Assessment of Private Hospitals, Nursing Homes/Medical Clinics, Medical Colleges

Indian healthcare sector is one of the fastest growing service  areas  and  has witnessed significant growth in terms of revenue and employment generation in recent years. With liberalization of the  economy, the  per capita  income had increased manifolds, which in turn increased the demand for high value quality health services. The public infrastructure for providing health related services is not sufficient to cater to the increasing demands of quality health services in the country. The healthcare sector in India comprises both private and public sectors. The private sector provides nearly 80 per cent of outpatient care and about 60 per cent of inpatient care. The private health care sector comprises organizations that operate both on profit and not-for-profit basis.  The “not-for-profit” organizations include healthcare service providers such as Non-Government Organizations (NGO’s), charitable institutions, trusts, etc. The private sector in India has a dominant  presence  in  medical  education and  training, hospital infrastructure and ancillary service areas  such  as medical technology  and diagnostics.

The health sector has witnessed a robust annual growth of 15 per cent (National Health Policy 2015). The sector is projected to grow from Rs. 684,000 crore in 2015 to Rs. 823,700 crore in 2018 with a CAGR of 12.1 per cent. (Industry Forecast -Healthcare -India -Q1 2015, Business Monitor International, 05 December 2014) 

Healthcare infrastructure

The healthcare infrastructure is divided into the following segments: Hospitals, which include  government hospitals and private  hospitals. The government hospitals include primary healthcare centres, district hospitals and general hospitals. The private hospitals include nursing homes/medical clinics, mid-tier and top-tier private hospitals.  It also includes hospitals run by trusts, charitable institutions and NGOs. Among the professionals engaged in delivery of healthcare services, there are all types of surgeons, doctors (all disciplines), nurses and allied health professionals (AHPs) viz. technologists, radiologists etc.

Legal Framework

The assessees engaged in the business of Private Hospitals, Nursing Homes/Medical clinics, Medical Colleges/Research Institutes, Diagnostic Centres, Pathological labs, Medical supplies agencies/stores etc. are governed by all the provisions of the Income Tax Act that are generally applicable to the different class of assessees viz. Companies, Firms, Trusts, Charity  firms, Association of Persons, Hindu Undivided  families, Individuals etc. Further, the Income Tax Act provides specific tax incentives to hospitals. It provides a five-year tax holiday in respect of profits derived from the business of operating and maintaining hospitals located anywhere in India other than the excluded areas subject to certain conditions, besides deduction of capital expenditure incurred in  connection with setting up of new hospitals, also  subject to certain conditions. Further, it allows higher rate of depreciation on medical equipment to incentivize the hospitals to upgrade their healthcare infrastructure and to provide access to patients to the latest technology.

Other important deductions and allowances admissible under the Income Tax Act which are also availed by the assessees in healthcare sector. There have been important judicial pronouncements, and circulars based on these, indicating that (i) there should be a direct nexus between the research activities undertaken and  business of  the  assessee  and  that  (ii) unlawful  expenditure  in  form  of commission paid to doctors to be disallowed as business expenditure.

The private healthcare sector comprises organizations working both on commercial basis for profit and on not-for-profit  basis. The ‘not-for-profit’ healthcare sector includes Non-Government Organisations (NGOs), charitable trusts etc. A large number of hospitals and medical institutions  enjoy the benefit of exemption either under section 11 or under section 10(23C). 

Definition for classification and categorization of Clinical Establishments

‘Hospital’ (WHO) means - Health care institutions that have an organized medical and other professional staff, and inpatient facilities, and deliver medical, nursing and related services 24 hours per day, 7 days per week.

‘General Hospital’ is- a set up having facilities, medical staff and all necessary personnel to provide diagnosis, care and treatment of a wide range of acute conditions, including injuries, and normally has an emergency department to deal with immediate and urgent threats to health.

Nursing Home ‘Nursing Home ’means any premises used or intended to be used for reception of persons suffering from any sickness, injury or infirmity and providing of treatment and nursing for them and include a maternity home.

Maternity Home – ‘Maternity Home’ means any premises used or intended to be used for reception of pregnant women or of women in labour or immediately after child birth;

‘Specialty Hospital’ are - hospitals having facilities, medical staff and all necessary personnel to provide diagnosis, tertiary care and treatment of a limited specialized group of acute or chronic conditions such as psychiatric problems, certain disease categories such as cardiac, oncology, or orthopedic problems, and so forth.

Multi-specialty hospitals are – hospitals offering specialized and tertiary care in single or multiple facilities segregated units each of which are devoted to a complexity of patient care defined in this subsection.

Clinics’ means – a medical facility run by a single or group of physicians or health practitioners smaller than a hospital. Clinics generally provide only outpatient services and can have an observation bed for short stay.

Clinical  Establishment which  include  small  clinics  providing  healthcare services without nursing aids and poly-clinic services;

Day care Facility (Medical/Surgical) – day care facility as part of an existing hospital. Here it is in the form of service offered by any hospital on its own premises or as extension outside its premises. Responsibility of the Day centre will be of parent organization/institution/hospital. Day care facility specific to a specialty e.g. Ophthalmic Services. ENT services etc. These centers should have referral mechanisms in place i.e. in case of need the patient can be shifted to a link hospital already identified. These referral mechanisms should be displayed prominently.

Diagnostic Centre means- stand alone organized facilities to provide simple to critical diagnostic procedures such as radiological investigation supervised by a radiologist and clinical laboratory services by laboratory specialist usually performed through referrals from physicians and other health care facilities.

Diagnostics Centres/Pathological Labs which  comprise  businesses  and laboratories  that  offer  analytic  or  diagnostic  and pathological  laboratory services;

Dental clinics - are places where dentists provide dental care with no inpatient facilities.

Dental hospitals - are places where dentists provide outpatient dental care with inpatient facilities

Inpatients – residents hospitalized for indoor care across all types of hospital beds.

Outpatients – where car is provided without admission/hospitalization as inpatient.

Medical  Equipment  and  Supplies  which  include  establishments  primarily engaged in medical equipment management and supplies such as surgical, dental, orthopaedic, ophthalmologic, laboratory, consumables etc.

Tax incentives available for private healthcare facilities under Income Tax Act

Tax incentives encourage the growth of private sector investment and serve as important  policy  tools  for  achieving  economic  and  social  objectives.  The assessees engaged in the business of running hospitals, nursing homes, medical research institutes  etc.  can  avail  of  reliefs  and  incentives.

The Income Tax Act, 1961 provides for tax concessions and exemptions to certain hospital and medical institutions as under :—

[1]   Income of Charitable Medical Institutions [Sections 10 (23C)]

        Section 10(23C) of the Income Tax Act, provides exemption to any hospital or institution in                    respect  of income from treatment if it obtains approval from the prescribed authority for that                  purpose and subject to fulfilment of specified conditions.

Section 10(23C) of the Income Tax Act, also provides exemption to any hospital or other institution for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit, and which is wholly or substantially financed by the Government.

 

Section 10(23C)(via) of the Act provides that exemption to the trust is available if it exists “solely” for philanthropic purpose and not for purposes of profit. Further, section 13 specifies situations in which the exemptions can be denied to trusts.

 

        Types of Institutions

(i)   Income of educational and medical institutions which are wholly or substantially financed by the Government Sub-clauses (iiiab) and (iiiac) of section 10(23C) provide for exemption for the income of educational and medical institutions which are wholly or substantially financed by the Government.

(ii)  Income of educational and medical institutions, the annual receipts of which do not exceed Rs. 5 crore Sub-clauses (iiiad) and (iiiae) of section 10(23C) provide for exemption for the income of educational and medical institutions, the annual receipts of which do not exceed Rs. 5 crore

(iii) Income of educational and medical institutions other than those covered under Section  

       10(23C)(iiiab), (iiiac), (iiiad) and (iiiae), with annual receipts exceeding Rs. 5 crore

        Section 10(23C)(vi) and (via) provide for exemption for the income of educational and medical institutions other than those covered under Section 10(23C)(iiiab), (iiiac), (iiiad) and (iiiae), which may be approved by the prescribed authority.

 

[A] Government Financed Hospital/Medical Institutions [Section 10(23C) (iiiac)]

Section 10(23C)(iiiac) makes the income of any hospital or other institutions which are wholly or substantially financed by the Government covered in section 10(23C)(iiiac) for fully exempt from income-tax. If the following conditions are satisfied, income of hospital or any other institution is exempt from income-tax under section 10(23C):—

(i) Income arises to a hospital or other institution for the reception and treatment of person—

(a) suffering from illness or mental defectiveness; or

(b) during convalescence; or

(c) requiring medical attention or rehabilitation.

(ii) The hospital or other institution exists solely for philanthropic purposes and not for the purpose of profit.

v   Philanthropic includes activities promoting goodwill to mankind or activities beneficial to humanity at large.

(iii) The hospital or other institution is—

(a) wholly or substantially financed by the Government [Section 10(23C)(iiiac)]; or

(b) the aggregate annual receipts of such hospital or institution do not exceed one crore;

(c) it is approved by the prescribed authority (i.e. the Pr. Commissioner or the Commissioner).

Hospital – Exemption is automatic for entities which are wholly or substantially funded by Government of India or State Government

The assessee, an association of persons, was established by the Government of Karnataka for charitable purposes. The assessee had received grant of a sum from State Government. At end of the relevant year the assessee had an unutilized fund which was claimed by the assessee as exempt under section 11. The Assessing Officer found that the assessee was not registered under section 12AA, held that the assessee was not entitled for exemption under section 11. The CIT(A) affirmed order of the Assessing Officer. On appeal by the assessee before the tribunal, the tribunal held that the assessee has been recognized as a Government established, exemption under section 10(23C)(iiiac) is automatic for entities which were wholly or substantially funded by the Government of India or State Government, as the case may be. Therefore the assessee is entitled for exemption under section 10(23C) (iiiac). (Assessment Years 2008-09, 2009-10) - [District Health & Family Welfare Society v. DCIT (2014) 61 SOT 41 (URO) (ITAT Bangalore)]

KEY NOTE:

(i) Application for grant for exemption is not necessary.

(ii) The statute does not mandate for application of income by such hospital/ medical institutions.

MANDATORY TO FILE RETURN OF INCOME

With effect from assessment year 2016-17, all such entities covered under section 10(23C)(iiiac) are mandatorily to file their return of income.

[B] Small Hospitals/Medical Institutions with Gross receipts upto one crore [Section

      10(23C)(iiiae)]

Section 10(23C)(iiiae) makes the income of hospitals/medical institutions eligible for exemption which fulfill the conditions prescribed in the section.

The conditions prescribed are:—

(a) The entity can be a hospital or any other institution

(b) The hospital or institution should be for the reception and treatment of persons suffering from illness or mental defectiveness or for the reception and treatment of persons during convalescence or of persons requiring medical attention or rehabilitation

(c) The hospital or the institution should be existing solely for philanthropic purposes and not for purposes of profit, and

(d) Aggregate annual receipts of such hospital or institution do not exceed the amount of annual receipts as may be prescribed (Presently 1 Crore, See Rule 2BC)

KEY NOTE:

Application for grant for exemption is not necessary.

MANDATORY TO FILE RETURN OF INCOME

With effect from assessment year 2016-17, all such entities covered under section 10(23C)(iiiae) are mandatorily to file their return of income.

[C] Other Hospitals/Medical Institutions [Section 10(23C)(via)]

  Section 10(23C)(via) provides full exemption from income-tax to any hospital or other institution existing solely for philanthropic purposes and not for purposes of profit other than those mentioned in section 10(23C)(iiiac) or 10(23C)(iiiae) which fulfill the following conditions:—

(a) The Hospital or other medical institutions may be approved by the prescribed authority which is as per Rule-2CA is the Pr. Commissioner of Income Tax or the Commissioner of Income Tax.

(b) In case hospitals or other medical institutions, which are not financed by Government, are having aggregate annual receipts exceeding one crore, section 10(23C)(via) will apply. Accordingly, the income of such hospitals or medical institutions will be exempt from tax only if the prescribed authority approves such entities.

(c) For this purpose an application for approval shall be made in Form No. 56D by any hospital or other medical institution to the prescribed authority.

 

Section  10(23C)(via)  of  the  Act  provides  that exemption to the trust is available if it exists “solely” for philanthropic purpose and  not  for  purposes  of  profit.  Further, section 13  specifies  situations :

 

(a) The property should be held under a trust or legal obligation;

(b) The property should be so held for charitable or religious purposes which, enure for  

     the benefit of the public. No part of the income or property of the trust should be used

     or applied directly or indirectly for the benefit of the settlor or other specified persons;

(c) The trust should not be created for the benefit of any particular religious community

     or caste;

(d) The exemption is restricted to such portion of the income as is applied or

     accumulated for application to charitable purpose in India;

(e) The accounts of the trust should be audited in certain cases as provided in Section

      12A(b);

(f) The funds of the trust should be invested or deposited in the permissible forms and

     modes only 

              

Conditions for grant of approval of exemptions to hospitals/other medical institutions under section 10(23C)(via)

(i) The aggregate annual receipts of such hospitals should have exceeded One crore.

v Where the total receipts of any hospital or other institution exceeded One crore in any preceding year, it shall publish its accounts in a local newspaper and furnish the same along with the application.

(ii) The institution has to be in actual existence.

(iii) The actual existence has to be seen every year.

(iv) Medical Institutions should exist solely for philanthropic purposes and not for the

       purposes of profit.

v  Philanthropic includes activities promoting goodwill to mankind or activities beneficial to humanity at large.

(v)    The assessee will apply its income or accumulate for application wholly and exclusively to the objects for which it is established.

(vi)  The assessee will not invest or deposit its funds (other than voluntary contribution received and maintained in the form of jewellery, furniture, etc.) for any period during the previous year relevant to the assessment years mentioned above otherwise than in any one or more of the forms or modes specified under section 11(5).

(vii)  This section will not apply in relation to any income being profits and gains of business, unless the business is incidental to the attainment of the objectives of the assessee and separate books of account are maintained in respect of such business.

(viii) The assessee will regularly file its return of income before the Income Tax authority in accordance with the provisions of the Act.

(ix)   That in the event of dissolution, its surplus and the assets will be given to a charitable organization with similar objectives and no part of the same will go to any of the members of the Institution.

(x) The approval under this section will not apply in relation to anonymous donations in terms of the fifteenth proviso to section 10(23C) read with section 115BBC of the Act.

It was held that where a hospital exists solely for philanthropic purposes, even if, incidentally profit is also earned, the hospital is entitled to benefit of exemption. [CIT v. Pulikkal Medical Foundation (1994) 210 ITR 299 (Ker)]

That eligibility for the exemption is subject to departmental scrutiny year after year. - [Aditanar Educational Trust v. Addl. CIT (1997) 224 ITR 310 (SC)]

Withdrawal of approval granted to hospital or medical institutions

An approval granted to a hospital or medical institutions by the prescribed authority may be withdrawn under the following circumstances:—

(i) Such hospital or medical institution—

(a) has not applied its income in accordance with the provisions contained in clause (a) of the third proviso; or

(b) has not invested or deposited its funds in accordance with the provisions contained in clause (b) of the third proviso; or

(ii) The activities of such hospital or medical institution—

(a) are not genuine; or

(b) are not being carried out in accordance with all or any of the conditions subject to which it was notified or approved.

v   It may, at any time after giving a reasonable opportunity of showing cause against the proposed action to the concerned hospital or medical institution, rescind the notification or, by order, withdraw the approval, as the case may be, and forward a copy of the order rescinding the notification or withdrawing the approval to such hospital or medical institution and to the Assessing Officer.

Requirement of Audit

Where the total income of the entity for the relevant previous year (without giving effect to the exemption allowable under the provisions referred to against such entity) has exceeded the maximum amount which is not chargeable to income-tax in respect of following entities are required to get its accounts audited in Form 10BB. [With effect from assessment year 2006-07]

v  Hospital or other medical institutions (other than those wholly or substantially financed by the Government or those having aggregate annual receipts not exceeding One crore) referred to in Section 10(23C)(via).

v  These entities must obtain a report from a Chartered Accountant in Form 10BB.

v  The format of audit report has been prescribed in Form No. 10BB vide rule 16CC.

v  The audit report shall be submitted electronically [Proviso to rule 12(2)].

Mandatory to file return of income

The entities covered under section 10(23C)(via) shall be mandatorily required to file their return of income.

[2]   income from property held for charitable purposes [Section 11]

Under section 11 of the Income Tax Act, a trust or institute can avail exemptions subject to conditions laid down under that section when it runs hospitals for charitable purposes.

If an assessee is running a hospital for a humanitarian cause, income tax shall be exempted. The same exemption is applicable to a foundation running a hospital for a similar cause.

       Exemption allowed to trust hospitals engaged in non-charitable activities

A charitable institution can also be engaged in non-charitable activities. As per Section 11(4A), deductions under section 11 shall not be admissible in relation to any income, being profits and gains of business, unless (i) the business is incidental to the attainment of the objectives of the trust or the institution and (ii) separate books of accounts are maintained by such trust or institution in respect of such business.

        Value of medical/education services provided to specified persons by trust running                           hospitals and educational institution - Exemption under section 11 shall not be available for           services provided to specified persons [Section 12(2)]

Value of medical/educational services provided to specified persons by trust running hospital and educational institution shall be income of trust and will be chargeable in the year in which services are provided and chargeable to tax, despite section 11(1).

[4]   Section 32 read with rule 5(1) Appendix I.

In respect of depreciation of machinery (life saving medical equipment) owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the deductions shall be allowed @ 40 per cent of written down value of the relevant assets. Depreciation on other machines will be restriced to 15% only.

 

(xia) Life saving medical equipment, being - (a)  D.C. Defibrillators for internal use and pace makers (b) Haemodialysors (c) Heart lung machine (d) Cobalt Therapy Unit (e) Colour Doppler (f) SPECT Gamma Camera (g) Vascular Angiography System including Digital subtraction Angiography (h) Ventilator used with anaesthesia apparatus (i) Magnetic Resonance Imaging System (j) Surgical Laser (k) Ventilators other than those used with anaesthesia (l) Gamma knife (m) Bone Marrow Transplant Equipment including silastic long standing intravenous catheters for chemotherapy (n) Fibreoptic endoscopes including Paediatric resectoscope/audit resectoscope, Peritoneoscopes, Arthoscope, Microlaryngoscope, Fibreoptic Flexible Nasal Pharyngo Bronchoscope, Fibreoptic Flexible Laryngo Bronchoscope, Video Laryngo Bronchoscope and Video Oesophago Gastroscope, Stroboscope, Fibreoptic Flexible Oesophago Gastroscope (o) Laparoscope (single incision)

[3]  Deduction in respect of expenditure on specified business [Section 35AD]

For allowing incentive on the investment in some specified sector (which included hospital sector) section 35AD was first introduced through Finance Act 2009 with effect from 01 April 2010.

 

An assessee shall be allowed a deduction in respect of the whole of any expenditure of capital nature incurred, wholly and exclusively, for the purposes of any specified business carried on by him during the previous year in which such expenditure is incurred by him : Provided that the expenditure incurred, wholly and exclusively, for the purposes of any specified business, shall be allowed at the specified rate as deduction during the previous year in which he commences operations of his specified business, if -

(a) the expenditure is incurred prior to the commencement of its operations; and

(b) the amount is capitalized in the books of account of the assessee on the date of commencement of its operations.

(c) This provision is admissible for specified business in the nature of building and operating anywhere in India a hospital with at least 100 beds for patients.[SEction

(d)  Further the capital expenditure shall not include acquisition of land or goodwill or financial instrument.

 

[4]  Allowability of certain expenditure for business or profession [Section 37]

Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profit and gains of business or profession. Further, as per the explanation given below section 37 any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure”.

Conditions laid out in Section 37 for General Deduction:

Expenditures covered under Section 30 to 36 aren’t allowed - As per this Section

(i)   If expenditure is covered under Section 30 to 36 of the Income Tax Act, the same is not allowed to be claimed under Section 37.

(ii)  Expenditure of capital nature is not allowed – For the purpose of this section, capital expenditure refers to the expenses incurred in acquiring, improving, or extending the life of a fixed asset and revenue expenditure refers to expenses incurred in a normal course of business.

(iii) Expenditure of a personal nature is not allowed – This Section specifically prohibits the deduction of any personal expenses. Here, personal expenses refer to any expense which satisfies personal needs and which are not related to the profession or business.

(iv) Such expenditure should have been paid or accrued in the previous year – In order to claim the deduction, such expense should have been expended in the previous year and the assessee must be in a position to establish that such expenditure was incurred in the previous year or something happened which created a liability for the assessee in the previous year. Expenditure should be incurred wholly or exclusively for Business or Profession

(v) The main prerequisite for claiming deduction under the provision of Section 37 is that expenditure should be wholly and exclusively for business or profession. Expenditure could be incurred by the assessee voluntarily without any necessity; however, the same should be for the purpose of his business or profession. Expenditure should be for the business or profession carried on by the assessee

(vi) For claiming deduction under this Section, expenditure must be incurred for the business or professional purpose carried on by the assessee in the previous year.

(vii) Expenditure of illegal nature are not allowed - Expenditure that is incurred by an assessee for purposes which are of offensive nature or prohibited by any law is not considered to have been incurred for business or profession and are not allowed as a deduction under Section 37.

[5] Disallowance under Section 40(a)(ia)

     As per section 40(a)(ia), any sum payable to a resident, which is subject to deduction of tax at                 source, would attract 30% disallowance if it is paid without deduction of tax at source or if tax is             deducted but is not deposited with the Central Government till the due date of filing of return

 

Following amounts shall not be deducted in computing the income from the business in the case of any assessee “any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or subcontractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139.”

[6] Where the assessee incurs any expenditure in respect of payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds Rs. 20,000, no deduction shall be allowed in respect of such expenditure [Section 40A(3)]

Section 40A(3) of Income Tax Act 1961 provides for disallowance of expenses in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on bank or account payee bank draft or use of electronic clearing system through a bank account, exceeds Rs 20,000.

[7]   Section 80IB (11B/11C)

Where the gross total income of an assessee includes any profits and gains derived from any business as specified, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section.

Tax holiday is allowable for hospitals with more than 100 beds for patients located in rural areas and non-metro urban areas for five years under section 80IB(11B)[introduced through Finance Act 2004] and section 80IB(11C)[introduced through Finance Act 2008] respectively. For rural areas, sunset clause was set as March 31, 2008 and for non-metro urban areas it was 31 March 2013.

 

The amount of deduction in the case of an undertaking deriving profits from the business of operating and maintaining a hospital in a rural area/other than excluded area shall be hundred per cent of the profits and gains of such business for a period of five consecutive assessment years, beginning with the initial assessment year, if

(i)          such hospital is constructed at any time during the period beginning on 1 October, 2004 and ending on 31 March, 2008; (for hospitals in rural area) and 1 April, 2008 and ending on the 31 March, 2013 (for hospitals in other than the excluded area 142

(ii)         the hospital has at least one hundred beds for patients;

(iii)       the construction of the hospital is in accordance with the regulations, for the time being in force, of the local authority; and

(iv)       the assessee furnishes along with the return of income, the report of audit.

 

Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profit and gains of business or profession. Further, as per the explanation given below section 37 any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure”.

CBDT Circular No. 5/2012 [F. No. 225/142/2012-ITA.II], dated 01.08.2012

Subject : Inadmissibility of expenses incurred in providing freebees to Medical Practitioner by pharmaceutical and allied health sector Industry

It has been brought to the notice of the Board that some pharmaceutical and allied health sector Industries are providing freebees (freebies) to medical practitioners and their professional associations in violation of the regulations issued by Medical Council of India (the ‘Council’) which is a regulatory body constituted under the Medical Council Act, 1956.

2. The council in exercise of its statutory powers amended the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10.12.2009 imposing a prohibition on the medical practitioner and their professional associations from taking any Gift, Travel facility, Hospitality, Cash or monetary grant from the pharmaceutical and allied health sector Industries.

3. Section 37(1) of Income Tax Act provides for deduction of any revenue expenditure (other than those failing under sections 30 to 36) from the business Income if such expense is laid out/expended wholly or exclusively for the purpose of business or profession. However, the explanation appended to this sub-section denies claim of any such expense, if the same has been incurred for a purpose which is either an offence or prohibited by law.

Thus, the claim of any expense incurred in providing above mentioned or similar freebees in violation of the provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section 37(1) of the Income Tax Act being an expense prohibited by the law. This disallowance shall be made in the hands of such pharmaceutical or allied health sector Industries or other assessee which has provided aforesaid freebees and claimed it as a deductable expense in its accounts against income.

4. It is also clarified that the sum equivalent to value of freebees enjoyed by the aforesaid medical practitioner or professional associations is also taxable as business income or income from other sources as the case may be depending on the facts of each case. The Assessing Officers of such medical practitioner or professional associations should examine the same and take an appropriate action.

This may be brought to the notice of all the officers of the charge for necessary action.

Payments made by Third Party Administrators (TPA) to hospital on behalf of insurance company would attract deduction of tax at source under section 194J

The assessee was a company engaged inter alia in the business of providing Third Party Administration (TPA) services on medical/health insurance policies issued by the insurance companies. The services provided by the assessee inter alia include enabling the policy holders viz., the patients to obtain medical treatment from the hospital without making upfront payments to the hospitals by direct settlement i.e., cashless scheme and reimbursement of claims of policy holders in accordance with the terms of the insurance policy. The assessee's obligation to make payment to the hospitals is as an agent to the insurance companies and not in consideration for any professional services rendered by the hospital to the assessee. The Deputy Commissioner of Income-tax (TDS), pursuant to a survey of the premises of the assessee held that payments made by the assessee to the hospitals constituted fees for professional services liable for tax deduction at source under section 194J. Accordingly, a demand was raised.

Third Party Administrators (TPAs), who were responsible for making payment to hospitals for rendering services on medical/health insurance policies issued by insurance companies would be liable to deduct tax at source under section 194J from payments made to hospitals. CBDT Circular No. 8, dated 24.11.2009, which provides that a failure to deduct tax on payments made by TPAs to hospitals under section 194J would necessarily attract a penalty under section 271C, besides interfering with quasi-judicial discretion of Assessing Officer or, as case may be, appellate authority, forecloses defence open to assessee under section 273B, hence, such direction issued by CBDT was in violation of restraints imposed upon it by provisions of sub-section (1) of section 119. Therefore, to that extent aforesaid circular issued by CBDT was to be set aside. [Partly in favour of revenue] (Related Assessment years : 2004-05 to 2009-10) – [TTK Healthcare TPA (P) Ltd. v. DCIT(TDS) (2020) 120 taxmann.com 307 (Karn.)]

Assessee-hospital availed catering services from ‘M’, in view of fact that services rendered by ‘M’ of cooking and serving food would fall within definition of ‘work’, assessee rightly deducted tax at source under section 194C while making payments to ‘M’

Contractors/sub-contractors, payments to (Catering services) - Assessee-hospital availed catering services from ‘M’. It deducted tax at source under section 194C while making payments to ‘M’.  Assessing Officer held that services of catering rendered by ‘M’ were in nature of technical services and, therefore, deduction of tax at source by assessee had to be under section 194J. However, Commissioner (Appeals) as well as Tribunal came to finding that services rendered by ‘M’ of cooking and serving food would fall within definition of ‘work’ provided under section 194C and thus, tax had been properly deducted at source by assessee. Since concurrent finding of fact rendered by Commissioner (Appeals) and Tribunal that service of cooking did not include any technical service, was not shown to be perverse, impugned order passed by Tribunal was to be confirmed. [In favour of assessee] (Related Assessment year 2011-12) - [CIT(TDS) Mumbai, v. Saifee Hospital Trust (2019) 262 Taxman 461 : 104 taxmann.com 217 (Bom.)]

Assessee-hospital made payments for services rendered towards maintenance of its medical equipments for proper and long functioning, it was required to deduction TDS under section 194C, and not under section 194J

Contractors/sub-contractors, payments to (Maintenance of medical equipments) - The supplier of medical equipments to the assessee hospital had also rendered services of maintenance of these equipments. The assessee deducted TDS under section 194C while making payment for maintenance services. The Tribunal placed reliance upon its order in respect of the same assessee for the assessment year 2011-12. It was held by the Tribunal that the services which were rendered for maintenance of equipment would not be in the nature of technical services. These services being of routine nature, would not be qualified to be called technical services which would require deduction under section 194J and the purpose of this services was only to ensure a proper maintenance of the machinery/equipment so as to ensure long life for the same. The Tribunal held that the payments made to said supplier were payments for work contract covered under section 194C and not fees for technical services under section 194J. On the revenue's appeal to the High Court:

The Commissioner (Appeals) as well as the Tribunal have on facts come to the conclusion that the services rendered in respect of the equipments are only in nature of maintenance services provided to ensure they function properly and would be able to provide services for a long period of time. This does not involve any technical service. These concurrent findings of the fact has not been shown to be perverse. [In favour of assessee] (Related Assessment years : 2008-09, 2009-10 and 2010-11) – [CIT(TDS) Mumbai, v. Saifee Hospital Trust (2019) 262 Taxman 343 : 104 taxmann.com 64 (Bom.)]

Sales promotion expenses incurred by pharmaceutical company on distribution of articles to stockists, distributors, dealers, customers and doctors are allowable

Assessee a pharmaceutical company was engaged in manufacturing and sales of pharmaceuticals and allied products. It had debited an amount under head ‘sales promotional article expenses’. Assessing Officer disallowed expenditure holding that expenditure having been incurred in violation of circular issued by Medical Council of India under MCI regulations, 2002 was not allowable as deduction under section 37(1). Commissioner(Appeals) partly sustained disallowance of sales promotion expenses. It was observed that MCI regulations relating to professional conduct of registered medical practitioners would only cover individual medical practitioners and not pharmaceutical companies or allied health sector industries. Therefore, assessee would be duly entitled for claim of sales promotion expenses incurred on distribution of articles to stockists, distributors, dealers, customers and doctors. [In favour of assessee] (Related Assessment year : 2013-14) – [Aristo Pharmaceuticals (P) Ltd. v. ACIT (2019) 178 ITD 147 : 107 taxmann.com 119 (ITAT Mumbai)]

Grants and charging management fees – Medical relief for patients and creating awareness about HIV and AIDS for purpose of its eradication are charitable activities – Entitled to registration

Medical relief for patients and creating awareness about HIV and AIDS for purpose of its eradication are charitable activities in the form of medical relief. Merely because the assessee was a company and receiving grant and also charging management fee for implementing project on behalf of various organisations would not make the activity of the assessee as business activity or non-charitable. Denial of registration is held to be not justified. (Related Assessment year : 2010-11) - [India HIV/AIDS Alliance v. CIT(E) (2019) 175 ITD 1 (ITAT Delhi)]

A hospital cannot be considered as an industrial undertaking under section 72A(7)(aa) and, thus, where amalgamating company was carrying on business of establishing and operating medical service centres, assessee’s claim for carry forward of unabsorbed depreciation under section 72A, was rightly rejected by authorities below

In terms of clause (aa) of sub-section (7) of section 72A, an undertaking to be considered as an industrial undertaking, total activities of undertaking should be that of manufacturing or processing of goods and even if undertaking is engaged in some other activities also, primary activity of said undertaking should be that of manufacturing or processing of goods. A hospital cannot be considered as an industrial undertaking under section 72A(7)(aa) and, thus, where amalgamating company was carrying on business of establishing and operating medical service centres, assessee’s claim for carry froward of unabsorbed depreciation under section 72A, was rightly rejected by authorities below. [In favour of revenue] (Related Assessment year : 2009-10) – [Healthcare Global Enterprises Ltd. v. JCIT, Bangalore (2018) 89 taxmann.com 317 (ITAT Bangalore)]

Expenditure incurred by assessee Pharma Company for customer relationship management, key account management, gift articles, free medicine sample, advertisement and sales promotion could not be considered as freebies given to doctors, they were purely for brand recognition; allowable as business expenditure and were not impaired by Explanation 1 to section 37(1)

Assessee was a pharmaceutical company engaged in business of providing pharma marketing consultancy and detailing services to develop mass market for Pharma products - During assessment proceedings, Assessing Officer noted that assessee had debited advertisement and sales promotion expenses, customer relationship management expenses, key account management expenses, gift articles and cost of free samples in profit and loss account. Assessing Officer disallowed above expenditure in terms of Explanation to section 37(1) in view of Circular No. 5 of 2012; wherein CBDT referred to amendment to 'Indian Medical Council Regulations, 2002', brought from 10.12.2009, imposing prohibition of medical practitioner and their professional associations from taking any gift, travel facility, hospitality, cash or monetary grant from pharmaceutical and allied health sector industries. MCI Regulation 2002 provides limitation/curb/prohibition only for medical practitioners and not for pharmaceutical companies and hence it could not have had any prohibitory effect on pharmaceutical company like assessee. Expenses incurred by assessee could not be reckoned as freebies given to doctors as they were purely promotional materials which were distributed to doctors for brand recognition and not for purpose of granting gift or any other form of inducement to doctors. Thus expenditure being purely for business purpose had to be allowed as business expenditure and were not impaired by Explanation 1 to section 37(1). [In favour of assessee] (Related Assessment year : 2010-11) - [DCIT v. PHL Pharma (P) Ltd. (2017) 184 TTJ 1 : 163 ITD 10 : 78 taxmann.com 36  (ITAT Mumbai)]

Medical relief – Running veterinary hospitals is covered under specific category of ‘medical relief’ hence eligible for exemption

Assessee engaged in running veterinary hospitals, collected nominal cess from milk producers members in lieu of providing them research, animal nursery, fertility, vaccination and breed improvement facilities, it could be regarded as rendering medical relief services, therefore, assessee could not be regarded as an entity advancing any other object of general public utility covered by proviso to section 2(15). (Related Assessment year 2010-11) - [Amul Research & Development Association v. ITO (2016) 182 TTJ 794 : 160 ITD 454 : 145 DTR 30 (ITAT Ahmedabad)]

Pharmacy shop was an integral part of hospital, same would not be hit adversely by conditions specified in provisions of section 11(4A) and, thus, would be eligible for exemption

Assessee is a registered charitable trust which is engaged in running schools and hospitals. Assessing Officer invoking the provisions of section 11(4A) held that as no separate books are maintained for pharmacy there is violation of provision hence not eligible for exemption. On appeal the Tribunal held that: Since pharmacy shop was an integral part of hospital, same would not be hit adversely by conditions specified in provisions of section 11(4A) and, thus, would be eligible for exemption. (Related Assessment years : 2006- 07 to 2009-10) - [Hiranandani Foundation v. ADIT (E) (2016) 181 TTJ 471 : 159 ITD 278 (ITAT Mumbai)]

Once registration under section 12AA has been granted to a company incorporated under section 25 of Companies Act, 1956, it cannot be denied approval under section 80G(5)(vi) unless there is non-fulfilment of conditions specified in section 80G(5)

Assessee, an Indian company incorporated under section 25 of Companies Act, 1956 had taken steps for implementation of its charitable objects inasmuch as it had acquired land, converted land-use for setting up hospital project, appointed architect, carried out soil testing etc. Registration under section 12AA was granted; however, application under section 80G(5)(vi) was rejected on ground that no activity had been started by assessee as per object. Since as part of fund raising programme for charitable project, approval under section 80G was sought whereby donations could be accepted for approved purposes and project could be expedited, approval under section 80G would, thus, be an aid and provide necessary support in successful completion of its project. Since approval under section 80G is closely linked to approval under section 12AA, once registration under section 12AA was granted, approval under section 80G could not be denied unless case of assessee falls under non-fulfilment of one or more of conditions specified in section 80G(5). [In favour of assessee] – [Hemdha Medi Resources (P) Ltd. v. CIT, Jaipur (2016) 159 ITD 627 : 71 taxmann.com 205 (ITAT Jaipur)]

Establishment of an allopathic hospital assisted assessee in its object of improving auyrvedic system, activities of assessee could not be held to be ultra vires its objects so as to deny exemption under section 11 to it

Assessee-trust was set up with object of improving auyrvedic system of medicine. In furtherance of its objects, it set up a hospital which provided allopathic as well as ayurvedic treatment and included investigation techniques of modern medicine. It was denied exemption under section 11 on ground that proportion of receipts pertaining to ayurvedic research institute was significantly lower than that pertaining to hospital and, thus, assessee’s activities were in excess of its objects. Since objects of trust did not prohibit running of an allopathic hospital or drawing from any other system of medicine for improving ayurvedic system of medicine and establishment of an allopathic hospital assisted assessee in its object of improving ayurvedic system, activities of assessee could not be held to be ultra vires its objects and fact that proportion of receipts pertaining to ayurvedic research institute was significantly lower than that pertaining to allopathic hospital would be immaterial in such case.  [In favour of assessee] Assessment year 2006-07 – [Mool Chand Khairati Ram Trust v. DIT (Exemptions) (2015) 277 ITR 650 : 280 CTR 121  234 Taxman 222 : 59 taxmann.com 398 (Del.)]

Assessee-society formed for providing concessional/free treatment for poor people, was allotted land at very concessional rate but it gave its hospital to Max group to exploit same commercially, assessee’s registration was to be cancelled

Assessee-society was formed for providing concessional/free treatment to patients from EWS category. Hence, it was allotted land by State Government at prime location in Delhi at very concessional rate. However, hospital run by assessee-society was given out to Max group of companies to exploit same commercially in a non-charitable manner. DIT (Exemption) held that assessee-society was not carrying on ‘charitable purpose’ as referred to in section 2(15) and it had merely acted as a “special purpose vehicle” to take advantage of concessional land allotted by State Government and to pass off profit earned from operating hospital to companies belonging to Max Group. DIT (Exemptions) was justified in withdrawing approval/registration granted to assessee-society under section 12A. [In favour of revenue] – [Devki Devi Foundation v. Director of Income-tax (Exemptions), Delhi (2015) 170 TTJ 69 : 153 ITD 716 : 56 taxmann.com 56 : 40 ITR(T) 1 (ITAT Delhi)]

Assessee-hospital was providing medical relief to people at large, merely because surplus was generated from hospital activities could not be ground to deny exemption under section 11 to assessee

Assessee-trust, running a multi-speciality hospital, claimed exemption of income under section 11.  Assessing Officer denied exemption on grounds that earning of profit was pre-dominant activity of trust and charitable activity was only incidental; and that assessee had failed to provide concessional treatment to indigent/poor patients. Since assessee was engaged in carrying on activities for attaining objects of providing medical relief to people at large which has been recognised as charitable activity under Act, merely because surplus was generated from hospital activities could not be ground to deny exemption under section 11. Under Act, there is no provision for providing a percentage of concession to indigent/poor patients and, therefore, this could not be a ground to disallow claim of exemption under section 11 to assessee-trust, which otherwise was entitled to deduction under section 11. [In favour of assessee] (Related Assessment year : 2008-09) – [ITO, Ahmednagar v. Noble Medical Foundation & Research Centre (2015) 68 SOT 343 : 57 taxmann.com 333 (ITAT Pune)]

Assessee-hospital under an agreement was availing services of doctors who fixed their own OPD hours etc. and there was no control of hospital by way of direction to doctors on treatment of patients, it could be said that there was no employer and employee relationship between hospital and professional doctors and, therefore, tax was to be deducted under section 194J and not under section 192

The assessee-company was running a hospital. It engaged certain professional doctors to provide full time services to the patients as per contract for service entered with them. The professional doctors shared fees received from the patients, their remuneration was not fixed and they were free to render service to the patients as they considered appropriate in terms of time or duration. The assessee-company deducted tax under section 194J from the payments made to them treating the payments as professional fees. The Assessing Officer held that there was employer-employee relationship between assessee and doctors and tax was to be deducted at source under section 192. On appeal, the Commissioner (Appeals) analysed the agreement with doctors and hospital. He found that the doctors enjoyed complete professional freedom, they define working protocol, have free hand in treatment of patients and there was no control of the hospital by way of any direction to the doctors on the treatment of patients. Doctors fixed their own OPD hours and were available on call in case of emergency. They were working in their professional capacity and not as employees. He, therefore, held that Assessing Officer was not right in concluding that there existed an employer-employee relationship between the hospital and the professional doctors and, thus, invocation of section 192 was not justified. [In favour of assessee] (Related Assessment years : 2009-10 and 2010-11) – [DCIT(TDS), Chandigarh v. Ivy Health Life Sciences (P) Ltd. (2015) 63 taxmann.com 362 (P&H)]

 

Assessee-third party administrator, settled mediclaim of insured and arranged said amount from insurance company, it was not liable to deduct tax against said payment made and therefore no disallowance under section 40(a)(ia) could be made

The assessee was carrying on business of Third Party Administrator (TPA) providing cash less hospitalization and claim processing of medical policy for insurance companies and others. During the assessment proceedings the Assessing Officer noted that the assessee had paid Rs. 187,82,28,432 to hospitals for settlement of claim of insurance for rendering medical services which is covered under section 194J. The Assessing Officer was of the view that the assessee was bound to deduct tax at source on such payments whereas the assessee had not deducted tax at source on the payments made to the hospital. Accordingly, the Assessing Officer has disallowed an amount of Rs. 1,66,56,45,168 under section 40(a)(ia) for non-deduction of TDS. On appeal, the Commissioner (Appeals) granted part relief to the assessee by holding that section 40(a)(ia) is applicable on the amount payable by the assessee to the hospital at Rs. 17,85,51,917 and not to the amount already paid by the assessee to the hospital. On appeal:

Held : Though the assessee is under the obligation to deduct tax at source under section 194J however, the consequential liability is only under section 201 and 201(1A) and the disallowance under section 40(a)(ia) cannot be automatic when the assessee has not claimed this payment as expenditure against the income. The assessee has shown the income, only the service charges receivable from insurance companies for rendering services as 3rd party administrator and not having any margin or profit element in the payment received from the insurers for the purpose of remitting to the hospitals to settle medical claim of the insured. Therefore, when the said payment has not been claimed as expenditure incurred for earning the income by the assessee then the provisions of section 40(a)(ia) is not attracted for non-deduction of tax at source in respect of the said payment. [In favour of assessee] (Related Assessment year : 2009-10) – [Paramount Health Services (TPA) (P) Ltd. v. ITO, Thane (2014) 65 SOT 152 : 49 taxmann.com 97 (ITAT Mumbai)]

Circular No. 5 of 2012, dated 01.08.2012 which lays down that claim of any expenses incurred in providing freebees to medical practitioner in violation of provisions of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible, is valid

The Medical Council of India in exercise of the powers vested in it under the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 imposed prohibition on any medical practitioner or their professional associates from accepting any gift, travel facility, hospitality, cash or monetary grant from any pharmaceutical and allied health sector industries. This regulation is a very salutary regulation which is in the interest of the patients and the public. Once this has been prohibited by the Medical Council under the powers vested in it, section 37(1) comes into play. The Explanation to section 37(1) makes it clear that any expenditure incurred by an assessee for any purpose which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession. The sum and substance of the circular is also the same. In case the assessing authorities are not properly understanding the circular then the remedy lies for each individual assessee to file appeals under the Income Tax Act but the circular which is totally in line with section 37(1) cannot be said to be illegal. [In favour of revenue] - [Confederation of Indian Pharmaceutical Industry (SSI) v. Central Board of Direct Taxes (2013) 353 ITR 388 : (2014) 44 taxmann.com 365 (HP)]

Assessee-hospital engaged some doctors on fixed monthly remuneration, and doctors were governed by its service rules, remuneration paid was taxable as ‘salaries’ and liable for deduction of tax under section 192

Assessee-hospital had engaged services of some doctors and was deducting TDS from payments made to them under section 194J on ground that doctors were appointed as consultants and there was no employer-employee relationship. However, from appointment order issued to doctors it was clear that a fixed remuneration was paid to them which was in no way concerned with fees received from patients treated by them and they were governed by service rules of assessee. Further, it was specifically mentioned in appointment order that it was a contract for employment and doctors were liable for retirement on attaining age of 58 years. Remuneration paid to doctors was chargeable to tax under head ‘salaries’ and liable for deduction of tax under section 192 and not under provisions of section 194J. [In favour of revenue] (Related Assessment year : 2007-08) - [DCIT v. Wockhardt Hospitals Ltd. (2013) 152 ITD 80 : (2012) 139 ITD 161 : 24 taxmann.com 190 (ITAT Hyderabad)]

Exercise of power under section 131(1A) is contemplated in a situation anterior to exercise of power under section 132

Exercise of powers under section 131(1A) is contemplated in a situation anterior to exercise of power under section 132. Before authorizing an officer, the officer referred to in section 132(1) would exercise power under section 131(1A). Section 131(1A) operates in different field than section 132. Assessee was an eye-surgeon and was practicing along with his wife, who was also medical doctor. A search and seizure operation were carried out at residence-cum-clinic of assessee. Warrant of authorization for conducting said search was prepared in name of assessee and his wife by recording a satisfaction note that doctor couple was disclosing only part of their income and that they had amassed huge wealth by receipts of crores of rupees every year. Assessee challenged search and seizure operation and contended that there was illegality in recording of satisfaction note by competent authorities before conducting said search as it was not based on relevant and credible evidence. It was found from records that there was credible and reliable evidence before the competent authority on which the satisfaction was recorded. Further it was found that Additional Director had visited clinic on four occasion and on last three occasions he visited along with decoy patient, and obtained receipt of consultation and laser treatment which showed that doctors received payments from patient but did not issue receipts to all patients. Further, income tax returns and balance-sheets of doctor couple were also examined which showed, negligible income, and, therefore, it confirmed fact that they had amassed huge wealth by receipts of crores of rupees every year. In view of above facts, it could be said that there was no illegality in recording satisfaction note by competent authorities based on relevant and credible evidence collected by department. Therefore, search warrant issued for conducting search suffered from no infirmity. [In favour of revenue] – [Dr. Roop v. CIT, Meerut (2012) 254 CTR 14 : 209 Taxman 421 : 20 taxmann.com 205 (All.)]

 

Running a chemist shop in the hospital

Application for approval under section 10(23C)(via) could not be rejected on the ground of running a chemist shop in the hospital, more so when the Chief Commissioner of Income Tax has accepted that the surplus which is earned from the operation of a chemist shop is utilised for the purposes of the hospital. Activity of a chemist shop is an activity which is incidental or ancillary to the dominant object and purpose which is to run a hospital. Running the chemist shop in this case is not the dominant object of the trust. - [Baun Foundation Trust v. Chief Commissioner of Income Tax & Anr. (2012) 251 CTR 237 (Bom.)]

 

In service contract, which is spread over to various years, income has to be recognized in proportion to services rendered in a particular year

In service contract, which is spread over to various years income has to be recognized in proportion to services rendered in a particular year. Assessee entered into an agreement with a hospital for rendering services as a hospital management consultant for a period of 5 years and received Rs. 1.22 crores. During relevant year, he declared his professional income from hospital at Rs. 6.09 lakhs which was in proportion to period for which services were rendered. Assessing Officer taxed entire amount of Rs. 1.22 crores. Since assessee had not rendered services for period of five years, entire amount could not be considered as income in year of receipt and, hence, assessee correctly declared his income in proportion to period for which services were rendered. [In favour of assessee] (Related Assessment year : 2006-07) – [Dr. Aman Khera v. DCIT (2012) 138 ITD 443 : 24 taxmann.com 142 (ITAT Delhi)]

Assessee-trust acted as a nodal agency for State of Andhra Pradesh to provide health care coverage to individuals, payments made to hospitals by assessee for medical services received by hospitals were liable to TDS under section 194J

Assessee was a trust formed by State of Andhra Pradesh acting as an independent nodal agency of said Government to provide health care coverage to individuals under a medical insurance scheme. For purpose of administering said scheme, assessee directly made payments to various hospitals as per MOUs it entered with such hospitals. Assessing Officer invoked section 194J and held assessee to be a responsible person for deducting tax at source under section 194J while making payments to hospitals. Commissioner (Appeals) confirmed order of Assessing Officer. In view of provisions of section 194J assessee as well as hospitals to which payments had been made clearly constituted ‘person’ as defined under-section 2(31) and services rendered by hospitals, being in nature of medical services, also came within scope of professional services as defined under section 194-J. Therefore, there could be no ambiguity with regard to assessee’s liability to deduct tax at source while making payments to hospitals. However, only element of fee for professional services comprised in each of payment made by assessee to hospitals fell within scope of section 194J and not elements of payment towards bed charges, medicines, follow-up services, outpatient services, transportation charges and similar such payments. [Partly in favour of assessee] (Related Assessment years : 2009-10 and 2010-11) – [Arogya Sri Health Care Trust v. ITO(TDS) Hyderabad (2012) 51 SOT 79 : 20 taxmann.com 539 (ITAT Hyderabad)]

Meaning of “philanthropic purpose”

For this purpose, the meaning of the words ‘Pilanthropic purpose’ include activities promoting goodwill to mankind or activities beneficial to humanity at large as opposed to activities solely for the benefit of a few individuals. Philanthropy is not restricted to giving a free treatment only to the extreme poor but also to giving treatment at a concessional rate to those who are not poor but cannot afford normal cost. Further there is also no bar on the concessional treatment to staff members – The application for exemption cannot be rejected on such grounds. - [Breach Candy Hospital Trust v. Chief CIT (2010) 322 ITR 246 (Bom.)]