Sale of medicine in hospital services was not taxable separately if it was part of composite healthcare service

Assistant Commissioner Vs Kota Eye Hospital and Research Foundation (Rajasthan High Court)

Conclusion: In case of rendering of health care/medical services and not supply of goods, the value recovered by the hospitals towards the cost of medicines, implants, stents, lenses and various other charges towards room rent, supply of food could not be classifiable as sale or supply of goods but the transaction would  be of service on account of Predominant Test/ Aspect Doctrine.

Held: The case of the Revenue was that the respondents-clinical establishments/hospitals/nursing homes purchased the medical implants like stents, eye-lenses, pharmacy and surgical items after payment of tax/VAT from dealers and utilized the same during the course of medical treatment of patients in-house and as the same constituted transfer of goods in terms of Section 2(35) of the RVAT Act, 2003. The same also amounted to sale in terms of Section 2(11) of the RVAT Act, 2003 and as they were selling the same for consideration, they qualified to be a dealer and alternatively, by virtue of Section 2(44) of the RVAT Act, 2003, as they carry out work of installation, the same amounted to “works contract”. It was noted that the respondents were running health care services wherein the patients were categorized primarily in two categories; out patients and “in-patients” for administrative convenience. The out patients were those who visited a hospital for routine check ups or clinical visits. In-patients were those who were admitted in the hospital for the required treatment.   The hospital was expected to provide not only primary services of medical treatment to in-patients but also to provide lodging, nursing care, supply of medicines, food and operational/ procedural treatment under the supervision of Doctor until discharge. There were bundle of services embodied to the primary services of medical treatment. The primary service without any doubt was of medical treatment but there were ancillary and incidental services of lodging, care, medicine, supply of food, implant of surgical items, installation of lenses, stents etc. Hence, the medicines, implants, room provided on rent used in the course of providing health care services/medical treatment to the patients admitted for diagnosis for treatment in the hospital or clinical establishment were undoubtedly naturally bundled in the main services of medical treatment and it was a composite supply to facilitate health care services. Whereas the out-patient pharmacy attached to the hospital provided drugs/medicines etc., upon valid prescription to out­patients and outside customers and receives consideration. No service of medical treatment was rendered and the dominant nature of the said transaction was sale of medicine. As far as out-patients were concerned, there was no control over its continuous treatment. The patient had absolute freedom to follow or not follow the prescription or to purchase the medicine from the hospitals’ drug store or from outside. The services in such cases were advisory in nature. If the drug store/ hospital sold the medicine, it was an isolated transaction and not a composite supply of health care service and was therefore, not covered under the ambit of health care services.

FULL TEXT OF THE JUDGMENT/ORDER OF RAJASTHAN HIGH COURT

1. Instant Sales Tax Revision Petitions under Section 84 of the Rajasthan Value Added Tax Act, 2003 (for short, ‘RVAT Act, 2003’) read with Section 86 of the Rajasthan Sales Tax Act, 1994 have been filed by the petitioner-Revenue assailing the order impugned passed by the learned Tax Board, Ajmer.

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