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TMI Blog2019 (3) TMI 438X X X X Extracts X X X X X X X X Extracts X X X X ..... 2018 passed by a Division Bench of this court. The question referred for consideration is as to whether the medicines supplied, implants carried out, the consumables used and surgical tools exclusively used in a particular procedure, as part of treatment of patients in a hospital, the price of which is recovered by way of bills from the patients are "sale of goods" as contemplated by the legislation levying such tax; herein the Kerala Value Added tax Act, 2003 (for brevity, "the KVAT Act"). The Division Bench was of the opinion that though under the VAT Act the hospitals may require registration as a dealer since they have pharmacies through which medicines and other components required for the treatment are sold; not only to in-patients but also to out-patients, such transactions would not be exigible to tax under the sales tax enactment as it forms part of services rendered by the hospital. The Division Bench, which made the reference, relied on Bharat Sanchar Nigam Ltd. v. Union of India [2006] 3 VST 95 (SC); [2006] 145 STC 91 (SC); [2006] 282 ITR 273 (SC); [2006] 6 RC 276; [2006] 3 SCC 1 to take a different view from that held by this court; by benches of varying strength of q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts and also separate proceedings threatening penalty for non-registration and non-compliance of the statutory provisions. The learned single judge found that though there might be qualitative and quantitative distinguishing aspects with respect to the standard of services provided, essentially the activities in a hospital are one and the same. The assessees had also relied on a notification issued under the Act (SRO 1090 of 1999 and SRO 802 of 2001), which provided exemption to medical practitioners dispensing medicines from their own dispensaries. To the said notification, there was an Explanation added with effect from August 16, 2001, excluding hospitals and clinics from the definition of "medical practitioners". The learned single judge found that the exemption was only to medical practitioners dispensing medicine from their dispensaries as distinguished from a hospital or clinic, wherein also the dispensation of medicine is on the prescription of a medical practitioner. The exemption even without the Explanation, was held to be of a limited nature and applicable only to such dispensaries wherein no medical or surgical care is provided by way of in-patient treatment and a doct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired to take out registration as a "dealer" under the taxation act and the question of levy, in the context of the first sale alone being taxable under the KGST Act, was left to be considered by the appropriate officers. The appeal from Malankara Orthodox Syrian Church v. Sales Tax Officer [2004] 135 STC 224 (Ker) rejected in (Qualified Pvt. Medical Practitioners' Assn. v. Sales Tax Officer (W. A. No. 555 of 2003 decided on November 26, 2003-Kerala High Court) did not consider the aforesaid aspects. Referring to the question raised as to whether the appellants-hospitals were dealers under the KGST Act, the Division Bench noticed that there was an opportunity given to the hospitals by way of issuance of a notice, which was not responded to. Since the appellants were admittedly selling medicines, it was held that the notice issued cannot be held to be void. As to the predominant activity of the appellants, whether it be sale of medicines, it was a question of fact which could be examined on evidence only by the authorities under the Act, was the finding of the Division Bench. 8. Again, yet another hospital, run by a trust, challenged the demands made for registration and production ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... electro magnetic waves or radio frequencies were goods for the purpose of article 366(29A)(d). The reliance placed by the assessee-petitioners on the statement made in para 44 of the judgment, wherein the honourable Supreme Court had cited an example as to a patient being given a pill by a hospital, was held to be not laid down as a principle covering all transactions in a hospital. The learned single judge held that Bharat Sanchar Nigam Ltd. [2006] 3 VST 95 (SC); [2006] 145 STC 91 (SC); [2006] 282 ITR 273 (SC); [2006] 6 RC 276; [2006] 3 SCC 1 was not rendered in the context of the provisions of the KVAT Act and the issue raised and decided was not in the context of a comparable controversy. It was held that the mere citing of an example of a pill in the course of a treatment cannot be held to be a declaration as to all transactions occurring in a hospital to be outside the taxation law. Hospitals in the present case were established by public limited companies, which are incorporated with a profit motive. On the said reasoning, it was held that if in a hospital, medicines and other consumables are sold to a patient and bills are raised, there cannot be any refuge taken under a me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a composite one and there could be no classification made as a sale of goods, it was held. Likewise, in State of Punjab v. Associated Hotels of India Ltd. [1972] 29 STC 474 (SC); [1972] 1 SCC 472, the question arose as to the service of supply of food at hotels to the residents could be assessed under the sales tax laws as a sale of goods. There being no distinct agreement for sale and the serving of food to the residents in a hotel being part of the service, as part of the hoteliers obligation; there was no warrant to charge sales tax on the food supplied, found the Supreme Court. The three contracts-works contract, hire purchase contract and catering contract-along with other transactions (with which we are not concerned in the present case) were deemed to be sales under article 366(29A) by an amendment to the Constitution. However, the position even after the said amendment, with respect to transactions of a composite nature based on an indivisible contract, were not covered under the specific clauses (a) to (f). The position as to other composite contracts remained the same and there could be no separation of a composite, indivisible transaction so as to tax the transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There fore, 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. 46. The reason why these services do not involve a sale for the purposes of entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley & Co. (Madras) Ltd. case [1958] 9 STC 353 (SC), namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in article 366(29A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 366(29A) can be separated and subject to sales tax. With respect to all other composite transactions, the State would not have such power to distinctly tax the transfer of goods forming part of a composite contract or a rendering of service. As has been held in Bharat Sanchar Nigam Ltd. [2006] 3 VST 95 (SC); [2006] 145 STC 91 (SC); [2006] 282 ITR 273 (SC); [2006] 6 RC 276; [2006] 3 SCC 1, the dominant nature test survives even after the 46th amendment. With due respect, we find the declaration of the honourable Supreme Court as to hospital services not enabled of differentiation as sale and services to be binding with all the force as available under article 141 of the Constitution of India. The sale, if any made, in the course of the treatment of a patient in a hospital, is with the sole intention of curing the patient, which is an inseparable part of the service offered in a hospital and it does not intend to create any separate rights on such drugs, implants or consumables used in the course of treatment. 13. As to the specific question dealt with in Bharat Sanchar Nigam Ltd. [2006] 3 VST 95 (SC); [2006] 145 STC 91 (SC); [2006] 282 ITR 273 (SC); [2006] 6 RC 276; [2006] 3 SCC 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndered. 14. We also notice the concurring judgment, which emphasizes that "the amendment introduced fiction by which six instances of transactions were treated as deemed sale of goods and that the said definition as to deemed sales will have to be read in every provision of the Constitution wherever the phrase 'tax on sale or purchase of goods' occurs" (sic). Apposite also would be paragraphs 108 and 109 (pages 133 and 134 in 145 STC) : "108. In the background of the above, the history prevailing at the time of the 46th Amendment and pre-enacting history as seen in the Statement of Objects and Reasons, article 366(29A) has to be interpreted. Each fiction by which those six transactions which are not otherwise sales are deemed to be sales independently operates only in that sub-clause. 109. While the true scope of the amendment may be appreciated by overall reading of the entirety of article 366(29A), deemed sale under each particular sub-clause has to be determined only within the parameters of the provisions in that sub-clause. One sub-clause cannot be projected into another sub-clause and fiction upon fiction is not permissible. As to the interpretation of fiction, particu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction created by the 46th amendment, it would be vitiated for total absence of legislative power. The definition of sale as found in section 2(xxi) of the KGST Act took care of instances as provided under clauses (a) to (f) in article 366(29A) respectively by Explanations (1A), (2), (3), (3A), (3B) and (3C). Some of these were existing prior to the 4th amendment, which was held to be not included in the definition of "sale of goods" by the honourable Supreme Court by various decisions which led to the 46th Amendment. After the deeming fiction was introduced by article 366(29A), all the transactions coming under the aforesaid Explanations stood validated as sale of goods. Similarly in the KVAT Act, section 2(xliii) defines "sale" and the Explanations I to VI took care of the transactions covered by clauses (a) to (f) of article 366(29A). Under the KGST Act and KVAT Act, the State cannot legislate in excess of the specific transactions brought in under article 366(29A), to create further deeming fiction with respect to other composite transactions. 17. Malankara Orthodox Syrian Church [2004] 135 STC 224 (Ker) also went on to hold that there is a clear distinction between supply of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x. This aspect of the matter has been considered by this court in Girdhari Lal Nannelal v. Sales Tax Commissioner [1977] 39 STC 30 (SC); [1977] 109 ITR 726 (SC) wherein it was held observe (SCC page 704, para 7) : "7. The approach which may be permissible for imposing liability for payment of Income-tax in respect of the unexplained acquisition of money may not hold good in sales tax cases. For the purpose of Income-tax it may in appropriate cases be permissible to treat unexplained acquisition of money by the assessee to be the assessee's income from undisclosed sources and assess him as such. As against that, for the purpose of levy of sales tax it would be necessary not only to show that the source of money has not been explained but also to show the existence of some material to indicate that the acquisition of money by the assessee has resulted from transactions liable to sales tax and not from other sources. Further, whereas in a case like the present a credit entry in respect of Rs. 10,000 stands in the name of the wife of the partner, no presumption arises that the said amount represents the income of the firm and not of the partner or his wife. The fact that neither the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n thereon amounts to a works contract or not. The agreement was one which was intended at developing and marketing flats to the customers. The developer entered into the agreement with the owner by virtue of which, after construction of the multi-storeyed building, 25 per cent. of the built up area was agreed to be surrendered to the owners of the land. 75 per cent. of the area was to be retained by the developer for sale to third parties. The court noticed Gannon Dunkerley [1958] 9 STC 353 (SC), which held the works contract to be indivisible contract not enabling the State to tax the transfer of goods made in pursuance of such indivisible contract. Article 366(29A) was noticed and it was held that after the 46th Amendment of the Constitution whether a works contract involved a dominant intention to transfer the property in goods was not at all material. Even if the dominant intention of the contract was not to transfer the property in goods and was of rendering of a service or the ultimate transaction is transfer of immovable property, then also it is open to the State to levy sales tax on the materials used in such contract was the finding. Bharat Sanchar Nigam Ltd. [2006] 3 VST ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a corporate or other legal entity. The supply of drugs use of consumables and the implants made are on professional medical advice intended at curing the patient and not deriving profits. Though not a charitable activity, hospitals cannot be said to be a business house established primarily for sale of drugs, consumables or implants. The principle is that mere passing of property in an article or commodity during the course of the performance of a contract or service, which is essentially one and indivisible, does not render it a transaction of sale, except in the case of the specific instances as available in clauses (b), (c) and (f) of article 366(29A). The fiction extends to only the specific clauses as coming under article 366(29A) and stops there and does not extend beyond that or encompass any other composite transaction. 22. In this context, fruitful reference can also be made to Federation of Hotel Restaurant Association of India v. Union of India [2018] 2 SCC 97. The issue raised therein was the applicability of Standards of Weights and Measures Act, 1976 read with enactment of 1985 and the Legal Meteorology Act, 2009. Whether the provisions of the said enactments would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.' A reading of the constitutional amendment would show that supply by way of or as part of any service of food or other article for human consumption is now deemed to be a sale of goods by the person making the transfer, delivery or supply." (underlining by us to emphatically say that clause (f) does not travel beyond this.) Clause (f) of article 366(29A) specifically introduced a deeming fiction insofar as catering contracts and supply of food and beverages in hotels and restaurants and permitted the supply of such food and drinks to be deemed to be sale of goods, though an integral part of the indivisible service rendered by the hotelier or restaurateur." 23. We also notice the Statement of Objects and Reasons appended to the Constitution (Forty-Sixth Amendment) Bill, 1981, which was enacted as the Constitution (Forty-Sixth Amendment) Act, 1982. We extract a portion of paragraph 3, 8 and clauses (vi) of paragraph 9 : "3.... In the Associated Hotels of India Ltd. [1972] 29 STC 474 (SC); AIR 1972 SC1131, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as part of any service, of food or any drink for cash, deferred payment or other valuable consideration." This would specifically indicate that the intention of the amendment, while introducing clause (f), was to get over the decisions in Associated Hotels of India Ltd. [1972] 29 STC 474 (SC); AIR 1972 SC1131 and Northern India Caterers (India) Ltd. [1978] 42 STC 386 (SC); AIR 1978 SC 1591 what was brought under the deeming fiction is the specific supply of food or drink in a hotel or in a restaurant, which is part of the service rendered by a hotelier or restaurateur. No reliance can be placed on the said deeming fiction, to bring in hospital services and differentiate the sale and service element so as to tax the sale of drugs, implants and other consumables, in the course of medical services rendered, as sale of goods. The dominant nature test squarely applies insofar as hospital services are concerned, which are essentially the service of providing medical treatment to an ailing individual. The words "any other article for human consumption" as found in clause (f) of article 366(29A) has to be understood in relation to food and drink as available in clause (f). Though drugs a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a direction under a Control Order, the element of volition by the seller, or mutual assent, is absent and, therefore, there is no sale as defined in the Sale of Goods Act, 1930. However, in Oil and Natural Gas Commission v. State of Bihar [1976] 38 STC 435 (SC); AIR 1976 SC 2478, the Supreme Court had occasion to consider its earlier decisions with regard to the liability of transfers of controlled commodities to be charged to sales tax. The Supreme Court held that where there are any statutory compulsions, the statute itself should be treated as supplying the consensus and furnishing the modality of the consensus. In Vishnu Agencies (Pvt) Ltd. v. Commercial Tax Officer [1978] 42 STC 31 (SC); AIR 1978 SC 449, six of the seven Judges concurred in overruling the decision, in New India Sugar Mills case [1963] 14 STC 316 (SC); AIR 1963 SC 1207 while the seventh Judge held the case to be distinguishable. It is, therefore, considered desirable to put the matter beyond any doubt. 9. It is, therefore, proposed to suitably amend the Constitution to include in article 366 a definition of 'tax on the sale or purchase of goods' by inserting a new clause (29A). The definition would specific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a sale of sugar, made by a dealer to a State Government, by reason of a specific allotment order issued by the sugar controller, found it to be a transaction under compulsion. There being no specific offer and acceptance, by a written or agreed contract for sale and there being absence of volition in the matter of supply of sugar, the majority found it to be not exigible to sales tax. However, the dissenting opinion too was noticed, as finding such consent "may be express or implied and it cannot be said that unless the offer and acceptance are there in an elementary form, there can be no taxable sale". The seven Judge Bench in Vishnu Agencies (Pvt) Ltd. [1978] 42 STC 31 (SC); AIR 1978 SC 449 opined that the true position in law is as set out in the dissenting judgment in New India Sugar Mills [1963] 14 STC 316 (SC); AIR 1963 SC 1207 and the majority view was held to be not good law. We deem it appropriate to extract paragraphs 23 and 24 (page 48 in 42 STC) : "23. These limitations on the normal right of dealers and consumers to supply and obtain the goods, the obligations imposed on the parties and the penalties prescribed by the control order do not, in our opinion, militate ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quirements governing the transaction, they agree as between themselves to enter into the transaction on statutory terms, one agreeing to supply the commodity to the other on those terms and the other agreeing to accept it from him on the very terms. It is, therefore, not correct to say that the transactions between the appellant and the allottees are not consensual. They, with their free consent, agreed to enter into the transactions." 28. The fundamental fallacy, in the argument so raised, is the fact that the State fails to realise the distinction with respect to an essential commodity and a controlled commodity. In the present case, there is absolutely no restriction or control insofar as the drugs are concerned, which, though an essential commodity, the dispensation of which is neither restricted nor controlled by the State in the manner in which a commodity is subjected to a control as understood in the decisions above referred. Further, it has to be emphasised that it is not the absence of a contract between the hospital and patient, that takes away the sale or rather dispensation and administration of drugs, implants and consumables from the definition of sale of goods. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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