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June 22, 2022

Commission paid to doctors on referral basis is not allowable as Business expenditure

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Commission paid to doctors on referral basis is not allowable as Business expenditure

Facts and issues of the case

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 the court.

The fees were so paid to the doctors, as referral fees, and were also claimed as a tax- deductible expense under section 37. The Assessing Officer disallowed this expense on the ground that it violates the code of conduct for medical practitioners, and is, as such, inadmissible as a tax-deductible expense being an expense prohibited by law. Aggrieved, the assessee carried the matter in appeal before the CIT(A) but without any success. The assessee is not satisfied and is in further appeal before us.

Observation by the court

The Court has heard the parties, perused the material on record and duly considered the facts of the case in the light of the applicable legal position. As observed by Hon‟ble Supreme Court, in the case of Apex Laboratories (supra) and in the inimitable words of Hon‟ble Justice Ravindra Bhatt, “medical practitioners have a quasi-fiduciary relationship with their patients” and “ a doctor‟s prescription is considered the final word on the medication to be availed by the patient, even if the cost of such medication is unaffordable or barely within the economic reach of the patient – such is the level of the trust reposed in doctors” It was then added that “Therefore, it is a matter of great public importance and concern when it is demonstrated that a doctor‟s prescription can be manipulated”. What essentially follows is that when the advice given by a medical professional to his client is influenced by an inducement by someone else, who has a stake in the course of action to be then followed by the client as a result of this advice, it is this undesirable influence which vitiates the performance of medical practitioner‟s fiduciary duties to his client, and that is what makes it unethical. When a referral fee is paid to a doctor for advising his client in a particular way so as to benefit the person paying the referral fee, that is clearly unethical and is susceptible to being used to manoeuvre the advice given by the doctor in the performance of his fiduciary duties. That is prohibited by Rule 6.8.1.(d) of the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 which specifically provides that a “medical practitioner shall not receive any cash or monetary grants from any pharmaceutical and allied healthcare industry for individual purpose in individual capacity under any pretext”.

In a rather recent judgment dated 19th April 2022, in the case of Peerless Hospitex Hospital & Research Centre Pvt Ltd Vs PCIT [(2022) 137 taxmann.com 359 (Cal)], His Lordship of Hon‟ble Calcutta High Court, dealing specifically with the referral fee- though in the context of reopening of assessment, has observed that “Considering the submission of the parties, aims and object of the amended Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, Explanation 1 to Section 37 (1) of the Income Tax Act, 1961, Circular No. 5/2012 dated 1st April, 2012 issued by Central Board of Direct Taxes and the judgment of the Hon‟ble Supreme Court in the case of M/s Apex Laboratories Pvt. Ltd. (supra) my answer is in negative to the question as to whether  Petitioner hospital is eligible and entitled to get deduction on expenditure by way of  commission to the doctors as „referral to doctors‟ for referring patients for treatment in  its hospital as business expenditure under Section 37 (1) of the Income Tax Act, 1961”. Our view finds support from this judicial precedent.

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.

The only other issue raised before us, in the ground no. 3, is against the alleged additional receipts of Rs 75,000 having been brought to tax in the hands of the assessee. Learned counsel of the assessee has now got some material to demonstrate that this receipt was already accounted for, but he fairly admits that this material was not available earlier, and, as such, authorities below had no occasion to deal with the same. Learned Departmental Representative also fairly accepts that this issue can be remitted to the file of the Assessing Officer for fresh examination, and taking an appropriate call in the light of such fresh examination. With the consent of the parties, therefore, the matter stands restored to the file of the Assessing Officer. Ground no. 3 is thus  allowed for statistical purposes in the terms indicated above.


The Court has dismissed the appeal and the appeal is partly allowed for statistical purposes

Read the full order from below


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