When Medical Treatment Is the Substance, GST Cannot Follow the Label

A Judgment That Protects the Substance of Healthcare Services

The Karnataka High Court's judgment in M/s Healthcare Global Enterprises Ltd Versus Assistant Commissioner of Commercial Taxes (Enforcement), Joint Commissioner of Commercial Taxes of DGST, The State of Karnataka, Commercial Tax Officer (ENF) -11 - 2026 (6) TMI 307 - KARNATAKA HIGH COURT is an important ruling on the GST exemption available to healthcare services. The judgment is significant because it rejects an attempt to tax medical services by describing them as 'support services'.

The dispute arose in the context of services provided by Healthcare Global Enterprises Ltd. through SHCS Hospital, Hubballi, Karnataka. The petitioner had entered into two agreements with SHCS Hospital. The first was an Operation and Maintenance Services Agreement dated 06.10.2016. The second was a Medical Services Agreement dated 10.07.2017. The Department issued the show-cause notices based on the second agreement, namely the Medical Services Agreement.

The judgment is an extensive one. It runs into 59 pages and is spread over 23 paragraphs. In para 11, the Court reproduced the complete text of the Medical Services Agreement. In para 12, the Court reproduced the relevant portion of Services Exemption Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017, along with the statutory definitions of 'authorised medical practitioner', 'clinical establishment' and 'health care services'.

The Real Question Was the True Nature of the Service

The central question before the Court was simple but important. Were the services rendered by the petitioner medical services exempt from GST, or could the Department tax them as business support services?

The Department treated the arrangement as the supply of skilled doctor services or support services to SHCS Hospital, taxable under SAC 9985 at 18%. The petitioner argued that this approach ignored the true character of the arrangement. According to the petitioner, it was not providing manpower or administrative support to SHCS Hospital. It provided medical treatment to patients through doctors, specialists, technicians, and paramedical personnel.

The Court accepted the petitioner's contention. In para 13, it held that the services rendered under the Medical Services Agreement fell within the ambit of healthcare services. The services involved diagnosis, treatment and medical care provided to patients at a recognised clinical establishment. Therefore, they were covered by the exemption to health care services under Notification No. 12/2017-Central Tax (Rate).

Revenue Sharing Does Not Change the Character of Medical Treatment

A significant feature of the case was the revenue-sharing arrangement between the petitioner and SHCS Hospital. The Department appears to have treated the petitioner's 75% share of gross revenue as consideration for support services. However, the Court's approach shows that the method of payment cannot decide the nature of the service. A revenue-sharing model may explain how parties distribute receipts, but it does not by itself convert healthcare services into manpower supply or business support services.

This is particularly relevant in the healthcare sector, where hospitals, specialists, diagnostic centres and clinical establishments often work through collaborative models. The GST treatment of such arrangements must depend on what is actually supplied to the patient. If the substance of the arrangement is diagnosis, treatment or medical care, the exemption cannot be denied merely because the commercial arrangement between the parties is structured through revenue sharing.

The Circular That Settled the Issue

The Court also relied upon CBIC Circular No. 32/06/2018-GST dated 12.02.2018. In para 14, the Court reproduced S. No. 5 of the circular. The circular clarifies that services provided by doctors, consultants and technicians engaged by hospitals, whether employed or otherwise, are healthcare services. It also clarifies that the entire amount charged by a hospital from patients, including retention money and amounts paid to doctors, is exempt from GST.

This clarification was important because it directly answered the Department's stand. The mere fact that the petitioner received a share of the revenue from SHCS Hospital did not change the nature of the service. The dominant character of the service remained the provision of medical treatment to patients.

Healthcare Exemption Serves a Larger Public Purpose

In para 15, the Court made an important observation on the purpose of the healthcare exemption. It noted that the exemption for healthcare services has been consistently retained across the indirect tax regime to ensure the affordability of medical treatment end-to-end.

This reasoning is very important. If the petitioner's services were taxed, SHCS Hospital would not be able to take input tax credit because its own output healthcare services were exempt. The tax charged to the petitioner would therefore become a cost. That cost would ultimately be passed on to patients. Such an interpretation would defeat the purpose of the exemption.

The Court therefore preferred an interpretation that preserved the affordability of healthcare services. The exemption was not treated as a narrow technical concession. It was treated as a beneficial exemption intended to protect patients from an additional tax burden.

Mother Superior Adoration Convent: Beneficial Exemptions Must Receive Full Effect

The Court relied upon the Supreme Court judgment in GOVERNMENT OF KERALA & ANR. Versus MOTHER SUPERIOR ADORATION CONVENT - 2021 (3) TMI 93 - Supreme Court. This reliance is important because that judgment explains how beneficial exemptions must be interpreted.

The general rule in tax law is that exemption notifications are construed strictly. However, the Supreme Court in Mother Superior Adoration Convent clarified that there is a difference between ordinary tax exemptions and beneficial exemptions. Where an exemption is granted to advance a public welfare objective, the Court should not interpret it in a narrow or mechanical manner. The interpretation must give full effect to the beneficial purpose behind the exemption.

In that case, the Supreme Court emphasised that when an exemption is intended to promote religious, charitable, educational or welfare objects, it must be interpreted in a manner that advances those objects rather than defeats them. The Court distinguished such beneficial exemptions from purely commercial exemptions. In other words, once the assessee falls within the broad purpose of the exemption, the exemption should not be denied by adopting an artificial or unduly restrictive interpretation.

This principle fitted the healthcare exemption perfectly. Healthcare services are exempt not to benefit one private party, but to keep medical treatment affordable. Therefore, if doctors, specialists and medical teams are actually treating patients, the exemption cannot be denied merely because the commercial arrangement between two clinical establishments involves revenue sharing.

Acer India: What Cannot Be Taxed Directly Cannot Be Taxed Indirectly

The Court also relied upon COMMISSIONER OF CENTRAL EXCISE, PONDICHERRY Versus ACER INDIA LTD. - 2004 (9) TMI 106 - Supreme Court. This judgment lays down a powerful principle. A levy cannot be created indirectly through valuation or classification when the charging provision itself does not tax the subject.

In Acer India, the Supreme Court dealt with the distinction between computers and software. It held that computer hardware and software were distinct goods. The value of software could not be added to the assessable value of computers for charging excise duty when the software itself was not chargeable in that manner. The Department could not use valuation provisions to indirectly tax something that was not taxable under the charging provision.

The broader principle is that the charging section is the source of tax liability. Valuation machinery or classification language cannot enlarge the charge. If a particular service or component is not taxable, the Department cannot tax it indirectly by giving it another label.

This principle was directly relevant in the Healthcare Global case. The underlying service was healthcare. It was exempt under Notification No. 12/2017-Central Tax (Rate). The Department could not indirectly tax the same service by calling it a business support service or a supply of skilled doctor service. The label used by the Department could not override the transaction's true nature.

Substance Must Prevail Over Labels

The judgment reinforces a fundamental principle of tax law: classification must follow substance. If the dominant nature of the service is medical treatment, it cannot be converted into a business support service merely because one hospital or clinical establishment works through another.

The Court criticised the Department for failing to properly consider the Medical Services Agreement. The agreement showed that the petitioner was providing healthcare services to patients. The petitioner was not merely supplying manpower. It was not providing administrative assistance. It was rendering medical treatment through qualified medical professionals.

This distinction is critical. A doctor treating a patient does not become a manpower supplier merely because the billing or revenue-sharing model is structured through a hospital. The service remains healthcare.

Why the Patient-Centric View Matters

The judgment is also important because it considers the transaction from the perspectives of the patient and the healthcare chain as a whole. The patient receives medical treatment at a clinical establishment. The doctors, specialists and medical personnel involved in that treatment are part of the healthcare delivery mechanism. If such services are broken into artificial segments and taxed at an intermediate stage, the exemption granted to healthcare services becomes incomplete.

This patient-centric approach is consistent with the purpose of Notification No. 12/2017-Central Tax (Rate). The exemption is not merely for the benefit of hospitals. Its primary objective is to prevent GST from becoming an additional cost of medical treatment. Therefore, any interpretation that increases healthcare costs without a clear statutory mandate must be approached with caution.

Alternative Remedy Did Not Bar Writ Jurisdiction

The Department also argued that the petitioner should participate in adjudication proceedings and avail alternative remedies. The Court rejected this contention in para 20.

The reason was that the show-cause notices lacked foundational jurisdictional facts. If the services were plainly exempt under the notification and circular, the very basis of the proposed demand was flawed. In such circumstances, the mere availability of an alternative remedy did not prevent the High Court from exercising writ jurisdiction.

This is another important aspect of the judgment. A taxpayer is not always required to go through the entire adjudication process when the notice itself proceeds on a legally unsustainable basis.

A Useful Precedent for Future Healthcare Arrangements

The judgment will be useful in cases involving contractual arrangements between hospitals, doctors, diagnostic service providers, oncology centres, speciality units and other clinical establishments. It shows that the Department cannot isolate one part of a healthcare arrangement and tax it by assigning a different label unless the true nature of the service is not healthcare.

At the same time, the judgment should not be read as saying that every service supplied to a hospital is exempt. Administrative services, housekeeping, security, accounting, marketing, or ordinary business support may still be taxable if they do not constitute healthcare services. The protection applies where the real and dominant nature of the service is medical treatment, diagnosis or care to patients. This distinction makes the judgment balanced and practically important.

Final Word

The writ petitions were allowed. The services provided by the petitioner through another hospital were treated as healthcare services exempt from GST under Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.

The show-cause notices and Form GST DRC-01 notices dated 24.08.2023 and 30.09.2023 were quashed as illegal, arbitrary, without jurisdiction and contrary to the CGST/KGST Act, Notification No. 12/2017-Central Tax (Rate) and CBIC Circular No. 32/06/2018-GST.

The judgment sends a clear message. Healthcare exemption cannot be denied by recasting medical treatment as business support services. The Department must examine the real nature of the service, not merely the form of the agreement or the mode of payment. Where the true and dominant nature of the service is diagnosis, treatment, and medical care for patients, the GST exemption for healthcare services must apply in full.

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