Sales of medicines by hospitals and sales tax/ Value Added Tax/ VATThe latest decision of Hon’ble Allahabad

High Court in case of International Hospital Pvt. Ltd. (WRIT TAX No. - 68 of

2014) dated 6 February 2014 is regarding implant of stent or valve in the course of a

surgical procedure in the hospital

The hon’ble Allahabad High Court has held that …….

• “the fact that in the bill which is raised on the patient, the hospital recovers, apart from the cost of the surgery, charges towards drugs and other consumables would not render the transaction of the implantation of a stent or valve a 'sale' within the meaning of Section 2 (ac) of the Act.”

The High Court Considered the following issues/ case laws during the discussion

• Aswini Hospital Pvt. Ltd. v. C.T.O. Thrissur and others

• P.R.S. Hospital v. State of Kerala• Tata Main Hospital v. The State of Jharkhand &

Ors.• Bharat Sanchar Nigam Ltd. and another v.

Union of India

Difference of opinion

• The issue regarding the taxability of the sales of drugs and medicines to indoor patient is contentious issue and legal fraternity is divided in this respect.

• Majority view is that the supply of drugs and medicines during the treatment of the patients is service activity and hence not taxable under sales tax laws of the States.

• Therefore, it is necessary to discuss the underlying legal provisions in order so as to unravel the mystery.

The following facts are relevant to the dispute regarding levy of tax / VAT in case of the sales of drugs and medicines /

stents/ valve to the in- patients in any hospital

• Clause (a) in the Article 366 (29A)………(i) a transfer, otherwise than in pursuance of a contract of property in any goods for cash, deferred payment or other valuable consideration;

• The definition of Drug given in Section 3(b) in the Drugs and Cosmetics Act, 1940

• The said definition also includes such devices intended for internal or external use in the diagnosis, treatment, mitigation or prevention of disease or disorder in human beings which are notified by Central Government from time to time.

The following facts are relevant to the dispute regarding levy of tax / VAT in case of the sales of drugs and medicines /

stents/ valve to the in- patients in any hospital

• Honourable Supreme Court décision in case of Vishnu Agencies (Pvt.) Ltd. Etc vs Commercial Tax Officer & Ors. 1978 AIR 449, 1978 SCR (2) 433

• The relevant chapter of 61 st Law Commission Report pertaining to the sales of controlled commodities, wherein it was recommended that the suitable amendment would be required in the definition of sale in the Article 366 of the Constitution of India so as to make the sale of controlled commodities taxable at the hands of the States.

The following facts are relevant to the dispute regarding levy of tax / VAT in case of the sales of drugs and medicines / stents/ valve to the in- patients in any

hospital

• Statement of Objects and Reasons appended to the Constitution (Forty-sixth Amendment) Bill, 1981 which was enacted as THE CONSTITUTION (Forty-sixth Amendment) Act, 1982

Statement of Objects and Reasons appended to the Constitution (46 the amendment) Bill,

• 4. In the New India Sugar Mills case (A.I.R. 1963 S.C. 1207), theSupreme Court took the view that in the transfer of controlledcommodities in pursuance of a direction under a Control Order, theelement of volition by the seller, or mutual assent, is absent and,therefore, there is no sale as defined in the Sale of Goods Act, 1930.However, in Oil and Natural Gas Commission Vs. State of Bihar (A.I.R.1976 S.C. 2478), the Supreme Court had occasion to consider itsearlier decisions with regard to the liability of transfers ofcontrolled commodities to be charged to sales tax. The Supreme Courtheld that where there are any statutory compulsions, the statuteitself should be treated as supplying the consensus and furnishing themodality of the consensus. In Vishnu Agencies Vs. Commercial TaxOfficer (A.I.R. 1978 S.C. 449), six of the seven Judges concurred inover-ruling the decision, in New India Sugar Mills case while theseventh Judge held the case to be distinguishable. It is, therefore,considered desirable to put the matter beyond any doubt.

Statement of Objects and Reasons appended to the Constitution (46 the amendment) Bill,

• 9. It is, therefore, proposed to suitably amend the Constitution to include in article 366 a definition of "tax on the sale or purchase of goods" by inserting a new clause (29A).

• The definition would specifically include within the scope of that expression tax on---

• (i) transfer for consideration of controlled commodities;

The following facts are also relevant

• It is mandatory for the drug store in the hospital to maintain the separate books of accounts under the provisions of the Drugs and Cosmetics Act, 1940.

• The cash memo or the bill is required to be issued while selling the drugs and medicines as well as stent/ valve, etc. under Drugs and Cosmetics Act, 1940.

The drugs and medicines are declared as controlled commodities under Essential Commodities Act by issuing Drug and Prices Control Order (DPCO), 1995.The cash memo or the bill is required to be issued while selling the drugs and medicines as well as stent/ valve, etc. under DPCO.

The conclusion• The definition of sales in clause a of article 366 (29A)

is also express and unambiguous…………..• Article 366 (29A) "tax on the sale or purchase of goods"

includes-• (a) a tax on the transfer, otherwise than in pursuance of a

contract, of property in any goods for cash, deferred payment or other valuable consideration;

• Considering the above definition of sale, drugs and medicines are taxable even though the same are supplied in the course of treatment to the in-patient who is admitted in the hospital for treatment or operation, as the contract or agreement is not to be considered in such case as it is excluded from the definition of sale when the controlled commodities are transferred from one person to another for valuable consideration.

The conclusion• Considering the provisions of Drug and Cosmetics Act,

DPCO, Drug License, Law Commission recommendations regarding controlled commodities, the ratio of the decision of the Honourable Supreme Court in case of Vishnu Agencies.

• The mandatory maintenance of separate books of accounts under DPCO and Drug and Cosmetics Act.

• It may be concluded that the sales of drugs and medicines can be subjected to sales tax / VAT under the respective Sales Tax Laws of the States.

• Majority of legal experts may not subscribe to aforesaid view but fact is fact and truth must prevail.