Whether Third Party Administrator is required to deduct tax at source?

The Delhi High Court has recently reserved its order on whether tax at source can be deducted from a Third Party Administrator (“TPA”). In Vipul Medcorp v. Central Board of Direct Taxes (“CBDT”), a petition has been filed by the TPA challenging the decision of the CBDT requiring them to deduct tax at source from the patients who receive cashless treatment under the Medical Insurance Policy scheme.

Third party administrators are organizations that process insurance claims on behalf of insurance companies. The petitioner argued that Tax Deduction at Source (“TDS”) under §194J of the Income Tax Act is applicable only on individuals and professionals, while hospitals are exempt from TDS as they fall under the business income category. However, the CBDT contended that TDS is chargeable under professional income as hospitals render professional medical services. In response, the petitioner argued that when any payment is made by TPAs to the insurance companies, various items, such as room rent, sale of medicines, use of equipment like ventilator, oxygen tank, food expense and diagnostics constitute a significant amount of the bill; therefore, these cannot be accounted as fees for professional services. After hearing arguments from both sides, the court reserved its order. 

Previously, a similar case has been decided by Karnataka High Court. In Medi Assist India TPA Pvt. Ltd. v. DCIT (TDS), WP No. 11376 of 2009, decided on August 13, 2009, it was held that in view of the agreement between the TPA and hospital for payment of money to the hospital, the TPA is obliged to deduct tax at source under §194J. Pursuant to this case, the CBDT, through Circular No. 8/2009, dated 24.11.2009, had clarified that TPAs who are making payment on behalf of insurance companies to hospitals for settlement of insurance claims under various schemes including cashless schemes are liable to deduct tax at source under section 194J on all such payments to hospitals etc.

The final outcome of this case in the Delhi High Court may finally settle the question regarding applicability of TDS to TPAs providing insurance claim services. [By Pritika Rai Advani (3rd year, NUJS)]