Third Party Administrators—whether liable to deduct tax at source under section 194J
Introduction
Any person (including an individual and HUF in the circumstances mentioned) responsible for paying inter alia, fees for technical or professional services to a resident person is required to deduct tax at source. For this purpose, payer himself is treated as person responsible for paying such fees. The tax is to be deducted either at the time of credit of such income to the account of 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.
Meaning of professional services
This phrase has been defined in the Explanation to section 194J thus:
” ‘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.”
Thus medical profession is one of the professions covered by section 194J.
Payments by third party administrators
The first issue that arises in this context is as to who is a third party administrator? Third party administrator is an independent organization that works as a link between insurance company and policy holder. The insurance companies issue health insurance policies which are serviced by the third party administrators. Third party administrators, inter alia, make payments on behalf of the insurance companies to hospitals for settlement of medical/insurance claims etc. on behalf of such companies.
Circular No. 8 of 2009 dated 24th November, 2009
The position regarding TDS from payments by third party administrators has been clarified by the CBDT in this circular. The view expressed by the CBDT reads as under :
“The services rendered by hospitals to various patients are primarily medical services and, therefore, provisions of section 194J are applicable on payments made by third party administrators to hospitals etc. Further for invoking provisions of section 194J, there is no stipulation that the professional services have to be necessarily rendered to the person who makes payments to hospital. Therefore, third party administrators who are making payments 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 hospital etc.”
Summing up
The view concerning CBDT expressed in its circular regarding penalty under section 271C again, it is respectfully said, needs review. The Court has proceeded on the ground that failure to deduct tax under section 194J will ‘necessarily’ attract a penalty under section 271C in terms of CBDT’s circular is not supported by the language of section 271C which says that ‘such person shall be liable to pay, by way of penalty’ does not rule out applicability of section 273B which, inter alia, provides that ‘notwithstanding anything contained in section 271C, no penalty shall be imposable for failure referred to in this section if the assessee proves that there was reasonable cause for the said failure. This overriding section deletes the impact of the word ‘shall’ in section 271C and the circular cannot go against the legal provision and hence the apprehension that the circular forecloses the defence of the assessee and therefore this part of the circular may not be said to be placing restraint in contravention of section 119 of the Act and therefore cannot be said to be invalid.
Refer Case:
Vipul Medcorp TPA (P) Ltd. & Ors. vs. CBDT (2011)(Del).
Sakharam Narayan Kherdekar vs. City of Nagpur Corporate AIR 1964 Bom 200, 210.
