2019 (3) TMI 1017 - HC - VAT and Sales Tax

Levy of tax - KVAT Act - 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? - Held that - The three contracts - works contract, hire purchase contract and catering contract - along with other transactions (with which we are not concerned in the present case) were deemed to be sales under Article 366(29A) by an amendment to the Constitution. However, the position even after the said amendment, with respect to transactions of a composite nature based on an indivisible contract, were not covered under the specific clauses (a) to (f). The position as to other composite contracts remained the same and there could be no separation of a composite, indivisible transaction so as to tax the transfer of goods, if at all there is such a transfer in the course of such composite contract or the service rendered - The sale element in composite, inseparable contracts which are covered by the six sub-clauses of Article 366(29A) can be separated and subject to sales tax. With respect to all other composite transactions, the State would not have such power to distinctly tax the transfer of goods forming part of a composite contract or a rendering of service. 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 decisions in Malankara Orthodox Syrian Church 2002 (12) TMI 587 - KERALA HIGH COURT and Comtrust Eye Hospital, 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. Supply of Medicines, Implants, Consumables, and Surgical Tools as 'Sale of Goods':
The central question referred for consideration was whether the supply of medicines, implants, consumables, and surgical tools used in hospital treatments, billed to patients, constitutes a 'sale of goods' under the KVAT Act. The Division Bench initially opined that such transactions form part of the services rendered by the hospital and are not exigible to tax under the sales tax enactment. This view was in conflict with previous decisions of the court, necessitating a reference.

2. Legal Precedents and Interpretations:
The court reviewed various decisions, including Malankara Orthodox Syrian Church v. Sales Tax Officer, where it was held that hospitals are 'dealers' under the Kerala General Sales Tax Act, 1963 (KGST Act), and the supply of medicines is an integral part of the treatment. The court noted that the legislative intent was to cover sales effected in the course of rendering services. However, the dominant nature test, as discussed in Bharat Sanchar Nigam Ltd. v. Union of India, was emphasized, indicating that the primary nature of transactions in hospitals is service-oriented, not sales.

3. Dominant Nature Test and Article 366(29A):
The court reiterated that the dominant nature test applies to composite transactions not covered by Article 366(29A) of the Constitution. It was emphasized that the sale of drugs, implants, and consumables in hospitals is part of the medical treatment service and does not create separate rights on such items. The dominant intention in hospital services is the provision of medical care, not the sale of goods.

4. Legislative Intent and Constitutional Amendments:
The court examined the legislative intent behind Article 366(29A), which introduced deemed sales for specific transactions like works contracts, hire-purchase contracts, and catering contracts. It was clarified that this amendment does not extend to hospital services. The supply of medicines in hospitals is an inseparable part of the medical service and cannot be taxed separately as a sale of goods.

5. Applicability of Previous Court Decisions:
The court reviewed decisions from other High Courts, such as International Hospital Pvt. Ltd. v. State of U.P., Fortis Health Care Limited v. State of Punjab, and Tata Main Hospital v. State of Jharkhand, which held that the supply of medicines and consumables in hospitals is part of the service rendered and not taxable as a sale of goods. These decisions aligned with the court's interpretation.

Conclusion:
The court concluded that the supply of medicines, implants, and consumables by hospitals to in-patients 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 Article 366(29A) of the Constitution. The previous decisions in Malankara Orthodox Syrian Church and related cases were found to be incorrect in law. The matters were directed to be placed before the Division Bench for consideration of individual cases.