2011 (9) TMI 85 - HC - Income Tax

Assessee in default - TDS u/s 194J - circular No. 8/2009 - it is submitted that a policy holder may not be required to deduct TDS under Section 194J of the Act but as per the circular the TPA would be liable to deduct TDS under Section 194J when it makes payment - TPAs and insurance companies the Board has decided that no proceedings u/s 201 may be initiated after the expiry of six years from the end of financial year in which such payment have been made without deducting tax at source etc by the TPAs The words in the course of carrying on do not mean that the person who renders service and is paid must be a professional - It is not necessary that the person who renders service and is receiving the payment/fee should himself or herself carry on the medical profession or other professions - Bombay High Court in Dedicated Health Care Services TPA (India) Pvt. Ltd. (2010 -TMI - 76302 - BOMBAY HIGH COURT ) wherein it was held that Parliament imposed that obligation on 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 and the expression professional services has been defined to mean services rendered by a person in the course of carrying on inter alia the medical profession - Writ petition is accordingly disposed of

Issues Involved:
1. Applicability of Section 194J of the Income Tax Act, 1961, to payments made by Third Party Administrators (TPAs) to hospitals.
2. Interpretation of "professional services" under Explanation (a) to Section 194J.
3. Whether corporate hospitals fall under the definition of entities providing "professional services."
4. Validity of Circular No. 8/2009 issued by the Central Board of Direct Taxes (CBDT).
5. Liability of TPAs to deduct Tax Deducted at Source (TDS) under Section 194J.

Issue-wise Detailed Analysis:

1. Applicability of Section 194J to Payments Made by TPAs to Hospitals:
The petitioners, who are TPAs, challenged the applicability of Section 194J of the Income Tax Act, 1961, which mandates the deduction of TDS on payments made to hospitals. The TPAs argued that they do not avail of professional services directly and are merely discharging the liability of insurance companies under contracts of insurance. The court held that Section 194J applies when a person is responsible for paying any sum by way of fee for professional services, technical services, or royalty. The nature and character of the payment in the hands of the payee determine whether TDS must be deducted. Therefore, TPAs are liable to deduct TDS under Section 194J when making payments to hospitals on behalf of insurance companies.

2. Interpretation of "Professional Services" Under Explanation (a) to Section 194J:
The petitioners contended that the payments made to hospitals do not fall under "professional services" as defined in Explanation (a) to Section 194J, which includes services rendered by a person in the course of carrying on medical, legal, engineering, architectural professions, etc. The court interpreted that the term "person" includes individuals, firms, associations, and artificial persons like corporate entities. It was held that the expression "professional services" includes all services rendered in the course of carrying on the specified professions, and it is immaterial whether the recipient is an individual or a corporate entity.

3. Whether Corporate Hospitals Fall Under the Definition of Entities Providing "Professional Services":
The petitioners argued that corporate hospitals are not individuals carrying on the medical profession and thus should not be subject to Section 194J. The court clarified that the term "professional services" encompasses services rendered in the course of carrying on the medical profession, regardless of whether the recipient is an individual, firm, or corporate entity. The court emphasized that services rendered by hospitals, even if they are corporate entities, fall under "professional services" as they are provided in the course of carrying on the medical profession.

4. Validity of Circular No. 8/2009 Issued by CBDT:
The petitioners challenged Circular No. 8/2009, which mandates TPAs to deduct TDS under Section 194J when making payments to hospitals. The court upheld the circular's validity, stating that it correctly interprets Section 194J. However, the court found that the circular's stipulation that a failure to deduct TDS would necessarily attract a penalty under Section 271C was beyond the CBDT's authority. The court set aside this part of the circular, stating that the Assessing Officers and appellate authorities must independently apply their minds without being bound by the circular.

5. Liability of TPAs to Deduct TDS Under Section 194J:
The court concluded that TPAs are liable to deduct TDS under Section 194J when making payments to hospitals for services rendered in the course of carrying on the medical profession. The court rejected the petitioners' argument that payments to corporate hospitals should not attract TDS under Section 194J, emphasizing that the nature of services rendered, not the entity type, determines the applicability of TDS provisions.

Conclusion:
The court held that Section 194J applies to payments made by TPAs to corporate or juristic entities providing professional services. The impugned Circular No. 8/2009 was partly set aside to the extent it mandated penalties under Section 271C for failure to deduct TDS. The Assessing Officers and appellate authorities must independently assess the applicability of TDS provisions without being constrained by the circular. The writ petition was disposed of with no order as to costs.

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