Dedicated Health Care Services TPA vs. ACIT (Bombay High Court)

S. 194J applies to payments made to non-professionals such as hospitals. CBDT Circular on TPA liability is valid except for view on penalty

The assessee, a Third Party Administrator (TPA), provided services such as hospitalization services, cashless access services and services in connection with the processing and settlement of claims and making payment to hospitals to holders of health insurance policies issued by insurance companies. All claims payable by the insurance company to the policyholder were paid through the TPA from a Claim Float Account (CFA) provided by the insurance company. In order to facilitate cashless hospitalization, the TPA entered into a memorandum of understanding with individual hospitals and medical aid providers. The AO took the view that in making payments to hospitals TPAs were required to deduct tax at source u/s 194J. The assessee filed a writ Petition to contend that s. 194J applied only to payments made to individuals carrying on the medical profession and not hospitals. HELD rejecting the claim:

(i) S. 194J requires tax to be deducted at source when payment of any sum is made to a “resident” by way of “fees for professional services”. The term “professional services” is defined in Explanation (a) to mean services rendered by a person inter alia in the course of carrying on medical profession. The term “resident” is not confined to a natural person. The argument that the medical profession can only be carried on by an individual and that consequently a hospital cannot be regarded as carrying on the medical profession and hence payments made by TPAs to a hospital cannot be treated as fees for professional services is not correct because in defining the expression “professional services” Parliament has not confined it to mean services rendered by an individual who carries on the medical profession. If Parliament intended to restrict the ambit of s. 194J only to fees received by an individual, it was open to Parliament to use words that would be indicative of that position. In fact, in defining the character of the person who is to make the payment, Parliament has excluded from the ambit of the expression “any person” an individual and a HUF. However, in defining the character of the payee, Parliament has used the wider expression “resident”. Further, the words “services rendered by a person in the course of carrying on” in the definition include services which are incidental to the carrying out of the medical profession;

(ii) Though a hospital by itself, being an artificial entity, is not a “medical professional”, yet it provides medical services by engaging the services of doctors and qualified medical professionals. These are services rendered in the course of the carrying on of the medical profession. The fact that the services are institutionalized at a hospital which provides medical services makes no difference to the applicability of s. 194J;

(iii) No exception can be taken to the view expressed by the CBDT in Circular No. 8/2009 dated 24.11.2009 that payments made by TPAs to hospitals fall within the purview of s. 194J. However, the determination made by the CBDT that a failure to deduct tax on payments made by TPAs to hospitals u/s 194J will necessarily attract a penalty u/s 271C interferes with the quasi judicial discretion of the AO and appellate authorities, forecloses the defense of “reasonable cause” u/s 273B and is in violation of the restraints imposed by s. 119 (1). To that extent the circular is set aside. Also clarified that in making assessments and passing appellate orders the AO and CIT (A) shall do so independently and not regard the exercise of their quasi judicial powers as being foreclosed by the issuance of the circular.