Chennai ITAT Eliminates Addition, Decides Hospital & Consultant Doctor Relationship Not Equivalent to Employer-Employee

Case Title: Deputy Commissioner of Income Tax Versus M/s. Kovai Medical Centre and Hospital Limited

Citation: ITA No.: 1004/Chny/2022

Date: 12.04.2023

Appellant By: Shri. M. Rajan, CIT -DR

Respondent By: Shri. Vikram Vijayaraghavan, Advocate

The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) has made a notable ruling by rejecting the inclusion of the short deduction of Tax Deducted at Source (TDS).

The tribunal highlighted that the association between a professional doctor consultant and a hospital could only be regarded as an employer-employee relationship if clearly specified in the appointment contract.

The bench, consisting of Mahavir Singh (Vice President) and Manjunatha G (Accountant Member), recognized the Commissioner of Income Tax (Appeals) CIT (A)'s justifications for removing the additions related to the short deduction of TDS under section 201(1) and the corresponding interest under section 201(1A) in relation to payments made to consultant doctors.

During a study conducted at the various branches of the respondent company, which operates a multispecialty hospital and provides healthcare services in Coimbatore City Center, Erode, Sulur, and Kovilpalayam, it was discovered that TDS was deducted from the remuneration paid to consultant doctors.

The Assessing Officer (AO) categorized the payment made to AMC (Annual Maintenance Contract) providers as fees for technical services, as defined under section 194J of the TDS (Tax Deducted at Source) regulations. 

As a result, the Assessing Officer (AO) contended that the assessee should have deducted TDS at a rate of 10% instead of the applicable 2% for works contracts.

However, the Commissioner of Income Tax (Appeals) CIT (A) determined that the consultant doctors employed at the hospital had individually obtained professional indemnity insurance policies at their own cost. 

It was determined that the compensation paid to consultant doctors could not be classed as pay for the purposes of TDS due to the lack of an employer-employee connection.

As argued by the assessee, the consultant physicians received a fixed monthly salary with additional components based on the number of patients they attended to. Furthermore, the doctors were not entitled to any statutory benefits, which further emphasizes the lack of an employer-employee relationship.

The ITAT (Income Tax Appellate Tribunal) determined that in order to classify the remuneration paid to consultant doctors as salary, it is necessary for an employer-employee relationship to be established. The ITAT reached the conclusion that the department lacked sufficient evidence to reevaluate the income of the consultant doctors.

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