Gujarat High Court
Bankers Cardiogy Pvt Ltd vs Commissioner Of Commercial Tax on 25 July, 2025
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
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Reserved On : 21/03/2025
Pronounced On : 25/07/2025
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 16927 of 2011
With
R/SPECIAL CIVIL APPLICATION NO. 865 of 2021
With
R/SPECIAL CIVIL APPLICATION NO. 13722 of 2021
With
R/SPECIAL CIVIL APPLICATION NO. 13723 of 2021
With
R/SPECIAL CIVIL APPLICATION NO. 13712 of 2021
With
R/SPECIAL CIVIL APPLICATION NO. 7823 of 2019
With
R/SPECIAL CIVIL APPLICATION NO. 14638 of 2021
With
R/SPECIAL CIVIL APPLICATION NO. 3123 of 2015
With
R/SPECIAL CIVIL APPLICATION NO. 5344 of 2015
With
R/SPECIAL CIVIL APPLICATION NO. 5345 of 2015
With
R/SPECIAL CIVIL APPLICATION NO. 5421 of 2015
With
R/SPECIAL CIVIL APPLICATION NO. 8443 of 2015
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR.JUSTICE D.N.RAY
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Approved for Reporting Yes No
✓
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BANKERS CARDIOGY PVT LTD & ANR.
Versus
COMMISSIONER OF COMMERCIAL TAX & ANR.
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Appearance:
MR SN SOPARKAR SENIOR ADVOCATE WITH MR UCHIT SHETH WITH
MR MANISH K KAJI(1030) for the Petitioner(s) No. 1,2
MR KAMAL TRIVEDI, ADVOCATE GENERAL WITH MR VINAY BAIRAGA
for the Respondent(s) No. 1,2
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR.JUSTICE D.N.RAY
CAV JUDGMENT
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. Heard learned Senior Advocate
Mr.S.N.Soparkar with learned advocate
Mr.Uchit N. Sheth and learned advocate
Mr.Manish K. Kaji for the petitioners and
learned Advocate General Mr.Kamal Trivedi
with learned Assistant Government Pleader
Mr.Vinay Bairagra for the respondents.
2. Since common issue is involved in all
these petitions, with the consent of the
learned advocates for the respective
parties, they have been heard analogously
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and are disposed of by this common
judgment.
3. By this group of petitions, the
petitioners have challenged the vires of
provision of clause (g) of section 2(23)
of the Gujarat Value Added Tax Act, 2003
(For short "the VAT Act") as being ultra
vires the legislative competence of the
State Legislature and further have prayed
to quash and set aside the assessment
orders and/or show cause notices for the
relevant period declaring that supply of
medicines, stents, implants, consumables
etc. during the course of treatment of
patients does not amount to 'sale' as
defined in section 2(23) of the VAT Act.
A) FACTS:
4. The petitioners are hospitals engaged
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in the activity of treatment of as indoor
patients. In order to treat the patients,
the petitioner hospitals use medicines,
implants, stents, consumables, etc.
5. In these petitions, by impugned show
cause notices/orders, the respondents have
imposed value added tax under the VAT Act
on supply of such medicines, implants,
stents, consumables, etc. used for
treatment of indoor patients considering
them as "sale of goods".
6. According to the petitioners, use of
medicines, implants, stents, consumables,
etc. is neither 'sale' as understood under
the Sales of Goods Act, 1930 nor 'deemed
sales' as defined under Article 366(29A)
of the Constitution of India and
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therefore, the respondent State does not
have competence to impose tax on such
supply of goods under the VAT Act, as such
imposition of tax would be beyond the
legislative competence under Entry 54 of
List II of the Seventh Schedule of the
Constitution of India.
7. Section 2(23) of the VAT Act defines
"sales" as under:
"2(23) "sale" means a sale of
goods made within the State for
cash or deferred payment or other
valuable consideration and
includes,-
(a) transfer, otherwise than
in pursuance of a contract, of
property in goods for cash,
deferred payment or other
valuable consideration,
(b) transfer of property in
goods (whether as goods or in
some other form) involved in
execution of a works contract,
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(c) delivery of goods on hire
purchase or any system of
payment by installments.
(d) 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) supply of goods by any
unincorporated association or
body of persons to a member
thereof for cash, deferred
payment or other valuable
consideration,
(f)supply of goods by a
society or dub or an
association to its members on
payment of a price or of fees
or subscription or any
consideration,
(g) supply of goods by way of
or as part of any service or
in any other manner
whatsoever, of
(h) supply 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,
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(i) supply by way of barter of
goods,
(j) disposal of goods by a
person in the manner
prescribed in Explanation
(iii) to clause 10
but does not include a
mortgage, hypothecation,
charge or pledge; and the
words "sell", "buy" and
"purchase" with all their
grammatical variations and
cognate expressions shall be
construed accordingly.
Explanation-(i) For the
purposes of this clause, "sale
within the State" includes a
sale determined to be inside
the State in accordance with
the principles formulated in
sub-section (2) of section 4
of the Central Act;
(ii) for the purpose of sub-
clause (b) of the expression
"works contract" means a
contract for execution of
works and includes such works
contract as the State
Government may, by
notification in the Official
Gazette, specify;
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(iii) every transfer of
property in goods by the
Central Government, any State
Government, a statutory body
ora local authority for cash,
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;"
8. Clause (g) of section 2(23) of the VAT
Act has been relied upon by the respondent
authorities for justifying imposition of
value added tax on supply of medicines,
implants, stents, consumables, etc. used
by the petitioner hospitals for treatment
of indoor patients.
9. The petitioners have therefore,
challenged the constitutional validity of
section 2(23)(g) of the VAT Act on the
ground that it is beyond the legislative
competence of the State Legislature.
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10. Prior to enactment of the
Constitution (Forty-sixth Amendment) Act,
1982 which came into effect from
02.02.1983, if there was one entire and
indivisible works contract of service
wherein, though the material used therein
passed through and though the said
contract could be broken for determining
the value of the material used, it was not
exigible to sales tax as the substance of
the contract was not for sale of goods or
materials and therefore, there was no
agreement to sell the goods/materials as
such and the property in the material did
not pass as movables. The Hon'ble Supreme
Court in case of The State of Madras v.
M/s. Gannon Dunkerly and Co.,(Madras) ltd.
reported in AIR 1958 SC 560 has held as
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such.
11. Prior to 46th Constitutional
Amendment, controversy arose as to what
was the scope of the power of the States
to impose tax under Entry 54 of List II of
the Seventh Schedule of the Constitution
of India. The Hon'ble Supreme Court in
case of Gannon Dunkerly (supra) answered
the question whether the State had
competence to impose sales tax on the
goods portion of an indivisible "works
contract" in the negative. It was held by
the Apex Court that 'sale' in the legal
sense was required to be interpreted as
understood under the Sales of Goods Act,
1930 and in case of a "works contract",
the transfer of the property in goods did
not pass pursuant to the agreement to sale
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but by the principle of accretion and
therefore, the State legislatures did not
have competence to impose tax on the goods
component of a "works contract".
12. Following the decision in case of
Gannon Dunkerly (supra), Hon'ble Supreme
Court in similar other cases held that
compulsory sales under the statute (New
India Sugar Mills reported in AIR 1963 SC
1207), food served in hotels (Associated
Hotels of India reported in AIR 1972 SC
1131) and food served in restaurants
(Northern India Caterers (India) Ltd.
reported in AIR 1978 SC 1591), such items
will not qualify as 'sales' as per the
Sales of Goods Act, 1930.
13. In view of decision of the Hon'ble
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Supreme Court in case of Gannon Dunkerly
(supra), Parliament passed the
Constitution (Forty-sixth Amendment) Act,
1982 by inserting clause (29A) in Article
366 of the Constitution of India effective
from 02.02.1983 which reads as under:
"(29A) "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
instalments;
(d) a tax on the transfer of
the right to use any goods for
any purpose (whether or not
for a specified period) for
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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;"
14. Statement of Objects and Reasons of
the Constitution (Forty-sixth Amendment)
Act, 1982 reads as under :
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"STATEMENT OF OBJECTS AND REASONS
Sales tax laws enacted in
pursuance of the Government of
India Act, 1935 as also the laws
relating to sales tax passed after
the coming into the to the footing
that the rule as to broad case
force of Constitution proceeded on
expression "sale of goods", having
regard interpretation of entries
in the legislative lists, would be
given a wider connotation.
However, in Gannon Dunkerley's
(A.I.R. 1958 S.C. 560), the
Supreme Court held that the
expression "sale of goods" as used
in the entries in the Seventh
Schedule to the Constitution has
the same meaning as in the Sale of
Goods Act, 1930. This decision
related to works contracts.
2. By a series of subsequent
decisions, the Supreme Court has,
on the basis of the decision in
Gannon Dunkerley's case, held
various other transactions which
resemble, sales, to be not liable
to sales tax. As a result of these
decisions, a transaction, in order
to be in transactions substance,
by way of subject to the levy of
sales tax under entry 92A of the
Union List or entry 54 of the
State List, should have parties
competent the mutual following
ingredients, namely, assent and
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transfer of property in goods from
parties to the contract to the
other party thereto for a price.
to one contract, of the
3. This position various ways. An
of tax in inter-State or in has
resulted for avoidance of scope
example of this is the practice
transfer of goods from head office
or agent in another State or vice
consignment account, payment of
sales tax on inter-State sales
under the Central Sales Tax
consignment transfers, i.e.,
principal in one State to a versa
branch on transfer of goods. or
case of a to on to avoid the Act.
While in the works contract, if
the contract treats the sale of
materials separately from the cost
of the labour, the sale of
materials would be taxable, but in
the case of an indivisible works
the transfer of levy sales tax
contract, it is not possible
property in the goods involved in
the execution of such contract as
it sale of the materials as such
and the has been held that there
is no property in them does not
pass as movables. Though
practically the at to or a not
purchaser in a hire-purchase
agreement gets the goods on the
date of the hire-purchase, it has
been held that there is sale only
when the purchaser exercises the
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option to purchase at a much later
date and therefore only the
depreciated value of the goods
involved in such transaction the
time the option purchase is
exercised becomes assessable to
sales tax. Similarly, while sale
by registered club or other
association of persons (the club
association of persons having
corporate status) its members is
taxable, sales by an
unincorporated club or association
of persons to its members is
taxable as such club or
association, in law, has no
separate existence from that of
the members. In the Associated
Hotels of India case (A.LR. 1972
S.C. 1131), the Supreme Court held
that there is no sale involved in
the supply of food or drink by a
hotelier to a person lodged in the
hotel.
4. In the New India Sugar Mills
case (A.L.R. 1963 S.C. 1207), the
Supreme Court took transfer of
controlled view that in the
commodities in pursuance of a
direction under a Control Order,
the element of volition by the
seller, or mutual assent, is
absent and, therefore, there is no
sale as defined in the Sale of
Goods Act, 1930. However, in Oil
and Natural Gas Commission Vs.
State of Bihar (A.L.R. 1976 S.C.
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2478), the Supreme Court had
occasion to consider its regard
liability controlled commodities
to be charged to sales tax. The
Supreme Court held that where
statutory compulsions, itself
should be treated as supplying the
consensus and furnishing the
modality of the consensus. In
Vishnu Agencies Vs. Commercial Tax
Officer (A.I.R. 1978 S.C. 449),
six of the seven Judges concurred
in over-ruling the decision, in
New India Sugar Mills case while
the seventh Judge held the case be
distinguishable. It is, therefore,
considered desirable to put the
matter beyond any doubt. carlier
decisions with there are to any to
the of transfers the of statute
5. The various problems connected
with the power of the States to
levy a tax on the sale of goods
and with the Central Sales Tax
Act, 1956 were to the Law
Commission of India. The
Commission considered these
matters in their Sixty-first
Report and, recommended, inter
alia, certain amendments in the
Constitution if as Π matter of
administrative policy it is
decided to levy tax on
transactions of the nature
mentioned in the preceding
paragraphs.
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6. Device by way of lease of films
has also been resulting in
avoidance of sales tax. The main
right in regard to a film relates
to its exploitation and after
exploitation for certain period of
time, in most cases, the film
ceases to have any value. It is,
therefore, that instead of
resorting to the outright sale of
a film, only a leased or transfer
of the right to exploitation is
made.
7. There were reports from State
Governments revenues from sales
tax have been assigned, as the
large scale avoidance of Central
sales leviable inter-State sales
of goods through the device of
consignment of goods from one
State to another and as to the
leakage local sales tax in works
contracts, hire-purchase
transactions, lease of films, etc.
Though Parliament could levy on
these transactions, as tax on
sales has all along been treated
as an item of revenue to be
assigned to the States, in regard
to these transactions which
resemble sales also, it is
considered that the same policy
should be adopted.
8. Besides the above mentioned
matters, a new problem has arisen
as a result of the decision of the
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Supreme Court in Northern India
Caterers (India) Ltd. Vs. Lt.
Governor of Delhi (A.LR. 1978
S.C.. 1591). States have been
proceeding on the basis that the
Associated Hotels of India case
was applicable only to supply of
food drink by hotelier to a person
lodged in the hotel and that tax
was leviable on the sale of
foodstuffs by a restaurant. But
over-ruling the decision of the
Delhi High Court, the Supreme
Court has held in the above case
that service of meals whether in a
hotel restaurant does constitute a
sale of food for the purpose of
levy of sales tax but must be
regarded as the rendering of a
service in the satisfaction of a
human need or ministering to the
bodily want of human beings. It
would not make any difference
whether the visitor to the
restaurant is charged for the meal
as a whole or according to each
dish separately. or not
9. It is, therefore, proposed to
suitably amend include in article
366 a definition of "tax on the
sale goods" by inserting a new
clause (29A). The specifically
include within the scope of that
expression tax on Constitution or
purchase of definition would to
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(i) transfer for consideration
of controlled commodities;
(ii) the transfer of property
in goods involved in the
execution of works contract; a
(iii) delivery of goods on
hire-purchase or any system of
payment by instalments;
(iv) transfer of the right to
use any goods for any purpose
for cash, deferred payment or
other valuable consideration;
(v) the supply of goods by
persons to a an unincorporated
association or body of member
thereof for cash, deferred
payment valuable
consideration; or other
(vi) the supply, by way of or
as part of any service, of
food or any drink for cash,
(See clause 4). deferred
payment or other valuable
consideration.
10. A new entry is sought to be
inserted in the Union List in the
Seventh Schedule, as to entry 92B,
enable the levy of tax on the
consignment ment of goods where
such consignment takes place in
the course of inter-State trade or
commerce. (See clause 5).
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11. Clause (1) of article 269 is
proposed to be amended so that the
levied on the consignment of goods
in course of inter-State trade or
commerce shall be assigned to the
States. Clause (3) of that article
is proposed to be amended to
enable Parliament to formulate by
law principles for determining
when a consignment of goods takes
place in the course of inter-State
trade or commerce. (See clause 2).
the
12. Clause (3) of article 286 is
proposed be amended to enable
Parliament the system of levy,
rates and transfer of goods
involved in the specify, by law,
restrictions and conditions to in
regard the other incidents of the
tax on execution of a works
contract, on the delivery of goods
on hire-purchase or any system of
payment by instalments and on the
right to use any goods. (See
clause 3).
13. The proposed amendments would
help in the augmentation of the
considerable extent. Cluase 6 of
the Bill seeks drink for validate
laws levying tax on the supply of
food consideration and also the
collection or recoveries made by
way of tax under any such law.
However, no sales tax will be
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payable on food or drink supplied
by a hotelier to a person lodged
in the hotel during the period
from the date of the judgment in
the Associated Hotels of India
case and the commencement of the
present Amendment Act if the
conditions mentioned in sub-clause
(2) of clause 6 of the Bill are
satisfied. In the case of food or
drink supplied by Restaurants this
relief will be available only in
respect of the period after the
date case and of judgment in the
Northern India Caterers (India)
Limited the commencement of the
present Amendment Act."
15. Therefore, a short question arises as
to (i) whether the respondent State can
impose tax on the supply of medicines,
stents, implants, consumables etc. used
during the course of treatment of indoor
patients while exercising the power to
impose tax on transactions expressly
defined as "deemed sale" under Article
366(29A) of the Constitution of India and
(ii) whether the decision of the Hon'ble
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Apex Court in case of Gannon Dunkerly
(supra) continues to operate insofar as
transactions other than "deemed sales" are
concerned.
B) Submissions of the petitioners:
16. Learned Senior Advocate Mr. S.N.
Soparkar with learned advocate Mr. Uchit
Sheth and learned advocate Mr. Manish Kaji
for the petitioners submitted that VAT is
not leviable on medicines, implants,
stents, consumables, etc. used during the
course of treatment of indoor patients in
petitioner hospitals. Reliance was placed
on the decision of Hon'ble Apex Court in
case of Gannon Dunkerly (supra) together
with Statement of Objects and Reasons of
the Constitution (Forty-sixth Amendment)
Act, 1982 to submit that none of the
clauses of Article 366(29A) of the
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Constitution of India would be applicable
to consider such supply of medicines,
implants, stents, consumables, etc. as
'deemed sales'.
17. Reference was also made to definition
of 'sale' in section 2(23) of the VAT Act
and more particularly, clause (g) of
section 2(23) to point out that clause
(g) provides that "sale" means supply of
goods by way of or as part of any service
or in any other manner whatsoever is
contrary to Article 366(29A) of the
Constitution of India and therefore, the
same may be declared as ultra vires as the
respondent authorities have invoked
section 2(23)(g) of the VAT Act to levy
value added tax on the supply of
medicines, implants, stents, consumables,
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etc. used for treatment of indoor patients
of the petitioner hospitals. It was
submitted that if comparison is made of
section 2(23)(g) of the VAT Act with
Article 366(29A) of the Constitution of
India, then clauses (g),(i) and (j) of
section 2(23) of VAT Act are not found as
per the Constitution and therefore, such
clauses are required to be declared as
unconstitutional.
18. It was pointed out that clauses (a) to
(d) of section 2(23) of the VAT Act are
same as clauses (a) to (d) of Article
366(29A), Clause (e) of Article 366(29A)
is divided in clause (e) and (f) in
section 2(23) of the VAT Act, whereas
clause (h) of section 2(23) is similar to
that of as clause (f) of Article 366(29A)
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19. It was therefore, submitted that the
respondent State could not levy VAT upon
the use of medicines, implants, stents,
consumables, etc. by the petitioner
hospital for treatment of indoor patients.
20. It was submitted that the case of the
petitioner is squarely covered by the
decision in case of Bharat Sanchar Nigam
Ltd. v/s Union of India (2006) 145 STC 91
(SC) wherein it has been observed as
under:
"43. Gannon Dunkerley [State of
Madras v. Gannon Dunkerley & Co.
(Madras) Ltd., (1958) 9 STC 353 AIR
1958 SC 560: 1959 SCR 379] 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 366(29-A)
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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. [See
Attorney General v. Edison Telephone
Co. of London Ltd., (1880) 6 QBD
244: 43 LT 697] But the Forty-sixth
Amendment does not give a licence,
for 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 [State of
Madras v. Gannon Dunkerley & Co.
(Madras) Ltd., (1958) 9 STC 353: AIR
1958 SC 560: 1959 SCR 379] 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
Sale of Goods Act, 1930 for the
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purpose of levy of sales tax."
21. It was submitted that the Hon'ble
Supreme Court in case of Bharat Sanchar
Nigam Ltd. (supra) has specifically
observed that "hospital services" are not
"deemed sales" and they cannot be taxed
even after the 46th Constitutional
Amendment. Reliance was placed on the
following observations:
"44. Of all the different kinds of
composite transactions the
drafters of the Forty-sixth
Amendment chose three specific
situations, a works contract, a
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-
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clauses of Article 366(29-A) do
not cover hospital services.
Therefore, 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 in
Gannon Dunkerley case[State of
principles Madras v. Gannon
Dunkerley & Co. (Madras) Ltd.,
(1958) 9 STC 353: AIR 1958 SC 560:
1959 SCR 379], 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
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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 if 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" [See Atiyah: The
Sale of Goods, (1995 reprint) p.
27.]. We will, for the want of a
better phrase, call this the
dominant nature test."
22. It was submitted that the
contention of the respondent that the
aforementioned observations of the Hon'ble
Supreme Court are in the nature of obiter
dicta and that only a question is raised
which is not answered by the Supreme Court
is not at all tenable as it is
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specifically stated in para 44 that sub-
clauses of Article 366(29A) do not cover
"hospital services" and the Hon'ble
Supreme Court in paragraph no.45 has
reiterated that such services do not
involve sale for the purpose of Entry 54
of List II of the Seventh Schedule to the
Constitution of India.
23. It was further submitted that the
contention of the respondents that the
observations of the Hon'ble Supreme Court
in the case of Bharat Sanchar Nigam Ltd.
(supra) are no longer good law in view of
subsequent judgements is not at all
tenable and in fact the judgement of
Hon'ble Supreme Court in the case of
Bharat Sanchar Nigam Ltd. (supra) was
specifically referred to and approved by
the subsequent judgements of Hon'ble
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Supreme Court in the case of Larsen and
Toubro Ltd v/s State of Karnataka reported
(2014) 1 SCC 708 as well as judgement of
Hon'ble Supreme Court in the case of Kone
Elevator India Pvt. Ltd. v/s State of
Tamil Nadu reported in (2014) 7 SCC 1.
24. It was submitted that the judgment
of Hon'ble Supreme Court in the case of
Bharat Sanchar Nigam Ltd. (supra) has been
followed by this Court in the case of Deep
Industries Ltd. v/s State of Gujarat
reported in 2018 (16) GSTL 392 (Guj.)
wherein it has been held that composite
contracts other than works contracts,
hire-purchase contracts and catering
contracts cannot be split up by the
authorities.
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25. It was submitted that the case of
the petitioner hospitals is squarely
covered by the decisions of following High
Courts:
(a) International Hospital Pvt. Ltd. v/s
State of UP and Others reported in (2014)
71 VST 139 (All.).
(b) Tata Main Hospital v/s State of
Jharkhand and Others [Writ Petition (T)
No. 2422 of 2006 decided on 7.9.2007.]
(c) Fortis Health Care Ltd. v/s State of
Punjab [WP No. 1922 of 2012 decided on
23.1.2015].
(d) Sanjose Parish Hospital v/s Commercial
Tax Officer [2019 SCC Ker 232.]
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(e) Assistant Commissioner, Anti Evasion,
Kota v/s Kota Eye Hospital and Research
Foundation [(2023) 120 GSTR 161 (Raj.)]
It was submitted that the Hon'ble
Supreme Court has dismissed Special Leave
Petitions filed by the States against the
decisions of Hon'ble Allahabad High Court
in the case of International Hospital Pvt.
Ltd. (supra) as well as Hon'ble Jharkhand
High Court in the case of Tata Main
Hospital (supra).
26. It was further submitted that when
the issue with respect to scope of Entry
54 of List II of the Seventh Schedule to
the Constitution of India and its non-
applicability to hospital services have
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been decided by various High Courts, such
decisions should be followed by this
Court. Reliance is placed in this regard
on judgement of this Court in the case of
Commissioner of Income Tax, Gujarat v/s
Sarabhai Sons Ltd. reported in (1983) 143
ITR 473 (Guj.).
27. It was further submitted that the
case of the petitioner is also squarely
covered by judgement of House of Lords of
England in the case of Beynon and Partners
(Respondents) v/s Her Majesty's
Commissioners of Customs & Excise
(Appellant), reported in (2004) UKHL 53
wherein it is held that services of
doctors would constitute single supply of
service and that it would not be
permissible to split up the transactions
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so as to impose VAT on drugs administered
during the course of providing medical
service.
28. It was further submitted that while
the State has competence to impose tax on
deemed sales as defined under Article
366(29A) of the Constitution of India,
clause (g) of Section 2(23) of the VAT Act
clearly seeks to expand the definition of
"sale" beyond the constitutional contours
by permitting splitting up of any
transaction even if it does not fall
within definition of "deemed sales" under
the Constitution and therefore, the
impugned provision is clearly
unconstitutional.
29. It was submitted that once it is
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concluded that a statutory provision is
unconstitutional, the same cannot be saved
on mere statement on behalf of the
Respondent-State that the same would not
be applied in the case of the Petitioners
and therefore, provision is required to be
declared as unconstitutional.
30. It was submitted that for the
purpose of imposition of service tax under
the Finance Act, 1994, the healthcare
services by a clinical establishment were
considered to be a "service" which was
exempt from tax by Entry No. 2 of
Notification No. 25/2012-Service Tax dated
20.6.2012. Thus, the entire intention of
the Government was not to impose burden of
tax on healthcare services. This intention
is sought to be defeated by the States by
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seeking to artificially splitting up
healthcare services and taxing the
medicines, implants, etc. used in
providing such services.
31. It was submitted that the GST regime
has replaced the VAT and service tax
regime from 1.7.2017 but the healthcare
services continue to be fully exempted by
virtue of Entry no. 74 of Notification no.
12/2017 Central Tax (Rate) dated 28.6.2017
and it has been further clarified by the
Central Board of Indirect Taxes and
Customs vide Circular no. 32/06/2018-GST
dated 12.2.2018 that even food that is
supplied to indoor patients is part of
composite supply of healthcare services
which is not separately taxable under the
GST Acts.
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32. It was submitted that it has been held
by the Kerala Authority for Advance Ruling
in the case of M/s Ernakulam Medical
Centre Pvt. Ltd. in Advance Ruling
No.Ker/16/2018 dated 19.09.2018 as well as
by the Tamil Nadu Advance Ruling authority
in the case of Shifa Hospitals in Order
No.42/AAR/2019 dated 23.09.2019 that
medicines, consumables, implants, etc.
used for treatment of indoor patients
would be considered as part of composite
supply of "healthcare services" and they
would not be taxable under the GST Acts.
Reliance was placed in this regard on
judgment of Hon'ble Supreme Court in the
case of Yogendra Nath Naskar v/s
Commissioner of Income Tax reported in
(1969) 1 SCC 555.
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33. Learned Senior Advocate Mr. Soparkar
in the case of petitioner - Gujarat
Research and Medical Institute, in
alternative submitted that it is a
charitable hospital registered under
Section 12AA of the Income Tax Act, 1961,
it is therefore outside the purview of the
Vat Act by virtue of Exception (iii) to
Section 2(10) of the Vat Act as held by
this Court in the case of Bhailal Amin
General Hospital v/s State of Gujarat [Tax
Appeal No. 1673 of 2009 decided on
1.8.2016]. It was submitted that the levy
of tax on charitable hospital is therefore
required to be quashed on this ground also
apart from the other common contentions
already made herein before which are
applicable to all the hospitals.
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C)Submissions of the respondents
34. On the other hand learned Advocate
General Mr. Kamal Trivedi for the
respondents submitted that while
challenging the constitutional validity of
Clause (g) of Section 2(23) of the Gujarat
Value Added Tax Act, 2003, the petitioners
have contended that the health care
service being provided by a clinical
establishment in favour of its indoor
patients along with supply of medicaments
and prosthetics, etc. during the course
whereof, is not the "works contract, and
hence, not excisable under the VAT Act,
however, transfer/delivery/ supply of
medicaments and prosthetics by the
petitioner hospitals in favour of their
indoor patients during the course of
providing treatment, should be considered
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as "deemed sale", as defined under Article
366(29A) of the Constitution of India and
consequently, the sale component involved
in the health care service rendered by the
petitioner hospitals, is exigible to tax
under the VAT Act. It was submitted that
the said transfer/ delivery/ supply of
medicaments and prosthetics by the
petitioners in favour of its indoor
patients during the course of providing
treatment, would be covered by sub-clause
(b) of Article 366(29A) of the
Constitution of India, failing which, in
sub-clause (a) of Article 366(29A) of the
Constitution of India.
35. It was submitted that the term
'works contract' used in sub-clause (b) of
Article 366 (29A) has not been defined
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under the Constitution. The ordinary
meaning of the term "works" means a
structure or apparatus of some kind,
architecture, engineering structure or a
building edifice, etc. whereas commonly
understood meaning of the expression
"works contract" is a contract or an
understanding to do some work on behalf of
somebody else. However, the Hon'ble Apex
Court in case of Larsen & Toubro Limited
vis. State of Karnataka, reported in
(2014) 1 SCC 708, while referring to the
aforesaid ordinary meaning with reference
to the expression "works contract" as
defined under Section 2(1)(vii) of the
Kamataka Sales Tax Act, 1957, which was
confined to building, construction, etc.
observed as under:
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"72. In our opinion, the term
'works contract in Article
366(29A)(b) is amply wide and
cannot be confined to a particular
understanding of term or to a
particular form. The term
encompasses a wide range and many
variety of contract the term
'works contract' in Article
366(29A)(b) takes within its fold
all genre of works contract and is
not restricted to one specie of
contract to provide for labour and
service alone. Parliament had all
genre of works contract in view
when clause(29A) was inserted in
Article 366."
36. It was submitted that similarly,
while dealing with the definition of the
term "works contract" given in Section
2(i) of the Madras General Sales Tax Act,
1947, as interpreted by the Hon'ble Apex
Court in case of State of Madras vs. M/s.
Gannon Dunkerley and Co., reported in AIR
1958 SC 560 , the Hon'ble Apex Court in
the above case of Larsen & Toubro (supra)
held as under:
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"67. Now, if by legal fiction
provided in clause (29A) of
Article 366, the works contract
becomes separable and divisible,
one for the materials and the
other for services and for the
work done, whatever has been said
by this Court in Gannon
Dunkerley(1) with regard to the
definition of works contract in
Section 2(i) of the Madras General
Sales Tax Act pales into
insignificance insofar as ambit
and scope of the term 'works
contract within the meaning of
Article 366(29A) is concerned. To
say that insertion of clause 29(A)
of Article 366 has not undone
Gannon Dunkerley(1) in any manner,
in our view, is not correct. The
narrow meaning given to the term
'works contract' in Gannon
Dunkerley(1) now no longer
survives."
37. Referring to the following
Explanation (ii) to section 2(23) of the
VAT Act explaining the expression "works
contract" it was submitted that the
expression is also required to be
appreciated and understood in light of the
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constitutional meaning of the said
expression:
"Explanation-
(i) xxxxx
(ii) for the purpose of sub-
clause (b) of the expression
"works contract means a contract
for execution of works and
includes such works contract as
the State Government may, by
notification in the Official
Gazette, specify."
38. Further reliance was placed on the
following observations of the Hon'ble Apex
Court in the case of Larsen & Toubro
(supra):
"87...... in our opinion, the
distinction between contract for
sale of goods and contract for
work for service) has almost
diminished in the matters of
composite contract involving both
contract of work / labour and a
contract for sale, for the
purposes of article 366(29A)(b)."
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39. It was submitted that the Hon'ble
Supreme Court in the case of State of
Karnataka vs. Pro Lab, reported in (2015)
8 SCC 557 in para 20 thereof held that:
".... after insertion of clause
(29A) in Article 366, the works
contract which was indivisible one
by legal fiction, altered into a
contract, which is permitted to be
bifurcated into two; one for "sale
of goods" and the other for
"services", thereby making goods
component of the contract exigible
to sale tax. Further, while going
into this exercise of
divisibility, dominant intension
behind such a contract, namely
whether it is for sale of goods or
for services, is rendered otiose
or immaterial."
40. It was therefore submitted that
while considering the aforesaid law laid
down by the Apex Court, it is amply clear
that an arrangement providing for any
"service", where the factum of supply of
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the goods (tangible or intangible) is
discernible, though being essentially a
service contract, would be nothing but a
"composite contract" providing for
"service" and "goods", falling within the
purview of the term "works contract".
41. It was submitted that in light of
the aforesaid discussion, even if such a
composite contract is single and
indivisible contract, then in that
eventuality also, by virtue of legal
fiction introduced by sub-clause (b) of
Article 366(29A) of the Constitution, it
would amount to "deemed sale" of goods
which are involved in the execution of the
works contract and exigible to VAT. It
was submitted that it has been
categorically held by the Apex Court in
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case of Larsen and Toubro (supra) in para
87 thereof, the distinction between
contract for sale of goods and contract
for service has almost diminished in the
matter of composite contract involving in
both a contract of service / labour and a
contract for sale of goods for the
purposes of sub-clause (b) of Article
366(29A) of the Constitution.
42. It was submitted that so far as the
present case is concerned, undisputedly
the petitioners are providing "services",
i.e. health care services to their
patients together with supply of
medicines, implants stent, consumables
etc. The said aspect is also discernible
on cumulative reading of Sections 65B (44)
and 65(105)(zzzzo) of the Finance Act,
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1994, which considers the 'health care
services' provided by clinical
establishments to any person as 'taxable
services'. Reference was made to Section
65B(44) of the Finance Act, 1994, which
defines the term "service" as under:
"65B. in this chapter, unless,
the context otherwise requires -
(44) service" means any activity
carried out by a person for
another for consideration, and
Includes a declared service, but
shall not include
(a) an activity which constitutes
merely
(i) transfer of title in goods or
immovable property, by way of
sate, gift or in any other manner;
or
(ii) such transfer, delivery or
supply of any goods which is
deemed to be a sate within the
meaning of clause (29A) of article
366 of the Constitution, or
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(iii) a transaction in money or
actionable claim;
(b) a provision of service by an
employee to the employer in the
course of or in relation to his
employment,
(c) fees taken in any Court or
tribunal established under any law
for the time being in force.
Explanation 1. For the removal of
doubts, it is hereby declared that
nothing contained in this clause
shall apply to,-
(A) the functions performed by the
Members of Parliament. Members of
State Legislative, Members of
Panchayats, Members of
Municipalities and Members. of
other local authorities who
receive any consideration in
performing the functions of that
office as such member, or
(B) the duties performed by any
person who holds any post in
pursuance of the provisions of the
Constitution in that capacity, or
(C) the duties performed by any
person as a Chairperson or a
Member or a Director in a body
established by the Central
Government or State Governments or
local authority and who is not
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deemed as an employee before the
commencement of this section.
Explanation 2. For the purposes of
this clause, the expression
"transaction in money or
actionable claim" shall not
include
(i) any activity relating to use
of money or its conversion by cash
or by any other mode, from one
form, currency or denomination, to
another form, currency or
denomination for which a separate
consideration is charged;
(ii) any activity carried out, for
a consideration, in relation to,
or for facilitation of, a
transaction in money or actionable
claim, including the activity
carried out-
(a) by a lottery distributor or
selling agent on behalf of the
State Government, in relation to
promotion, marketing, organising,
selling of lottery or facilitating
in 7 organising lottery of any
kind, in any other manner, in
accordance with the provisions of
the Lotteries (Regulation) Act,
1998, (17 of 1998):]
(b) by a foreman of chit fund for
conducting or organising a chit in
any manner;
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Explanation 3. For the purposes of
this Chapter,
a) an unincorporated association
or a body of persons, as the case
may be, and a member thereof shall
be treated as distinct persons;
(b) an establishment of a person
in the taxable territory and any
of his other establishment in a
non-taxable territory shall be
treated as establishments of
distinct persons.
Explanation 4. A person carrying
on a business through a branch or
agency or representational office
in any territory shall be treated
as having an establishment in that
territory."
43. Thereafter reference was made to
Section 65(105)(zzzzo) of the Finance Act,
1994 which deals with "taxable service",
wherein the services being provided by a
clinical establishment or by a doctor not
being an employee of a clinical
establishment, would be "taxable service"
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as under:
"65. In this chapter, unless the
context otherwise requires, -
105. "taxable service" means any
service provided or to be provided
-
(zzzzo) to any person, -
(i) by a clinical establishment,
or
(ii) by a doctor, not being an
employee of a clinical
establishment, who provides
services from such premises for
diagnosis, treatment or care for
illness, disease, injury,
deformity, abnormality or
pregnancy in any system of
medicine;"
44. It was therefore submitted that the
treatment given to the patients in the
clinical establishment is nothing, but a
"service" being provided by a clinical
establishment, along with supply of
medicaments, prosthetics, etc. This would,
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at best be a composite arrangement called
'a composite service contract' involving
rendition of "service", as well as "sale
of goods" i.e. medicaments and
prosthetics, etc. which would be falling
within the term "works contract". Such a
composite arrangement is now divisible by
legal fiction after 46th Constitutional
Amendment and can attract the service tax
on the value of service being provided and
would attract the tax on the "deemed
sales" of the movables/articles, used
during the course of the execution of the
said 'service contract'. It was however
pointed out that by Entry No. 2 of
Notification No. 25/2012-Service Tax dated
20.6.2012, health care service were
exempted.
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45. Relying upon the case of Associated
Cement Companies Ltd vs. Comm. Customs,
reported in (2001) 4 SCC 593, it was
submitted that the Apex Court while
dealing with the contract for providing
Architectural Services including design-
development drawing, observed as under:
"26 ....The Forty-sixth Amendment
was made precisely with a view to
empower the State to bifurcate the
contract and to levy sales tax on
the value of the material involved
in the execution of the works
contract, notwithstanding that the
value may represent a small
percentage of the amount paid for
the execution of the works
contract. Even if the dominant
intention of the contract is the
rendering of service, which will
amount to a work contract, after
the Forty-sixth Amendment the
State would now be empowered to
levy sales tax on the material
used in such contract."
46. It was further submitted that in the
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later judgment of the Apex Court in case
of Commissioner, Central Excise & Customs,
Kerala v/s. Larsen & Toubro Limited,
reported in (2016) 1 SCC 170 following
five services specified under Section
65(105) of the Finance Act, 1994,
containing non-service elements in
addition to service elements in composite
contracts, were held to be "works
contract" liable to sales tax, with a
categorical remark that if the said
services were "service contracts
simpliciter without any other element in
them", would not be excisable to sales tax
by the State Authorities.
47. Thereafter reference was made to the
following observations of the Hon'ble Apex
Court in case of Larsen & Toubro Ltd.
(supra):
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"15 ....... In the present case,
the dichotomy is between sales tax
leviable by the States and service
tax leviable by the Centre. When
it comes to composite indivisible
works contracts, such contracts
can be taxed by Parliament as well
as State legislatures. Parliament
can only tax the service element
contained in these contracts, and
the States can only tax the
transfer of property in goods
element contained in these
contracts. Thus, it becomes very
important to segregate the two
elements completely.
xxxx
23. This would unmistakably show
that what is referred to in the
charging provision is the taxation
of service contracts simpliciter
and not composite works contracts,
such as are contained on the facts
of the present cases, it will also
be noticed that no attempt to
remove the non-service elements
from the composite works contracts
has been made by any of the
aforesaid Sections by deducting
from the gross value of the works
contract the value of property in
goods transferred in the execution
of a works contract.
24. In fact, by way of contrast,
Section 67 post amendment (by the
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Finance Act, 2006) for the first
time prescribes, in cases like the
present, where the provision of
service is for a consideration
which is not ascertainable, to be
the amount as may be determined in
the prescribed manner."
48. It was therefore submitted that any
composite arrangement for providing
medical services in a clinical
establishment along with supply/
introduction of medicaments and
prosthetics, would be covered by sub-
clause (b) of Article 366(29A), which
provides for "sales tax on transfer
property in goods (whether as goods or in
some other form) involved in execution of
work contract".
49. With regard to the contention
raised by the petitioners that as there is
no accretion in the present case, the same
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cannot fall within the purview of 'works
contract", it was submitted that after the
46th Constitutional Amendment and the law
laid down by the Hon'ble Supreme Court in
the case of Laser & Toubro Limited
thereof, there cannot be any absolute
proposition in law that the ownership of
the goods must pass by way of accretion,
but can pass under the terms of a contract
or by statute. Thus, the tests laid down
in the judgments prior to the 46th
Constitutional Amendment would not be
applicable. In addition, in the case of
Kone Elevator (supra), more particularly
in para 70 thereof it has been observed
that "once there is a composite contract
for supply and installation, it has to be
treated as a works contract, for it is not
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a sale of goods/chattel simpliciter. It is
not chattel sold as chattel or, for that
matter, a chattel being attached to
another chattel". It was submitted that in
fact, in subsequent and recent judgments
of the Hon'ble Supreme Court, where the
Hon'ble Supreme Court was dealing with
purely service contracts with respect to
Processing and Supplying Photographs, Pest
Control Service and Supplying and Laying
down Pipelines, though there is no aspect
of accretion involved in such service
contracts, the same have been considered
to be "works contract", falling under
clause (b) of Article 366(29A) of the
Constitution.
50. It was submitted that on the basis
of the scope, purview and meaning of the
expression "works contract", the following
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service contracts have been held to be
"works contract" within the meaning of
clause (b) of Article 366(29A) of the
Constitution, wherein the element of sale
of any material/goods being discernible
has been held to be taxable by the State
Authorities, regardless of the fact
whether the element of service contained
therein, was taxable or not at the hands
of the Central Government:
a) Contract for providing Architectural
Service including Design Development
Drawings, as dealt with by the Apex Court
in case of Associated Cement Company
Limited v/s. Comm. Customs, reported in
(2001) 4 SCC 593.
b) Contract of Financial Leasing Services,
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as dealt with the Apex Court in case of
Association of Leasing and Financial
Service Co. vis. Union of India, reported
in (2011) 2 SCC 352.
(c) Contract of Manufacture, Supply and
Installation of Lift as dealt with the
Apex Court in case of Kone Elevator India
Pvt. Ltd. v/s. State of Tamil Nadu,
reported in (2014) 7 SCC 1.
(d) Contract of Processing and Supplying
Photographs as dealt with the Apex Court
in case of State of Karnataka vis. Pro
Lab, reported in (2015) 8 SCC 557.
(e) Contract of providing Pest Control
Service - as dealt with the Apex Court in
case of State of Gujarat v/s. Bharat Pest
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Control, reported in (2018) 14 SCC 685.
(f) Contract of Supplying and Laying down
Pipelines as dealt with the Apex Court in
case of Indian Hume Pipe Co. Ltd. v/s.
State of Rajasthan reported in (2019) 14
SCC 584.
(g) Arrangement / Contract for providing
Medical Services along with the Supply of
Medicaments and Prosthetics as dealt with
the Apex Court in case of MIOT Hospital
Ltd. vs. State of Tamil Nadu, reported in
2020 SCC OnLine Mad 28124.
51. Learned Advocate General Mr. Trivedi
submitted that the reliance placed by the
petitioners on the observations made by
the Apex Court in para 44 of the judgment
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of the Apex Court in case of BSNL vs.
Union of India, reported in (2006) 3 SCC
1, is totally misplaced, inasmuch as, in
the said case, as observed in para 33
thereof, the Apex Court was considering
the construction, particularly of sub-
clause (d) of Article 366 (29A) of the
Constitution and hence, there was no
occasion before the Apex Court to consider
the aspect of health care services
provided by different hospitals, which can
be covered under sub-clause (b) of Article
366(29A). Further, even in the said para
44, the Apex Court has merely raised
questions, but without answering them and
has not held that the hospital services
would not be covered within the term
"works contract" used in sub-clause (b) of
the Article 366 (29A) of the Constitution.
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Thus, the observations "For example, the
sub-clauses of Article 366 (29A) do not
cover hospital services. Therefore, if
during the treatment of patient in a
hospital, he or she is given a pill, can
the Sales Tax Authorities tax the
transaction as the same?", as contained in
para 44 of the said judgment form obiter
dicta, inasmuch as the said issue was not
consciously determined by the Hon'ble Apex
Court. Further, the said observations also
do not form the ratio decidendi of the
said judgment inasmuch as the same was not
necessary for disposal of the said case,
which was dealing with the interpretation
of sub-clause (d) of Article 366(29A),
involving tax on the transfer of the right
to use any goods i.e. electromagnetic
waves generated through mobile phone
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connection. In support of such contention,
reliance is placed on the following
judgments:
(i) Kamleshkumar Ishwardas Patel vs. Union
of India, reported in (1994) Mh.L.J. 1669.
(ii) Arnit Das vs. State of Bihar,
reported in (2000) 5 SCC 488.
(iii) Career Institute Educational Society
vs. Om Shree Thakurji Educational Society,
reported in 2023 SCC Online SC 586.
52. It was submitted that in case of
Bharat Sanchar Nigam Ltd.(supra), the Apex
Court was confronted with a question as to
whether the transaction by which mobile
phone connections are enjoyed by the
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subscribers, having "right to use
electromagnetic waves /radio frequencies",
would be a 'deemed sale' under Article 366
(29A)(d) of the Constitution which deals
with "the transfer of right to use any
goods". Ultimately, it was held that the
electromagnetic waves / radio frequencies
are not "goods", and hence, no question
arises of transfer of right to use the
same and hence, there cannot be any
"deemed sale" of the goods for the purpose
of Article 366(29A)(d). However, at the
same time, the Apex Court also held that
it is possible for the State to tax the
sale element in a composite contract of
providing telephone connection, provided
there is a discernible sale. It was
submitted that even the observation in
para-44 of the Apex Court in the case of
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Bharat Sanchar Nigam Ltd. (supra), to the
effect that "splitting of the service and
supply has been constitutionally permitted
only in case of the works-contract covered
by sub-clause (b), a hire-purchase
contract covered by sub-clause (e) and a
catering contract covered by sub-clause
(f) of Article 366(29A)", is required to
be appreciated in light of what has been
further elaborated in para-49 of the
judgment as under:
"49 We agree. After the Forty-sixth
Amendment, the sale element of those
contracts which are covered by the six
sub-clauses of clause (29-A) of
Article 366 are separable and may be
subjected to sales tax by the States
under Entry 54 of List Il and there is
no question of the dominant nature
test applying."
53. It was further submitted that even
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while assuming without admitting the above
referred arrangement of providing health
care services in a clinical establishment
along with the supply of medicaments,
prosthetics etc. is not a "works
contract", then in that case also, the
supply/transfer of medication and
prosthetics in favour of a patient would
be taxable within the purview of sub-
clause (a) of Article 366(29A) of the
Constitution, which deals with "tax on
transfer, otherwise than in pursuance of a
contract, of property in any goods for
cash, deferred payment or other valuable
consideration", more particularly when, it
has got all the three elements of (i)
there being goods, (ii) there being
transfer of property of goods, and (ii)
there being valuable consideration. It was
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submitted that this was so held by the
Apex Court in case of Sunrise Associates,
vis. Government of NCT of Delhi, reported
in (2006) 5 SCC 603.
54. Learned Advocate General Mr. Trivedi
thereafter relied upon the following
averments made in affidavit in reply:
"10. The petitioners hospital has
issued invoices and received sale
price at the Maximum Retail Price
(MRP) inclusive of all taxes
including sales tax. Once the
dealer has collected the entire
price including tax, it must pay
it to the government treasury.
Otherwise, I would amount to
unjust enrichment. By way of
specimen, copies of the 3 Medicine
Requisition Forms along with the
corresponding invoices in respect
of various lems and medicines sold
at MRP to in-patients to the
hospital are attached herewith and
collectively marked Annexure-
(Colly) at pgs 312-317 (Para 10 pg
304 of the Affidavit-in-Reply of
the Respondents)
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14. I respectfully say that as the
normal practice prevalent in the
State in all the commercial
hospital including that of the
petitioners, an amount is
deposited by the patients at the
time of admission as indoor
patients which is adjusted/applied
towards the cost of service as
well as goods, i.e. medicines and
other consumables wherefrom an
element of sale, of course being
part of the service/treatment
being provided for, is very much
discernible and that, therefore,
after the 48 Constitution
Amendment in Article 366(29A) the
State Legislature has full
competence to levy sales tax with
reference to sale of medicines and
other consumables as contemplated
under Article 368(204)(b) and/or
Article 366(2A)(a) and/or Article
306(29A)(f) of the Constitution
read with Section 223(g) of the
VAT Act at pgs 307-308 (Para 14
@pg.307-306 of the Affidavit-in-
Reply of the Respondents)
xxxx
17. Further, in respect of several
inpatients, the detailed bills
towards medicines were scrutinised
and it was observed after checking
their price with the labels of
medicines that all the drugs and
medicines supplied to the in-
patients were sold at maximum
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Retail Price (MRP) which was
inclusive of all taxes and in some
cases, even amount higher than MRP
were charged It was after taking
all these factual matrix and
documentary evidence into
consideration that the audit
assessment order under the VAT Act
was passed by the concerned
respondent herein. Coples of such
invoices, the detailed ledger and
bifurcation of drugs and
medicines, sample copies of
medicine requisition forms and
copies of invoices of sale of
drugs and medicines issued to in-
patients and a statement
indicating prices of drugs and
medicines charged from patients
along with their invoices
accompanied by the labels of the
drugs and medicines indicating the
MRP of the said drugs and
medicines are annexed herewith and
collectively marked as Annexure
Colly. at pg 318-350."
55. Referring to the decision in case
of Tata Main Hospital v/s. State of
Jharkhand reported in 2008 (2) JCR 174
(JHR) relied upon by the petitioners it
was submitted that though the tests of
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"dominant intention" and "substance of
contract have been given a go-bye with
reference to the concept of "deemed sale"
provided by way of legal fiction in case
of six categories specified from sub-
clauses (a) to (f) of Article 386(29A) of
the Constitution, paragraphs 12 and 25 of
the Judgment clearly hold that the test of
deciding whether the contract falls into
one of the aforesaid categories or the
other is as to what is the subsistence of
contract or the dominant nature test. It
was submitted that the aforesaid judgment
runs counter to the dictum of law laid
down by the Apex Court in various
judgments cited on behalf of the
respondent State, and hence, it is not a
good law.
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56. Referring to the judgment in case
of International Hospital Pvt. Ltd, v/s.
State of Uttar Pradesh reported in (2014)
71 VST 139 (All) relied upon by the
petitioners, it was submitted that the
said judgment proceeds on the acceptance
of proposition that a composite
arrangement of providing medical services
as well as medicament and prosthetics are
not covered by any of the 6 categories
specified from sub-clauses (a) to (f) of
Article 366(29A) of the Constitution,
without determining as to why and how the
said composite arrangement cannot be
covered by any of the said categories. It
was submitted that paragraph 9 of the said
Judgment clearly suggests that the Hon'ble
Allahabad High Court had straightaway
accepted that neither of the 6 sub-clauses
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of Article 366 (29A) of the Constitution
is attracted to the aforesaid composite
arrangement. It was submitted that the
judgment of Hon'ble Allahabad High Court
follows the aforesaid judgment of Hon'ble
Jharkhand High Court, which is not a good
law and therefore, the said judgment also
runs counter to the dictum of law laid
down by the Apex Court in the above
referred judgments and hence, it is not at
all a good law.
57. Referring to the decision in case of
Forties Health Care Limited v/s. State of
Punjab (supra) relied upon by the
petitioners it was submitted that
paragraph 23 of the said Judgment clearly
suggests that the Hon'ble Punjab and
Haryana High Court has merely proceeded on
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the footing that the Hon'ble Apex Court in
case of Bharat Sanchar Nigam Ltd. (supra)
specifically observed (though as an
illustration), that "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."
58. Referring to the decisions in case
of Assistant Commissioner, Kota, Kota Eye
Hospital & Research Foundation, reported
in (2023) 120 GSTR 161 (Raj) in case of
Sanjose Parish Hospital vs. Commercial Tax
Officer reported in (2019) SCC OnLine Ker
232 relied upon by the petitioners, it was
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submitted that in the said case also, the
Hon'ble High Courts of Rajasthan and
Kerala did not undertake the exercise of
evaluating as to whether the hospital
services would be falling within the
purview of "works contract" under the sub-
clause (b) of Article 366 (29A) of the
Constitution and without there being any
such evaluation, it has gone on the basis
that the said services are not falling
within any of the sub-clauses of Article
366(29A), and that, dominant intention
test has been applied.
59. It was submitted that all the five
judgments have, at the outset, accepted
the conclusion that hospital services are
not covered by any of the six
categories /contingencies of "deemed sale"
provided from clauses (a) to (f) of
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Article 366(29A), without discussing as to
why and how the same cannot be covered
even in any of the said six categories,
much less, as "works contract" and also
without appreciating the well settled
legal position flowing from various
judgements of the Apex Court, referred to
and relied upon by the Respondent-State.
60. With regard to the opinions of the
House of Lords in Appeal for judgment in
the case relied upon by the petitioners,
it was submitted that the United Kingdom,
Value Added Tax Act, 1994 does not provide
for any legal fiction like what is
available in Indian Constitution in
respect of six categories/transactions
specified under clauses (a) to (f) of
Article 366(29A) where "transfer",
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"delivery" or "supply" of goods that may
take place under any of the categories
referred to in clauses (a) to (f) of
Article 366(29A), whereby the transactions
involved in any of the said six
categories, by legal fiction, would stand
altered into a contract, which would be
divisible into sale of goods and other
supply of services. It was submitted that
in para 30 of the said judgment, "test of
dominant intention", was pressed in
service, which is otherwise not applicable
in our country in respect of six
categories/contingencies, referred to
above, in sub-clauses (a) to (f) of
Article 366(29A).
61. With regard to decision in case of
Deep Industries Ltd. v/s. State of Gujarat
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reported in 2018 (16) GSTL 392 (Guj.),
relied upon by the petitioners, it was
submitted that in the said case, this
Court was dealing with the issue that as
to whether the service contracts entered
into by the Petitioners therein with ONGC
would be exigible to Tax under the VAT
Act. It was submitted that in the said
service contract, the equipment in
question i.e. workover rigs, always
remained with and under the control of the
Petitioner therein and at no point the
same were delivered to the ONGC nor ONGC
ever used the same to the exclusion of the
Petitioner therein, thus, in light of such
facts and circumstances where the control
of the goods and equipment in terms of
effective possession never passed from one
person to another, this Hon'ble Court held
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that the sales tax would not be applicable
on such service contracts, since there is
no transfer of right to use goods whereas,
in the present case, the ownership and
possession of the equipment in question
i.e. medicines and prosthesis get
transferred in favour of the patients
during the course of treatment undertaken
at the hospital. Thus, the said Judgment
cannot be made applicable to the facts of
the present case.
62. Referring to Notification No.25 of
2012-ST dated 20.06.2012, as amended
relied upon by the petitioners it was
submitted that merely because the said
Notification issued by the Central
Government issued under the Finance Act,
1994 dealing with service tax regime under
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the jurisdiction of the Central
Government, exempts "health care services"
by a clinical establishment, etc. from the
payment of whole of the service tax
leviable under Section 66(B) of the
Finance Act, 1994, it does not necessarily
mean that similar such exemption should
also follow as a matter of course, in the
matter of payment of Value Added Tax
under the Gujarat Value Added Act, 2003
under the jurisdiction of the State
Government.
63. It was submitted that reliance
placed on Notification No.12/2017-Central
Tax (Rate) dated 18.06.2017 issued under
Section 11 of CGST Act, Circular bearing
F. No. 354/17/2018-TRU dated 12.02.2018,
Advance Ruling No.KER/16/2018 dated
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19.09.2018 and Advance Ruling
No.42/AR/2019 dated 23.09.2019 of State of
Tamil Nadu Advance Ruling Authority relied
by the petitioners are issued/passed
under the later law i.e. Goods and Service
Tax Act, 2017 which is totally
misconceived inasmuch as, under the GST
Act, there is a concept of "composite
supply" and further, the GST Act has
marked a significant advancement in
cooperative federalism by enabling the
Centre and States to levy taxes on goods
and services concurrently, by merging
various taxes including Service Tax Act
and Sales Tax Act. Therefore, the said GST
Act cannot be compared with VAT Act 2003,
more particularly for the aspect of
"deemed sale". It was therefore submitted
that this is more particularly in view of
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the fact that as per the provisions of
Sections 2(30), 2(74), 2(90) and 8 of the
GST Act read with entry 6 of Schedule II
to the GST Act, for ascertaining the tax
liability on the composite supply, the tax
is to be considered on the principal
supply involved in the said composite
supply. It was submitted that after the
enactment of the GST Act, with respect to
the "composite supply" of goods and
services, the dominant intention involved
therein in the manner of principal supply
has been incorporated, and hence,
virtually, the era of pre-46th
Constitutional Amendment has been brought
back with respect to "composite supply".
Therefore, the above-referred
Notifications, Circulars and Advance
Rulings cannot be relied upon for
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evaluating the issues raised in these
petitions, which are admittedly with
respect to post-46th Constitutional
Amendment period, where the aspect of
"deemed sale" is provided and for that,
"dominant intention" test was given a go-
by.
64. Referring to the decision in case
of Yogendra Nath Naskar v/s. Comm. Of
I.T., reported in (1969) 1 SCC 555 relied
upon by the petitioners it was submitted
that the said judgment has been pressed in
service to contend that while interpreting
the provision of the earlier law,
corresponding provision in the later law,
which has been in currency, should be
taken into consideration, however, in the
said judgment, the Hon'ble Apex Court,
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while interpreting the term "Individual"
occurring under the Income Tax Act, 1961,
guidance was derived from the definition
of a very term available under the Income
Tax Act, 1922, which made the meaning of
the term "explicit" which was "implicit"
under the 1961 Act. It was submitted that
in the present case, reliance on the later
law i.e. Goods and Service Tax Act, for
interpreting the provisions of VAT Act, is
totally misconceived inasmuch as, both the
Acts are quite different from each other
and more particularly in view of the
aspect of "composite supply' in the GST
Act. It was therefore submitted that in
the aforesaid judgment, the Acts during
pre and post Amendment, had remained the
same i.e. Income Tax Act, hence, the same
cannot be applied to the facts of the
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present case.
65. Referring to the decision in case of
Commissioner of Income Tax, Gujarat-1,
v/s. Sarabhai Hospital, reported in 1983,
Vol.143 ITR 473 relied upon by the
petitioner, it was submitted that the
said judgment has been relied upon to
contend that in conformity with the
unanimous policy laid down in the Income
Tax matters, whatever view has been taken
by another Court on interpretation of the
provisions of all India Statute, the same
must be accepted. It was submitted that it
was on the basis of the aforesaid
philosophy that the Petitioners contend
that five judgments of all the Hon'ble
High Courts of Jharkhand, Allahabad,
Punjab & Haryana, Kerala and Rajasthan
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are being required to be followed by this
Hon'ble Court. It was submitted that all
the aforesaid five judgments have, at the
outset, accepted the conclusion that
hospital services are not covered by any
of the six categories/contingencies of
"deemed sale" provided under sub-clauses
(a) to (f) of Article 366(29A), without
discussing as to why and how the same
cannot be covered even in any of the said
six categories, much less, as "works
contract" and also without appreciating
the well settled legal position flowing
from the later judgements of the Apex
Court, hence, under such circumstances,
the said judgments, with respect, do not
deserve to be followed and therefore, the
aforesaid judgment in case of Commissioner
of Income Tax (supra), cannot be made
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applicable to the facts of the present
case.
66. Referring to decision in case of
Bhailal Amin General Hospital v/s. State
of Gujarat, reported in 2016 SCC OnLine
Guj. 2539 relied upon by the petitioners
it was submitted that the aforesaid case
went in an appeal filed under Section 78
of the VAT Act for exempting the Appellant
Hospital from sales tax liability on the
ground that the same was found to be a
charitable hospital on the basis of the
material evidence available on record, as
observed in Para-5 of the said judgment,
whereas, in the present case, whether the
Hospital run by the Petitioner is
charitable or not, and whether there is
any business purpose in running the same
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or not, is required to be examined by
leading evidence before various
authorities under the VAT Act and such a
finding cannot be reached on the basis of
mere assertions advanced in the captioned
writ petition, more particularly when, the
said controversies are confronted with
disputed questions of facts.
67. Regarding the Constitutional Validity
of clause (g) of section 2(23) of VAT Act
it was submitted that the petitioners have
challenged the validity of the said clause
(g) of Section 2(23) of the VAT Act on the
ground that the same goes beyond the scope
and purview of Article 366(29A) of the
Constitution which, inter-alia, deals with
only six contingencies where the fiction
of "deemed sale" would be applicable even
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in a composite contract which is not
divisible. Reliance was placed on clause
(g) Section 2(23) as well as clause (h) of
the said Section 2(23) of VAT Act, which
reads as under:
"2(23) Sale means a sale of goods
made with the State for cash or
deferred payment or other valuable
consideration and includes, -
(g) supply of goods by way of or
as part of any service or in any
other manner whatsoever, of
(h) supply 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."
It was submitted that clauses (g) & (h)
of Section 2(23) of the VAT Act are
nothing but the provisions borrowed from
the following one single sub-clause (f) of
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Article 366(29A) of the Constitution.
Reliance was placed on Article 366(29A)(f)
which reads as under:
"366(29A), tax on the sale or
purchase of goods includes -
Xxx
(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."
68. It was submitted that it is well
settled position of law that the Court
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should try to sustain the validity of any
statutory provision to the extent possible
by ironing defects, if any, in drafting
and that while doing so, the said
statutory provision should be interpreted
purposively or should be read down, so as
to save the same from the vice of
unconstitutionality. In support of such
submission, reliance is placed on the
following two judgments:
i) State of Bihar v. Bihar Distillery Ltd
reproted in (1997) 2 SCC 453
ii) M. Rathinaswami v. State of Tamil Nadu
reported in (2009) 5 SCC 625.
69. It was therefore, submitted that
clauses (g) and (h) of Section 2(23) of
the VAT Act may be read together so as to
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put the same at par with the language used
in sub-clause (f) of Article 366(29A) of
the Constitution and if it is so done, the
said provisions of the VAT Act can be
saved from the same being
unconstitutional.
70. It was submitted that the State
Legislature has, while dealing with
cognate provisions contained under Section
2(10) of the VAT Act defining the term
"dealer", has sought to lay down clause
(i) by using the language, combining the
above-referred clauses (g) and (h) of
Section 2(23) by putting the same at par
with the language used in Article 366(29A)
of the Constitution, as under:
"2(10). Dealer means any
person...... and includes, -
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(i) any person who supplies, by
way of or as part of any service
or in any other manner whatsoever,
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."
71. It was therefore, submitted that
clauses (g) and (h) of Section 2(23) may
be read together in juxta-position of the
definition of the term "dealer" as defined
in the aforesaid Section 2(10)(i) of the
VAT Act, because of the fact that unless a
person effecting transfer, delivery or
supply of any goods is the "dealer" within
the meaning of the said Section 2(10)(i)
of the VAT Act, no question would arise
about taxing such a transaction by
applying clauses (g) and (h) of Section
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2(23) of the VAT Act. Thus, the said two
clauses (g) and (h) of Section 2(23) of
the VAT Act are required to be read
together and if it is so done, there is
nothing unconstitutional about the said
provision. It was submitted that even
otherwise, it is now a specific stand on
behalf of the Respondent State that the
transfer/delivery/supply of medicaments
and prosthetics by the Petitioners
hospital in favour of their indoor
patients during the course of providing
treatment, is covered by sub-clause (b) of
Article 366(29A) of the Constitution of
India, failing which, sub-clause (a) of
Article 366(29A) of the Constitution of
India and therefore, there arises no
question of considering the applicability
of either sub-clause (f) of Article
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366(29A) of the Constitution or clause (g)
of Section 2(23) of the VAT Act, in the
present case.
D) Rejoinder of the petitioners
72. Learned Senior Advocate Mr. S.N.
Soparkar in rejoinder submitted that the
submission of the respondents that the use
of medicines, implants, consumables, etc.
in the course of treatment of indoor
patients is "deemed sales" under Article
366(29A)(b) of the Constitution of India
is not tenable in law.
73. It was submitted that Article
366(29A) was incorporated in the
Constitution of India by the 46th
Constitutional Amendment to nullify
specific judgements holding certain
transactions to be not a "sale" for the
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purpose of Entry 54 of List II.
74. It was submitted that the scope of
Article 366(29A) of the Constitution has
to be restricted to these specific
transactions sought to be brought within
the ambit of the sales tax legislations,
because, admittedly hospital services were
not in consideration at the time of 46th
Constitutional amendment and therefore
they cannot be brought within the purview
of "deemed sales" under Article 366(29A)
of the Constitution of India. Reliance was
placed in this regard on the judgement of
Hon'ble Supreme Court in the case of State
of West Bengal v/s Calcutta Club Ltd.
(2019) SCC Online SC 1291 wherein it was
categorically held that 46th
Constitutional Amendment was made to
overcome specific judgements and therefore
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clause (f) deeming supply of food,
articles of human consumption and drinks
to be a sale could be applied only if such
supply was by hotels and restaurants and
that it could not be applied to supply of
food and drink by clubs.
75. It was submitted that in any case
clause (a) of Article 366(29) of the
Constitution of India which is sought to
be relied upon by the Respondents cannot
cover the transactions in question. It was
pointed out that it was clearly stated in
the Statement of Objects and Reasons of
the 46th Constitutional Amendment that
this clause was for the purpose of taxing
controlled commodities and to overcome the
judgement of Hon'ble Supreme Court in the
case of New India Sugar Mills (supra). It
was submitted that in any case, even plain
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reading of the clause suggests that it
applies to transfers otherwise than in
pursuant of a contract and in the present
case, it is not as if contract is absent
between hospitals and patients. It was
therefore submitted that there is a
composite agreement with the intention of
curing the patients of their ailments,
hence, such transactions clearly fall
outside the purview of clause (a) of
Article 366(29A) of the Constitution of
India. It was submitted that the judgement
of Hon'ble Supreme Court in the case of
Sunrise Associates v/s Govt of NCT of
Delhi reported in (2006) 5 SCC 603 which
has been relied upon in the context of
clause (a) is also not applicable as Para
7 of the said judgement only states that
an agreement for sales is not necessary
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for constituting a sale under clause (a).
it was therefore submitted that this does
not mean that even a pure service
transaction would come within the ambit of
clause (a) which otherwise would be
clearly contrary to the law laid down by
Hon'ble Supreme Court in the case of
Calcutta Club Ltd. (supra) that the 46th
Constitutional Amendment cannot be made
applicable beyond its intended scope.
76. It was further submitted that
transactions of the petitioners are also
not "works contracts" and therefore they
are also not taxable under clause (b) of
Article 366(29A) of the Constitution of
India as sought to be contended by the
Respondents. Reference was made to the
phrase "works contract" defined under
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clause (ii) of Explanation to Section
2(23) of the VAT Act as under:
"Explanation -
xxx
(ii) for the purpose of sub-clause
(b) of the expression "works
contract" means a contract for
execution of works and includes
such works contract as the State
Government may, by notification in
the Official Gazette, specify;
77. It was submitted that Notification
No. (GHN-23)/VAT-2006/(5.2)(23)(1)/TH
dated 31.3.2006 notifies works as
mentioned in the Schedule of the
Notification as "works contracts" and all
the notified "works contracts" are in the
nature of contracts requiring affixation
of goods on another form of moveable or
immoveable property.
78. It was therefore submitted that even
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otherwise, "works contracts" are
understood to be contracts where property
is transferred to the recipient on the
principle of accretion and Human body
cannot be considered to be "property" and
there cannot be any accretion on human
body as treatment of patients by hospitals
cannot be considered as "works contracts"
as understood in law nor are they
specifically notified to be "works
contracts" under the Vat Act, hence, tax
cannot be imposed on hospitals by treating
the agreement to treat patients as "works
contracts".
79. Reference was made to the meaning
of the expression "works contracts" as
discussed by Hon'ble Supreme Court in the
judgement in the case of Larsen and Toubro
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Ltd. (supra) as under:
"68. There is no doubt that to
attract Article 366(29-A)(b) there
has to be a works contract but
then what is its meaning. The term
"works contract" needs to be
understood in a manner that
Parliament had in its view at the
time of the Forty-sixth Amendment
and which is more appropriate to
Article 366(29-A)(b).
69. The ordinary dictionary
meaning of the word "work" means a
structure or apparatus of some
kind; architecture or engineering
structure, a building edifice.
When it is used in the plural i.e.
as works, it means architectural
or engineering operations, a
fortified building, a defensive
structure, fortification or any of
the several parts of such
structures. In Webster's
Comprehensive Dictionary,
International Edition the term
"work" is stated to be, ... (2)
that upe upon which labor is
expended; an undertaking task; (3)
that which is produced by or as by
labor, specifically, an
engineering structure..... In the
same dictionary, the term "works"
is stated as a manufacturing
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establishment including buildings
and equipment.
70. In Radha Raman [Radha Raman v.
State of U.P., AIR 1954 All 7001
the Allahabad High Court stated
(although in the context of
Section 40 of the Land Acquisition
Act, 1894) that: (AIR p. 702, para
5)
"5.... the word 'work' has a very
wide meaning. It is really used in
two senses of bestowing labour and
that upon which labour has been
bestowed. When used in plural, the
word certainly means some
outstanding or important result of
the labour that has been bestowed,
and large industrial and
scientific establishments are
called works...."
80. It was therefore, submitted that the
aforementioned paragraphs clearly show
that "works contracts" requires coming
into existence of "works" which can be a
structure or apparatus of some kind,
however, treatment of indoor patients does
not result into coming in existence of
"works", such transaction clearly does not
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constitute "works contract".
81. It was submitted that the though the
case of the petitioners is squarely
covered by the judgment in the case of
Larsen and Toubro (supra), the respondents
however, have sought to rely on some
paragraphs of the judgement. It was
submitted that reliance placed on para 72
of the said judgement by the respondents
is completely misplaced because it only
states that a contract will not cease to
be "works contract" merely because there
were certain additional obligations
flowing from the contract other than
"works contract". It was therefore
submitted that this observation was in the
context of the argument of the assessee in
that case that since the agreement for
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sale of flats also involved sale of land,
it would not be a "works
contract" ,however, the very same
paragraph again reiterates that there
needs to be a contract for undertaking or
bringing into existence some "works" and
the meaning of the term "works" has
already been discussed by Hon'ble Supreme
Court in the preceding paragraphs.
82. It was further submitted that
reliance placed on para 90 of the said
judgement is also misplaced in as much as
the same only states that the property
need not pass by accretion only to the
owners of the land. It was submitted that
this observation was in the context of the
argument that in case of tripartite
agreement between owner of land, developer
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and buyer of flat, the property in flat is
transferred to the buyer of flat and not
to land owner, however, this cannot be
interpreted to mean that Hon'ble Supreme
Court seeks to do away with principle of
accretion which is applicable in case of
"works contracts'.
83. Learned Senior Counsel Mr. Soparkar
further relied upon the judgement of
Hon'ble Supreme Court in the case of
Kartar Singh Bhadana v/s Hari Singh Nalwa
and Others reported in (2001) 4 SCC 661
for the purpose of meaning of expression
of the phrase "works contract". Further,
reliance was also placed on the judgement
of Hon'ble Supreme Court in the case of
State of Andhra Pradesh and Others v/s
Larsen & Toubro Ltd. and Others reported
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in (2008) 9 SCC 191 wherein not only
the meaning of the phrase "works contract"
has been discussed but it has also been
reiterated that the property in a works
contract passes on the basis of "principle
of accretion" and hence if the main
contractor has sub-contracted the work to
a sub-contractor, then the property will
pass directly from sub-contractor to the
contractee even if there is no privity of
contract.
84. Reliance was also placed on judgement
of Hon'ble Supreme Court in the case of
Commissioner, Central Excise and Customs,
Kerala v/s Larsen and Toubro Ltd. Reported
in (2016) 1 SCC 170 wherein the
definition of "works contract" appearing
in Explanation to Section 65(105)(zzzza)
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of the Finance Act, 1994 was reproduced
which also would cover only 'works
contracts' as per the said definition. It
was submitted that the budget speech of
the Finance Minister for introducing such
definition has been reproduced in Para 26
of the judgement which shows that the same
was introduced to levy service tax on the
service portion of 'works contract' as the
State Governments levy tax on transfer of
property in goods involved in the
execution of 'works contract'. It was
submitted that therefore the meaning of
the phrase "works contract" for the
purpose of the VAT Act cannot be
drastically different than the definition
given by the Parliament under the Finance
Act, 1994.
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85. It was submitted that a collective
reading of the aforementioned judgements
clearly shows that "works contracts"
requires firstly coming into existence of
"works" and secondly that the property
passes from seller to buyer by the
principle of accretion, in other words the
property in a 'works contract' passes by
the act of affixation of the goods being
transferred upon another property which
may be moveable or immoveable. It was
submitted that both these fundamental
features of "works contract" are absent in
so far as transaction of treatment of
indoor patients by hospitals is concerned
and therefore such transactions cannot be
considered to be "works contracts".
86. It was further submitted that human
body is not "property" and therefore
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principle of accretion cannot apply to
treatment of patients because of following
reasons:
(a) Substantive civil law is divided into:
(i) the law of property,
(ii) the law of obligations; and
(iii) the law of status.
(b) There is a clear distinction between
the legal treatment of "property" and of
"persons". The very arrangement of
chapters in Salmond on Jurisprudence bears
out a testimony to the fact that "persons"
(in chapter 10) are treated separately
from "property". The law thus does not
treat persons as "property".
(c) While in its widest sense "property"
includes all of a person's legal rights,
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this usage however is obsolete in law.
Besides, the law has always treated
persons and property separately which is
also borne out from a sequencing of the
provision in the IPC by treating offences
relating to persons and those related to
property separately.
(d) Even under the law of torts, torts
relating to the person are treated
separately from torts relating to
property.
(e) To treat a live human body as a
property is shockingly retrograde and
harks back to the pre-colonial era when
humans were treated as object and were
kept in captivity as slave.
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(f) If human body were to be treated as a
property, it is an issue which involves
sociological, medical, ethical, moral,
philosophical, religious, economic issues
and it is for the Parliament to legislate.
Therefore, so until then there cannot be
any tax. It is submitted that a human body
cannot be subject to "works contract" by
going beyond language used.
(g) If human body were property, it would
amount to validating suicide, foeticide,
prostitution and a host of other immoral
activities. Besides section 19 of the
Transplantation of Human Organs and
Tissues Act, 1994 makes the commercial
dealing in human organ an offence
punishable. There is a legislative drift
to not to tax. The right to deal is the
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substratum of any property/ proprietary
right. When such right has been taken away
by another legislation, the arguments that
human body/organs is "property" also falls
and fails miserably at its very core.
(h) It would be disingenuous for the State
to contend that the human organs are not
property for any of the above purposes of
section 19 of the Transplantation of Human
Organs and Tissues Act, 1994, but property
for the purpose of the Vat Act. To treat a
medical procedure as a "works contract",
the State would necessarily have to
contend that a living human body, or for
that matter even a particular organ, is
property and such a contention is
intrinsically abhorrent and would be an
absurdity wrapped in an anomaly inside the
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aforesaid contradiction. If at all body
parts are to be "property", it could only
be such parts which are detachable and
regenerative.
87. It was further submitted that the
other judgments relied upon by the
respondents also do not lay down any
different law with regard to meaning of
the phrase works contracts. Learned
Senior Advocate Mr. S.N. Soparkar
distinguished the cases cited by the
respondents as under:
(a) Decision in case of Builders
Association of India v/s Union of India
reported (1989) 2 SCC 645 only laid down
that even deemed sales under Article
366(29A) of the Constitution would be
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governed by other restrictions as
applicable to Entry 54 of List II and Para
41 of the judgement states that there can
be various varieties of "works contracts".
However, it was submitted, this does not
mean that the fundamental condition of
coming into existence of "works" can be
bypassed.
(b) It was submitted that decision in case
of Association of Leasing and Financial
Service Companies v/s Union of India
reported in (2011) 2 SCC 352 is with
regard to competence of power to impose
tax on financial leasing services which
has no relevance in so far as meaning of
phrase "works contract" is concerned.
(c) It was submitted that decision in case
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of Kone Elevators India Pvt. Ltd. v/s
State of Tamil Nadu reported in (2014) 7
SCC 1 was a judgement concerning the issue
of whether a contract of supply,
installation and commissioning of
elevators could be considered to be "works
contracts" and the judgement specifically
affirms the earlier judgement in the case
of Larsen and Toubro (supra), hence, it
cannot be said that any different meaning
is assigned to "works contract" than as
discussed by Hon'ble Supreme Court. It was
pointed out that the judgement then goes
on to reiterate that dominant intention is
not to be seen in case of a works
contract, and there is no dispute to the
proposition that in case of a 'works
contract' dominant intention is not to be
seen, however, for this purpose, firstly
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the contract should qualify as 'works
contract'. It was further submitted that
the fact in the case of Kone Elevators
(supra) very much involved installation of
the elevators and therefore the principle
of accretion was satisfied, whereas in the
present case, the agreement to treat
patients cannot be considered as "works
contract" and therefore the dominant
intention will very much be applicable as
held by Hon'ble Supreme Court in the case
of Bharat Sanchar Nigam Ltd. (supra).
(d) It was submitted that decision in case
of State of Karnataka v/s Pro Lab and
Others reported in (2015) 8 SCC 557 relies
upon judgement in the case of Bharat
Sanchar Nigam Ltd.(supra) and thereafter
goes on to reiterate that dominant
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intention is not to be seen in a "works
contract" ,however, this in no way
overrules or dilutes the conclusion in the
case of BSNL that all composite contracts
cannot be considered as works contracts
and that hospital services cannot be made
amenable to sales tax/Vat.
(e) It was submitted that decision in case
of State of Gujarat v/s Bharat Pest
Control (2018) 14 SCC 685, there was no
dispute as to whether the contract in
question is a 'works contract' or not and
Hon'ble Supreme Court simply reiterated
the principle that dominant intention test
is not to be applied in the case of a
'works contract'.
(f) It was submitted that decision in case
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of Indian Hume Pipe Company Ltd. v/s State
of Rajasthan reported in (2019) 14 SCC
584, it was categorically noted in Para 18
of the judgement that there was no dispute
that the contract in question was a 'works
contract',hence, the judgement is not
relevant.
(g) It was submitted that decision in case
of Miot Hospitals Ltd. v/s State of Tamil
Nadu reported in 2020 SCC Online Mad 28124
proceeds on the basis that all composite
contracts are "works contracts" which is
not only contrary to the observations of
Hon'ble Supreme Court in the case of
Bharat Sanchar Nigam Ltd. (supra) but also
to other judgements of Hon'ble Supreme
Court in the case of Larsen and Toubro
(supra) and Kartar Singh (supra) wherein
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the meaning of the expression "works
contract" has been clearly discussed.
E) Analysis and Findings
88. Considering the submissions made by
the learned advocates for the parties and
considering the decision of Hon'ble Apex
Court in case of Gannon Dunkerly (supra)
and subsequent decision in case of Bharat
Sanchar Nigam Ltd. and others v. Union of
India and others reported in (2006) 3 SCC
1 and the judgments on the same issue
rendered by various High Courts relied
upon by the petitioners, the core issue
involved in these petitions is whether the
respondent State can levy Value Added Tax
treating the supply of medicines,
implants, stents, consumables, etc. used
by the petitioner hospitals as "sale of
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goods" in execution of "works contract"
or not as the learned Advocate General Mr.
Kamal Trivedi has made a statement at Bar
that the respondent State is not invoking
clause (g) of section 2(23) of the VAT Act
for levy of VAT on supply of medicines,
implants, stents, consumables, etc. used
by the petitioner hospitals during the
course of its treatment of the patients
and VAT will be leviable either under
clauses (a) or (b) of section 2(23) as
"deemed sales" or both.
89. As per the definition of 'sale' in
section 2(23) of the VAT Act, 'sale' means
sale of goods made within the State for
cash or deferred payment or other valuable
consideration and includes clauses (a) to
(j) and as per clause (b), transfer of
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property in goods (whether as goods or in
some other form) involved in execution of
"works contract". Therefore, expression
"works contract" which has been pressed
into service by the respondent State for
levy of VAT in the facts of the present
cases is required to be considered in
light of the various decisions relied upon
by both the sides.
90. Prior to 46th Amendment of the
Constitution of India, "works contract"
were not liable to sales tax. However,
definition of "deemed sales" incorporated
the expression "works contract" in Article
366(29A)(b). Prior to 46th Amendment in
the Constitution, definition of "sale" as
it prevailed did not justify the proposals
to tax goods used for the provision of
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such services coupled with supply of goods
or use of goods and the Courts frowned
upon the attempt to tax such transactions
and held the demand of tax to be without
authority of law and in violation of Sale
of Goods Act,1930 and Government of India
Act, 1935. Therefore, to plug the revenue
leakage regarding the contract involving
the "works contract", provision to tax
"works contract" was incorporated. A
reading of the case laws prior to decision
of Hon'ble Apex Court in case of Gannon
Dunkerly (supra) indicates that "works
contract" to begin with was intended to
tax only building and allied contracts,
where a contractor provided a composite
contract for both supply of service and
goods or even used goods of considerable
value in the course of provision of such
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services with or without break-up of cost
of such goods in the execution of building
contract.
91. Section 2(13) of the VAT Act defines
"goods" as under:
2(13) "goods" means all kinds of
movable property (other than
newspapers, actionable claims,
electricity, stocks and shares and
securities) and includes live
stocks, all materials, articles
and commodities and every kind of
property (whether as goods or in
some other form) involved in the
execution of works con-tract, alt
intangible commodities and growing
crops, grass, Standing timber or
things attached to be forming part
of the land, which are agreed to
be severed before sale or under
the contract of sale;"
92. Hon'ble Apex Court following the
decision in case of M/s. Gannon Dunkerly
and Co.,(Madras) ltd.(supra) while
considering the levy of tax on the "works
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contract" held in case of State of Madras
v. Richardson & Cruddas Ltd. reported in
[1968] 21 STC 245, that under the terms of
contract when the respondents undertook
to install a bottle cooling equipment,
that is, to fabricate different parts of
the unit according to the special
requirements of the customer, and to
install the unit in the premises of the
customer, each bottle cooling equipment
required special fabrication and had to be
installed at the place selected by the
customer and found suitable for
installation of the unit. The contract
being one for supplying for an inclusive
price for a specially designed fabricated
unit to be assembled and installed by
specially trained technicians in the
premises of the customer, it cannot be
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said to be a contract for sale of a unit
or different parts of the unit as specific
goods, but it amounts to "works contract".
93. Similarly, in case of Assistant
Sales Tax Officer and others v. B.C. Kame,
Proprietor of Kame Photo Studio reported
in (1977) 1 SCC 634 the Hon'ble Apex Court
held that when a photographer undertakes
to take a photograph, develop the
negative, or do other photographic work
and thereafter supply the prints to his
client, he cannot be said to enter into a
contract for sale of goods. On the
contrary, the contract is for use of skill
and labour by the photographer to bring
about a desired result. It was further
held that the occupation of a
photographer, except insofar as he sells
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the goods purchased by him, is essentially
one of skill and labour.
94. Hon'ble Kerala High Court in case of
Deputy Commissioner of Sales Tax v. Dr.
Paran's Dental Laboratories, reported in
(1987) 67 STC 249 following the decision
of Hon'ble Apex Court in case of B.C. Kame
(supra) held that the amount realised
towards teeth setting charges was
essentially a contract to do skilled
labour and if the teeth prepared by the
dentist for a particular customer, was not
taken delivery of by him, it would be a
waste. It was held that what was
manufactured was not marketable goods and
it was vital factor to decide whether
there is a sale of goods.
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95. The Hon'ble Apex Court in case of
Builders' Association of India and others
v. Union of India and others reported in
(1989) 2 Supreme Court Cases 645 in
context of 'works contract' held that the
object of the new definition introduced in
clause (29A) of Article 366 of the
Constitution is, therefore, to enlarge the
scope of 'tax on sale or purchase of
goods' wherever it occurs in the
Constitution so that it may include within
its scope the transfer, delivery or supply
of goods that may take place under any of
the transactions referred to in sub-
clauses (a) to (f) thereof wherever such
transfer, delivery or supply becomes
subject to levy of sales tax. Therefore,
the expression 'tax on the sale or
purchase of goods' in Entry 54 of the List
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II of the Seventh Schedule of the
Constitution of India (State List)
includes 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' also.
96. The Hon'ble Apex Court further held as
under:
"36. Even after the decision of
this Court in the State of Madras
v. Gannon Dunkerley & Co. (Madras)
Ltd. it was quite possible that
where a contract entered into in
connection with the construction
of a building consisted of two
parts, namely, one part relating
to the sale of materials used in
the construction of the building
by the contractor to the person
who had assigned the contract and
another part dealing with the
supply of labour and services.
sales tax was leviable on the
goods which were agreed to be sold
under the first part. But sales
tax could not be levied when the
contract in question was a single
and indivisible works contract.
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After the 46th Amendment the works
contract which was an indivisible
one is by a legal fiction altered
into a contract which is divisible
into one for sale of goods and the
other for supply of labour and
services. After the 46th
Amendment, it has become possible
for the States to levy sales tax
on the value of goods involved in
a works contract in the same way
in which the sales tax was
leviable on the price of the goods
and materials supplied in a
building contract which had been
entered into in two distinct and
separate parts as stated above. It
could not have been the contention
of the revenue prior to the 46th
Amendment that when the goods and
materials had been supplied under
a distinct and separate contract
by the contractor for the purpose
of construction of a building the
assessment of sales tax could be
made ignoring the restrictions and
conditions incorporated in Article
286 of the Constitution. If that
was the position can the States
contend after the 46th Amendment
under which by a legal fiction the
transfer of property in goods
involved in a works contract was
made liable to payment of sales
tax that they are not governed by
Article 286 while levying sales
tax on sale of goods involved in a
works contract? They cannot do so.
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When the law creates a legal
fiction such fiction should be
carried to its logical end. There
should not be any hesitation in
giving full effect to it. If the
power to tax a sale in an ordinary
sense is subject to certain
conditions and restrictions
imposed by the Constitution, the
power to tax a transaction which
is deemed to be a sale under
Article 366(29-A) of the
Constitution should also be
subject to the same restrictions
and conditions. Ordinarily unless
there is a contract to the
contrary in the case of a works
contract the property in the goods
used in the construction of a
building passes to the owner of
the land on which the building is
constructed, when the goods or
materials used are incorporated in
the building. The contractor
becomes liable to pay the sales
tax ordinarily when the goods or
materials are so used in the
construction of the building and
it is not necessary to wait till
the final bill is prepared for the
entire work. In Hudson's Building
Contracts (8th edn.) at page 362
it is stated thus:
'The well known rule is that the
property in all materials and
fittings, once incorporated in or
affixed to a building, will pass
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to the freeholder quicquid
plantatur solo cedit. The employer
under a building contract may not
necessarily be the freeholder, but
may be a lessee or licensee, or
even have no interest in the land
at all, as in the case of a sub-
contract. But once the builder has
affixed materials, the property in
them passes from him, and at least
as against him they become the
absolute property of his employer,
whatever the latter's tenure of or
title to the land. The builder has
no right to detach them from the
soil or building, even though the
building owner may himself be
entitled to sever them as against
some other person e.g., as
tenant's fixtures. Nor can the
builder reclaim them if they have
been subsequently severed from the
soil by the building owner or
anyone else. The principle was
shortly and clearly stated by
Blackburn J. in Appleby v.
Meyersts: Materials worked by one
into the property of another
become part of that property'.
This is equally true whether it be
fixed or movable property. Bricks
built into a wall become part of
the house, thread stitched into a
coat which is under repair, or
planks and nails and pitch worked
into a ship under repair, become
part of the coat or the ship.
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39. In view of the foregoing
statements with regard to the
passing of the property in goods
which are involved in works
contract and the legal fiction
created by clause (29-A) of
Article 366 of the Constitution it
is difficult to agree with the
contention of the States that the
properties that are transferred to
the owner in the execution of a
works contract are not the goods
involved in the execution of the
works contract, but a
conglomerate, that is the entire
building that is actually
constructed. After the 46th
Amendment it is not possible to
accede to the plea of the States
that what is transferred in a
works contract is the right in the
immovable property.
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41. We, therefore, declare that
sales tax laws passed by the
legislatures of States levying
taxes on the transfer of property
in goods (whether as goods or in
some other form) involved in the
execution of a works contract are
subject to the restrictions and
conditions mentioned in each
clause or sub-clause of Article
286 of the Constitution. We,
however, make it clear that the
cases argued before and considered
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by us relate to one specie of the
generic concept of 'works
contracts'. The case-book is full
of the illustrations of the
infinite variety of the
manifestation of 'works
contracts'. Whatever might be the
situational differences of
individual cases, the
constitutional limitations on the
taxing power of the State as are
applicable to 'works contracts'
represented by "building
contracts" in the context of the
expanded concept of "tax on the
sale or purchase of goods" as
constitutionally defined under
Article 366(29-A), would equally
apply to other species of 'works
contracts' with the requisite
situational modifications."
97. The expression "works contract"
involves two fundamental elements namely,
(i) transfer of material/goods and (ii)
rendering of services. The supplier
transfers the ownership and possession of
the material used to the recipient in the
course of execution of 'works contract'
which sometimes result in a new identity
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altogether different from the material
supplied while sometimes such materials
become part of the existing structure or
goods.
98. 'Works contract' can be both
divisible and indivisible contract. In
divisible works contract, it is possible
to segregate the value of sale of goods
and labour whereas in indivisible contract
where the parties agree for lump-sum
consideration for the entire contract
without any break-up of the value of sale
of goods and the labour. The sale
consideration of material used in the
contract and remuneration for the labour
therefore, is not separately identifiable.
99. In case of Larsen and Toubro limited
and another v. State of Karnataka and
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another reported in (2014) 1 Supreme Court
Cases 708, Hon'ble Apex Court held as
under:
"67. Now, if by legal fiction
provided in clause (29-A)(b) of
Article 366, the works contract
becomes separable and divisible,
one for the materials and the
other for services and for the
work done, whatever has been said
by this Court in Gannon Dunkerley
(1) with regard to the definition
of works contract in Section 2(i)
of the Madras General Sales Tax
Act pales into insignificance
insofar as ambit and scope of the
term "works contract" within the
meaning of Article 366(29-A) is
concerned. To say that insertion
of clause (29-A) in Article 366
has not undone Gannon Dunkerley
(1) in any manner, in our view, is
not correct. The narrow meaning
given to the term "works contract"
in Gannon Dunkerley (1) now no
longer survives.
68. There is no doubt that to
attract Article 366(29-A)(b) there
has to be a works contract but
then what is its meaning. The term
"works contract" needs to be
understood in a manner that
Parliament had in its view at the
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time of the Forty-sixth Amendment
and which is more appropriate to
Article 366(29-A)(b)
69. The ordinary dictionary
meaning of the word "work" means a
structure or apparatus of some
kind; architecture or engineering
structure, a building edifice.
When it is used in the plural i.e.
as works, it means architectural
or engineering operations, a
fortified building, a defensive
structure, fortification or any of
the several parts of such
structures. In Webster's
Comprehensive Dictionary,
International Edition the term
"work" is stated to be, ... (2)
that upon which labor is expended;
an undertaking task; (3) that
which is produced by or as by
labor, specifically, an
engineering structure;.. In the
same dictionary, the term "works"
is stated as a manufacturing
establishment including buildings
and equipment.
70. In Radha Raman (AIR 1954 ALL
700) the Allahabad High Court
stated (although in the context of
Section 40 of the Land Acquisition
Act, 1894) that: (AIR p. 702, para
5)
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"5. the word 'work' has a very
wide meaning. It is really used
in two senses of bestowing
labour and that upon which
labour has been bestowed. When
used in plural, the word
certainly means some
outstanding or important result
of the labour that has been
bestowed, and large industrial
and scientific establishments
are called works...."
71. Hudson's Building and
Engineering Contracts, 11th Edn.,
Vol. 1, for the purposes of that
book, starts by saying that a
building or engineering contract
may be defined as an agreement
under which a person (called
builder or contractor) undertakes
for reward to carry out for
another (building owner or
employer), works of building or
civil engineering character. It
continues to say that in the
typical case, the work will be
carried out upon the land of the
employer or building owner, though
in some special cases obligations
to build may arise by contract
where this is not so, for example,
under building leases and
contracts for the sale of land
with a house in the course of
erection upon it. The above
statement by Hudson indicates that
in a typical case work (structure,
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building, etc.) will be carried
out upon the land of the employer
or building owner though in some
special cases an obligation to
build may arise by contract where
this is not so. Hudson gives an
example of building leases and
contracts for the sale of land
with a house in the course of
erection upon it.
72. In our opinion, the term
"works contract" in Article
366(29-A)(b) is amply wide and
cannot be confined to a particular
understanding of the term or to a
particular form. The term
encompasses a wide range and many
varieties of contract. Parliament
had such wide meaning of "works
contract" in its view at the time
of the Forty-sixth Amendment. The
object of insertion d of clause
(29-A) in Article 366 was to
enlarge the scope of the
expression "tax on sale or
purchase of goods" and overcome
Gannon Dunkerley (1). Seen thus,
even if in a contract, besides the
obligations of supply of goods and
materials and performance of
labour and services, some
additional obligations are
imposed, such contract does not
cease to be works contract. The
additional obligations in the
contract would not alter the
nature of contract so long as the
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contract provides for a contract
for works and satisfies the
primary description of works
contract. Once the characteristics
or elements of works contract are
satisfied in a contract then
irrespective of additional
obligations, such contract would
be covered by the term "works
contract". Nothing in Article
366(29-A)(b) limits the term
"works contract" to contract for
labour and service only. The
learned Advocate General for
Maharashtra was right in his
submission that the term "works
contract" cannot be confined to a
contract to provide labour and
services but is a contract for
undertaking or bringing into
existence some "works". We are
also in agreement with the
submission of Mr K.N. Bhat that
the term "works contract" in
Article 366(29-A)(b) takes within
its fold all genre of works
contract and is not restricted to
one specie of contract to provide
for labour and services alone.
Parliament had all genre of works
contract in view when clause (29-
A) was inserted in Article 366.
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86. In our opinion, the tests laid
down in Hindustan Shipyard after
the Forty-sixth Amendment are not
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of much help in determining
whether a contract is a works
contract or sale of goods. In any
case, Hindustan Shipyard also
says that there is no absolute
rule for distinguishing a contract
for sale (of goods) and a contract
for labour (or services).
87. It seems to us (and that is
the view taken in some of the
decisions) that a contract may
involve both a contract of work
and labour and a contract of sale
of goods. In our opinion, the
distinction between contract for
sale of goods and contract for
work (or service) has almost
diminished in the matters of
composite contract involving both
a contract of work/labour and a
contract for sale for the purposes
of Article 366(29-A)(b). Now by
legal fiction under Article
366(29-A)(b), it is permissible to
make such contract divisible by
separating the transfer of
property in goods as goods or in
some other form from the contract
of work and labour. A transfer of
property in goods under clause
(29-A)(b) of Article 366, is
deemed to be a sale of goods
involved in the execution of a
works contract by the person
making the transfer and the
purchase of those goods by the
person to whom such transfer is
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made. For this reason, the
traditional decisions which hold
that the substance of the contract
must be seen have lost their
significance. What was viewed
traditionally has to be understood
in the light of the philosophy of
Article 366(29-A).
88. The question is : whether
taxing sale of goods in an
agreement for sale of flat which
is to be constructed by the
developer/promoter is permissible
under the Constitution? When the
agreement between the
promoter/developer and the flat
purchaser is to construct a flat
and eventually sell the flat with
the fraction of land, it is
obvious that such transaction
involves the activity of
construction inasmuch as it is
only when the flat is constructed
then it can be conveyed. We,
therefore, think that there is no
reason why such activity of
construction is not covered by the
term "works contract". After all,
the term "works contract" is
nothing but a contract in which
one of the parties is obliged to
undertake or to execute works.
Such activity of construction has
all the characteristics or
elements of works contract. The
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ultimate transaction between the
parties may be sale of flat but it
cannot be said that the
characteristics of works contract
are not involved in that
transaction. When the transaction
involves the activity of
construction, the factors such as,
the flat purchaser has no control
over the type and standard of the
material to be used in the
construction of the building or he
does not get any right to monitor
or supervise the construction
activity or he has no say in the
designing or layout of the
building, in our view, are not of
much significance and in any case
these factors do not detract the
contract being works contract
insofar as construction part is
concerned.
89. For sustaining the levy of tax
on the goods deemed to have been
sold in execution of a works
contract, in our opinion, three
conditions must be fulfilled : (i)
there must be a works contract,
(ii) the goods should have been
involved in the execution of a
works contract, and (iii) the
property in those goods must be
transferred to a third party
either as goods or in some other
form. In a building contract or
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any contract to do construction,
the above three things are fully
met. In a contract to build a flat
there will necessarily be a sale
of goods element. Works contracts
also include building contracts
and therefore without any fear of
contradiction it can be stated
that building contracts are
species of the works contract.
90. Ordinarily in the case of a
works contract the property in the
goods used in the construction of
the building passes to the owner
of the land on which the building
is constructed when the goods and
materials used are incorporated in
the building. But there may be
contract to the contrary or a
statute may provide otherwise.
Therefore, it cannot be said to be
an absolute proposition in law
that the ownership of the goods
must pass by way of accretion or
exertion to the owner of the
immovable property to which they
are affixed or upon which the
building is built.
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97. In light of the above
discussion, we may summarise the
legal position, as follows:
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97.1. For sustaining the levy of
tax on the goods deemed to have
been sold in execution of a works
contract, three conditions must be
fulfilled : (i) there must be a
works contract, (ii) the goods
should have been involved in the
execution of a works contract, and
(iii) the property in those goods
must be transferred to a third
party either as goods or in some
other form.
97.2. For the purposes of Article
366(29-A)(b), in a building
contract or any contract to do
construction, if the developer has
received or is entitled to receive
valuable consideration, the above
three things are fully met. It is
so because in the performance of a
contract for construction of
building, the goods (chattels)
like cement, concrete, steel,
bricks, etc. are intended to be
incorporated in the structure and
even though they lost their
identity as goods but this factor
does not prevent them from being
goods.
97.3. Where a contract comprises
of both a works contract and a
transfer of immovable property,
such contract does not denude it
of its character as works
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contract. The term "works
contract" in Article 366(29-A)(b)
takes within its fold all genre of
works contract and is not
restricted to one specie of
contract to provide for labour and
services alone. Nothing in Article
366(29-A)(b) limits the term
"works contract".
97.4. Building contracts are a
species of the works contract.
97.5. A contract may involve both
a contract of work and labour and
a contract for sale. In such
composite contract, the
distinction between contract for
sale of goods and contract for
work (or service) is virtually
diminished.
97.6. The dominant nature test has
no application and the traditional
decisions which have held that the
substance of the contract must be
seen have lost their significance
where transactions are of the
nature contemplated in Article
366(29-A). Even if the dominant
intention of the contract is not
to transfer the property in goods
and rather it is rendering of
service or the ultimate
transaction is transfer of
immovable property, then also it
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is open to the States to levy
sales tax on the materials used in
such contract if such contract
otherwise has elements of works
contract. The enforceability test
is also not determinative.
97.7. A transfer of property in
goods under clause (29-A)(b) of
Article 366 is deemed to be a sale
of the goods involved in the
execution of a works contract by
the person making the transfer and
the purchase of those goods by the
person to whom such transfer is
made.
97.8. Even in a single and
indivisible works contract, by
virtue of the legal fiction
introduced by Article 366(29-A)
(b), there is a deemed sale of
goods which are involved in the
execution of the works contract.
Such a deemed sale has all the
incidents of the sale of goods
involved in the execution of a
works contract where the contract
is divisible into one for the sale
of goods and the other for supply
of labour and services. In other
words, the single and indivisible
contract, now by the Forty-sixth
Amendment has been brought on a
par with a contract containing two
separate agreements and the States
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now have power to levy sales tax
on the value of the material in
the execution of works contract.
97.9. The expression "tax on the
sale or purchase of goods" in
Schedule VII List II Entry 54 when
read with the definition clause
(29-A) of Article 366 includes a
tax on the transfer of property in
goods whether as goods or in the
form other than goods involved in
the execution of works contract.
97.10. Article 366(29-A)(b) serves
to bring transactions where
essential ingredients of "sale"
defined in the Sale of Goods Act,
1930 are absent within the ambit
of sale or purchase for the
purposes of levy of sales tax. In
other words, transfer of movable
property in a works contract is
deemed to be sale even though it
may not be sale within the meaning
of the Sale of Goods Act.
97.11. Taxing the sale of goods
element in a works contract under
Article 366(29-A)(b) read with
Entry 54 List II is permissible
even after incorporation of goods
provided tax is directed to the
value of goods and does not
purport to tax the transfer of
immovable property. The value of
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the goods which can constitute the
measure for the levy of the tax
has to be the value of the goods
at the time of incorporation of
the goods in works even though
property passes as between the
developer and the flat purchaser
after incorporation of goods.
98. The crucial question would now
remain: whether the view taken in
Raheja Development with reference
to the definition of "works
contract" in the KST Act is
legally unjustified? The following
definition of "works f contract"
was under consideration before
this Court in Raheja Development:
(SCC p. 166, para 12)
"12...... 2. (1)(v-i) "works
contract" includes any
agreement for carrying out for
cash, deferred payment or
other valuable consideration,
the building, construction,
manufacture, processing,
fabrication, erection,
installation, fitting out,
improvement, modification,
repair or commissioning g of
any movable or immovable
property;'"
The Court also noticed the
definition of "dealer " and
"taxable turnover"
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109. In Article 366(29-A)(b) the
term "works contract" covers all
genre of works contract and it is
not limited to one specie of the
contract. In Raheja Development¹
the definition of "works contract"
in the KST Act was under
consideration. That definition of
"works contract" is inclusive and
refers to building contracts and
diverse construction activities
for monetary consideration viz.
for cash, deferred payment or
other valuable consideration as
works contract. Having regard to
the factual position, inter alia,
Raheja d Development entered into
development agreements with the
owners of the land and it also
entered into agreements for sale
with the flat purchasers, the
consideration being payment in
instalments and also the clauses
of the agreement, the Court held
that developer had undertaken to
build for the flat purchaser and
so long as there was no
termination of the contract, the
construction is for and on behalf
of the purchaser and it remains a
"works e contract". The legal
position summarised by us and the
foregoing discussion would justify
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the view taken by the two-Judge
Bench in Raheja Development."
100. On perusal of the above decision of
Hon'ble Apex Court, it is clear that the
expression "works contract" is of wide
amplitude and need not be confined to a
particular understanding of the term or a
particular form as it is held that the
term "works contract" in Article 366 (29-
A)(b) of the Constitution of India takes
within its fold all genre of "works
contract" and is not restricted to one
specie of contract to provide for labour
and service alone. Article 366 (29A)(b)
does not limit the term "works contract"
and the object of insertion of clause
(29A) in Article 366 was to enlarge the
scope of the expression "tax on sale or
purchase of goods" to overcome the ratio
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of the Hon'ble Apex Court in case of
Gannon Dunkerley (supra).
101. Thus, it is clear that provision of
"service", where the factum of supply of the
goods whether tangible or intangible is
discernible, forming part of the service
contract would be nothing but a "composite
contract providing for "service" and
"goods", falling within the purview of the
term "works contract".
102. By virtue of legal fiction introduced
by Article 366(29A)(b) of the Constitution,
even if such a composite contract is single
and indivisible contract, it would amount to
"deemed sale" of goods which are involved in
the execution of the "works contract" and
exigible to Sales Tax. In paragraph no.87 of
the decision in case of Larsen and Toubro
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Ltd. (supra), the Hon'ble Apex Court has
succinctly drawn a distinction between the
contract for sale of goods and contract for
service by diminishing the distinction
between the two in the matter of composite
contract involving a contract of service/
labour and a contract for sale of goods in
relation to Article 366(29A)(b) of the
Constitution.
103. Therefore, reliance placed on behalf
of the petitioners on the observations made
by the Hon'ble Apex Court in case of Bharat
Sanchar Nigam Ltd. (supra) which has been
diluted in case of Larsen and Toubro Ltd.
(supra) and the example in paragraph no. 44
of the decision in case of Bharat Sanchar
Nigam Ltd. (supra) cannot be stretched to
include all kinds of "hospital services"
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provided by the petitioners because a simple
treatment with medicine cannot be equated
with complicated medical procedures
undertaken by the petitioner hospitals
involving skill and use of expensive
implants/prosthetics and use of laboratory
testing equipments. It is true that the
dominant intention of the contract was not
to transfer the property in goods i.e.
consumables, medicines, implant, stents etc.
used in the treatment of indoor patients by
the petitioner hospitals but the same was
for rendering of services, however, the
ultimate transaction is nothing but a
transfer of movable property and it would be
open for the respondent State to levy sales
tax/VAT on the materials used in such
contract if such contract otherwise has
element of "works contract" which would fall
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within clause(b) of Article 366(29A) of the
Constitution as it would amount to
transfer either in goods or some other form.
104. The Hon'ble Apex Court in case of
State of Andhra Pradesh v. Kone Elevators
(India) Ltd. reported in (2005) 3 SCC 389
had also earlier held that there is no
standard formula by which one can
distinguish a "contract for sale" from a
"works contract" and it would largely depend
upon the terms of the contract including the
nature of the obligations to be discharged
thereunder and the surrounding
circumstances.
105. Though the Constitution Bench of
Hon'ble Apex Court in case of Kone Elevators
India Pvt. Ltd. v/s State of Tamil Nadu
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reported in (2014) 7 SCC 1 has overruled the
aforesaid decision in case of State of
Andhra Pradesh v. Kone Elevators (India)
Ltd.(supra) on other aspects, the above
observations have not been diluted as it was
observed by Hon'ble Apex Court that in all
the cases which have been brought before it,
there was a composite contract for the
purchase and installation of the lift and
the price quoted was a composite one for
both.
106. It would therefore, be germane to
refer to the provisions of service tax as
provided in the Finance Act, 1994 and
consider the provisions of Sections 65B(44)
and 65(105)(zzzzo) of the Finance Act, 1994,
which considers the 'health care services'
provided by clinical establishments to any
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person as 'taxable services' as under:
"65B. in this chapter, unless,
the context otherwise requires -
(44) service" means any activity
carmed out by a person for another
for consideration, and includes a
declared service, but shall not
include
(a) an activity which constitutes
merely
(i) transfer of title in goods or
immovable property, by way of
sate, gift or in any other manner;
or
(ii) such transfer, delivery or
supply of any goods which is
deemed to be a sate within the
meaning of clause (29A) of article
366 of the Constitution, or
(iii) a transaction in money or
actionable claim;
(b) a provision of service by an
employee to the employer in the
course of or in relation to his
employment,
(c) fees taken in any Court or
tribunal established under any law
for the time being in force.
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Whereas, the following Section
65(105)(zzzzo) of the Finance Act,
1994 deals with "taxable service",
wherein the services being
provided by a clinical
establishment or by a doctor not
being an employee of a clinical
establishment, would be "taxable
service".
105. "taxable service" means any
service provided or to be provided
-
(zzzzo) to any person, -
(i) by a clinical establishment,
or
(ii) by a doctor, not being an
employee of a clinical
establishment, who provides
services from such premises for
diagnosis, treatment or care for
illness, disease, injury,
deformity, abnormality or
pregnancy in any system of
medicine;"
107. Therefore, the treatment given to the
patients in the clinical establishment is
nothing, but a "service" being provided
along with supply of medicaments,
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prosthetics, etc. which would fall within
the "composite service" contract involving
rendition of service, as well as, sale of
goods comprising medicaments and
implants/prosthetics, etc. resulting into
"works contract". Such a composite
arrangement is now covered by legal fiction
after 46th Constitutional Amendment and can
attract the service tax on the value of
service being provided and would attract the
sales tax/VAT on the "deemed sale" on the
movables/articles in form of medicaments,
prosthetics, etc. used during the course of
the execution of such "composite service
contract".
108. The Hon'ble Apex Court in case of
Associated Cement Companies Ltd vs. Comm.
Customs, reported in (2001) 4 SCC 593 while
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dealing with the contract for providing
Architectural Services including design-
development drawing observed that even if
the dominant intention of the contract is
the rendering of service, it would amount to
a works contract, if it is possible to
bifurcate the contract and to levy sales tax
on the value of the material involved in the
execution of the works contract,
notwithstanding that such value may
represent a small percentage of the amount
paid for the execution of the works contract
and after the Forty-sixth Amendment the
State would be empowered to levy sales
tax/VAT on the material used while rendering
in such composite health service contract.
109. The contention raised on behalf of the
petitioners that there is no accretion in
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the facts of the present cases and
therefore, rendering of medical treatment to
indoor patients cannot fall within the
purview of 'works contract' is very
attractive at first blush however, after
46th Constitutional Amendment and in view of
law laid down by Hon'ble Apex Court in case
of Larsen and Toubro Ltd. (supra), there
cannot be any absolute proposition in law
that the ownership of the goods must pass
away by way of accretion, but same can also
pass away under the terms of a contract or
by statute. Therefore, the test laid down in
the judgments prior to the 46th
Constitutional Amendment would not be
applicable in facts of the case. The Hon'ble
Apex Court in case of Kone Elevator (supra)
in paragraph no. 70 has observed that "once
there is a composite contract for supply and
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installation, it has to be treated as a
works contract, for it is not a sale of
goods/chattel simpliciter. It is not chattel
sold as chattel or, for that matter, a
chattel being attached to another chattel."
110. "Works contract" has been also been
defined in section 2(119) of the CGST Act,
2017 as follows:
"works contract" means a contract
for building construction,
fabrication, completion, erection,
installation, fitting out,
improvement, modification, repair,
maintenance, renovation,
alteration or commissioning of any
immovable property wherein
transfer of property in goods
(whether as goods or in some other
form) is involved in the execution
of such contract".
111. The most significant change with
regard to works contract in GST is with
regard to meaning of expression "works
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contract" which has been restricted to any
work undertaken for an 'immovable property'
unlike under the VAT regime and service tax
law under the Finance Act, 1994 where
"works contract" was applicable to movable
properties.
112. It is for this reason that health
services have been specifically exempted
under the Finance Act, 1994 as well as under
the GST Act but at the same time, it cannot
be said that the health services involving
the implanting of prosthetics or other
artificial parts inside the body of patient
were either outside the purview of the tax
levy under VAT Act or were exempted under
any notification.
113. On perusal of the affidavit in reply
filed on behalf of the respondent State, it
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emerges that the petitioner hospitals have
issued invoices and received sale price at
the Maximum Retail Price (MRP) inclusive of
all taxes including sales tax. Reliance was
placed on three specimen copies of Medicine
Requisition Forms along with the
corresponding invoices in respect of various
items and medicines sold at MRP to in-
patients by the hospital which clearly shows
that the petitioner hospitals requires the
patients to deposit an amount at the time
of admission as indoor patients which is
adjusted/applied towards the cost of service
as well as goods i.e. medicines and other
consumables, implants, stents etc. which
clearly forms an element of sale, being
part of the medical treatment service
provided to the patient. Therefore, it is
not in dispute that the petitioner hospitals
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charge MRP inclusive of all taxes and in
some cases higher amount than MRP in the
invoices raised upon the patients whereby
clear bifurcation of sale of medicines,
implants/prosthetics used in medical
treatment is made available to the patients
along with invoices raised by the petitioner
hospitals.
114. In view of such factual matrix,
reliance placed by the petitioners on the
decisions of various High Courts would not
be applicable to the facts of the case.
115. In case of Tata Main Hospital vis.
State of Jharkhand reported in 2008 (2) JCR
174 (JHR), the test of "dominant intention"
and "substance of contract" have to be given
a go-by with reference to the concept of
"deemed sales" as per legal fiction in case
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of six categories specified from sub-clauses
(a) to (f) of Article 366(29A) of the
Constitution, and once the contract falls
into one of such categories, it would amount
to the subsistence of contract or the
dominant nature test.
116. Similarly in case of International
Hospital Pvt. Ltd, v/s. State of Uttar
Pradesh reported in (2014) 71 VST 139 (All),
Hon'ble Court had straightaway accepted that
neither of the six categories of Article
366(29A) of the Constitution is attracted to
the composite arrangement of providing
medical services as well as medicament and
prosthetics by following the decision of
Jharkhand High Court in case of Tata Main
Hospital v/s. State of Jharkhand (supra).
117. Hon'ble Punjab and Haryana High Court
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in case of Fortis Health Care Limited v/s.
State of Punjab (supra) has followed the
decision of Hon'ble Apex Court in case of
Bharat Sanchar Nigam Ltd. (supra) which is
further diluted by Apex Court in case of
Larsen and Toubro Ltd. (supra).
118. Hon'ble Rajasthan High Court also did
not undertake the exercise of evaluating as
to whether the hospital services would be
falling within the purview of "works
contract" under the sub-clause (b) of
Article 366 (29A) of the Constitution in
case of Assistant Commissioner, Kota, v.
Kota Eye Hospital & Research Foundation,
reported in (2023) 120 GSTR 161 (Raj).
119. Hon'ble Kerala High Court also in case
of Sanjose Parish Hospital vs. Commercial
Tax Officer reported in (2019) SCC OnLine
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Ker 232, did not undertake the exercise of
evaluating as to whether the hospital
services would be falling within the purview
of "works contract" under the sub-clause (b)
of Article 366 (29A) of the Constitution.
120. Therefore, all the judgments relied
upon by the petitioners have accepted the
conclusion that hospital services are not
covered by any of the six categories
/contingencies of "deemed sales" as provided
from sub-clauses (a) to (f) of Article
366(29A) of the Constitution without
examining in detail whether the hospital
services would fall either in clause (a) or
clause (b) applying the decision of Hon'ble
Apex Court rendered in case of Larsen and
Toubro Ltd. (supra).
121. Similarly, reliance placed by the
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petitioners in the opinions of the Lords of
Appeal for judgment in the cause refers to
Value Added Tax Act, 1994 of United Kingdom
would not be applicable in the facts of the
case as it is pertinent to note that the
said Act does not provide for any legal
fiction as is available in Constitution of
India as per sub-clauses (a) to (f) of
Article 366(29A) to consider "transfer",
"delivery" or "supply" of goods as "deemed
sales" by legal fiction being part of the
contract which would be divisible into sale
of goods and other supply of services.
Therefore, the "test of dominant intention"
which was pressed into service by the House
of Lords would not be applicable in India in
respect of six categories/contingencies,
provided in sub-clauses (a) to (f) of
Article 366(29A) of the Constitution of
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India.
122. Therefore, the question posed before
us is whether the supply of prosthetics and
other medicaments, consumables, stent,
implants etc. supplied by the petitioner
hospitals to an indoor patient which are
closely linked to form objectively a single
economic supply would be subject to an
artificial split or not? We are of the
opinion that the answer would be in the
affirmative as the transaction between the
hospital and the patient is required to be
regarded from an economic point of view
because the material available on record
clearly shows that the payments are made by
the patient or an insurer to the petitioner
hospitals for all the supplies in relation
to supply of prosthetics and other
medicaments, consumables, stent, implants
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etc. and associated hospital care, together,
in one invoice or series of invoices.
123. It is also not in dispute that a
patient who requires an artificial hip or
requires to implant a stent in the heart may
be able to choose such implant or stent from
different categories and such element of
transaction is an important factor in
determining whether there is a single supply
or several independent supplies, which may
not be decisive. However, in case of
implants, the ability of the patient to
choose is limited as to whether or not such
implant or stent to be used as per the
advice of the consultant or possibly the
hospital in which patient will be admitted
to have the necessary surgery. Thereafter it
is for the petitioner hospitals to provide
medical care along with such
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implants/prosthesis resulting into a single
transaction. However, the reason for
introducing the 46th Amendment to the
Constitution is to bring such indivisible
contracts within the purview of sales tax.
The Hon'ble Apex Court in case of Builders
Association of India (supra) held that it is
now open to the court to divide the "works
contract" into two separate contracts by a
legal fiction, one, contract for sale of
goods involved in the said works contract;
and second, for supply of labour and
service. Such division of contract under the
amended law could be made only if the "works
contract" involves a dominant intention to
transfer the property in goods and not in
contracts were the transfer of property
takes place as an incident of the contract
of service. The Hon'ble Apex Court,
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therefore, has held that every contract,
whether it is service contract or otherwise,
may involve use of some material or other in
the execution of such contract and the State
is now empowered by the 46th Amendment to
impose sales tax on such incidental
materials used in such contracts. However,
the aforesaid view was overruled by the Apex
Court in case of Associated Cement Companies
Limited c. Commissioner of Customs reported
in (2001) 4 SCC 593 by holding that the
conclusion arrived by the Apex Court in case
of Rainbow Colour Lab and another v. State
of MP reported in (2000) 2 SCC 385 runs
counter to the express provisions contained
in Article 366(29A) as also to the
decision of the Constitution Bench of the
Supreme Court in case of Builders
Association of India (supra) which was
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reiterated in case of Bharat Sanchar Nigam
Ltd. (supra). Though in paragraph no.44 in
case of Bharat Sanchar Nigam Ltd. (supra),
the Hon'ble Apex Court has held that sub-
clauses of Article 366(29A) do not cover
hospital services, the same is overruled by
the Apex Court itself in case of Larsen and
Toubro Ltd. (supra).
124. The Hon'ble Apex Court in case of
Bharat Sanchar Nigam Ltd. (supra) has laid
down the test as to what would constitute
"transfer of right to use" for the purpose
of clause(b) of Article 366(29A) of the
Constitution and although the examples in
paragraph nos. 44 and 45 of the said
decision appears to be the basis of the
relief granted by the other High Courts, the
same cannot be applied to the kinds of
hospital/medical services provided by the
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petitioners, in view of the observations
made by the Apex Court in paragraph no.41 in
case of Builders Association of India
(supra) as well as in light of observations
of Apex Court in case of Larsen and Toubro
Ltd. (supra), wherein it was held that in
Article 366 (29A)(b), the term "works
contract" covers all genre of "works
contract" and it is not limited to one
specie of the contract and the Parliament
had all genre of "works contract" in view
when clause (29A) was inserted in Article
366. The Hon'ble Apex Court in case of
Larsen and Toubro Ltd. (supra) has further
held that the term "works contract" in
Article 366(29A)(b) is amply wide and cannot
be confined to a particular understanding of
the term or to a particular form and the
term encompasses a wide range and many
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varieties of contract and when the
Parliament had provided for such wide
meaning of "works contract" at the time of
the Forty-sixth Amendment of the
Constitution, the object of insertion of
clause (29A) in Article 366 was to enlarge
the scope of the expression "tax on sale or
purchase of goods" to overcome the decision
in case of Gannon Dunkerley (supra).
125. The decisions relied upon by the
petitioners rendered by five Hon'ble High
Courts giving reliefs to the hospitals in
Jharkhand, Allahabad, Punjab and Haryana,
Rajsthan and Kerala would not be applicable
to the facts of the case as the said cases
were concerned with transfer of right of
use, which is another specie of sale and
different from "works contract" and the
Hon'ble High Courts examined the issue from
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a common perspective without examining the
issue from the point of view of "works
contract" and therefore, with due respect,
we are unable to follow the same as the same
are not binding on this Court.
126. "Works Contract" is defined as per
Explanation (ii) to section 2(23) of the VAT
Act explaining the expression "works
contract" and it is to be appreciated and
understood in light of the constitutional
meaning.
127. Clause (ii) of the Explanation to
section 2(23) stipulates that for the
purpose of sub-clause (b) of the expression
"works contract' means a contract for
execution of works and includes such "works
contract" as the State Government may, by
notification in the Official Gazette,
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specify and therefore, as observed by the
Hon'ble Apex Court in paragraph no.87 of the
decision in case of Larsen and Toubro Ltd.
(supra) that the distinction between
contract for sale of goods and contract for
work of services has almost diminished in
the matters of composite contract involving
both contract of work / labour and a
contract for sale, for the purposes of
Article 366(29A)(b) of the Constitution of
India. Therefore "Works contract" includes
any agreement for "fitting out" of any
movable property. It is not confined to any
genre of contract. Therefore, fitting out or
implanting of items into the physiology or
the body of a human patient for alleviation
of pain or for improvement of the life of
the patient in the course of
medical/surgical procedure is required to be
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construed as "works contract", more
particularly, when the petitioners have not
been able to demonstrate how the definition
of "works contract" is not attracted to the
facts of the present case.
128. An attempt has been made on part of
the petitioners to distinguish the
contentions raised on behalf of the
respondents by canvassing that passing of
property by principle of accretion is
fundamental to "works contract" and human
body is not a "property" and therefore,
principle of accretion cannot apply to the
treatment of patients because substantive
civil law is divided into the law of
property, the law of obligations and the
law of status and there is a clear
distinction between the legal treatment of
"property" and of "persons". Reference was
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made to Salmond on Jurisprudence to submit
that "persons" in chapter 10 are treated
separately from "property" and the law does
not treat persons as "property". It was also
submitted that the "property" includes legal
rights of a person, but such usage is
obsolete in law as law has always treated
persons and property separately which is
also borne out from the provisions of the
IPC by treating offences relating to persons
and those related to property separately and
even under the law of torts, torts relating
to the person are treated separately from
torts relating to property and therefore, to
treat a live human body as a property is
shockingly retrograde and harks back upon
the pre-colonial era when humans were
treated as objects and were kept in
captivity as slaves and therefore, medical
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treatment to the human being cannot be
equated with treatment to a property and
therefore the use of medicines, implants,
stents, consumables, etc. for such treatment
cannot be subjected to sales tax under
clause (b) of Article 366(29A) of the
Constitution, and the treatment of the human
body cannot be equated to "works contract".
Reliance placed on section 19 of the
Transplantation of Human Organs and Tissues
Act, 1994 which prohibits the commercial
dealing in human organs an offence
punishable was also cited to canvas that
there is a legislative drift to not to tax
and the right to deal is the substratum of
any property/ proprietary right and when
such right has been taken away by another
legislation, it cannot be said that human
body/organs is "property". These submissions
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and contentions raised on behalf of the
petitioners are very attractive but the same
are not tenable in view of the decision of
Hon'ble Apex Court in relation to the "works
contract" as it is not in dispute that
petitioner hospitals render composite health
services which include the use and supply of
prosthetics, consumables, implant, stents,
medicines, etc. while treating the human
body and therefore it would fall within the
ambit of Article 366(29A)(b) of the
Constitution read with section 2(23) of the
VAT Act. The argument of the petitioners
that accepting the submission that composite
health services offered by the Hospitals
would fall within the meaning of words
"contract" within the ambit of Article 366
(29A)(b) of the Constitution would be
retrograde step in jurisprudence is, on the
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contrary, a retrograde interpretation of the
dynamic constitutional ingredients under
Article 366 (29A)(b) of the Constitution
which takes the entire jurisprudence back to
pre-Gannon Dunkerly days, apart from
stretching the context of "persons" and
"property" to a point of absurdity.
Therefore, definition of "sale" in section
2(23) of the VAT Act and the definition of
the "works contract" as per explanation (ii)
makes it clear that it is of wide import as
the rendering of services together with
supply of prosthetics,implants, stents,
consumables, medicines etc. used for
treatment of indoor patient cannot be given
a restricted meaning by excluding the same
from "works contract" on the basis that
"works contract" as a concept was originally
confined to contracts relating to immoveable
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properties alone. However, after the 46th
Amendment to the Constitution, the
definition of "works contract" was widened
and it is broad based taking within its fold
every possible and conceivable contracts
involving transfer of property while
providing services. Therefore, the
definition of "works contract" can include
hospital/ health/ Medical services including
composite contracts where the provision of
services also includes supply of goods along
with medical service and the definition
takes within its fold such services also and
therefore, the respondent State was
justified in proposing a demand to tax from
the petitioner hospitals on supply of
consumables, medicines, stents, implants,
etc. for treatment of indoor patients and
the reasons given in the decisions of five
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Hon'ble High Courts would have been
acceptable in the era prior to the 46th
Amendment to the Constitution as per the
decision of Hon'ble Apex Court in case of
Gannon Dunerkerly (supra) which has required
the Parliament to introduce 46th Amendment
to the Constitution so as to bring all genre
of contents of services including the supply
of goods within the purview of "works
contract" as held by Hon'ble Apex Court in
case of Larsen and Toubro Ltd. (supra).
129. It is also pertinent to observe that
when medical treatment is given to the
indoor patient there is not only transfer of
possession of implants/prosthetics into the
physiology of the patient but also the
ownership of such prosthetics to the patient
for consideration in course of the provision
of medical/health service. Similarly, in the
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course of taking X-ray, scan, MRI/CT Scan
for such in-patient, cost of which gets
included into the package are also liable to
be taxed as such activity can be termed as
the sale of immoveable property.
130. In view of the foregoing reasons, the
petitions therefore, fail and are
accordingly dismissed. Rule is discharged.
(BHARGAV D. KARIA, J)
(D.N.RAY,J)
After pronouncement of the judgment,
learned Senior Advocate Mr. S.N. Soparkar
prayed for stay of implementation and
operation of the impugned judgment for a
further period of 8 weeks and also prayed
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for time to file appeal in cases where
order-in-original is challenged and to
file reply in those petitions in which
show cause notices are challenged before
this Court.
In view of the fact that these
petitions are pending for a considerable
time and taking into consideration the
controversy involved therein both the
prayers are granted and implementation
and operation of the judgment shall remain
stayed for a period of eight weeks and the
petitioners shall be entitled to file
reply to the show cause notice within a
period of eight weeks from the date of
uploading this order and in the petitions
where show cause notices are challenged
and the petitioners shall be entitled to
file an appeal in the petitions
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challenging the order-in-original within
the statutory time period available from
the date of uploading this order.
(BHARGAV D. KARIA, J)
(D.N.RAY,J)
RAGHUNATH R NAIR
