By TIOL News Service

CHANDIGARH, FEB 25, 2015: THE issues before the Bench are - Whether medicines, drugs & stents administered to patients during a medical procedure are a "sale", under the Punjab VAT Act, 2005 and therefore exigible to VAT and Whether a medical procedure can be severed into separate elements of service and sale with service being the medical advise and medical procedure and the sale being the supply of medicines, surgical items, implants, to patients whether as part of a package or to an individual patient, under the Punjab VAT Act, 2005. And the verdict favours the assessee.

Facts of the case

The assessee filed an application before the Excise & Taxation Commissioner seeking advance determination of the question whether medicines, drugs, stents etc., administered to patients during a medical procedure are a "sale", under the Punjab VAT Act, 2005. The Excise & Taxation Commissioner held that medicines, implants, stents, etc. administered to a patient during a medical procedure like open heart surgery, angiography, knee surgery, hip replacement etc., are a "sale" under the Punjab VAT Act, 2005 and, therefore, exigible to VAT. The assessee got itself registered as a dealer under the VAT Act and the Central Sales Tax Act, 1956 at Mohali and began complying with its statutory obligations. The assessee reflected a total sale of Rs.48,36,16,032/- with a tax liability of Rs.1,96,14,867/- for the financial year 2005-06. The issue regarding applicability of VAT to medicines, stents, implants came up for consideration before the High Court of Jharkhand in Tata Main Hospital v. The State of Jharkhand and others, 2008(2) JCR 174 (Jhr.). After considering the definition of sale and nature of medical services the Jharkhand High Court held that the supply of medicines, vaccines, surgical items, implants, X-ray film etc. in the course of medical treatment does not involve a sale that would invite levy and payment of VAT. The State of Jharkhand, filed Special Leave Petition (Civil) No.3652 of 2008, which was dismissed by the Supreme Court on 10.03.2008.

The assessee addressed a letter to the Excise and Taxation Commissioner intimating that in view of the judgment in Tata Main Hospital it has stopped charging VAT for the medicines, consumables etc. administered during the course of treatment to, in house patients. The petitioner, thereafter, filed an application, u/s 39 of the Punjab VAT Act, 2005, for refund of VAT. The Assistant Excise & Taxation Commissioner-cum-Designated Officer rejected the application by holding that as the Bihar Finance Act is different from the Punjab VAT Act, the judgment by the Jharkhand High Court is a judgment in personam and as the assessee has accepted clarificatory order dated 10.08.2005, it is required to pay VAT.

The assessee filed an appeal before the Deputy Excise and Taxation Officer, however, the same was dismissed but by recording a finding that the assessee has paid VAT from its own resources without recovering the same from patients/ECHS. An appeal filed before the Tribunal was dismissed by holding that jurisdiction to determine the controversy, lies with the High Court.

On further appeal by the assessee, the Tribunal held that,

++ a medical procedure commences with a patient visiting a hospital to elicit a doctor's opinion regarding his medical condition and in case he requires a medical procedure, information regarding the particulars of the procedure and the cost. The patient is, thereafter, informed of the particulars of the medical procedure, the drugs, implants, stents etc. that are required for his treatment/ medical procedure and the cost. The patient accepts the offer and opts for a particular procedure. Once having opted for a particular procedure, the choice of the drugs, implants, stents etc. would depend upon medical advice and only where, medically permissible, the choice of the patient. The question posed would, therefore, have to be further refined, namely, whether a medical procedure can be severed into separate elements of service and sale with service being the medical advise and medical procedure and the sale being the supply of medicines, surgical items, implants, to patients whether as part of a package or to an individual patient?;

++ The State governments draws their power to impose tax on sale or purchase of goods, other than newspapers, from entry No.54 of List II of Schedule VII of the Constitution of India. The power of the Union to tax, can be traced to entry No.97 of List I or Entry 92-C of List I of Schedule VII of the Constitution of India. A State may impose tax on "sale of goods" but is not empowered to impose tax on services. There may and often are contracts for service called composite contracts that may inher an element of sale without fulfilling all the elements of a sale. As far back as in Gannon D unkerley & c o., the Supreme Court held that composite contracts are not a "sale" as one or the other element of "sale" is missing. Article 366 (29-A) of the Constitution of India, was introduced to overcome this hurdle and allow taxation of the element of sale in composite contracts and provide a frame work for the Union as well as the States to bring forth to taxation transactions in which one or more of the elements of sale is missing;

++ a perusal of the definition of "sale" reveals that "sale" is defined to include transfer of property in goods for cash etc. and includes composite contracts as set out in Article 366 (29-A) of the Constitution of India. The States of Punjab and Haryana may, therefore, levy VAT on only such transactions as fall within the definition of "sale" whether as a sale of goods or as a composite contract. Where, however, the contract does not possess the element of a sale as set out in these sections nor is it a composite contract the State cannot by a legal fiction infer a sale and seek to tax the so called element of sale;

++ a medical procedure that as an integral part requires administering of drugs, stents, implants, etc. may only be brought forth for payment of VAT if it fulfills the ingredients of sale, as defined under the Punjab and Haryana VAT Acts and Article 366(29-A) of the Constitution of India. As a result the test whether a medical procedure involves a "sale of goods" continues to be the same i.e., the intention of parties, the nature of goods, their delivery etc. being determinative factors;

++ 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. Would the supply of medicines, stents, implants etc. at a price, enable the State to infer a fictional sale or a severable contract that can be brought forth to taxation as a sale? The answer is no. 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. The supply of these articles are integral to and essential for the treatment offered to patients and even if one may categorize these as incidental to the actual medical procedure, one cannot but ignore that a medical procedure cannot be completed without supply of medicines, drugs, stents, implants, thereby leading to a singular conclusion that the State is not empowered under any provision of the Constitution much less the definition of goods, sale or dealer, to severe the contract and construe the supply of drugs, medicines, stents, implants etc. as a severable part of the contract and, therefore, exigible to VAT, as a sale. The situation would obviously be different if these articles are supplied from the pharmacy of a hospital;

++ 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;

++ an argument that the definition of "sale" under the Bihar and the Uttar Pradesh Acts, is entirely different, must also fail. A perusal of the definition of sale in the Bihar and the Uttar Pradesh Statutes reveals that this argument has apparently been raised by disregarding the definition of sale in these statutes which are essentially identical to the definition of sale of the present statute;

++ therefore, 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.

(See 2015-TIOL-466-HC-P&H-VAT)