Sale Vis-À-Vis Service Qua Treatment In Hospital

Introduction

In pre GST era, whether a particular
transaction is sale or service has always remained debatable issue. There are a
number of judgements involving the above controversy. Recently, in Maharashtra,
there arose a controversy about nature of transaction in treatment of in-house
patients in a hospital. In hospital, when the patient is admitted, he is given
medical treatment. The treatment includes services of doctors as well as giving
medicines as may be required. In this transparent era, normally, hospitals show
charges towards medicines separately and other charges like bed charges, room
charges etc., separately. Although, this entire in-house treatment is
generally considered as single transaction of service, thus not liable for VAT.
But, in case of Saifee Hospital, while deciding first appeal, the
first appellate authority took a view that the receipts toward medicines are
liable to tax under MVAT Act. Similarly, estimations were made towards food
supply out of composite charges for room. There were also receipts towards
special beds and mattresses. These charges were also held to be liable to VAT
under ‘Transfer of right to use goods’.

Against the above first appeal order, second
appeal was filed before Hon. M.S.T. Tribunal. Hon. Tribunal has recently delivered
judgment in case of Saifee Hospital (Second Appeal No.190 of 2016 dated
8.12.2017).

Issues raised by
first appeal order

 The
Hon. Tribunal has noted that the following issues are raised by the first
appellate authority and after giving hearing, the first appellate authority
held them as liable to tax under MVAT Act.

“According to the first appellate authority,
the following transactions were liable to tax,

1) The supply of drugs and
medicines and other surgical goods effected by pharmacy/drugstore to indoor
admitted patients, is a sale liable to VAT.

2)  Provision of food in hospital to admitted patients received in
the composite charges received from patients for the bed charges is a sale of
food and liable to VAT.

3) Supply of dental materials/implants
by dental Department is a sale liable to VAT.      

4)  Hire charges for mattresses
are liable to VAT.

5)  Provisions of goods like
special beds and equipments where hire charges have been received from patients
is deemed sale in the nature of transfer of right to use any goods.”

Arguments on
behalf of the appellant

The Hon. Tribunal has noted the submissions
made by the appellant in detail. The indicative grounds of appeal are as under:

1. On introduction of VAT,
specific query was made with the Commissioner of Sales Tax about liability of
tax on medicines administered to in-patients for treatment.

     The Commissioner of Sales
Tax, vide letter dated 26.12.2007, has clearly stated that the dominant
intention in administering medicines to in-patients is treatment of diseases
and not supply/sale of medicines consumables or implants.

2.  The department has further
issued circular no.7A of 2008 dated 13.3.2008, wherein also, following BSNL,
same position is reiterated.

3.  Even if pharmacy from where
medicines are supplied is owned by hospital, so far as supply of medicines for
treatment to in-patients is concerned it is not sale. So far as sale by
pharmacy over counter to outpatients or general public is concerned, it is
considered as sale under MVAT Act and due VAT has been discharged.        

4.  Various judgements on very
same issue were cited like:

(a) Dr. Hemendra Surana (90 STC
251) wherein it is held that taking x-ray and giving report is not a works
contract activity. 

(b) Bharat Sanchar Nigam Ltd. (145 STC 91)(SC), where it is observed
that medicines provided by doctor/hospital is not sale.

(c) International Hospital Pvt.
Ltd. (Writ Tax No. 68 of 2014 decided on 6.2.2014) in which use of stents for
treatment of patient is held as not amounting to sale.

(d) Tata Main Hospital (2208
NTN Vol-36 149) and Fortis Healthcare (CWP 1922 to 1924 of 2012 dated
23.1.2015).

In the above judgements, the respective High
Courts have held that treatment of in-house patients is not amounting to
sale.  

5.  Even the extended meaning
of ‘sale’ under Article 366 (29A) does not cover such services. Various
judgements were cited in support of the same.

6.  In relation to charging the
medicines at MRP used for in-patient, it was contended that there is no tax
collection. Reliance was placed on the judgement of Hon. Supreme Court in case
of Hindustan Lever Ltd. (93 VST 452).

Arguments on
behalf of Department

Supporting the order of the first appellate
authority, the department made elaborative arguments. Indicative arguments are
noted as under:

(1) In pharmacy, there is common stock and there is no difference
between supplying medicines over the counter and supplied for treatment of
in-patient.

(2) To show sales of goods,
Department also cited instances that the patients take away unused medicines
with them while taking discharge.

(3) Judgements cited, including
BSNL were tried to be distinguished on ground that they relate to composite
transaction sand not the one where sale is discernible.

(4) The judgments relating to
medicine services were also tried to be distinguished on ground that the facts
were different, mainly that there was no sale from pharmacy owned by very same
hospital.

(5) Judgements of Kerala High
Court in case of Malankara Orthodox Syrian Church (135 STC 224)(Ker) and
PRS Hospital vs. State of Kerala, 2003 (11) KTR 176 were relied
upon. In those judgements, based on facts and legal position under respective
Act, the activity of Hospital was held as covered by Sales Tax Acts.

(6) The arguments were also
made to treat these transactions as deemed sales by Works Contract or transaction
of hotel service on ground there is transfer of medicines/food for human
consumption.

(7) The provisions of MRP/Drug
Price Control Order relied upon to suggest that the prices are inclusive of
tax. It was contended that tax is collected which cannot be allowed to be
retained by hospital.     

The Hon. Tribunal has analysed arguments
from both sides in elaborate manner.

The Hon. Tribunal held that the basic nature
of transaction is of rendition of services. The intention of parties is not to
sell/purchase medicines, but to be administered by doctors in course of
treatment.

The Hon. Tribunal examined position whether
there is discernible sale or not, in following words.

“44. The next question is whether the supply
of medicine in the course of treatment are discernible sale so as to attract
the main definition of sale i.e. sale as per the Sales of Goods Act. The
Appellant Officer in para 116 of his order remarks that intention of private
hospital is to sell the medicine and earn profit. This may be so, but whether
the patient intends to purchase medicine when admitted to hospital? Even in a
composite contract, for a sale to be discernible, it must satisfy all the
criteria for sale as per sale of goods Act. In Gannon Dunkerley (8 STC) the concept
of sale has been discussed.

In para 16 the Court has said :

“.. In order to constitute a sale, it is
necessary that there should be an agreement between the parties for the purpose
of transferring goods which of course presupposes capacity to contract, that it
must be supported by money consideration and that as a result of the
transaction property must actually pass in goods. Unless all these elements are
present, there can be no sale.”

“We are accordingly of the opinion that on
true interpretation of expression ‘sale of goods’ there must be an agreement
between the parties for the sale of very goods in which property eventually
passes.”

45.Thus, when a patient is admitted to
hospital, his intention is not to buy medicines, nor the medicines identified
or agreed to be delivered to patient before administering the same during
course of the treatment. It is not correct to say that as soon as bills are
prepared by pharmacy, the goods are ascertained and delivered to the patients.
These bills to inpatient according to appellate authority himself, are as per
requirement of DCPO and for the purpose of books to be maintained according to
DCPO. In large organisations, which to an outsider is single entity, there may
be internal divisions incorporating the concept of profit centre for each
division. Such divisions do not make them a separate entity from the single
whole for transaction with outside person. Internal dynamism may allow pharmacy
to operate as a profit Centre, treating everything issued from it same as any
other sale, but that does not make it a sale same as over the counter sale to
customer. The fact that billing from over the counter and to a patient in same
and same price is charged also does not make it different. In a restaurant,
there may be sale from counter as well as service. The billing may be same and
even  price may be same for the both
types of sales, yet first is sale simplicitor and second is a deemed sale.”

The Tribunal refuted each and every argument
of department by giving elaborate explanation.

The argument that it can be deemed sale
under clauses 366(29A) is also rejected.

It is held that the circular issued by
Commissioner of Sales Tax is binding. It is also held that though charges for
medicines are at MRP, there is no collection of tax but it is price.

The Hon. Tribunal thus concurred with
appellant hospital and set aside the order of first appellate authority.

In respect of argument about charges for
special bed etc. also the Tribunal held that there is no lease
transaction. The patient cannot take such goods outside. Therefore, there is no
lease sale in respect of such goods also.

Similarly, there cannot be tax on food
included in room rent as it is not separable nor provided for in Rules. Rule 59
of MVAT Rules is meant for hotels and not for hospitals. Tribunal deleted such
levy also.

Finally, the Hon. Tribunal allowed appeal in
favour of appellant in all respects.      

Conclusion     

The judgement will definitely give respite
to worried hospitals. The Hon. Tribunal has set guidelines for levying tax
under MVAT Act. This judgement will be useful in various other situations. _