SUPPLY OF STENT OR VALVE FOR SURGERY OF HEART BY HOSPITALS – A SALE?

[Mr. M. GOVINDARAJAN]

In the course of medical treatment for heart if it is required stent or valve would be implanted by the hospital which would be supplied by the hospital itself.  Whether the supply of such stent or valve would amount to sale and attract VAT for the same?  This would not amount to sale which has been explained in the following decided case law:                      

In ‘M/s International Hospitals Private Limited V.  State of U.P. and others’ – 2014 (2) TMI 765 - ALLAHABAD HIGH COURT the petitioner has set up a super-speciality integrated hospital at Noida.  Patients who are required to undergo treatment are admitted to the hospital and are treated as indoor patients.  During the course of assessment proceedings for the financial year 2008 – 09 the Deputy Commissioner of Commercial Taxes issued show cause notice to the petitioner proposing to impose tax on the value of stents and valves used for providing medical services.

The petitioner, in response to the said show cause notice, submitted reply to the Deputy Commissioner.   The petitioner contended that the use of stents and valves in the course of angioplasty or surgical procedure is incidental to the medical service which is provided by the hospital and the stents and valves would not be taxable under the Act. But the Deputy Commissioner passed order on 27.09.2013  treating the purchase of stents and valves by the hospital as being unregistered dealers and bringing them to tax @ 12.5% and also subjecting to tax at the same rate, the use of the stents and valves  in the medical services provided by the hospital.   The petitioner challenged the order of Deputy Commissioner by means of writ petition before the High Court.

The petitioner submitted the following before the High Court:

• Whenever a stent or valve is required to be implanted in a patient, neither the hospital nor its pharmacy sells the implants directly to the patient;
• The implants used in the course of surgical procedure would not amount to sale when such  a procedure is performed on the patient;
• The same are incidental to the medical service and as such it would not amount to sale.

The Revenue raised a preliminary objection contending that appeal would be available against the order of assessment under the provisions of Section 55 of the Act.  The High Court held that this issue will be taken later since there is no dispute on facts.  The High Court is to consider the question of law as to whether a ‘sale’ within the meaning of Section 2(ac) of the Act takes place when a stent or valve is implanted in a patient in the course of a surgical procedure in the hospital.

The Revenue contended that the contract between the patient and the hospital is a divisible contract in which the sale element involving the sale of the stent or valve to the patient is distinct from the surgical procedure and hence the supply of stent and valve is subject to tax.  On the other hand, the assessee has relied upon the judgment of the Supreme Court in ‘Bharat Sanchar Nigam Ltd. and others V. Union of India and others’ - 2006 (3) TMI 1 - Supreme court and on the judgment of the Jharkhand High Court in Tata Main Hospital V. The State of Jharkhand and others’ - 2007 (9) TMI 599 - JHARKHAND HIGH COURT against which a special leave petition has been dismissed by the Supreme Court.

Prior to the 46th Amendment, the conventional position as elucidated in State of Madras v. Gannon Dankerley & Co. (Madras) Ltd. - 1958 (4) TMI 42 - SUPREME COURT OF INDIA and the decisions which followed it, was that a works contract does not involve the transfer of property in goods since there is one indivisible contract in the performance of which the goods which are utilized and annexed since they form part of the overall transaction. This position has now undergone a change after introduction of Article 366 (29-A) of the Constitution.

Article 366 (29-A) 'tax on the sale or purchase of goods' includes –

1. a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;
2. a tax on the transfer of property in goods (whether  as goods on in some other form)  involved in the execution of a works contract;
3. a tax on the delivery of the goods  on hire purchase or any system of payments by installments;
4. a tax on the transfer of the right to use any goods  for any purpose (whether or not for a specified period) for cash,  deferred payment or other valuable consideration;
5. a tax on the supply of goods by any unincorporated  association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;
6. a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods , being food or any other article for home consumption or any drink (whether or not intoxicating), where such supply or  service, is for cash, deferred payment or other valuable consideration

and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.

The High Court observed that the six clauses of Article 366 (29-A) of the Constitution incorporate situations in which the Constitution now envisages that it would be open to the States to divide the contract into two separate contracts, the first involving sale of goods and the second a supply of labor or service.

The issue in the present case relates to a contract between a patient and a hospital where an individual gets admitted as an indoor patient for the purposes of a surgical procedure under medical supervision. Admittedly, none of the six clauses of Article 366 (29-A) of the Constitution are attracted to the rendering of such a service and hence, the deeming definition under which a contract is regarded as a contract for the sale of goods is not attracted. According to the hospital, where a patient comes to get admitted for a surgical procedure like an angioplasty, the contract is indivisible, in the course of which medical service is rendered to the patient. The issue as to whether a service of this nature would fall within the ambit of the expression 'sale' has to be determined with reference to the definition.

The High Court analyzed the definition of ‘sale’ under Section 2(ac) of the Act to determine whether a service of this nature would fall within the ambit of the term ‘sale.  Section 2(ac) of the Act provides that with its grammatical variations and cognate expressions, means any transfer of property in goods (otherwise than by way of a mortgage, hypothecation, charge or pledge) by one person to another, for cash or for deferred payment or for any other valuable consideration and includes,--

1. a transfer, otherwise than in pursuance of a contract of property in any goods for cash, deferred payment or other valuable consideration;
2. a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
3.  the delivery of goods on hire purchase or any other system of payment by installments;
4.  a transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;
5. the supply of goods by an association or body of persons (whether incorporated or not) to a member thereof for cash, deferred payment or other valuable consideration;
6.  the supply, by way of or as part of any service or in any other manner whatsoever of goods, being food or any other article for human consumption or any drink (whether or not intoxicating) where such supply or service is for cash, deferred payment or other valuable consideration

and such delivery, transfer or supply of any goods under (i) to (vi) above shall be deemed to be sale of those goods by the person making the delivery, transfer or supply and a purchase of the goods by the person to whom such delivery, transfer or supply is made.

The High Court observed that sub clauses (i) to (vi) of Section 2(ac) of the Act correspondent to sub clauses of (a) to (f) of Article 366 (29-A) of the Constitution.  Te High Court held that those clauses are not attracted.  Therefore the only issue to be considered is whether any element of sale is involved by the transfer of property in goods by one person to another for cash, deferred payment or other valuable consideration in the course of the execution of a contract for the implementation of a stent or value in the performance of a surgical procedure.

The High Court found that the present case does not involve the application of one of the sub-clauses of Article 366 (29-A) of the Constitution.   The deeming provisions of the clause are also not attracted.  In the opinion of the High Court there  is no element of sale in this case.  The fact that in the bill which is raised on the patient, the hospital recovers, apart from the cost of the surgery, charges towards drugs and other consumables would not render the transaction of the implantation of a stent or valve a 'sale' within the meaning of Section 2 (ac) of the Act.

In respect of alternative remedy the High Court held that they do not consider it appropriate and proper to relegate the petitioner to pursue the alternative remedy under the Act. The existence of an alternative remedy is a matter of discretion under Article 226 of the Constitution and as the essential facts are not in dispute in the present case and the question raised is a question the law relating to construction of the provisions of the Act, we have considered it fit and appropriate to entertain the petition on merits.  The High Court allowed the petition and set aside the order of Dy. Commissioner of Commercial Tax.