BANGALORE, APRIL 26, 2013: THESE forty one appeals are directed against the appeal orders concluded by the Joint Commissioner of Commercial Taxes (Appeals)-I, Bangalore (First Appellate Authority or for short FAA)

Facts as submitted by the appellant's counsel:

++ The appellant is engaged in the medical profession, rendering medical services.The appellant has established clinics all over India to render medical services. The appellant is not a registered dealer, either under the KVAT Act, 2003 or CST Act, 1956.

++ The services rendered by the appellant is in the nature of consultancy, advice, diagnosis and treatment. For this purpose, the appellant has hired doctors to render medical services. Doctors are called Consultants or Consulting Doctors who in the course of medical treatment, dispense, homeopathic medicine to the patients.

++ The appellant urges that the medicines dispensed in the course of medical treatment is purchased from the concerned doctors in their name, store and dispense medicine to their respective patients during the course of medical treatment.

++ The AA who is also inspecting authority inspected the business place of the appellant on 10 th February 2009 and thereupon issued show cause notice dated 26 th March 2009 proposing to tax, the value of medicines which have been dispensed by the doctors to the patients in the course of medical treatment. Thus the AA treats the dispensation of medicines as sale of goods. In doing so, the AA has adopted the formula of 30% towards consultancy and 70% towards the value of medicines. The appellant assails that the arbitrary formula adopted by the AA of 30%: 70% is illogical and no reasoning is given to arrive at such conclusion.

++ The AA after hearing the appellant has confirmed the tax proposed by the protective assessment order dated 02 nd June 2009 u/s. 38(5) of the Act. Aggrieved by the said order of the AA, the appellant filed an appeal before the FAA who has modified the protective assessment orders of the AA to re-compute the sale value of the medicine by adding 70% of the margin to the cost of medicines purchased and to compute the taxable turnover. Hence, the present appeals are preferred.

++ The appellant urges that the activity carried out by it is only medical services and substantial expenditure is towards establishment and promotional expenses to effectively render the medical services.

++ It is submitted that the medicines are not at all purchased in the name of the appellant clinic for which the reliance is placed on audited financial statements to substantiate the fact that the purchase cost of medicine is not reflected in such audited financial statements.

++ The medicines dispensed by the doctors are in the course of the treatment and medicines dispensed during the course of the treatment are unique to the patient, based on individual prescription of the doctor and the patient does not even know the name or potency of the medicine.

++ It has been urged that the appellant no-way sells medicines by a pharmacy.

++ The appellant's counsel submits that the FAA erred in confirming the demand of output tax payable on taxable turnover of the medicine dispensed during the course of medical treatment by adding 70% margin to the cost of medicine purchased and avers that how the FAA has come to the conclusion that 70% margin has to be adopted is not known and it is arbitrary fiction. The learned counsel further submits that there is no provision under the Act and Rules made there under, to arrive at the taxable turnover by adding margin of profit on the purchase value of the goods, for levying output tax. The very fact that such type of bifurcation amounts to artificial bifurcation of a composite transaction involving goods and services, to impose tax only on the goods. The appellant highlights the definition of works contract under Section 2(37) of the Act which defines works contract in an elaborate manner. The appellant emphasizes the fact that the activity carried out by the appellant does not fall under the definition of works contract. Thereby, the appellant puts forth the plea that the transactions effected by it are a composite in nature which includes both goods and services.

++ The appellant urges that Article 366 has been amended by inserting Clause (29A) which has six sub-clauses. The activity carried out by the appellant does not fall under any of sub-clauses namely Article 366 (29A) from sub-clauses (a) to sub-clauses (f). These amendments have been carried out and allow the legislature to bifurcate the substantial composite contacts into divisible contracts by legal fiction and thereby the sale can be isolated and be subjected to tax. The three types of activities which are eligible for vivisection are sub-clause (b), sub-clause (c) and sub-clause (f) dealing with works contract, hire purchase contract and catering contract.

++ The appellant on the above grounds submits that the transaction carried out by it is neither a catering contract nor a hire purchase contract. It is a composite contract involving both goods and services. If at all, the composite contract has to be bifurcated then the transactions are to be proved as works contract which is not so in the case of the appellant. The main reason for the same is that the impugned transaction namely dispensing of medicine during the course of medical treatment does not find any place in the transactions envisaged in Clause 29A of the Article 366, in order to subject the same for levy of tax under deeming fiction of sale. In support of the same, the appellant cites the decision rendered by the Hon'ble Supreme Court in the case of Bharat Sanchar Nigam Ltd. Vs. UOI reported in - 2006-TIOL-15-SC-CT-LB. The appellant highlights particularly paragraph No. 42, 43 and 48 of the said judgment to drive home his point. The appellant brings to the notice of this bench that the Hon'ble Apex Court has decided that only in case of sub-clause (b) and sub-clause (f) the splitting of the agreement is permissible. The fact why this service does not involve a sale for the purposes of Entry 54 of List-2 is for the reason ultimately attributable to the principles enunciated in Gannon Dunkerly first case. Therefore, the service rendered by the appellant being simply services which are not enumerated under the said Article cannot be discernable.

To sum up the appellant relies on five factors.

++ The nature of contract i.e. composite contract.

++ Article 366 (29-A).

++ Dominant nature test approved by the Hon'ble Apex Court in BSNL case .

++ Non permissibility to divide the composite contract as transactions of sale and transactions of service as against the principles enunciated in BSNL case and also as per Article 306 (29-A).

++ The professional dispensing of medicine by the doctors who have effected purchases in their name cannot be considered as a sale for the purpose of the Act.

The Appellate Tribunal decided the following issues:

1) Whether the impugned order of the FAA treating the transactions effected by the appellant so far as dispensation of medicine is a transaction of sale is correct?

As held in BSNL case, the dominant nature being rendering of medical services, the transaction cannot be split into service and goods components. The concept of aspects theory which had found a force in State of U.P. Vs. Union of India (2003) 3 SCC 239 has expressly being over ruled by a three - judge bench in Bharat Sanchar Nigam Limited wherein the doctrine of aspects theory has been over ruled. This has been affirmed by the Apex court in Imagic Creative Pvt., Ltd. Vs. Commissioner of C.T. - 2008-TIOL-04-SC-VAT. Further to this, the transactions in question does not fit under any of the sub-clauses of Article 366 (29-A). By applying the dominant nature test as well as the transaction nature it is decided that the dispensing of medicine by the doctors during the course of integrated package treatment cannot be considered as sale for the purpose of the Act. Therefore both FAA and AA have erred in deciding that the dispensing of medicines by the doctors/medical experts or consultants is sale. Hence the point No.1 is answered in the Negative.

2) Whether the appellant has rendered purely services as urged in his ground and as per the facts of the case?

If during the treatment of the patient in a hospital, if the patient is given pill can the tax authority tax the transactions as a sale? Doctors, Lawyers and other professionals render services in the course of which can it be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client? Strictly speaking with the payment of fees, consideration passes from the patient or client to the doctor or lawyer. In both the cases, the same cannot be considered as sale as envisaged under Article 366 (29-A) of the constitution. On this basis, whether a transaction can be termed as sale is purely based on matter of contract and intention. Therefore relying on paragraphs 42, 43 and 48 of the BSNL case , only works contract and catering contract involve both service and sale at the same time, only with respect of these two cases, splitting of service and supply of goods is permissible. Therefore, the service rendered by the appellant being simply services which are not enumerated under the said Article cannot be discernable.

All the forty one appeals are allowed. The impugned orders of the FAA and AA are set aside. The tax levied by AA as directed by the FAA is cancelled. Consequently penalty & interest levied if any is also cancelled.

(See 2013-TIOL-01-TRIBUNAL-BANG-VAT)