On writ the Court held that third party administration services are rendered on medical and health insurance policies issued by insurance companies. The services enable the policy holders, viz., the patients to obtain medical treatment from the hospital without making upfront payments to the hospitals by direct settlement, i. e., cashless scheme and reimbursement of claims of policy holders in accordance with the terms of the insurance. The third party administrator service providers pay to hospitals under the cashless scheme in fulfilment of contractual obligations between the insurance companies and the policy holders on the one hand and insurance companies and third party administrator service providers on the other hand. The third party administrator service providers are required to deduct tax at source on payments made to hospitals under section 194J.

Circular No. 8 of 2009, dated November 24, 2009 (2009) 319 ITR (St.) 22) The Board has by the circular taken the view that payments which are made by third party administrators to hospitals fall within the purview of section 194J. 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 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. The circular provides that a failure to deduct tax on payments made by third party administrators 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 Board 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 Board 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 Board would have to be set aside.( AY.2004-05 to 2009-10)