P R S HOSPITAL Vs. STATE OF KERALA

JUDGEMENT

(1.) THE short question arising in these cases is whether a hospital is a "dealer" within ' the definition of that term contained in the K. G. S. T. Act, hereinafter called the "act". THE proceedings initiated against the petitioners by the Sales Tax authorities under the Act under challenge are issued on the basis that the petitioners are "dealers" under the Act. While in some cases notices are issued to the hospitals directing them to take registration under the K. G. S. T. Act, in some cases hospitals are directed to produce books of accounts and in yet another category penalty is levied or proposed either for not registering or for non-compliance with other statutory provisions. THE validity or otherwise of all these proceedings will depend on whether the concerned hospital can be treated as a "dealer" to subject it to all the disciplines provided under the Act and Rules, THEre is a standard pattern of service rendered in a hospital and distinguishing factors among the hospitals may be in regard to quality and volume of it, but essentially the activities in all the hospitals are one and the same. THEre is no case by any of the petitioner-hospitals that they are not supplying or selling medicines to the patients in the course of medical treatment which is the very basis on which sales tax authorities have issued notices calling them to take registration, to produce books of accounts, file returns and pay tax, if any due. THErefore, the essence of issue is whether the supply of medicine to patients in the course of treatment constitute "sale" bringing the petitioners within the scope of "dealer" under the Act making them liable to take out registration, file returns and to pay sales tax if payable.

(2.) I heard counsel for the petitioners and also the special Government Pleader for taxes.

(3.) THE next question is with regard to the liability of hospitals to take registration and pay tax on the turnover of sale of medicines and supply of other items in the hospitals. THE petitioners' contention is that hospitals are essentially engaged in medical service and supply of medicine is only incidental to the service which does not attract the definition of "dealer" under the Act. THE definitions of various terms contained in s. 2 of the Act which are relevant in this context are extracted hereunder: S. 2 (vi) "business" includes a) any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture, whether or not such trade, commerce, manufacture, adventure or concern is carried on with a motive to make gain or profit and whether or not any profit accrues from such trade, commerce, manufacture, adventure or concern; and b) any transaction in connection with or incidental or ancillary to such trade, commerce, manufacture, adventure or concern; viii) "dealer" means any person who carries on the business of buying, selling, supplying or distributing goods, (executing works contract, transferring the right to use any goods or supplying by way of or as part of any service, any goods) directly or otherwise, whether for cash or for deferred payment, or for commission, remuneration or other valuable consideration and includes? (a) (xxxx) (b) a casual trader; (c) a commission agent, a broker, a del credere agent or an auctioneer or any other mercantile agent by whatever name called, who carries on the business of buying, selling, supplying or distributing goods (executing works contract, transferring right to use any goods or supplying by way of or as part of any service, any goods) on behalf of any principal; (d) a non-resident dealer or an agent of a non-resident dealer or a local branch of a firm or company or (association or body of persons whether incorporated or not) situated outside the State; ( (e) a person who, whether in the course of business or not sells; i) goods produced by him by manufacture, agriculture, horticulture or otherwise; or ii) trees which grow spontaneously and which are agreed to be severed before sale or under contract of sale;) ( (f) a person who whether in the course of business or not:? (1) transfers any goods, including controlled goods, whether in pursuance of a contract or not, for cash or deferred payment or other valuable consideration; (2) transfers property in goods (whether as goods or in some other form) involved in the execution of a works contract; (3) delivers any goods on hire-purchase or any system of payment by instalments; (4) transfers the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (5) supplies, by way of or as part of any service or in any other manner whatsoever, goods, being food or any other articles for human consumption or any drink (whether or not intoxicating), where such supply or service is for cash, deferred payment or other valuable consideration; Explanation:- (1) A society including a co-operative society, club or firm or an association or body of persons, whether incorporated or not] which whether or not in the course of business, buys, sells, supplies or distributes goods from or to its members for cash or for deferred payment, or for admission, remuneration or other valuable consideration, shall be deemed to be a dealer for the purposes of this Act; Explanation:- (2) THE Central Government or a State government, which, whether or not in the course of business, buy, sell, supply or distribute goods, directly or otherwise, for cash " or for deferred payment, or for commission, remuneration or other valuable consideration, shall be deemed to be a dealer for the purposes of this Act;) (g) a bank or a financing institution which whether in the course of its business or not, sells any gold or other valuable articles pledged with it to secure any loan, for the realisation of such loan amount; Explanation I:- Bank for the purpose of this clause includes a Nationalised Bank or a Scheduled Bank or a Co-operative Bank; Explanation II:- Financing Institution means a financing institution other than a bank; (xii) "goods" means all kinds of movable property (other than newspapers, actionable claims, electricity, stocks and shares and securities) and includes livestock, all materials, commodities and articles (including those to be used in the construction, fitting out, improvement or repair of immovable property or used in the fitting out, improvement or repair of movable property) (and e very kind of property (whether as goods or in some other form) involved in the execution of a works contract) and all growing crops, grass or things attached to, or forming part of the land which are agreed to be severed before sale or under the contract of sale; (xxi) "sale" with all its grammatical variations and cognate expressions means every transfer (whether in pursuance of a contract or not) of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration, but does not include a mortgage, hypothecation, charge or pledge; Explanation (3c):- Any supply, by way of or as part of any service or in any other manner whatsoever of goods being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service is for cash, deferred payment or other valuable consideration shall be deemed to be a sale. (xxvii) "turnover" means the aggregate amount for which goods are either bought or sold, supplied or distributed by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or other valuable consideration, provided that the proceeds of the sale by a person of agricultural or horticultural produce, grown by himself or grown on any land in which he has an interest whether as owner, usufructuary mortgagee, tenant or otherwise, shall be excluded from his turnover. " THE main contention of the petitioners as stated above is that supply of medicine though conceded, is only incidental and essentially the hospital is rendering medical services with professionals namely doctors and nurses who are experienced in the medical field. THE petitioners have relied on the decisions of the Supreme Court in State of Tamil Nadu v. Board of Trustees of the Port of Madras ( (1999) 114 STC 520) and in Northern India Caterers (India) Ltd. LT. Governor of Delhi ( (1978) 42 STC 386. Relying on the above two decisions the petitioners contended that the main activity being rendering of medical services, the supply of medicine is only incidental and it does not constitute "sale" to make the petitioners liable as a "dealer" under the Act. In this regard the petitioners have pointed out that the pattern of billing in the hospitals may vary from hospital to hospital. In some hospitals consolidated bills are raised including service charges, accommodation charges, charges for supply of medicine, good etc. , whereas in some other hospitals separate bills are raised for medical services, supply of medicine, food, rent and other allied services like X-ray ECG etc. It may not be possible to bifurcate the amount charged to a patient for the various services rendered in hospital. However, there is no dispute that supply of medicine is an integral part of the services rendered and it is significant in terms of cost to the patient and charged separately. THErefore, the first question to be answered is whether the supply of medicine is only an incidental transaction or otherwise it is as important as any other service such as rendering medical service or other services. In the course of treatment except probably in surgical treatment, nobody can have a doubt that medicines account for the main cost along with consultancy charges for the doctor, expenditure in diagnosis etc. THErefore, from common knowledge it is clear that medicine is as important, if not more in terms of value and purpose as anything else in the medical treatment. THErefore, in the first place, the petitioners contention that supply of medicine is only incidental cannot be accepted at all. It is as important as medical consultation or other services in the hospital. THErefore, supply of medicine in the course of medical treatment either to inpatients or to outpatients has to be taken as one of the main activities in a hospital or in a clinic. THE Supreme Court had occasion to consider as to when a person becomes a "dealer" in the decision in THE State of Gujarat v. Raipur manufacturing Co. Ltd. ( (1967) 19 STC 1) wherein it was held as follows: "whether a person carries on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transactions must ordinarily be entered into with a profit-motive. By the use of the expression "profit-motive" it is not intended that profit must in fact be earned. Nor does the expression cover a mere desire to make some monetary gain out of a transaction or even a series of transactions. It predicates a motive which pervades the whole series of transactions effected by the person in the course of his activity. In actual practice, the profit-motive may be easily discernible in some transactions, in others it would have to be inferred from a review of the circumstances attendant upon the transaction. For instance, where a person purchases a commodity in bulk and sells it in retail, it may readily be inferred that he has a profit-motive in entering into the series of transactions of purchase and sale. A similar inference may be raised where a person manufactures finished goods from raw materials belonging to him or purchased by him and sells them. But where a person comes to own in the course of his business of manufacturing or selling a commodity, some other commodity which is not a by-product or a subsidiary product of that business and he sells that commodity, cogent evidence that he has intention to carry on business of selling that commodity would be required. Where a person in the course of carrying on a business is required to dispose of what may be called his fixed assets or his discarded goods acquired in the course of the business, an inference that he desired to carry on the business of selling his fixed assets or discarded goods would not ordinarily arise. To infer from a course of transactions that it is intended thereby to carry on the business ordinarily the characteristics of volume, frequency, continuity and regularity indicating an intention to continue the activity of carrying on the transactions must exist. But no test is decisive of the intention to carry on the business in the light of all the circumstances an inference that a person desires to carry on the business of selling goods may be raised. " Going by the above test, no one can have a doubt that the volume, frequency and continuity or regularity of transaction in regard to purchase and sale of medicine by a hospital will be such that it will answer the definition of "dealer" under the Act beyond any doubt. In this context it is worthwhile to take note of the amendment to the term "dealer" contained in S. 2 (viii) of the Act above stated wherein supplying goods by way of or as part of any service is also treated as business to make a person involved in it a "dealer" under the Act. Of course the definition of "supply of goods as part of service" introduced in the Act is in the context of Art. 366,29a (f) of the Constitution of India which was introduced to get over the decision of the Supreme Court in the context of various decisions, particularly, in Northern India Caterers' case (42 STC 386)referred to above. THE Constitution only provides for supply of food or any other article for human consumption to bring it within the extended definition of "sale". THE petitioners contended that the definition introduced under the explanation (3c) to the term "sale" contained in S. 2 (xxi)of the Act contemplates only food and articles of human consumption and the same does not take in "medicine". Even though the amendment was brought to cover hotels, the legislative intent is to enlarge the scope of the operation of the Act to cover sales effected in the course of rendering services also. Moreover, in the definition clause of "dealer" the supply of goods in the course of rendering service is not limited to food and articles of human consumption alone. Further, it is also not possible to compare the case of supply of food as part of service in a hotel and supply of medicine in the course of medical treatment. THEre is substantial difference between these two transactions. While food served to a guest in a hotel is only incidental and part of service, the supply of medicine in the course of treatment is not just incidental, but it is the main and integral part of treatment and supply by itself or sale of medicine as such is part of business in the hospital. It is not disputed that the hospitals are independently billing and charging for the medicines supplied and as already stated, going by the value of medicines involved in treatment, it is the main component of the cost to the patient and it is not an incidental transaction at all. In other words, sale of medicine is in terms of volume, frequency, continuity, regularity and in all other aspects it is one of the main activities in the hospital. THErefore, such of the hospitals which are supplying medicines of the value in excess of the turnover for which registration is required i. e. Rs. 2 lakhs in an year are liable to be registered under the K. G. S. T. Act. THE decisions referred to by the petitioners do not apply or are at least not relevant here. THE decision in State of Tamil Nadu v. Board of Trustees of the port of Madras (114 STC 520) was rendered by the Supreme Court in the context of statutory service rendered by the Port Trust and other services and the transaction involved there was only sale of scrap materials which is occasional and incidental. Whereas in the case of hospitals, as found earlier the sale of medicine is one of the main activities and it satisfies the test laid down by the Supreme Court in THE State of Gujarat v. Raipur Manufacturing Co. Ltd. (19 stc 1) referred to above. THE activity answers all the test laid down by the supreme Court to make the hospital a "dealer". THE decision in northern India Caterers" case referred to above is also not comparable and is no longer relevant after the 42nd amendment to the Constitution of India and the consequent amendment to the Sales Tax Act.