Income Tax Act | Payment To Consulting Doctors Appointed On Probation Is Not Salary; TDS Deductible U/S 194J, Not U/S 192: Bombay High Court

Justices B.P. Colabawalla and Firdosh P. Pooniwalla stated that there does not exist an employer-employee relationship between the assessee and consultant doctors, and the payments made to them by the assessee come under the purview of section 194J of the Income Tax Act.

Section 194J of the Income Tax Act, 1961 mandates tax deductions at source (TDS) in respect of payments made for professional and technical services exceeding Rs. 30,000 in a financial year.

As per Section 192 of the Income Tax Act, 1961, the employer is required to deduct tax at source on the amount payable at the average rate of income tax. This is to be computed based on rates in force for the financial Year in which the payment is made.

In this case, the Assessee (the Respondent – Hospital) is a Trust, which is engaged in the business of running a hospital.

According to the Revenue/appellant, the Assessee had appointed consultant doctors on its panel. The Assessing Officer noted that the Assessee had deducted TDS from the honorarium pay to these doctors under Section 194J, treating it as fees for professional services.

The Assessing Officer concluded that the consultant doctors are employees of the Assessee and the payment made to them was in the nature of “salary”, and therefore TDS ought to have been deducted under Section 192 of the IT Act, instead of Section 194J.

The Assessing Officer also observed that the Assessee was paying Annual Maintenance Contract (“AMCs”) charges in respect of the maintenance of various medical equipment.

The Assessing Officer held that the services rendered are “technical services”, and therefore, whilst making payment under the AMCs, tax should have been deducted under Section 194J, instead of Section 194C. The assessee filed an appeal before the CIT (A).

The CIT(A) concluded that the provisions of Section 192 of the Income Tax Act [for deduction of TDS] are not attracted. The revenue challenged the order passed by the CIT(A) before the ITAT.

ITAT held that TDS was correctly deducted under Section 194J and not under Section 192.

The questions before the bench were:

1. Whether the ITAT was justified in holding that there does not exist an employer-employee relationship between the Assessee and the consultant/honorary doctors, and that the payments made to them by the Assessee would come under the purview of Section 194J of the Income Tax Act?
2. Whether the Assessee was correct in deducting TDS under the provisions of Section 194C for payments made towards AMC charges, and not under the provisions of Section 194J as held by the Assessing Officer?

On question A, the bench observed that the Assessee Hospital does not exercise any real supervisory control in respect of the work entrusted to these doctors. All these factors clearly go to show that the relationship between the Assessee Hospital and these doctors cannot and does not create any relationship of “employer and employee”.

These very doctors filed their Income Tax Return under the head “Income from Business or Profession”. These doctors themselves also do not treat the remuneration received from the Assessee Hospital as a salary, as contended by the Assessing Officer, added the bench.

On question B, the bench opined that the ITAT ought to have independently analysed each AMC and given its finding thereon. This has not been done in the impugned order. Since the ITAT is the last fact-finding authority, the order of the ITAT on this issue, namely, whether the AMCs entered into by the Petitioner Trust with its vendors were really for rendering any “technical services”, ought to be set aside and the matter remanded to the ITAT for fresh consideration.

Regarding Question (A), the bench opined that the question does not give rise to any Substantial Question of Law requiring an answer by the Court.

Regarding Question (B), the bench quashed the order passed by the ITAT and remanded the matter to the ITAT.

Case Title: The Commissioner of Income Tax v. Dr. Balabhai Nanavati Hospital

Case Number: INCOME TAX APPEAL NO. 2166 OF 2018

Counsel for Appellant/Department: Mr. Prakash Chhotaray a/w Ms. Sangita C. Ms. Akanksha Shukla

Counsel for Respondent/Assessee: Dr. K. Shivaram, Senior Counsel a/w Mr. Rahul Hakani, Mr. Shashi Bekal

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