Brief Facts of the Assessee:
- Appeal filed by Assessee – The Assessee is a company incorporated under the provisions of Companies Act, 1956 and is engaged in running a Super Specialty Cardiac hospital. The assessee employs two types of Doctors, viz. Full time Consultants (herewith “FTCs) and Panel Doctors. FTCs were paid professional fee, on which assessee deducted tax at source in terms of the provisions of section 194J of the Income Tax Act, 1961. The Assessing Officer (herewith “the AO”) analyzed terms of employment of the FTCs and observed that assessee company exercised such control over these consultants that they did not enjoy any independent status of a Consultant, but they act as an employee of the assessee company. The AO concluded that assessee was required to deduct tax at source in terms of the provisions of section 192 of the Act. The AO also held the Assessee as Assessee in default as per section 201(1)/201(1A) of the Act for short deduction of tax at source. Such shortfall of tax was determined at Rs. 4,61,25,376/- and the related interest chargeable under section 201(1A) of the Act was determined at Rs. 2,21,40,180/-.
- Cross Appeal filed by Revenue – The issue relates to payment made by Assessee towards Annual Maintanance of Machineries and payments made for pest control expenses. In both the type of payments, the assesse withheld taxes by invoking section 194C of the Act. Whereas the AO held that such payments were liable to TDS u/s 194J and not 194C of the Act.
Held by CIT (A):
- Appeal filed by Assessee – The CIT(A) observed that the features of appointment of FTCs Doctors brought out by the AO established that it was a case where employer employee relationship existed between the assessee company and FTCs Doctors. Hence the CIT(A) upheld the order of AO and concluded that the remuneration paid to the FTCs doctors as a result of said relationship was in the nature of ‘salary’, which would attract the provisions of section 192 of the Act.
- Cross Appeal filed by Revenue – The CIT(A) has accepted the stand of Assessee in the matter of payments towards AMC of Machineries and Pest control expenses and has held that such payments are liable to TDS u/s 194C and not 194J of the Act.
Question of Law:
- Whether payments made to FTCs are in the nature of salary and are subject to TDS u/s 192.
- Whether payments made towards annual maintenance of machines and pest control expenses is liable to TDS u/s 194C.
Contention of the Revenue:
The Revenue observed that Assessee exercised such control over these consultants that they did not enjoy any independent status of a Consultant, but they act as an employee of the assessee. The features of appointment of FTCs Doctors brought out by the AO established that it was a case where employer employee relationship existed between the assesse and FTCs Doctors.
The Revenue also contended that the FTCs Doctors were supposed to supervise the work of the staff; that they were not supposed to be engaged in competing or conflicting profession or business; attachment to any other hospital was prohibited; that the recording of attendance was mandatory; that there was restrictions regarding use of information/results of clinical research outside assessee’s hospital; and, that a notice of three months was required to terminate the arrangement between the assessee and the Doctors. Also in the appointment letter of FTCs Doctors there was a standard clause which stated that the Doctor was to be governed by the bye-laws and the general rules and regulations of the appellant hospital.
Contention of the Assessee:
- The Assessee contended that the tenure of appointment of all FTCs Doctors was for a period of one year, which was renewable on a yearly basis depending on the performance of the doctors, whereas the tenure of appointment is not fixed in case of a salaried employee. Also none of the FTCs Doctors were eligible for any benefits such as encashment of leave, gratuity, contribution to provident fund, superannuation, etc., whereas the employees are given such benefits.
- The Assessee explained that all the FTCs Doctors were required to maintain indemnity insurance at their own cost during the period of contract with the assessee hospital. It is pointed out that responsibility of collection of fee was on the doctors and if the amount was not received, the doctors did not get their payments. Such a clause is completely missing in a case where assessee has employed full time employees. Also the employees of the assesse are eligible for specific number of leaves during their tenure, for example privilege leaves, casual leave, sick leave, etc., whereas no such benefits were available for the doctors. As far as remuneration is of concern, it was pointed out that it varied from month to month and was dependent on the patients attended to by the doctors. The doctors were paid their remuneration only after the realization of fees from the patients unlike employees who receive salary at a fixed date of month.
- The Assessee argued that the appointment letters of the FTCs Doctors clearly point out that it is a ‘contract for service’ and not a ‘contract of service’ so as to suggest any employee-employer relationship. Also, the recipient FTCs Doctors had filed their individual returns of income showing the income received from the assessee as professional income, and the same was accepted by the Department without any contravention.
Held by the Income Tax Appellate Tribunal (“ITAT”):
- The ITAT observed that the doctors had been employed by the assessee in terms of their respective contracts. The remuneration of some of the doctors was fixed per month but there was clause which envisaged sharing of fees with the hospital. The assesse hospital deducted its share and only thereafter the amount was paid to the Consultants. The arrangement between the assessee hospital and the FTCs Doctors showed that the earnings of the Doctors were dependent on the patients coming to the hospital. Hence the FTCs Doctors cannot be construed as employees of the assessee hospital but are independent consultants, who undertake risk and reward of their medical profession.
- The ITAT also relied upon the judgement passed by Hon’ble Bombay High Court in the case of Grant Medical Foundation (supra) and Hon’ble Karnataka High Court in the case of Manipal Health System Limited (supra). Hence the appeal filed by the assessee is allowed and the corresponding levy of Interest charged u/s 201(1A) was deleted.
- With respect to payment towards maintenance of machines and pest control expenses, the ITAT relied upon the CBDT Circular No.715 dated 8/8/1995 and as also the decision of the Ahmedabad Bench of the Tribunal in the case of Nuclear Power Corporation Ltd. and held that annual or routine maintenance work do not involve services of technical nature so as to be assessable as “fees for technical services”. Also in case of pest control expenses, the work is repetitive in nature and the persons who carry out the same are semi-skilled persons not having any high degree of professional qualification. Hence, it was held that the Assessee has rightly withheld tax u/s 194C of the Act and therefore, the appeal filed by Revenue stays dismissed.