Drugs, Medicines, Equipment Used In Course Of Treatment At Hospital Not Subject To Sales Tax: Maha Sales Tax Tribunal [Read Judgment]

The Maharashtra Sales Tax Tribunal has ruled that no sales tax can be levied on drugs, medicines, stents and other goods used in the course of medical treatment in the hospital as the same does not amount to sale.

A bench of judicial member CD Gongle and member GB Indurkar said so, while deciding an appeal moved by Saifee Hospital, a charitable institution in Mumbai.

“The supply of medicine, drugs, stent, implant to inpatient during the course of treatment in the facts and circumstances of this case does not amount to sale under the provisions of MVAT (Maharashtra Value Added Tax) Act,” the tribunal held.

It also held that the “supply of foods to inpatients included in the composite charges for room rent cannot be based under the MVAT Act 2002 in view of no machinery provision”.

Charges for special bed and mattress are also not exigible to tax.

Saifee hospital is a public charitable trust running a hospital, which also has a pharmacy on the ground floor of the hospital, from where medicines are supplied to inpatients and outpatients.

The hospital is registered under the MVAT Act. It was assessed for the period of April 1, 2010 to March 31, 2011, and the sales tax department vide order dated March 30, 2015, raised a demand of Rs 14, 50, 444, which included interest and penalty.

The hospital filed a first appeal before the Deputy Commissioner (Appeals), who was of the opinion that the hospital was under-assessed and the supply of drugs and medicines to patients admitted in the hospital was sale or deemed sale liable to tax under the MVAT Act.

According to the Deputy Commissioner, supply of drugs, medicines and other surgical goods effected by pharmacy/ drugstore to indoor patients is a sale liable to VAT.

He also held that provision of food in hospital to admitted patients received in composite charges received from the patients for the bed-charge is a sale of food and liable to VAT besides supply of dental implant, hire charges for mattresses and provisions of goods like special beds, equipment.

The appellate officer raised a demand of Rs 2,92,05,898, which included a penalty of Rs 1,06, 19, 835.

It was against this order that the hospital moved this second appeal.

Hospital’s counsel SS Ranganekar, submitted before the Tribunal that though the hospital issues cash memos to outpatients, it being a charitable hospital does not collect tax but pays tax while filing returns.

The hospital also submitted that it mentions the list of medicines in the consolidated invoice issued to the inpatients only to comply with the provisions of the Drugs and Cosmetic Act which mandates disclosure of all details.

It also submitted that on introduction of MVAT, the sales tax department had clarified in its letter to the Association of Hospitals in December, 2007 that since the dominant intention in administering medicines to inpatients is treatment of disease and not supply/ sale of medicines, consumable, implants, therefore, the activity would not amount to “deemed sale”.

The counsel relied upon the Supreme Court observation in BSNL vs Union of India and also the State of Karnataka Vs Prolab and others to emphasise on the relevance of dominant intention test.

The hospital also assailed the order of the first appellate authority and contended that there is no transfer of property in the sale of medicines and that in case of hospital services, there are no ingredients of sale of goods simplicitor. She added that there is no delivery but instead consumption of drugs and medicines.

The Revenue argued that the drugs sold under Drug Price Control Order (DPCO) are controlled and the MRP expressly includes sales tax/ VAT. It said the hospital is not deducting the sales tax/ VAT component while charging in-patients which would indicate that there is sale and sales tax/ VAT is being collected by the hospital by virtue of the fact that it is charging full MRP.

Therefore, the Revenue said the hospital should either have sold such drugs minus the sales tax component or should pay over the sales tax collected by it. If not, it would result in unjust enrichment.

It said the profit and loss account of the hospital shows income on account of medical supplies is approximately Rs 29.93 crores, but it has given details of only Rs 2.23 crore which shows that a sizeable profit is made by the hospital, which has paid VAT only in respect of sales effected to outdoor patients.

The tribunal, firstly, decided the question: “Is supply of medicine in course of treatment discernible sale?”

The tribunal noted the remark of the appellate officer that the intention of the private hospital is to sell medicines and earn profit and went on to say, “ This may be so but whether the patient intends to purchase medicine when admitted to hospital? Even in a composite contract, for a sale to be discernible, it must satisfy all criteria for sale as per the Sale of Goods Act.”

“…When a patient is admitted to a hospital, his intention is not to buy medicines, nor are the medicines identified or agreed to be delivered to patient before administering the same during the course of treatment. It is not correct to say that as soon as the bills are prepared by the pharmacy, the goods are ascertained and delivered to the patients. These bills are as per the requirement of DPCO.

“In a large organisation, which to an outsider is a single entity, there may be internal divisions incorporating the concept of profit centre for each division. Such divisions do not make them a separate entity from the single whole. … Internal dynamism may allow the pharmacy to operate as a profit centre treating everything issued from it same as any other sale but that does not make it a sale same as over the counter sale to customer. The fact that billing from over the counter and to inpatients is same and same price is charged also does not make different.

“In a restaurant, there may be sale from counter as well as service. The billing may be same and even price …yet the first is sale simplicitor and second is deemed sale,” the tribunal observed.

The tribunal relied on Allahabad High Court decision in Tata Main Hospital case to say that supply of medicines to inpatients during course of treatment does not fall in the category of deemed sale.

The tribunal said to attract Article 366(29A) dealing with tax on sale and purchase of goods which covers deemed sale, there has to be work contract.  It said the amendment to the Article was effected to enlarge its compass to include any service and not confine it to mere hotel or eating place.

“But then how large can be the meaning of word ‘any article for human consumption’. It cannot encompass all the articles consumed by human in any manner...,” the tribunal said referring to Larsen and Toubro matter while adding that it has to be understood in the terms that Parliament intended at the time of making the amendment.

“Thus the words ‘any other article for human consumption’ will necessarily get colour from the words ‘food’ and ‘drink’. Human consumption has a very wide meaning and can include everything that a person may consume by way of intake or use.

Articles such as cigarettes served in a bar though neither food or drink may get covered by this clause but going by the mischief rule, medicines as a class of goods for human consumption was not contemplated by this clause.”

Lease charges for bed

 The appellate officer had levied tax on hire charges recovered by the hospital in respect of Alpha Tran Cell Bed, Nimbus Bed and IPC equipment as charges received from transfer of right to use those beds and equipment.

The hospital had stated that these are special kind of mattresses required for treatment of patients and are given only on prescription of the doctor and their charges are not included in the room rent.

The tribunal held them to be not exigible to tax.