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Dominant intention and common parlance – Recent VAT orders

26 February, 2014

In a spate of interesting judgements delivered recently, the Allahabad High Court provided refreshing insight into classification and taxability under VAT laws.

Oxygen -  Curative effect when used as medicine for medical purposes

At issue was oxygen – Oxygen IP - prepared under license granted under Drugs and Cosmetics Rules, 1945. The revenue authorities sought to classify the product under Oxygen and other gases attracting VAT of 12% while the assessee claimed that the oxygen gas being used in medical treatment ought to taxed under the entry ‘Medicine and Pharmaceutical Preparation’ subject to tax at the rate of 8%. On oxygen produced for industrial use, there was no dispute.

Interestingly, the use of oxygen and therefore its classification has been examined by atleast four other High Courts - Kerala, Madras, Rajasthan and Karnataka. A 1968 decision of the Allahabad High Court held that oxygen is a chemical and turnover is to be apportioned according to use for purposes of tax. The distinctive quality and dominant purpose test served to classify medicinal or medical under pharmaceutical preparation. The importance of curative function was emphasised.  The common contention of the department that there was no specific entry for medicinal use was of no avail. The court held that Oxygen IP is covered by specific entry ‘Medicine and Pharmaceutical Preparation’ and could not be classified under general entry of oxygen and other gases. [Panki Oxygen v. State of UP, Order dated 11-2-2014]

Oil – vegetable oil or edible oil?

With emphasis on the nature and substance of that commodity to determine appropriate entry, the High Court sought to understand the commodity further, rather than rest upon the general term ‘oil’. The tribunal had held that the correct classification was under ‘Edible oil and oil cake’.

The commodity manufactured by the assessee using milk, hydrogenated and unhydrogenated fats and various natural and identical flavouring substances, was in the nature of oil. The court observed that though the commodity would not be Vanaspati, it would be covered under ‘vegetable oil’ since the term would include every oil which is vegetable in nature. Being a cooking medium the commodity would be edible oil. It was held that the specific entry vegetable oil would prevail over ‘Edible oil and oil cake’. [M/s Agarwal Food Industries v. Comm. Sales Tax, Order dated 16-1-2014]

Stent – Sale embedded in implants?

In International Heart Hospital v. State of UP, decided on 6-2-2014, the court examined afresh dominant intention to hold that when implants are used during the course of a surgical procedure, there is no 'sale' when such a procedure is performed on the patient.

The court rejected the contention of the revenue authorities that the contract between the patient and the hospital is a divisible contract. The essence of the contract was performing a medical procedure and not sale of stent. Even if the patient were to choose between different stents available, the character of service is not lost. An argument put forth by the petitioner was that such implants or stents are not sold by the hospital directly to the patients. The court quashed the order of the Deputy Commissioner, Commercial Tax imposing tax on  stents or valves used by the hospital in providing medical services to its indoor patients              
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