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.