2025 (12) TMI 456 - AT - Service Tax

Healthcare revenue-sharing held non-taxable; no separate management, manpower supply, or coaching services, service tax demand quashed

M/s. Aravindh Eye Hospital Versus Commissioner of GST and Central Excise, Madurai

Appeal allowed. The Tribunal held that under the MOUs, the arrangement between Appellant Hospital and partnering hospitals was on a ... Taxability of service - consideration received for setting up, deputing Doctors and Staff and imparting training, monitoring and managing another hospital from 2008– 09 to 2011–12 under continuing cooperation and collaboration by joining hands with the other hospital - invocation of extended period of limitation - imposition of penalties u/s 77 and 78 of Finance Act, 1994 - HELD THAT:- On perusal of the MOUs between the parties clearly shows that the contracts between the appellant and various Hospitals are on principal-to-principal basis and are in the nature of sharing-revenue. As per the contracts, the appellant is required to provide Knowhow and manpower and the MOU Hospitals will provide infrastructure and funds and will be part of the Joint management. The revenue earned from the patients is shared between the appellant and the MOU Hospitals and no taxable service is being provided by the appellant to other hospitals. There is absolutely no stipulation of payment of any service charges by the MOU Hospitals to the appellant and the contract is purely for sharing of revenue. Though Para 2.2 of CBEC Circular No. 109/03/2009-ST dated 23.02.2009 was issued in context of levy of service tax on movie theatres, but the principle involved is applicable to the present case also, because in the present case, the appellant and the other Hospitals are dealing with each other on principal-to-principal basis - it is observed that on the deputation of doctors and para-medical staff, the MOU MENTIONS that employees remained on Appellant’s Hospital rolls and Hospital B reimbursed actual salary costs. The major service is business support services, manpower supply and training of staff in that order. Therefore, the management of the hospital is a dominant service in this case and has to be classified accordingly. Therefore, there are no hesitation in holding that that it is service related to health care clinical management. It is exempt from Service Tax as there is no element of service, and it is like a hospital managing its own hospital. The receipts characterized as “royalty” / “management fee” are, on the material before us, are integrally connected with the provision of healthcare services and do not constitute a separate taxable Management or Business Consultancy Service. The payments are in substance revenue sharing for collaborative clinical management and there is no element of service among the joint venture partners - Reimbursement of salaries in respect of staff deputed by Appellant Hospital to Hospital, where reimbursement is made on an actual cost basis and the employees continue to be on the payroll of Appellant Hospital, does not constitute a taxable Manpower Recruitment or Supply Agency Service - Similarly, the charges of training of medical and nonmedical personal cannot be treated as Commercial coaching centres as the Appellant and the MOU Hospitals are functioning under Trusts, and providing free eye care for certain percentage of the patients and therefore such an arrangement cannot be held to be on Commercial terms and has to be held as part of integrated clinical delivery. As the demand is answered on merits itself, there is no requirement to examine the aspect of limitation - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether consideration received under Memoranda of Understanding for setting up, staffing, training, monitoring and managing eye hospitals under collaborative arrangements is liable to service tax under the categories of (a) Management or Business Consultancy Service, (b) Manpower Recruitment or Supply Agency Service, and (c) Commercial Training or Coaching Service for the period 2008-09 to 2011-12. 1.2 Whether, in light of the nature of the arrangements and receipts, the classification principles under section 65A of the Finance Act, 1994 require treatment of the activities as a composite/integrated service of healthcare clinical management outside the levy of service tax. 1.3 Consequent upon the answer on merits, whether the extended period of limitation and penalties under sections 77 and 78 of the Finance Act, 1994 are sustainable (considered only to the extent rendered necessary by the finding on taxability). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2 - Taxability and classification of consideration received under MOUs with other hospitals Legal framework (as discussed) 2.1 The judgment considers the pre-negative-list 'positive list' regime under the Finance Act, 1994 and the classification rule in section 65A, particularly section 65A(2)(b) relating to composite services to be classified according to the service which gives them their essential character. 2.2 The Court examines the CBEC Education Guide dated 20.06.2012 (issued for the post-01.07.2012 negative list regime) and holds it to be only an explanatory guidance document, not a statutory notification, circular or instruction, and therefore not binding. It is found inapplicable to the earlier positive-list period in issue. 2.3 Reliance is placed on CBEC Circular No. 109/03/2009-ST dated 23.02.2009, para 2.2, explaining that where parties share revenue on a principal-to-principal basis (illustrated therein by theatre-distributor revenue sharing), no taxable service is rendered by one to the other. Interpretation and reasoning 2.4 The Court finds, on examination of the MOUs and Profit & Loss accounts, that the arrangements between the appellant hospital (a charitable trust) and the other hospitals/trusts are collaborative healthcare ventures on a principal-to-principal basis, with revenue sharing out of patient receipts and joint involvement in running clinical establishments. 2.5 The MOUs show that the appellant provides medical know-how, clinical supervision, standard operating procedures, administrative practices, deputation of doctors and staff, assistance in recruitment, sourcing of equipment, consumables, and training of personnel, while the partner hospitals provide infrastructure and funds. Day-to-day administration is to be carried out by committees in which the appellant is represented, indicating joint management of clinical establishments. 2.6 The consideration, described in the agreements and accounts as 'royalty', 'management fee', and reimbursements, is found on facts to represent: (a) A fixed percentage of revenue from patients (3.5% or 5%), (b) Training fees for doctors and other staff, and (c) Reimbursements, or direct payments, of salaries, travelling and related outstation allowances for deputed staff. 2.7 The Court notes there is no stipulation of separate 'service charges' for consultancy or manpower supply; remuneration is linked to hospital revenue and/or actual costs, and there is no material showing any profit-oriented consultancy mark-up or independent commercial consideration for distinct services. 2.8 Applying section 65A(2)(b), the Court treats the activities as composite services consisting of several elements (know-how, management inputs, deputation of staff, training etc.), to be classified according to the dominant/essential character. On the facts, the dominant character is held to be healthcare clinical management and integrated delivery of healthcare services through charitable clinical establishments. 2.9 The Court reasons that, in substance, the activity is that of hospitals/charitable trusts jointly providing healthcare to patients; the revenue-sharing and cost recovery mechanisms between joint venture partners do not convert this integrated healthcare activity into taxable 'Management or Business Consultancy Service' or 'Business Support Service'. 2.10 As regards 'Manpower Recruitment or Supply Agency Service', the Court finds that: (a) Staff deputed to the MOU hospitals largely remained on the appellant's rolls, (b) Salary reimbursements were at actual cost with no demonstrated mark-up, and (c) The department has not produced any manpower supply contracts or invoices showing a profit element or independent manpower supply arrangement. On these facts, deputation and reimbursement are held not to be taxable manpower recruitment/supply services. 2.11 On 'Commercial Training or Coaching Service', the Court notes that the appellant and MOU hospitals are trusts/charitable institutions providing free eye care to a segment of patients and that training is imparted in the context of these collaborative healthcare institutions. The training fees and training activities are found to be part of the integrated clinical delivery system, not a standalone, profit-oriented commercial coaching activity or commercial coaching centre. 2.12 While the lower authorities had rejected the appellant's plea by treating the receipts as consideration for distinct taxable services, the Court holds that the correct legal approach is to view the arrangement as a composite healthcare management activity. The revenue's attempt to artificially trisect the arrangement into separate taxable services (management consultancy, manpower supply, commercial training) is rejected as inconsistent with section 65A(2)(b) and with the principal-to-principal/revenue-sharing nature of the relationship. 2.13 The Court also notes that the principle in CBEC Circular No. 109/03/2009-ST, that revenue-sharing arrangements on a principal-to-principal basis do not constitute provision of service by one to another, applies by analogy to these MOUs, reinforcing the conclusion that no taxable service is rendered inter se. Conclusions 2.14 Receipts described as 'royalty' or 'management fee' under the MOUs are held to be revenue-sharing or cost-sharing arrangements integrally connected with collaborative provision of healthcare; they do not constitute consideration for a separate taxable Management or Business Consultancy Service or Business Support Service. 2.15 Reimbursement of salaries and related allowances for deputed staff, where employees continue on the appellant's rolls and reimbursements are at actual cost, is held not to amount to Manpower Recruitment or Supply Agency Service. 2.16 Training fees and training activities for medical and non-medical personnel, in the context of charitable clinical establishments providing free care to part of their patients, are held not to constitute 'Commercial Training or Coaching Service' but to form part of integrated clinical delivery. 2.17 Applying section 65A(2)(b), the composite activity is classified as healthcare clinical management/integrated healthcare delivery, outside the scope of taxable services under the positive-list regime for the period in dispute. Consequently, the demand of service tax on the alleged three categories of services, along with interest and penalties, is held unsustainable and set aside in toto. Issue 3 - Limitation and penalties Interpretation and reasoning 2.18 In view of the finding that the activities do not amount to taxable services and that no service tax is payable on merits, the Court considers that examination of limitation (including the extended period) and the propriety of penalties under sections 77 and 78 is rendered academic. Conclusions 2.19 As the entire demand fails on merits, the Court holds that there is no necessity to adjudicate on limitation or penalties; the demand of tax, interest and penalties is set aside and the appeal allowed with consequential relief.