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TMI Blog2019 (3) TMI 1017X X X X Extracts X X X X X X X X Extracts X X X X ..... re is such a transfer in the course of such composite contract or the service rendered - The sale element in composite, inseparable contracts which are covered by the six sub-clauses of Article 366(29A) can be separated and subject to sales tax. With respect to all other composite transactions, the State would not have such power to distinctly tax the transfer of goods forming part of a composite contract or a rendering of service. With respect to hospital services, we cannot but observe that the sale of drugs, implants and other consumables are a part of the medical treatment rendered. There is no identity of the medicines or consumables or implants, as it does not lie in the mind or mouth of the patient to identify the drugs to be administered in the course of the treatment. Though a patient on his volition could refuse to take a particular drug, he cannot demand, as a matter of right, that a drug be administered to him in the course of the medical treatment. A demand of that nature will not be complied with by either a medical practitioner or a hospital, the latter of whom dispenses medicines only in accordance with the directions of the attending Physician or Surgeon - The c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... armacies through which medicines and other components required for the treatment are sold; not only to in-patients but also to out-patients, such transactions would not be exigible to tax under the sales tax enactment as it forms part of services rendered by the hospital. The Division Bench, which made the reference, relied on Bharat Sanchar Nigam Ltd. Another v. Union of India Others [(2006) 3 SCC 1] to take a different view from that held by this Court; by Benches of varying strength of quorum. The difference of opinion, so arising in the mind of the Division Bench being in conflict with a number of decisions of this Court on the very same aspect, the last of which also noticed Bharat Sanchar Nigam Ltd.; but found the dictum therein to have no relevance to the particular transactions as carried out by the hospitals, a reference was necessitated. 2. Some of the petitioners are also concerned with the tax leviable on the consumables including medicines as supplied by the Pharmacies to out-patients who are not admitted to the hospital for a definite medical treatment or surgical procedure. There being no view expressed on that aspect nor a reference made by the Division Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as only to medical practitioners dispensing medicine from their dispensaries as distinguished from a hospital or clinic, wherein also the dispensation of medicine is on the prescription of a medical practitioner. The exemption even without the Explanation, was held to be of a limited nature and applicable only to such dispensaries wherein no medical or surgical care is provided by way of in-patient treatment and a Doctor carries on only consultation. 6. The contention of the assessees therein that the hospitals are also run by medical practitioners was negatived and it was observed, there could be hospitals owned by companies, partnerships, trusts or by individuals who may or may not be medically qualified. The exemption was held to be not covering an organised activity of running a hospital even if the owners are doctors. Examining the definition of business , dealer , sales and turnover , the assessee's contention that the supply of medicine is only incidental and essential to the rendering of medical services was rejected. It was found that supply of medicine is an integral part of the treatment or medical services rendered and it is significant in terms of the cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ants, whether it be sale of medicines, it was a question of fact which could be examined on evidence only by the authorities under the Act, was the finding of the Division Bench. 8. Again, yet another hospital, run by a Trust, challenged the demands made for registration and production of books of accounts, contending that the decision of the Supreme Court in Board of Trustees of the Port of Madras and Commissioner of Sales Tax v. Sai Publication Fund [(2002) 4 SCC 57] were not correctly appreciated and applied. Yet another Division Bench noticed the decision in W.A. No. 555 of 2003 and independently found a distinction from both the Board of Trustees of the Port of Madras and Sai Publication Fund. This Division Bench also noticed that the appellant had not produced any evidence to indicate what their predominant activity was. The Writ Appeal filed from the judgment of the learned Single Judge was dismissed by judgment dated 31.10.2005 in W.A. No. 1134 of 2005. The issue was once more agitated before this Court under the KGST Act insofar as a hospital claiming exemption for the sale of artificial lens used for replacement of the natural lens in the course of cataract operation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue on the basis of the binding precedent as available from Bharat Sanchar Nigam Ltd., relying on which the reference has been made. At the outset, we have to emphasise that the contention of the State insofar as bringing in the sale of drugs, implants, consumables, etc. in the course of medical treatment under the sale of goods as provided in the sales tax enactment is based on clause (f) of Article 366(29A). We, hence, notice briefly the legal history of Article 366(29A) as noticed in Bharat Sanchar Nigam Ltd. with reference to the specific question here, as to whether there can be a separation of the service and sale element in the subject transactions carried out in the course of medical treatment. Prior to the 46th amendment as noticed in Bharat Sanchar Nigam Ltd., composite contracts such as works contracts, hire purchase contracts and catering contracts, were not assessable as contracts for sale of goods. State of Madras v. Gannon Dunkerley Co. (Madras) Ltd.-I [(1958) 9 STC 353 CSC) 1 found the classical concept of sale to apply to the entry in the legislative List, which postulated three essential components to constitute a transaction of sale, viz., (i) an agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atic. Courts must move with the times. But the 46th Amendment does not give a licence for example to assume that a transaction is a sale and then to look around for what could be the goods. The word goods has not been altered by the 46th Amendment. That ingredient of a sale continues to have the same definition. The second respect in which Gannon Dunkerley has survived is with reference to the dominant nature test to be applied to a composite transaction not covered by Article 366(29A). Transactions which are mutant sales are limited to the clauses of Article 366 (29A). All other transactions would have to qualify as sales within the meaning of Sale of Goods Act, 1930 for the purpose of levy of sales tax. 45. Of all the different kinds of composite transactions the drafters of the 46th Amendment chose three specific situations, a works contract, a hire-purchase contract and a catering contract to bring within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been Constitutionally permitted in clauses (b) and (f) of Clause (29A) of Art. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 4 SCC 593] did not say that in all cases of composite transactions the 46th Amendment would apply . {Underlining by us for emphasis} 12. Hence, the sale element in those composite, inseparable contracts which are covered by the six sub-clauses of Article 366(29A) can be separated and subject to sales tax. With respect to all other composite transactions, the State would not have such power to distinctly tax the transfer of goods forming part of a composite contract or a rendering of service. As has been held in Bharat Sanchar Nigam Ltd., the dominant nature test survives even after the 46th amendment. With due respect, we find the declaration of the Hon'ble Supreme Court as to hospital services not enabled of differentiation as sale and services to be binding with all the force as available under Article 141 of the Constitution of India. The sale, if any made, in the course of the treatment of a patient in a hospital, is with the sole intention of curing the patient, which is an inseparable part of the service offered in a hospital and it does not intend to create any separate rights on such drugs, implants or consumables used in the course of treatment. 13. As to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of the service rendered. 14. We also notice the concurring judgment, which emphasizes that the Amendment introduced fiction by which six instances of transactions were treated as deemed sale of goods and that the said definition as to deemed sales will have to be read in every provision of the Constitution wherever the phrase tax on sale or purchase of goods occurs (sic). Apposite also would be paragraphs 108 and 109: 108. In the background of the above, the history prevailing at the time of the 46th Amendment and pre-enacting history as seen in the Statement of Objects and Reasons, Article 366 (29A) has to be interpreted. Each fiction by which those six transactions which are not otherwise sales are deemed to be sales independently operates only in that sub clause. 109. While the true scope of the amendment may be appreciated by overall reading of the entirety of Article 366 (29A), deemed sale under each particular sub-clause has to be determined only within the parameters of the provisions in that sub- clause. One sub-clause cannot be projected into another sub-clause and fiction upon fiction is not permissible. As to the interpretation of fiction, particularly i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower. The definition of sale as found in Section 2(xxi) of the KGST Act took care of instances as provided under clauses (a) to (f) in Article 366(29A) respectively by Explanations (1A), (2), (3), (3A), (3B) and (3C). Some of these were existing prior to the 4th amendment, which was held to be not included in the definition of 'sale of goods' by the Hon'ble Supreme Court by various decisions which led to the 46th Amendment. After the deeming fiction was introduced by Article 366 (29A), all the transactions coming under the aforesaid Explanations stood validated as sale of goods. Similarly in the KVAT Act, Section 2(xliii) defines 'sale' and the Explanations I to VI took care of the transactions covered by clauses (a) to (f) of Article 366 (29A). Under the KGST Act and KVAT Act, the State cannot legislate in excess of the specific transactions brought in under Article 366(29A), to create further deeming fiction with respect to other composite transactions. 17. Malankara Orthodox Syrian Church also went on to hold that there is a clear distinction between supply of food as part of service in a hotel and supply of medicine in the course of medical treatment. Pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility for payment of income tax in respect of the unexplained acquisition of money may not hold good in sales tax cases. For the purpose of income tax it may in appropriate cases be permissible to treat unexplained acquisition of money by the assessee to be assessee's income from undisclosed sources and assess him as such. As against that, for the purpose of levy of sales tax it would be necessary not only to show that the source of money has not been explained but also to show the existence of some material to indicate that the acquisition of money by the assessee has resulted from transactions liable to sales tax and not from other sources. Further, whereas in a case like the present a credit entry in respect of ₹ 10,000 stands in the name of the wife of the partner, no presumption arises that the said amount represents the income of the firm and not of the partner or his wife. The fact that neither the assessee firm nor its partner or his wife adduced satisfactory material to show the source of that money would not, in the absence of anything more, lead to the inference that the said sum represents the income of the firm accruing from undisclosed sale transactions. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng, 25% of the built up area was agreed to be surrendered to the owners of the land. 75% of the area was to be retained by the developer for sale to third parties. The Court noticed Gannon Dunkerlev-1, which held the works contract to be indivisible contract not enabling the State to tax the transfer of goods made in pursuance of such indivisible contract. Article 366(29A) was noticed and it was held that after the 46th Amendment of the Constitution whether a works contract involved a dominant intention to transfer the property in goods was not at all material. Even if the dominant intention of the contract was not to transfer the property in goods and was of rendering of a service or the ultimate transaction is transfer of immovable property, then also it is open to the State to levy sales tax on the materials used in such contract was the finding. Bharat Sanchar Nigam Ltd. was relied on, specifically on the aspect of the declaration that Gannon Dunkerley-I survived insofar as the definition of sale for the purposes of the Constitution in general and for the purpose of Entry 54 List II in particular, except to the extent the clauses in Article 366(29A) operate and also as to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to only the specific clauses as coming under Article 366 (29A) and stops there and does not extend beyond that or encompass any other composite transaction. 22. In this context, fruitful reference can also be made to Federation of Hotel and Restaurant Association of India v. Union of India [(2018) 2 SCC 37]. The issue raised therein was the applicability of Standards of Weights and Measures Act, 1976 read with enactment of 1985 and the Legal Meteorology Act, 2009. Whether the provisions of the said enactments would interdict the sale of mineral water in hotels and restaurants at prices above maximum retail price (MRP) was the issue considered. The Hon'ble Supreme Court found that the definition of sale in the said enactments have not incorporated the deeming fiction as available under Article 366 (29A). Despite 46th amendment made in the Constitution, the judgment in Associated Hotels of India Ltd., would apply to the sale of mineral water in hotels which does not qualify the definition of sale of goods as per the enactments considered therein. The supply of mineral water, though for a price, is in the course of the service rendered by the hotelier to the customer. Parag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jects and Reasons appended to the Constitution (Forty-Sixth Amendment) Bill, 1981, which was enacted as the Constitution (Forty-Sixth Amendment) Act, 1982. We extract a portion of paragraph 3, 8 and clauses (vi) of paragraph 9: 3. xxx In the Associated Hotels of India case (AIR 1972 S.C. 1131), the Supreme Court held that there is no sale involved in the supply of food or drink by a hotelier to a person lodged in the hotel. xxx xxx xxx 8. Besides the above mentioned matters, a new problem has arisen as a result of the decision of the Supreme Court in Northern India Caterers (India) Ltd. vs. Lt. Governor of Delhi (AIR 1978 SC 1591). States have been proceeding on the basis that the Associated Hotels of India case was applicable only to supply of food or drink by a hotelier to a person lodged in the hotel and that tax was leviable on the sale of foodstuffs by a restaurant. But overruling the decision of the Delhi High Court, the Supreme Court has held in the above case that service of meals whether in a hotel or restaurant does not constitute a sale of food for the purpose of levy of sales tax but must be regarded as the rendering of a service in the satisfaction of a human ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indivisible transaction. 24. The learned Senior Government Pleader Sri. C.K. Govindan then raised a contention that the drugs are essential commodities and hence, the sale of drugs by a hospital even in the course of the provision of medical treatment would fall under clause (a) of Article 366 (29A). The argument is based on M/s. Vishnu Agencies (Pvt.) Ltd. v. Commercial Tax Officer Others [AIR 1978 SC 449] and the amendment brought forth, providing a deeming fiction as to sale of goods even in such instances covered by clause (a) of Article 366(29A); which is in the nature of a clarification. In M/s. Vishnu Agencies (Pvt.) Ltd. the contention was that transfer of controlled commodities in pursuance of direction issued under a control order cannot be brought under the definition of 'sale of goods' for reason of the element of volition by the seller and the mutual assent, being absent as held in M/s. New India Sugar Mills Ltd. v. Commissioner of Sales Tax, Bihar [AIR 1963 SC 1207]. This decision was overruled by the seven Judge Bench in M/s. Vishnu Agencies (Pvt.) Ltd. Despite this, for more clarity, clause (a) was brought in, under Article 366 (29A). 25. Reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssential commodity. The dealer supplied cement to persons, only on valid permits issued by the authorities to obtain the commodity. If the sale involved an element of volition or consensuality, the transactions would amount to sales and not otherwise. The specific contention was raised, since the cement control order restrained disposal of cement except in accordance with the conditions contained in a written order of the authorised authority. This provided a limitation on the dealers' right to supply and consequently no person could purchase the controlled commodity freely and in the open market, but can effect a purchase only in pursuance of a written order, that too specifying the quantity permitted. There was also a restriction, by which a dealer may charge for the commodity at a price not more than the notified price. These conditions/restrictions resulted in an absence of element of volition or consensuality; thus taking away the transaction, from the definition of sale of goods as has been held in M/s. New India Sugar Mills Ltd., was the contention taken. 27. The Supreme Court in M/s. Vishnu Agencies (Pvt.) Ltd. noticed the decision of the three Judge Bench and found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods changed hands. In the first place, it is not obligatory on a trader to deal in cement nor on any one to acquire it. The primary fact, therefore, is that the decision of the trader to deal in an essential commodity is volitional. Such volition carries with it the willingness to trade in the commodity strictly on the terms of Control Orders. The consumer too, who is under no legal compulsion to acquire or possess cement, decides as a matter of his volition to obtain it on the terms of the permit or the order of allotment issued in his favour. That brings the two parties together, one of whom is willing to supply the essential commodity and the other to receive it. When the allottee presents his permit to the dealer, he signifies his willingness to obtain the commodity from the dealer on the terms stated in the permit. His conduct reflects his consent. And when, upon the presentation of the permit, the dealer acts upon it, he impliedly agrees to supply the commodity to the allottee on the terms by which he has voluntarily bound himself to trade in the commodity. His conduct too reflects his consent. Thus, though both parties are bound to comply with the legal requirements gover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of U.P. Others [ (2014) 71 VST 139 (All)], Fortis Health Care Limited and Another v. State of Punjab and Others [(2015) VTL-73-P H] and Tata Main Hospital v. The State of Jharkhand Others [2008 (2) JCR 174 Jhr.] are in consonance with our finding. The decision of the High Court of Jharkhand has also been challenged before the Hon'ble Supreme Court by a Special Leave Petition, which was dismissed. We do not find a necessity to extract the reasoning in the said decisions; which we notice is in tandem with our findings. Malankara Orthodox Syrian Church was noticed in the aforesaid decisions, but was distinguished on facts and in any event, the judgments of the learned Single Judge as also the Division Bench of this Court have only a persuasive effect on those other High Courts. Suffice it to notice that the three High Courts referred to above considered the very same transactions, we were concerned with, as part of a service rendered in a hospital and held the same not permissible of being distinctly taxed as sale of goods on the precedents we also relied on. 30. We, in the light of the findings above, answer the reference and agree with the Division Bench which doubted ..... X X X X Extracts X X X X X X X X Extracts X X X X
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