2014 (9) TMI 300 - HC - VAT and Sales Tax

Liability of Hospital for registration as dealer for selling medicines to patients - Constitutional validity of Section 6 of Kerala Value Added Tax Act, 2003 - whether hospital is a dealer within the definition of the term as contained in the KGST Act - The petitioners mainly relied on para 44 of the judgment in the case of Bharat Sanchar Nigam Ltd. judgment 2006 (3) TMI 1 - Supreme court where the apex court held that hospital service is still outside article 366 (29A) and explained it with an example that if during the treatment of a patient in a hospital, he or she is given a pill, sales tax authorities cannot tax the same as a sale. According to the petitioners, what they render is hospital service and that therefore, the medicine or other consumable sold during treatment is not a sale under the Act to attract levy of tax. On this basis, they contended that since section 6 of the Act authorises levy of tax on such medicines and other consumables, the section is unconstitutional. Held that - First of all, Bharat Sanchar Nigam Ltd. judgment 2006 (3) TMI 1 - Supreme court was not rendered in the context of the provisions of the KVAT Act and the issue raised and decided in that case is also not in the context of a comparable controversy. In so far as the finding regarding hospital services or example that is given by the apex court are concerned, the court has only laid down a principle and said that if in the process of treatment a pill is given to a patient, such a transaction cannot be treated as a sale. That example given by the apex court cannot be taken to mean that it was laying down a principle that in all circumstances, every transaction that takes place in a hospital, is a service and is outside the taxation law. This is all the more so in today s context where hospitals are being established by public limited companies which are incorporated with profit-motive. Therefore, if in a hospital, medicines and other consumables are sold to a patient and bills are raised, such transaction cannot be outside the KVAT Act and taking refuge under the example given by the apex court to explain the meaning and content of article 366(29A) of the Constitution, such hospitals cannot avoid statutory liabilities. On the other hand, if in an individual case, a particular transaction is not a sale, it is for the concerned hospital to contest the matter in accordance with law and that does not mean that the whole hospital industry in the State can remain outside the discipline of the KVAT Act. Decision in the case of Malankara Orthodox Syrian Church v. Sales Tax Officer in 2002 (12) TMI 587 - KERALA HIGH COURT fully answers the contentions raised by the petitioners in these cases regarding their liability to be registered under the Act and to pay tax thereunder. - Decided against assessee.

Summary

Issues Involved:
1. Liability of private hospitals to register as dealers under the Kerala Value Added Tax Act, 2003 (KVAT Act) and pay tax for medicines and consumables sold to patients.
2. Constitutionality of Section 6 of the KVAT Act.

Issue-Wise Detailed Analysis:

1. Liability of Private Hospitals to Register as Dealers under KVAT Act:

The petitioners, comprising private hospitals and the Kerala Private Hospitals' Association, argued that hospitals primarily render "hospital service" and the supply of medicines and consumables is merely incidental. They contended that the KVAT Act does not envisage taxing such supplies, thus exempting hospitals from registration and tax payment.

The court, referencing previous judgments, notably P.R.S. Hospital v. State of Kerala and Malankara Orthodox Syrian Church v. Sales Tax Officer, held that hospitals qualify as "dealers" under the Act. The court emphasized that the supply of medicines is integral to the hospital's services and significant in cost, making it a principal component of medical treatment. Consequently, hospitals engaging in such transactions must register and pay taxes if their turnover exceeds Rs. 2 lakhs annually.

The court dismissed the petitioners' reliance on Supreme Court decisions in State of Tamil Nadu v. Board of Trustees of the Port of Madras and Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi, clarifying that these cases were contextually different. The court reiterated that the supply of medicines in hospitals constitutes a "sale" under the Act, thereby necessitating registration and tax compliance.

2. Constitutionality of Section 6 of the KVAT Act:

The petitioners challenged Section 6 of the KVAT Act, asserting it unconstitutional if it mandates tax on the sale of medicines and consumables in hospitals. They cited Article 366(29A) of the Constitution and the Supreme Court judgment in Bharat Sanchar Nigam Ltd. v. Union of India, which held that certain services, including hospital services, are outside the purview of "sale" under Article 366(29A).

The court clarified that the Bharat Sanchar Nigam Ltd. case did not pertain to the KVAT Act and was not directly comparable. The court explained that the Supreme Court's example of a pill given during treatment not constituting a sale was not a blanket principle exempting all hospital transactions from tax. In today's context, where hospitals operate as profit-oriented entities, transactions involving the sale of medicines and consumables cannot be excluded from the KVAT Act.

The court concluded that the principles laid down in Bharat Sanchar Nigam Ltd. do not render Section 6 of the KVAT Act unconstitutional. The petitioners' request to declare the section unconstitutional was thus rejected.

Conclusion:

The petitions were dismissed, affirming that private hospitals must register under the KVAT Act and comply with tax obligations for the sale of medicines and consumables. The court upheld the constitutionality of Section 6 of the KVAT Act, rejecting the petitioners' challenges.