Case Analysis Report: Herbal Holiday Resorts (Pvt) Ltd. v. Commissioner General of Inland Revenue
SC Appeal No. SC/APPEAL/6/2022 | Decided on: 03 June 2024

1. Background:

Herbal Holiday Resorts (Pvt) Ltd., operating under the name “Hotel Paradise Island” in Bentota, claimed Value Added Tax (VAT) exemption under paragraph (b)(xii) of Part II of the First Schedule of the VAT Act No. 14 of 2002 (as amended). This provision exempts “all health care services provided by the medical institutions or professionally qualified persons providing such care.”

The company argued that it was a pure Ayurveda clinic and not merely a wellness spa, hence falling under the category of a “medical institution.”

2. Legal Journey:

• Tax Appeals Commission (TAC): Dismissed the appeal, holding that registration with the Department of Ayurveda is a mandatory requirement to qualify as a medical institution for VAT exemption purposes.
• Court of Appeal: Overturned the TAC’s determination, ruling that non-registration under the Ayurveda Act does not disqualify the appellant from claiming the VAT exemption.
• Supreme Court: The Commissioner General of Inland Revenue appealed to the Supreme Court, challenging the ruling of the Court of Appeal.

3. Supreme Court Decision:

The Supreme Court unanimously reversed the decision of the Court of Appeal, restoring the ruling of the Tax Appeals Commission.

Key observations made:

• Legal Interpretation: The VAT Act does not define “medical institution”; however, the definition provided in the Guide to VAT issued by the Inland Revenue Department was used as a reference (though non-binding).
• Mandatory Registration: According to the Ayurveda Act No. 31 of 1961, registration of Ayurvedic establishments is mandatory. Without such registration, the appellant cannot be legally recognized as a medical institution.
• Court of Appeal’s Error: The Supreme Court noted that the Court of Appeal assumed Herbal Holiday Resorts was a medical institution, although that issue was never determined by the TAC or conceded by the tax authority.
• Strict Interpretation of Tax Exemptions: In line with international jurisprudence (e.g., the Indian Supreme Court case of Dilip Kumar & Co., 2018), the Supreme Court reiterated that ambiguity in tax exemptions must be interpreted in favor of the revenue.

4. Key Legal Principles Applied:

• Statutory Cohesion: Interpretation of VAT exemptions must align with definitions and requirements of related laws (Ayurveda Act).
• Tax Exemption Interpretation: Exemptions must be strictly construed, and the burden of proof lies on the taxpayer to meet all eligibility criteria.

5. Outcome:

• Supreme Court ruled in favor of the Commissioner General of Inland Revenue.
• Judgment of the Court of Appeal set aside.
• Determination of the Tax Appeals Commission restored.
• No costs were awarded.

6. Implications:

This case sets a precedent emphasizing that:

Ayurveda-based resorts or clinics must register under the relevant regulatory framework to qualify for VAT relief.

Institutions seeking tax exemptions must strictly comply with statutory and regulatory requirements (such as mandatory registration).

Courts will not assume qualifications for tax benefits unless adequately proven.