It is often said that the importance of careful analysis of statutory language cannot be overstated, especially in fiscal matters. One will not be surprised to find, therefore, that the term “professional services” has recently engendered an interesting controversy as to its true scope. It arose before the Bombay High Court in Dedicated Health Care Services TPA v. ACIT, where it was argued that “professional services” can be rendered only by an individual, and not by a corporation or by any other organised vehicle of business.
The context for this case is the now-widely prevalent service provided in the insurance industry by an entity known as a “Third Party Administrator” [“TPA”]. TPAs enter into service agreements with policyholders to provide hospitalization services, cashless access, billing etc., and are regulated by the IRDA. It is common, therefore, for a TPA to make payments to hospitals on behalf of their clients under the terms of the policy, and the question that arose before the Bombay High Court was whether the TPA is required to deduct tax at source under the provisions of s. 194J of the Income Tax Act, 1961.
Section 194J, which deals with TDS for professional and technical services, and which we have considered in another context here, provides that “any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of fees for professional services…” shall deduct TDS at a specified percentage of the sum paid. “Professional services” is defined by the Explanation as “services rendered by a person in the course of carrying on legal, medical profession…”
From the plain language of the provision above, there are two possible avenues to contend that a payment by a TPA to a hospital does not qualify as “fees for professional services”. The first is to suggest that the “hospital” is not a payee for the purposes of s. 194-J, because it is, as a corporate entity, incapable of rendering “professional services”. The second contention is that even if services are rendered by a hospital, the “payer” (the TPA) is not the beneficiary of the service. The second contention will face the obvious objection that there are elements of agency in the relationship between a TPA and its client, and it is perhaps for this reason that the assessees in Dedicated Health Services chose to focus entirely on the first.
The Court began its analysis by noting that Parliament has used three distinct terms in s. 194-J – “person, not including an individual…”, to describe the character of the payer, “resident”, to describe the character of the payee, and “services rendered by a person in the course of carrying on the medical profession” to indicate the meaning of professional services. “Person” is defined in s. 2(31) of the Act as including inter alia an “individual”. “Resident” is defined in s. 2(42) as a person (and therefore an individual) who satisfies the residency requirements set out in s. 6. The Court, proceeding on the reasonable premise that Parliament employed three different expressions consciously, held that the use of the word “person” in the definition of professional services, in preference to the term “individual” used earlier indicates that s. 194-J applies to corporations as well. The following observations are pertinent:
Firstly, in defining the character of the person who is to make the payment and whose obligation it is to deduct tax at source, Parliament has excluded from the ambit of the expression “any person” an individual and a Hindu Undivided Family. Secondly, in defining the character of the payee under the substantive part of Section 194J Parliament has used the wider expression “resident”. Thirdly, in terms of Explanation (a), the words “services rendered by a person in the course of carrying on” have to be given a meaning. These words include service rendered which is incidental to the carrying on of a profession…
While one cannot fault this analysis, there is some support in case law for the position that a professional, in general, is an individual and not a corporation. The Supreme Court, for example, held in Surti v. State of Gujarat (AIR 1969 SC 63) that “a professional activity must be an activity carried on by an individual by his personal skill and intelligence.” Other decisions followed this principle in various contexts.
The Bombay High Court recognised this, and held that a hospital “by itself, being an artificial entity, or a corporate enterprise which conducts the hospital is not a medical professional”. However, the Court held that Parliament, which is presumed in law to have been aware of this position, intended to nevertheless impose the withholding tax obligation on payments made to non-individual payees. For this proposition, the Court relied on the fact that the definition of “professional services” is confined to s. 194-J by virtue of the expression “for the purposes of this section…” Secondly, it relied on the difference between “person”, “resident” and “individual” adverted to above. Finally, the Court held that it is anomalous to hold that a doctor who runs a nursing home qualifies as a “payee” under this provision, while a corporation that runs a hospital and provides exactly the same service does not.
Thus, there appears to be a distinction between the terms “profession”, “professional” “professional activity” and “professional services”. In sum, although only an individual can be a “professional” under existing law, it does not follow that only individuals are capable of rendering “services in the course of carrying on the medical profession”.