2025 (8) TMI 328 - HC - VAT / Sales Tax

Section 2(23)(g): Medical Supplies to Indoor Patients Classified as Taxable Works Contract

The HC upheld the validity of clause (g) of section 2(23) of the Gujarat VAT Act, ruling that the supply of medicines, stents, implants, and consumables ... Validity of provision of clause (g) of section 2(23) of the Gujarat Value Added Tax Act, 2003 - vires/beyond the legislative competence of the State Legislature or not - supply of medicines, stents, implants, consumables etc. used during the course of treatment of indoor patients - sale or deemed sale - applicability of decision of the Hon’ble Apex Court in case of Gannon Dunkerly [1958 (4) TMI 42 - SUPREME COURT] insofar as transactions other than “deemed sales” are concerned. HELD THAT:- Works contract’ can be both divisible and indivisible contract. In divisible works contract, it is possible to segregate the value of sale of goods and labour whereas in indivisible contract where the parties agree for lump-sum consideration for the entire contract without any break-up of the value of sale of goods and the labour. The sale consideration of material used in the contract and remuneration for the labour therefore, is not separately identifiable. On perusal of the decision of Hon’ble Apex Court in Larsen and Toubro limited and another v. State of Karnataka and another [2013 (9) TMI 853 - SUPREME COURT], it is clear that the expression “works contract” is of wide amplitude and need not be confined to a particular understanding of the term or a particular form as it is held that the term “works contract” in Article 366 (29-A)(b) of the Constitution of India takes within its fold all genre of “works contract” and is not restricted to one specie of contract to provide for labour and service alone. Article 366 (29A)(b) does not limit the term “works contract” and the object of insertion of clause (29A) in Article 366 was to enlarge the scope of the expression “tax on sale or purchase of goods” to overcome the ratio of the Hon’ble Apex Court in case of Gannon Dunkerley. By virtue of legal fiction introduced by Article 366(29A)(b) of the Constitution, even if such a composite contract is single and indivisible contract, it would amount to “deemed sale” of goods which are involved in the execution of the “works contract” and exigible to Sales Tax. In paragraph no.87 of the decision in case of Larsen and Toubro Ltd., the Hon’ble Apex Court has succinctly drawn a distinction between the contract for sale of goods and contract for service by diminishing the distinction between the two in the matter of composite contract involving a contract of service/ labour and a contract for sale of goods in relation to Article 366(29A)(b) of the Constitution. The Hon’ble Apex Court in case of State of Andhra Pradesh v. Kone Elevators (India) Ltd. [2005 (2) TMI 519 - SUPREME COURT] had also earlier held that there is no standard formula by which one can distinguish a “contract for sale” from a “works contract” and it would largely depend upon the terms of the contract including the nature of the obligations to be discharged thereunder and the surrounding circumstances. The contention raised on behalf of the petitioners that there is no accretion in the facts of the present cases and therefore, rendering of medical treatment to indoor patients cannot fall within the purview of ‘works contract’ is very attractive at first blush however, after 46th Constitutional Amendment and in view of law laid down by Hon’ble Apex Court in case of Larsen and Toubro Ltd., there cannot be any absolute proposition in law that the ownership of the goods must pass away by way of accretion, but same can also pass away under the terms of a contract or by statute. Therefore, the test laid down in the judgments prior to the 46th Constitutional Amendment would not be applicable in facts of the case. The Hon’ble Apex Court in case of Kone Elevator [2014 (5) TMI 265 - SUPREME COURT (LB)] in paragraph no. 70 has observed that “once there is a composite contract for supply and installation, it has to be treated as a works contract, for it is not a sale of goods/chattel simpliciter. It is not chattel sold as chattel or, for that matter, a chattel being attached to another chattel.” The question posed here is whether the supply of prosthetics and other medicaments, consumables, stent, implants etc. supplied by the petitioner hospitals to an indoor patient which are closely linked to form objectively a single economic supply would be subject to an artificial split or not? - It is opined that the answer would be in the affirmative as the transaction between the hospital and the patient is required to be regarded from an economic point of view because the material available on record clearly shows that the payments are made by the patient or an insurer to the petitioner hospitals for all the supplies in relation to supply of prosthetics and other medicaments, consumables, stent, implants etc. and associated hospital care, together, in one invoice or series of invoices. The definition of “works contract” can include hospital/ health/ Medical services including composite contracts where the provision of services also includes supply of goods along with medical service and the definition takes within its fold such services also and therefore, the respondent State was justified in proposing a demand to tax from the petitioner hospitals on supply of consumables, medicines, stents, implants, etc. for treatment of indoor patients and the reasons given in the decisions of five Hon’ble High Courts would have been acceptable in the era prior to the 46th Amendment to the Constitution as per the decision of Hon’ble Apex Court in case of Gannon Dunerkerly which has required the Parliament to introduce 46th Amendment to the Constitution so as to bring all genre of contents of services including the supply of goods within the purview of “works contract” as held by Hon’ble Apex Court in case of Larsen and Toubro Ltd. It is also pertinent to observe that when medical treatment is given to the indoor patient there is not only transfer of possession of implants/prosthetics into the physiology of the patient but also the ownership of such prosthetics to the patient for consideration in course of the provision of medical/health service. Similarly, in the course of taking X-ray, scan, MRI/CT Scan for such in-patient, cost of which gets included into the package are also liable to be taxed as such activity can be termed as the sale of immoveable property. Petition dismissed. ISSUES: Whether the supply of medicines, implants, stents, consumables, etc. used during treatment of indoor patients by hospitals amounts to 'sale' under clause (g) of section 2(23) of the Gujarat Value Added Tax Act, 2003 ('VAT Act').Whether clause (g) of section 2(23) of the VAT Act is ultra vires the legislative competence of the State Legislature under Entry 54 of List II of the Seventh Schedule of the Constitution of India.Whether the supply of such goods during treatment falls within the ambit of 'deemed sale' as defined under Article 366(29A) of the Constitution of India, particularly under sub-clauses (a) or (b) relating to 'works contract'.Whether hospital services involving supply of medicines and implants constitute a 'works contract' under Article 366(29A)(b) of the Constitution and section 2(23)(b) of the VAT Act.Whether the 'dominant intention test' applies to composite contracts involving supply of goods and services post the Forty-sixth Amendment to the Constitution.Whether the human body can be considered 'property' for the purposes of applying the 'works contract' definition in the context of medical treatment.Whether the judgments of various High Courts exempting hospital services from VAT are binding or applicable in light of the constitutional and Supreme Court jurisprudence.Whether clauses (g) and (h) of section 2(23) of the VAT Act can be read down to conform to Article 366(29A)(f) of the Constitution to save them from unconstitutionality. RULINGS / HOLDINGS: The supply of medicines, implants, stents, consumables, etc. during treatment of indoor patients constitutes a 'sale' of goods involved in the execution of a 'works contract' under clause (b) of Article 366(29A) of the Constitution and section 2(23)(b) of the VAT Act, and is therefore taxable.Clause (g) of section 2(23) of the VAT Act, which attempts to expand the definition of 'sale' beyond the constitutional contours, is not invoked by the State in these cases; VAT is leviable under clauses (a) or (b) of section 2(23) as 'deemed sales'.The term 'works contract' in Article 366(29A)(b) is of wide amplitude, encompassing all genres of contracts involving transfer of property in goods along with services, including composite contracts such as hospital services involving supply of medicines and implants.The 'dominant intention test' has no application to contracts falling within the ambit of Article 366(29A); the legal fiction introduced by the Forty-sixth Amendment permits bifurcation of composite contracts into sale of goods and provision of services for taxation purposes.The human body is not treated as 'property' in civil or criminal law; however, for tax purposes, the supply of goods (medicines, implants, consumables) used in medical treatment is a transfer of property in goods involved in a 'works contract' and is taxable notwithstanding the non-applicability of the principle of accretion.Judgments of various High Courts exempting hospital services from VAT without examining applicability of 'works contract' under Article 366(29A)(b) are not binding and are not followed.Clauses (g) and (h) of section 2(23) of the VAT Act may be read together and construed in pari materia with Article 366(29A)(f) to avoid unconstitutionality, but this is not determinative in the present case as VAT is levied under other clauses. RATIONALE: The legal framework is primarily based on the Forty-sixth Amendment to the Constitution of India which inserted clause (29A) in Article 366, defining 'tax on the sale or purchase of goods' to include certain categories of 'deemed sales', including 'works contracts'.Pre-amendment jurisprudence (e.g., State of Madras v. Gannon Dunkerly & Co.) held that indivisible works contracts were not subject to sales tax on goods used, as the property did not pass pursuant to a sale agreement; the Forty-sixth Amendment introduced a legal fiction allowing bifurcation of such contracts for taxation.Subsequent Supreme Court decisions (Larsen & Toubro Ltd. v. State of Karnataka, Associated Cement Companies Ltd. v. Comm. Customs) expanded the scope of 'works contract' to include all genres of contracts involving transfer of property in goods along with services, diminishing the distinction between sale and service contracts for taxation.The 'dominant intention test' for determining whether a contract is a sale or service is no longer applicable to contracts covered by Article 366(29A); the legal fiction mandates taxing the goods component irrespective of the dominant nature.The supply of medicines, implants, stents, consumables, etc. by hospitals to indoor patients forms part of a composite contract involving transfer of property in goods and provision of medical services, thus constituting a 'works contract' taxable under VAT.The argument that the human body is not 'property' and thus medical treatment cannot be a 'works contract' is rejected for tax purposes, as the focus is on the transfer of goods involved in the contract, not on the nature of the recipient.Decisions of various High Courts exempting hospital services from VAT are distinguished on the basis that they did not consider the applicability of 'works contract' under Article 366(29A)(b) and are therefore not followed.The GST regime and related rulings are not applicable to the VAT Act context due to differences in statutory frameworks and concepts such as 'composite supply'.The Court applies a purposive and constitutionally consistent interpretation of the VAT Act and the Constitution to uphold the State's power to levy VAT on the supply of goods involved in hospital services as 'deemed sales' under 'works contract'.