The main legal point established in the judgment is the distinction between a 'contract for service' and a 'contract of service' in determining the relationship between parties. Additionally, the judgment emphasizes the substance of transactions over the nomenclature used.

Revenue is in appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’ for short) challenging the order dated 3.7.2009 passed by the Income-Tax Appellate Tribunal – “B” Bench, Bangalore pertaining to the assessment years 2006-2007 and 2007-08 on the following substantial questions of law:

1. Whether the Appellate Authorities were correct in holding that the remuneration paid to consultant Doctors employed by the assessee hospital is not under an employer and employee relationship and therefore tax at source has to be deducted u/s. 192 of the Act and not u/s. 194J of the Act?

2. Whether the Appellate Authorities were correct in holding that the lease rent paid to Medical Relief Society of South Canara under the guise of repayment of loan taken by the lessor under a supplementary agreement would not attract section 194I of the Act and tax at source need not be deducted when the said arrangement was external to deductions at source?

2. Facts in brief are:

A survey under Section 133A of the Act was conducted at the business premises of the assessee on 26.9.2007 by the competent authority in order to ascertain the TDS compliance with respect to Section 192 of the Act on two issues i.e.,

(i) Issue of consultant doctors

(ii) Issue of rent

3. The Assessing Officer(AO) found that there were three categories of doctors viz., A, B and C appointed by the assessee-Company and the assessee has made the TDS on the sum paid to the doctors under Section 194(J) of the Act which deals with the TDS on payment of fee for professional or technical services. The AO held that there existed a relationship of employer and employee between the assessee Company and the doctors engaged by the Company, and applying the provisions of Section 192 of the Act computed the TDS liability under Section 201(1) and 201(A) of the Act. As far as the issue of the rent, the AO noticed that the assessee – company has entered into a memorandum of agreement with Medical Relief Society (MRS) of South Canara (registered). After examining the said memorandum of agreements, AO held that the assessee-company was required to deduct TDS on rent in cash of Rs.5 crores per annum and on the loan liability discharged.

4. Aggrieved by the said order, the assessee preferred appeals before the Commissioner of Income Tax –Appeals V, Bangalore (CIT) who allowed the appeals holding that consulting doctors working in the assessee’s hospital cannot be construed as employees of the assessee-company and the professional fee paid to them attract TDS under Section 194(J) and not under Section 192 of the Act. As far as the issue of rent is concerned, it was held that the payments made by the assessee-company to MRS in pursuance to the amended agreement dated 26.4.2006 is not in the nature of rent. Accordingly, allowed the appeals filed by the assessee.

5. Aggrieved by the said order of CIT, revenue preferred appeals before the Income-Tax Appellate Tribunal in ITA Nos. 699 and 700/2008 (ITAT). ITAT vide common order dated 3.7.2009 dismissed the appeals against which these appeals are filed by the revenue.

6. The learned counsel appearing for the appellants Sri K.V. Aravind contended that the relationship of the assessee with all the categories of doctors appointed by the company is of an employer and employee and not that of consultant. In support of this proposition, he relied on the terms and conditions of the contracts executed between the assessee and the doctors. It was further contended that these doctors, though treated as ‘consultants’ of the assessee-company, were regularly employed by the assessee on a fixed remuneration, and were bound by the service conditions of the assessee-Company thus, the provisions of Section 192 of the Act were applicable. The CIT and ITAT, without appreciating these aspects in a right perspective, have held that these docto