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TMI Blog2010 (5) TMI 98X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Third Party Administrator Health Services Regulations 2001 framed under the provisions of Sections 14 and 26 of the Insurance Regulatory and Development Act read with Section 114 A of the Insurance Act. The Sixth Petitioner is a trust registered under the Indian Trust Act 1882 and has been constituted by Third Party Administrators (TPAs). TPAs enter into agreements, described as service level agreements, with insurance companies. The insurance companies issue health insurance policies which are serviced by the TPAs who act as facilitators. Under the service level agreements, the TPA is obligated to perform various services for policyholders. A specimen of a service level agreement which is relied upon in the proceedings contains a recital to the effect that the TPA is engaged in making available health and support services and that the insurer and the TPA have agreed that the latter shall provide to customers of the insurer health care services for a fee. The services which are provided inter alia include hospitalization services, cashless access services, billing services and call center services. Each TPA as a facilitator of the insurance company provides services in connec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of the hearing that against the orders passed under Section 201, appeals have been filed before the Commissioner (Appeals). However, the Petitioners have pressed their challenge in these proceedings since they seek a resolution of the issue of interpretation of Section 194J and since, according to them, the issuance of a circular by the Central Board of Direct Taxes amounts to an interference with the quasi judicial powers of assessing authorities under the Act. 5. Counsel appearing on behalf of the Petitioners submits that (i) Section 190 forms a part of Chapter 17 which deals with the collection and recovery of tax. Sub section (1) of Section 190 provides that tax on income shall be payable by deduction or collection at source or by advance payment, in accordance with the provisions of the Chapter, notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year; (ii) Section 194J applies where any person (not being an an individual or a Hindu Undivided Family) is responsible for paying to a resident any sum by way of fees for professional services. The expression "professional services" is defined by the Explanation to me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent any sum by way of (a) fees for professional services, or (b) fees for technical services, or (c) royalty, or (d) any sum referred to in clause (va) of section 28. 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 percent of such sum as income tax on income comprised therein. Explanation (a) to the provision is as follows: "(a) "professional services" means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or of this section." 8. The substantive part of Section 194J requires a deduction of an amount equal to 10% where any person, not being an individual or a Hindu Undivided Family is responsible for paying to a resident any sum inter alia by way of fees for professional services. The deduction has to be made at the time of the credit of such sum to the account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to in Clause (a) of the Explanation can only be carried on by an individual. Consequently, it has been urged that a hospital cannot be regarded as carrying on the medical profession and hence, payments made by TPAs to a hospital cannot be treated as fees for professional services. Now it needs to be emphasised that while defining the expression "professional services" Parliament has not defined the expression to mean services rendered by an individual who carries on the legal, medical, engineering or architectural profession or any of the other professions listed in the clause. If Parliament intended to restrict the ambit of Explanation (a) only to fees received by an individual in the discharge of his or her duties as a professional, it was open to Parliament to use words that would be indicative of that position. In fact as noted earlier, while defining the character of the payer Parliament specifically excluded an individual and a Hindu Undivided Family from the purview of the expression of the person who is liable to deduct tax at source and a portion of the payment which is made to the payee. Hence, there are three circumstances, while construing the provisions of Section 194 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was construing the provisions of Section 2(4) of the Bombay Shops and Establishments Act, 1948 which defined the expression "commercial establishment". In that case, a doctor who was running a dispensary was convicted for an offence under Section 52(e) read with Section 62 of the Act and of the Rules. The Supreme Court while allowing the appeal against the order of conviction held that the case of the appellant did not fall within the purview of the Act, more specifically Section 2(4). The Gujarat High Court similarly had occasion to follow this principle in its decision in Commissioner of Income Tax v. Dr. K.K. Shah {(1982) 135 ITR 146.} while holding that where both spouses were doctors, lawyers or architects, and form a partnership for the purpose of carrying on a professional activity, their income would not be liable to be clubbed together under Section 64(1)(i). The Gujarat High Court held that for this purpose, if the spouses were to carry on the activity of a nursing home as part of their professional activity for treating their own patients, the income from the nursing home could be treated as their professional income which was not liable therefore to be clubbed. However ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icate or deduct no tax, as the case may be. It would be open to any hospital, if it is so advised, to make an application under the provisions of Section 197 for the deduction of tax at a lower rate or, as the case may be, for no deduction of tax as for instance when the hospital itself is exempted under the provisions of Section 10(23C) of the Act. Such applications, as the affidavit in reply discloses, have already been made. 13. The Petitioners have also called into question the validity of a circular issued by the Central Board of Direct Taxes, being Circular 8/2009 dated 24 November 2009. Paragraphs 3, 3.1 and 4 of the circular are to the following effect: "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 cashles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purview of Section 194J. No exception can be taken to the circular to that extent, consistent with the interpretation placed on the provisions of Section 194J in the course of this judgment. However, the grievance of the Petitioners is that 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 impossible 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 vice in the circular that has been issued by the Central Board of Direct Taxes lies in the determination which has been made by the Board that a failure to deduct tax on payments made by TPAs 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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