TDS u/s 194J applicable on payment made by TPAs to hospitals on behalf of insurance Co.

IN THE HIGH COURT OF KARNATAKA
AT BENGALURU

The Relevant Text of the Order as follows :

13. From close scrutiny of the aforesaid provision, it is axiomatic that in Section 194J(1), the expression, any person employed by the legislature in Section 194J(1) refers to the payer, which excludes individual or Hindu Undivided Family. The aforesaid provision mandates 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. While defining the character of the payer, the Parliament has referred to the expression any person not being an individual or a Hindu Undivided Family, nothing repugnant to the context appears in Section 194J(1), so as to not read the expression “person” as defined in Section 2(31) of the Act, which includes an individual; a Hindu Undivided Family; a company; a firm; an association of persons or a body of individuals whether incorporated or not; a local authority; and every artificial judicial person not covered in the previous clauses.The contention that there is no privity of contract between TPAs and individuals and TPAs make payment on behalf of individual also is excluded from purview of Section 194J(1) of the Act, therefore, TPAs should also be excluded appears to be attractive at the first blush, but does not deserve acceptance as on closer scrutiny and taking into account the stand of the assessee before assessing officer, it is evident that the relationship between assessee and the Hospital is principal to principal and assessee makes payment on behalf of contractual obligation between assessee and the bank.

14. However, in Explanation to Section 194J(1), the Parliament has not used the expression “individual” but has used wider expression “person” and therefore, if the expression “person” is read with reference to Section 2(31) of the Act, it is evident that professional services mentioned in Explanation (a) viz., Legal, Medical, Engineering or Architectural Profession or profession of accountancy or technical accountancy or interior decoration or advertising or such other professions can be carried on by individuals, firm, company, an association of persons, a body of individuals whether incorporated or not, a local authority and every artificial judicial person. The legislature has used a wider term “person” in Explanation (a) to Section 194J(1), in which on plain reading all professional services are covered, therefore, the submission that the word “person” has to be understood in context with reference to each profession independently, does not deserve acceptance as the language used in Explanation (a) to Section 194J(1) is unambiguous and clear. Even otherwise, if the Parliament intended to restrict the scope of Explanation (a) only to the fees received by an individual, it was open for the Parliament to use the words differently to express different intention as it is well settled that where the legislature intends to express different intention it uses the language differently. If the Parliament had intended that the expression “person” has to be read differently with reference to each profession, it would not have used a wider expression viz., the “person” and would have used the word “individual” or “firm” with reference to legal medical or profession of accountancy and for remaining professions, it would have used the expression “person”.

15. We agree with the submission made on behalf of the assessee that a hospital does not carry on profession of medicine as it is not a professional and does not wholly earn professional income. Learned counsel for the assessee is also correct in saying that profession can be carried on by an individual or groups of individuals because profession requires expertise and professional skills, as held, by Supreme Court in ‘DR. DEVENDRA. M. SURTI V. STATE OF GUJARAT’, AIR 1969 SC 63. However, incidental or ancillary services, which are connected with carrying on Medical Profession are included in the term Professional Services for the purpose of Section 194J. The words “in the course of carrying on” are used with the intention to include incidental, ancillary, adjunct or allied services connected with or relatable to medical services. Thus, the sweep and scope of Explanation (a) to Section 194J is not restricted only to payments made to medical or other professionals but services rendered in the course of carrying on the stipulated profession. It is pertinent to note that payments are made to the hospitals and not personally by the payer to the individual doctors or professionals. The medical services are rendered in the course of carrying on the medical profession. Undoubtedly, the nature of payment in the hands of the recipient, is determinative of deductibility of tax at source, however, the payments in the hands of hospital cannot be treated to be business income as the payments are received in the course of carrying on the medical profession. It is well settled rule of statutory interpretation that meaning and purport of one section cannot be understood with reference to other sections of the Act. Therefore, with reference to Section 35AD(8)(C), 44AA and 80-IB, it cannot be inferred that the hospitals carry on business and not profession. The submission of TPAs that when they make payments to the hospitals, they are not liable to deduct tax at source as hospitals carry on a business activity under Section 194J, is not worthy of acceptance.

16. In Dedicated Healthcare Services, supra in paragraph 14, the division bench of Bombay High Court while dealing with the Circular No.8/2009 dated 24.11.2009 issued by Central Board Of Direct Taxes has held as follows:

14. Section 119 of the Act provides that the Board may, from time to time issue such orders, instructions and directions to other income tax authorities as it may deem fit for the proper administration of the Act and that such authorities and all other persons employed in the execution of the Act shall observe and follow such orders, instructions and directions of the Board. The proviso to Sub-section (1) however stipulates that no such orders, instructions or directions shall be issued (a) so as to require any income tax authority to make a particular assessment or to dispose of a particular case in a particular manner; or (b) so as to interfere with the discretion of the Commissioner (Appeals) in the exercise of his appellate functions. The Board has by the circular taken the view that payments which are made by TPAs to hospitals fall within the purview of u/s 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 u/s 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 u/s 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 which is open to the assessee under Section 273B. By foreclosing a recourse to the defence statutorily available to the assessee under Section 273B, the Board has by issuing such a direction acted in violation of the restraints imposed upon it by the provisions of Sub-section (1) of Section 119. To that extent, therefore the circular that was issued by the Board would have to be set aside and is accordingly set aside. We also clarify that in making assessments or, as the case may be, in passing orders on appeals filed under the Act, the Assessing Officers and the Commissioner (Appeals) shall do so independently and shall not regard the exercise of their quasi judicial powers as being foreclosed by the issuance of the circular.

17. We respectfully agree with the aforesaid findings recorded by the High Court and to the extent as held by the Bombay High Court, the impugned Circular is quashed. It is needless to state that the Assessing Officer and the Appellate Authority shall independently apply their minds in exercise of their quasi judicial powers without being influenced by the Circular. 11. For the aforementioned reasons, we are not inclined to agree to the submission made on behalf of the assessee that while interpreting Section 194J, the High Court of Bombay and Delhi High Court have enlarged the scope of the Act. In fact, the language employed in Section 194J is plain and unambiguous, which does not admit of any two interpretations. It is also the submission that the courts have rewritten or recast Section 194J while interpreting the same is also untenable. Since, Section 194J neither suffers from any ambiguity nor admits of two interpretations. The question of taking a view which is favorable to the assessee does not arise. In view of preceding analysis, as well for the reasons assigned by High Court of Bombay and Delhi High Court in Dedicated Healthcare Services supra and Vipul Medcorp supra, we respectfully concur with the view taken by Bombay and Delhi High Court. As an upshot of aforesaid discussion, the substantial questions of law framed are answered in terms of the decisions of High courts of Bombay and Delhi.

In the result, the appeal is disposed of.