2010 (5) TMI 98 - HC - Income Tax

TPAs must deduct tax on medical payments per Section 194J. Court upholds Circular 8/2009, questions penalty imposition.

The court held that Third Party Administrators (TPAs) are required to deduct tax at source under Section 194J when making payments to hospitals for ... Deduction of tax at source under Section 194J - definition of 'professional services' in the Explanation to Section 194J - liability of a deductor who is a person other than an individual or a Hindu undivided family - availability of certificate under Section 197 for lower or no deduction - validity and limits of a Central Board of Direct Taxes circular issued under Section 119 - preservation of the statutory defence under Section 273B and prohibition on directions that foreclose quasi judicial discretionDeduction of tax at source under Section 194J - definition of 'professional services' in the Explanation to Section 194J - liability of a deductor who is a person other than an individual or a Hindu undivided family - availability of certificate under Section 197 for lower or no deduction - Whether payments made by Third Party Administrators (TPAs) to hospitals under cashless hospitalization schemes are subject to deduction of tax at source under Section 194J. - HELD THAT: - Sub section (1) of Section 194J obliges any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of fees for professional services to deduct tax at source. The Explanation to Section 194J defines 'professional services' as services rendered by a person in the course of carrying on the medical profession. The statutory wording deliberately employs the wider expressions 'person' and 'resident' rather than limiting the definition to natural persons. Medical services provided institutionally by a hospital are services rendered in the course of carrying on the medical profession because hospitals engage qualified medical professionals and provide an umbrella of medical services; institutionalisation does not remove such services from the ambit of 'professional services' as defined. To construe the Explanation as applying only to fees received by individual practitioners would produce an anomalous result whereby payments to corporate hospitals would escape Section 194J, which Parliament's language does not support. Accordingly TPAs, when making payments to hospitals (and being persons other than individuals or HUFs), are subject to the deduction obligation under Section 194J. Hospitals dissatisfied with deduction at source may seek certificates under Section 197 for lower or no deduction; such recourse is available and has been relied upon in the proceedings. [Paras 8, 9, 10, 11, 12]Payments by TPAs to hospitals for medical services under cashless schemes fall within fees for professional services under Section 194J and TPAs (being persons other than individuals or HUFs) are liable to deduct tax at source; hospitals may apply under Section 197 for deduction at lower or nil rates.Validity and limits of a Central Board of Direct Taxes circular issued under Section 119 - preservation of the statutory defence under Section 273B and prohibition on directions that foreclose quasi judicial discretion - Whether Circular No. 8/2009 dated 24 November 2009 issued by the CBDT is valid in its characterisation of payments by TPAs to hospitals and in directing consequences for failure to deduct. - HELD THAT: - Under Section 119 the Board may issue directions for administration of the Act but the proviso forbids issuance of directions that require an income tax authority to dispose of a particular case in a particular manner or that interfere with the discretionary appellate functions of the Commissioner (Appeals). The Board's view in Circular 8/2009 that payments by TPAs to hospitals fall within Section 194J is consistent with the Court's construction and therefore stands. However, the circular goes further by declaring that failure to deduct will necessarily attract penalty under Section 271C and by directing limits on initiation of proceedings and on enforcement which effectively foreclose the statutory defence available under Section 273B (i.e. proof of reasonable cause) and intrude on the quasi judicial discretion of assessing and appellate authorities. By so doing the Board exceeded the permitted scope of directions under Section 119 and unlawfully precluded assessment and appellate authorities from independently exercising their powers; that portion of the circular is therefore invalid and is set aside. Assessing Officers and Commissioners (Appeals) must independently exercise their functions and may consider defences under Section 273B where raised. [Paras 13, 14]Circular 8/2009 is valid insofar as it states that payments by TPAs to hospitals fall under Section 194J; it is quashed insofar as it directs that failure to deduct will necessarily attract penalty under Section 271C or otherwise forecloses the defence under Section 273B or the independent quasi judicial exercise of assessing and appellate authorities.Final Conclusion: The petition is allowed in part: TPAs making payments to hospitals under cashless hospitalization schemes are liable to deduct tax at source under Section 194J (subject to hospitals seeking relief under Section 197), and Circular 8/2009 is set aside to the extent it mandates that failure to deduct will necessarily attract penalty or foreclose the statutory defence under Section 273B; assessing and appellate authorities must exercise their quasi judicial powers independently. No costs; coercive steps stayed for eight weeks. Issues Involved1. Applicability of Section 194J of the Income Tax Act, 1961 to payments made by Third Party Administrators (TPAs) to hospitals.2. Validity of Circular 8/2009 issued by the Central Board of Direct Taxes (CBDT).3. Interpretation of 'professional services' under Section 194J.4. Authority of the CBDT to issue directions under Section 119 of the Income Tax Act.Issue-wise Detailed Analysis1. Applicability of Section 194J to Payments Made by TPAs to HospitalsThe primary issue in these proceedings is whether TPAs are required to deduct tax at source under Section 194J when making payments to hospitals. The petitioners, comprising companies registered under the Companies Act, 1956, and a trust, argued that the payments made to hospitals under cashless hospitalization schemes should not be subject to tax deduction under Section 194J. They contended that hospitals do not carry on the medical profession and hence, payments made to them should not be classified as fees for professional services.The court analyzed Section 194J, which mandates a deduction of 10% on payments made for professional services. The term 'professional services' is defined to include services rendered in the course of carrying on the medical profession. The court observed that while hospitals are not individual medical professionals, they provide medical services through qualified professionals. Therefore, payments made to hospitals for these services fall within the ambit of Section 194J.2. Validity of Circular 8/2009 Issued by CBDTThe petitioners also challenged the validity of Circular 8/2009 issued by the CBDT, which clarified that TPAs must deduct tax at source under Section 194J for payments made to hospitals. The court upheld the circular to the extent that it aligns with the interpretation of Section 194J, confirming that payments made by TPAs to hospitals are subject to tax deduction.However, the court found fault with the circular's stipulation that failure to deduct tax would automatically attract penalties under Section 271C. This, the court held, interferes with the quasi-judicial discretion of the Assessing Officer and the appellate authority, as it forecloses the defense available to the assessee under Section 273B, which provides for reasonable cause exceptions.3. Interpretation of 'Professional Services' Under Section 194JThe court delved into the interpretation of 'professional services' as defined in the Explanation to Section 194J. It noted that the term 'person' in this context is not restricted to individuals but includes entities like hospitals that provide medical services. The court emphasized that the provision of medical services by a hospital, which employs qualified medical professionals, falls under the definition of professional services. Consequently, the payments made by TPAs to hospitals are for professional services and are subject to tax deduction under Section 194J.4. Authority of the CBDT Under Section 119The court examined the authority of the CBDT under Section 119 of the Income Tax Act, which allows the Board to issue orders, instructions, and directions for the proper administration of the Act. However, the proviso to Section 119(1) prohibits the Board from issuing directions that interfere with the discretion of the Assessing Officer or the Commissioner (Appeals) in their quasi-judicial functions. The court held that the CBDT's circular, by mandating penalties for non-deduction of tax without considering reasonable cause, overstepped its authority under Section 119.ConclusionThe court concluded that:- TPAs are required to deduct tax at source under Section 194J when making payments to hospitals for medical services.- Circular 8/2009 is valid to the extent it aligns with this interpretation but is invalid insofar as it mandates automatic penalties under Section 271C.- The definition of 'professional services' under Section 194J includes medical services provided by hospitals.- The CBDT cannot issue directions that interfere with the quasi-judicial discretion of tax authorities.The court made the rule absolute in these terms and stayed the operation of the judgment for eight weeks to allow the petitioners to seek recourse to their remedies in appeal, with a direction that no coercive steps be taken to enforce outstanding dues during this period.