TAXABILITY OF HOSPITALS - A STUDY

BY K.K.Tiwari,
Member Tribunal Trade Tax (Retd.),
R-4/8, Raj Nagar, Ghaziabad
(A) ENTRY TAX:
Entry Tax was introduced on 1.11.1999 by promulgation of The
U.P.Act on Entry of Goods Act, 2000 (U.P.Act No.12 of 2000).
Machinery and Spare parts were also brought within the ambit of
Entry Tax by notification No. KA.Ni.-2-2283 dated 31.10.1999.
However, by Notification No. KA.Ni.-2-927 dated 18.2.2003 machinery
to be used in manufacturing unit was taken out from the ambit.
A debatability has been arisen whether Medical Equipment procured
by Hospitals / Medical practitioners used for their professional
services shall attract levy of Entry Tax under the head of Machinery
or not?
(1) LEVY OF TAX:
(i) There shall be levied and collected a tax on entry of any goods
specified in the Schedule into a local area from any place outside
that local area including a place outside the Uttar Pradesh
for consumption, use or sale therein, at such rates not
exceeding five per cent of the value of the goods as may be
specified by the State Government by notification and different
rates may be specified in respect of different goods or different
classes of goods:
Provided that the State Government may by notification amend the
Schedule and upon issue of any such notification, the Schedule
shall, subject to the provisions of sub-section (6) be, deemed to be
amended accordingly.
(ii) The tax levied under sub-section (1) shall be payable by a dealer
who brings or causes to be brought into the local area such
goods, whether on his account or on the account of his
principals or takes delivery or is entitled to take delivery of
such goods on its entry into a local area.
Explanation:
Whether the goods are taken delivery of on its entry into a local
area or brought into a local area by a person other than a dealer,
the dealer who takes delivery of the goods from such person shall
be deemed to have brought or caused to have brought the goods
into the local area.
(2) The word ‘Dealer’ referred in section 4 of the Act have been
defined u/s 2 (b) of the Act, relevant portion of the definition of
the word ‘Dealer’ as defined runs as under:
“Dealer” means any person who in the course of business whether

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 on his own account or on account of a principal or any other
person, brings or causes to be brought into a local area any goods
or takes delivery or is entitled to take delivery of goods on its entry
into a local area and includes:
(3) The word “Business” referred u/s 2(b) of the Act have defined u/
s 2(a) of the Act which runs as under:
(i) Any trade, commerce or manufacture or any adventure or
concern in the nature of trade, commerce or manufacture,
whether or not such trade, commerce, manufacture, adventure
or concern is carried on with a motive to make profit and
whether or not any profit accrues from such trade, commerce,
manufacture, adventure or concern.
(ii) The execution of any works contract or the transfer of the right
to use any goods for any purpose whether or not for a specified
period; and
(iii) Any transaction in connection with or incidental or ancillary to
or resulting from such trade, commerce, manufacture,
adventure or concern or works contract or lease.
(4) The perusal of section 4 read with section 2(b) and 2(a) of the
Act clearly shows that the liability to pay entry tax is leviable
on entry of any goods specified in the schedule, into a local area
from any place outside the local area including a place outside
Uttar Pradesh for consumption, use or sale therein, only in the
circumstances when it has been brought by a dealer in the course
of business and not otherwise.
(5) The word “local area” has been defined u/s 2(c) as under:
“local area” means the territorial area of,-
(i) a Municipal Corporation under the Uttar Pradesh Municipal
Corporation Act, 1959;
(ii) a Municipality under the Uttar Pradesh Municipalities Act, 1916;
(iii) a Zila Panchayat or a Kshettra Panchayat under the Uttar
Pradesh Kshettra Panchayats and Zila Panchayats Adhiniyam,
1961;
(iv) a Gram Panchayat under the United Provisions Panchayat Raj
Act, 1947;
(v) a Cantonment under the Cantonments Act, 1924;
(vi) any Industrial Development Area under the Uttar Pradesh
Industrial Area Development Act, 1976.
(vii) any other local authority by whatsoever name called under an
Act of the Parliament or the State Legislature.
The words and explanation used in this but not defined shall have
the meaning assigned to them in U.P.Trade Tax Act, 1948.
The perusal of item No. 5 of the Schedule of Entry Tax (Supra)
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 shows that the levy of Entry Tax by this Entry is leviable on
Machinery or its spare parts of the machinery, if value of such
machinery or spare parts individually exceeds Rs. 10 Lakhs or
more at the time of Entry of Goods into the local area and not
otherwise.
(6) M.P. High Court in the case of National Thermal Power
Corporation Limited vs. the Additional Commissioner,
Commercial Taxes reported in 24 TLD page 62 have held as
under:
“That it is now well established that building material, machinery
and other articles which were brought into a local area for the
purpose of establishment an industry and before the production of
goods are exempted from liability of entry tax.”
In the aforesaid case the question for adjudication before Hon’ble
M.P. High Court was whether the entry of plant and machinery into
local area before commencement production in 2nd phase i.e. for
erection and commencement in the 2nd phase of expansion is liable
to entry tax or not. After going into deep identical and similar
provisions of Entry Tax Act in M.P. as exist in U.P. Hon’ble M.P.
High Court have held that it is not liable to entry tax because it
was not brought by a dealer in course of business.
(7) It is also noteworthy to mention here that the definition of
Business has been widened by the U.P. State Legislature in
consequence to the draw back pointed out by the Hon’ble Apex
Court in the case of M/s Raipur Manufacture Company reported
in 19 STC page 1 wherein the U.P.State Legislature has
intentionally not used the word “commencement or closure” in
the definition of the Business while substituting the definition
of the Business in the U.P. Trade Tax Act in consequence to
the decision of the Apex Court in the case of M/s Raipur
Manufacture Company as have been used in Bombay Sales Tax
Act by the Maharashtra State Government vide Maharashtra
Act No. 9 of 1998 with effect from 1st July 1981.
(8) Even when the U.P. Government have not chosen to levy any
entry tax on entry of goods on commencement or closure of
business, as such the entry of goods into the local area from
any place outside the local area including outside the State of
U.P. cannot be deemed as brought in the course of business
or is liable to entry tax in view of the principles laid down by
the Hon’ble High Court (Supra) and by the Hon’ble Bombay High
Court in the case of Commissioner of Sales Tax vs. Steels
Suppliers P.Ltd. reported in 98 STC 448. Since it was brought
for use in Diagnostic Centre.
(9) It is admitted that liability to pay the entry tax under the entry
tax Act is leviable only on entry of goods by a dealer in the course
of business and not otherwise in view of the principles settled

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 by Hon’ble Bombay High Court in the case of Commissioner of
Sales Tax, Bombay Vs. Billion Plastic P. Ltd. reported in 98 STC
185.
(10) Hospitals and Doctors are not ‘Dealer’ as they are neither doing
any manufacture nor any trading. Since their activities are
not covered by the terms “business” hence Entry Tax is not ab-
inito applicable on the Entry of Medical Equipment.
Decision of J.C.Shah J. in CST vs. Sukhdev (1969) 23 STC 385 (SC) at
387-388 affirmed 1963 145 STC 581 ALL.HC.
“In our judgment whereas prescribed by a Medical Practitioner, a
mixture of different drugs is prepared by the medical practitioner or
by his employees specially for the use of a patient in the treatment
of an ailment or discomfort diagnosed by the Medical Practitioner
by his professional skill and which mixture is normally incapable
of being passed from hand to hand, as a commercial commodity,
the medical practitioner supplying the medicines cannot be said
to be a manufacturer of the mixture and mixture cannot be said
to be manufactured within the meaning of the notification.
(11) In the case of M/s Bharat Sanchar Nigam Ltd., vs. Union of India
whereat the Supreme Court has discussed as to the taxability of
hospital services Para 45 and 46. Reproduced below (Quote):
Para 45 :- Of all the different kinds of composite transactions the
drafters of the 46th Amendment chose three specific situations, a
works contract, a hire purchase contract and a catering contract
to bring 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 clauses (b) and (g) of Clause
29A of Article 366, there is no other service which has been
permitted to be so split. For example the clauses of Art. 366 (29A) 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.
Para 46 :- The reason why these services do not involve a sale for
the purposes of Entry 54 of List II is, as we see it, for reasons
ultimately attributable to the principles enunciated in Ganon
Dunkerley’s case, namely, if there is an instrument of contract
which may be composite in form in any case other than the
exceptions in Article 366(29-A), unless the transaction in truth
represents two distinct and separate contracts and is discernible

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 as such, then the State would not have the power to separate the
agreement to sell from the agreement to render service, and
impose tax on the sale. The test therefore for composite contracts
other than those mentioned in Article 366 (29A) 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. We will, for the want of a better
phrase call this the dominant nature test.
(12) Further the view expressed by Apex Court in the case of Bharat
Sanchar Nigam Ltd.(supra) has been relied upon by All.HC, in
the case International Hospital Ltd., Noida Vs. State of U.P. 2006
NTN 402 while deciding the issue of exigibility of sales tax on
hospital services.
(13) Most of the Hospital Equipments is electronically operated hence
more rationally should be classified as “Electronic Goods” rather
than Machinery. The perusal of aforesaid entry further shows
that legislature has chosen to levy Entry Tax on machinery and
not on Electronic goods. There is wide distinction between the
word machinery and electronic goods.
(14) Term ‘Machinery’ has not been defined in U.P.Trade Tax Act
and U.P.Tax on Entry of Goods Act. Reliance is placed in the case
of Commissioner Trade Tax U.P. Vs. Elmech Engineers reported at
2005 NTN (Vol.27) page 397 the Hon’ble Court while examining
the meaning of the word `Machinery’ in the context of Diesel
generating set.
(15) Machinery as in common parlance under the U.P. Trade Tax Act
is generally related to manufacturing process and termed as a
Capital Goods under the head of Plant and Machinery in a
manufacturing unit. Machinery defined u/s 3A of U.P. Trade
Tax Act is a general entry. While the Entry of Electronic Goods is
a special entry under U.P. Trade Tax Act *** In the case
reported in Seimens Ltd. Vs. CTO (Supra) Hon’ble Karnataka High
Court 1999 NTN 571 has clearly held that the principle of
general speculations non derogant can also be applied as the
entry of machinery is a general entry the special entry of
electronic machinery would stand excluded. The said case
related in matter of Computer whereas specific entry stands
under section 3A of U.P. Trade Tax Act [Entry No.75 (ii) as inserted
vide Notification No. 306 dated 29.1.2001].
Machinery as otherwise under “common parlance” is termed
to execute ’work’ whereas mechanical force is applied by way of
human force or animal force or by way of conversion of electrical
energy to mechanical energy as in case of lathe or drill machine
etc. Electronic Goods under the head of Hospital Equipments i.e.

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 Diagnostic equipments like Ultrasound Machine, C.T.Scan,
Magnetic Resonance Images (MRI) Pathological analysis and
processors, EGC Machine, Heart Fabrilattors, Heart Lung Machine
etc. do not use mechanical force and run on electronic principle
using microprocessor. The use of energy in said Hospital
equipments is invisible as can be observed otherwise.
(i) X-Ray Machine - High Frequency Waves scan the body and no
mechanical force is applied on the body while taking X-Ray.
(ii) Ultra sound Machine - Electronic tranducers are used whereas
sound waves are generated to scan the body.
(iii) MRI - Magnetic Resonance device is used to scan the body, duly
controlled by Microprocessor.
(iv) Heart Lung Machine
(v) Pathological analysers.
Simultaneously only other equipments wherein no mechanical
forces is exerted, cannot be termed as machinery.
(a) The word machinery for the first time came up for interpretation
before the Privy Council. Lord Atkinson in the judgment
Corporation of Calcutta Vs. Chairman of the Cossipore
Municipality and Shitpore Municipality, reported at 1922 AIR (PC)
page 27 held as under :
“The word “machinery” when used in ordinary language prime
facie means some mechanical contrivances which by themselves
or the combination with one or more other mechanical
contrivances, by respective parts generate and inter dependent
operation of their natural forces with the object in each case of
effecting a definite and specific results”.
(15) In the case of D.B.Bhandari vs. State of Mysore reported at 1967
(20 STC 25) whereat it has been held that the machinery is a
contrivance whereby several things are put up together to
work in such a way that force may be applied at a most
convenient point in most convenient way to get a particular work
or an item of work or produce a specific article or manufacture
goods. Thus the medical equipment is outside the purview of
machinery.
(16) In the case of M/s Engg. Traders reported at 1973 UPTC Page 91
ALL. HC whereat it has been held that machinery in generic
sense would include all appliances and instruments whereby
energy or force is transmitted and transferred from one point to
another.
(17) In the case of Engineering Traders vs. State of U.P. reported in 31
STC page 456.The Full Bench of Allahabad High Court defines
machinery as follows :

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 “ Machinery according to the dictionary meaning means a
machinery in general or a functioning unit. The word “machine”
is a well-known term and according to Webster dictionary means
an instruments (as a Lever) design to transmit and modify the
application of power, force and motion. Thus machinery in generic
sense would include all appliance and instruments where by energy
or force is transmitted and transformed from one point to another
in that sense it will include simple appliance like a lever to
complicated machinery employed in mills and factories.
Hence it is seen that the said Hospital Equipment work on the
principle of electronics and these equipments are controlled by
Microprocess wherein semiconductors (silicon chips) are used.
There is no use of mechanical force while operating these
equipments to get the results neither manufacturing is done in
the process.
(18) In the case of Agilent Technology India P.Ltd. vs. C.T.T. reported
at 2003 NTN Vol. 23 Page 558 ALL.HC, it has been held that
Medical Equipment for Measuring and Testing are Electronic
Goods. Hence these equipments do not transfer any force and
hence do not fall under the generic term of machinery.
(19) Hon’ble Supreme Court in the case of M/s BPL Limited vs. State
of Andra 2001 NTN Vol.19, Page 10 has treated automatic
Washing Machine as Electronic Goods and the ratio of law held
is that systems, instruments, appliances, apparatus and
equipment which operate on Electronic principle would be
Electronic Goods. Evidently, therefore, the Medical Electronic
Equipment is covered under the term Electronic Goods and
therefore the Entry Tax @ 2% levied on its value under the
category of machinery is not maintainable.
(20) Cumulative inference of the above in my opinion is that
Hospital Equipment shall not be exigible to Entry Tax primarily
for the reason that hospital is not dealer. Furthermore Medical
Equipment does not qualify test of machinery and the same
are predominantly “Electronic Goods”..
(B) SALES TAX:
(1) Another question, which is now being dealt, is regarding
taxability of various consumables used in the hospitals. At
times medicine is supplied to the patients along with the Doctors
fee.
The hospital bill also separately includes cost of medicines shown
in the bill. Likewise cost of stunts in a heart surgery; cost of X-
Ray films; cost of IO Lenses recovered from the patients, whether
shall be further exigible to tax in the State, if such material has
been purchased ex-U.P. by the hospital?
(2) Relevant definition under the U.P.Trade Tax Act is as under:

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(a) ‘Goods” means every kind or class of movable property.
(b) ‘Dealer” means any person who carries on in U.P. business of
buying, selling, supplying or distributing goods directly or
indirectly for valuable consideration and includes inter-alia
Firm, Company or other Body Corporate.
(c) ’Business’ of Buying or selling goods includes any Trade,
Commerce or manufacture or any adventure or concern in the
nature of Trade, Commerce or manufacture whether or not
any profit accrues but does not include any activity in the nature
of mere service or profession which does not involve purchase or
sale of goods.
(3) In the case of Dr. Golak Bihari Mohanty vs. State of Orissa reported
at (1974) 33 STC page 514, Orissa High Court observed:
“The radiologist is usually approached for technical advice and for
rendering such advice a fee is charged. A patient does not approach
the radiologist with a request to take a radio-photograph of his as
a customer approaches a professional photographer. The primary
object of the transaction and the intention of the parties while
entering into the arrangement in the case of a patient and the
radiologist is really not the transfer of the title of the X-ray plate,
but the technical advice which the radiologist enables himself to
give on the basis of his readings from the X-ray photograph. It is
with the technical opinion of the radiologist that the patient is
concerned.””There is no doubt that for doing the job, the radiologist
uses the X-ray plate which was hitherto his and after it is utilised
for taking the X-ray photograph of the patient, it no more continues
to be his. Whether the radiologist keeps it, as indicated by Dr. Mody,
or makes it over to the patient, it is really not a chattel in the
commercial sense which has to be possessed for ever like a
photograph; with the detection of the ailment, the utility of the
goods is over.”
(4) In the case of Dr. Hemendra Surana vs. State of Rajasthan,
reported at (1993) Vol. 90 STC 251 Rajasthan High Court observed:
“In every case, the court has to find out what was the primary
object of the transaction and the intention of the parties while
entering into it. Radiologist is usually approached for technical
advice and for rendering such advice, a fee is charged. The primary
object of the transaction and the intention of the parties in such
matters is really not the transfer of the title to the X-ray plate but
the technical advice which the radiologist gives on the basis of
his reading from X-ray photograph. The patient is concerned with
this technical opinion and not the X-ray film. Taking X-ray
photograph is nothing but rendering a professional service and
does not involve the element of sale. I am fortified in my view
that I have expressed above, by the judgment of this Court in
National Clinic’s case ILR 1966 Raj. 3 as also Dr. Golak Behari

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 Mohanty’s case [1974] 33 STC 514 (Orissa). If we look at the
definition of “dealer” given below, it cannot be said that the
petitioner can be included in the definition of “dealer”.
(5) In the case of M/s Bharat Sanchar Nigam Ltd., vs. Union of
India whereat the Supreme Court has discussed the taxability
of hospital services. Relevant para 45 and 46 has been
reproduced earlier under the head of Entry Tax.
(6) In the case of CST vs. Sai Publication Fund reported in 2002
NTN (Vol. 20) 305; (2002) UPTC Page 335 Supreme Court held
that as the Trust is not in the business of selling and supply of
goods, hence not a dealer. In the case Trust has not been held
as a dealer and not liable to sales tax. Evidently Entry Tax is not
applicable to the Trust when the Unit is not a dealer. This
case is squarely applicable to hospitals run by Charitable Trusts.
(7) In light of the various legal judgments discussed herein- above,
I am of the opinion that the Hospital services are exempted from
being split into service and sale under Clauses (b) and (g) of
Clause 29A of Article 366 of the Constitution.
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