Hospitals’ Supply of Medicines and Implants to Indoor Patients Not a Taxable Sale: Gujarat HC Holds Charitable Hospitals Outside VAT Levy [Read Order]

The Petitioners, Bankers Cardiogy Pvt. Ltd. and other hospitals, primarily engaged in treatment of indoor patients, used medicines, implants, stents, and other consumables during the course of treatment. They were subjected to assessment orders and show-cause notices by the commercial tax authorities treating such supply as a taxable sale under Section 2(23) of the Gujarat Value Added Tax Act, 2003.

Appearing for the Petitioners, S. N. Soparkar, Uchit Sheth and Manish Kaji argued that the use of medicines and implants during treatment is not a sale as understood under the Sale of Goods Act, 1930 and does not fall within any category of deemed sale under Article 366(29A) of the Constitution of India.

The counsel also argued that charitable hospitals registered under Section 12AA of the Income Tax Act, 1961 are excluded from VAT by virtue of the exemption (iii) to Section 2(10) of the Gujarat Value Added Tax Act.

Also Read: AAR Bars ITC on Clinical Trial Imports, Says Free Drugs Are NotBusiness Supply

Appearing for the Respondents, Kamal Trivedi and Vinay Bairagra submitted that the transfer of medicines and consumables to indoor patients constitutes a deemed sale under Article 366(29A)(a) and (b) of the Constitution of India.

They argued that the arrangement between the hospital and patient is a composite transaction where the supply of goods can be severed and taxed separately, and that Section 2(23)(g) of the Gujarat Value Added Tax Act validly includes such supply within the definition of sale.

The Definitive GST Guide for Today’s Tax Landscape! Click here

The Bench of Justice Bhargav D. Karia and Justice D. N. Ray held that the transaction between a hospital and an indoor patient is an indivisible contract for medical treatment, and the dominant nature test still applies for transactions not expressly covered by Article 366(29A).

It observed that in order to certify whether the hospital services would fall either in clause (a) or clause (b) applying the decision of Hon’ble Apex Court rendered in case of Larsen and Toubro Ltd. v/s State of Karnataka (2014).

Also Read: No Transfer of 'Effective Control': CESTAT rules MedicalEquipment Leasing as Service, Not Deemed Sale, upholds Service Tax Demand

The Court noted precedents holding that supply of medicines and consumables to indoor patients cannot be assessed to tax under VAT and took judicial notice that Special Leave Petitions against such rulings were dismissed by the Supreme Court.

The Court relied on constitutional history including the Gannon Dunkerley principle and the Statement of Objects and Reasons of the Forty-Sixth Constitutional Amendment to determine that healthcare services are not among the categories of deemed sales.

The Court further accepted that charitable hospitals registered under Section 12AA do not fall under the tax net as per the exclusion in Section 2(10).

Accordingly, show-cause notices and assessment orders were quashed.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates