Stemade Biotech Private Limited Vs DCIT (ITAT Mumbai)
ITAT held that Referral commission paid to doctors in Violation of the professional conduct is Not allowable as Business Expenditure.
ITAT held that When an unsuspecting client walks into the consulting chamber of a dentist who advises him to go for stem banking from his dental plump, one cannot be sure whether it is the doctor’s genuine advice on its merits of what the doctor actually believes to be beneficial to the client or it is a piece of advice influenced by the financial inducement by way of „referral fee’ that the doctor will get for his client being referred to the service provider in question. Such a situation de facto amounts to receipt of cash or monetary grant by the medical professional from the allied healthcare industry, on the pretext of referral fees- in clear violation of rule 6.8.1(d) of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002. The true consideration for this referral fee is the advice given to the doctor’s patient, and a potential customer of the service provider, in favour of stem cell banking. The fiduciary relationship between the doctor and patient is, or has the potential of being, compromised as such by the extraneous considerations. That is clearly contrary to the letter, as also the spirit, of the code of conduct for the medical practitioners. The acceptance of such a referral fee by a medical practitioner is thus forbidden by the legally enforceable code of conduct, which renders it an expense for a purpose that is „prohibited by law’ depriving the assessee company to claim a tax deduction in respect of the said expenditure. We, therefore, approve the conclusions arrived at by the learned Commissioner (Appeals) on this issue, and decline to interfere in the matter.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. By way of this appeal, the appellant has challenged the correctness of the order dated 30th September 2009, passed by the learned Commissioner (Appeals) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 201516.
2. Notwithstanding the final word spoken by the Hon’ble Supreme Court in the case of Apex Laboratories Pvt Ltd [(2022) 442 ITR 1 (SC)] on the issue of tax-deductibility of freebies etc to medical practitioners, and notwithstanding the amendment made in the related tax law provision by the Finance Act 2022, many would not let the litigation come to an end until the legal ingenuity is exhausted- which is always a good distance away. The amount involved in this appeal may be relatively small at Rs 9,61,140, but the issue raised in the appeal does seek to reignite, what many believe to be, a controversy laid at rest. We must, therefore, deal with the issue in appeal in some detail.
3. Grievance of the appellant, as raised in grounds of appeal numbers 1 and 2 and in substance, is that the authorities below erred in holding that referral commission paid to doctors is in violation of the professional conduct under the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations 2002, and, as such, inadmissible as a tax deduction under section 37 of the Income Tax Act, 1961.
4. The assessee before us is a company engaged in the business of „extraction, collection, preservation and banking of stem cells’- mainly from dental pulp. As its product brochure, a copy of which is filed before us as well, indicates, stem cells are master cells that have the potential to become any type of cell in the body and which have the unique trait of self-renewal and multiplication and the potential to develop into other types of cells. These stem cells are said to have potential use in the treatment of several life-threatening diseases, and what is referred to as stem cell banking is the storage of these cells several degrees below the freezing point by way of cryopreservation. Obviously, these things are a bit too technical for laymen to understand, and all that we have done above is a simple reproduction from the product brochure- without having any idea about the authenticity or relevance of what is stated. If this service is to be sold to a potential customer, particularly as it is an expensive service, probably the minimum it needs is a recommendation from a medical practitioner trusted by the potential customer. That is the backdrop in which referral service is paid by the assessee to the medical practitioners who refer the potential customer for availing of the stem cell banking services. The assessee’s offer, for this referral plan, is titled „Introducing an Opportunity to become a Stemade Connect Doctor’- a copy of which is placed before us as well, and this document, inter alia, states as follows:
There is a lot of buzz around us about stem cells being poised as one of the probable sources of futuristic medicine. However, as this concept is very unique, there is a need to create awareness about the „true potential‘ of these stem cells among the people…….
If you are one of those who have the conviction in this concept and would like to spread the awareness about the benefits of stem cells among your patients, here is an opportunity to be associated…………… The details of the referral plan are given below:
