2019 (3) TMI 1019 - HC - VAT and Sales Tax

Levy of sales tax - drugs, implants and consumables used in the treatment of an inpatient in a hospital - KVAT Act - Whether hospitals, which carry out inpatient and outpatient treatments and in the course of such treatments administer drugs, carries out invasive surgeries to make implants and uses consumables in the various medical procedures, are to be registered under the KVAT Act? - Whether the sales carried out in the pharmacies to outpatients can be categorised as sale of goods liable to tax under the KVAT Act? Held that - The minute consultation with the Doctor ends as far as an out-patient is concerned, he is free to decide whether he purchases the medicine or not. The service of medical care ceases with the consultation and the further sale made to an outpatient of any goods from the pharmacy has the connotation of sale of goods. The supply of medicines from the pharmacy to an out-patient is mere sale of goods and not a supply in the course of medical service. It is at best a sale in pursuance of a service, ie the consultation - the hospitals with Pharmacies have to be necessarily registered under the KVAT Act and they also have to satisfy the liability to tax under the respective enactments in the various periods, on the medicines, consumables or implants supplied to an out-patient, as distinguished from an administration of drug or use of consumables or implants carried out within the hospital premises itself, subject however to the purchase having been made from a compounded dealer, who has already paid tax on the MRP. The hospitals are to be registered under the sales tax enactment, whether they have a Pharmacy catering to out-patients or not. The hospitals who transfer or supply goods in the course of treatment are exempted from the levy of sales tax for such goods; the transfer being not in the course of sale of goods exigible to tax. The sale of any drug, implant or consumable from the Pharmacy to an out-patient which is not administered, used or implanted within the premises of the hospital would be taxable as sale of goods. Insofar as oxygen and nitrous oxide are concerned, the same are administered for providing respiratory therapy and as an anaesthetic agent respectively, which is provided within the hospital itself and to inpatients as also at times outpatients. The administration of the oxygen and nitrous oxide is definitely in the course of treatment and it cannot be said to be a sale of goods under the KVAT Act, since it is part of the service rendered in a hospital. X-Rays too when taken of the inpatients and outpatients are taken within the hospital and they cannot be treated as sale of goods, since it cannot be divided into a sale and service; the dominant intention being of provision of treatment, or diagnosis of ailment of the patients. Application disposed off.

Summary

Issues Involved:
1. Taxability of drugs, implants, and consumables used in inpatient treatment under the Kerala Value Added Tax Act, 2003 (KVAT Act).
2. Requirement for hospitals to register under the KVAT Act.
3. Taxability of sales made from hospital pharmacies to outpatients.

Detailed Analysis:

1. Taxability of Drugs, Implants, and Consumables Used in Inpatient Treatment:
The Full Bench in Sanjose Parish Hospital v. Commercial Tax Officer held that drugs, implants, and consumables used during hospital treatment are part of a composite medical service and do not constitute a sale of goods liable to sales tax. This judgment is upheld, confirming that such items used in the course of medical treatment within a hospital are exempt from sales tax as they are part of the therapeutic care provided to patients.

2. Requirement for Hospitals to Register Under the KVAT Act:
The court examined the arguments regarding the necessity for hospitals to register under the KVAT Act. It was argued that hospitals, which supply drugs and consumables as part of their services, should not be considered dealers since their primary function is to provide medical treatment, not to engage in trade or commerce. However, the court concluded that hospitals must register under the KVAT Act. The definition of "dealer" under Section 2(xv) includes persons supplying goods as part of any service, and "business" under Section 2(ix) encompasses activities carried out with a profit motive. Thus, hospitals supplying goods in the course of treatment must register to establish that such supplies are part of medical services and not taxable sales.

3. Taxability of Sales Made from Hospital Pharmacies to Outpatients:
The court differentiated between supplies made to inpatients and sales from hospital pharmacies to outpatients. While supplies made during inpatient treatment are part of a composite service and not taxable, sales from pharmacies to outpatients are considered taxable transactions. Outpatients have the option to purchase prescribed medicines from the hospital pharmacy or elsewhere, indicating a consensual sale of goods. Therefore, hospitals with pharmacies must register under the KVAT Act and comply with tax liabilities for sales made to outpatients.

Additional Issues:
- Oxygen, Nitrous Oxide, and X-Rays:
The court ruled that the administration of oxygen and nitrous oxide and the taking of X-rays within the hospital for treatment purposes are part of the medical service and not taxable as sales of goods.

- Penalty for Non-Registration:
Hospitals failing to register under the KVAT Act were subject to penalties. The court upheld penalties for non-registration but set aside penalties for non-production of books of accounts, as the consequence should be a best judgment assessment.

- Specific Case Decisions:
The court addressed individual cases, directing modifications to assessment orders based on the above principles. For instance, in WP(C) No.14047/2018, the court declared that drugs administered and implants used in treatment are not taxable. In W.A.No.823 of 2015, the court directed the appellate authority to consider the appeal per the judgment. Various other cases were decided similarly, with directions to modify assessments and delete impermissible levies.

Conclusion:
The court concluded that while hospitals must register under the KVAT Act, supplies made during inpatient treatment are not taxable. However, sales from hospital pharmacies to outpatients are taxable, necessitating compliance with registration and tax liabilities. The judgment provided detailed directions for modifying assessments and handling penalties, ensuring clarity in the application of the KVAT Act to hospitals.