Section 194J of the Income-tax Act, 1961 - Deduction of tax at source - Fees for professional or technical services - Applicability of provisions under section 194J, in the case of transactions by the Third Party Administrators (TPAs) with hospitals etc
Circular No. 8/2009 was issued by the Central Board of Direct Taxes on 24 November 2009. Its subject is Section 194J of the Income-tax Act, 1961 - Deduction of tax at source - Fees for professional or technical services - Applicability of provisions under section 194J, in the case of transactions by the Third Party Administrators (TPAs) with hospitals etc.
Holds that a third party administrator paying a hospital on an insurance company's behalf must deduct tax under section 194J. Services rendered by hospitals to patients are primarily medical services, and section 194J does not require that the professional services be rendered to the person who makes the payment, so payments by third party administrators to hospitals in settlement of medical or insurance claims, including under cashless schemes, attract deduction at ten per cent. Past transactions are equally covered, with the administrator deemed an assessee in default, liable to interest under section 201(1A) and penalty under section 271C. To temper that, the Board decides that no proceeding under section 201 is to be initiated after six years from the end of the financial year in which the payment was made without deduction, and that a demand under section 201(1) may not be enforced if the administrator satisfies the officer in charge of tax deducted at source that the hospital has paid the taxes, a certificate from the hospital's auditor that the tax and interest due have been paid for the assessment year concerned being sufficient.
A number of representations came from stakeholders on whether section 194J applied to payments made by third party administrators to hospitals on behalf of insurance companies in settling medical and insurance claims.
Section 194J of the Income-tax Act, 1961 - Deduction of tax at source - Fees for professional or technical services - Applicability of provisions under section 194J, in the case of transactions by the Third Party Administrators (TPAs) with hospitals etc.
CIRCULAR NO. 8/2009 [F.NO. 385/08/2009-IT(B)], DATED 24-11-2009A number of representations have been received from various stakeholders regarding applicability of provisions under section 194J of Income-tax Act, 1961 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
(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 section 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 are primarily medical services and, therefore, provisions of section 194J are applicable on payments made by TPAs 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 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 under section 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(1A) 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.nn
In a section 201 proceeding against a third party administrator for old hospital settlements, and in the hospital's own assessment when its auditor is asked for the certificate.
It mentions. Circular No. 8/2009
Source: the Income Tax Department’s own published text — its page for this instrument.
