THIRD PARTY ADMINISTRATOR AND TDS

[C.A. DEV KUMAR KOTHARI]

Relevant links:

Section 194C, 194I and 194J of the Income Tax Act, 1961.

The East India Hotels Ltd. & Jaswant Singh Bhatia Versus CBDT and UOI [2009 -TMI - 32651 - BOMBAY HIGH COURT] in judgment dated 06.03.2009.

Third party administrator (TPA):

As the name suggest a TPA is a person or organization who is not the person originally liable to perform some functions, or discharge some obligations but is a person who perform performs such functions on behalf of the person liable to perform originally. The functioning of TPA is under agreement with person originally liable to perform functions or discharge obligation. Thus in commercial language a TPA is an agent or contractor of the person originally liable.

Simple example:

An insurance company appoints TPA to settle claims and pay to policy holders. The TPA acts as an agent performing claim settlement and disbursement functions. TPA has recognized and enlisted various hospitals and nursing homes. Policy holder can know about the same and select a hospital for hospitalization. TPA usually settle claims only in case of hospitalization. Expenses incurred prior to hospitalization and after discharge from hospital have to be claimed from insurance company directly. Many times TPA do not pay full amount even to the hospital, and the policy holder is required to make a claim for reimbursement on insurance company. The insurance company can pay directly or through TPA depending on their understanding.

TPA get money from insurance company on account of claims settled and disbursed and some charges for their services which may be called commission or service charges.

TPA is an agent of insurer and not policy holder:

TPA is not an insurer, but an agent of insurer. TPA is not an agent of policy holder. TPA makes payment in terms of insurance policy to the hospitals and get funded from insurer for the same.

Third party administration (TPA) in case of insurance sector:

TPA are agents of insurance companies. In India, the main function of TPA are to manage insurance claims in case of cash-less policies. The insured person can lodge claim directly on the insurance company or through the TPA. In case of cashless insurance, usually claims are lodged based on estimated expenses and they are provisionally approved by the TPA. On submission of final claim the settlement is made. It is experienced that many times TPA does not pay the full amount, although it is covered by policy, and then insured person has to claim reimbursement of medical expenses from insurance company.

Thus In India TPA are mostly acting as partial claim settlement and payment on behalf of insurance companies. They are agents of insurance companies for this limited purpose. In future role of TPA may increase provided they get support from various agencies in a reasonable manner.

A third party administrator (TPA) can be regarded as an organization that processes insurance claims or certain aspects of employee benefit plans for a separate entity. This can be viewed as "outsourcing" that is getting work done from an outside agency acting as an agent of insurance company or employer.

Insurance Regulatory & Development Authority of India (IRDA) has defined TPA's as "An insurance intermediary licensed by the Authority who, either directly or indirectly, solicits or effects coverage of, underwrites, charges premium from an insured, or adjusts or settle claims in connection with health insurance, except as an agent or broker or an insurer."

Thus TPA is not an insurance agent, broker or insurer. But an insurance intermediary registered by IRDA and appointed by any insurance company for settlement of claims etc. At present, and in the context of this write-up we consider TPA engaged in settlement of claims in a cashless insurance system.

 In USA, Europe and some other places Third Party Administrators (TPAs) are the intermediaries who bring all the components of health care delivery - hospitals, physicians, clinics, long-term care facilities and pharmacies - into a single entity. They extend quality health care and services at reasonable costs. It is hoped that in India in near future role of TPA may increase towards economically, and under one-umbrella services.

Functioning of TPA:

TPA's are neither insurance companies nor healthcare providers but intermediaries who can bring all factors of health care such as physicians, hospitals, clinics, pharmacies etc. together. The services provided by them include cashless service at hospitals, telephonic support to policyholders and management of claims and reimbursements. They can also provide services to the corporate sector in designing and managing health benefit packages for their employees.

Cashless hospitalization:

It can be said that the main function of a TPA is to guarantee cashless hospitalisation to policyholders. TPAs are a key link between insurance companies, health care providers and policyholders.

TPAs sort out health care providers by setting up a network with hospitals, general practitioners, diagnostic centers, pharmacies, dental clinics etc. They sign a memorandum of understanding with insurance companies under which they let policyholders know about the various health care delivery facilities and the methods for settling claims. Policyholders get themselves registered with TPA's to benefit from these services and at the time of hospitalization, health facilities are expected to pass on this information to the TPA's. The medical representatives of the TPA examine the acceptability of the case and accordingly informs the healthcare providers to provide cashless facility to the policy holder.

Process of payment to policy holders:

The agreement between TPA's and health care facilities includes the collection of documents and bills concerning the treatment. Documents are assessed and sent to the insurance company for reimbursement. TPA's also procure reimbursements from the insurance company and pay the healthcare provider. TPA's usually have in-house specialists comprising of medical practitioners, insurance consultants, legal experts and IT professionals. The mainstay of TPA's is information management system.

The value added services provided by TPAs, in future may include ambulance service, medicines and supplies, information about health facilities, hospitals, bed availability etc. However, at present their activities are mainly in relation to receiving, approving provisional estimates and final bills and to pay to health providers. In case of hospitalization, generally all bills of diagnosis, doctors, operation , medicines provided by hospitals are paid by TPA to the hospital and then the hospital pay the amount to respective parties- pharmacy, doctors, equipment provider, utilities provider etc.

Payment from insurance companies are payment of claims to policy holders:

When an insurance company pay to the policy holder any sum on account of medical expenses or motor car accidental repairs the insurance company pays to settle insurance claims. The payment may be made directly to the service provider like hospital or diagnosis centre in case of mediclaim insurance or to Authorized Service station / vehicle repair shops in case of insurance of motor cars. The insurance company does not pay as professional fees to hospital or as payment under a works contract to the vehicle repair workshop. Therefore, insurance companies do not deduct tax under sections like section 194J or 194C while making payment to hospitals or workshops. The insurance companies are not required to deduct tax even when payment is made directly to the hospital or the workshop.

 TPA is paying on behalf of insurance company:

As discussed earlier TPA is an agent or outsourced service for receiving and settling claims within limitation of delegation in their favor and can make disbursement on behalf of insurance companies. The TPA has no agreement in nature of works contract or for professional services. It is not case that the TPA has appointed a hospital or a work shop and entered into a contract with them. The policy holder as a patient or a vehicle owner choose any hospital or workshop and enter into contract with hospital or vehicle workshop. The policy holder does not make a claim for his services under a professional service contract or a works contract. Policy holder claims amount receivable by him as per terms and conditions of the insurance policy. TPA pay to hospital or vehicle workshop, admissible amount, as per policy and within his limitations. TPA makes payment of insurance claims to hospital or vehicle workshop, as the case may be for an on behalf of insurance company.

Therefore, what is applicable to insurance company is applicable to TPA. When the principal that is the insurance company is not required to deduct tax while making direct payment to hospital or vehicle workshop or making payment to policy holder as reimbursement there is no question to ask TPA to deduct tax while making payment of hospital or workshop.

 Therefore, merely because insurer has appointed TPA as an intermediary or an agent to perform some of its functions, different rules cannot be applied to TPA. TPA is therefore not liable to deduct tax from payments made to hospitals.

Hospital services are not professional services under section 194J:

Hospital is an organized entity. It provides infrastructure and organizes various services required for treatment of patients. It cannot be said that a hospital is a doctor. Hospital may organize and arrange to provides services of different doctors as may be required by patients. In case of private hospitals, the choice of doctor is also made by patient and not by hospital. Hospital cannot also be called performing any work under a works contract. As in case of a hotel ( rendering hospitality service) it cannot be said that they provide any service under works contract to guests, similarly it cannot be said that a hospital provide any service under works contract to patients.  

The East India Hotels Ltd. & Jaswant Singh Bhatia Versus CBDT and UOI [2009 -TMI - 32651 - BOMBAY HIGH COURT]  in judgment dated 06.03.2009 held that a hotel is not providing hospitality services and facilities under any works contract so tax is not deductible under section 194C. As facilities/amenities made available by petitioner do not constitute 'work' within the meaning of section 194C, consequently, the circular No. 681 to the extent it holds that the services made available by a hotel are covered under section 194C must be held to be bad in law.

News report about TPA required to deduct tax under section 194J:

Press report of 15 Sep 2009, 0545 hrs IST by Deepshikha Sikarwar, ET Bureau is summarized below with highlights so far it is necessary to consider TDS aspect:

TPAs processing health insurance claims and making payments to hospitals for treatment of subscribers in cashless systems would soon have to deduct tax at source from the payments they make to hospitals. The CBDT is likely to issue a directive to this effect.

The CBDT's proposed move comes in the wake of a recent Bangalore High Court ruling that makes deduction of tax at source mandatory for TPAs.

In 2008, tax authorities had carried out surveys on TPAs, raising a tax demand for the tax the CBDT expected them to deduct at source from hospitals under Section 194J of the Income Tax Act.

The section 194J provides for TDS from fees for professional services paid by certain specified entities That they were making payments to hospitals on behalf of individuals (patients) and individuals are exempt from the requirement to deduct tax so they are not required to deduct tax.

The Bangalore High Court has upheld the tax authorities' position.

 Wrong approach and contention of TPA:

Though the full judgment is not available, however from the press report it appears that the TPA has not stated facts clearly and for the same reason they lost the case. TPA has contended that they make payment on behalf of patients- this is wrong. In fact, as discussed earlier TPA make payments on behalf of insurance companies and they make payment of insurance claim as per terms and conditions of insurance policies.

This can be illustrated as follows with a real example (with changes in name):

Mrs. P is a medi claim policy holder, she get admitted in a hospital and send intimation to the TPA with estimates of expense at Rs.60000/- for certain surgical operations. The TPA approves a sum of Rs.50000/-. Some complications arises and Mrs. P has to undergo another operation. A revised estimate is sent for Rs.2,50,000/-. The TPA approves Rs.1,25,000/- as against sum insured Rs.2,00,000/- The final bill of hospital is for Rs.2,45,000/- out of which inadmissible items are of rs.20,000/- and admissible items are of Rs.2,25,000/-. The insurance company is liable to pay Rs.2,00,000/-. However, in terms of contract between TPA and insurance company, the TPA approves payment of Rs.1,40,000/- only to the hospital and ask patient to make payment of balance amount and claim reimbursement from insurance company. The patient pays Rs.1,05,000/- to the hospital and then send claim to insurance company. Insurance company pays Rs.60,000/- to the policy holder as reimbursement.

In absence of TPA the insurance company could directly make payment to the hospital to the extent of sum insured that is Rs.2,00,000/- without deducting tax. The insurance company while making payment to hospital is not required to deduct tax at source either under section 194C (works contract) or 194J (professional fees) or even under section 194I (rent). Merely because a payment of Rs.1,40,000/- is made by TPA on behalf of insurance company to the hospital, there should not be any obligation to deduct tax.

Board should not issue circular to ask for TDS:

In view of the above discussion it is desirable that the Board should not issue any circular asking TPA to deduct tax. Rather better course would be that the Board should clarify the legal position and issue directives that no tax is required to be deducted by TPA while paying insurance claims to hospitals and vehicle workshops or similar other insurance claims.

Suggested course of action for TPA:

TPA can make representations to the Board and explain their position and legal provisions. They can request the Board to issue directions that TPA should not be required to deduct tax.

In case TPA is asked to deduct tax, they can properly challenge the order and the circulars.

During pendency the TPA can ask hospitals and vehicle workshops to apply to their A.O. and obtain certificates under section 197 for receiving payment without TDS or TDS at lower rate of tax. In case the A.O. of hospital or workshop do not grant for nil TDS, the TPA can make payment under protest and without prejudice.