Stem Cell Banking part of “Health Care Services”, qualifies for Service Tax Exemption: Supreme Court [Read Order]

The Supreme Court of India has delivered a landmark judgment confirming that stem cell banking services, including enrolment, collection, processing, and storage of umbilical cord blood stem cells, constitute “Healthcare Services” under the Finance Act, 1994. The Apex Court thus ruled that such services are exempt from service tax, setting aside adverse orders passed by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Ahmedabad.

The company, Stemcyte, challenged service tax demands raised for the period between July 1, 2012, and February 16, 2014, when the department argued that their services were taxable because the exemption notification did not explicitly mention stem cell banking before February 2014.

Stemcyte contended that their activities fall squarely within the ambit of “Healthcare Services,” as defined by the exemption notification dated June 20, 2012 (Notification No. 25/2012-ST). They argued that the subsequent 2014 insertion of Entry 2A, explicitly exempting cord blood banks, was merely clarificatory and should be applied retrospectively.

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The appellant also posited that they had acted in bona fide belief of exemption, had obtained appropriate registration as a healthcare service provider, and maintained ongoing communication with the authorities seeking clarifications.

The Revenue maintained that stem cell banking services were not healthcare services by clinical establishments and that the exemption introduced in 2014 applied only prospectively. It contended that service tax and penalties were rightly imposed for the earlier period, with the extended limitation period justified by alleged misstatements.

In its judgment, the Supreme Court emphasized the broad definition of “Healthcare Services” under the Finance Act, which includes diagnosis, treatment, or care for illness, injury, deformity, abnormality, or pregnancy in any recognized system of medicine in India. The Court observed that stem cell banking services are preventive and therapeutic in nature and form an integral part of healthcare, particularly given their application in treating life-threatening diseases.

The Court further held that the 2014 notification inserting Entry 2A is clarificatory, designed to clarify the exemption’s scope rather than create a new exemption. Therefore, this clarification should apply to ongoing disputes, including this case. However, it acknowledged that the notification does not expressly provide retrospective effect and should be applied prospectively unless in pending litigation.

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On the question of limitation, the Court ruled that the department’s invocation of the extended five-year period was unwarranted, as there was no evidence of fraud, collusion, or suppression of facts with intent to evade tax. The appellant’s transparent cooperation, including a deposit of Rs. 40 lakhs under protest, and continuous rapport with the authorities negated any claim of wilful default.

Regarding penalties, the Court found that the appellant’s bona fide belief in exemption and conduct did not warrant punitive measures. Penal provisions are intended to deter deliberate evasion, which was not established here.

The Supreme Court therefore allowed the appeals, set aside the demand for service tax, interest, and penalties for the disputed period, and ordered the refund of the Rs. 40 lakh deposit.

The judgment establishes that stem cell banking services are essential healthcare services exempt from service tax. It was observed by the bench of Justices J B Pardiwala and R Mahadevan that, “it is evident that the appellant’s services fall within the ambit of “Healthcare Services” as defined under the exemption notification. These services are preventive and curative in nature and encompass diagnosis, treatment, and care.”

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