The Hyderabad Bench of the Goods and Services Tax Appellate Tribunal (GSTAT) has held that food supplied by an outsourced caterer to hospital in-patients is liable to GST and cannot be treated as part of an exempt composite healthcare service. 

The bench of A P Ravi (Judicial Member) and Duvvuri Krishna Srinivas (Technical) allowed the department’s appeal and set aside the order of the First Appellate Authority (FAA), which had earlier granted relief to the taxpayer by treating such supplies as composite healthcare services. 

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The dispute arose from supplies made by the respondent assessee to MGM Hospital, Warangal. The taxpayer was engaged under an agreement with the hospital to provide food to in-patients, out-patients, doctors, and hospital staff. While the taxability of food supplied to other categories was not in dispute, the controversy centered on food supplied to in-patients during the period from January 2018 to November 2021. 

The department challenged the FAA’s decision, arguing that the taxpayer was merely an outsourced caterer and not a healthcare provider or clinical establishment. According to the department, the benefit of CBIC Circular No. 32/06/2018-GST dated February 12, 2018, which treats food supplied to in-patients as part of a composite healthcare service, is available only to hospitals and healthcare providers and not to third-party contractors supplying food to hospitals.

The department also contended that such supplies were taxable as restaurant services attracting GST at 5 percent. 

The taxpayer, on the other hand, argued that food supplied to in-patients pursuant to the hospital’s requirements formed part of healthcare services and therefore enjoyed the same tax treatment as healthcare services. It relied upon the CBIC circular, various communications issued by authorities, and the fact that the food was supplied within hospital premises and according to medical advice and nutritional requirements. 

After examining the provisions relating to composite supply under Section 2(30) of the CGST Act, the Tribunal observed that a composite supply requires the existence of two or more naturally bundled taxable supplies supplied together, one of which is the principal supply. 

The Bench noted that in the hands of the taxpayer there was only a single supply, namely the supply of food to the hospital under a contractual arrangement. Since there was no bundle of multiple supplies by the taxpayer, the essential ingredients of a composite supply were absent. 

The Tribunal further analyzed the CBIC circular and clarified that the circular was issued in the context of healthcare services provided by hospitals and clinical establishments. According to the Bench, when a hospital provides healthcare services to an in-patient, food supplied as part of treatment forms part of a composite healthcare service because healthcare is the principal supply and food is naturally bundled with it.

 However, the outsourced caterer in the present case was supplying only food and was not providing any healthcare service. Therefore, the circular could not be extended to the caterer’s supplies. 

The Tribunal emphasized that the food was supplied by the taxpayer to MGM Hospital under a contract and that the fact that the food was ultimately consumed by in-patients did not transform the transaction into a composite healthcare service. It concluded that the taxpayer had incorrectly interpreted the Board’s circular and that the FAA had erred in treating the activity as a composite supply. 

The Tribunal also examined whether the extended period and penal provisions under Section 74 of the CGST Act had been correctly invoked. The Bench found that although the taxpayer’s understanding of the law was erroneous, there was no evidence of fraud, wilful misstatement, or suppression of facts with intent to evade tax. The Tribunal observed that the taxpayer had acted under a mistaken interpretation of the circular and that the ingredients necessary for invoking Section 74 had not been established. 

The Tribunal directed that the proceedings be treated as if initiated under Section 73 rather than Section 74. Consequently, the proper officer was directed to re-determine the tax liability, interest, and penalty in accordance with Section 73. 

The Tribunal also granted the taxpayer the benefit of the cum-tax principle under Rule 35 of the CGST Rules. It noted that the taxpayer had not separately collected GST in the invoices issued for food supplied to in-patients. Therefore, the invoice value had to be treated as inclusive of tax and the tax liability recomputed accordingly. The Bench stressed that tax authorities must collect only the tax legally due and cannot deny statutory benefits merely because a taxpayer did not specifically claim them. 

The GSTAT held that food supplied by the taxpayer to MGM Hospital for consumption by in-patients was taxable under GST and not exempt as a composite healthcare service. However, it directed the proper officer to recompute the demand by treating the proceedings as arising under Section 73 and by extending the benefit of cum-tax valuation under Rule 35 after verification of the relevant invoices. 

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