2025 (4) TMI 1002 - AAR - GST

Exemption from GST under entry no. 74 of the Notification no. 12/2017-CT(R) dated 28th June 2017 - diagnostic services - to be classified under service accounting code 9993 or under Service accounting code 9981 - HELD THAT - The applicant has not produced any license or certificate from the Central Drugs Standard Control Organisation (CDSCO) or the Indian Council for Medical Research validating their research and the resultant test provided by them as a proper diagnostic test for cancer detection. In vitro diagnostics (IVD s) are medical devices used to perform tests on samples of blood urine tissue etc. to diagnose diseases or monitor health conditions including cancer biomarker tests. Under Medical Devices Rules 2017 IVDs are classified as medical devices and regulated by CDSCO. Companies manufacturing or importing IVDs must obtain a licence from CDSCO and must comply with quality standards such as ISO 13485. A Medical Device includes any instrument apparatus appliance implant material or other article whether used alone or in combinations including software or an accessory intended by the manufacturer to be used specifically for human beings or animals for one or more of the specific purposes of diagnosis prevention monitoring or alleviation of any disease or disorder. Software used for medical purposes is explicitly ERBE included in the definition. The tests carried out by the applicant cannot be treated as a proper diagnostic test but is more in the nature of clinical research and development and as a result it does not qualify as a Health Care Service as envisaged under Notification No. 12/2017-Central Tax (Rate) dated 28.6.2017. The services provided by the applicant is more in the nature of research and experimental development work undertaken in natural science primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts without any particular application of use in view and experimental development services involving systematic work drawing on knowledge gained from research and practical experience in the field of biotechnology gene and RNA vectors like gene therapy viral vectors etc. The primary activity is research and experimental development of Cancer Prognostic and Diagnostic Technologies. The said services are aptly covered under SAC 998111 and therefore the applicant is not eligible for the benefit of exemption Notification 12/2017-Central Rate (Tax) dated 28.6.2017. Conclusion - i) The applicant s services do not qualify for GST exemption under Entry No. 74 of Notification No. 12/2017-CT(R) and are not classifiable under SAC 9993 for exemption. ii) The appropriate classification is under SAC 9981 (research and experimental development services) for which no exemption is available under the GST regime.

Summary

ISSUES PRESENTED and CONSIDERED

1. Whether the provision of diagnostic services by the applicant qualifies for exemption from GST under Entry No. 74 of Notification No. 12/2017-Central Tax (Rate) dated 28th June 2017, and consequently, whether the proposed services are classifiable under Service Accounting Code (SAC) 9993.

2. In the event the proposed services do not qualify for exemption under Entry No. 74 of Notification No. 12/2017-CT(R), whether Service Accounting Code 9981 becomes relevant, particularly in the absence of exemption for the specified service accounting code.

ISSUE-WISE DETAILED ANALYSIS

1. Qualification for GST Exemption under Entry No. 74 of Notification No. 12/2017-CT(R) and Classification under SAC 9993

The core legal framework for this issue is Entry No. 74 of Notification No. 12/2017-CT(R), which exempts "health care services by a clinical establishment, an authorised medical practitioner or para medics" (SAC 9993) from GST. The relevant definitions are:

• "Health care services" (clause (zg)): any service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognised system of medicines in India, including patient transportation, but excluding certain cosmetic procedures.
• "Clinical establishment" (clause (s)): a hospital, nursing home, clinic, sanatorium, or any other institution offering services/facilities requiring diagnosis, treatment, or care for illness, injury, deformity, abnormality, or pregnancy in any recognised system of medicines, or a place established as an independent entity to carry out diagnostic or investigative services of diseases.

The applicant contended that its blood-based diagnostic services for early cancer detection, using next-generation sequencing (NGS) and qRT-PCR technologies, fall within the definition of "health care services" and are provided by a "clinical establishment." The applicant emphasized their technical process, staff qualifications, laboratory equipment, and applications for accreditations (NABL, GLP, DSIR) as evidence of operating as a medical laboratory and clinical establishment. The applicant relied on various advance rulings (Kerala, Karnataka, and others) to argue that diagnostic centers and similar entities qualify as clinical establishments and their services as health care services, thus eligible for GST exemption.

The jurisdictional officer opposed the applicant's claim, arguing that:

• The applicant's activities are oriented towards research and development of diagnostic technologies rather than established diagnostic services.
• The applicant's accreditation and certificates pertain to "Testing and Calibration Laboratories" for development and commercialization of cancer prognostic diagnostic technologies, not for direct provision of health care services as recognized diagnostic tests.
• No license or approval has been obtained from the Central Drugs Standard Control Organisation (CDSCO) or Indian Council of Medical Research (ICMR) validating the applicant's tests as recognized diagnostic tests.
• The process is in the nature of clinical research and development, not yet validated or accepted by regulatory authorities or the medical fraternity as a standard diagnostic service.
• Without such regulatory validation, the services cannot be classified as "health care services" by a "clinical establishment" under the exemption notification.

The Court's analysis focused on whether the applicant's services fulfill both prongs required for exemption: (i) provision of "health care services" and (ii) provision by a "clinical establishment." The Court reviewed the technical details of the applicant's process, the regulatory status of their tests, and the nature of their accreditations. The Court noted:

• The applicant's test (HrC test) for early cancer detection is still in development and not validated by Indian medical regulatory bodies.
• Diagnosis, for the purposes of the exemption, must be recognized and validated by the medical fraternity and Indian regulatory authorities (e.g., CDSCO, ICMR).
• The applicant has not produced any CDSCO or ICMR approval or license for their test as an accepted diagnostic procedure.
• Under the Medical Devices Rules, 2017, in vitro diagnostics (IVDs) are classified as medical devices and regulated by CDSCO; the applicant has not obtained the required licenses.
• Without regulatory validation, the applicant's activity is considered research and development, not a recognized diagnostic service.

The Court also distinguished the applicant's case from the cited advance rulings, noting that in those cases, the applicants were providing recognized diagnostic services or were accredited as clinical establishments. In contrast, the present applicant's services are not yet recognized as diagnostic services by regulatory authorities.

Key Evidence and Findings:

• The applicant's laboratory is in the process of operationalization and has applied for, but not yet obtained, NABL accreditation in the relevant medical laboratory category.
• The certificates produced relate to "Testing and Calibration Laboratories" for development and commercialization, not direct provision of diagnostic services.
• No CDSCO or ICMR approval or license for the diagnostic test in question.
• Statements in the application and supporting documents indicate ongoing clinical trials and development, rather than provision of established diagnostic services.

Application of Law to Facts:The Court held that, in the absence of regulatory recognition and validation, the applicant's activities do not qualify as "health care services" by a "clinical establishment" under Entry No. 74 of Notification No. 12/2017-CT(R). Therefore, the services are not classifiable under SAC 9993 for exemption.

Treatment of Competing Arguments:The applicant's reliance on prior advance rulings was distinguished on the basis that those cases involved recognized diagnostic services and accredited clinical establishments, whereas the present applicant's activities remain in the realm of research and development, pending regulatory approval.

Conclusion:The applicant's provision of diagnostic services does not qualify for exemption from GST under Entry No. 74 of Notification No. 12/2017-CT(R), nor are the services classifiable under SAC 9993 for exemption purposes.

2. Classification under SAC 9981 (Research and Experimental Development Services) if Exemption is Denied

The applicant alternatively sought classification under SAC 9981 (Research and experimental development services in medical sciences and pharmacy - 998113), arguing that their activities involve DNA/RNA sequencing and gene expression profiling, which may fall within the scope of research and experimental development services.

The jurisdictional officer supported classification under SAC 9981, particularly SAC 998111, which covers research and experimental development services in natural sciences, including biotechnology techniques such as DNA/RNA sequencing, gene expression profiling, and related activities. The officer emphasized that the primary activity is the development of cancer prognostic and diagnostic technologies, aligning with the explanatory notes for SAC 998111/998113.

The Court examined the explanatory notes to the Scheme of Classification of Services issued by CBIC, which clarify that SAC 9981 includes basic and applied research services in natural sciences, experimental or theoretical work to acquire new knowledge, and experimental development services involving systematic work in biotechnology and related fields.

The Court found that:

• The applicant's activities are primarily aimed at developing new diagnostic technologies for cancer detection, involving systematic research, clinical trials, and validation processes.
• The process is not yet recognized as a standard diagnostic service but constitutes research and development in the field of biotechnology and medical sciences.
• The applicant's own submissions and supporting documents refer to ongoing clinical trials, development of innovative tests, and raising funds for further research and trials.

Key Evidence and Findings:

• Descriptions in the application and supporting documents indicate the process is at the research and development stage, not an established diagnostic service.
• The lack of regulatory approval further supports classification as research and experimental development services.

Application of Law to Facts:The Court held that, given the current status of the applicant's activities, the appropriate classification is under SAC 9981 (specifically, SAC 998111/998113), which covers research and experimental development services in medical sciences and pharmacy. There is no exemption provided for such services under Notification No. 12/2017-CT(R).

Treatment of Competing Arguments:The applicant's argument for classification under SAC 9993 was rejected due to the lack of regulatory recognition. The jurisdictional officer's position that the services fall under SAC 9981 was accepted.

Conclusion:If the proposed services do not qualify for exemption under Entry No. 74 of Notification No. 12/2017-CT(R), they are appropriately classifiable under SAC 9981 (research and experimental development services), for which no exemption is available.

SIGNIFICANT HOLDINGS

• The Court held: "Diagnosis, for the purposes of the exemption, must be recognized and validated by the medical fraternity and Indian regulatory authorities (e.g., CDSCO, ICMR). The applicant has not produced any CDSCO or ICMR approval or license for their test as an accepted diagnostic procedure. Without regulatory validation, the applicant's activity is considered research and development, not a recognized diagnostic service."
• "It is observed that said the test claimed to be a diagnostic test by the applicant is still in its developmental stage and is not yet validated by the medical regulatory bodies. Any inconclusive research, not agreed to by the medical fraternity nor approved by the regulatory authorities in India such as the DCGI through CDSCO, the ICMR or any other regulatory body under the Drugs & Cosmetics Act, would not qualify as a Health Care Service as envisaged under the Notification No. 12/2017."
• "We find that the services provided by the applicant is more in the nature of research and experimental development work undertaken in natural science primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts, without any particular application of use in view and experimental development services involving systematic work, drawing on knowledge gained from research and practical experience in the field of biotechnology, gene and RNA vectors like gene therapy, viral vectors etc. The primary activity is research and experimental development of Cancer Prognostic and Diagnostic Technologies. The said services are aptly covered under SAC 998111 and therefore, the applicant is not eligible for the benefit of exemption Notification 12/2017-Central Rate (Tax) dated 28.6.2017."
• Final determination on each issue:
  • Question 1: "Whether the provision of diagnostic services by the applicant would qualify for exemption from GST under Entry No.74 of Notification No. 12/2017-Central Tax (Rate) dated 28.6.2017 and consequently the proposed services would get classified under Service Accounting Code 9993?" Answer: No.
  • Question 2: "If Service Tax Accounting Code 9981 would become relevant in case where the proposed services would not qualify for exemption under Entry No.74 of Notification No. 12/2017-Central Tax (Rate) dated 28.6.2017 in absence of exemption for specified accounting code?" Answer: Yes.

Core principles established:

• For a service to qualify as "health care services" by a "clinical establishment" and claim GST exemption under Entry No. 74 of Notification No. 12/2017-CT(R), the diagnostic service must be recognized and validated by Indian medical regulatory authorities (CDSCO, ICMR, etc.).
• Activities in the nature of research and experimental development, including clinical trials and development of new diagnostic technologies not yet validated by regulatory authorities, are classifiable under SAC 9981 and are not eligible for GST exemption under the said notification.
• Accreditation or certification as a "Testing and Calibration Laboratory" for development and commercialization does not suffice to establish status as a clinical establishment providing recognized health care services for exemption purposes.

Final determinations:

• The applicant's services do not qualify for GST exemption under Entry No. 74 of Notification No. 12/2017-CT(R) and are not classifiable under SAC 9993 for exemption.
• The appropriate classification is under SAC 9981 (research and experimental development services), for which no exemption is available under the GST regime.