The Business of “Hospitals”

The Business of “Hospitals”

 Hospital being a public health care facility has always been a borderline case with regard to the question of being an industry. The Management of Safdur Jung Hospital v Kuldip Singh Sethi AIR 1970 SC1407 and The State of Bombay v Hospital Mazdoor Sabha AIR 1960 SC 610 are the cases which justify the contrary point of views. When Safdur Jung denies the status of industry to hospitals, Hospital Mazdoor Sabha guarantees the commercial activity of hospital. However the need to settle the primary function of a hospital has become a necessity in the scenario of Sales Tax since sale of medicine in hospitals has gone way up. Liability to pay Sales tax arise only if the person is “in the business of” buying, selling etc of goods. The term business is defined as carrying on a trade or commerce. Consequently unless it is proved that primary function itself is a business, there can be no liability under sales tax. Supreme Court has resorted to the test of volume, frequency, continuity & regularity of the activity to consider whether sales tax can be imposed [State of TN v Board of Trustees of the Port of Madras 114 STC 520]. Hence the sale of medicines in hospitals can be brought under sales tax purview only if it is shown that hospital are doing “business” and sale of medicines is an incidental/ancillary function to the main activity. Kerala High Court has, in its decisions 55 VST 208 (Ker), 135 STC 224, held that hospitals though a health care facility where individual doctors serve patients has grown into a commercial activity and taken up the character of business. Hence hospitals can be considered as dealers who are liable under Sales tax. However they have not answered as to the character of those hospitals which are state/ central funded or non-profit motive. The Supreme Court decision The Management of Safdur Jung Hospital v Kuldip Singh Sethi AIR 1970 SC1407 still stands ground since they analyse the character of hospitals in wide manner.   

(Disclaimer:- The opinion mentioned here is of the author and author alone and in no case, should it be linked to any another advocate, be it the law firm where the author is currently working or any other who may or may not know the author. The opinion has to be understood in the context in which it is expressed and in that context only. Author will not be liable for any misinterpretation of the idea mentioned in this article.)

SALE/SERVICE CONUNDRUM IN RESTURANTS

Service tax on outdoor catering has long been a controversy in indirect tax regime. Law defines outdoor caterer as

“65(76a)     “outdoor caterer” means a caterer engaged  in  providing services in connection with catering at a place other than his own but including a place provided by way of tenancy or otherwise by the person receiving such services.”

“65(24)       “caterer” means any person who supplies, either directly or indirectly, any food, edible preparations, alcoholic or non-alcoholic beverages or crockery and similar articles or accoutrements for any other purpose or occasion.”

The taxable service u/s 65(105)(zzt) means any service provided or to be provided “to any person by an outdoor caterer”. Up to 16.5.2008, the expression was “service provided or to be provided to a client”. In Tamil Nadu Kalyana Mandapam Association vs Union of India (2004) 135 STC 480 (SC), the hon’ble Supreme Court has held that the outdoor catering is predominantly a service. This coincides with the view of the review judgment of Hon’ble Supreme Court in the judgment reported in 45 STC 212 (SC) (Northern India Caterers (India) Limited  vs Lt .Governor of Delhi). The Judgment goes on to point out what can be a service and what not.  In a restaurant if the purchaser of food cannot take away the food as and when he wishes, the activity is merely a service and not sale. Forty Sixth Amendment seeks to rectify what has been proposed and brings supply, delivery and transfer of food and beverages for human consumption under the purview of sales tax. The constitutional amendment which sought to eliminate the confusion only further increased the problems. What happens to the service element during the transfer of goods. Who can tax the service aspect? Whether State as “deemed sale” or Centre as “service”?

If the recent judgments given by various High Courts are observed, we can be sure of only one point. No one concurs on the issue in hand. When Kerala High Court though its judgment dated dated 3.07.2013, reported as   2013 (31) STR 257 (Ker.) (Kerala Classified Hotels and Resorts Association vs Union of India) expresses it as a deemed sale and State, as, only having power to levy tax, Bombay High Court choose to depart from Kerala High Court decision in the judgment reported in 2014 (34) STR 522 (Bom.) (Indian Hotels and Restaurant Association vs. Union of India). Bombay High Court out-rightly rejected the idea that parliament was denuded of its competence to legislate and impose tax provided, in this case, service provided by restaurants and hotels.

Karnataka High Court, in the judgment reported in (2011) 46 VST 57 (Kar.) (Commissioner of Service Tax vs. LSG Sky Chef India Private Ltd) has gone a step beyond and held that there should be bifurcation of the sales component and service component. Though this view might be the only practical scenario available, the judgment failed to provide sufficient reasons on the query of whose prerogative whether Parliament or State Legislature. Further the legality to levy of service tax on outdoor catering has been upheld in the judgment, dated 10^th April 2014, reported as [2014] 72 VST 191 (All.) (Indian Coffee Workers’ Co-operative Society Limited vs Commissioner of Central Excise and Service Tax Allahabad).

The High Courts have given various view point’s that can be taken. Each one more precarious than the other, if not careful. Hence we can wait for the One Supreme Court Judgment that will certainly put to rest the controversy. However it is rather curious as to which route will Apex Court chose to end the debate. My bet is on Karnataka High Court since that is the easiest way out and probably the right one.    

 BCCI- IPL - SPONSORS Service Tax Triangle- On Revenue Sharing 

     

  When the concept of revenue sharing is questioned in respect of its liability under service tax, the main point to be scrutinized is the meaning of “revenue”. Ramantha Aiyer[1] defines it as “The gross inflow of cash receivables or other consideration arising in the course of ordinary activities of an enterprise from the sale of goods, from rendering of services and from the use by others of enterprises resources yielding interest, royalties and dividends”. And a similar definition found in Black’s Law dictionary[2] is “The gross receipts of a business, individual, government or other reporting entity. The receipts are usually the result of product sales, services rendered interest earned etc”. All definitions[3] brings us to the common conclusion that it is the amount collected in the course of business activities of an organization. Once the term “revenue” starts to make sense, next step is to understand how any transfer of amount as a result of an agreement to share the revenue will fall in the purview of Service Tax Department. Best way for this is to analyze agreements like agreement between theatre owner and film distributor, agreements between restaurant owners and other person whereby one is responsible for food preparation and other for providing space, decoration, furniture, cutlery, crockery etc. In these agreements, both the parties have their own roles. However when the revenue is generated, agreement helps them to keep check/determine their own share in the amount collected.

The recent spot light on “revenue sharing agreements” is because of the franchisee agreements between BCCI and team sponsors for conducting IPL tournaments. The legal issue raised is whether every amount from BCCI to team sponsors will have service tax liability under Business Support Service/ Business Auxiliary Service. The CBEC Circular No. 109/3/2009-S.T., dated 23-2-2009 clarifies that in an agreement of revenue sharing the contracting parties does not render any service and the transaction is one of principal to principal basis. Due to popular understood concept that revenue sharing agreement will not fall under service tax liability, another Circular No. 148/17/2011-S.T., dated 13-12-2011 was issued stating that merits of every transactions has to be considered while considering revenue sharing agreements. These circulars where noted while considering two stay matters in relation to Kph Dream Cricket (P) Ltd[4] and Espn Software (I) (P) Ltd[5].  In both the matter, in relation to the revenue sharing issue, complete waiver of pre-deposit and stay granted.  

In the recent matter of India Cement heard by CESTAT Chennai on 7/11/2013, the issue of revenue sharing between BCCI and India Cements was argued by Senior Advocate Arvind Datar where he raised the point that no service was rendered by India Cements to BCCI which can be categorized as Business Support Service [Section 65(104)]. Transaction between the parties is as a result of agreement and not for any service rendered. The Tribunal also took note of the above mentioned two circulars and the ESPN decision. The Tribunal held that prima facie case is in favour of India Cements and waived pre-deposit of balance amount.

However we might have to wait till final decision in any of these matters to come up to have a better understanding of the issue. Lets hope the ESPN matter which scheduled to be heard on third week of November will provide us with enough closure on the matter.     

  

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[1] Ramanatha Aiyer, 3^rd Edition, 2005

[2] Blacks Law dictionary 6^th edition

[3] Ramanatha Aiyer’s definition, Black Law dictionary definition, Webster definition, investopedia [http://www.investopedia.com/terms/r/revenue.asp]

[4] 2012 (26) S.T.R. 362 (Tri. - Del.)

[5] 2011 (23) S.T.R. 400 (Tri. - Del.)

Additional Grounds- Only on New circumstances

The question of whether additional grounds can be submitted before the Customs, Excise and Service Tax Appellate Tribunal is always answered in affirmative with the condition that bench has given its permission. Hence if additional grounds need to be filed, file a petition to take on record the additional grounds which will be numbered and heard by the Tribunal as per Rule 10 of CESTAT (Procedure) Rules 1982. So next question will definitely be regarding the criteria upon which the miscellaneous application is allowed. On a thorough analysis on the caselaws, it is seen that major reasons given be Tribunal for accepting additional grounds are

           *Impugned grounds are legal [11 STR 407; 278 ELT 263]

        *Impugned grounds goes into the root of the cause[ 9 STR 157; 280 ELT 481 AP]

Impugned grounds being legal means the newly raised ground is as per a new introduction of law, circular, caselaws. If the grounds raised is due to the reason that new circumstances with regard to the legal position of the disputed issue has aroused, then new grounds are allowed. Similarly if the newly raised grounds give a clear picture of the grounds already in existence without the formation of a new fact, then it can also be treated as sufficient cause for allowing additional grounds. Thus the new ground should go to the root of the disputed matter to make its place to the grounds of the appeal. 

VOLUNTARY COMPLIANCE ENCOURGEMENT SCHEME, 2013- An Escape route or a trap?

For those who have not paid their service tax dues for the period from Oct 2007 to Dec 2012, the year 2013 is a time to rejoice. On February 28, 2013 Finance Minister in his Budget speech[1] spoke of a Voluntary Compliance Scheme, 2013 (for convenience herein after referred to as VCES) whereby a defaulter can make his service tax payment from the period 1/10/2007 provided he files a truthful declaration and his interest, penalty and other consequences will be waived. True to his words, VCES came into effect on 10^th May 2013[2] along with all the necessary Rules and Forms and clarifications. However what everyone fails to take notice is the last two sentences in his speech which starts as “I hope to entice a large number of assessees to return to the tax fold. I also hope to collect a reasonable sum of money [3]”.    

The VCES comes along with the similar riders as all the “buy one get one” offers we come across. The conditions start off with the second proviso to Section 106 of the Finance Act 1994 whereby declarations are denied in case a notice or order of determination has been issued before 01/03/2013 in respect of any period on any issue. Meaning, if any issue is already noticed by the department, the defaulters cannot make the declaration under VCES. Therefore if anyone has managed to sneak out from the vision of department, they alone can make the payment. Also there exists doubt regarding “same issue” used in the proviso. Neither this Scheme nor the further clarification explains a situation where though the issue been raised earlier, the period for the which the declarant making payment contains a different issue also and it is not covered in the earlier period. Department on finding that a similar case exist will reject the declaration and in the absence of appeal provision the declarant will be subject to further litigation with the issuance of Show Cause Notice even after the promise of no proceedings. Further more he has already paid the service tax amount for the one and half years which he need not have paid since Show Cause Notice can only be issued for the earlier five years. However a clarification dated 8^th August 2013[4] sl no 14 says that amount so paid by the Scheme if rejected can be adjusted against the liability that is determined by the department. Section 106 does not stop with the proviso regarding notice or order of determination. Subsection (2) goes on to include all the inquiry, investigation; audit which remains pending as on the 1^st day of March 2013.

Next rider that comes into play is provided under Section 109 whereby no amount paid under the Scheme shall be refunded under any circumstances. The matter does not end with this. The Commissioner of Central Excise may serve notice if he has reasons to believe that there exists “substantial” false payment.  However the term “substantially false” is not defined by the Scheme paving way for multiple interpretations and for substantial misuse of the provision by the Department.  But one positive is this action cannot be taken after the expiry of one year from the date of declaration.     

Though the VCES seems to help the Government in finding out who the defaulters are, it remains to be seen as to whether VCES will help the assessee in the long run or will it drive him to endless litigation running through years. Whatever be the situation, even Finance Minister was sure of one thing that is this Scheme will help in “substantially increasing” Indian treasury .       

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[1] Para 183 of Finance Minister’s Budget speech

[2] Date of assent of the Finance Bill by the President

[3] Ibid 1

[4] Circular No 170/5/2013-ST dated 08/08/2013

"On-Shore Terminal" – An exemption or a casualty of undefined term under “Commercial or Industrial Construction Services”

Commercial or Industrial Construction service in its definition as per Section 65(105) (25b) provides for an exemption for construction of ‘transport terminal’, a vague undefined term. This term has led to many interpretations latest of them being construction On-shore Terminal for the transportation of natural gas. For those who do not understand the term On-shore terminal, it is the junction where the unprocessed natural gas is mixed with methanol so as to prevent the formation of ice during transportation and this processed natural gas is transported to various places through pipelines. The Exemption wordings goes as “but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams”. So whoever concerned with this issue will look into the principle of ejusdem generis and concentrate on all the near-words to understand transport terminal, since the word remains undefined. In the matter of IVRCL[1], the commissioner (appeals) went on to hold that this principle cannot be applied since there exist no common factor in them and “Transport Terminal” includes the On-shore Terminal. Tribunal in two conditional stay order passed in favour of M/s L&T ltd[2], however differ from the view took by the commissioner appeals and held that by applying the principle of ejusdem generis, all the terms in the list are public goods and are provided by government at different Levels and on-shore terminal does not fall under that category.

The stay orders passed by Tribunal seem to overlook the fact that legislative intention cannot be read into provisions without proper phrases. The provision does not include the criteria that these categories should be of public utility. The proper route to interpretion is that each and every terms mentioned in the exemption have the common factor of “transport of materials” among them and “On-shore Terminal” includes in “Transport Terminals”.  However we have to wait till the appeal is heard by the Tribunal for the reaching a conclusion. Till then this question will remain as such for various parties to interpret as their own wimps and fancies

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[1] Orders-in-appeal No 38 &39/2009 (H-II) S.Tax

[2] 2010 (20) S.T.R. 113 (Tri. - Bang.),  Stay Order 308/2011

How to reverse CENVAT CREDIT while complying with CESTAT stay order demanding pre-deposit?

An assessee whenever a stay order demanding pre-deposit is issued, looks for easy way of making the pre-deposit without the deposit of cash amount. The most comfortable way by which pre-deposit can be made is vide reversing the CENVAT credit. This find legal footing through various judgments like Manak Moti Forging Pvt Ltd 264 ELT 100 (Tribunal-Mumbai), 254 ELT 528 (Tri-Calcutta), 243 ELT 601 (Tri-Chennai), 247 ELT 601(Tri-Chennai). However the next question that daunts the assessee is how to make the reversal. Only column that is ever found for reversal of CENVAT credit is in the tax returns. But the assessee cannot wait till the next return is to be filled.

The practical method followed through the legal tax platform is to make an entry in the CENVAT Credit register of the assessee as to reversal of credit stating that reversal is pursuant to stay order of Hon’ble CESTAT and getting that entry verified by the respective department. On receiving the acknowledgment from the department inform the CESTAT registry as to the compliance made along with the photocopy of the acknowledged CENVAT register. The matter comes to an end on the date of report compliance if the department representative accepts the reversal made by the assessee.          

(Disclaimer:- The opinion mentioned here is of the author and author alone and in no case, should it be linked to any another advocate, be it the law firm where the author is currently working or any other who may or may not know the author. The opinion has to be understood in the context in which it is expressed and in that context only. Author will not be liable for any misinterpretation of the idea mentioned in this article.)