2020 (6) TMI 119 - HC - VAT and Sales Tax

Levy of VAT - Medical services for in house patients - stents, valves, medicines, x-ray and other goods used while treating their in house patients - works contracts or not - deemed sale - whether in the course of provision the medical service, petitioners who are private hospitals were liable to pay Value Added Tax (VAT) under the provisions of the Tamil Nadu Value Added Tax Act, 2006 on the stents, valves, medicines, x-ray and other goods used while treating their in house patients? HELD THAT - 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. The Honourable Supreme Court in Commissioner of Central Excise versus Larsen and Toubro Ltd and another 2015 (8) TMI 749 - SUPREME COURT while dealing with the above provision in the Finance Act, 1994 held that works contract is a separate species of contract distinct from contract for services simpliciter recognised by the world of commerce and law as such, and has to be taxed separately as such. This decision though was rendered in the context of levy of service tax on works contract , make it clear on supply portion sales tax was payable. Thus, the Hon ble Supreme Court has time and again recognized that works contract is a separate specie of contract distinct from contract for service. A possible conflict which would have arisen as to whether a health service having trappings of works contract as we understandnow in the said notification could also have been classified as a works contract also. Scope for such any confusion was averted by clever drafting by the draftsman in the Act. The definitions were defined separately. Section 65(F)(2) which dealt with Principles of interpretation of specified descriptions of services or bundled services left no scope for ambiguity - As per Section 65F(2), where a service was capable of differential treatment for any purpose based on its description, the most specific description was to be preferred over a more general description. The health services involving the implanting of prosthetics and other artificial parts inside the body of a patient were either outside the purview of tax levy under Tamil Nadu Value Added Tax Act, 2006or earlier under the Tamil Nadu General Sales Tax, 1958 or were exempted by notifications under the respective enactments in absence of a specific notification. The dominant test after the 46th amendment does not survive for the reasons stated in this order. 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 in Section 2(t) of the Bihar Finance Act 1981 were attracted or not. It is only after ruling out the applicability of Section 2(t) 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. Thus, the 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 limited. 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 quality as works contract - It encompasses within its fold it every possible and conceivable commercial transactions which involve sale and service. Therefore, Medical / 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 - 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 . It is for the petitioners to demonstrate how the definition of works contract is not attracted to this case. 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 - 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. The respondent shall exclude the value of medicine and other consultation charges while determining the taxable value. The demand shall be confirmed to the value of prosthetics and charges incurred towards X-ray, C.T.Scan, PET Scan etc. - The respondent assessing officer shall hear out the petitioners separately and pass appropriate order on mertis all the other issues raised in the respective notices impugned in these writ petitions - Petition disposed off.

Summary

Issues Involved:
1. Liability of private hospitals to pay Value Added Tax (VAT) on stents, valves, medicines, x-ray, and other goods used while treating in-house patients under the Tamil Nadu Value Added Tax Act, 2006.
2. Whether the provision of medical services by private hospitals can be classified as a "works contract" under Section 2(43) of the Tamil Nadu Value Added Tax Act, 2006.
3. Validity of the impugned notices issued under Section 27 of the TNVAT Act, 2006 to reopen completed assessments.
4. Applicability of previous High Court and Supreme Court decisions on similar issues.
5. The interpretation of "works contract" and "sale" under the Tamil Nadu Value Added Tax Act, 2006 and the Constitution of India.

Detailed Analysis:

1. Liability to Pay VAT:
The core issue was whether private hospitals are liable to pay VAT on stents, valves, medicines, x-ray, and other goods used in treating in-house patients. The petitioners argued that they charge a consolidated amount for medical treatments, inclusive of all expenditures, without separately charging for these items. The respondent, however, issued notices demanding VAT on the deemed sale of these items as "works contract" under Sections 5/6 of the TNVAT Act, 2006.

2. Classification as "Works Contract":
The definition of "works contract" under Section 2(43) of the TNVAT Act, 2006 includes any agreement for building construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair, or commissioning of any movable or immovable property. The court examined whether the medical services provided by the petitioners, which involve the implantation of prosthetics and use of ancillary services, could be classified as "works contract."

The court noted that the definition of "works contract" is broad and not confined to a specific genre of contracts. It includes agreements for fitting out any movable property, which could encompass the implantation of prosthetics in patients. The court concluded that the medical services provided by the petitioners could fall within the ambit of "works contract" under the TNVAT Act, 2006.

3. Validity of Impugned Notices:
The petitioners challenged the validity of the impugned notices issued under Section 27 of the TNVAT Act, 2006 to reopen completed assessments. The court observed that the petitioners should have participated in the adjudication proceedings before the respondent and raised their contentions on merits. However, given the considerable time lapse, the court decided to address the issue on merits rather than relegating the parties to the alternative remedy.

4. Applicability of Previous Decisions:
The petitioners relied on decisions from four different High Courts (Jharkhand, Allahabad, Punjab and Haryana, and Kerala) and the Supreme Court's observation in BSNL Vs UOI (2006) 3 SCC 1, which held that hospital services do not involve a sale for the purposes of Entry 54 of List II. The court, however, distinguished these decisions, noting that they did not examine the issue from the perspective of "works contract" as defined in the respective tax enactments.

The court also referenced the decision in Larsen and Toubro Ltd. Vs State of Karnataka and another [2013] 65 VST 1 (SC), which held that the term "works contract" in Article 366(29-A)(b) of the Constitution is of wide amplitude and not limited to a particular form.

5. Interpretation of "Works Contract" and "Sale":
The court emphasized that the definition of "works contract" under the TNVAT Act, 2006 is expansive and includes any agreement for fitting out any movable property. The court held that the implantation of prosthetics and use of ancillary services in medical treatments could be classified as "works contract" and thus subject to VAT.

The court directed the petitioners to file their respective replies to the impugned notices within two months and cooperate with the respondent assessing officer by furnishing all records. The respondent was instructed to exclude the value of medicines and consultation charges while determining the taxable value and to limit the demand to the value of prosthetics and charges incurred towards X-ray, CT Scan, PET Scan, etc.

Conclusion:
The court concluded that the medical services provided by the petitioners involving the implantation of prosthetics and use of ancillary services could be classified as "works contract" under the TNVAT Act, 2006, making them liable to pay VAT. The petitioners were directed to respond to the impugned notices, and the respondent was instructed to proceed with the assessment, excluding the value of medicines and consultation charges. The court disposed of the writ petitions with these observations.