The power to impose sales tax/VAT flows from Entry 54 of List II of Schedule VII of the Constitution of India. Under Article 366(29A) of the Constitution of India, ‘tax on the sale or purchase of goods’ includes

(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;

(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

(c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments;

(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;

(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration,

As per the above definition, the status of deemed sale is fastened to transactions where one or the other element of sale is missing. But where the element of sale is altogether missing, the transaction would not fall within any of the clauses of Article 366(29A) of the Constitution of India

There were disputes as to whether supplies (such as medications, implants, surgical items and other pharmaceutical items) made to an In-Patient would constitute an independent sale amenable to levy of VAT or to be considered as part of the healthcare service.

The Punjab & Haryana High Court in the case of M/s. Fortis Health Care Ltd. and Another[1] had passed a combined order against a batch of writ petitions, holding that

For the purpose of attracting VAT, a transaction or a part thereof, which is essentially a service would have to qualify as a sale within the meaning of Sales of Goods Act, 1930 or the definition of sale. The fiction of a deemed sale applies only to such situations as would fall within the sub-clauses of Article 366(29-A) of the Constitution of India which permit severance of the service element from the sale element and empowers the State to tax the element of sale. A perusal of Article 366(29-A) of the Constitution of India does not enable us to record an opinion that it covers services provided by hospitals. Before such a transaction is put to tax, whether under the Haryana or Punjab VAT Act, it would have to satisfy the dominant nature test by reference to the substance of the contract. A contract for medical treatment necessarily involves medicines, supply of surgical items, stents, implants, valves, without which a medical procedure or medical treatment cannot be completed.

Medical procedures/services offered by the petitioners are a service. The supply of drugs, medicines, implant, stents, valves and other implants are integral to a medical services/procedures and cannot be severed to infer a sale as defined under the punjab or the haryana act and therefore, are not exigible to value added tax.

The Jharkhand High Court in the case of M/s. TATA Main Hospital[2] had passed an order against the writ petition filed, wherein it had held as under

On the facts noticed in the forgoing paragraphs, we find that the TMH is not doing business of sale of the aforesaid articles, i.e. Medicines, vaccines, surgical items, x-ray films & plates etc. and therefore, cannot be said that the Hospital is a dealer within the meaning of Dealer Under the Bihar Finance Act.

The transaction aforesaid, cannot be said to be sale under the law as there is no element of sale at all in the said transaction. It is to be held that the transaction of supply of Medicines, surgical items, x-ray films and plats etc. for the treatment of the indoor patients does not come under the purview of sale in terms of the Bihar Finance Act because the TMH is not selling those items to the indoor patients but in fact they are being consumed, utilized, administered to those indoor patients, which are essentially required for their treatment. Accordingly, it is to be held that supply of the aforesaid article by the TMH are not liable to be taxed.

Same view has been held by the Allahabad High Court in the case of M/s. International Hospital Pvt. Ltd.[3]

Contrary to the above, the Kerala High Court in the case of Malankara Orthodox Syrian Church[4] (Single Member) and Comtrust Eye Hospital[5] (2 Member Division Bench) the court held that hospitals selling medicines in the course of medical treatment would be liable to pay tax. Replacement of natural lens with artificial lens supplied by hospital through implantation is not different from sale of medicines. While lens is inserted in the eye in place of natural lens in cataract surgery, artificial stent is fixed inside blood vessel in the course of angioplasty to clear occluded blood vessel supplying blood to the heart muscle. Similar is the case of installation of steel rods to repair or reconstruct damaged human bones, whether crushed or corroded by reason of disease, injury, etc. Even though hospitals may be charging consolidated rates, the cost of material supplied is a major component of the charges and it is proportionate to the value of the item supplied, which again depends on its quality, brand name, etc

Subsequently, the Division Bench (3 Member Bench) of the Kerala High Court in the case of Sanjose Parish Hospital and Ors[6] had disagreed to the above referred judgement of the lower benches of the same Court. It was held that the judgements in these cases do not propound and declare the correct position in law and the Registry was directed to place these orders before the Division Bench for consideration.

Recently, in the case of MIOT Hospitals Ltd.[7], the Single Member Bench of the Madras High Court while dismissing a batch of Writ petitions, had disagreed with the rulings of other High Courts on the said matter and held that health services provided to In-Patient would qualify as a works contract, liable to VAT. The primary question of law under consideration was whether in the course of provision the medical service, VAT would be applicable on the stents, valves, medicines, x-ray and other goods used while treating their In-Patients. In this case, the Court had made the following key observations

1. Works contract essentially involves two fundamental elements namely (i) transfer of material and (ii) rendering of service. The supplier transfers the ownership and possession of the material used to the recipient in the course of execution of the work contract. Sometime such work may result in new identity altogether different from the material supplied while sometimes such materials become part of the existing structure or goods. It can be both divisible and indivisible contract.

2. Referring to the decision of the Hon’ble Supreme Court in the case of Larsen and Toubro Ltd and another[8], it held that “works contract” is a separate specie of contract distinct from contract for service

3. Works contract is of infinite variety and it is not possible to conclude hospital service are outside the purview of Art.366 (29A) of the Constitution.

4. Definition of “works contract” in Section 2(43) of the Tamil Nadu Value Added Tax Act, 2006 is of very wide import. It is a generic definition. It is not confined to any specific genre of contract involving service and supply of goods. It is also not confined to immoveable property. Any agreement for fitting or installation of any moveable property such as prosthetics can qualify as “works contract”

5. The ground of “dominant test” does not survive after the 46th amendment to the Constitution. Even if such a test was to be applied, the Court has to first answer as to whether in the course of the provision of “medical /health service”, any of the clauses in the definition of “sale” were attracted or not. It is only after ruling out the applicability of the definition of sale and the definition of “works contract” in the said Act, the Court could have thereafter proceeded to determine the taxability or non-taxability of the transaction.

6. Health service cannot be carved out as separate specie of service and/or sale different from the definition of “works contract” for the purpose of the Tamil Nadu Value Added Tax Act, 2006.

7. Fitting out or implanting of prosthetics into the physiology or the body of the patient for alleviation of pain or for improvement of the life of the patient in the course of medical/surgical procedure can be construed as “works contract”.

8. Thus, there is merits in the contention of the respondent that the medical/Health services rendered by the petitioners could fall within the ambit of the Article 366 (29-A) of the Constitution of India read with the provisions of the Tamil Nadu Value Added Tax Act, 2006. At the same time, dispensing of medicine to such patients while they undergo treatment as an inpatient in the hospital cannot come within the purview of the definition of “works contract”. Consequently, no tax can be demanded on the value of such medicine.

9. Under section 2(43) of the Tamil Nadu Value Added Tax Act, 2006 the definition of “works contract” includes any agreement for carrying out building construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property for cash or deferred payment or other valuable consideration. The words fitting out of any immovable property can bring within its purview the fixing of valves, stents, metal plates, artificial hips and knees etc.

10. There is not only transfer of possession of prosthetics into the physiology of the patient but also the ownership of such prosthetics to the patient for consideration in the course of the provision of medical/health service. Similarly, in the course of taking x-ray, scan, MRI/CT Scan for such in-patient, cost of which get included into the package are taxable as such activity can be termed as the processing of moveable property.

In the view of the authors, the Madras High Court has failed to consider and evaluate the expression “property”. Under no stretch of imagination, a living human body can be considered as a “property” and therefore it would be absurd to conclude that there could be a “works contract” on the body of a living human being. There is a clear distinction between the term “property” and “persons”. The Court had failed to answer the specific question as to how the patient could be considered as a property and thus the question of levy as a works contract would fail.

One needs to consider the definition of works contract and none of the words used therein can be said to allude to work on a human body. The term “fitting out” and “improvement” are not phrases used to describe procedures carried out on a human body. The contextual exclusion of surgical procedures from the definition of “works contract” is even more compelling when one considers that the legislature which went to considerable lengths to include 11 such words, but did not choose to mention “implant” or “transplant” on human body, which are the words which are used to describe surgical procedures. Hence, it is difficult to understand as to how one can fit the said service within the purview of “works contract”.

The various other High Courts had appreciated the correct nature of transaction and held that there is no independent sale leviable to VAT in case of goods used for treatment of Inpatient. The objective of the patient is to get the healthcare services wherein the goods are consumed in the course of services. Thus, the entire transaction is to be considered as a service, though certain goods are supplied in the course of provision of such service. However, where the medicines / consumables prescribed can be procured from outside, GST on such items could be applicable.

In the context of GST, the coverage of works contract under Section 2(119) of the CGST Act,2017 is applicable only with respect to immovable property. Also, the Madras High Court in Para 139 of the said order had acknowledged the fact that it is a healthcare service and that GST would be exempted on such service.

For Feedback: vikram@hiregange.com & ashish@hiregange.com

Note: Certain excerpts of this note have been referred from the upcoming book on Practical Guide to GST on Healthcare and Pharmaceutical Sector, authored by CA.Vikram Katariya, CA.Vasant Bhat and CA.Ashish Chaudhary under the guidance of CA.Madhukar Huregange

[1] 2015 (2) TMI 1014

[2] 2007 (9) TMI 599

[3] 2014 (2) TMI 765

[4] 2002 (12) TMI 587

[5] 2006 (10) TMI 413

[6] 2019 (3) TMI 1017

[7] 2020 (6) TMI 119

[8] 2015 (8) TMI 749 – SUPREME COURT

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