Supply of medicines, drugs, stents, and other implants etc., during the course of treatment or a medical procedure is not a ‘Sale’ and thus not exigible to VAT

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Dear Professional Colleague,

We are sharing with you an important judgment of Hon’ble High Court, Punjab and Haryana, in the case of Fortis Health Care Ltd And Another Vs. State Of Punjab And Others [2015-TIOL-466-HC-P&H-VAT] on the following issue:


Whether the Supply of medicines, drugs, stents, and other implants etc., during the course of treatment or a medical procedure would be exigible to VAT

Facts & background:

Fortis Health Care Ltd. And Another (“the Petitioners”) filed an application before the Excise & Taxation Commissioner, Punjab, Patiala Division, Patiala (“the Commissioner”), seeking advance determination of the question whether medicines, drugs, stents etc., administered to patients during a medical procedure (“impugned goods”) are a ‘Sale’, under the Punjab VAT Act, 2005 (“Punjab VAT Act”).

The Commissioner vide Order dated August 10,2005 responded the aforesaid question in favour of Revenue and therefore the impugned goods are made exigible to VAT (“Order 1”). Thereafter, the Petitioner got registered as a dealer under the Punjab VAT Act and the Central Sales Tax Act, 1956 and started discharging their statutory obligations.

Later, the Hon’ble High Court of Jharkhand in Tata Main Hospital Vs. The State of Jharkhand and others [2008(2) JCR 174 (Jhr.)] (“Tata Main Hospital Case”) held that the impugned goods are not exigible to VAT as the same is not ‘Sale’. Being aggrieved, the State of Jharkhand, filed a Special Leave Petition before the Hon’ble Supreme Court, which was dismissed.

Based on the decision in Tata Main Hospital Case, the Petitioner stopped charging VAT and also filed refund of VAT (“Refund Claim”) for the Financial Year 2005-06. The Assistant Excise & Taxation Commissioner-cum-Designated Officer, rejected the Refund Claim and held that the judgment by the Jharkhand High Court is a judgment in personam and as the Petitioner has accepted Order 1, it is required to pay VAT.

Being aggrieved, the Petitioner preferred an appeal before the Deputy Excise and Taxation Officer where the appeal was dismissed with the finding that the Petitioner has paid VAT from its own resources without recovering the same from patients/ ECHS. Thereafter, the Petitioner preferred an appeal before the Hon’ble Tribunal which was again dismissed holding that jurisdiction to determine the controversy, lies with the Hon’ble High Court. Therefore, the Petitioner filed a Writ Petition before the Hon’ble High Court of Punjab and Haryana.


The Hon’ble High Court of Punjab and Haryana made elaborate discussion in this regard and held as under:

1.  The State Governments draws their power to impose Sales Tax/ VAT on sale or purchase of goods, other than newspapers, from Entry No.54 of List II of Schedule VII of the Constitution of India (“the Constitution”) and the element of sale in composite contracts is exigible to Sales Tax/VAT by virtue of Article 366(29A) of the Constitution. The power of the Union to tax, can be traced to Entry No.97 of List I or Entry 92-C of List I of Schedule VII of the Constitution. A State may impose tax on ‘sale of goods’ but is not empowered to impose tax on services;

2.  Perusal of Article 366(29A) of the Constitution, does not enable the Hon’ble High Court  to opine that services provided by hospitals are Deemed Sale;

3.  Perusal of the definition of ‘Sale’ under Section 2(zf) of the Punjab VAT Act and Section 2 (ze) of the Haryana VAT Act, 2003 reveals that ‘Sale’ is defined to include transfer of property in goods for cash etc. and composite contracts as set out in Article 366 (29A) of the Constitution. The States of Punjab and Haryana may, therefore, levy VAT on only such transactions as fall within the definition of ‘Sale’ whether as a sale of goods or as a composite contract;

4.  Impugned goods are exigible to VAT only if it fulfills the ingredients of ‘Sale’, as defined under the Punjab and Haryana VAT Acts and Article 366(29A) of the Constitution;

5.  The dominant purpose of medical treatment is medical services and integral to such a service is a medical procedure that involves administering medicines and drugs and may involve, implants, stents etc., as integral to a successfully medical treatment/ procedure. A perusal of the statutory definition of ‘Sale’ in both the Punjab and Haryana enactments, reveals that after setting out that a sale is a transfer of ownership in goods for consideration it proceeds to replicate Article 366 (29A) of the Constitution. A medical procedure is a pure service with no part having the attributes or the elements set out in Article 366 (29A) of the Constitution or the definition of ‘Sale’ under the Punjab and Haryana statutes and, therefore, cannot be held to involve a ‘Sale’;

6.  A contract for medical treatment necessarily involves medicines, supply of surgical items, stents, implants, valves, without which a medical procedure or medical treatment cannot be completed;

7.  The supply of these articles are integral to and essential for the treatment offered to patients and even if one may categorize these as incidental to the actual medical procedure, one cannot ignore that a medical procedure cannot be completed without supply of medicines, drugs, stents, implants, thereby leading to a singular conclusion that the State is not empowered under any provision of the Constitution much less the definition of goods, sale or dealer, to severe the contract and construe the supply of drugs, medicines, stents, implants etc. as a severable part of the contract and, therefore, exigible to VAT as a ‘Sale’;

8.  The situation would be different if, these articles are supplied from the pharmacy of a hospital.

Our Comments:

1.  Very recently, the Hon’ble Supreme Court in the case of State of Karnataka Etc. Vs. Pro LAB and Ors [2015-TIOL-08-SC-CT-LB] had re-affirmed the position laid down in Larsen Toubro and another Vs. State of Karnataka and another [2013-TIOL-46-SC-CT-LB] followed by landmark judgment of Five Judge Constitution Bench of the Hon’ble Supreme Court in the case of Kone Elevator India Private Limited Vs. State of Andhra Pradesh [2014-TIOL-57- SC-CT-CB], regarding inapplicability of ‘Dominant Intention Test’ in case of Works contract. Consequent to the aforesaid decisions, Assessees or the Revenue should no longer be able to have recourse to the ‘Dominant Intention Test’ for determining the taxability of Works contract transactions.

2.  However, the question was still open on applicability of ‘Dominant Intention Test’ for transactions which do not get covered under Article 366(29A) of the Constitution.

3.  Now, with the above stated judgment of the Hon’ble High Court of Punjab and Haryana, the scenario seems to be clarified to infer that if a transaction doesn’t qualify as a Works contract, it would not be open for vivisection.

4.  However, the same may light up fresh litigation in deciding as to whether a contract falls within the ambit of Works contract under Article 366(29A) of the Constitution, making it imperative for the

5.  Assessee to closely examine the transactions in order to determine their true nature.

Hope the information will assist you in your Professional endeavors. In case of any query/ information, please do not hesitate to write back to us.

Thanks & Best Regards,

Bimal Jain                   

FCA, FCS, LLB, B.Com (Hons)

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