2009 (8) TMI 85 - HC - Income Tax

Petitioner's Failure to Deduct Tax at Source Deemed Violation of Income Tax Act

THE MEDI ASSIST INDIA TPA (P) LTD. Versus DCIT (TDS), CIT (TDS), CBDT & UOI

The court held that the petitioner was required to deduct tax at source under Section 194J of the Income Tax Act for payments to hospitals for medical ... TDS u/s 194J -Third Party Administrator (TPA) - According to the petitioners an individual will not come within the ambit of section 194J of the Act, In as much as, the payments are made in fulfillment of the contractual obligations between the insurance company and the policy holder and not towards rendering any professional services. Hence, according to the petitioners, sections 194J are not at all attracted to these payments - Held that - A perusal of the terms of payment would clearly indicate that it is the duty and the obligation of the TPA to pay the hospitals. Indeed the insurer in this regard will not have any role to play, in as much as, it is only to replenish the amount in the float account once the amount deposited therein is exhausted. Ultimately the agreement entered into inter se between the hospital and the TPA for payment of money holds the field. In the circumstance, it cannot be said that the TPA who is the authority or the person to pay the amount to the hospital is not required to deduce the tax at source and section 194J is not attracted cannot be accepted. Issues Involved:1. Applicability of Section 194J of the Income Tax Act, 1961.2. Violation of principles of natural justice.3. Obligation to deduct tax at source by Third Party Administrators (TPAs).4. Interpretation of agreements between TPAs, insurance companies, and hospitals.5. Compliance with Sections 201(1) and 201(1A) of the Income Tax Act.Issue-wise Detailed Analysis:1. Applicability of Section 194J of the Income Tax Act, 1961:The petitioner contended that Section 194J, which pertains to fees for professional or technical services, was not applicable to the payments made to hospitals. The argument was that the payments were made in fulfillment of contractual obligations between the insurance company and the policyholder, not for professional services. However, the court noted that Section 194J mandates a 5% deduction at source for fees for professional services, which include medical services. The court concluded that the payments made by TPAs to hospitals for medical services fall within the ambit of Section 194J.2. Violation of Principles of Natural Justice:The petitioner argued that they were not given sufficient opportunity to present their case, thus violating the principles of natural justice. The court examined the sequence of events, including the issuance of a show cause notice and the petitioner's replies requesting more time to gather information. The court found that adequate opportunities were provided to the petitioner to present their case, and the lack of additional documents did not constitute a denial of natural justice.3. Obligation to Deduct Tax at Source by TPAs:The court analyzed the role of TPAs, who act as intermediaries between insurance companies and hospitals. TPAs are responsible for processing claims and making payments to hospitals from a claim float account funded by insurance companies. The court observed that TPAs, by making these payments, are fulfilling their contractual obligations and are thus required to deduct tax at source under Section 194J. The court emphasized that TPAs control the funds once deposited in the float account and are responsible for payments to hospitals.4. Interpretation of Agreements Between TPAs, Insurance Companies, and Hospitals:The court reviewed the agreements between TPAs, insurance companies, and hospitals. It noted that TPAs enter into agreements with hospitals to provide cashless treatment to policyholders and are responsible for reimbursing hospitals for medical services rendered. The court highlighted that these agreements clearly establish the TPAs' obligation to make payments to hospitals, thereby necessitating the deduction of tax at source under Section 194J.5. Compliance with Sections 201(1) and 201(1A) of the Income Tax Act:The court discussed the consequences of failure to deduct or pay tax as required under Section 201. It noted that if a person or entity fails to comply with the provisions of the Act by not deducting TDS, they are deemed to be an assessee in default and are liable to pay interest on the unpaid tax. The court found that the petitioner, by not deducting tax at source on payments made to hospitals, was in violation of Sections 201(1) and 201(1A).Conclusion:The court concluded that the petitioner was obliged to deduct tax at source under Section 194J of the Income Tax Act for payments made to hospitals for medical services. The impugned order was found to be in compliance with the law, and the petition was rejected. The court emphasized that sufficient opportunities were provided to the petitioner to present their case, and the agreements clearly established the TPAs' obligation to deduct tax at source.