Healthcare Global Enterprises Ltd. – WP No. 22236/2023 – Karnataka HC
I. Introduction
One of the defining features of the Goods and Services Tax regime has been the conscious decision of Parliament and the GST Council to keep essential public welfare services outside the tax net. Among these, healthcare services occupy a unique position. Unlike several exemptions that are subject to monetary thresholds or conditional compliance, healthcare services provided by specified establishments and medical professionals enjoy a broad and unconditional exemption under Notification No. 12/2017-Central Tax (Rate) dated 28 June 2017. The underlying rationale is self-evident: taxation should not increase the cost of access to medical treatment or impede the delivery of healthcare to patients.
Despite the clarity of this legislative objective, disputes have continued to arise regarding the scope of the exemption, particularly where healthcare services are rendered through collaborative arrangements involving multiple entities. Modern healthcare delivery increasingly operates through integrated models in which specialist hospitals, diagnostic centres, management companies and local healthcare institutions pool their expertise to provide comprehensive medical services. Such commercial arrangements frequently involve revenue-sharing mechanisms, service agreements and operational collaborations that do not fit neatly into traditional notions of a hospital-patient relationship.
The Karnataka High Court’s decision in M/s Healthcare Global Enterprises Ltd. v. Assistant Commissioner of Commercial Taxes addresses one such dispute. The controversy was not whether the services rendered to patients constituted healthcare services; that proposition was never seriously disputed. Rather, the issue was whether the exemption under Notification No. 12/2017 would cease to apply merely because the healthcare provider rendered medical services through another hospital under a contractual revenue-sharing arrangement instead of billing patients directly.
The Department sought to characterise the arrangement as the provision of “business support services” taxable under Service Accounting Code (SAC) 9985, whereas the taxpayer maintained that the true nature of the supply remained the provision of healthcare services exempt under Heading 9993. The dispute therefore raised a broader interpretative question that extends beyond the healthcare sector itself: should GST classification be determined by the legal form of the contractual arrangement or by the intrinsic nature of the services actually supplied?
The judgment is significant because it reinforces a settled but often overlooked principle of indirect taxation. Classification under GST depends primarily upon the character of the supply and not merely upon the contractual structure adopted by the parties. Where the essential nature of the activity remains unchanged, the exemption cannot ordinarily be denied simply because the services are delivered through an intermediary contractual arrangement.
Legislative Framework Governing Healthcare Exemption
Unlike many exemptions under the GST regime that seek to incentivise particular sectors or economic activities, the exemption for healthcare services is rooted in considerations of public policy and social welfare.
Entry 74 of Notification No. 12/2017-Central Tax (Rate) exempts healthcare services provided by a clinical establishment, an authorised medical practitioner or paramedics. The notification defines healthcare services broadly to include diagnosis, treatment and care for illness, injury, deformity, abnormality or pregnancy in any recognised system of medicine. Certain ancillary services that are integral to patient care are also included within the scope of the exemption.
The legislative intent underlying this exemption has remained remarkably consistent.
Even under the pre-GST service tax regime, healthcare services were largely kept outside the tax net. The transition to GST was not intended to alter this policy but rather to continue it under a unified indirect tax framework.
Recognising the practical difficulties that emerged after implementation of GST, the GST Council considered several representations concerning the scope of healthcare exemptions. Pursuant to the recommendations of the 25th GST Council Meeting, the Central Board of Indirect Taxes and Customs issued Circular No. 32/06/2018-GST dated 12 February 2018, clarifying various aspects relating to healthcare services. The Circular reiterated that healthcare services, when provided by eligible clinical establishments, continue to enjoy exemption notwithstanding the commercial arrangements adopted for their delivery.
This clarification assumed considerable importance in the present dispute because it reflected the consistent administrative understanding that the exemption was intended to attach to the nature of the healthcare service itself rather than to the contractual mechanics through which consideration was received.
Commercial Evolution of Healthcare Delivery
The dispute also illustrates the changing landscape of healthcare administration in India.
Large healthcare organisations increasingly collaborate with regional hospitals by providing specialised medical expertise while the local institution continues to own and operate the hospital infrastructure. Under such arrangements, one entity may deploy doctors, surgeons, technicians and specialised medical staff, while another provides land, buildings, administrative support and patient interface.
From a commercial perspective, such collaborations enable smaller hospitals to access specialised medical expertise without independently developing those capabilities. For specialist healthcare providers, these arrangements facilitate expansion into new geographical areas without establishing entirely new hospitals.
Revenue-sharing agreements have consequently become common within the healthcare sector.
However, these commercial innovations have also generated questions under GST.
When a specialist healthcare institution provides doctors, medical personnel and clinical expertise to another hospital, is it supplying healthcare services or merely rendering management or support services to the hospital itself?
The answer depends not upon the wording of the invoice alone but upon the true substance of the underlying transaction.
It is precisely this distinction that came before the Karnataka High Court.
Facts Giving Rise to the Dispute
The petitioner, Healthcare Global Enterprises Limited (HCG), is one of India’s leading providers of specialised healthcare services and is registered as a clinical establishment under the applicable regulatory framework. Apart from operating its own hospitals, HCG also collaborates with other healthcare institutions through contractual arrangements for providing specialised medical services.
In the present case, HCG entered into a Medical Services Agreement dated 10 July 2017 with Suchirayu Health Care Solutions Limited (SHCS), which operated a multi-speciality hospital at Hubballi.
The agreement contemplated far more than a conventional consultancy arrangement.
HCG agreed to provide comprehensive medical services through its team of doctors, specialists, technicians and paramedical personnel. SHCS, on the other hand, continued to operate the hospital and raised invoices upon patients receiving treatment.
Instead of charging patients directly, HCG became entitled to receive seventy-five per cent of the gross revenue generated by the hospital from medical services, investigations, diagnostic procedures, surgeries, pharmacy sales and other allied patient services. The remaining revenue was retained by SHCS in accordance with the contractual arrangement.
The Department conducted an inspection of HCG’s premises and formed the view that the consideration received under the agreement represented payment for “business support services” rendered to SHCS rather than exempt healthcare services rendered to patients.
Proceeding on this basis, the authorities issued notices under Section 73 of the Central Goods and Services Tax Act, 2017 for multiple financial years proposing recovery of GST, interest and penalty. According to the Department, HCG was liable to GST at the rate applicable to business support services falling under SAC 9985 because it received seventy-five per cent of SHCS’s gross collections under the revenue-sharing arrangement.
HCG challenged these proceedings before the Karnataka High Court.
The company’s principal contention was that the substance of the arrangement remained the provision of healthcare services to patients. The fact that invoices were initially raised by SHCS and that HCG received its consideration through a revenue-sharing mechanism did not alter the essential character of the medical services actually performed.
Reliance was also placed upon the exemption notification as well as Circular No. 32/06/2018-GST to contend that healthcare services do not lose their exempt character merely because they are provided through another clinical establishment.
The Department, however, maintained that HCG was effectively rendering support services to SHCS and that the contractual revenue-sharing model distinguished the transaction from the direct provision of healthcare services to patients.
The controversy before the High Court therefore ultimately turned upon a deceptively simple question. When specialised medical services are rendered by one clinical establishment through another hospital under a revenue-sharing agreement, should GST law focus upon the contractual recipient of consideration or upon the true nature of the services actually delivered?
The Court’s answer to this question has important implications not only for collaborative healthcare arrangements but also for the broader principles governing classification of composite commercial relationships under the GST regime.
II. The High Court’s Reasoning: Classification Must Follow the True Nature of the Supply
The Karnataka High Court approached the controversy by examining the substance of the arrangement between Healthcare Global Enterprises Limited (“HCG”) and Suchirayu Health Care Solutions Limited (“SHCS”), instead of limiting its enquiry to the manner in which consideration flowed between the parties. In doing so, the Court reaffirmed an important principle of GST jurisprudence: tax liability must ultimately be determined by the real character of the supply rather than by the commercial mechanics adopted for billing or revenue sharing.
The Department’s primary contention was straightforward. Since HCG raised invoices upon SHCS and received seventy-five per cent of the gross collections earned by the hospital, it was argued that HCG was not supplying healthcare services to patients but was instead providing business support services to SHCS. According to the Revenue, such services were classifiable under SAC 9985 and therefore liable to GST at the applicable rate.
The High Court found this approach to be fundamentally flawed.
Reading the Agreement as a Whole
A significant feature of the judgment is the Court’s insistence upon reading the Medical Services Agreement in its entirety instead of isolating individual clauses dealing with consideration or invoicing.
The Court observed that the agreement was expressly entered into for the provision of medical services. Its recitals recorded that HCG was engaged in the business of operating hospitals and providing specialised healthcare, while SHCS desired to obtain those very medical services for patients attending its hospital. The operative provisions required HCG to deploy doctors, specialists, technicians and paramedical personnel for providing diagnosis, treatment and other clinical services. The agreement also conferred upon HCG substantial responsibility in determining medical charges, maintaining patient records and ensuring delivery of healthcare in accordance with accepted medical standards.
Viewed in this manner, the Court concluded that the dominant purpose of the agreement was unmistakably the provision of healthcare services.
The fact that SHCS collected consideration from patients and subsequently shared the agreed percentage with HCG did not transform the essential nature of the underlying activity.
The Court thus declined to elevate the payment mechanism over the substance of the contractual obligations.
Revenue Sharing Does Not Alter Classification
One of the central arguments advanced by the Department was that the seventy-five per cent revenue share payable to HCG represented consideration for services rendered to SHCS rather than to the patients.
The High Court rejected this characterisation.
The Court observed that the revenue-sharing arrangement merely represented the commercial mechanism through which HCG was compensated for the healthcare services rendered by its medical professionals. Such arrangements are common in several sectors where two or more entities collaborate to provide a single service to the ultimate consumer. The mode of computing consideration cannot, by itself, determine the taxability or classification of the supply.
In the present case, every component of the revenue shared with HCG arose from services actually rendered to patients. The gross revenue included collections from consultations, investigations, diagnostics, surgical procedures, inpatient treatment, pharmacy operations and allied patient services. HCG’s entitlement therefore arose directly from the provision of healthcare and not from any independent administrative or support function rendered to SHCS.
The Court consequently held that the Revenue’s attempt to classify the arrangement as business support services ignored the commercial substance of the transaction.
Distinguishing Healthcare Services from Operational Management
An important aspect of the judgment is the distinction drawn between two separate contractual arrangements executed between the parties.
The record disclosed that even before the Medical Services Agreement dated 10 July 2017, HCG had entered into an Operation and Management Services Agreement with SHCS in October 2016. That earlier agreement dealt with matters such as hospital administration, branding, equipment management, staffing support and operational functions.
The High Court treated this distinction as significant.
While the earlier agreement undoubtedly related to management and operational support, the subsequent Medical Services Agreement governed an entirely different subject matter. It specifically concerned the provision of doctors, specialists, medical personnel and clinical services to patients.
The Department, however, failed to appreciate this distinction and effectively sought to characterise both agreements as involving business support services.
The Court held that such an approach overlooked the independent legal character of the Medical Services Agreement. Merely because two parties maintain multiple contractual relationships does not imply that every service rendered under each agreement acquires the same tax treatment. Each agreement must be examined independently having regard to its own terms and commercial purpose.
Significance of the Exemption Notification and CBIC Circular
The Court also attached considerable importance to the exemption notification and the subsequent clarification issued by the Central Board of Indirect Taxes and Customs.
Entry 74 of Notification No. 12/2017 grants an unconditional exemption to healthcare services provided by clinical establishments, authorised medical practitioners and paramedics. The notification itself does not stipulate that the clinical establishment must necessarily invoice the patient directly or receive consideration without the involvement of another healthcare institution.
Equally important was Circular No. 32/06/2018-GST, issued pursuant to the recommendations of the GST Council. The Circular clarified that healthcare services remain exempt notwithstanding the commercial arrangements adopted for their delivery and reiterated the legislative intention that healthcare services should remain outside the GST net.
The Court observed that administrative circulars issued to clarify the implementation of exemption notifications deserve due weight, particularly where they faithfully reflect the legislative intent and do not seek to impose any additional burden upon taxpayers.
The Circular therefore reinforced the conclusion that the exemption attached to the nature of the healthcare service rather than to the identity of the person raising the invoice.
Classification Depends Upon the Nature of the Supply
Underlying the entire judgment is the broader principle that GST classification must follow the intrinsic nature of the supply.
The Court recognised that HCG’s doctors, specialists, technicians and paramedical staff were directly engaged in diagnosing and treating patients. Their activities unquestionably constituted healthcare services within the meaning of the exemption notification.
The Department nevertheless attempted to focus exclusively upon the contractual relationship between HCG and SHCS while ignoring the actual recipient of the medical services.
The Court declined to adopt such a narrow approach.
It observed that the patients remained the ultimate beneficiaries of the medical services. SHCS merely functioned as the institutional platform through which those services were organised and delivered. The presence of an intermediary contractual arrangement could not alter the essential character of the activity undertaken by HCG.
This reasoning reflects an important interpretative principle under GST law. Classification cannot be determined merely by identifying the immediate contractual recipient of consideration. It must instead take into account the true nature of the activity performed and the economic substance of the supply.
Indirect Taxation Cannot Circumvent a Direct Exemption
The High Court also accepted the petitioner’s broader submission that what cannot be taxed directly cannot ordinarily be taxed indirectly through an artificial process of reclassification.
The exemption granted under Notification No. 12/2017 is unconditional. If the services rendered by HCG directly to patients would admittedly qualify as exempt healthcare services, the Revenue could not deny the exemption merely because identical services were delivered pursuant to a collaborative arrangement with another hospital.
To hold otherwise would produce anomalous results.
Two doctors performing identical medical procedures upon similarly situated patients would receive different GST treatment solely because one practised in his own hospital while the other rendered services through a revenue-sharing arrangement with another clinical establishment.
The Court rightly observed that such a distinction finds no support either in the notification or in the broader scheme of GST legislation.
Reaffirming Substance over Form
Viewed as a whole, the judgment represents a reaffirmation of a fundamental principle of indirect taxation: commercial arrangements cannot be dissected into artificial components for the purpose of imposing tax where the true nature of the transaction remains unchanged.
The Court was careful not to suggest that every revenue-sharing arrangement automatically qualifies for exemption. Its conclusion rested upon the specific terms of the Medical Services Agreement, the actual functions performed by HCG’s medical personnel, the statutory definition of healthcare services and the legislative policy reflected in the exemption notification and the CBIC Circular.
Nevertheless, the broader significance of the decision lies in its insistence that GST classification must be grounded in commercial substance rather than contractual labels. Where the dominant activity continues to be the diagnosis, treatment and care of patients by a recognised clinical establishment, the exemption cannot be denied merely because the parties have adopted a commercially convenient mechanism for sharing revenue or raising invoices.
III. Concluding Remarks
The Karnataka High Court’s decision provides valuable guidance on the interpretation of healthcare exemptions under the GST regime by reaffirming that classification must be determined by the true nature of the services rendered rather than by the contractual structure adopted by the parties. Where the dominant activity is the diagnosis, treatment and care of patients by a recognised clinical establishment, the exemption under Notification No. 12/2017 cannot be denied merely because the services are delivered through a revenue-sharing arrangement with another hospital.
The ruling is likely to have significant implications for hospital management agreements, specialist healthcare collaborations, oncology networks, telemedicine partnerships and other integrated healthcare models that have become increasingly common in India. It also reinforces a broader principle of GST jurisprudence that exemption notifications must be interpreted in a manner that furthers their legislative purpose and does not permit taxation through artificial reclassification of supplies. By preferring substance over contractual form, the judgment offers welcome certainty to the healthcare sector while remaining consistent with the public policy objective of keeping essential medical services outside the ambit of GST.