(2012) 271 KLR 041

IN THE HIGH COURT OF KERALA AT ERNAKULAM 

PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC 

FRIDAY, THE 14TH DAY OF SEPTEMBER 2012/23RD BHADRA 1934 

WP(C).No. 7129 of 2008 (W) 

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PETITIONER(S):

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RESPONDENT(S):

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THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 4-09-2012, ALONG WITH WP(C)NO.4442 OF 2011 AND CONNECTED CASES, THE COURT ON 14-09-2012 DELIVERED THE FOLLOWING: sts WP(C)NO.7129/2008 

APPENDIX 

PETITIONER'S EXHIBITS:

RESPONDENT'S EXHIBITS:

/TRUE COPY/ P.A.TO.JUDGE sts 

ANTONY DOMINIC, J. 

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W.P.(C) Nos. 7129/08, 32637/10, 1458, 3169,3682, 4018, 4442, 9809, 14218, 15228/11, 4303 & 6343 OF 2012 

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Dated this the 14th day of September, 2012 

Head Note:-

Constitution of India, 1950 - Article 29A and 266 - Kerala Value Added Tax Act, 2003 - Section 6 - Constitutional Validity of - Hospital Service - Tax for Medicines and Consumables sold to patients - Hospitals are being established by public limited companies which are incorporated with profit motive. Therefore, if in a hospital, medicines and other consumables are sold to a patient and bills are raised, such transaction cannot be outside the KVAT Act and taking refuge under the example given by the Apex Court to explain the meaning and content of Article 366 (29-A) of the Constitution, such hospitals cannot avoid statutory liabilities. On the other hand, if in an individual case, a particular transaction is not a sale, it is for the concerned hospital to contest the matter in accordance with law and that does not mean that the whole hospital industry in the State can remain outside the discipline of the KVAT Act.

J U D G M E N T 

This batch of writ petitions are filed by the private hospitals in the State and the Kerala Private Hospitals' Association (Modern Medicine) State Committee. They have approached this Court disputing their liability to get themselves registered as dealers under the Kerala Value Added Tax Act (hereinafter referred to as the Act for short) and to pay tax under the said Act for the medicines and consumables sold to their patients.

2. The issue being common, the cases were heard together treating WP(C) No. 7129/08 as the leading case.

3. In these writ petitions, there are two main prayers. The first prayer is to declare that hospitals are not liable to take registration and pay tax under the Act for the supply of medicines and other items meant for treatment. The second prayer, which was urged as an alternative one, is to declare that Section 6 of the Act and the corresponding rules are ultra vires and unconstitutional to the extent it seek to impose tax on hospitals and compel them to take registration under the Act. As a consequence, petitioners are also seeking to quash the notices, and other proceedings issued by the officers of the Commercial Taxes Department.

4. In so far as the liability to take registration under the Act and to pay tax thereunder is concerned, the contention of the counsel for the petitioners was that hospitals are rendering what is called "hospital service" and that supply of medicines and other items is incidental to the service rendered to the patients treated. According to them, the Act does not contemplate levy of tax on such supply of medicines and other items and hence the hospitals have no obligation to get themselves registered under the Act or to pay tax thereunder.

5. In my view, this question does not need much deliberation for the reason that this very issue has already been considered by this Court and has been decided against the petitioners. In the context of the provisions contained in the Kerala General Sales tax Act, in P.R.S. Hospital v. State of Kerala (2003(1) KLT 633), this Court considered the question whether hospital is a dealer within the definition of the term as contained in the KGST Act. In that context, the question regarding the liability of the hospitals to take registration and to pay tax on the turn over of sale and supply of other items in the hospitals was considered. Thereafter, referring to the definition of the expressions business, dealer, goods, sale and turn over in the KGST Act, this Court answered the question thus:- 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.

6. The petitioners are also liable to take drug licence under the Drugs Control Order for storing and selling drugs. Exemption is of course granted only to registered medical practitioners and Government hospitals and local bodies and hospitals and dispensaries run by Government or local bodies. Therefore, under the Drugs Control Order also hospitals and dispensaries are treated just like other dealers.

6. This judgment of the learned Single Judge was confirmed by the Division Bench of this Court in WA Nos.555/03 and 1487/03.

7. The judgment in WA No.1134/05 shows that the contention of the appellant was that while rendering the judgment in PRS Hospital's case and the Writ Appeals confirming the same, the Apex Court judgments in State of T.N and another v. Board of Trustees of the Port of Madras (1999 (4) SCC 630) and Commissioner of Sales Tax v. Sai Publication Fund (2002(4) SCC 57) were not correctly appreciated and applied. It was argued that the fact that medicines were sold through Pharmacy in a hospital though may involve buying and selling, is no reason to hold that the hospital is a dealer since the hospital is not engaged in any business within the meaning of Section 2(vi) of the KGST Act. It was argued that the predominant object of a hospital is not to do business and the various services rendered in the hospital are non business activities and that sale of medicine is an integral part of such an activity.

8. The Division Bench rejected these contentions and dismissed the writ appeal holding thus; 6. The Apex Court in the above decision was considering as to whether the Madras Port Trust is now a major port trust governed by the provisions of the Major port Trusts Act, 1963 providing services of landing, shipping or trans- shipping, receiving, shifting, transporting, storing or delivery of goods brought into the premises of the Port Trust and while in the course of such activities uncleared or abandoned goods which the Port Trust brings them for sale in public auction after the approval of the Customs Authorities are sales eligible to tax under the Madras Sales Tax Act and whether the Port Trust can be said to be a dealer within the meaning of section 2(b) of Madras General Sales Tax Act , 1939. After referring to the relevant provisions in the statute and also the definition of the term "business" under Section 2(d) and the definition of the term under Section 2(d) and on a consideration of various case laws on the subject. The Apex Court concluded by saying that in many of the cases the main activity of the person or body was undoubtedly "business" even though the motive of profit was excluded by statute and even though the connected. Incidental or ancillary sales were statutorily included in the definition of "business". Then the court proceeded to consider the question as to whether the Port Trust was established by the statute to carry on business and it was held that the main activity of the Port Trust was not "business", then the connected. Incidental or ancillary activities of sales would not normally amount to "business" unless an independent intention to conduct "business' . In these connected, incidental or ancillary activities is established by the Revenue. It was held that if the sales were connected or incidental or ancillary to the "nonbusiness" activity then as stated earlier, there would be a presumption that they were not intended to the "business". After referring to the decision reported in Trustees of the Port of Madras v. Aminchand Pyarelal (1976) 3 SCC 167) and the observation of His Lordship Justice Chandrachud, J. as extracted in paragraph 39 of the said judgment. It was held that the said observations clearly show that Port Trusts are not established for carrying on business. The Apex Court referred to the following observations made in Base Repair Corporation v. State of A.P. (1988) 53 STC):

"According to the definition, if the main activity is in the nature of trade, commerce or manufacture any ancillary or incidental transaction be it per se in the nature of trade, commerce or manufacture or not, is also treated as "business". But the converse is not true. In other words, if the main activity is not business, but if an ancillary or incidental activity is per se business, the incidental or ancillary activity does not cease to be business, merely because it is ancillary or incidental to the main activity, which itself is not business. The definition is not capable of being read in such a manner". The Apex Court agreed with the above observations subject to the following clarification or modification in paragraph 36 of the judgment as follows: 

"If the main activities are "business" then the sales in connection with incidental or ancillary thereto need not have been intended as a business or commercial activity. Their mere connection with or being incidental or ancillary to something else which was "business" was sufficient to include such sales in the main business. The second part of the last extract starting with the words "But the converse is not true" is to be modified to mean that if the main activity falling under sub-clause (1) did not amount to business, normally these sales made in connection with or incidental or ancillary to the main activity would not be "business" but there could still be an exception where the sales so connected or incidental or ancillary to the main "non-business" activity were proved to have been made with an independent intention to do business and the burden of proof to prove the exception would fall on the Revenue. In our view, the Andhra Pradesh High Court did not, in the above passage, imply that even where the main activities were not business, the assessee must prove want of an intention to carry on business in the connected, incidental or ancillary activity which involved sales. It is possible in exceptional cases that such latter sales could per se be business having been proved by the Revenue to have been carried on with such an explicit intention. The burden, as already stated, would here lie on the Revenue". 

In (2002) 4 SCC 57 the question that arises for consideration before the Apex Court was as to whether the trust of Sai Publication Fund which was set up by some devotees of Saibaba can be held to the a "dealer". In respect of sale of books, booklets, pamphlets and other literature containing the message of Saibaba and the turnover can be assessed to tax under the Bombay Sales Tax Act, 1959.

7. From the above decisions it is clear that if the main activities of the assessee concerned were not business. In which case any business activity incidental or ancillary thereto which is infinitesimal or small part of the main activities cannot bring it within the scope of the term 'dealer'. In other words, the presumption will be that these connected incidental or ancillary activities of sales are not business and the onus of proof of an independent intention to do business in these connected incidental and ancillary sales will rest on the Department. It was also held that if the main activity is "non-business" and activity of buying and selling which forms part of an integral part of the non- business activity then also the party will not be a dealer.

8. According to the learned counsel for the petitioner hospital is not engaged in carrying on any business of buying and selling that there is no business activity and hence buying and selling of medicine through its pharmacy being an integral part of the non-business activity, hospital will not come within the meaning of the term 'dealer' under the KGST Act. We are unable to agree with this contention because business as defined under Section 2(vi) is imparimateria the same as is in the case of Tamil Nadu Sales Tax Act which was considered by the Apex Court in (1999) 4 SCC 57. It was held that to bring it within the expression "business" there need not be any motive to gain or profit. Though it is true that Doctors of various specialties doing service in hospital by their intellectual skill in the matter of treating the patients by itself may not be a business activity and that is only a profession but various other facilities provided in the hospital cannot said to be non-business activity. For example, a clinical laboratory can independently function outside a hospital and do business the fact that it is housed in a hospital will not make the service rendered a non-business activity. Further, as rightly observed in PRS Hospital's case, the hospital may be owned by a firm, limited company or may be proprietorship concern. Medical Practitioners of various specialties may visit the hospital only on call. Thus the activities in the hospital may involve business activities and non-business activities as well.

9. Subsequently in the judgment in WA No.2908/09 and WP(C) No. 6913/10 and in the Division Bench judgment in M/s. Comtrust Eye Hospital v. Addl. Sales Tax Officer and another (2008 16 KTR 128), the judgment in PRS hospital's case was followed.

10. The term business, dealer, goods, sale, turnover are defined in Section 2(ix), 2(xv), 2(xx), 2(xliii) and 2(lii) of the KVAT Act and these expressions read as under:

S. 2(ix) "Business" includes 

a) any trade, commerce, 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; 

2(xv) "dealer" means any person who carries on the business of buying, selling, supplying or distributing goods, executing works contract, delivering any goods on hire-purchase or on any system of payment by instalments 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) a casual trader; 

(b) a commission agent, a broker or a delcredere agent or an auctioneer or any other mercantile agent, by whatever name called, of such dealer 

(c) 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 person whether incorporated or not situated outside the State; 

(d) a person who, whether in the course of business or not sells; 

i) goods produced by him by manufacture or otherwise; or 

ii) trees which grow spontaneously and which are agreed to be severed before sale or under contract of sale; 

(e) a person who whether in the course of business or not: 

(i) transfers any goods, including controlled goods, whether in pursuance of a contract or not, for cash or for deferred payment or other valuable consideration; 

(ii) 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 commission, remuneration or other valuable consideration, shall be deemed to be a dealer for the purposes of this Act; 

Explanation II:- 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; 

(f) a bank or a financing institution which whether in the course of its business or not, sells any gold or other valuable article 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; 

2(xx) "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 and every 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; 

2(xliii) "sale" with all its grammatical variations and cognate expressions means any 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 for other valuable consideration, but does not include a mortgage, hypothecation, charge or pledge; 

Explanation 1-A transfer of property in goods by the Central Government or a State Government for cash or for deferred payment or other valuable consideration whether or not in the course of business shall be deemed to be a sale for the purposes of this Act. 

Explanation II-The transfer of property involved in the supply or distribution of goods by a society (including a co-operative society), club, firm or any association or body of persons, whether incorporated or not, to its members, for cash or for deferred payment or other valuable consideration, whether or not in the course of business, shall be deemed to be a sale for the purposes of this Act. 

Explanation III-A transfer of goods on hire-purchase or other instalment system of payment shall, notwithstanding the fact that the seller retains the title in the goods as security for payment of the price, be deemed to be a sale on the date of delivery of the goods in pursuance of the agreement of such hire purchase or other system of payment in instalments. 

Explanation IV-A transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract shall be deemed to be a sale. Explanation V- A transfer of right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration shall be deemed to be a sale. 

Explanation VI:- Any supply, by way of or as part of any service or in any other manner whatsoever of 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 shall be deemed to be a sale. 

Explanation VII- Unless otherwise expressly provided in this Act, any transfer, delivery or supply of any goods referred to in this clause shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and purchase of those goods by the person to whom such transfer, delivery or supply is made. 

Explanation VIII- (a) The sale or purchase of goods shall be deemed, for the purposes of this Act, to have taken place in the State where the contract of sale or purchase might have been made, if the goods are within the State,- 

(i) in the case of specific or ascertained goods at the time the contract of sale or purchase is made; and 

(ii) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale or purchase by the seller or by the purchaser, whether the assent of the other party is prior or subsequent to such appropriation; 

(b) Where there is a single contract of sale or purchase of goods situated at more places than one, the provisions of clause (a) shall apply as if there were separate contracts in respect of the goods at each of such places; 

(c) For the purpose of this Act, the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract shall be deemed to have taken place in the State, if the goods are within the State at the time of such transfer irrespective of the place where the agreement of works contract is made, whether the assent of the other party to the contract is prior or subsequent to such transfer; 

Explanation IX- Notwithstanding anything to the contrary contained in this Act or any other law for the time being in force, two independent sales or purchases shall, for the purposes of this Act, be deemed to have taken place.- 

(a) when the goods are transferred from a principal to his selling agent and from the selling agent to the purchaser; or 

(b) when the goods are transferred from the seller to a buying agent and from the buying agent to his principal, if the agent is found in either of the cases aforesaid. 

(i) to have sold the goods at one rate and to have passed on the sale proceeds to his principal, at another rate; or 

(ii) to have purchased the goods at one rate and to have passed them on to his principal at another rate; or 

(iii) not to have accounted to his principal for the entire collections or deductions made by him in the sales or purchases effected by him on behalf of his principal; or 

(iv) to have acted for a fictitious or non existent principal; Provided that the deduction or addition, as the case may be, of the commission agreed upon and specified in the accounts and incidental charges incurred by the agent which are specified in the accounts and which the assessing authority considers legitimate shall not be deemed to be a difference in the rates referred to in sub-clauses (i) and (ii). 

2(lii) "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 for other valuable consideration, provided that the proceeds of the sale by a person not being a Company or Firm registered under the Companies Act, 1956 (Central Act 1 of 1956) and Indian Partnership Act, 1932 (Central Act 9 of 1932) [or society including a co-operative society or association of individuals whether incorporated or not] 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." 

Explanation I-The turnover in respect of delivery of goods on hire purchase or on any system of payment by instalments shall be the market price of such goods at the time of delivery. 

Explanation II-The turnover in respect of the transfer of the right to use any goods shall be the aggregate amount received or receivable by the dealer as consideration for such transfer. Explanation III-Subject to such conditions and restrictions, if any, as may be prescribed in this behalf; 

(i) The amount for which goods are sold shall include any sums charged for anything done by the dealer in respect of the goods sold at the time of, or before, the delivery thereof; 

(ii) any discount on the price allowed in respect of any sale where such discount is shown separately in the tax invoice and the buyer pays only the amount reduced by such discount; or any amount refunded in respect of goods returned by customers shall not be included in the turnover. 

(iii) Where for accommodating a particular customer, a dealer obtains goods from another dealer and immediately disposes of the same to the said customer, the sale in respect of such goods shall be included in the turnover of the latter dealer but not in that of the former; 

Explanation IV- "Agricultural or horticultural produce" shall not include such produce as has been subjected to any physical, chemical or other process for being made fit for consumption, save mere cleaning, grading, sorting, drying or de-husking. 

Explanation V- where a dealer receives in any return period any amount due to price variations in respect of any sale effected during any earlier return period, such amount shall be deemed to be the turnover relating to the return period in which such amount is received. 

Explanation VI- The turnover in respect of rubber shall be deemed to include any cess leviable under the Rubber Act, 1947 irrespective of whether the payment of cess is deferred till the rubber is consumed by the manufacturer of rubber goods; 

Explanation VII- Where a dealer sells any goods purchased by him at a price lower than that at which it was purchased and subsequently receives any amount from any person towards reimbursement of the balance of the price, the amount so received shall be deemed to be turnover in respect of such goods.

11. A comparative analysis of the provisions contained in the KGST Act which were considered by this Court in PRS Hospital's case and the aforesaid corresponding provisions of the KVAT Act show that the statutory provisions remain the same although the KGST Act has been replaced by the KVAT Act. Therefore, the principles laid down by this Court in the PRS Hospital's judgment fully answers the contentions raised by the petitioners in these cases regarding their liability to be registered under the Act and to pay tax thereunder.

12. The second contention raised by the petitioners is to declare Section 6 of the KVAT Act to be unconstitutional. Section 6 of the Act provides for levy of tax on sale or purchase of goods. Petitioners contend that if the Section authorises levy of tax on the sale of medicines and other consumables in the hospitals, this Section is unconstitutional. In support of this contention, they relied on Article 366 (29-A) of the Constitution of India and the Apex Court judgment in Bharat Sanchar Nigam Ltd. v. Union of India {(2006) 3 SCC 1}. In the BSNL case, the Apex Court considered the question whether the nature of transaction by which mobile phone connections are enjoyed is a sale or a service or whether it is both. The Apex Court finally held that the goods as defined in the Constitution do not include electro magnetic waves or radio frequencies for the purpose of Article 366 (29-A) (d), In that context, the Apex Court referred to Article 366 (29-A) and held thus:-

40 :Article 366 was therefore amended by inserting a definition of "tax on the sale or purchase of goods" in clause (29-A). The definition reads:

"366 (29-A) '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; 

b. a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. 

c. a tax on the delivery of goods on hire purchase or any system of payment by installments. 

d. a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration. 

e. a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration. 

f. a tax on the 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, and such transfer delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made." 

41. Sub-clause(a) covers a situation where the consensual element is lacking. This normally takes place in an involuntary sale. Sub-clause (b) covers cases relating to works contracts. This was the particular fact situation which the Court was faced with in Gannon Dunkerley and which the Court had held was not a sale. The effect in law of a transfer of property in goods involved in the execution of the works contract was by this amendment deemed to be a sale. To that extent the decision in Gannon Dunkerley was directly overcome. Sub-clause ) deals with hire-purchase where the title to the goods is not transferred. Yet by fiction of law, it is treated as a sale. Similarly the title to the goods under sub-clause (d) remains with the transferor who only transfers the right to use the goods to the purchaser. In other words, contrary too A.V.Maiyappan decision a lease of a negative print of a picture would be a sale. Sub-clause(e) covers cases which in law may not have amounted to sale because the member of an incorporated association would have in a sense begun as both the supplier and the recipient of the supply of goods. Now such transactions are deemed sales. Sub-clause (f) pertains to contracts which had been held not to amount to sale in State of Punjab v. Associated Hotels of India Ltd. That decision has by this clause been effectively legislatively invalidated.

42. All the sub clauses of Article 366(29-A) serve to bring transactions where one or more of the essential ingredients of a sale as defined in the Sale of Goods Act, 1930 are absent, within the ambit of purchase and sales for the purposes of levy of sales tax. To this extent only is the principle enunciated in Gannon Dunkerley Ltd (sic modified). The amendment especially allows specific composite contracts viz. works contracts [(sub-clause (b)]; hire-purchase contracts [sub-clause (c)], catering contracts [sub- clause (e)] by legal fiction to be divisible contracts where the sale element could be isolated and be subjected to sales tax.

43. Gannon Dunkerley survived the Forty-sixth Constitutional Amendment in two respects. First with regard to the definition of "sale" for the purposes of the Constitution in general and for the purposes of Entry 54 of List ii in particular except to the extent that the clauses in Article 266(29-A) operate. By introducing separate categories of "deemed sales", the meaning of the word "goods" was not altered. Thus the definitions of the composite elements of a sale such as intention of the parties, goods, delivery, etc. would continue to be defined according to known legal connotations. This does not mean that the content of the concepts remain static. The courts must move with the times. But the Forty-sixth Amendment does not give a license, fir example, to assume that a transaction is a sale and then to look around for what could be the goods. The word "goods" has not been altered by the Forty-sixth Amendment. That ingredient of a sale continues to have the same definition. The second respect in which Gannon Dunkerley has survived is with reference to the dominant nature test to be applied to a composite transaction not covered by Article 366(29-A). Transactions which are mutant sales are limited to the clauses of Article 366(29-A). All other transactions would have to qualify as sales within the meaning of the Sales of Goods Act, 1930 for the purpose of levy of sales tax.

44. Of all the different kinds of composite transactions the drafters of the Forty-sixth Amendment chose three specific situations, a works contract, hire- purchase contract and a catering contract to bring them within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been constitutionally permitted in sub-clauses (b) and (f) of clause (29-A) of Article 366, there is no other service which has been permitted to be so split. For example, the sub-clauses of Article 366(29-A) do not cover hospital services. There fore, if during the treatment of a patient in a hospital, he or she is given a pill, can the Sales Tax Authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which can it be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client? Strictly speaking, with the payment of fees, consideration does pass from the patient or client to the doctor or lawyer for the documents in both cases.

45. The reason why these services do not involve a sale for the purposes of Entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29-A), unless the transaction in truth represents two distinct and separate contracts, and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366(29-A) continues to be: Did the parties have in mind or intend separate rights arising out of the sale of goods? If there was no such intention there is no sale even it the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is "the substance of the contract". 

We will, for the want of a better phrase, call this the dominant nature test.

13. The petitioners mainly relied on para 44 of the judgment where the Apex Court held that hospital service is still outside Article 366 (29-A) and explained it with an example that if during the treatment of a patient in a hospital, he or she is given a pill, sales tax authorities cannot tax the same as a sale. According to the petitioners, what they render is hospital service and that therefore, the medicine or other consumable sold during treatment is not a sale under the Act to attract levy of tax. On this basis, they contended that since Section 6 of the Act authorises levy of tax on such medicines and other consumables, the section is unconstitutional.

14. First of all, BSNL judgment was not rendered in the context of the provisions of the KVAT Act and the issue raised and decided in that case is also not in the context of a comparable controversy. In so far as the finding regarding hospital services or example that is given by the Apex Court are concerned, the Court has only laid down a principle and said that if in the process of treatment a pill is given to a patient, such a transaction cannot be treated as a sale. That example given by the Apex Court cannot be taken to mean that it was laying down a principle that in all circumstances, every transaction that takes place in a hospital, is a service and is outside the taxation law. This is all the more so in today's context where hospitals are being established by public limited companies which are incorporated with profit motive. Therefore, if in a hospital, medicines and other consumables are sold to a patient and bills are raised, such transaction cannot be outside the KVAT Act and taking refuge under the example given by the Apex Court to explain the meaning and content of Article 366 (29-A) of the Constitution, such hospitals cannot avoid statutory liabilities. On the other hand, if in an individual case, a particular transaction is not a sale, it is for the concerned hospital to contest the matter in accordance with law and that does not mean that the whole hospital industry in the State can remain outside the discipline of the KVAT Act.

15. Thus, the principles laid down by the Apex Court in the judgment in the BSNL case do not in any manner render Section 6 of the KVAT Act unconstitutional for any reason. Therefore, the second prayer sought by the petitioners also cannot be granted and is rejected. Writ petitions therefore fail and are dismissed. 

ANTONY DOMINIC, JUDGE 

Rp