DCIT, CIRCLE - 14(2), KOLKATA , KOLKATA vs. M/S. NAVKETAN NURSHING HOME PVT. LTD., , KOLKATA

O R D E R

PER S.S.Godara, Judicial Member:

DCIT Cir-14(2) Kol Vs. M/s Navketan Nurshing Home Page 4 Also, please note that the authorized signatories for carrying out the banking transactions of the Company are the following CAHPL officials viz., i. Dr. Nandakumar Jairam ii . Mr. Tufan Ghosh iii . Mr. Jagannath MS iv. Mr. Naveen Mantha v. Mr. Anunay Kumar Sinha vi. Mr. Babu Shenoy vii. Mr. Shankar Ranganathan c. Human Resource: Nominee directors of the Company from CAHPL viz., Mr. Tufan Ghosh, Dr. Nandakumar Jairam and Mr. Jagannath MS have regularly provided guidance and advise to HR Manager Mr. Aniruddha Banerjee of our Company and have also supervised his activities on a regular basis. Apart from above, the Nominee Directors and also the VP HR of CAHPL Mr. Kalappa and other officials of HR department of CAHPL have regularly supported the HR function of the Company and a brief of the activities involved are as under: i. Recruitment of new employees viz., Doctors, Nursing staff, HR staff, etc of the Company ii. Support in resolving HR problems of the staff of the Company iii. Introduction of new HR policies and revision and update of existing HR policies iv. Training of new recruits of the Company v. Support in reviewing performance and conducting performance appraisals of employees of the Company. d. Legal: The legal head of CAHPL Mr. Sreevastha and his team at CAHPL regularly provide support and advise on legal activities and also have regularly supported in and carried out legal compliances for the Company. We give below a brief on the various activities for which legal team of CAH has supported the Company: i. Advise on legal matters of the Company ii Support and advise in meeting statutory compliances such as conducting Board meetings and drafting of Minutes thereof iii. Support and advise in Conducting Shareholder Meetings and drafting of Minutes thereof iv. Filing of statutory returns and forms under Companies Act and various other Acts v. Drafting and review of various customer and vendor contracts vi. Filing of petitions before Courts and Appellate forums on behalf of the Company in case of legal issues e. Information Technology: The IT team of CAHPL regularly supports and advises in various IT related activities. We list below some of the key activities that IT team of CAHPL viz., Mr. Ashokkan V R and others have helped the IT team of the Company viz., Mr. Arnab and his team during FY 2011-12: i. Rolling out and implementation of new patches and improvements of ERP packages viz., Care21. ii. Implementation and Roll out of SAS Software being a Budget Tool/Module iii. CAHPL has provided the Company with use of ERP and other software licenses for which no separate license fees is charges and it is considered as part of the O&M Agreement. iv. Providing updates, enhancements and improving version systems of ERP package v. Review and support in preparation of IT budgets DCIT Cir-14(2) Kol Vs. M/s Navketan Nurshing Home Page 5 vi. Providing regular IT support such as fixing bugs in IT systems, maintenance of IT systems, etc vii. Training IT and functional teams of Company in respect use of ERP package viii. Also the domain name used by the Company for the email ids issued to its employees is that of CAHPL. This is evidenced in all the mail conversations of the employees of the Company enclosed with this letter. f Procurement: The purchases team of CAHPL have regularly provided support and advise to the purchase team of the Company in identifying suitable vendors in terms of technology offered, quality of services provided by the vendors, negotiation with vendors on prices, etc. In this regard, it may be noted that the purchase team of CAHPL generally identifies vendors and negotiates with them centrally for all Columbia Asia group of hospitals in India and thereafter communicates to the group of hospitals with the details of vendors identified and the prices negotiated. g. Marketing Function: The marketing function for the group of Columbia Asia Hospitals in India is centralized at Columbia Asia Hospitals Private Limited, Bangalore. The marketing team in CAHPL guides and supports the marketing activities of the assessee. As a matter of fact, the marketing activities and events carried out by the group for promotion of the Columbia group of hospitals, the benefit of which is enjoyed by the assessee as well, is formulated and executed by CAHPL. h. Process Manuals: Process Manuals are prepared and updated by CAHPL that need to be followed by the operations/departments of the Columbia group of hospitals including the hospital run by the Company. CAHPL regularly reviews and monitors the processes followed by all the Columbia group of hospitals in order to ensure uniformity and efficiency in the operations of the Columbia group hospitals in India. i: Other services: CAHPL also has regularly rendered advisory services and monitored the activities of the Company in respect of Marketing, customer care, Nursing, laboratory, radiology, Engineering, Biomedical, quality assurance etc. Needless to mention that senior doctors of CAHPL have regularly provided technical advice wherever necessary to the doctors of the Company. 4.3. The AO in the assessment order had also observed "on perusal of the P&L account, it has been observed that an amount of Rs.12,00,000/- has been debited on account of payments to Directors. The relevant payment was made to the two Directors namely, Shri Kamal Kishor Gandhi and Smt. Monalisa Nimani Gandhi. The assessee company is a Nursing homel Hospital and run by the name of Columbia Asia Healthcare service and medical profession are the basic activity of the assessee company. M/s. Columbia Asia Hospital Private Limited based in Banglore is the holding company of the assessee company. This is worthwhile to mention that the above named two Directors who have been paid Rs.12,00,000/- by the assessee company are not actively rendering any medical service in the day to day work of the assessee company. During the course of hearing the AIR of the assessee company was asked to justify the payment of salary made to the two Directors vis-a-vis. their active service provided to the assessee company vide order sheet entry dated 24.03.2015 and also to explain as to why the payment should not be treated as excessive u/s. 24.03.2015 and also to explain as to why the payment should not be treated as excessive u/s. 40(A)(2) of the LT. Act, 1961. The assessee company could not offer any reasonable explanation. However, considering the minimum responsibility as a Director, Rs1,00,000/- each for the whole year is taken as Process Manuals are prepared and updated by CAHPL that need to be followed by the operations/departments of the Columbia group of hospitals including the hospital run by the Company. CAHPL regularly reviews and monitors the processes followed by all the Columbia group of hospitals in order to ensure uniformity and efficiency in the operations of DCIT Cir-14(2) Kol Vs. M/s Navketan Nurshing Home Page 6 the Columbia group hospitals in India reasonable and Rs.10,00,0001- is disallowed u/s. 40(A)(2)." 4.4. I have considered the submission of the assessee and perused the relevant assessment records. The AO in his order had disallowed consultancy and professional charges amounting to Rs. 1,70,63,423/-paid by the appellant company to M/s. Columbia Asia Hospital Pvt. Ltd and Rs.100000/- paid to two Directors of the company on grounds that the assessee company has paid at a much higher rate for a little/ non-significant medical advice because the assessee has sufficient number of inhouse professionals/experts to maintain their day to day business. The AO however has not substantiated this disallowance with any concrete findings. The disallowance has been made in an arbitrary manner and no facts have been adduced by the AO in support of his findings that the assessee company had made higher payments for little/non-significant medical advice. The IT AT, Delhi in the case of Dy. CIT v. Spark Hotels (P.) Ltd. (Del) of 2011 has quoted the decision of Honble Gujrat High Court in Coronation Flour Mills v. Asstt. CIT (2009) 27 (I) ITCL 317 (Guj-HC) : (2011) 188 Taxman 257 (Guj) where it observed that if the Aa is of the opinion that such expenditure is excessive or unreasonable having regard to (a) fair market value of the goods, services or facilities for which the payment is made; or (b) the legitimate needs of the business of the assessee; or (c) the benefits derived by or accruing to the assessee on receipt of such goods, services or facilities, then the AO shall not allow as a deduction so much of the expenditure as is so considered by the AO to be excessive or unreasonable. Therefore, it becomes apparent that the AO is required to record a finding as to whether the expenditure is excessive or unreasonable in relation to anyone of the three shown to be satisfied the provision can be invoked and applied, if the facts so warrant. Thus, only so much of the expenses, if paid to a person referred to in clause (b), are allowable which are found to be not excessive and unreasonable and- the excessive or unreasonable portion has to be disallowed. It is well settled that the provisions of section. 40A(2)(a) of the Act cannot have any application unless it is first concluded that the expenditure was excessive or unreasonable, as held in the case of Upper India Publishing House (P.) Ltd. v. C1T (1979) 117 ITR 569 (SC). In the instant case, there is nothing to suggest that the AO found the payment of remuneration to director excessive having regard to either (a) fair market value of the services or facilities; or (b) the legitimate needs of the business of the assessee; or (c) the benefits derived by or accruing to the assessee on receipt of such services or facilities. No businessman can be compelled to maximize his profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman." The AO has not recorded any satisfaction in respect of any of these three ingredients in his assessment order. There is nothing to suggest that the AO ever brought any material on record on this aspect before concluding payments of consultancy and professional charges neither were excessive or unreasonable nor even cited any comparable instances in respect of the fair market value of the services rendered by the director. In this connection, the fact that the appellant company as well as its holding company are in the same tax bracket and pay same rate of tax is a fact which assumes importance. Admittedly, it is not a case of tax evasion inasmuch as if the payment of consultancy and professional charges would have been less, the appellant company's profit would have been more but the profits of the holding company would have been less and both being taxable at the same rate, there would be no difference in the aggregate tax payable by the assessee and its holding company. The AO has not disputed that payment made by the appellant company to M/s. Columbia Asia Hospital Pvt. Ltd. was for the purpose of business. As held by the Hon 'ble Apex Court in the case of S.A. Builders Ltd. Vs. CIT [2007] 288 ITR "We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be DCIT Cir-14(2) Kol Vs. M/s Navketan Nurshing Home Page 7 the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman." The AO has not brought any facts on record to prove that payment of consultancy and professional charges is high and unreasonable. The AO could have conducted market surveys to arrive at comparables based on arms lengths transactions but no attempt was made. As held in many judicial decisions "no addition can be made on the basis of suspicion and conjuncture." On perusal of Schedule-I of the Operation and Management agreement between the appellant company and Columbia Asia Hospital Pvt. Ltd. which relates to scope of services the following are enumerated. Scope of Services» • Management and Consultancy Services, • Provision of medical protocols, • Provision of Operating Protocols, • Provision of account protocols, • Provision of marketing and advertising protocols, • License of Columbia Asia logo, brand name and trademark, • Pan-India participation in: Medical programmes, Purchasing programmes, Advertising programmes, Third party administrators, Manpower selection and management, License, maintenance, implementation and upgrades of the following software: Hospital front office software, Medical records software, Patient queuing and scheduling software and Accounting software. The AO's contention that services provided are vague in nature and no professional services provided on daily basis is not borne by facts. The benefit that accrues to the appellant company is from the use of the Columbia Asia logo, brand name and trade mark, business model and also implementation of the franchisor's protocols in respect of various activities. It is not uncommon for new players in the medical field to enter into a franchise with a reputed player in order to establish themselves in the business. This arrangement is not related only hospitals, but also extends to hotels and franchisee of multinational companies in the food and beverages industry. The high cost involved is primarily because of use of the franchisor's brand name and trademark. The AO has disallowed Rs.10,00,000/- out of Rs.12,00,000/- paid to two Directors namely Sri Kamal Kishore Gandhi and Srnt. Monalisa Nimani Gandhi on the grounds that the payment was excessive u/s. 40A(2) of the LT Act. The AIR expressed his opinion, that the directors are not rendering any active medical service, in day to day work of the company. The opinion given by the AO is flawed as Smt. Monalisa Nimani Gandhi, is not a medical professional Moreover, the AO could not adduce any evidence or put on record, any material to hold the payment, made to the two directors was excessive. The payments to each of the two directors amount to Rs.50000/- per month and cannot be considered excessive, considering the pay package of medical and management professionals. The AO has not disputed the genuineness of the payments but only questioned the quantum.

DCIT Cir-14(2) Kol Vs. M/s Navketan Nurshing Home Page 8 Reference may be made to the decision of the Hon 'ble Madras High Court in the case of CIT Vs. NEPC India Ltd. [2008] 303 ITR 271 held that the opinion formed by the Assessing Officer in view of section 40A(2) (a) must be an honest information having been formed based on the circumstances available before him. There should be some material available for the Assessing Officer for invoking section 40(a) (2)(a) to initiate action to disallow or refuse to deduct the excessive or unreasonable expenditure mentioned there under. The decision of the Assessing Officer should be based on reasons well-founded which are judiciously acceptable, In the instant case, there is no material before the Assessing Officer for disallowing the expenditure. The Assessing Officer has never disputed the payments of Rs.25595135/- paid by the appellant company to Columbia Asia Hospitals Pvt.Ltd and Rs.120000001- paid to the two directors.- He has just questioned the rate which in his opinion was very high for non-significant medical advice. He has not disallowed the payments made but however restricted the disallowance based on some general findings which will not stand the test of judicial scrutiny. 4.5 After a careful consideration of the relevant judicial decisions as foregoing including the assessment records, and the submission of the ape, disallowance of Rs.1,70,63,423/- for consultancy and professional charges and Rs.10,-00,000/- t two Directors of the appellant company u/s. 40A(2) of the Act, is to be deleted. The Assessing Officer is directed accordingly. These grounds of appeal succeed and are, therefore, allowed.”

3. Learned Departmental Representative vehemently contends during the course of hearing that the Assessing Officer had rightly invoked the impugned disallowance on both counts that as the assessee failed to prove the reasonableness element in the two heads in issue. He seeks to buttress the point that assessee’s payments made to its director as well as the holding company have been found to be very much excessive. We find no substance in Assessing Officer’s action seeking to invoke the impugned disallowance provision. The limited question herein is that of reasonableness of the impugned twin payments. The assessee had claimed an amount of ₹12 lac to its two directors as deduction. The Assessing Officer accepted the same in part only to the extent of ₹ 1 lac each and disallowed the remaining sum of ₹10 lac. Learned Departmental representative fails to rebut the crucial fact that the Assessing Officer nowhere made any comparative analysis of similar services paid in the very kind of business so as to invoke the statutory provision in question. Same appears to be the case with latter issue of payment made to assessee’s holding company (supra). It has filed on record all relevant particulars of details of services rendered by the payee company (supra). We find there is no independent comparison in assessment order suggesting any excessive element. The CIT(A) has discussed in detail a