No Service Tax on health care services by clinical establishments

M/s Sir Ganga Ram Hospital Bombay Hospital & Medical Research Centre Vs CCE (CESTAT Delhi)

The proceedings by the Revenue, initiated against the appellant hospitals, are mainly on the inference drawn to the effect that the retained amount by the hospitals out of total charges collected from the patients should be considered as an amount for providing the infrastructure like room and certain other secretarial facilities to the doctors to attend to their work in the appellants hospitals. We find this is only an inference and not coming out manifestly from the terms of the agreement. Here, it is very relevant to note that the appellant hospitals are engaged in providing health care services. This can be done by appointing the required professionals directly as employees. The same can also be done by having contractual arrangements like the present ones. In such arrangement, the doctors of required qualification are engaged/contractually appointed to provide health care services. It is a mutually beneficial arrangement. There is a revenue sharing model. The doctor is attending to the patient for treatment using his professional skill and knowledge. The appellants hospitals are managing the patients from the time they enter the hospital till they leave the premises. ID cards are provided, records are maintained, all the supporting assistance are also provided when the patients are in the appellant hospital premises. The appellant hospital also manages the follow-up procedures and provide for further health service in the manner as required by the patients. As can be seen that the appellants hospitals are actually availing the professional services of the doctors for providing health care service. For this, they are paying the doctors. The retained money out of the amount charged from the patients is necessarily also for such health care services. The patient paid the full amount to the appellant hospitals and received health care services. For providing such services, the appellants entered into an agreement, as discussed above, with various consulting doctors. We do not find any business support services in such arrangement.

Examining the scope of the tax entry for BSS, we are of the considered view that there is no taxable activity identifiable in the present arrangement for tax liability of the appellant hospitals.

No Service Tax on health care services by clinical establishments

Under negative list regime w.e.f. 01.07.2012, the health care services are exempt from service tax. Earlier the health care services were only taxed for specified category of hospitals and for specified patients during the period 01.07.2010 to 01.05.2011. With effect from 01.05.2011, health care services were exempt from service tax under Notification No.30/2011 ST. After introduction of negative list tax regime, Notification No. 25/2011-ST exempted levy of service tax on health care services rendered by clinical establishments. We have examined the scope of the terms ‘clinical establishments’ and ‘health care services’. The notification defines these terms. The term ‘clinical establishments’ is defined as below:

“Clinical establishment” means hospital, nursing home, clinic, sanatorium or any other institution by whatever name called, that offers services or facilities requiring diagnosis or treatment of care for illness, injury, deformity, abnormality or pregnancy in any recognized system of medicines in India, or a place established as an independent entity or a part of an establishment to carry out diagnostic or investigative services of diseases.”

The terms ‘health care services’ is defined as below:

“health care services” means any service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognized system of medicines in India and includes services by way of transportation of the patient to and from a clinical establishment but does not include their transplant or cosmetic or plastic surgery, except when undertaken to restore or to reconstruct anatomy or functions of both affected due to congenial defects, developmental abnormalities, injury or trauma.”

These two provisions available in Notification No.25/2012 will show that a clinical establishment providing health care services are exempted from service tax. The view of the Revenue that in spite of such exemption available to health care services, a part of the consideration received for such health care services from the patients shall be taxed as business support service/taxable service is not tenable. In effect this will defeat the exemption provided to the health care services by clinical establishments. Admittedly, the health care services are provided by the clinical establishments by engaging consultant doctors in terms of the arrangement as discussed above. For such services, amount is collected from the patients. The same is shared by the clinical establishment with the doctors. There is no legal justification to tax the share of clinical establishment on the ground that they have supported the commerce or business of doctors by providing infrastructure. We find that such assertion is neither factually nor legally sustainable.

FULL TEXT OF THE CESTAT ORDER IS AS FOLLOWS:-

These 7 appeals are involving common dispute and are accordingly taken up together for disposal. 6 appeals are by assessees. One is by Revenue. The appellant assessees are engaged in health care services to the patients and they are managing well-known hospitals/medical centres in various places. To provide the medical services to different patients, the appellants have engaged professionals and doctors on contractual basis. These doctors are provided space in the hospitals with required facilities to attend to the patients coming to the hospitals, run by the appellants. These doctors engaged on contract basis are paid professional fee in terms of the contracts. Fee paid to the doctors is computed based on a pre-determined ratio on the amount received by the appellants from the patients. The Revenue entertained a view that the “collection charges/facilitation fee” retained by the appellants are liable to service tax under the category of Business Support Service for the period prior to 01.07.2012 and are a taxable service post negative list also. The Revenue held a view that such charges/fee retained by the appellant formed a taxable consideration for the service of infrastructural support provided by the appellants to the doctors to enable the doctors to carry-out their work in the hospital. The original authorities in different impugned orders concluded that appellants provided infrastructural support service to consultant doctors and, as such, are liable to pay service tax under the category of Business Support Services. They also imposed various penalties on the appellants.

2. Ld Advocate Shri B.R. Narsimhan, representing 5 of the appellants, contested the findings recorded by the original authority on various grounds. His submissions can be summarized as below:

a) The amount booked under “collection charges/facilitation fee” of doctors is not liable to service tax under Business Support Service. In terms of Section 65(104c) of the Finance Act, 1994, doctors are not “business entities” and are not engaged in a business or commerce. Reliance was placed on the decision of Hon’ble Gujarat High Court in Dr. KK Shah 135 ITR 146 (Guj.). Business Support Service is essentially an outsourced service. The doctors have not outsourced any activity to the appellants hospital. In fact, the appellants engaged in the main activity of health care services appointed various doctors in furtherance of their health care services.

b) The agreements between the doctors and the appellants are mainly on revenue sharing basis. The collection charges are part of the amount collected by the appellants from the patients for providing health care services. The doctors are entitled to get a fixed percentage of total revenue earned by the appellants. If more work is carried-out by the doctor generating more income, the revenue accruing to the doctors shall be more. The gain or loss of each party to the agreements depends on the working arrangement only. It is essentially a revenue sharing arrangement and not a case of one party providing service to another.

c) Notwithstanding the above, service, if any, is provided by the doctors to the appellants not vice-versa. The doctors are required to treat the patients who visit the appellants hospital which is providing health care services. The doctors are helping the appellant hospital in providing such health care services and are getting paid for the same.

d) Health care services are exempt from service tax for the period post negative list 01.07.2012. Health care services were selectively taxed for the period 01.07.2010 to 01.05.2011 and thereafter by notification No.30/2011 ST dated 25.04.2011, health care services were exempt from service tax. Post negative list regime with effect from 01.07.2012, health care services rendered by clinical establishments were exempt by Notification No.25/2012 ST dated 20.06.2012. In such facts and circumstances, the view of the revenue that though health care services were exempt, the services, if any, rendered in connection with such health care services will be taxed will defeat the very purpose of exemption to medical services. The activities of the appellant, even if it is considered as services to doctors, is not limited to provision of space or infrastructure but also includes various other services like blood bank, emergency units, operations theaters, which are essentially for diagnosis and treatment of patients. These are typically health care services which are clearly exempt.

e) The demand cannot be sustained for extended period as there is no element of fraud, willful mis-statements etc. The demand was raised by the Revenue based on examination of documents maintained by the appellant during the course of audit by the officers. Accordingly, the demand for extended period and imposition of penalties are not sustainable.

2. Shri B.S.Manoj, ld Advocate appearing for one of the appellant hospital (M/s Appollo) mainly submitted again on the above lines. He further stated that the patients entry and follow-up in the appellant hospital premises is monitored and regulated by the appellant hospital only. The patients are provided with ID cards and all the contacts and follow-up facilitation of each of the patients is managed and regulated by the appellant hospital only. Thus, the patients are of the hospital only and not the individual doctors who are engaged to provide health care services by the appellant hospital.

3. The ld AR Shri Amresh Jain contested the appeals. He submitted that the doctors are engaged in the business activity and are earning consideration in their professional capacity. To perform their professional business, they have availed the support services of the appellant hospitals. The method of sharing revenue etc. cannot alter the nature of service provided by the appellant hospitals to various doctors. The agreements entered into by the appellant hospitals with the doctors stipulate various duties and responsibilities of the appellant hospitals and the doctors. It is clear that the appellants are providing infrastructural support to the doctors without which they cannot undertake their activities as professional doctors. For such infrastructural support, the appellant hospital retained certain portion of the total amount received from the patients. Such consideration, retained by the appellant hospitals, are rightly subjected to service tax for providing support services.

4. We have heard both the sides and perused the appeal records. We have also perused specifically the terms of some of the agreements on record. The dispute in the present appeals is with reference to the tax liability of the appellant hospitals under the category of business support services. The statutory provision for the said tax entry is as below:

“Section 65 (104c) ‘support services of business or commerce’ means services provided in relation to business or commerce and includes evaluation of prospective customers, telemarketing, processing of purchase orders and fulfillment services, information and tracking of delivery schedules, managing distribution and logistics, customer relationship management services, accounting and processing of transactions, operational or administrative assistance in any manner, formulation of customer service and pricing policies, infrastructural support services and other transaction processing.

Explanation. __ For the purposes of this clause, the expression ‘infrastructural support services’ includes providing office along with office utilities, lounge, reception with competent personnel to handle messages, secretarial services, internet and telecom facilities, pantry and security.”

5. The claim of the Revenue is that the appellants have provided infrastructural support service to various doctors. As a consideration for such support, they have retained a part of the amount collected from visiting patients. We have perused some of the agreements/appointment arrangements entered into between the appellants hospitals and the individual doctors. Typically, the arrangement contains details like duration of time for consultation, the obligations on the part of the doctors, fee to be paid, procedure for termination of agreement, etc. The agreements generally talk about appointment of consultants to provide services to the patients who will visit or admitted in the appellants hospital. The doctors will receive a percentage of share of the collection from the patients in case of consultation, procedures and surgeries done by them. In some cases, there is a provision for treating patients from low economic background without any financial benefits. On careful consideration of various terms and conditions and the scope of arrangement, we are of the considered view that such arrangement are for joint benefit of both the parties with shared obligations, responsibilities and benefits. The agreements do not specify the specific nature or list of facilities which can be categorized 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 service.

6. The proceedings by the Revenue, initiated against the appellant hospitals, are mainly on the inference drawn to the effect that the retained amount by the hospitals out of total charges collected from the patients should be considered as an amount for providing the infrastructure like room and certain other secretarial facilities to the doctors to attend to their work in the appellants hospitals. We find this is only an inference and not coming out manifestly from the terms of the agreement. Here, it is very relevant to note that the appellant hospitals are engaged in providing health care services. This can be done by appointing the required professionals directly as employees. The same can also be done by having contractual arrangements like the present ones. In such arrangement, the doctors of required qualification are engaged/contractually appointed to provide health care services. It is a mutually beneficial arrangement. There is a revenue sharing model. The doctor is attending to the patient for treatment using his professional skill and knowledge. The appellants hospitals are managing the patients from the time they enter the hospital till they leave the premises. ID cards are provided, records are maintained, all the supporting assistance are also provided when the patients are in the appellant hospital premises. The appellant hospital also manages the follow-up procedures and provide for further health service in the manner as required by the patients. As can be seen that the appellants hospitals are actually availing the professional services of the doctors for providing health care service. For this, they are paying the doctors. The retained money out of the amount charged from the patients is necessarily also for such health care services. The patient paid the full amount to the appellant hospitals and received health care services. For providing such services, the appellants entered into an agreement, as discussed above, with various consulting doctors. We do not find any business support services in such arrangement.

7. The inference made by the Revenue that the retained amount by the hospital is to compensate the infrastructural support provided to the doctors can be examined in another angle also. Reading the statutory provisions for BSS, we note that the services mentioned therein are “provided in relation to business or commerce.” As such, to bring in a tax liability on the appellant hospital, it should be held that they are providing infrastructural support services in relation to business or commerce. That means, the doctors are in business or commerce and are provided with infrastructural support. This apparently is the view of the Revenue. We are not in agreement with such proposition. Doctors are engaged in medical profession. As examined by Hon’ble Gujarat High Court in Dr KK Shah (supra), though in an income-tax case, we note that there is a discernable difference between “business” and “profession”. The Gujarat High Court referred to decision of Hon’ble Supreme Court in Dr Devender Surtis AIR 1962 SC 63. The Supreme Court observed as below:

“There is a fundamental distinction between a professional activity and an activity of a commercial character” : “…a “profession”… involves the idea of an occupation requiring either purely intellectual skill, or of manual skill controlled, as in painting and sculpture, of surgery, by the intellectual skill of the operator, as distinguished from an occupation which is substantially the production or sale or arrangements for the production or sale of commodities” “…a professional activity must be an activity carried on by an individual by his personal skill and intelligence…and unless the profession carried on by (a person) also partakes of the character of a commercial nature” the professional activity cannot be said to be an activity of a commercial character. “

8. Applying the above ratio and examining the scope of the tax entry for BSS, we are of the considered view that there is no taxable activity identifiable in the present arrangement for tax liability of the appellant hospitals.

9. Under negative list regime w.e.f. 01.07.2012, the health care services are exempt from service tax. Earlier the health care services were only taxed for specified category of hospitals and for specified patients during the period 01.07.2010 to 01.05.2011. With effect from 01.05.2011, health care services were exempt from service tax under Notification No.30/2011 ST. After introduction of negative list tax regime, Notification No. 25/2011-ST exempted levy of service tax on health care services rendered by clinical establishments. We have examined the scope of the terms ‘clinical establishments’ and ‘health care services’. The notification defines these terms. The term ‘clinical establishments’ is defined as below:

“Clinical establishment” means hospital, nursing home, clinic, sanatorium or any other institution by whatever name called, that offers services or facilities requiring diagnosis or treatment of care for illness, injury, deformity, abnormality or pregnancy in any recognized system of medicines in India, or a place established as an independent entity or a part of an establishment to carry out diagnostic or investigative services of diseases.”

10. The terms ‘health care services’ is defined as below:

“health care services” means any service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognized system of medicines in India and includes services by way of transportation of the patient to and from a clinical establishment but does not include their transplant or cosmetic or plastic surgery, except when undertaken to restore or to reconstruct anatomy or functions of both affected due to congenial defects, developmental abnormalities, injury or trauma.”

11. These two provisions available in Notification No.25/2012 will show that a clinical establishment providing health care services are exempted from service tax. The view of the Revenue that in spite of such exemption available to health care services, a part of the consideration received for such health care services from the patients shall be taxed as business support service/taxable service is not tenable. In effect this will defeat the exemption provided to the health care services by clinical establishments. Admittedly, the health care services are provided by the clinical establishments by engaging consultant doctors in terms of the arrangement as discussed above. For such services, amount is collected from the patients. The same is shared by the clinical establishment with the doctors. There is no legal justification to tax the share of clinical establishment on the ground that they have supported the commerce or business of doctors by providing infrastructure. We find that such assertion is neither factually nor legally sustainable.

12. The Revenue has filed an appeal against order dated 01.02.2016 of Commissioner of Service Tax, Delhi-I. In similar set of facts, as discussed above, the Commissioner, after detailed examination, held that the respondent (hospital) is not providing any services to the consultants/doctors. The service provided by the respondent hospital would merit classification under Health Care Services extended to the patients. Accordingly, the demand proceedings against the respondent hospital was dropped. Revenue filed appeal against the said order. In view of our detailed analysis on the same dispute while dealing with appeals by the appellant hospitals, as above, we find no merit in the present appeal by the Revenue. We are in agreement with the ratio and decision of the Commissioner in the impugned order. Accordingly, the appeal by the Revenue is dismissed.

13. In view of above discussion and analysis, we hold that the impugned orders against which appellant hospitals filed appeal are devoid of merit, the same are set–aside. Upholding the order dated 01.02.2016 of Commissioner, Service Tax, New Delhi, we dismiss the appeal by the Revenue. All the 7 appeals are disposed-of in these terms.

(Pronounced in Court on 06.12.2017)