The Customs, Excise & Service Tax Appellate Tribunal has delivered a pivotal clarification on the boundary between taxable cosmetic procedures and exempt healthcare services under the Mega Exemption Notification. This judgment resolves long-standing ambiguity for dermatological and trichological clinics, establishing that the purpose of treatment - not its superficial outcome - determines tax liability.
Background & Facts
The Dispute
M/s. Trichoderm operates a clinical establishment under the brand name 'Medlinks' in New Delhi, offering a range of dermatological and trichological services including acne treatment, alopecia correction, hair transplant, vitiligo surgery, scar removal, and wart removal. The appellant claimed exemption under Entry No.2 of Notification No.25/2012-ST, which exempts 'healthcare services' rendered by authorized medical practitioners in clinical establishments. The Department, however, classified these services as 'cosmetic and plastic surgery' under Section 65(105)(zzzzk) of the Finance Act, 1994, and imposed a service tax demand of over Rs.2.62 crore.
Procedural History
- 2016 - 2017: Appellant rendered services and claimed exemption under the Mega Exemption Notification.
- November 8, 2019: Show Cause Notice (SCN) issued proposing service tax demand of Rs.2,61,94,416 based on best judgment assessment under Section 72, using Kachcha register data and balance sheet figures.
- January 28, 2021: Principal Commissioner confirmed demand of Rs.2,62,91,823, including penalty under Sections 77 and 78.
- 2021 - 2025: Appeal filed before CESTAT, challenging classification, assessment methodology, limitation, and denial of cum-tax benefit.
Relief Sought
The appellant sought: (1) quashing of the demand on grounds of incorrect classification; (2) exclusion of Rs.97,407 beyond SCN scope; (3) rejection of Kachcha register as evidence; (4) entitlement to cum-tax benefit under Section 67(2); and (5) non-invocation of extended limitation period due to absence of suppression.
The Legal Issue
The central question was whether services such as hair transplant, vitiligo treatment, and scar removal qualify as 'healthcare services' exempt under Entry No.2 of Notification No.25/2012-ST, or whether they fall under the taxable category of 'cosmetic or plastic surgery' as defined in Section 65(105)(zzzzk), particularly when performed to restore bodily function rather than for mere aesthetic enhancement.
Arguments Presented
For the Appellant
The appellant argued that its services, including treatment for alopecia, vitiligo, and burn scars, are therapeutic interventions for recognized medical conditions, not cosmetic enhancements. It relied on multiple CESTAT precedents (Mohak Hi Tech, Berkowits Hair & Skin Clinic, Sreyas Holistic Remedies) holding that treatments addressing congenital defects, injuries, or pathological conditions fall within 'healthcare services' even if they involve surgical procedures. It further contended that reliance on Kachcha registers for assessment was legally untenable, and that the extended limitation period could not apply since the issue was one of interpretation, not suppression.
For the Respondent
The Department contended that all services aimed at improving physical appearance - regardless of medical justification - constitute cosmetic surgery under the statutory definition. It argued that hair transplant and mole removal are inherently aesthetic, and that the appellant’s self-assessment system amounted to deliberate non-disclosure. The Department defended the use of best judgment assessment under Section 72 due to non-cooperation from Zenoti software providers and insisted that cum-tax benefit was inapplicable since no service tax was collected separately from clients.
The Court's Analysis
The Tribunal undertook a granular analysis of the statutory definitions under Section 65(105)(zzzzk) and Entry 2(t) of Notification No.25/2012-ST. It emphasized that while the exemption explicitly excludes 'hair transplant or cosmetic or plastic surgery', it carves out a critical exception: services undertaken to 'restore or reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities, injury or trauma'.
The Court observed that the adjudicating authority had failed to examine each service individually, instead applying a blanket classification based on perceived aesthetic outcomes. This approach was found legally flawed. The Tribunal cited Berkowits Hair & Skin Clinic to affirm that alopecia is a recognized medical condition, and treatment for it qualifies as healthcare. Similarly, vitiligo and scar treatments were held to be restorative, not cosmetic.
"The definition of healthcare service although specifically excludes hair transplant or cosmetic or plastic surgery but still covers the same when undertaken to restore or reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities, injury or trauma."
The Court rejected the use of Kachcha registers as the basis for assessment, noting they are preliminary and subject to change, whereas balance sheets reflect actual income and are corroborated by bank records. On the issue of cum-tax benefit, the Tribunal relied on Advantage Media Consultant and affirmed that where service tax is not collected separately, the gross amount received must be treated as inclusive of tax, entitling the assessee to deduction under Section 67(2). Regarding limitation, the Court held that mere non-disclosure of legal interpretation does not constitute suppression under Section 73(1), especially where returns were filed and accounts audited.
The Verdict
The appellant succeeded on all substantive grounds. The CESTAT set aside the impugned order and remanded the matter to the adjudicating authority for fresh adjudication. The Court held that each service must be individually classified based on its medical purpose, Kachcha registers cannot be used for assessment, cum-tax benefit is applicable, and the extended limitation period cannot be invoked.
What This Means For Similar Cases
Classification Must Be Service-Specific
- Practitioners must maintain detailed clinical records linking each procedure to a diagnosed medical condition (e.g., alopecia, vitiligo, burn scar).
- Blanket claims of exemption or taxation are no longer sustainable; each service must be documented with diagnostic codes and treatment rationale.
- Clinics offering both cosmetic and therapeutic services must maintain separate billing and record-keeping systems.
Kachcha Registers Are Inadmissible for Assessment
- Revenue authorities cannot rely on appointment logs, estimated fees, or preliminary records to determine turnover.
- Assessments must be based on audited financial statements, bank reconciliations, and verified client payment trails.
- Practitioners should ensure software systems (e.g., Zenoti) are configured to generate auditable reports for tax purposes.
Cum-Tax Benefit Applies Even Without Separate Tax Collection
- Where service tax is not billed separately to clients, the gross receipts are deemed inclusive of tax under Section 67(2).
- Taxpayers are entitled to deduct the tax component from gross receipts to compute taxable value, even if no tax was collected from customers.
- This principle overrides the Amrit Agro ruling, which dealt with excise duty on goods, not service tax on professional services.
Extended Limitation Requires Actual Suppression
- Mere disagreement over legal interpretation does not amount to suppression or misstatement.
- If returns are filed and books are maintained, the burden shifts to the Department to prove intentional concealment.
- Practitioners should retain all ST-3 returns and audit reports for at least six years to defend against retrospective demands.
