ACIT Vs Indus Health Plus Private Limited (ITAT Pune)
Assessee didn’t submitted necessary details before AO. CIT(A) deleted the addition made by the AO on this score without calling for the remand report. Tribunal set-aside the impugned order.
Facts-
Revenue preferred an appeal against deletion of addition of Medical Check-up Provision (MCP). Facts are the assessee was set up with the objective of promoting Preventing Health Checkups/Health Diagnostics etc. in a network mode. The assessee created the MCP amounting to Rs.20,68,90,289/-, which was debited to the P&L account under the head ‘Operating expenses’. The AO called upon the assessee to explain as to how the MCP was created for Rs.20.68 crore. The assessee submitted that it had four different health packages for sale to customers during the year and there was a fixed cost involved for the medical check-ups under such packages, which was to be paid to the empanelled hospitals at the time of their performing the medical check-ups, which facility could be availed by its customers within three years from the date of sale of package. The assessee submitted that it created the provision of Rs.20.68 crore for the year under consideration on the basis of number of health packages sold. AO made the addition as the assessee neither submitted any basis for making the MCP nor furnished any package-wise details in respect of the working of the amount of the MCP. The assessee submitted all such details before the CIT(A), who concurred with the assessee’s point of view and deleted the addition. Aggrieved thereby, the Revenue has come up in appeal before the Tribunal.
Next issue is deletion of addition of Rs. 1,99,17,012/- in respect of ‘Escrow Disbursement Provision’ EDP created by the assessee for the year in question. Notably, in previous year the AO disallowed the closing balance of the EDP, for the year under consideration, the AO made disallowance of the difference between the Escrow Disbursement Provision at Rs.16,34,09,427/- and Escrow Disbursement Payment at Rs.14,34,92,415/-. The ld. CIT(A) deleted the addition.
Conclusion-
In view of the fact that the ld. CIT(A) deleted the addition made by the AO on this score without calling for the remand report of the AO and further knowing well that such details were not available before the AO, we consider it expedient to set-aside the impugned order and remit the matter to the file of the AO. We order accordingly and direct him to decide this issue afresh by allowing deduction of the MCP created during the year on the basis of number of packages sold as reduced by the reversal of the amount of provision on the expiry of three years’ period from the date of sale of package for non-availing the facility of medical check-ups.
We, therefore, set-aside the impugned order and remit the matter to the file of the AO for doing the exercise of allowing deduction of Escrow Incentive.
FULL TEXT OF THE ORDER OF ITAT PUNE
These two appeals by the Revenue relate to the assessment years 2013-14 and 2014-15. We are proceeding to dispose them off by this consolidated order for the sake of convenience because of some common issue.
A.Y. 2013-14 :
2. The Revenue has filed revised grounds of appeal against which no objection has been raised by the ld. AR. The first issue in this appeal is against the deletion of addition of Medical Check-up Provision (hereinafter also called `the MCP’) amounting to Rs.16,51,23,783/-. Succinctly, the facts of the case are that the assessee was set up with the objective of promoting Preventing Health Checkups/Health Diagnostics etc. in a network mode. The assessee created the MCP amounting to Rs.20,68,90,289/-, which was debited to the Profit & loss account under the head ‘Operating expenses’. The opening balance of the MCP was Rs.16.49 crore. The assessee paid medical charges to the hospitals during the year amounting to Rs.18.14 crore, leaving balance at Rs.19.04 crore. Excess provision of Rs.2.53 crore, created in earlier years, was reversed, giving the closing balance of the MCP at Rs.16,51,23,783/-. The AO called upon the assessee to explain as to how the MCP was created for Rs.20.68 crore. The assessee submitted that it had four different health packages for sale to customers during the year and there was a fixed cost involved for the medical check-ups under such packages, which was to be paid to the empanelled hospitals at the time of their performing the medical check-ups, which facility could be availed by its customers within three years from the date of sale of package. It was explained that for each Essential Care Health Checkup Package worth Rs.4,995/-, the cost of medical check-up payable to hospitals was Rs.830/-; for each Early Care Health Checkup Package worth Rs.7,950/-, the cost of medical tests payable to the concerned hospitals was Rs.2,000/-; for each Exclusive Health Checkup Page worth Rs.12,999/-, the cost of medical check-up tests was Rs.4,500/-; and for each Exclusive and Comprehensive Health Checkup Package worth Rs.16,999/-, the cost of medical check-ups payable to hospitals was Rs.6,400/-. Each of the four packages had different tests depending upon their value. The assessee submitted that it created the provision of Rs.20.68 crore for the year under consideration on the basis of number of health packages sold. The AO recorded on page 55 of his order that the assessee neither submitted any basis for making the MCP nor furnished any package-wise details in respect of the working of the amount of the MCP. He, therefore, made addition of Rs.16,51,23,783/-, being, the closing balance of the MCP as appearing in the assessee’s balance sheet. The assessee submitted all such details before the CIT(A), who concurred with the assessee’s point of view and deleted the addition. Aggrieved thereby, the Revenue has come up in appeal before the Tribunal.
3. Having heard both the sides and gone through the relevant material on record, it is seen that the assessee claimed to have created the MCP of Rs.20.68 crore towards medical check-up charges payable to the empanelled hospitals. The assessee was having different types of packages, namely, Essential Care Health Checkup package worth Rs.4995/-; Early Care Health Checkup package worth Rs.7950/-; Indus Exclusive Health Checkup package worth Rs.12,999/-; and Exclusive and Comprehensive Health Checkup package worth Rs.16,999/-. This provision was stated by the ld. AR to have been created on the basis of the number of the four packages sold during the year multiplied with the rate of medical tests payable to the hospitals at Rs.830/-, Rs.2,000/-, Rs.4,500/- and Rs.6,400/- under each package respectively. The MCP was created at the time of sale of the package w.r.t. the costs involved for medical check-ups under it. The assessee further submitted that the amount of the MCP was debited to the Profit and loss account of the year in which the concerned package was sold. Here, it is pertinent to mention that the assessee has no medical check-up infrastructure of its own for conducting the medical tests of the buyers of its packages. On the basis of its network of the Customer Distributors (CDs), it gets customers for its packages. When a customer purchases a health package, he gets option to undergo the specified tests under the respective package from any of the hospitals empanelled with the assessee. Bill is raised by the concerned hospital on the assessee, when the customer undergoes medical check-ups. On making the payment, the assessee reverses the provision and debits the MCP. Buyer of the package has a choice to undergo medical check-ups either in that year itself or within next two years. In case the package is not availed by the customer within the stipulated period of three years, the assessee reverses the MCP at that time. The MCP of Rs.20.68 crore was claimed to have been created by the assessee w.r.t. the number and type of packages sold during the year. The ld. AR explained that the actual medical check-up charges paid during the year amounted to Rs.18.14 crore, which pertained not only to the packages sold during the year but also in prior two years. The MCP created at the time of sale of such packages, in respect of the customers who could not avail the medical check-ups within a period of three years of the purchase, was reversed during the year amounting to Rs.2.53 crore and consequently offered to tax. Here, it is pertinent to note that the AO made the addition of the closing balance of the MCP amounting to Rs.16.51 crore, primarily, by recording that the assessee: “In the course of the assessment proceedings has not given any basis for making provision for medical checkup charges. Further, no details have been furnished in respect of working of the provision on this count package wise”. The ld. AR fairly admitted that such details of the creation of the MCP were not furnished to the AO as those were claimed not to have been requisitioned from the assessee. It was only before the ld. CIT(A) that the assessee furnished necessary details concerning the MCP. In view of the fact that the ld. CIT(A) deleted the addition made by the AO on this score without calling for the remand report of the AO and further knowing well that such details were not available before the AO, we consider it expedient to set-aside the impugned order and remit the matter to the file of the AO. We order accordingly and direct him to decide this issue afresh by allowing deduction of the MCP created during the year on the basis of number of packages sold as reduced by the reversal of the amount of provision on the expiry of three years’ period from the date of sale of package for non-availing the facility of medical check-ups. Needless to say, the assessee will place on record all the necessary details in this regard to facilitate the determination of the deductible amount.
4. The next issue raised in this appeal is against allowing deduction of Rs.18,82,70,667/- us.37(1) of the Income-tax Act, 1961 on account of “Escrow Disbursement Provision” (hereinafter also called `the EDP’).
5. On perusal of the return filed by the assessee, the Assessing Officer (AO) observed that the EDP was appearing in the balance sheet with closing balance at Rs.18,82,80,667/-, having two components viz., Long Term Provision – Escrow Disbursement at Rs.16,38,72,155/- and Short Term Provision – Escrow Disbursement amounting to Rs.2,43,98,512/-. The assessee claimed deduction towards the EDP amounting to Rs.23,20,33,756/- in its Profit and loss account. On being called upon to justify the claim for the deduction, the assessee submitted that it was set up in the year 2000 for providing affordable comprehensive and qualitative preventive health checkups and diagnostics for asymptomatic Indians. The assessee enters into an arrangement with various delivery partners at different locations in India to help it deliver the abovementioned four types of packages through Multi Level Marketing Scheme. Under this scheme, the assessee company enters into agreement with Customer Distributors (CDs) who market its packages. The assessee pays Incentive to the CDs for selling its packages mainly under three types of business plans. The first is the Beginners plan with 100 IVPs (Indus Value Points) to whom incentive of Rs.10,000 is paid, which gives rate of Rs.100 per IVP. Once a Customer Distributor (CD) obtains 100 IVPs, he gets promoted to the Easy plan with 200 IVPs having Incentive payment of Rs.15,000, which gives rate of Rs.75 per IVP. Once a CD obtains 300 points, in total, he gets promoted to the next, viz., Leaders Plan with 400 IVPs and Incentive payment of Rs.29,000, which gives rate of Rs.50 per IVP. Once a CD enters into the Easy Plan by collecting 100 IVPs, he never goes back to the Beginners plan. On obtaining 300 IVPs under the second plan, the CD enters into the third plan, namely, Leaders Plan and never goes back to the earlier plans throughout his association with the assessee-company. The CDs who accept the terms and conditions of the concerned packages become eligible to sell the Indus packages through their own respective networks which they create downline. The assessee has multi-level marketing strategy in which the CDs sell the packages through their own network. The IVPs are also granted on prospecting fresh CDs by any of the downline CDs. On every sale made by such CD or his downline, certain number of IVPs are allocated at that time only, depending upon the package sold. For example, 2.5 IVPs for lowest value package of Rs.4,999, increasing to 5, 9 and 12 IVPs with the next packages in the line respectively. If CD-A prospects CD-B and B prospects C and C prospects D, so CD-A will have downlines of B, C and D. Each upline gets IVPs on sale of a package by any of the downlines. When B, C or D sells the packages, CD-A also gets IVPs depending upon the package sold. This has been set out in the order passed by the CIT(A) wherein the assessee contended that whenever sale is effected under the Network Marketing Binary plan, i.e. Left Wing and Right Wing, all the uplines get IVPs. In fact, the company credits IVPs on every sale of package to each of the uplines of the sponsored CDs. However, in order to get commission, the concerned CD must get package for self every year in addition to bringing in new CDs. It is only when the above conditions are fulfilled that a CD becomes entitled to Escrow Incentive payment depending upon the number of IVPs on his left wing and right wing, which get accordingly redeemed on payment. The assessee explained to the AO that on sale of each package, it was making a fair and reasonable estimate of the liability to be incurred towards IVPs and likely encashment and thus creating the EDP. It was further submitted that around 40% of its Revenue from the sale of packages goes in the EDP. In order to show that the amount of the EDP created by the assessee was reasonable, it put forth the Actuarial valuation of the unpaid IVPs as on 31.3.2013 obtained from Ranadey Professional Services. The AO took note, inter alia, of the facts that the assessee was creating the EDP at the time of sale of each package which was claimed as deduction in the computation of total income; such EDP was based on certain formula worked out by the assessee; every customer who purchases the assessee’s package does not always go in for selling the assessee’s packages; the assessee did not give any acceptable and cogent reasons that on what basis and at what percentage the provision of incentive payment was made; the assessee did not provide particulars about the EDP for different packages; the calculation given by the assessee of IVPs for incentive payments had also some lapsed IVPs; and the Actuarial Valuation Report was not reliable as it was based on presumptions and figures provided by the assessee only. He, therefore, held that the Escrow Disbursement Provision made by the assessee was an unscientific calculation, not supported by any acceptable data. He also found some inconsistencies in the Actuarial Valuation Report, which was based primarily on probability factors and assumptions based on the data. The AO noticed that the assessee claimed deduction of the EDP for a sum of Rs.23.20 crore by means of debit to its Profit and loss account as against the actual Escrow Disbursement Payment of Rs.20.76 crore. Considering all these facts, he made an addition of Rs.18,82,70,512/-, i.e. the closing balance of the Escrow Disbursement Provision, which was made up by the opening balance of the provision at Rs.16.38 crore as increased by the fresh Escrow Disbursement Provision created for the year at Rs.23.20 crore as reduced by the Escrow Disbursement payments made at Rs.20.76 crore. The ld. CIT(A) deleted the addition, against which the Revenue has come up in appeal before the Tribunal.
6. We have heard the rival submissions and gone through the relevant material on record. The assessee is engaged in providing preventive health check-ups through certain hospitals, with which it has prior agreements. Its net-work of the CDs brings in new customers, to whom the packages are sold. Each buyer, depending upon the package purchased, becomes entitled to certain specific type of tests, which are got done from the hospitals empanelled with the assessee. The major expenditure of the assessee against sale of each package is Escrow Disbursement incentive and Medical check-up charges payable to the hospitals against each package. The assessee has no medical check-up infrastructure of its own. We have discussed supra the MCP. Right now, we are concerned with the Escrow Disbursement Provision created by the assessee at Rs.23.20 crore, for which deduction was claimed by taking it to the Profit and Loss account. The AO made disallowance of Rs.18.82 crore out of such provision, which is the closing balance of the EDP. We have noted above that the Escrow Disbursement Provision is made on the basis of and simultaneously with the sale of the packages by the CDs. Each buyer of the package, in turn, also becomes a CD, eligible for Escrow Disbursement payment subject to the conditions discussed above.
7. Having seen the modus operandi in which the multi-level marketing scheme operates, let us examine the manner in which the assessee created the Escrow Disbursement Provision for the year amounting to Rs.23.20 crore and claimed deduction for the same. The assessee explained that EDP of Rs.23.20 crore was computed by considering the number of packages sold vis-à-vis the rate per IVP of Rs.650/- and IVP points under different packages. The assessee gave package-wise Revenue and provision working for the F.Y. 2012-13 as reproduced on page 58 of the impugned order:
Table- I
