CA. (Dr.) Gaurav Gupta
In the recent judgement by Madras High Court in MIOT Hospitals Ltd v State of Tamil Nadu and others [W.P.Nos.2982 TO 2987/2012 BATCH], the hon’ble Court has held that there is a transfer of property in cases where a prosthetic is implanted into a patient for consideration in the course of the provision of medical/ health service. The Hon’ble Court further held that in the course of taking x-ray, scan, MRI/CT Scan for such in-patient, cost of which get included into the package are taxable as such activity can be termed as the processing of moveable property. Thus, the package which includes the entire value of implanting including diagnosis services but excluding consultation and medicine charges is held to be liable to Value Added Tax under the provisions of the Tamil Nadu Value Added Tax Act, 2006. However, the value of medicine and other consultation charges while determining the taxable value are to be excluded.
The decision came as a shock to the entire medical fraternity. The facts of the case are as under:
The petitioners are hospitals and are providing expensive Medical/Health services to their inpatients. In the course of provision of such services, they have implanted implants such as prosthetic such as Ortho Plates, Surgical Plates, Screws, Knee replacement, Hip Replacements, Cardiac Implants, Stents, Valves, Pace Maker, Intra Aortic Balloon Pump, Pulmonary Ortho Catheter, Prosthetic Valves, Tissue Valves etc, (collectively referred to as Prosthetic) in the body of the patients for treatment by surgery and provided such other ancillary services such as MRI Scan Films, X-Ray Films and others. The petitioners submitted that they do not charge any amount separately towards the cost of these items and charge a consolidated amount from the patients towards cost of medical treatments and it is inclusive of all the expenditure incurred by it. The department called upon the petitioners to pay Value Added Tax (VAT) on the purported deemed sale of stents, valves, hip replacement and knee replacement etc. in the course of provision of medical services by the petitioners as “works contract” within the meaning of Section 2(43) of the Tamil Nadu Value Added Tax Act, 2006 chargeable to tax under Sections 5/6 of the said Act.
It was also submitted by the Appellant that in four cases, Hon’ble High Courts have already held decision in favour of assessees:
- M/s. Tata Main Hospital Vs State of Jharkhand and others, 2007 (9) TMI, [2007 SCC Online Jhar.260]; (2008) 2 JCR 174. The Hon’ble Supreme Court dismissed the appeal preferred by the State of Jharkhand and others by its order dated 10.03.2008 in SLP (Civil)- No.3652 of 2008.
- M/s. International Hospital Pvt. Ltd., Vs State of UP and others, (2014) TIOL 551 (Allahabad) ; [2014 SCC Online All. 1956].
- M/s. Fortis Health Care Ltd and other Vs State of Punjab and others, (2015) TIOL 466 (P& H); 2015(2) TMI 2015; and
- Aswini Hospital Pvt. Ltd., and others Vs Intelligence Officer, Squad No.1, Thrissur and Others, [2019] 61 GSTR 492 Full Bench (Kerala);
In the Tata Main Hospital case, it was held that the transaction of supply of medicines, vaccines, surgical items, x-ray films and plates etc. to the indoor patients in course of treatment in TMH does not come within the purview of the definition of ‘sale’ as envisaged under Section 2 (t) of the Bihar Finance Act. In the case of International Hospital Private Limited, it was held that the definition of the expression ‘sale’ in Section 2 (ac) of the Act is not attracted where a stent or valve is implanted in a patient in the course of a surgical procedure. Similarly, in the case of Fortis Health Care, the Hon’ble Court held that that medical procedures/services offered by the petitioners are a service and the supply of drugs, medicines, implant, stents, valves and other implants are integral to a medical services/procedures and cannot be severed to infer a sale as defined under the Punjab or the Haryana Act and therefore, are not exigible to value added tax. In the case of Aswini Hospital, it was held that if in a hospital, medicines and other consumables are sold to a patient and bills are raised, such transaction cannot be outside the KVAT Act and taking refuge under the example given by the Apex Court to explain the meaning and content of Article 366 (29-A) of the Constitution.
The Appellants also referred to the decision of Hon’ble Supreme Court in Bharat Sanchar Nigam Ltd., Vs Union of India, (2006) 3 SCC 1, wherein, Hon’ble Supreme Court observed that that during the course of provision of medical services, when doctors write out and hand over prescriptions to his/her patient, there is no sale though strictly speaking, with the payment of fees consideration, it does pass to the patient from the doctor.
The contention of the Appellant was that the levy of VAT on such transactions would mean performance of “works contract” on the body of a living human being. It was argued that the test for deciding whether a contract falls into one category or the other is to as what is “the substance of the contract would be the “dominant nature test” as enunciated by the Hon’ble Supreme Court. It is submitted that the dominant intention of the petitioner was Health/Medical service and not sale. They also referred, quoting international cases, to the settled law that every supply must be regarded as distinct and independent, although supply which comprises a single transaction from an economic point of view should not be artificially split. They referred to English jurisprudence wherein it was held that supply of prosthetic not “a means of better enjoying the principal service supplied”. Therein Court held that the supply of the prosthesis and other services and goods supplied by GHG to the typical patient are “so closely linked that they form, objectively, a single, indivisible economic supply which it would be artificial split.”
The entire question was whether the implant of Prosthetic in a human body amounts to Works contract as envisaged in Article 366(29A) or not?
Article 366(29-A)(b) reads as under:
‘tax on the sale or purchase of goods’ includes—
(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
Hon’ble Kerala High Court in the case of Miot Hospital and others observed that “works contract” is of infinite variety and it is not possible to conclude hospital service are outside the purview of Art.366 (29A) of the Constitution. “Works contract” essentially involves two fundamental elements namely (i)transfer of material and (ii) rendering of service. Works contract can be both divisible or indivisible. Divisible contract i.e. where the value of the sale of goods and labour can be clearly segregated. Indivisible contracts, where the parties agree for lump-sum consideration for the entire contract without any break-up. The Court observed that a simple treatment with medicine cannot be equated with complicated medical procedures under taken by the petitioners’ involving skill and use of expensive prosthetic and use of laboratory testing equipments. Even if the dominant intention of the contract was not to transfer the property in goods and rather rendering of service or the ultimate transaction was a transfer of movable property, it is open to the States to levy sales tax on the materials used in such contract if such contract otherwise has elements of “works contract”. In constitutional terms, it is a transfer either in goods or some other form. Amongst others, reliance was placed by the Hon’ble Court on the decision of Constitutional Bench of the Honourable Supreme Court in Kone Elevator India (P) Ltd. v. the State (2014) 7 SCC 1.
The Honb’le Court distinguished the four decided cases on the basis that such cases never examined it from the perspective of works contract. It further held that medical services are not excluded from works contract. The Court observed that “Works contract” includes any agreement for “fitting out” of any movable property and thus, fitting out or implanting of prosthetic into the physiology or the body of the patient for alleviation of pain or for improvement of the life
of the patient in the course of medical/surgical procedure can be construed as “works contract” and thus, the decision.
Comments:
The above observations of the Court are correct that works contract cannot be confined to construction and other similar works. It has innumerable versions. However, when applying works contract to Health services, there were more elements which required further examination, viz.,
a. Are there two supplies or one – There is a single supply in particular in cases where one or more elements are to be regarded as constituting the principal service, whilst one or more elements are to be regarded, by contrast, as ancillary services which share the tax treatment of the principal service. A service must be regarded as ancillary to a principal service if it does not constitute for customers an aim in itself, but a means of better enjoying the principal service supplied (Joined Cases C-308/96 and C-94/97 Commissioners of Customs and Excise v Madgett and Baldwin [1998] ECR I-6229, paragraph 24). In present case, obtaining treatment is the very intent of the patient and not any goods and thus, the very observation of the Court that works contract involve two supplies one of which being ‘transfer of material’, is missing in the present case of implanting Prothetic.
b. The intent to procure such goods is missing – the goods so procured by patient has never been a choice of the patient but is supplied at the prescription of a doctor, can a supply of goods form part of works contract when the same was never at the choice of the recipient. Procurement is a matter of choice and not prescription. The person can choose to get treated or not but the choice of replacing a part is not in place.
c. Fitting out – Is it not to be used to fit something as per the measurement rather than reading it as a mere plug and play. A prosthetic is an artificial device that replaces a missing body part, which may be lost through trauma, disease, or a condition present at birth. It cannot be seen as a good being purchased or procured by a person but a buying of his part of body. He does not intent to buy a good for his body but to replace his impaired part. Thus, till Prosthetic is traded as a mere goods, it fits into the zone of taxability, but the very moment, its intent is to form / replace part of a human body, it is not a good being given but a body part performing a particular function. If seen from a broader perspective, an insulin injection is given in doses to perform a particular function, viz., treat diabetes, similarly, a pace maker may have a longer life but is also performing a vital function of body. Thus, if a pacemaker implant is a deemed sale of goods, insulin injection by a doctor is also a good which is being injected into the human body to perform a vital function (for a day may be less).
Prosthetic implantation in GST
The dividing line of a human heart and a car engine has been disparaged. Trust this judgement would not lead to a discussion that Health insurances be seen as a annual maintenence contract for Human body. There are major provocations in accepting the ratio of this decision – whether a recovery of an indemnity for placement of a damaged Prosthetic part or for severence of such part in an accident cause by another be equated as damages received for goods? The judgement has reignited the debate of understanding the term ‘works contract’ and may blow out every extremity known to this word.
In my humble opinion, the above judgement shall not be applicable in GST regime but has touched upon a issue that could rile up the hornet’s nest for all cases in VAT regime. The concept of works contract as envisaged in Article 366(29-A) is not applicable in GST and thus, in such cases, the above decision shall not be applicable to present era. GST statutes carry their own definition of works contract and its classification and has kept movable property outside the ambit of the term ‘works contract’. Therefore, the entire understanding of whether treatment and supplies involved therein is a composite supply of goods or services or is it a mixed supply needs a fresh outlook in GST. With advancing technologies and more suave Prosthetic being invented for betterment of human life which shall be more advanced, costlier and may be, can be adapted as a matter of choice rather than replacement in case of trauma or imputation, may surely find the ratio of the present judgement correct, in place and in order.
