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TMI Blog2019 (3) TMI 1017X X X X Extracts X X X X X X X X Extracts X X X X ..... ave been placed before us by virtue of a reference order dated 13.04.2018 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 "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. & Another v. Union of India & Others [(2006) 3 SCC 1] to take a different view from that held by this Court; by Benches of varying strength ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 16.08.2001, 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 Doctor carries on only consultation. 6. The contention of the assessees therein tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 rejected in W.A. No. 555 of 2003 by decision dated 26.11.2003 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 of books of accounts, contending that the decision of the Supreme Court in Board of Trustees of the Port of Madras and Commissioner of Sales Tax v. Sai Publication Fund [(2002) 4 SCC 57] were not correctly appreciated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ablished 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 mere example cited by the Supreme Court in a decision totally unrelated to the subject. The hospitals cannot avoid such statutory liabilities, was the specific finding. 10. We have been taken through a number of decisions of various other High Courts which took a contrary view from that taken by this Court, especially following Bharat Sanchar Nigam Ltd. However, before looking into those, we would first independently consider the issue on the basis of the binding precedent as available from Bharat Sanchar Nigam Ltd., relying on which the reference has been made. At the outset, we have to emphasise that the contention of the State insofar as bringing in the sale of drugs, implants, consumables, etc. in the course of medical treatment under the sale of goods as provided in the sales tax enactment is based on clause (f) of Article 366(29A). We, hence, notice briefly the legal history of Article 366(29A) as noticed in Bharat Sancha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... char Nigam Ltd.: "44. Gannon Dunkerley survived the 46th Constitutional Amendment in two respects. First with regard to the definition of 'sale' for the purposes of the Constitution in general and for the purposes of Entry 54 of List II in particular except to the extent that the clauses in Art. 366(29A) operate. By introducing separate categories of 'deemed sales', the meaning of the word 'goods' was not altered. Thus the definitions of the composite elements of a sale such as intention of the parties, goods, delivery etc. would continue to be defined according to known legal connotations. This does not mean that the content of the concepts remain static. Courts must move with the times. But the 46th Amendment does not give a licence for example to assume that a transaction is a sale and then to look around for what could be the goods. The word "goods" has not been altered by the 46th Amendment. That ingredient of a sale continues to have the same definition. The second respect in which Gannon Dunkerley has survived is with reference to the dominant nature test to be applied to a composite transaction not covered by Article 366(29A). Transactions which ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill, for the want of a better phrase, call this the dominant nature test. XXX XXX XXX 50. We agree. After the 46th Amendment, the sale element of those contracts which are covered by the six sub-clauses of clause (29A) of Article 366 are separable and may be subjected to sales tax by the States under Entry 54 of List II and there is no question of the dominant nature test applying. Therefore, when in 2005, C.K. Jidheesh v. Union of India, (2005) 8 Scale 784, held that the aforesaid observations in Associated Cement (supra) were merely obiter and that Rainbow Colour Lab (supra) was still good law, it was not correct. It is necessary to note that Associated Cement [(2001) 4 SCC 593] did not say that in all cases of composite transactions the 46th Amendment would apply". {Underlining by us for emphasis} 12. Hence, the sale element in those composite, inseparable contracts which are covered by the six sub-clauses of Article 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd is not sold by the assessee to the subscribers but is merely part of the services rendered by the service providers, then a SIM card cannot be charged separately to sales tax. It would depend ultimately upon the intention of the parties. If the parties intended that the SIM card would be a separate object of sale, it would be open to the sales tax authorities to levy sales tax thereon (para 87)". Again, the Hon'ble Supreme Court emphasized on the aspect of sale being a part of the service rendered; there telecommunication services by the service provider; being outside the scope of levy of tax on sale of goods for reason of the same being an integral part of the service rendered. 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: "108. In the background of the above, the history prevailing at the time of the 46th Amendment and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fiction permitted only certain transactions to be treated as sale of goods, the State legislature cannot enlarge the scope of the definition in excess of that available in the deeming fiction to those transactions not strictly answering the definition of sale of goods or extend the fiction to those other transactions. In the Explanation, the State legislature cannot have any intention in excess of the fiction as brought in by the amendment to the Constitution. Even if such an intention was there, to the extend it is beyond and steps out of the ambit of, the fiction 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 Hon'ble 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e High Court furthermore committed a serious error insofar as it failed to draw a distinction between the assessment under income tax and assessment under sales tax. Whereas income tax is levied on income under the Income Tax Act irrespective of the sources from which such an income had been derived, sales tax is levied only on the quantum of sales and, therefore, element of transaction of sale is a prerequisite for levy of sales tax. This aspect of the matter has been considered by this Court in Girdhari Lal Nannelal v. CST [1976 (3) SCC 701] wherein it was held: (SCC p. 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 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 acquisit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utic treatment rendered. The patient has no control or say, has limited control, on the procedures taken in the course of the treatment, the drugs administered and the consumables used. 20. Larsen & Toubro Ltd. v. State of Karnataka [(2013) 65 VST 1 (SC)] was concerned with the question as to whether a development contract aimed at developing a land by making construction 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% of the built up area was agreed to be surrendered to the owners of the land. 75% of the area was to be retained by the developer for sale to third parties. The Court noticed Gannon Dunkerlev-1, 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 materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 and Restaurant Association of India v. Union of India [(2018) 2 SCC 37]. 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 interdict the sale of mineral water in hote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art 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. xxx In the Associated Hotels of India case (AIR 1972 S.C. 1131), the Supreme Court held that there is no sale involved in the supply of food or drink by a hotelier to a person lodged in the hotel. xxx xxx xxx 8. Besides the above mentioned matters, a new problem has arisen as a result of the decision of the Supreme Court in Northern India C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot come within the meaning of 'human consumption' as contemplated in clause (f). We, hence, find that the decisions of this Court, as cited herein before, finding the sale of drugs, implants and consumables by a hospital to its inpatients, in the course of medical treatment administered, cannot be separated from the composite indivisible service of providing medical care and treatment and it cannot be said to be a sale of goods. Nor would the deeming provision under Article 366 (29A) of the Constitution take in such services to differentiate the distinct elements, comprised in one, inseparable, indivisible transaction. 24. The learned Senior Government Pleader Sri. C.K. Govindan then raised a contention that the drugs are essential commodities and hence, the sale of drugs by a hospital even in the course of the provision of medical treatment would fall under clause (a) of Article 366 (29A). The argument is based on M/s. Vishnu Agencies (Pvt.) Ltd. v. Commercial Tax Officer & Others [AIR 1978 SC 449] and the amendment brought forth, providing a deeming fiction as to sale of goods even in such instances covered by clause (a) of Article 366(29A); which is in the nature of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d idem. In any event, we notice the decision in M/s. Vishnu Agencies (Pvt.) Ltd. Therein, the question raised was on the sale and supply of essential goods of short supply, regulated by a control order. Whether the sale made as a result of the directions issued under a control order, being a compulsory sale made by a dealer, is exigible to sales tax was the question raised. One of the instances which came up for consideration before the Supreme Court in that case was in the context of the control orders issued by the Government of West Bengal for regulating supply and distribution of cement, an essential commodity. The dealer supplied cement to persons, only on valid permits issued by the authorities to obtain the commodity. If the sale involved an element of volition or consensuality, the transactions would amount to sales and not otherwise. The specific contention was raised, since the cement control order restrained disposal of cement except in accordance with the conditions contained in a written order of the authorised authority. This provided a limitation on the dealers' right to supply and consequently no person could purchase the controlled commodity freely and in the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that offer and acceptance can be spelt out from the conduct of the parties which covers not only their acts but omissions as well. Indeed, on occasions, silence can be more eloquent than eloquence itself. Just as correspondence between the parties can constitute or disclose an offer and acceptance, so can their conduct. This is because, law does not require offer and acceptance to conform to any set pattern or formula. 24. In order, therefore, to determine whether there was any agreement or consensuality between the parties, we must have regard to their conduct at or about the time when the goods changed hands. In the first place, it is not obligatory on a trader to deal in cement nor on any one to acquire it. The primary fact, therefore, is that the decision of the trader to deal in an essential commodity is volitional. Such volition carries with it the willingness to trade in the commodity strictly on the terms of Control Orders. The consumer too, who is under no legal compulsion to acquire or possess cement, decides as a matter of his volition to obtain it on the terms of the permit or the order of allotment issued in his favour. That brings the two parties together, one of wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of a sale and the absence of a contract are not the fetter on the State to tax the sale of drugs, consumables and implants. The State is fettered in so far as the levy being not competent and permissible, when the sale is effected in the course of a composite service or contract; not possible of bifurcation and isolation from the composite transaction, for effectuating a separate levy on the value of the sale effected. 29. We notice that the decisions of the High Courts of Allahabad, Punjab and Haryana and Jharkhand, respectively reported in International Hospital Pvt. Ltd. v. State of U.P. & Others [ (2014) 71 VST 139 (All)], Fortis Health Care Limited and Another v. State of Punjab and Others [(2015) VTL-73-P&H] and Tata Main Hospital v. The State of Jharkhand & Others [2008 (2) JCR 174 Jhr.] are in consonance with our finding. The decision of the High Court of Jharkhand has also been challenged before the Hon'ble Supreme Court by a Special Leave Petition, which was dismissed. We do not find a necessity to extract the reasoning in the said decisions; which we notice is in tandem with our findings. Malankara Orthodox Syrian Church was noticed in the aforesaid decision ..... X X X X Extracts X X X X X X X X Extracts X X X X
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