WHILE MAKING PAYMENTS TO HOSPITALS TPAs ARE REQUIRED TO DEDUCT TAX AT SOURCE

[Mr. M. GOVINDARAJAN]

Third Party Administrators (TPAs) enter into agreements, described as service level agreements, with insurance companies which issue health insurance policies which are serviced by the TPAs who acted as facilitators. The TPA is obliged, under the service level agreements, to perform various services for policy holders. The agreement will contain a recital to the effect that the TPA is engaged in making available health and support services. The insurers and the TPA have agreed that the latter shall provide to customers of the insurer health services for a fee. The services that are provided inter alia include hospitalization services, cashless access services, billing services and call centre services. Each TPA as a facilitator of the insurance company provides 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 the TPA from a Claim Float Account (CFA) provided by the insurance company. The TPA, in order to facilitate cashless hospitalization, enters into a memorandum of understanding with individual hospitals and medical aid providers.

The issue taken for discussion here is whether, while making payments to hospitals TPAs are required to deduct tax at source under the provisions of Sec. 194J of Income Tax Act, 1961.

The substantial part of Section 194J requires a deduction of an amount equal to 10 per cent where any person, not being an individual or a Hindu Undivided Family 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 credit of such to the account of the payee, or at the time of payment whichever is earlier. 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 medical profession. The Circular No. 8/2009, dated 24.11.2009 provides that the services rendered by hospitals to various patients are primarily medical services and, therefore, provisions of Sec. 194J are applicable on payments made by TPAs to hospitals etc., Further for invoking provisions of section 194J, there is no stipulation that the professional services have to be necessarily rendered to the person who makes payment to hospital. Therefore TPAs who are making payment on behalf of insurance companies to hospitals for settlement of medical/insurance claims etc., under various schemes including cashless schemes are liable to deduct tax at source under section 194J on all such payments to hospitals etc.,

In 'Dedicated Health Care Services TPA (India) (P) Ltd., V. Assistant Commissioner of Income Tax' - [2010 -TMI - 76302 - BOMBAY HIGH COURT] the relief sought by the petitioner is (i) a declaration that the provisions of Sec. 194J are not applicable to payments made by the Petitioners to hospitals under the cashless hospitalization scheme; (ii) setting aside of the Circular No.8/2009, dated  24.11.2009 issued by the Central Board of Direct Taxes and (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.

The Revenue contended that various hospitals have applied under Section 197 seeking a certificate for a lower deduction of tax in respect of different types of income earned by the hospitals which shows that the hospitals are treating payments made by the TPAs to them as professional fees and are seeking a certificate for a deduction at a lower rate. On the other hand the petitioners contended that for Section 194J to apply, the payee must render service in the course of carrying on the medical profession. The hospitals to whom payments are made by TPAs do not carry on the medical profession which only an individual can carry on and that consequently such payments are not subject to a deduction of tax at source under Section 194J.

The High Court held that 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. Hence it 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.

Regarding the impugned circular the Court held that the Board has by the circular 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, consistent with the interpretation placed on the provisions of section 194J. The grievance of the petitioner is that the circular proceeds to postulate that a liability to pay a penalty under section 271(c) will be attracted for a failure to make a deduction under Section 194J. Section 273B of the Act provides that notwithstanding anything contained in the provisions inter alia of Section 271C no penalty shall be imposable 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. In 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 Board would foreclose the defence which is open to the assessee under Section 273B. By foreclosing recourse to the defence statutorily available to the assessee under section 273B, the Board has by issuing such a direction acted in violation of the restrains imposed upon it by the provisions of Sec. 119(1). To that extent, therefore the circular that was issued by the Board would have to be set aside and is accordingly set aside.