TDS ON TPA THE RECENT CIRCULAR IS NOT VALID- suggested course for CBDT and TPA.

[C.A. DEV KUMAR KOTHARI]

Recent circular issued by CBDT:

Circular No. 8/2009 has been issued vide F.No.385/08/2009-IT(B) by the Government of India, Ministry of Finance, Department of Revenue, Central Board of Direct Taxes on 24th November, 2009 holding the view that Third party Administration who pay to hospitals, on account of insurance claims for mediclaim policies are liable to deduct tax at source because they are liable to pay such sums and the payment made is on account of professional fees covered by S. 194J.

Analysis of circular:

The relevant part of the circular is reproduced in the table below in column 1 and in column 2 a brief discussion is made by the author:

From circular (1)	Discussion by author
Sub: Applicability of provisions under Section 194J  of Income Tax Act'61 in the case of transactions by the Third Party Administrators (TPAs) with Hospitals etc.	This is subject matter concerning applicability of S.194J to TPA
A number of representations have been received from various stakeholders regarding applicability of provisions under Section 194J of Income Tax Act'61 on payments made by Third Party Administrators (TPAs) to hospitals on behalf of insurance companies for settling medical/insurance claims etc with the hospitals.	The circular is in response to representations. It is recognized that TPA make payment on behalf of insurance companies for settling insurance claims.
2. The matter was examined by the Board. As per provisions of section 194J (1) 'Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of—	TPA is generally not an individual or HUF. So it is an entity which will not be exempt entity.
(a) fees for professional services, or	Payment by TPA to settle insurance claim cannot be called payment of fees for professional services
(b) fees for technical services, [or]	Payment by TPA to settle insurance claim cannot be called payment of fees for technical services.
[(c) royalty, or	Payment by TPA to settle insurance claim cannot be called royalty.
(d) any sum referred to in clause (va) of section 28,]	Payment by TPA to settle insurance claim is not a sum referred to in S. 28(va).
shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to ten per cent of such sum as income-tax on income comprised therein…". Further as per Explanation (a) to 194J "professional services" means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession etc..'.	TPA is just an agent of insurance company. Payment  for insurance claim is  made by insurance company and not by TPA- TPA is just like a disbursing agent or another officer of insurance company. Therefore, TPA cannot be considered a person who pays to hospitals.
3. The services rendered by hospitals to various patients are primarily medical services and, therefore, provisions of 194J are applicable on payments made by TPAs to hospitals etc. Further for invoking provisions of 194J, there is no stipulation that the professional services have to be necessarily rendered to the person who makes payment to hospital. Therefore TPAs who are making payment on behalf of insurance companies to hospitals for settlement of medical/insurance claims etc under various schemes including Cashless schemes are liable to deduct tax at source under section 194J on all such payments to hospitals etc.	This paragraph also recognize that TPAs are making payment on behalf of insurance companies to hospitals for settlement of medical/insurance claims etc. When payment is admittedly n behalf of insurance company and to settle insurance claim this cannot be regarded as payment of professional fees.
3.1. In view of above, all such past transactions between TPAs and hospitals fall within provisions of Section 194J and consequence of failure to deduct tax or after deducting tax failure to pay on all such transactions would make the deductor (TPAs) deemed to be an assessee in default in respect of such tax and also liable for charging of interest under Section 201 (1A) and penalty under Section 271C.	This view will create un-necessary litigation. Because hospitals who received payment without TDS  would have paid their taxes by way of advance tax,, self assessment tax and tax on regular assessment. In fat when there was no TDS, advance tax is generally payable much earlier starting from June of previous year. In case o failure to pay advance tax or its installment etc. interest is payable.
. Considering the facts and circumstances of the class of cases of 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 Board is also of the view that tax demand arising out of Section 201 (1) in situations arising above, may not be enforced if the deductor (TPA) satisfies the officer in charge of TDS that the relevant taxes have been paid by the deductee assessee (hospitals etc.). A certificate from the auditor of the deductee assessee stating that the tax and interest due from deductee assessee has been paid for the assessment year concerned would be sufficient compliance for the above purpose. However, this will not alter the liability to charge interest under Section 201 (1A) of the Income Tax Act till payment of taxes by the deductee assessee or liability for penalty under Section 271C of the Income Tax Act as the case may be.	In most of cases of TPA assessments up to assessment year 2006-07 would have been completed. Practically and in regular way a claim for refund can be preferred only from AY 2008-09 (up to 31.03.10) and 2009-10 (up to 31.03.11). Therefore, for TDS of period   prior to 01.04.2007 TPA will not be able to claim refund against TDS.

Circular is not valid:

The circular assumes character of payment made by TPA on behalf of insurance companies as payment for professional fees or technical fees. This is not correct.

Since payment is for insurance claim, on behalf of insurance companies and are against charges of composite nature tax is not deductible u/s 194J.

 Payment made to hospital is not for professional fees, or technical fees but is in settlement of insurance claim on behalf of insurance company and in any case is in nature of composite payment for reimbursement of payments made to doctors, nurses, other service providers, supply of medicines and other consumables, provision for space and facilities, provision of machines and equipments etc. Therefore the case of hospital is similar to a hotel who organize and provide various supplies, facilities and services to its guests. The hospital provide facilities etc. to patients and payment is made by us on behalf of insurance companies and not on behalf of patients. Therefore, provisions of TDS are not at all applicable.

An illustration:

Suppose a patient was in hospital for 15 days he underwent a major surgery and one minor surgery. Normal charges of a hospital of reasonably good standard will be as follows and this can be considered a model bill:

Brief description		Amount Rs.
Facilities of furnished room with facilities of meals, cleaning , laundry etc. @ Rs.2500 per day	37500/-
Operation theatre  twice   for major and minor surgery 7000 + 3000	10,000
Doctors, and diagnostic services	7500/-
Receivable on own account of hospital		55,000
Reimbursement for outsourced services, supplies and facilities:
Medicines and supplies	110000
Doctors fees	35000
Nurses and others	7500
Diagnostic services outside	15000
Total re-imbursement claim		1,67,500
Grand total		2,22,500
Insurance claim settled for (up to amount insured)		2,00,000
Direct payment by employer of patient		22,500
Percentage of hospitals own charges in total bill 24.71%

In the above example we find that the hospitals own charges are only for room charges, OT charges, and some doctors and diagnostic service charges which are also incidental of providing rooms to patients. All these charges are not in nature of 'professional fees' or 'technical fees'. Hospital is not carrying any medical profession like a doctor or nurse carry. Hospital is also not carrying any technical service like an engineer or other person carry and as normally understood.

 Hospital is a facility and service provider and organizer of certain services from outside. Case of hospital is similar to hotel. Therefore, asking TPA who settles the insurance claim and pay Rs.2,00,000 to hospital is not in accordance with provisions of S. 194J. If at all payment received by hospital on its own account is hardly 25-30% and if tax is deducted on entire amount it will not be in accordance with S. 194J because, as discussed above even payment of Rs.55000 in the above example cannot be regarded as payment of professional or technical fees in the above illustration.

 Payment of Rs.2,00,000 by TPA on account of settlement of insurance claim is not in nature of payment for professional fees or technical fees. If the insurance company had issued cheque to hospital directly, then insurance company would not be liable to deduct tax. The TPA has made payment to hospital on behalf of its principal that is insurance company, therefore asking TPA to deduct tax from payment of Rs.2,00,000 made in settlement of claim is not in accordance with S. 194J.

The employer of patient who is a public limited company say E Ltd makes balance amount of payment of Rs.22500/- . E Ltd is not required to deduct tax from Rs.22500 because the payment made to hospital is not considered as a payment of professional or technical fees.

Therefore, there is no justification of asking TPA to deduct tax u/s 194J. The circular is contrary to provisions of S. 194J and it is therefore not valid.

Suggested course for CBDT:

CBDT would have taken a practical view and clearly waived requirement of TDs for past periods. For future CBDT can very well direct to deduct tax at source on a reasonable basis. Generally charges of hospital are in nature of charges for organizing activities and providing facilities. Considering the fact that total bill of a hospital contain own charges in range of 20-30%, TDs @ 1% u/s 194C can be considered proper and reasonable. Excessive TDs @ 10% will require higher TDs and higher refunds, and that will serve no purpose of TDS.

Earlier article on this website:

An article titled "THIRD PARTY ADMINISTRATOR AND TDS" appearing at serial no. 133 in list of articles by the author was webhosted on 27.09.09. The readers may refer to the same for a detailed discussion. The article was written after reading of some news report. Later on a judgment of Madras High Court was also reported and thereafter the author had made feed back as follows:

The judgment has now been hosted as 2009 - TMI - 34599 - THE MEDI ASSIST INDIA TPA (P) LTD. Versus DCIT (TDS), CIT (TDS), CBDT & UOI . The court has observed that TPA is agent of insurance company and is acting as insurer, except issuing insurance policies. Modalities are fully discussed, it is also noticed by court that TPA will not pay anything more than to which insurance company is liable. The modalities of functioning of TPA clearly shows that they are agent of insurance company and not of patients /policy holders. The courts view was affected, in my opinion, due to wrong approach of counsels of the TPA to claim that TPA pay as agent of policy holder and policy holder as an individual is not liable to deduct tax. Had they claimed that TPA is an arm or agent or officer/ authority to settle and disburse claims, then there would have been different thinking of the judge and the matter could be decided in favor of the TPA. Some facts noted are wrong like TPA decides about hospital. In fact TPA simply lists approved hospitals; the decision is of policy holder as to which hospital he chooses. He can choose any other hospital also, in that case the claim will not be on cashless basis, but policy holder will have to pay first himself and then claim reimbursement. It is also wrongly noted that TPA is person ultimately liable to pay to hospital. This is wrong, because the real person who pay claims is the insurance company and not TPA. TPA is simply agent of insurance company. One can put the matter like this- whether an officer of insurance company signing cheques for hospital will be liable to TDS. The answer is No. So when instead of an officer (he is also an agent), TPA is signing cheque to pay to hospital, how TPA can be liable to deduct tax. The rule that AGENT CAN BE LIABLE ONLY TO THE EXTENT OF HIS PRINCIPAL, need to be emphasized. As noted in article, the role of TPA in the case before the court was limited to administration and disbursement of claim.

Admitted position that TPA is agent of insurance company:

From reading of the recent circular as well as observations of Madras High Court it is clear that TPA is an agent of insurance company and it settles and pays against any sum which is payable under insurance policy by the insurer. There is no dispute on this aspect.

Insurance companies are not required to deduct tax:

It is worth to note that insurance companies are not required to deduct tax while paying mediclaim insurance claims, or motor car accident claims for restoration or repair of vehicles even if payment is made directly to a hospital where policy holder got treatment or to a authorized service station or other garage where vehicle of policy holder got repaired.

When insurance company as principal, is not required to deduct tax from payment to hospital or garage, as the case may be, while making payment of insurance claim, how their agents like TPA can be called upon to deduct tax?

Purpose of TDS:

Purpose of TDS is easy collection of tax and to widen tax payers base and to put a check on tax evasion by persons who do not report income at all. TDS is considered as payment of advance tax, one can consider the amount of TDS likely to be deducted during the previous year, while computing amount of even first installment of TDS which falls due on 15^th of previous year in case of most of TPA's who are companies. Even if TDS is made on 31^st March and deposited on 31^st  May, the deductee can  get credit against first installment of advance tax and also interest in case of refund, w.e.f. 1^st April that is even prior to the date of deposit of TDS.

The TPA's are regulated type of assesses they have PAN and are required to file return of income regularly. Their A.O.'s have not raised question about TDS fro a long period of time.

Hospitals are also generally organized entities, they are assessed to tax and most of them might have paid their tax and maters might have settled. Now, if TDS is made, it will be very difficult to claim refund for period prior to 01.04.2007 because limitation to claim refund for assessment year 2007-08 (PYE 31.03.07) lapsed on 31.03.2009. The A.O might have collected tax and interest from hospitals. Therefore, now directing TPA to deduct tax, deposit the same, issue TDS certificate, and file revised returns will not serve purpose of TDS.

The requirement should be for future if at all:

When a clarification is issued by Board recently, and when deduction for past period is not possible or will not serve purpose of TDS, it is not worth to ask TPA's to deduct TDS for past period. The Circular may if at all considered proper, be made applicable for future only.    

Challenge of circular is needed:

In view of above discussion, it is a fit case to challenge the circular as ultravirse the Income-tax Act and particularly S.194J under which it is issued. The circular can also be challenged on constitutional grounds, because tax deduction on all sums paid to TPA imposes unreasonable restrictions. The Circular can also be challenged for its retrospective effect etc.

Belated demands - does government want its unjust enrichment:

TDS is with a view to allow corresponding credit of tax to concerned party. TDS is not aimed to collect tax as a final tax collection.

It is likely that the ITO(TDS) will raise demands and  TPA as assessee will prefer appeals before CIT(A). There will be considerable period between end of the relevant previous year and raising of demand. In this regard the following contentions can be raised before the CIT(A):

1. For that Ld. A.O. is not justified in passing the order dated 28.12.2009 for F.Y. 2003-04 which has been made after a prolonged delay of  about sixty nine  months from end of F.Y.

2. For that in the facts and circumstances of the case, the revenue has not suffered due to alleged short deduction, or non deduction of the tax because the assessee has not issued TDS certificate to the concerned parties for the amount alleged to be short deducted or not deducted.

3. For that in view of fact that deposit of tax, issuance of TDS certificate will involve unnecessary proceedings and there is no possible way by which the parties (hospitals) can claim refund, it would be fitting in the procedure of tax collection through the mechanism of TDS, advance tax and self assessment tax and tax and interest payable by ultimate tax payer that assessee / deductor is not required to deduct further tax for which no TDS certificates have been issued. 

4. Without prejudice to the first three grounds, learned A.O. was not justified to demand for tax deduction from payment made to hospitals, for insurance claims settled on behalf of our principals who are insurance companies and would not be required to deduct tax, if the principal has directly made payment.

5. That payment made to hospital is not for professional fees, or technical fees but is in settlement of insurance claim on behalf of insurance company and in any case is in nature of composite payment for reimbursement of payments made to doctors, nurses, other service providers, supply of medicines and other consumables, provision for space and facilities, provision of machines and equipments etc. Therefore the case of hospital is similar to a hotel who organize and provide various supplies, facilities and services to its guests. The hospital provide facilities etc. to patients and payment is made by us on behalf of insurance companies and not on behalf of patients. Therefore, provisions of TDS are not at all applicable.

The submissions can be made as follows:

The assessee issued TDS certificates only for the amount of tax deducted and deposited. Therefore, there has not be any loss to the revenue for the alleged lower TDS or alleged default in deducting tax or non deposit of tax. Because the concerned parties could claim tax only on the basis of TDS certificates issued by the assessee/ tax deductor.

TDS can be claimed only on the basis of TDS certificates issued by tax deductor. TDS paid is considered as an amount of income received (S. 198) tax deducted and paid is considered as tax paid on behalf of the person from whose income tax is deducted and paid by deductor - (S.199).

As per S. 209(1)(d) TDS is adjustable against tax payable even by way of first installment of advance tax payable by the recipient. Therefore, if tax is not deducted or a TDS certificate is not produced the recipient of income becomes liable to pay interest u/s 234B and 234C for short fall in payment of installments of advance tax or deferment of payment by way of installments of advance tax. Therefore, it can be said that the revenue has not suffered any loss due to alleged non deduction or short deduction of tax, for which TDS certificates have not been issued. We have to consider the purpose of TDS, issuance of TDS certificates, adjustment of TDS against advance tax installments and tax and interest payable by recipient etc. in the overall context of provisions relating to TDS, tax payment and recovery of taxes and interest payable by assesses.

As per section 190 TDS, TCS and advance tax are three methods of collection of tax before it is due for the assessment year which commences afterwards. Provisions of section 190 have been enacted for the purpose of easy collection of tax and avoidance of tax and not for collection of excessive tax.

As per S. 191 where there is no provision of TDS/ TCS or where TDS or TCS has not been done the taxpayer shall pay tax directly.

Section 197 and 197A provides for relaxation from TDS in specified circumstances. It can be said that such circumstances are not exhaustive and are indicative only. Thus, in some other circumstances also relaxation can be made by authorities to serve the purpose of TDS and relaxation from TDS. When it is found that if forcefully tax is collected by way of TDS or TCS, and it is very likely that such tax cannot be appropriately adjusted against tax liability of income earner or cannot be refunded if excess tax collection is found, then the relaxation can be granted by the A.O. or the appellate authorities.

Section 201 also requires to be interpreted in a purposive manner for the purposes of tax collection by way of TDS which can be allowed credit or refunded to the person from whose income tax is alleged to be deductible. In case it is impossible or even difficult to give credit and refund against such tax then there is no purpose of collection of alleged non deduction or short deduction particularly when TDS certificate has not been issued.

As per section 202 TDS is only one mode of recovery.

As per S. 203 TDS certificate is to be issued in prescribed form which inter alia include details of payment of TDS. Therefore, unless tax is paid a TDS certificate cannot be issued and the payee cannot get credit of TDS. Therefore, in case of belated allegation of non deduction or short deduction, the provisions of TDS cannot be given full and desired effects that is deduction, payment, certification and allowing credit and refund.

As per S. 205 also the payee of income shall not be called upon to pay tax only to the extent to which tax has been deducted from the income. Therefore, in case of allegations of non deduction and/ or short deductions, the payees of relevant income can be called upon to pay their tax dues. As per provisions of the Act, normally the assessment of payees should have been completed, therefore, they would not be allowed any credit for tax if paid for alleged cases of non deduction or short deduction and they will have to pay the tax without any consideration of tax alleged by AO as not deducted or short deducted.

As per section 206 a person is required to file return of TDS in prescribed manner, in prescribed form and within prescribed period etc. Therefore, it would be impossible to comply with this provision if tax is collected against alleged items of non-deduction or short deduction because the prescribed period to file return of TDS is already over.

Thus, we find that in case of alleged non deduction or short deduction the provisions of the Act cannot be applied in the desired manner so that to allow credit and / or refund against such tax which may be collected belatedly on allegation of non deduction or short deduction.  

In view of all relevant provisions, the purpose of TDS and also as commonly understood it is not intention of the legislature that tax should be collected by way of delayed allegation of non deduction or short deduction of TDS, which cannot be allowed credit. In other words there is also no intention of unjust enrichment of the government to collect tax which cannot properly be appropriated against tax dues by alleging defaults of no deduction or short deduction of tax when it is clear that the concerned persons cannot claim refund against such tax. If such allegations are accepted or forced upon the  tax deductor and tax is  deposited and certificates are issued then also such tax will remain with the revenue because the recipient of TDS certificates cannot claim refund due to limitation prescribed u/s 239 (2)(c).  

In view of the above submission we request that demand against  any of alleged non deduction, short deduction or non-deposited TDS for which we have not issued TDS certificate, may be set aside fully as it will not serve the purpose and collection of such excessive tax will be against the scheme of  collection by way of  TDS, TCS, advance tax, self assessment tax and tax payable against regular assessment  and also interest payable by the main tax payer where there is short fall in payment of tax or installment of advance tax.

In view of long delay in passing order u/s 201(1) / 201(1A) no purpose will be served because if the assessee pay the amount of tax and issue TDS certificate the recipient thereof may not be in a position to claim the refund without undue hardship. The TDS is not final payment of tax by the recipient of income. The recipient of income is ultimate taxpayer and if the tax is paid by the recipient then the assessee / tax deductor may not be asked to pay such tax and interest thereon. In respect to Financial Year 2002-03 the relevant assessment year in hands of the recipients of TDS certificates will be assessment year 2003-04 for which period of limitation to claim refund has already lapsed on 31.03.2005. Limitation for filing of return even u/s 139(4) lapsed on 31.03.05. Period for filing a revised return also lapsed long ago. Therefore, even if tax is deducted, and certificates are issued it would not be possible for recipients of TDS certificates to claim credit and / or refund against such TDS. TDS is only one form of collection of tax, and by now the revenue must have assessed, demanded and collected tax from various parties.

Impossibility to deduct:

One can deduct tax only if more than alleged amount deductible is payable to concerned party. At present we have no sums payable to such parties, nor any amount is to be credited to their accounts. Therefore it is impossible to deduct tax as directed by the A.O.

Therefore, balance of convenience also demand that no tax be deducted from alleged items of no deduction and no further tax be deducted from alleged items of short deduction and also no tax be collected against any sum retained against which TDS certificates have not been issued.

TDS provisions are not applicable

Since payment is for insurance claim, on behalf of insurance companies and are against charges of composite nature tax is not deductible. Payment made to hospital is not for professional fees, or technical fees but is in settlement of insurance claim on behalf of insurance company and in any case is in nature of composite payment for reimbursement of payments made to doctors, nurses, other service providers, supply of medicines and other consumables, provision for space and facilities, provision of machines and equipments etc. Therefore the case of hospital is similar to a hotel who organize and provide various  supplies, facilities and services  to its guests. The hospital provide facilities etc. to patients and payment is made by us on behalf of insurance companies and not on behalf of patients. Therefore, provisions of TDS are not at all applicable.

Discussions to this article

[DEV KUMAR KOTHARI]

Thanks to ITO's and CBDT to raise such disputes which benefit our professions and shows that government machinery is working hard. What will be ultimate collection of tax ( TDS + interest ) - ( Refund with interest) may be estiamted. Is it worth to involve in such exercises instead of looking forward? Why to waste national human resources on such exercises which are not likely to result in much gains. All such disputes are reason that in our system a lawyer or A CA ( who are compelled to do unproductive work) get more importance than a doctor or engineer ( who work for productibve and beneficial purpsoes). We must change our mind frame to be more forward looking and result oriented.

[chetan parikh]

As sole propritor,we file i tax return on dr's name.Payment cheque is issued in compulsorily in name of Hospital.TDS will be deducted in name of hospital.hospital can not have pan no,as return can be filed only in name of Dr.TDS will be credited in name of Hospital but it can't have PAN no. What to do?

[MOHAN S]

This is a very good Article which clearly analyse the TDS provisions. I agree that when the insurance company is not required to Deduct tax, TPA being an Agent cannot be saddled with this burden. I hope some one challenges the CBDT circular through a writ petition.

[DEV KUMAR KOTHARI]

Refer: Comments by Chetan Parikh Dated: December 3, 2009. In case of proprietary concerns PAN , is always in name of proprietor. The proprietor can carry business in severla trade names. There should be mention about proprietor. Parties paying any charges after TDS can be informed about this fact and obtain TDS certificate from them in name of proprietor e.g DR. Surgeon (Prop. of Surgeon's Nursing Home) or Dr. Surgeon a/c Syrgeon's nursing Home.