2015 (2) TMI 1014 - HC - VAT and Sales Tax

Whether supply of medicines, drugs, stents, and other implants etc., during the course of treatment or a medical procedure is a sale in the States of Punjab and Haryana - Held that - Admittedly, hospitals administer drugs, implants, stents to a patients on medical advice. The dominant purpose of medical treatment is medical services and integral to such a service is a medical procedure that involves administering medicines and drugs and may involve, implants, stents etc. as integral to a successfully medical treatment/procedure. - A perusal of the statutory definition of sale in both the Punjab and Haryana enactments, reveals that after setting out that a sale is a transfer of ownership in goods for consideration it proceeds to replicate Article 366 (29-A) of the Constitution of India. A medical procedure is a pure service with no part having the attributes or the elements set out in Article 366 (29-A) of the Constitution of India or the definition of sale under the Punjab and Haryana statutes and, therefore, cannot be held to involve a sale . The power to impose sales tax/VAT flows from Entry 54 of List II of Schedile VII and Article 366(29-A) of the Constitution, the latter assigning the status of a deemed sale to transactions where one or the other element of sale is missing, but where the element of sale is altogether missing and the transaction does not fall within any of the clauses of Article 366(29-A) of the Constitution of India, a State shall not be empowered to levy of value added tax on such a transaction. For the purpose of attracting VAT, a transaction or a part thereof, which is essentially a service would have to qualify as a sale within the meaning of Sales of Goods Act, 1930 or the definition of sale. The fiction of a deemed sale applies only to such situations as would fall within the sub-clauses of Article 366(29-A) of the Constitution of India which permit severance of the service element from the sale element and empowers the State to tax the element of sale. A perusal of Article 366(29-A) of the Constitution of India does not enable us to record an opinion that it covers services provided by hospitals. Before such a transaction is put to tax, whether under the Haryana or Punjab VAT Act, it would have to satisfy the dominant nature test by reference to the substance of the contract. A contract for medical treatment necessarily involves medicines, supply of surgical items, stents, implants, valves, without which a medical procedure or medical treatment cannot be completed. A deeming fiction, must be rational and not farcical. The dominant purpose of a hospital is to provide medical treatment and if during a medical procedure it is required to provide medicines, stents, implants etc., it cannot by a deeming fiction be held to be a sale . A patient may have a choice as to the quality of implant/stent but even that choice is confined to the suitability of a stent etc. The fact that a hospital may charge money for individual stents etc., whether as part of a package or separately is entirely irrelevant. A contract of medical service cannot be said to be a contract for sale of a stent, or valve or of medicines to be used in a medical/surgical procedure. The essential element of such a contract is the procedure of knee replacement, hip replacement, angioplasty, which as an intrinsic and integral part involves placing an implant whether in the knee, hip or a heart etc. The only choice available to the patient is the nature of the implant, namely, its quality but such a procedure is admittedly, a medical procedure and a service that cannot be completed without an implant/drugs and medicines as an integral part of the procedure. A private hospital does not provide medical services for free. The fact that it charges money, for drugs, medicines etc. cannot raise an inference of intent to sell goods in the shape of medicines, stents, implants etc. We are, therefore, in complete agreement with the opinion recorded by the Jharkhand High Court in Tata Main Hospital (2007 (9) TMI 599 - JHARKHAND HIGH COURT) and the Allahabad High Court in M/s International Hospital Pvt. Ltd. v. State of U.P. and two others 2014 (2) TMI 765 - ALLAHABAD HIGH COURT . No hesitation in holding that medical procedures/services offered by the petitioners are a service. The supply of drugs, medicines, implant, stents, valves and other implants are integral to a medical services/procedures and cannot be severed to infer a sale as defined under the Punjab or the Haryana Act and therefore, are not exigible to value added tax. - Decided in favour of assessee.

Summary

Issues Involved:
1. Exigibility of medicines, drugs, stents, valves, implants, and other consumables provided to patients during medical procedures to Value Added Tax (VAT).

Detailed Analysis:

Issue 1: Exigibility of Medicines, Drugs, Stents, Valves, Implants, and Other Consumables to VAT

Facts and Background:
The petitioners, which include private hospitals, challenged various orders and notices demanding VAT on medicines, drugs, stents, implants, and other consumables provided during medical procedures. The core question was whether these items, administered during medical procedures, constitute a "sale" under the Punjab VAT Act, 2005, and the Haryana VAT Act, 2003.

Arguments by Petitioners:
The petitioners argued that the supply of these items is integral to medical services and does not constitute a "sale" as defined under the VAT Acts or Article 366(29-A) of the Constitution of India. They contended that the dominant purpose of medical procedures is to provide medical services, not to sell goods. They cited judgments from the Jharkhand High Court and the Allahabad High Court, which held that such supplies do not involve a sale liable to VAT.

Arguments by Respondents:
The respondents argued that the definition of "sale" under the Punjab and Haryana statutes includes the supply of goods for consideration, and since the hospitals charge for these items, it constitutes a sale. They relied on the fact that the hospitals itemize and charge separately for these goods in their invoices.

Court's Analysis:
The court examined the statutory definitions of "sale" under the Punjab and Haryana VAT Acts, which include composite contracts as set out in Article 366(29-A) of the Constitution. The court referred to the Supreme Court's judgment in Bharat Sanchar Nigam Limited v. Union of India, which upheld the dominant nature test for transactions not covered by Article 366(29-A). The court also considered judgments from the Jharkhand High Court and the Allahabad High Court, which held that the supply of such items during medical procedures does not constitute a sale.

Judgment:
The court held that medical procedures/services offered by the petitioners are a service. The supply of drugs, medicines, implants, stents, valves, and other consumables are integral to medical services/procedures and cannot be severed to infer a sale as defined under the Punjab or Haryana VAT Acts. Consequently, these items are not exigible to VAT.

Relief Granted:
- The court set aside various orders and notices demanding VAT and remitted the matters to the respective VAT Tribunals and Assessing Authorities for fresh adjudication in accordance with the law.
- Specific orders and demand notices in each writ petition and VAT appeal were set aside, and the matters were restored to the Assessing Authorities/Officers for fresh decisions based on the court's declaration of law.

Conclusion:
The court concluded that the supply of medicines, drugs, stents, implants, and other consumables during medical procedures does not constitute a sale and is not subject to VAT under the Punjab and Haryana VAT Acts. The dominant purpose of these transactions is to provide medical services, and the supply of these items is incidental and integral to the medical procedures.