India: Retention Fee Of Hospitals Not Subject To Service Tax Under ‘Business Support Service' - CESTAT New Delhi

Last Updated: 22 December 2017
Article by SKP  

Citation - 2017 (12) TMI 509

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi has held that retention fee of hospitals is not subject to service tax under 'Business Support Service'.

Facts of the case

  • Hospitals (appellants) were engaged in rendering healthcare services to patients through doctors/medical practitioners appointed on contractual basis.
  • Professional fee was paid to doctors by applying a pre-determined ratio on the amount received by the appellants from patients.
  • The amount retained by the appellants is termed as retention fees/collection charges/facilitation fees.

Question before CESTAT

  • Whether it can be said that the doctors have availed infrastructural support services from the appellant hospitals and that the retention fees is attributable towards the consideration for the same?
  • Whether it can be said that retention fee is subject to service tax in the pre and post negative list regime?

Decision of CESTAT

The CESTAT while pronouncing its decision in favour of the appellant hospitals laid down its findings and observations which can be analysed from the point of view of service tax law under the pre and post negative list regime.

  • Pre-negative list

    • The CESTAT held that the agreements between hospitals and doctors do not specify the specific nature or list of facilities which can be categorised as infrastructural support to the doctors. The revenue model, as agreed upon between the contracting parties also did not refer to any consideration attributable to such infrastructural support services. The arguments of the Revenue in this regard is only an inference and is not coming out manifestly from the terms of the agreement.
    • The doctor attending to the patient for treatment is using his professional skill and knowledge and the appellants are managing administrative matters involved like managing the patients from the time they enter the hospital till they leave the premises. It is actually the hospitals who are availing the professional services of the doctors and not vice-versa. 
    • Services mentioned under the head 'Business Support Service' in statutory provisions should be 'provided in relation to business or commerce'. Doctors are not engaged in a business or commerce as there is a discernible difference between 'business' and 'profession' as was held by the Hon'ble Gujarat High Court in Dr KK Shah [135 ITR 146 (Guj.)] while referring to the decision of the Hon'ble Supreme Court in Dr Devender Surtis [AIR 1962 SC 63].
    • Applying the above ratio, the CESTAT held that there is no taxable activity identifiable in the present arrangement for the tax liability of the appellants.
  • Post-negative list

    • The CESTAT held that post negative list from 1 July 2012 'healthcare services' provided by 'clinical establishments' are exempt from service tax. Hospitals providing medical services fall squarely within the ambit of these definitions.
    • The CESTAT held that if the contention of the Revenue is to be accepted, it will lead to the taxing of consideration paid by the patients to the hospitals which will defeat the purpose of the exemption granted.

SKP's comments

  • Revenue sharing arrangements have always been vulnerable to be brought within the ambit of service tax and the decision of the Tribunal will bring relief to various hospitals involved in similar litigations.
  • The CESTAT while delivering its judgement placed significant reliance on the language of the agreement between the appellant and the doctors to determine the nature of the revenue sharing arrangement. It reinforces the fact that careful consideration must be placed while entering into agreements to bring out the nuances involved in a complex arrangement like a revenue sharing model which can be decisive in service tax disputes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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