M/S.PARCO DIAGNOSTICS & REASEARCH CENTRE P. LTD,CALICUT vs. THE DCIT(TDS), CALICUT

Per GEORGE GEORGE K.,JUDICIAL MEMBER:

These appeals at the instance of the assessee are directed against the

consolidated order of the CIT(A) dated 17/06/2016, in relation to the assessment

years 2005-06,2006-07 and 2007-08. The order of the CIT(A) arise out of the

orders passed u/s. 201 and 201(1A) of the I.T. Act.

disposed of by this consolidated order.

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pertaining to assessment year 2005-06 are reproduced below:

The assessee is a company engaged in the business of running a diagnostic

centre with CT and MRI scan facilities. For the assessment years 2005-06 to

2007-08, the assessee had debited in its P&L account a sum of Rs.34,29,556,

Rs.19,33,632/- and Rs.39,21,576/- respectively as business promotion expenses.

During the course of proceedings u/s. 143(3) of the Act, it was noticed by the

Assessing Officer that the assessee had not maintained proper vouchers in

respect of these expenses and treated the entire business promotion expenses

as commission payments to the doctors who referred the cases to the assessee

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for scanning and other medical examinations. The Assessing Officer was of the

opinion that the assessee ought to have deducted tax at source u/s. 194H of the

Act, since these payments made to the doctors were in the nature of commission

and since no deduction of tax at source was made by the assessee, the

Assessing Officer passed orders u/s. 201 and 201(1A) of the Act. The details of

the amounts for which the assessee is made liable u/s. 201 and 201(1A) of the

Act in respect of the assessment years 2005-06 to 2007-08 read as under:

AY Amount Tax Deductible Interest u/s. 201(1A) Total debited to P&L 2005-06 34,29,556 1,71,478 75,416 2,46,894 2006-07 19,33,632 96,682 30,912 1,27,594 2007-08 39,21,576 1,96,079 39,200 2,35,279

the assessment years 2005-06 to 2007-08, the assessee preferred appeals

before the first appellate authority. Before the first appellate authority, it was

contended that the relationship between the assessee and the doctors cannot be

termed as a principal and agent but on a principal to principal basis and hence,

provision of section 194H of the Act does not have an application. For the above

proposition, the assessee relied on the following judicial pronouncements:

1) CIT vs. Mother Diary India Ltd. 18 Taxman Com 49 (Delhi) 2) Kotak Securities Ltd. vs. dy CIT 18 Taxman.Com 48 (Mumbai) 3) CIT vs. Jai Drinks Pvt. Ltd. 198 Taxman 271 (Del)

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the Assessing Officer is justified in passing the orders u/s. 201 and 201(1A) of

the Act. The CIT(A) however partly allowed the appeal of the assessee by

reducing the disallowance made by the Assessing Officer in the assessment order

with regard to business promotion expenses. The relevant findings of the CIT(A)

are as follows:

“On going through the submissions, it is seen that the appellant had accepted that these are the payments made to doctors as referral fees, who refer the patients for scanning to the appellant company. If it is a proper expense, I should have been properly vouched. As it is not properly vouched, it appears that all these payments are amounts paid to the doctors. The doctors who are the recipients of these payments have not offered these amounts for taxation as the appellant has not disclosed the information to whom these payments were made. In the absence of the same, the Revenue is losing tax from the recipient doctors. As the appellant was showing it as deduction by debiting it to the P & L account, it is reducing its taxable income. To avoid this lacunae only, the law for deducting TDS on commission or brokerage in the form of Section 194H in the Income Tax Act, 1961 was brought in by the Parliament. After introduction of this section, “any person, who pay on or after 1st June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194D or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of 10% if the aggregate of such payment is Rs.5,000/- or more.” In the present case, the appellant has paid commission to various doctors. Actually, it is in the form of secret commission as the appellant as well as the doctors who received it, never wanted this information to be revealed to the Income Tax Department or to the public. It is because of this reason, these amounts are not vouched.

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Tribunal. It was contended by the Ld. Counsel for the assessee by relying on

the Board’s Circular No. 5/2012 dated 1-8-2012 that the commission paid to the

doctors cannot be termed as freebies. It was submitted that only freebies such

as Gift, Travel facility, Hospitality, Cash or monetary grant from the

pharmaceutical and allied health sector industries can be disallowed u/s. 37 of

the I.T. Act. The learned AR, relying on Board Circular No. 5/12 dated

29/02/2016 contended that the assessee’s relationship with that of the doctors is

on a principal to principal basis and provision of section 194H does not have

application.

7.1 The Ld. DR present strongly supported the orders of the Income Tax

authorities.

Section 194H was introduced by Finance Act (No. 2), 1991 with effect from

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01/10/1991. The object and extent of the new provision was explained by the

Board in its Circular No. 621 dated 19/12/1991 (1992) 195 ITR Statute 154).

The relevant portion of the Board Circular No. 621 dated 19/12/1991 reads as

follows:

“Insertion of a provision for deduction of tax at source from payments in the nature of commission, brokerage, etc.:- 59. Income by way of commission (not being insurance commission referred to in section 194D) and brokerage is, at present, not subject to deduction of tax at source. This is one source of income where the incidence of tax evasion is very high. A new section 194H relating to deduction of tax at source has, therefore, been inserted. Under this section, the person responsible for paying any income by way of commission or brokerage for services rendered (not being professional services) or for any services in the course of buying or selling of goods etc., shall deduct income-tax thereon at the rate of ten per cent. However, no such deduction shall be made where the amount of payment or the aggregate amount of payments, in a financial year, does not exceed two thousand or five thousand rupees. The new section will not apply when payments are made by individuals or Hindu undivided families. The expressions “commission or brokerage” and “professional services” have been defined in the Explanation to the section.” (Underline supplied)

8.1 In the instant case, it is admitted by the assessee that the payments are

made to the doctors as reference fees. These are admittedly cash payments and

not through banking channels. The assessee does not have a case that the

doctors have disclosed these payments made by the assessee in their returns of

income and paid due taxes to Government. Admittedly, the payments made by

the assessee to the doctors are taxable in the hands of the doctors. The

payments are actually in the form of secret commission and the assessee as well

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as the doctors who received it never wanted this information to be revealed to

the Income Tax Department or to the general public. Had the assessee effected

TDS on these payments, the doctors would have been compelled to disclose this

income in their returns of income. The assessee by not deducting tax at source,

had aided the doctors to evade income tax which was due to the Central

Government.

8.2 The explanation of term ‘Commission’ or ‘brokerage’ in section 194H of the

I.T. Act is an inclusive definition. An inclusive definition only seeks to specifically

include the meaning given in the Explanation within the term ‘Commission’ or

‘Brokerage’. The explanation given for ‘Commission or Brokerage’ in Section

194H of the Act being an inclusive definition, does not exclude the ordinary

meaning of ‘Commission’ or ‘Brokerage’. Therefore, the ordinary or the dictionary

meaning of the term ‘Commission’ or ‘Brokerage’ also need to be examined.

Moreover whether the payment made by the assessee falls within the term

‘Commission’ or ‘Brokerage’ is to be examined necessarily from the point of view

of the payer/assessee, namely the scanning centre. The assessee payee while

making payments as referral fees to the doctors is not providing any professional

services. The payment of referral fees not being in lieu of professional services,

the same cannot be excluded from the provisions of section 194H of the Act.

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The ordinary and dictionary meaning of the term ‘Commission’ or ‘Brokerage’

reads as follows:

i) a system of payment based on a percentage of the value of sales or other business done, or a payment to someone working under such a system (Cambridge Dictionary)

ii) a fee for services rendered based on a percentage of an amount received or collected or agreed to be paid (as distinguishable from salary). (Vocabulary.com)

iii) a sum typically a set percent of value involved in a transaction. (Oxford Dictionary)

iv) Commission is a sum of money paid to a sales person for very sale that he or she makes. If a sales person is paid on commission, the amount they receive depends on the amount they sell. (Collins English Dictionary)

v) Mutually agreed upon, or fixed by custom or law, fee according to an agent, broker or sales person for facilitating, initiating or executing a commercial transaction. (Business Dictionary)

8.3 The payment made by the assessee as referral fees is directly proportionate

or percentage of an amount received by the assessee for providing CT scan and

MRI scan and such payment comes within the term ‘Commission or Brokerage’.

In the light of the above said reasoning and ordinary dictionary meaning of

‘Commission’, I am of the view that the order passed by the Assessing Officer

u/s. 201(1) and 201(1A) of the Act and which was sustained by the CIT(A) is

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correct and in accordance with law. Therefore I uphold the same. It is ordered

accordingly.

sd/- ( GEORGE GEORGE K.) JUDICIAL MEMBER

Place: Kochi Dated: 8th June, 2017 GJ Copy to: 1. M/s. Parco Diagnostics & Research Centre Pvt. Ltd., Meenchanda, Kozhikode. 2. The Assistant Commissioner of Income-tax (TDS), Kozhikode. 3. The Commissioner of Income-tax(Appeals), Kozhikode. 4. The Commissioner of Income-tax (TDS), Kochi. 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin