TDS u/s. 194J in case of transactions by TPAs with Hospitals

CBDT circular on withholding tax on payments by TPAs to hospitals

Summary:- This alert summarizes the Circular No 8/2009 (Circular) issued by the Central Board of Direct Taxes on the withholding tax aspect, under section 194J (Section) of the Indian Tax Law (ITL), in respect of payments by third party administrators (TPAs) to the hospitals on behalf of insurance companies for settling medical insurance claims.

Content of the Circular

• As per the Section, taxpayers (other than individuals or Hindu Undivided Family) responsible for payment of fees for professional or technical services to any resident, are required to withhold tax @10% on such payment.

• The services rendered by the hospitals are primarily medical services, liable to tax withholding under the ITL.

• It is not necessary for the professional services to have been rendered to the person who makes payment to the hospitals. Therefore, the TPAs making payments to the hospitals, on behalf of the insurance companies, for the settlement of claims under various schemes, including Cashless Schemes, are liable to withhold tax.

• The TPAs who fail to withhold tax from payments to the hospitals are liable to remit the tax amount, along with interest and penalty.

• However, no proceedings for recovery of tax will be initiated against the TPAs beyond a period of 6 years from the end of the tax year in which payments are made without withholding tax.

• In other cases, recovery of tax from the TPAs will not be made if the auditors of the hospitals furnish a certificate to the effect that the relevant tax (including interest, if any) for the tax year has been paid by the hospitals. However the TPAs shall be liable to interest on the amount of tax not withheld till the date of discharge of tax liability by the hospitals. Further, penalty for failure to withhold tax, in accordance with the ITL, may also be levied.

Comments:-

This Circular is in response to the representations made by affected taxpayers, after the pronouncement of the recent ruling of Karnataka High Court (Writ Petition No. 11376 of 2009) in the case of Medi Assist TPA (P) Ltd. [¹] which held that the TPAs are required to withhold tax from payments to the hospitals.

This Circular gives total relief to the TPAs in respect of the transactions effected beyond 6 years. In respect of other transactions, the relief is restricted only to the recovery of the withholding tax amount (i.e. no relief from interest and penalty), if an appropriate certificate from the auditors of the hospitals is obtained.

Though the Circular is silent, it appears that in a case where the hospitals are exempt from tax, the TPAs should be entitled to the benefit of the Circular.

Please refer our earlier post mentioning high court rule on Applicability of TDS on TPA titled “Applicability of TDS in case of Third Party Administrator (TPA) providing health insurance claim services.’

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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.

Circular No. 8/2009, dated 24-11-2009
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.

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-

(a) fees for professional services, or

(b) fees for technical services, [or] 1

(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 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..’.

3. The services rendered by hospitals to various patients arc 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.

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.

4. 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 (1 A) 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.

5. The contents of the circular may be brought to the notice of officers and officials working under you for strict compliance.