JUNE 11,2020

By Abhijit Saha

HOSPITAL service is always surrounded by controversy and ambiguity insofar as its implications under the indirect tax law is concerned. Recently, Madras High Court in the case of MIOT Hospitals Ltd. - 2020-TIOL-1010-HC-MAD-VAT held that the medical implants used for treatment by surgery and other ancillary services like MRI Scan, X-Ray etc. would be liable to be taxed as works contract under Tamil Nadu VAT Act, 2006.

In this respect it is pertinent to mention that the Punjab and Haryana High Court in the case of M/s Fortis Healthcare Limited - 2015-TIOL-466-HC-P&H-VAT, Jharkhand High Court in the case of M/s Tata Main Hospital [2007 SCC Online Jhar.260], and Allahabad High Court in the case of M/s International Hospital Private Limited - 2014-TIOL-551-HC-ALL-CT has held that 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 VAT Act and therefore, are not exigible to value added tax.

However, Kerala High Court in the case of Malankara Orthodox Syrian Church [(2004) 135 STC 224 (Ker)] and Comtrust Eye Hospital [2009] 20 VST 532 (Ker) held that hospitals selling medicines in the course of medical treatment would be liable to pay tax.

In this respect it is relevant to mention that the Three Member Bench of the Kerala High Court in the case of San Jos Parish Hospital [2019 (1) KLT 336] did not agree to the above view of the Kerala High Court and has referred the matter to be heard by the Constitutional Bench of the Kerala High Court.

In the first place, it may be mentioned that in view of the above matter being decided by the division bench of different High Court and especially, the issue has been referred to the Constitutional Bench of the Kerala High Court, a question may be raised as to whether the Single Member Bench of the Madras High Court is legally authorised to decide the issue as it has been done in the case of MIOT Hospitals Ltd.

The most interesting aspect of MIOT Hospitals Ltd. judgment is that it has expressly ignored the decision of the Three Member Bench of the Supreme Court in the case of BSNL vs Union of India - 2006-TIOL-15-SC-ST-LB.] and held that medical implants, MRI Scan, X Ray etc. are taxable as works contract.

In the MIOT Hospitals Ltd. Judgment in Para 173, the relevant para 44 of the BSNL decision of the Supreme Court was reproduced. The same is reproduced hereunder for ease of reference:

44. Of all the different kinds of composite transactions the drafters of the Forty-sixth Amendment chose three specific situations, a works contract, a hire-purchase contract and a catering contract to bring them 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 sub-clauses (b) and (f) of clause (29-A) of Article 366, there is no other service which has been permitted to be so split. For example, the sub-clauses of Article 366(29-A) do not cover hospital services. Therefore, if during the treatment of a patient in a hospital, he or she is given a pill, can the Sales Tax Authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service 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 does pass from the patient or client to the doctor or lawyer for the documents in both cases.

Inspite of the above categorical view of the Hon'ble Supreme Court, the Single Judge Bench of the Madras High Court held in Para 174 that although in paragraph 44, the Hon'ble Supreme Court has held that sub-clauses of Article 366(29-A) do not cover hospital services, there is no legal basis to follow the said conclusion any longer in the light of subsequent decisions of the Hon'ble Supreme Court.

The Single Judge Bench of the Madras High Court in MIOT Hospitals Ltd. case has not referred to any subsequent decision of the Hon'ble Supreme Court which has expressly negated the view of the Three Member Bench decision of the Hon'ble Supreme Court in the case of BSNL.

The Single Judge Bench of the Madras High Court in MIOT Hospitals Ltd. Case, has held in para 200 of the order that the observation of the Hon'ble Supreme Court in BSNL Vs Union of India 2006-TIOL-15-SC-ST-LB cannot apply as the obiter dicta or the observation in para 44 and the illustration in BSNL vs Union of India cannot be construed as a binding ratio for the reason given in this order.

In view of the author, the Madras High Court decision needs to be revisited to ascertain whether it can distinguish the clear position taken by the Larger Bench of the Hon'ble Supreme Court in BSNL case.

Last but not the least, the definition of works contract has been mentioned in para 70 of the order. It is reproduced below:

Section 2(43): "works contract" includes any agreement for carrying out for cash, deferred payment or other valuable consideration, building construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning, of any movable or immovable property;

As per the understanding of the author, Section 2(43) of the TNVAT Act, 2006 which defines the expression "works contract" cannot be made applicable for the services provided by corporate hospitals to its patients since the activities referred to in the said provision pertain to building construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property. Human being is neither moveable nor immovable property for the purpose of the aforesaid provisions.

[The views expressed are strictly personal.]