Medicines supplied by Hospital pharmacy for inhouse patients not liable for Sales Tax: Tribunal

Mumbai: In an important observation concerning charges of medicines inside a hospital, recently, the Maharashtra Sales Tax Tribunal has ruled that sales tax cannot be levied on drugs, medicines, stents etc that are supplied by a hospital pharmacy for the treatment of in-house patients. The court observed that these such items are used in the course of medical treatment in the hospital hence the same does not amount to sale.

The decision comes in response to an appeal filed by Saifee Hospital ( run by a public charitable trust) which pointed out that it ran a pharmacy on the ground floor of the hospital that supplied medicines to both inpatients and out-patient. The hospital went going through an assessment for sales tax under the MVAT Act. The assessing officer, stating that the supply of medicines to in-patient was a sale or a deemed sale imposed a demand of Rs 14,50,444 on the hospital including interest and penalty.

Challenging the order of the assessing officer, the hospital filed a first appeal before the Deputy Commissioner (Appeals), who upheld that the hospital was under assessed, observing that supply of drugs, medicines and other surgical goods effected by pharmacy/ drugstore to indoor patients is a sale liable to VAT. The first appellate authority also raised  the demand to whooping Rs 2.92 crore out of which Rs 1.05 crore was imposed as penalty. The appeal also brought under consideration in issue of levy of sales tax on food provided to inpatients as well as special beds and mattresses provided.

Aggrieved, the hospital then filed a second appeal against the said order . The counsel for the hospital quoted a clarification issued by the department to association of hospitals which stated

the dominant intention in administering medicines to inpatients is treatment of disease and not supply/sale of medicines, consumabes or implants. Therefore, the activity would not amount to "deemed sales" for the purpose of explanation to sub-52(24) ofthe MVAT Act.

Also the hospital argued

 .....Merely because the bills show MRP does not mean the hospital has collected taxes which are included in MRP. Collection of tax is separate. The fixation of MRP is done with a view to making the drugs available to customers at reasonable prices and the pharmacy is free to sell medicines below MRP......

.....The patient does not approach the hospital with the intention of buying drugs and medicines, but enters into a contract for medical services without even knowing which medicines have been finally used. His sole purpose is to get treatment.....

The counsel then also submitted a number of clarifications issued by the government department as well as number of judgement in this regard.

The counsel for the govt argued that the drugs sold under Drug Price Control Order (DPCO) are controlled and the MRP expressly includes sales tax/ VAT. It said the hospital is not deducting the sales tax/ VAT component while charging in-patients which would indicate that there is sale and sales tax/ VAT is being collected by the hospital by virtue of the fact that it is charging full MRP.

The counsel for the revenue department added that turnover of the hospital's pharmacy would be taxable. "This turnover would necessarily include the amount received from in-patients to whom drugs and medicines are supplied."

Therefore, the Revenue said the hospital should either have sold such drugs minus the sales tax component or should pay over the sales tax collected by it. If not, it would result in unjust enrichment.

The tribunal after going through the various arguments and the past court judgement allowed the appeal, the court noting:-

.....The internal dynamism may allow a pharmacy to operate as a profit centre. But supply to patients differed from across-the-counter sale....

.... if the pharmacy was run by a third party supply of drugs to in-patients could be termed a sale....

The tribunal then passed the following jdugement

1) The supply of medicine, drugs, stent implants to impatient during the course of treatment in the facts of and circumstances of this case does not amount to sale under the provisions of MVAT Act.

2) Supply of foods to inpatients included in the composite charges for room rent cannot be based under the MVAT Act, 2002 in view of no machinery provision.

3)Charges for special bed and mattresses are not exigible to tax.