2019 (3) TMI 438 - HC - VAT and Sales Tax

Sale of goods or not? - deeming fiction - Whether the medicines supplied, implants carried out, the consumables used and surgical tools exclusively used in a particular procedure, as part of treatment of patients in a hospital, the price of which is recovered by way of bills from the patients are sale of goods as contemplated by the legislation levying such tax? - article 366(29A)(f) of the Constitution of India. Held that - When the Constitution by a deeming fiction permitted only certain transactions to be treated as sale of goods, the State Legislature cannot enlarge the scope of the definition in excess of that available in the deeming fiction to those transactions not strictly answering the definition of sale of goods or extend the fiction to those other transactions. In the Explanation, the State Legislature cannot have any intention in excess of the fiction as brought in by the amendment to the Constitution. Even if such an intention was there, to the extend it is beyond and steps out of the ambit of, the fiction created by the 46th amendment, it would be vitiated for total absence of legislative power. The definition of sale as found in section 2(xxi) of the KGST Act took care of instances as provided under clauses (a) to (f) in article 366(29A) respectively by Explanations (1A), (2), (3), (3A), (3B) and (3C) - After the deeming fiction was introduced by article 366(29A), all the transactions coming under the aforesaid Explanations stood validated as sale of goods. Similarly in the KVAT Act, section 2(xliii) defines sale and the Explanations I to VI took care of the transactions covered by clauses (a) to (f) of article 366(29A). Under the KGST Act and KVAT Act, the State cannot legislate in excess of the specific transactions brought in under article 366(29A), to create further deeming fiction with respect to other composite transactions. With respect to hospital services, we cannot but observe that the sale of drugs, implants and other consumables are a part of the medical treatment rendered. There is no identity of the medicines or consumables or implants, as it does not lie in the mind or mouth of the patient to identify the drugs to be administered in the course of the treatment. Though a patient on his volition could refuse to take a particular drug, he cannot demand, as a matter of right, that a drug be administered to him in the course of the medical treatment. A demand of that nature will not be complied with by either a medical practitioner or a hospital, the latter of whom dispenses medicines only in accordance with the directions of the attending physician or surgeon - The cost of the implants, consumables or the drugs is irrelevant insofar as deciding what is the dominant nature of the transaction or service rendered to the patient in a hospital, which, without any doubt, is the therapeutic treatment rendered. The patient has no control or say, has limited control, on the procedures taken in the course of the treatment, the drugs administered and the consumables used. The declaration so made was with respect to the development contract which was held to be a works contract. As to the other transactions the dominant nature test applies and in hospital services the dominant intention is provision of medical care and treatment, to effectively cure the patient of his/her ailment and it is not the sale of drugs, implants or other consumables. The service offered is one of medical treatment and the dispensation or administration of drugs or implants carried out in the course of surgical procedures and the consumables used in the course of any medical procedure would be an inseparable, indivisible part of the treatment rendered. The business expediency has no control in the administration of drugs, use of consumables or the implants carried out and neither does the control lie with the hospital, as a corporate or other legal entity. The supply of drugs use of consumables and the implants made are on professional medical advice intended at curing the patient and not deriving profits. Though not a charitable activity, hospitals cannot be said to be a business house established primarily for sale of drugs, consumables or implants. The principle is that mere passing of property in an article or commodity during the course of the performance of a contract or service, which is essentially one and indivisible, does not render it a transaction of sale, except in the case of the specific instances as available in clauses (b), (c) and (f) of article 366(29A). The fiction extends to only the specific clauses as coming under article 366(29A) and stops there and does not extend beyond that or encompass any other composite transaction. The decisions in Malankara Orthodox Syrian Church 2002 (12) TMI 587 - KERALA HIGH COURT , Comtrust Eye Hospital v. Addl. Sales Tax Officer 2006 (10) TMI 413 - KERALA HIGH COURT do not propound and declare the correct position in law. We direct the registry to place the matters before the Division Bench for consideration of the individual cases.

Summary

Issues Involved:
1. Whether the supply of medicines, implants, consumables, and surgical tools used in hospital treatments constitutes a "sale of goods" under the Kerala Value Added Tax Act, 2003 (KVAT Act).

Issue-wise Detailed Analysis:

1. Definition of Sale of Goods in Hospital Services:

The primary question referred for consideration was whether the medicines supplied, implants carried out, consumables used, and surgical tools exclusively used in a particular procedure as part of the treatment of patients in a hospital, the price of which is recovered by way of bills from the patients, are considered "sale of goods" under the KVAT Act. The Division Bench initially opined that hospitals might require registration as dealers due to their pharmacies but suggested that such transactions form part of the services rendered by the hospital and are not exigible to tax under the sales tax enactment.

2. Legal Precedents and Interpretations:

The court referred to various decisions, including the landmark case of Bharat Sanchar Nigam Ltd. v. Union of India, which emphasized the distinction between services and sale of goods. The court noted that the dominant nature test survives even after the 46th amendment to the Constitution, which introduced Article 366(29A). This article allows certain composite transactions to be treated as sales, but this does not extend to hospital services.

3. Analysis of Hospital Services as Composite Transactions:

The court emphasized that hospital services, including the administration of drugs, implants, and consumables, are integral and inseparable parts of the medical treatment provided. The dominant intention in such transactions is to provide medical care and treatment, not to sell goods. The court held that these services cannot be separated into distinct elements of sale and service for the purpose of levying sales tax.

4. Examination of Previous Judgments:

The court examined previous judgments, including Malankara Orthodox Syrian Church v. Sales Tax Officer, which had held that hospitals are dealers under the KGST Act and that the supply of medicines is an integral part of the treatment. However, the court found that this reasoning was flawed as it did not consider the dominant nature test and the inseparability of the service provided.

5. Applicability of Article 366(29A):

The court clarified that the deeming fiction created by Article 366(29A) applies only to specific transactions such as works contracts, hire-purchase contracts, and catering contracts. It does not extend to hospital services, where the supply of medicines and other consumables is part of the composite service of providing medical treatment.

6. Comparison with Other High Court Decisions:

The court noted that other High Courts, including those of Allahabad, Punjab and Haryana, and Jharkhand, had taken a similar view that the supply of medicines and consumables in hospitals is part of the service rendered and not a sale of goods. These decisions were consistent with the court's findings.

Conclusion:

The court concluded that the supply of medicines, implants, and consumables by hospitals to inpatients in the course of medical treatment cannot be separated from the composite, indivisible service of providing medical care and treatment. Such transactions do not constitute a sale of goods under the KVAT Act. The court directed that the individual cases be placed before the Division Bench for further consideration.