Bombay High Court: Payment by TPA to Hospitals Professional Service !

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Five Third Party Administrators (TPA), approached Mumbai High court that they are facilitator of the insurance company and provided services in connection with the settlement of claims, processing of claims received from policyholders/hospitals and making payment thereafter, after allowing for cashless hospitalization. All claims payable by the insurance company to the policyholder are paid through them.They raised the issue before the High Court whether while making payments to hospitals TPAs are required to deduct tax at source under the provisions of section 194J.

The issue before Bombay in Dedicated Health Care Services TPA vs Assistant Commissioner of Income-tax 324 ITR 345 was

Whether, while making payments to hospitals TPAs are required to deduct tax at source under the provisions of section 194J. The relief that has been sought in these proceedings is (i) A declaration that the provisions of section 194J are not applicable to payments made by the Petitioners to hospitals under the cashless hospitalization scheme; (ii) Setting aside of a circular dated 24-11-2009 (Circular 8/2009) issued by the Central Board of Direct Taxes; (iii) A mandamus directing the Respondents to drop all proceedings initiated for non-deduction of tax at source under section 194J on payments made to hospitals under the cashless hospitalization scheme, and reliefs ancillary thereto

Hon’ble Bombay held vide its order 5/3/2010 as under :

The substantive part of section 194J requires a deduction of an amount equal to 10 per cent where any person, not being an individual or a HUF is responsible for paying to a resident any sum, inter alia, by way of fees for professional services. The deduction has to be made at the time of the credit of such sum to the account of the payee, or at the time of payment whichever is earlier. Sub-section (1) of section 194J uses three expressions, viz., (i ) person; (ii) individual; and (iii) resident. The Parliament having used three separate expressions in the same provision, this must be construed as being done with a sense of deliberateness. In defining the character of the payer, the Parliament has referred to any person not being an individual or a HUF. The liability to make a deduction is not attracted where the payer is either an individual or a HUF. The character of the payee is, on the other hand, referred to as a resident to whom the payer is responsible for paying any sum by way of fees for professional services.

The expression ?person? is defined in section 2(31) to include (i) an individual; (ii) a HUF; (iii) a company; (iv ) a firm; (v) an AOP or a body of individuals whether incorporated or not; (vi) a local authority; and (vii) every artificial juridical person not covered in the previous clauses. The expression ?resident? is defined in section 2(42) to mean a person who is resident in India within the meaning of section 6. Section 6 prescribes the conditions subject to which an individual under sub-section (1), a HUF under sub-section (2), a company under sub-section (3), and every other person under sub-section (4) can be treated as being a resident of India in any previous year. Consequently, by virtue of the definition of the expression ?resident? in section 2(42), read with section 6, it is evident that the expression is not confined to a natural person.

The Explanation to section 194J stipulates that for the purposes of the section professional services means services rendered by a person in the course of carrying on, inter alia the medical profession. Conscious as it was of the use of the expressions ?person?, ?individual? and ?resident? in sub-section (1) of section 194J, the Parliament has not used the expression ?individual? in clause (a) of the Explanation, but has used the expression ?a person?. Professional services are defined to mean services rendered by a person in the course of carrying on the medical or other professions.

While defining the expression ?professional services?, the Parliament has not defined the expression to mean services rendered by an individual who carries on the legal, medical, engineering or architectural profession or any of the other professions listed in the clause. If the Parliament intended to restrict the ambit of Explanation (a) only to fees received by an individual in discharge of his or her duties as a professional, it was open to the Parliament to use words that would be indicative of that position. In fact, while defining the character of the payer, the Parliament specifically excluded an individual and a HUF from the purview of the expression of the ?person? who is liable to deduct tax at source and a portion of the payment which is made to the payee. Hence, there are three circumstances while construing the provisions of section 194J that would weigh in determining the interpretation of the provision. Firstly, in defining the character of the person who is to make the payment and whose obligation is to deduct tax at sources, the Parliament has excluded from the ambit of the expression ?any person? an individual and a HUF. Secondly, in defining the character of the payee under the substantive part of section 194J, the Parliament has used the wider expression ?resident?. Thirdly, in terms of Explanation (a), the words ?services rendered by a person in the course of carrying on? have to be given a meaning. These words include service rendered which is incidental to the carrying out of a profession which is listed therein. If the submission of the assessee was accepted, the consequence would be that when a doctor runs a nursing home, section 194J would apply in respect of payments made by any person who is not an individual or a HUF for professional services. However, section 194J would, as a consequence of that submission, would have no application where a corporate body runs the hospital. As a matter of interpretation, there is no reason to postulate that the Parliament would have intended such a result. There can be no gainsaying the fact that a hospital provides medical services. As a matter of fact, a hospital provides an umbrella of services and for making those services available engages the services of doctors and qualified medical professionals. The fact that the services are institutionalized at a hospital which provides medical services should make no difference to the applicability of the provision of section 194J. The services, which are provided, continue to be services rendered in the course of carrying on the medical profession. These are medical services institutionally provided by the hospital in the course of the carrying on of the medical profession.

The Explanation to section 194J provides a definition of the expression ?professional services? only for the purposes of the section. The Parliament must be attributed to be cognizant of the fact that the pursuit of a profession is an activity carried on by an individual through the application of personal skill and intelligence. Despite this, when it imposed an obligation under section 194J to deduct tax, the Parliament imposed that obligation on any person (not being an individual or a HUF) who is responsible for paying to a resident any sum by way of fees for professional services and the expression ?professional services? has been defined to mean services rendered by a person in the course of carrying on, inter alia, the medical profession. Where the provision of medical services takes place within the institutional framework of a hospital, services are rendered as part of an umbrella of services provided by the hospital which engages qualified medical professionals who practise the medical profession. These are services rendered in the course of the carrying on of the medical profession. Hence, it is not possible to accept the submission that TPAs, when they make payments to hospitals, are not liable to deduct tax at source under the provisions of section 194J. Section 197(1) provides that where in the case of any income of any person or sum payable to any person income-tax is required to be deducted at the time of credit or, as the case may be, at the time of payment at the rates in force under the provisions, inter alia, of section 194J and the Assessing Officer is satisfied that the total income of the recipient justifies a deduction of income-tax at lower rates or no deduction of income-tax, the Assessing Officer shall, on application made by the assessee in this behalf, give to him such certificate as may be appropriate. Where a certificate to that effect is given, then under sub- section (2) the person responsible for paying the income-tax shall, so long as the certificate remains valid, deduct income-tax at the rates specified in the certificate or deduct no tax, as the case may be. It would be open to any hospital, if it is so advised, to make an application under the provisions of section 197 for the deduction of tax at a lower rate or, as the case may be, for no deduction of tax under section 194J.

The CBDT, by the Circular No. 8, dated 24-11-2009, has taken the view that payments which are made by TPAs to hospitals fall within the purview of section 194J. No exception can be taken to the circular to that extent. However, the grievance of the assessee was that the circular proceeds to postulate that a liability to pay a penalty under section 271C will be attracted for a failure to make a deduction under section 194J. Section 273B provides that notwithstanding anything contained in the provisions inter alia of section 271C, no penalty shall be impossible on the person or the assessee, as the case may be, for any failure referred to in the provision if he proves that there was a reasonable cause for the failure. The vice in the circular, that has been issued by the CBDT, lies in the determination which has been made by the CBDT that a failure to deduct tax on payments made by TPAs to hospitals under section 194J will necessarily attract a penalty under section 271C. Besides interfering with the quasi-judicial discretion of the Assessing Officer or, as the case may be, the appellate authority, the direction which has been issued by the CBDT would foreclose the defence which is open to the assessee under section 273B. By foreclosing a recourse to the defence statutorily available to the assessee under section 273B, the CBDT has, by issuing such a direction, acted in violation of the restraints imposed upon it by the provisions of sub-section (1) of section 119. To that extent, therefore, the circular that was issued by the CBDT was to be set aside. In making assessment or, as the case may be, in passing orders on appeals filed under the Act, the Assessing Officers and the Commissioner (Appeals) shall do so independently and shall not regard the exercise of their quasi-judicial powers as being foreclosed by the issuance of the circular.