erred in exercising jurisdiction u/s 263 of the Act in relation to disallowance of expenditure u/s 14A of the Act, without establishing any error in the order passed u/s 143(3) of the IT Act, merely on the erroneous presumption that the claims made by the Appellant was not examined during the course of assessment and on the presumption that alleged error would is prejudicial to the interest of the revenue.
5. The Ld. Principal CIT erred in exercising jurisdiction u/s 263 of the Act in relation to disallowance u/s 43B of the Act:
a. In violation of principle of natural justice, in so far as the order has been passed without issuing any notice on this point to the assessee.
b. Without establishing any error in the order passed by the AO u/s 143(3) of the Act.
c. Without giving any reasons for holding the claims of the assessee as inadmissible.
C. GROUNDS ON MERITS:
6. The Ld. Principal CIT erred in holding that the payments made by the assessee to dentists/general physician is by itself in violation of Circular 5 of 2012 issued by CBDT.
7. The Ld. Principal CIT erred in holding that the disallowance u/s 14A of the Act in the case of the assessee has to be enhanced.
D. OTHER GROUND ON JURISDICTION:
8. The Ld. Principal CIT erred in setting aside the order of the AO passed u/s 143(3) of the Act without giving any specific direction to the AO.
10. Before us, Ld. AR appearing on behalf of the assessee submitted that the assessment was completed under section 143(3) of the IT Act vide order dated 20thMarch 2016 and in the assessment order, the AO made certain additions, which were not challenged by the assessee.
11. He further submitted that the Ld. PCIT issued a notice under section 263 of the IT Act dated 7thDecember, 201 7 seeking to exercise jurisdiction u/s 263 of the Act, on the following grounds;
i) A company running pathology labs making payments to dentists, general physicians, etc, and not pathologists, is prima facie in the nature of freebies to the payee, and is in violation of CBDT Circular No 5 of 2012, which has not been examined during 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 Rs.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 expenses are in the nature of expenses under Section 37 of the IT Act, and also the guidance issued Contained in Circular No. 5 of 2012;
iii) The 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.
13. Accordingly, the PCIT, vide his order dated 20thFebruary, 2018 directed the AO to:
(i) Examine in detail the nature of professional fees paid to the doctors amounting to Rs. 70.89 crores and its allowability under the provisions of the IT Act, especially keeping in view the CBDT guidelines contained in Circular No. 5 of 2012;
(ii) Examine the nature of all the assets held by the assessee and work out the disallowance under section 14A of the IT Act afresh;
(iii) Examine the disallowance made under section 43B of the IT Act after obtaining details of actual payments of expenses covered under section 43B of the IT Act and rework the disallowance accordingly after verification.
14. Aggrieved by the Impugned Order of the PCIT, the assessee is submitting following submissions against the findings and conclusions of Ld PCIT.
15. First submission:
15.1. He submitted that Ld. PCIT has made the following observations in the impugned order.
“6 The submissions of the assessee company has been considered and the same is not found to be acceptable. The claim of the assessee company that, it had submitted the complete details of professional fees amount into Rs. 70.89 Crores paid to doctors, during the course of assessment proceedings wide letter dated 22.02.2016 and 08.03.2016 is factually incorrect and false. The perusal of the case records on the submissions filed during the course of assessment proceedings clearly shows that no such details as claimed by the assessee have been filed during the course of assessment proceedings. Therefore, the further claim of the assessee 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 tenable on the records”.
15.2. He submitted that the above observation of the PCIT is factually incorrect. This is established beyond doubt, from the evidence available on record itself relating to the appellate proceedings of AY 2014-15.
15.3. He submitted that the assessee was vigorously pursuing the authorities 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 11 5JB 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 by the PCIT, reads as under:
Sub – Notice u/S 263 of the IT Act, 2961 – in the case of M/s SRL Diagnostics Pvt. Ltd for AY 2013-14
It is observed on perusal of records
a) It was seen that your company had debited an amount of Rs 7,089.37 Lakhs as professional fees to doctors in AY 2013-14 which was allowed during scrutiny proceedings by the assessing officer. Your company was involved in running a chain of pathological laboratories. However, as per details of professionals fees paid revealed that payments were made to dentists, general physicians, etc. and not pathologist. Therefore, the nature of these payments were not examined by AG in light of CBDT’s Circular No 5/2012″
15.5. Therefore, He submitted that Ld. PCIT’s observation in para 6 of the impugned order is plainly incorrect.
16. Second Submission:
16.1. He submitted with reference to the AO letter dated 22.05.2019 and show cause notice u/s 263, which was reproduced in the earlier paragraphs that the language employed by the Revenue audit party and in the SCN issued by Ld. PCIT is practically identical. It is obvious and self-evident that the Ld. PCIT issued notice u/s 263 of the Act, based only on the objection raised by the Revenue Audit Party.
16.2. He submitted by relying on the decision of Punjab and Haryana High Court in CIT v. Sohana Woollen Mills [2007] 207 CTR 178 (P&H), it is held that, mere audit objection and because a different view could be taken, are not enough to say that the order of the Assessing Officer was erroneous or prejudicial to the interests of the Revenue.
16.3. Further, He relied on the Calcutta High Court decision, in Jeevanlal (1929) Ltd v. ACIT [1977} 108 ITR 407 (Cal) and Hon’ble High Court quashed a notice initiating 263 proceedings, when the notice was based on audit objection and not on independent examination of assessment record by the CIT.
16.4. Ld AR submitted, the notice dated 7.12.2017 for initiation of revision proceedings, evidently being solely based on audit objection is therefore clearly illegal. Consequentially, the impugned order, would have to be quashed.
17. Third submission
17.1. He submitted that the AO, in para 3 of his assessment order dated 22nd March, 2016 notes that the assessee company is engaged in the business of providing testing, diagnostics and prognostics monitoring 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 the Assessee as a salaried employee. They are independent service providers/professional. Without their services, the Assessee would not have earned any income. In this background, the AO allowed the expenditure incurred by the Assessee.
17.5. He submitted that the Assessing Officer had called for the details and the same were filed by the assessee. There may not be elaborate discussion in the assessment order. That would not lead to assumption of jurisdiction under Section 263.
17.6. He submitted, Assessee, as a part of its operating diagnostics centers, offers pre job and post job health checkups, ‘wellness packages’, etc. to its corporate clients as well as walk inclients. The wellness packages offered by the Assessee which includes general physical check up and dental check can be seen from the brochure of the Assessee.
17.7. In view of these, he submitted that the assumption of audit party and show cause notice is entirely a conduit and Circular No. 5 of 2012 dated 1.8.20 12 has no relevance even remotely to the present matter.
18. Fourth Submission:
18.1. He submitted that the entire regulation ‘Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002’ deals with the professional conduct, etiquette and ethics for registered medical practitioners only. Chapter 6 of the said regulation/notification deals with unethical acts, whereby a physician or medical practitioners shall not aid or abet or commit any of the acts illustrated in clauses 6.1 to 6.7 of the said regulation which shall be construed as unethical.
18.2. He submitted that the clause 6.8 has been added (by way of amendment dated 10-12-2009) in terms of notification published on 14-12-2009 in Gazette of India laying down the code of conduct for doctors and professional association of doctors in their relationship with pharmaceutical and allied health sector industry.
18.3. Further he submitted that on a plain reading of the aforesaid notification, it is quite apparent that the code of conduct enshrined therein is meant to be followed and adhered by medical practitioners/doctors. It illustrates the various kinds of conduct or activities which a medical practitioner should avoid while dealing with pharmaceutical companies and allied health sector industry. It provides guidelines to the medical practitioners of their ethical 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 pharmaceutical companies or allied health sector industries.
Further, he relied on:
Cadila Pharmaceuticals Ltd. v. DCIT [2017] 85 taxmann.com 354 (Ahmedabad – Trib.) – para 28
Dr. Reddy’s Laboratories Ltd. v. ACIT [2017] 81 taxmann.com 398 (Hyderabad – Trib.) – para 42 and 43
Aishika Pharma (P.) Ltd v. ITO /[2019] 177 ITD 238 (Delhi – Trib.) – para 6
19.2. He submitted that the question has been considered very recently by the Mumbai ITAT in the case of erstwhile parent company of the Assessee as well. The Assessee was earlier owned by Piramal Enterprises Ltd. The said Piramal Enterprises was also engaged in running of pathological laboratories. A question arose before the Tribunal (in DCIT v. Primal Enterprises Ltd [2020] 117 Taxmann.com 970 (Mum), as to whether payments made by the said Piramal Enterprises to doctors was barred by CBDT Circular No 5 of 2012. Following the earlier judgments, the Tribunal held that the Medical Council Regulations would not apply to a Company managing Pathological laboratories, and consequently the payments made to doctors would not be barred by CBDT Circular No. 5 of 2012.
20. Sixth Submission
20.1. He submitted, the order of the AO cannot be regarded as erroneous, for not having followed a Circular particularly which is contrary to law laid down by Courts/Tribunals. This principle was explained by Calcutta High Court in Bhartia Industries Ltd v. CIT [20131 353 ITR 486 (Calcutta), in the context of CBDT Circular relating to allowability of VRS compensation paid to employees. The AO in this case had allowed deduction for expenditure incurred by the assessee towards Voluntary Retirement Scheme framed by the assessee. The question of whether such expenditure was allowable in the year of payment or on accrual basis, was a subject matter of dispute before various Courts. The CBDT vide Circular No. 200/79/2000-IT(A-I), dated 23-1-2001 opined that expenditure on VRS should be treated as capital expenditure. The CIT exercised his jurisdiction u/s 263 of the Act to treat the order passed by the AO as erroneous, for the reason that the AO failed to examine applicability of the Circular to the assessee. The High Court, setting aside the order of the CIT, held that power u/s 263 cannot be exercised to force upon an officer to follow a Circular that expresses a view contrary to law laid down by Courts.
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 Rs 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 Rs 70.82 Crores, Rs 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 of diseases. Further during the subject assessment year the Company has made a sale of Rs.49.35 crore and earned a EBITDA of Rs. 23.52 crore from this lab. The break up of the expenditure is as under:
