Raj Jaggi
Composite Healthcare Supply Requires More Than Mere Food Delivery
The ruling in Boilla Venkataramana Reddy v. M/S Shivenari Canteen Services, 2026- VIL- 105- GSTAT- HYD, dated 18.09.2026, addresses an important GST issue: whether food supplied by an outsourced canteen contractor to hospital in- patients is part of exempt healthcare services or remains a separate taxable supply of food.
The dispute arose from a contract under which the respondent supplied food to MGM Hospital. The food was intended for various categories of persons, including in- patients, outpatients, hospital staff and doctors. However, the main controversy concerned food supplied for in- patients from January 2018 to November 2021.
The respondent argued that food given to in- patients was not an independent canteen service. According to it, such food formed part of the overall healthcare service provided by the hospital to admitted patients. On this basis, the First Appellate Authority accepted the respondent' s position and held that the supply of food to in- patients was part of a composite healthcare service and could not be taxed separately.
The Department challenged this finding. It contended that the respondent was only an outsourced caterer. It was not a hospital, clinical establishment, authorised medical practitioner or healthcare provider. Therefore, the exemption available for healthcare services could not automatically be extended to the caterer merely because the food was ultimately consumed by hospital in- patients.
The Department also relied on CBIC Circular No. 32/06/2018- GST dated 12.02.2018. The circular clarifies that food supplied to in- patients, as advised by doctors or nutritionists, may form part of composite healthcare services when supplied by the hospital as part of patient care. However, the Department' s argument was that this benefit applies to the healthcare provider, not to an independent outsourced canteen contractor supplying food under a separate contract.
In simple terms, the issue was not whether food given to in- patients can ever be part of healthcare services. The real question was who is supplying it and in what capacity. A hospital may include diet and nutrition as part of its exempt healthcare service to admitted patients. But an outsourced caterer, supplying food to the hospital for consideration, does not become a healthcare provider merely because the food is meant for in- patients.
A Composite Supply Must Contain Two or More Naturally Bundled Supplies
The Tribunal first examined whether the respondent’s supply fell within the definition of a “composite supply” under Section 2(30) of the CGST Act, 2017. A composite supply must involve two or more supplies of goods or services, or a combination of both. These supplies must be naturally bundled and provided together in the ordinary course of business. One of them must constitute the principal supply, which gives the entire transaction its essential character.
The respondent’s case failed this basic test. From the caterer’s perspective, there was only one supply: the supply of food. The respondent did not provide medical treatment, nursing care, diagnostic services, dietary consultation, or any other healthcare service. Its contractual responsibility was limited to preparing and supplying food to MGM Hospital at agreed rates.
Therefore, the respondent was not bundling food with healthcare services. Since there were no two or more supplies made by the respondent, the question of identifying a principal supply or determining whether the supplies were naturally bundled did not arise.
The distinction lies in the identity and role of the supplier. A hospital may provide several services to an admitted patient as part of an integrated healthcare package. These may include medical treatment, nursing, accommodation, medicines, and food prescribed by a doctor or nutritionist. In that context, the patient’s diet may be incidental or ancillary to the hospital’s principal supply of healthcare services.An outsourced caterer, however, does not provide this complete healthcare package. It merely supplies food to the hospital under a separate commercial contract. The fact that the food is ultimately served to in-patients does not, by itself, convert the caterer’s supply into a healthcare service.
Accordingly, the same food may occupy different positions in two separate transactions. In the hospital’s supply to an in-patient, prescribed food may form part of the overall healthcare service. In the caterer’s supply to the hospital, however, it remains an independent supply of food.
The composite-supply analysis must therefore be undertaken from the standpoint of the actual supplier and the supplies made by that supplier. The nature of a supply cannot be determined solely by its end use or by the exempt status of the service provided by the recipient.
CBIC Circular Protects Food Supplied by the Healthcare Provider, Not the Outsourced Caterer
The respondent relied heavily on CBIC Circular No. 32/06/2018-GST. The circular clarified that food supplied to in-patients, as advised by doctors or nutritionists, forms part of the composite supply of healthcare and is not separately taxable. It also clarified that other supplies of food by a hospital to patients who are not admitted, attendants, or visitors are taxable.
The Tribunal interpreted the circular in its proper context. The clarification applies where the healthcare service provider itself supplies food to in-patients as part of treatment. In such a case, the principal supply is the healthcare service, and food is ancillary to that service. The food and treatment are supplied in conjunction because the treatment of an in-patient may include a prescribed diet.
However, the circular does not convert the supply made by an outsourced caterer into a healthcare service. The caterer is not treating patients. It does not provide medical advice. It does not undertake the principal supply of healthcare. Its contractual supply is to the hospital, even though inpatients ultimately consume the food.
The Tribunal therefore held that the Board’s clarification did not affect the respondent’s supply. The respondent mistakenly believed the circular covered its transaction. That misunderstanding could explain the non-payment of tax, but it could not change the character of the supply.
Recipient and End-Consumer Are Not Always the Same for GST Classification
A key part of the reasoning rests on the distinction between the contractual recipient and the ultimate consumer. The respondent argued that the food was supplied to in-patients on hospital premises, based on doctors’ or nutritionists’ advice. On that basis, it claimed the supply should be absorbed into the healthcare service.
The Tribunal rejected this approach. The respondent supplied food to MGM Hospital under an agreement. The fact that the food was ultimately consumed by in-patients did not make the caterer a healthcare service provider, nor did it make the supply a composite healthcare supply in the caterer’s hands.
This distinction is important for GST classification. Taxability depends on the supply made by the supplier to the recipient. The ultimate use of the goods or services may matter in some contexts, but it cannot override the legal character of the supplier’s transaction. In this case, the hospital may have provided an exempt healthcare service to its in-patients. The outsourced caterer, however, supplied food to the hospital.
PAG and Hospital Clarifications Cannot Override the Statutory Scheme
The respondent also relied on communications from the Principal Accountant General[PAG] and MGM Hospital to support the view that food supplied to in-patients was not taxable. These communications were said to reflect the understanding that diet supplied to in-patients formed part of a composite healthcare service.
The Tribunal declined to treat those communications as determinative. Neither the PAG nor the hospital was the proper authority to issue a binding tax clarification on the respondent’s GST liability. At best, such communications could explain the Board’s circular. They could not expand the circular or create an exemption where the statutory framework did not provide one.
This is a useful reminder that taxpayers must exercise caution when relying on third-party letters, internal hospital communications or audit observations. An exemption must flow from the statute, notification or a binding circular applicable to the taxpayer’s transaction. It cannot arise merely from another institution’s view of the tax position.
Restaurant Service Classification Survived the Composite Supply Claim
The Department argued that the supply was taxable as restaurant service at 5% GST. It relied on the definition of restaurant service in the relevant rate notifications and submitted that outsourced food supply to the hospital was taxable. The First Appellate Authority had disturbed the adjudicating authority’s conclusion by treating the supply as an exempt composite healthcare service.
The Tribunal set aside the FAA’s order. Once the composite supply theory failed and the CBIC circular was held inapplicable to the outsourced caterer, the respondent remained liable to pay GST on food supplied to MGM Hospital for in-patient consumption.
The ruling therefore draws a clear boundary. Food supplied by a hospital to in-patients may be absorbed into an exempt healthcare service if supplied as part of treatment. Food supplied by an independent caterer to the hospital does not acquire that exemption merely because in-patients consume it.
Bona Fide Misreading of a Circular Does Not Establish Fraud
Although the Tribunal held the supply taxable, it did not accept the Department’s invocation of Section 74 of the CGST Act, 2017. Section 74 applies where tax has not been paid or has been short-paid by reason of fraud, wilful misstatement, or suppression of facts with intent to evade tax. These ingredients must be established clearly.
The respondent had relied on the Board’s circular, though mistakenly. The Tribunal treated this as a gross error in understanding the law and the clarification, not as deliberate evasion. No concrete material showed mala fide intention. The fact that the adjudicating authority itself had dropped the penalty proposed under Section 122 further supported the view that the respondent had not deliberately chosen to evade tax.
This part of the decision is important for interpretational disputes. A wrong legal view does not automatically amount to fraud. Where the taxpayer’s conduct is traceable to a plausible, though incorrect, understanding of a circular or exemption entry, the Department must do more than show taxability. It must establish the additional ingredients required for Section 74.
Section 75(2) Converts the Proceeding to the Normal Demand Route
Having held that Section 74 was unsustainable, the Tribunal invoked Section 75(2) of the CGST Act, 2017. This provision enables the appellate authority, Tribunal or court to treat a notice issued under Section 74 as one issued under Section 73 where the charges of fraud, wilful misstatement or suppression to evade tax are not established.
Accordingly, the Tribunal directed that the show cause notice be deemed issued under Section 73(1). The Tribunal directed the proper officer to determine the tax payable, along with consequential interest and penalty, on that basis.
This is a balanced outcome. The taxpayer was not absolved of tax merely because Section 74 failed. At the same time, the more serious fraud-based consequences under Section 74 could not survive without proof of intent to evade. The ruling thus separates taxability from culpability.
Cum-Tax Valuation Applies When Tax Was Not Separately Collected
The Tribunal then addressed valuation. From January 2018 to November 2021, the respondent did not issue separate invoices charging GST on food supplied to in-patients. The invoice values did not indicate any tax component. There was also no allegation that tax had been collected in excess of the invoice value.
In these circumstances, the Tribunal held that the declared invoice value must be treated as inclusive of tax. Rule 35 of the CGST Rules, 2017 provides the formula for determining tax when the value of supply is inclusive of integrated tax, central tax, state tax or union territory tax. Accordingly, tax had to be extracted from the cum-tax value rather than calculated on the entire invoice amount as if it were exclusive of tax.
This finding has substantial financial significance. If tax is calculated on the full invoice amount without cum-tax treatment, the taxpayer effectively pays tax on a value that already includes tax. Rule 35 prevents such over-collection by ensuring that the taxable value is determined after deducting the tax component.
Statutory Benefit Cannot Be Denied Merely Because It Was Not Claimed
A key feature of the ruling is that the respondent did not specifically claim the benefit of Rule 35 before the Tribunal or the lower authorities. The Tribunal nevertheless extended the benefit because the relevant facts were already on record.
The Tribunal relied on the principle that authorities must collect only the tax legally due, neither more nor less. It referred to Unichem Laboratories Limited v. Collector of Central Excise, 2002-TIOL-237-SC-CX, 2002-VIL-31-SC-CE, where the Supreme Court emphasised that tax authorities do not have a duty to deprive an assessee of a benefit available in law merely to augment revenue.
This principle adds fairness to the adjudicatory process. If the record clearly shows that tax was not separately collected and the invoice value was inclusive, Rule 35 must be applied. A statutory valuation benefit does not become unavailable merely because the taxpayer did not cite the rule at the correct stage.
Re-Determination Must Reflect Taxability, Normal Limitation and Cum-Tax Benefit
The final outcome was partly in favour of the Department and partly in favour of the taxpayer. The FAA’s order was set aside because it wrongly treated the outsourced caterer’s supply as an exempt composite healthcare service. The respondent was held liable to pay GST on food supplied to MGM Hospital for in-patients’ consumption.
However, the demand was not to be sustained under Section 74. The proper officer was directed to re-determine liability by treating the notice as one under Section 73(1) and to recompute tax after extending the cum-tax benefit under Rule 35. The officer was also directed to verify the invoices and ascertain that no tax had been collected during the relevant period.
The re-determination was to be completed within four weeks of receipt of the Tribunal’s order, and the respondent was to be intimated within two weeks thereafter. Thus, the Department succeeded on taxability, but the taxpayer succeeded on penalty classification and valuation.
Exemption Depends on the Supplier's Role
The ruling confirms that a healthcare exemption cannot automatically extend to an independent supplier merely because its food is ultimately consumed by hospital patients.It also limits the mechanical application of Section 74. A mistaken interpretation of the law or a CBIC circular does not, by itself, establish fraud, wilful misstatement or suppression of facts.
Further, the tax liability must be calculated correctly under Rule 35 wherever applicable, even if the taxpayer did not claim its benefit. The decision thus denies the exemption while preventing excessive tax recovery and unjustified penalties.
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