VAT Rate on Dental Prosthesis Materials: CAAD Arbitral Decision 67/2015-T on List I Point 2.6 CIVA

ARBITRAL DECISION

The arbitrators Fernanda Maçãs (arbitrator president), Diogo Feio and António Martins, designated by the Deontological Council of the Center for Administrative Arbitration to form the Arbitral Court, constituted on 15/4/2015, agree as follows:

I. REPORT

1. The Claimant A… - …, Unipessoal, Lda ("A…"), legal entity no. … with registered office at Rua …, no. …, …, Rooms … and …, … ..., comes, pursuant to the provisions of article 2, no. 1, subparagraph a) of article 10 and following of D.L. no. 10/2011, of 20 January (hereinafter referred to as RJAT[1]), to request the constitution of an Arbitral Court, for which purpose it filed a petition to that effect on 04-02-2015.

2. The claim that is the subject of the request for arbitral determination consists of the request for annulment of the official VAT assessments relating to the tax years of 2010, 2011, 2012, 2013 and 2014 and the corresponding compensatory interest and default interest assessments, in the total value of €635.078,71 as well as in the request for compensation of the Claimant for all costs incurred with the suspension and guarantee of the tax enforcement proceedings that may be instituted.

2.1. By petition of 16/2/2015, the Claimant came to request the extension of the request for arbitral determination to the VAT assessments and corresponding default interest, relating to the month of November 2014.

1. The request for constitution of the arbitral court was accepted by the President of the CAAD and automatically notified to the Tax and Customs Authority on 06-02-2015.

3.1. The Claimant did not proceed to the appointment of an arbitrator, whereby, pursuant to the provisions of subparagraph a) of no. 2 of article 6 and subparagraph b) of no. 1 of article 11 of the RJAT, the President of the Deontological Council designated the undersigned as arbitrators of the collective arbitral court, who communicated their acceptance of the designation within the prescribed period.

3.2. On 30-03-2015, the parties were notified of the appointment of the arbitrators and raised no objection.

3.2. In accordance with the provision of subparagraph c) of no. 11 of the RJAT, the collective arbitral court was constituted on 15-04-2015.

3.3. In these terms, the Arbitral Court is regularly constituted to examine and decide the subject matter of the proceedings.

1. To support the request for arbitral determination, the Claimant alleges, in summary, the following:

a) Within the scope of its activity, the Claimant imports implants and abutments that it subsequently sells to dentists or dental prosthetics technicians;

b) Implants are a structure surgically positioned in the maxillary bone below the gingiva, "replacing" the function of the tooth root. The abutment consists of a connecting or fixing structure of the dental prosthesis, inserted in the implant. Finally, on the abutment is introduced a crown that aims to replace the visible part of the tooth;

c) Implants and abutments are produced in series, unlike the crown, which is elaborated by dental prosthetics technicians and needs to be adjusted to the characteristics of the dentition of the patient in question, whereby it is specifically produced for each patient;

d) Having the AT concluded, in the context of the inspection procedure, that the wholesale commercialization of implants and abutments does not fall within the objective scope of item 2.6 of List I annexed to the VAT Code, a normal VAT rate should be applied, given that this item only applies to "transfers of prostheses consisting of a single unit of implant, that is, implant + connecting pieces + tooth", and whereas, in Case no. 429/2014-T, of the Center for Administrative Arbitration, the Arbitral Court decided, unanimously, that the commercialization of abutments and implants is subject to the reduced VAT rate, in accordance with the provision of Item 2.6, of List I annexed to the VAT Code;

e) In accordance with the provision of Item 2.6 of List I, annexed to the VAT Code, are subject to the reduced VAT rate "orthopedic devices, artificial limbs and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body or the treatment of fractures";

f) The aforementioned Arbitral Court held, in the decision relating to Case no. 429/2014-T, that: "The meaning and scope of the reduced rate applied in this field should take into consideration the good rules of hermeneutics, having regard not only to the grammatical element, but also to its context, reason for being and purposes pursued by item 2.6, and should result in a non-restrictive interpretation.";

g) The letter of the provision thus leads to the conclusion that dental implants fall within the said list, since it is a matter of prosthetic material intended to replace an organ of the human body, in the case, the dental apparatus, given that implants and abutments are, without difficulty, included in the category of artifact, since they constitute "objects produced by mechanical work";

h) Furthermore, there seems to be no doubt that the implants and abutments in question are prosthetic material, that is, material used in the creation of an artificial piece that replaces a part of the human body (in this case an artificial tooth intended to restore the mastication and aesthetic function of lost or fractured teeth);

i) Thus, and articulating the two formulations, that is, "artifacts and other prosthetic material", the interpreter can only be led to conclude that implants and abutments are naturally encompassed by that normative provision, whereby a mere literal positive interpretation of the provision places implants and abutments within the objective scope of the rule of incidence;

j) On the other hand, implants and abutments can only be used within the scope of implantology, with a view to replacing, in whole or in part, the patient's tooth, and are not susceptible – given their characteristics – to any other use, as follows from the Information of the Order of Dental Surgeons, on the subject of "Medical Devices - Regulation", of 20 February 2013, where it is written that "the dental implant is a medical device for single use to which are assigned the purposes described above [restoration of mastication and aesthetic function] supporting oral rehabilitation, relating to subparagraph t) of article 3 of Decree-Law no. 145/2009, 17 June, serving as support to the dental prosthesis; lacking elements designated connectors - connecting pieces - also these specific accessories and with medical purpose", which would corroborate its thesis;

k) Although, in the Inspection Report, mention is made of the Binding Information issued in Case no. 2883, order of the SDG of Taxes, on 20 December 2011, where reference is made to the importance of tariff classification in determining the objective scope of the reduced VAT rate, such an understanding has no support in law, since the combined nomenclature serves only for statistical purposes and for the application of the common tariff, and is not relevant for the purpose of determining goods subject to the reduced VAT rate.

1. The Tax and Customs Authority presented a Response and attached the investigative file, invoking in summary, the following:

a) Only the assessments relating to the tax years 2010 to 2013 can be subject to consideration because only these were covered by the inspection report;

b) As conveyed by the Design Division of the VAT Services Directorate, prosthetic materials are only taxed at the reduced rate if they are intended for the purpose defined in the item, that is, the replacement of a part of the body with deficiency or illness or its function;

c) Such interpretation implies that goods consisting of pieces, parts and accessories of those prostheses are not encompassed by item 2.6, given that, in addition to not being prostheses, they are not capable of fulfilling, considered individually, the function of replacement of a part of the body or its function;

d) Item 2.6 only encompasses the transfer of the article that, in itself, constitutes an artificial piece that replaces the organ of the human body or part thereof, that is, "autonomously or unitarily", in the terms used in the binding information questioned;

e) In the dental prosthesis by implant, the normal tax rate is therefore applied to the transfer of connecting or fixing pieces, given that they, do not fulfill, in themselves, objectively, the function described in item 2.6 of List I annexed to the VAT Code;

f) Thus, it is not enough to be in the presence of "devices, artifacts and other prosthetic or compensatory material", it being necessary that these goods are suitable to replace, in whole or in part, any limb or organ of the human body;

g) It is important to distinguish the concept of implant from the concept of prosthetic material. By "prosthetic material" should be understood that which is intended for or is suitable to replace a limb or organ of the human body, in whole or in part. Dental prostheses aim to replace the dental apparatus, in whole or in part. That replacement occurs not only physically but also in the replacement of its functions: mastication, verbalization, aesthetic function;

h) The question should focus on whether item 2.6 of List I is intended to tax at the reduced rate the transfer of prostheses, whatever their type, or whether the legislator intended to encompass here, also, the sale of all types of fixing devices that are not prostheses, are manufactured in series and which, when considered in isolation, namely at the moment of their transfer by suppliers such as the taxpayer, do not replace a limb or an organ of the human body;

i) The reduced rate should apply to "complete devices", as opposed to operations taxable on parts, pieces and accessories, which do not fulfill the function described above, and which, as such, should be taxed at the normal rate of the tax, for lack of classification in Lists I and II, annexed to the VAT Code. In this sense, and contrary to what the taxpayer intends, it does not appear that the letter of the law supports the thesis that item 2.6 encompasses the commercialization of all types of pieces intended for the fixing of prostheses or their connection, rather than referring to the prosthesis itself, finished product suitable to replace an organ or part of the human body;

j) The goods in question, transacted by the taxpayer, are not prosthetic material. Indeed, according to the opinion of the Order of Dental Surgeons, referred to above, such goods serve as support to the dental prosthesis;

k) The principle of fiscal neutrality opposes differentiation in the taxation of goods or services of identical nature, being verified when the tax does not influence the consumer's choice. Therefore, when the question of neutrality is raised regarding the taxation of different types of prosthesis, one must compare the transfer of removable prosthesis with that of fixed prosthesis, and not with that of fixed prosthesis plus fixing and connecting pieces;

l) Regarding the position of the claimant, according to which Directive 2006/112/EC of the Council, of 28 November 2006, is not directly applicable in the Portuguese legal order, it should be understood that the fact that the combined nomenclature (CN) has not been adopted in the transposition of the directive does not preclude the possibility of its use in the interpretation of the national norm. The CN is a fundamental piece in the commercial circuit of goods, since it is through it that the identification of goods subject to import or export proceeds, with the consequent tax classification, whereby recourse to this tool by the interpreter strengthens the credibility of the interpretation.

1. On 23-06-2015, a meeting was held convened pursuant to the provision of article 18 of the RJAT, within which proof issues were defined, and the parties did not express disagreement with these. Moreover, the court invited the Claimant to clarify and specify the meaning of the proof request previously offered by it, for which purpose it granted it a period of 15 days.

In view of the proof issues established, the parties were, on the other hand, granted the possibility of exercising the right to proof, as well as defined the subsequent proceedings.

1. Following the court's invitation, the Claimant came on 8/7/2015 to amend the proof request it had initially offered.

2. On 09-09-2015, in accordance with the provision of article 18 of the RJAT, a trial hearing took place, and at which the testimonial proof requested was produced and attached to the case file the scientific documentation exhibited by one of the witnesses and attached to the minutes of the said hearing. The date of 14 October was also set as the deadline for rendering the final decision.

3. The parties presented written submissions within the legal period, maintaining in their essence their initial arguments, pronouncing themselves on the matter of fact to be deemed proven and concluding that their claim should proceed.

4. By order of 30 September, the Court notified the Respondent to attach to the case file the administrative proceedings justifying the corrections notified to the taxpayer in 2014. In exercise of the right to reply, the latter argued the incompetence of the court to examine the legality of such acts because they are claims relating to the declaration of illegality of self-assessment acts. The taxpayer invoked, differently, that assessments were made pursuant to article 87 of the VAT Code and, thus, direct consequence of amounts not carried forward at the end of 2013.

II. PRELIMINARY EXAMINATION

1. Scope of the subject matter of examination by the Court

The Respondent alleges, among other things, that "The VAT assessments relating to the year 2014, identified by the Claimant in its PPA, are not official assessments originating from any correction prepared by the tax inspection, but rather assessments resulting from the filing of periodic declarations by the Claimant itself…", whereby the declarations relating to the self-assessment declaration, as is the case with those assessments, must be preceded by recourse to the administrative route, pursuant to articles 131 to 133 of the Code of Administrative Tax Procedure".

Since this has not occurred with respect to the 2014 self-assessments, this reason would determine the incompetence of the arbitral court.

The Respondent further seeks the illegality of the cumulation of claims since the cause of action underlying the 2014 self-assessments is not identical to the one that serves as the cause of action in the present proceedings.

In exercise of the right to reply, the Claimant came to allege, in summary, that:

• analyzing the assessments relating to the tax year 2014, it appears that in the grounds it is stated: "assessment made pursuant to article 87 of the VAT Code, as a result of the processing of the corrective declaration, sent for a tax period for which a periodic declaration had already been sent"".

• "(…) the rectification in question is always carried out by the Tax and Customs Authority, which is why the assessments relating to 2014 are immediately challengeable", as indeed follows from the VAT assessments themselves, relating to 2014, where it is expressly stated that "the taxpayer may submit to the competent tax office a gracious complaint or court challenge in accordance with articles 70 and 102 of the Code of Administrative Tax Procedure";

• The assessments in question result from the reduction of the tax credits carried forward from prior tax years as a result of corrections and assessments made by the Tax and Customs Authority, following the inspection in question, which will have resulted in a "reduction to zero of the tax to be carried forward";

• "(…) the amounts assessed in 2014 are a direct and immediate consequence of the amounts not carried forward at the end of 2013, as a result of the corrections contained in the Tax Inspection Report".

It is necessary to decide.

From the analysis of the documentation attached to the case file, it is clear that the VAT assessments relating to 2014, challenged by the Claimant, do not constitute challenges to self-assessments.

In truth, what is at issue are "VAT Assessment Statements", notified to the Claimant in 2014, of which the grounds state that they were issued pursuant to article 87 of the VAT Code, a provision that provides as follows:

Article 87
Rectification of declarations and additional assessments

1 - Without prejudice to the provision of article 90, the General Tax Authority proceeds to rectify the declarations of taxpayers when it reasonably considers that they show a tax lower or a deduction higher than due, liquidating additionally the difference.

2 - The inaccuracies or omissions made in the declarations may result directly from their content, from the comparison with substitute declarations presented for the same period or relating to prior tax periods, or also with other elements available, particularly those relating to personal income tax, corporate income tax or information received within the scope of administrative cooperation and mutual assistance.

From the analysis of the documents brought to the case, it appears that for the monthly tax periods relating to 2014, the Tax and Customs Authority sent the referred "VAT assessment statements", supporting them on the aforementioned article 87 of the VAT Code.

Accordingly, as the Claimant argues, the VAT assessments relating to 2014 result from automatic corrections made by the system (pursuant to article 87 of the VAT Code) as a consequence of the reduction of the excess to be carried forward from prior periods, as a result of the corrections made by the Respondent, within the scope of the inspection procedure.

Such assessments are, without any doubt, a consequence of the additional assessments made by the Respondent within the scope of the inspection procedure, that is, they are a direct and immediate consequence of the amounts not carried forward at a prior moment.

The request for cumulation, relating to the official correction of November 2014, is, thus (as with respect to the other corrections relating to 2014) a direct and immediate consequence of the amounts not carried forward previously, as a result of the corrections contained in the Inspection Report, whereby there is no obstacle to its cumulation to the initial claim.

Present thus, the assessments of 2014, a connection with the corrections made in 2013, by virtue of the VAT to be carried forward having been influenced by them.

Being assessments that are the result of official corrections made and proceeding from the Tax and Customs Authority, the same cannot, consequently, fail to be immediately challengeable, in accordance, moreover, with the tenor of the notification that accompanied them.

On the other hand, it appears from such notifications that the Claimant could "submit to the competent Tax Service a gracious complaint or court challenge pursuant to articles 70 and 102 of the Code of Administrative Tax Procedure".

In these terms, the Respondent indicates to the individual that it can complain or challenge (thus in alternative terms) and not that it must complain before challenging. This latter provision would result, moreover, from rules different from those that the Respondent indicates in its notification (articles 131 to 133 of the Code of Administrative Tax Procedure).

Now, accordingly, and even if, merely by hypothesis, the circumstance aforementioned did not occur, the Tax and Customs Authority would have induced the individual in error, whereby the immediate challenge of such assessments would always be admissible, pursuant to the provision of article 58, no. 4, subparagraph a), of the Code of Administrative Procedure.

In such terms, the alleged exception of absolute incompetence of the arbitral court lacks merit, and moreover, strictly speaking, what would be at issue would not be a problem of incompetence of the court, but of non-verification of a prerequisite for the exercise of the court's competence.

The request for cumulation formulated by the Claimant proceeds, on the other hand.

12.1. The court is, thus, competent and is regularly constituted.

12.2. The parties have legal personality and capacity, show themselves to be legitimate and are regularly represented (articles 4 and 10, no. 2, of the RJAT and article 1 of Ordinance no. 112-A/2011, of 22 March).

12.3. The proceedings do not suffer from any nullities.

12.4. There are no circumstances that impede the examination of the merits of the case.

III. MERITS

III.1. Matter of Fact

1. Proven Facts

13.1. With relevance for the examination and decision of the issues raised, preliminary and on the merits, the following facts are given as established and proven:

a) A… - …, Unipessoal, Lda ("…"), legal entity no. … with registered office at Rua …, no. …, …, Rooms … and …, … ..., claimant in the present proceedings, has as its principal activity the import and wholesale distribution of medical devices used in the field of implantology;

b) The Claimant was notified of official additional VAT assessments, relating to the tax years of 2010, 2011, 2012, 2013 and 2014, as well as the corresponding compensatory interest and default interest assessments (doc. 1, attached to the arbitration request);

c) Such assessments amount to a total value of € 635.078,71 and correspond to the following description (doc. 1, attached to the arbitration request):

c) The assessment acts were practiced following a Tax Inspection, promoted by the Finance Directorate of Porto, credited by Service Orders nos. OI2014… and OI2014…, from which resulted the Tax Inspection Report, notified on 25 November 2014 (doc. 2, attached to the arbitration request);

c1) Regarding the VAT period relating to November 2014, the Claimant was notified of an assessment statement to be paid in the amount of € 9.284,03, as well as default interest of € 32,04, which totals, for said monthly period, € 9.316,07 (doc. submitted by the Claimant);

d) The medical devices commercialized by the Claimant are of various kinds, having in common being intended to be used in the treatment of anomalies and deficiencies of the teeth, mouth, maxillae and adjacent structures (testimonial evidence and document presented at hearing);

f) Within the scope of its activity, the Claimant imports implants and abutments that it subsequently sells to dentists or dental prosthetics technicians (testimonial evidence);

g) The tooth is an organ formed by root, cervix and crown (testimonial evidence and document presented at hearing);

h) The dental prosthesis, which replaces the tooth in its entirety and which involves the realization of an implant, is composed of three elements: implant, abutment and crown (testimonial evidence and document presented at hearing);

i) Any one of these elements is intended to replace part of the tooth organ (testimonial evidence and document presented at hearing);

j) The implant is a structure surgically positioned in the maxillary bone below the gingiva, "replacing" the function of the tooth root and serving, as a rule, to support a fixing abutment and a crown (testimonial evidence and document presented at hearing);

k) The implant can, by itself, perform an autonomous function, namely to prevent the bone absorption process that occurs in the absence of a root, thus ensuring the viability of future surgical procedures, as well as preventing facial deformation of the patient (testimonial evidence);

l) The abutment consists of a connecting structure inserted between the implant and the crown, in a situation where the entire tooth organ is absent (testimonial evidence and document presented at hearing);

m) On the abutment is introduced a crown that aims to replace the visible part of the tooth (testimonial evidence and document presented at hearing);

n) The crown is designed by the prosthetist, specifically for each patient, taking into account their morphological characteristics (testimonial evidence and document presented at hearing);

o) The surgical procedure for placing a dental prosthesis involves, as a rule, three stages. These may succeed each other with greater or lesser intervals, which depends not only on the technique used, but also on the patient's characteristics (testimonial evidence and opinion);

p) The procedure for placing the prosthetic pieces may involve more than one participant, since it involves surgical work that must be done by a physician and work on the elaboration of the crown that must be done by a prosthetist (testimonial evidence);

q) The first stage consists of the surgical placement of the dental implant, within the gingiva (testimonial evidence);

r) In a second stage, the surgeon verifies the implant to confirm whether osseointegration was successful and, if so, selects the abutment to apply and fixes it on the implant (testimonial evidence);

s) In a third stage, the crown, designed by the prosthetist, is coupled to the abutment (testimonial evidence);

t) Situations arise where the patient does not require the three elements of the complete prosthesis, being able, for example, to be unnecessary abutments and implants and only crowns (testimonial evidence);

t) Implants and abutments are not susceptible to being commercialized in unitary terms, namely because the choice of abutment occurs at a time subsequent to the application of the implant, depends on the characteristics of each patient (such as height and width of the gingiva) or the manner of placement of the implant (being necessary to choose abutments with the appropriate angulation) (testimonial evidence and opinion);

u) Similarly, single units of implant formed by implant, abutment and crown are not commercialized (testimonial evidence and opinion);

v) In the process of applying a dental implant, the suppliers of implants may not be the same suppliers of abutments, namely because the manufacturing process of the latter proves to be easier, which led to the emergence of various suppliers in the market, only directed to the commercialization of abutments (testimonial evidence);

w) Implants, abutments and crowns constitute "artifacts" or "prosthetic materials" (testimonial evidence and opinion).

In these terms, being two the proof issues in the present case:

a) Are the pieces that the taxpayer commercializes artifacts or prosthetic materials that replace, in whole or in part, the patient's tooth?

b) Are the referred pieces unsuitable to be commercialized in unitary terms, both deserve affirmative answer, thus being considered, in consequence, proven the matter of fact in which they are embodied.

13.2. Grounds for the decision on the matter of fact

The factuality proven was based on the position assumed by each of the Parties and not contradicted by the opposing party, the critical analysis of the documents attached to the case file (in the briefs and in the hearing phase) and whose authenticity and veracity were not challenged by any of the parties.

It was based, on the other hand, on the content of the testimonial statements produced at trial, these proving to be credible, bearing in mind both the conviction, clarity, coherence and relevance with which they were given, and the direct and specialized knowledge that the witnesses manifested regarding the matter in question.

The court also considered the opinion submitted by the Claimant in its request for arbitral determination.

There are no other facts with relevance for examination of the merits of the case that have not been proven.

III.2. Matter of Law

2.1. The first legal issue to be considered in the present case relates to the first claim formulated by the Claimant, to the effect of the annulment of the additional assessments, identified above, made by the Tax and Customs Authority.

The assessment corrections made by the Respondent are based on the circumstance that the latter considers applicable to the transfers that have as their object dental implants and abutments, the normal VAT rate of 23%[2], whereas, according to the understanding of the Claimant (reflected in the self-assessment made by it), to such transactions should be applied the reduced rate of 6%.[3]

The AT thus maintains that article 18, no. 1, c) of the VAT Code is applicable, pursuant to which the rate of 23% is applicable.

Differently, the taxpayer argues that article 18, no. 1, a) of the same instrument should be applied.

VAT constitutes a general consumption tax, of an indirect and multi-stage nature and of Community source[4], and in accordance with the aforementioned provision,

"1 - The tax rates are as follows:

a) For imports, transfers of goods and provision of services listed in List I annexed to this instrument, the rate of 6%".

Pursuant to point 2.6 of List I annexed to the VAT Code, the following goods are subject to the reduced rate:

"Orthopedic devices, medical-surgical belts and medicinal stockings, wheelchairs and similar vehicles, manually or motor-driven, for disabled persons, devices, artifacts and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body or the treatment of fractures and lenses for sight correction, as well as orthopedic footwear, provided prescribed by medical prescription, in accordance with the terms regulated by the Government",

and the normal rate applies only on a subsidiary basis, that is, in case there is no application of a reduced rate.

At issue is, in sum, to determine whether dental implants and abutments represent or not "prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body or the treatment of fractures and lenses for sight correction, as well as orthopedic footwear, provided prescribed by medical prescription, in accordance with the terms regulated by the Government".

2.1.1. It is important, for that purpose, in particular, to determine what the notions of prosthetic material and organ of the human body amount to, as well as to verify whether the transacted goods are included in prosthetic material and whether they are intended to replace, in whole or in part, an organ of the human body.

From the evidence produced at the trial hearing, it resulted that (as set out above, in the decision on the matter of fact), in the medical context in question, by prosthetic material, is meant every artificial element introduced into the human body.

From the statements made there and documentation presented and attached to the case file, it resulted, on the other hand, that the tooth is an organ of the human body, consisting of three parts: root, cervix and crown.

The deponents were also unanimous in that: the implant constitutes a prosthetic structure, in the form of a screw, intended to replace the root; that the crown is molded, in the laboratory, in a personalized manner, for each patient, representing a prosthetic construction that aims to replace the natural crown and that the abutment represents a prosthetic element that ensures the connection between the implant and the crown.

Both declarants clarified, assertively and convincingly, that any one of the referred elements (implant, abutment and crown) embodies prosthetic material.

Such information is also documentally corroborated by the information contained in the dossier (consisting of images and scientific written exposition) exhibited at hearing by witness Laredo de Sousa and attached to the present case file.

From any one of the aforementioned evidence elements (by statement and documentary) results, thus, that the referred meanings are the only ones to be attributed, with scientific precision and rigor, to each of the terms under analysis (of crown, implant, abutment and prosthesis), with the inaccurate meanings that, in the incorrect slang of the layperson, may be attributed to them being irrelevant, when, for example, the entire dental reconstruction is incorrectly designated as implant or the crown is called prosthesis.

The Respondent itself mixes, on the other hand, in several passages of its Response, technical usage with inaccurate or improper use of the expression implant, either referring, correctly, to the implant as an element substituting the root, or referring, improperly, to the implant as a set integrated by the three pieces (implant, abutment and crown) used in the integral reconstruction of the tooth.

Similarly, it sometimes refers to prosthesis alluding, improperly, only to the crown, or mentions the same term referring to the set of the three pieces, when, with accuracy, the designation encompasses any one of the referred elements.

Mindful of the referred factual presuppositions, it is verified, in the specific case, that any one of the goods subject to transfer by the Claimant represents prosthetic material, intended to replace, in whole or in part, an organ of the human body.

It is revealed, from the foregoing, to lack any foundation, the understanding sustained by the AT, to the effect that the goods in question are not prostheses, as well as that the same goods are not capable "to fulfill, considered individually, the function of replacement of a part of the human body or its function".

The goods in question constitute, thus, prosthetic material (not material for prostheses), with a substitutive function of part or entirety of an organ of the human body, intended to promote, in particular, the proper performance of the chewing function.

As Xavier de Basto refers, in the opinion submitted with the case file, these are elements of prostheses and not raw material used in the elaboration of prostheses, observing: "Perhaps the administration intends to say that the materials of which the three pieces referred to above are made have no classification in List I, that is, that the pieces and materials from which manufacturers obtain the implants, the abutments and the crown that are, in phases, introduced in the patient's oral cavity cannot benefit from the reduced rate. If that were the doctrine, everything would be correct. Indeed, the reduced rate does not extend upstream to the materials that are then transformed into prosthetic pieces (…) The principle followed is, therefore, that when it comes to pieces or materials that are incorporated into the process of production of dental prostheses or other similar products, the normal VAT rate will be applied, because such goods are not intended directly for the purpose pursued by the prosthesis, but when the pieces, by their objective characteristics, can be applied, without being subject to further transformation, to the prosthesis, then they do benefit from the application of the reduced VAT rate. Now the implants, abutments and crown that constitute the prosthesis are applied to the patient, in different phases of the procedure, without any transformation".

In these terms, such transfer finds perfect and direct legal classification in the literal element of the norm contained in point 2.6 of List I annexed to the VAT Code, applying consequently to such transactions, the reduced rate of 6%, contemplated in article 18, no. 1, a) of the referred instrument.

2.1.2. Equally without merit is the interpretation, defended by the same Respondent, to the effect that the reduced rate would only apply when the transaction of a "single unit of implant" was in question.

a) The referred interpretation does not find, on one hand, support in the literal element of the norm, constituting a vision that represents the adoption of a regime not that legally provided, without acceptance in the legal text and incapable, therefore, of being sustainable in the context of the present litigation. In truth, as is likewise explained in the decisions 429/2014-T and 530/2014-T of the CAAD (incident on the same type of problem), in no segment of the norm is it required that prosthetic materials be transferred in aggregate manner, noting, in the last mentioned decision, that: "such interpretation has minimal verbal correspondence with the letter of the Law". In the same sense, Xavier de Basto refers, in an opinion in which he pronounces on this question, that the referred understanding of the Tax and Customs Authority "does not result at all from the letter of the VAT Code norm. Indeed, no distinction is made there that would authorize giving the benefit of the reduced rate only to prostheses consisting of a "single unit of implant"". He further states that "it does not appear from the law and in the legislative formulation nothing exists, even imperfectly expressed, that indicates that such restriction is, in any way, contained in the legislative intent".

b) On the other hand, such perspective, in addition to not finding acceptance in the letter of the law (which, by itself, pursuant to the provision of no. 2 of article 9 of the Civil Code[5], excludes the possibility of representing an adoptable understanding) and of being based on an erroneous notion of implant, would always prove incapable of practical application, thus constituting an understanding inapplicable in nature. In truth, as Xavier de Basto explains in the aforementioned opinion, "a single unit of implant simply does not exist", whereby, proceeding with the understanding of the Regulatory and Customs Authority, it would result from it that "this type of prosthesis never benefits from a reduced rate".

In truth, as above explained in the context of the matter of fact, it resulted proven, following the instruction, that the pieces used in the reconstruction of the human tooth, as a whole, are not found on sale in the market in unitary packs.

Differently, they are sold separately. There are, for example, numerous references of abutments, acquirable from different suppliers, it being incumbent on each case to select the one that best adapts to the clinical situation of the patient undergoing treatment.

The crown, for its part, is molded by the prosthetist, in the laboratory, exactly to measure and according to the characteristics of the patient's dental structure, in accordance with the mold taken for that purpose.

Moreover, each of the pieces in analysis is applied, in the treatment process, in temporally distinct phases, whereby it does not become necessary, nor, frequently, appropriate, the acquisition of all of them at the same moment, in particular because the selection of the type of abutment to adopt only occurs in the post-surgical phase (of implant placement).

It would not make sense, for these reasons (and does not occur, therefore) the joint commercialization of such pieces, not being transacted "single units of implant".

Not constituting these, subject to transfer in commercial circulation, it is revealed to be without foundation the understanding that the reduced VAT rate of 6% would apply only when the acquisition and sale of the designated joint units was in question.

c) Even if, however, it happened differently and the elements making up the prosthetic reconstruction of the entirety of the tooth were sellable together, the interpretation that the referred reduced rate would apply only when such elements were acquired separately would always prove, on one hand, inconsistent with the reason for being of the norm and, thus, with the teleological element[6] that justifies it and, on the other hand, offensive to fundamental legal principles and values.

c.1) The legal fixing of reduced VAT rate is justified, in the hypothesis being considered, in order to create the possibility of easier access, by citizens, to health care involving the recourse to the materials in question.

The ultimate reason for being of the norm corresponds, thus, to the intent to guarantee and promote public health in the field of oral health.

It is, moreover, that legislative intent that justifies that, within the scope of article 9 of the VAT Code, it is provided, in subparagraph a), that the following are exempt from tax "the provision of services exercised in the professions of physician, dentist, midwife, nurse and other paramedical professions"(emphasis added) and, in subparagraph b), that, equally exempt from tax, are the "provision of services exercised in the exercise of their activity by dental prosthetists" (emphasis added).

Thus constituting the objective of the legislator, to ensure access to health care that it deems essential, it would be incomprehensible if the reduced VAT rate would be applied when treatment materials were sold together and not when sold separately, creating, without justification, in violation of the principle of equality, unequal treatment between patients equally in need of health care, when, pursuant to the provision of article 64, no. 1 of the Constitution of the Portuguese Republic "All have the right to protection of health and the duty to promote and defend it" and, according to no. 3 of the same provision, "it is the primary responsibility of the State: a) to guarantee access for all citizens, regardless of their economic condition, to preventive, curative and rehabilitation medical care" (emphasis added).

Such unequal treatment would prove all the more glaring given that, in addition to the foregoing, the patient lacks, in certain cases, only one or some of the referred prosthetic materials for its treatment to be complete. In these cases, the prosthetic material becomes necessary to replace only part of the organ that the tooth represents. Thus, for example (as resulted from the testimonial statement given at hearing), when the implant piece is embedded in the patient's maxilla only to prevent the bone absorption process, not for it to serve as support for the application of abutment and crown. So too if, for example, the patient has a root, making unnecessary the application of an implant that serves as support to the crown (prosthetic) created in the laboratory and that needs to be applied to the patient in question.

Incomprehensible it would be, in these terms, that such patients, by virtue of the type of pathology of the oral cavity affecting them, would come to bear, by repercussion, normal VAT rate, when others, also in need, by virtue of different disease at the level of the dental system, of the application of this piece, would bear, as to the same, reduced VAT rate, only because acquired, that one, together with others of which they also have need.

This further demonstrates that each of the referred prosthetic materials represents, in itself, an autonomous unit, thus of transaction subordinable to reduced rate even if it were understood that this applied only to the total number of pieces involved in the treatment of oral pathology.

Moreover, that understanding would induce patients, with lesser economic capacity and in need of prostheses integrally substituting one or more teeth, to opt for traditional compact prostheses (commonly referred to as "plates"), to benefit from a more accessible price, when that solution entails greater discomfort for the patient and lesser quality of that type of alternative. With this, the opposite effect of that which the norm intends would be produced – instead of promoting the quality of health services which, with reduced rate, is intended that citizens have access, a regression and recourse to means of oral treatment markedly inferior in technique would be fostered, with the aggravation that such effect would be reflected, in unequal treatment, at the level of the economically less favored citizens.

The principle of VAT uniformity would be violated, pursuant to which similar economic activities must be treated in the same manner, and should be observed, in obedience to the principle of objectivity, as is emphasized in Case no. 429/2014 – T, of the CAAD, applying "one and the same rule to taxable operations of the same nature, there being a presumption of similarity when the operations in question correspond to diverse variants of a single and same taxable operation included in one of the categories of Annex III of the VAT Directive".

c.2) The principle of equality would be violated also from the point of view of the producer and supplier of the goods in question, to the extent that the subject who produced or sold the goods together would benefit from privileged tax treatment relative to one who did so only separately, which finds no support in the reasons justifying the rate reduction, representing, consequently, in distortion of the rules of the European Union in force in tax matters, violation of the imposition of competitive neutrality[7] (a maxim whose importance is emphasized, also jurisprudentially, at the domestic and European Union level, namely in the decisions handed down in Case no. 429/2014-T of the CAAD, in the Rompelman case (decision of 22 June 1993, Case 268/83), when this type of neutrality constitutes one of the aspects making up fiscal neutrality and this corresponds to a principle which, as Xavier de Bastos notes, "the tax is particularly sensitive to".

d) Nor, on the other hand, does the allegation reveal itself to be an argument capable of sustaining the understanding defended by the respondent, that there should be restrictive interpretation as to the exceptions to the application of the normal VAT rate. In truth, the only defensible principle would be that, in case of exceptional regime, the interpreter cannot extend such regime to other situations, even if it deems them analogous.

It is thus forbidden to extend the legally provided benefit to other hypotheses not contained in the law.

Such does not, however, detract from the fact that the interpreter is forbidden from not applying the legal benefit to hypotheses contained in the norm in question. When applying the statute to the normative hypothesis, the interpreter merely complies with its duty – to apply the law in the terms legally provided -, it not being incumbent on it (rather being forbidden to it) to expand or restrict the scope of the legal regime.

The interpreter must, thus, proceed, not to a restrictive interpretation, but to a strict interpretation of the law, that is, to a declarative interpretation of the provision to apply, as is likewise explained in the decision handed down in Case no. 171/2013-T, of the CAAD[8], and the administrative power cannot distort the meaning of the fruit of the exercise of legislative power.

From the adequate interpretation of the norm being examined, it results, as above concluded, that the reduced VAT rate must be applied to the implant, abutment and crown, as prosthetic materials.

Sustaining the non-application of the reduced VAT rate to the prosthetic materials being considered, in disregard of the legally fixed regime, would offend, in consequence, the security and confidence that the legal wording should be able to ensure to the citizens subject to the norm. Such would not represent restrictive interpretation of the norm (that operation in which the literal scope of the norm is restricted, if dubious, so that it coincides with its reason for being), but improper disappliance thereof, it being certain, on the other hand, that within the scope of the provision being considered, the legislator did not obey, nor is bound by, the contents contained in the Combined Nomenclature. Thus it is emphasized by Xavier de Basto when it clarifies that: "the Combined Nomenclature serves for statistical purposes and application of the common tariff, but has no relevance in the classification of goods and services, for purposes of Portuguese VAT", adding that the adoption of tariff classification "would be very unfriendly, not to say hostile" to taxpayers, given that they, in the context of VAT, proceed to the assessment of the tax.

In the same sense, it is emphasized in Case 171/2013-T, of the CAAD, that "If it is true that according to article 98, no. 3 of the VAT Directive the Member States may use the Combined Nomenclature to delimit with exactitude each category subject to the reduced rate, it is certain that the Portuguese legislator did not follow that path (nor was it obligated to do so)", adding further, that it is "irrelevant, for VAT purposes, the classification that the pieces in question have in the Combined Nomenclature", as well as "without prejudice to the freedom which the Portuguese legislator enjoys in the delimitation of the transfers of goods and provision of services to which reduced VAT rates are applicable, within the closed catalog contained in Annex III of the VAT Directive, it appears that the correct interpretation of item 2.6 of List I annexed to the VAT Code encompasses the parts of wheelchairs and mobility scooters that are at the origin of the VAT assessment acts in dispute".

Adopting identical line of argumentation, it is referred to, in decision 429/2014-T, of the CAAD (in which the same subject matter which is the object of decision in the present case is examined in essence), that "the use of the Combined Nomenclature to delimit with exactitude each category is a mere possibility which, as such, may or may not be used for that purpose by Member States", in which it is explained that the "only case in which in the VAT Code the Combined Nomenclature is resorted to to define the scope of the tax regime of goods comes provided in its respective article 14, no. 1, subparagraph i), for purposes of determining the regime of exemption (complete or zero rate), in accordance with which are exempt the "transfers of goods of supply put on board the warships classified by code 89060010 of the Combined Nomenclature, when they leave the country with destination to a port or anchorage situated abroad"", adding: "provision this not applicable in the situation in question".

The prosthetic materials in question would always be, in any case, encompassed by the said nomenclature, as referred to by Xavier de Basto in the mentioned opinion: "The constituent elements of the implant, moreover, are covered by classification 9021 of the Combined Nomenclature, which encompasses, in its heading, "prosthetic articles and apparatus".

e) In these terms, having regard to the set of factual and legal reasons adduced, it is considered applicable to the act of transfer of the prosthetic materials in which the dental implant, abutment and crown are translated, the reduced VAT rate of 6%, in accordance with the provision of article 18, no. 1, a) of the VAT Code and with point 2.6 of the List attached thereto, proceeding, in consequence, with the impugnatory claim, formulated by the Taxpayer, in the present case, of the assessment acts it identifies in the arbitration request.

2.2. With regard to the second claim formulated, the taxpayer did not invoke, nor proved, any facts representative of costs incurred with the suspension and guarantee of tax enforcement proceedings, nor did it proceed to their quantification, nor even alleged and proved the institution or pendency of any tax enforcement proceedings.

The prerequisites provided for in article 53, nos. 1 and 2, of the General Tax Law not being verified, in such terms the application for a finding of liability for compensation is judged without merit.

IV. DECISION

In these terms, the present Court agrees to:

• Judge the exception of absolute incompetence of the court as lacking merit;

• Judge the claim for annulment of the VAT assessments and respective interest, subject to challenge in the present action, as well-founded;

• Judge the claim for finding of liability for compensation for provision of undue guarantee as lacking merit.

V. VALUE OF THE CASE

In accordance with the provisions of articles 306, no. 2, and 297, no. 2 of the Code of Civil Procedure, article 97-A, no. 1, subparagraph a) of the Code of Administrative Tax Procedure and article 3, no. 2, of the Regulation of Costs in Tax Arbitration Proceedings, the total value of the case is fixed at €644.394,78, which includes the value of €9.316,07 resulting from the extension of the claim to the VAT period relating to November 2014.

VII. COSTS

Pursuant to the provisions of articles 22, no. 4 and 12, no. 2 of the Legal Regime of Arbitration, article 2, no. 1 of article 3 and nos. 1 to 4 of article 4 of the Regulation of Costs in Tax Arbitration Proceedings, as well as Table I annexed thereto, the value of the arbitration fee is fixed at €9.486, to be paid by the Respondent.

Notify.

Lisbon, 14 October 2015.

The Arbitrator-President,

(Maria Fernanda dos Santos Maçãs),

The Arbitrator Rapporteur,

(António Martins)

The Arbitrator Rapporteur,

(Diogo Feio)

Text prepared by computer, pursuant to article 138, number 5 of the Code of Civil Procedure (CPC), applicable by reference of article 29, no. 1, subparagraph e) of the Legal Regime of Tax Arbitration.

The drafting of this decision is governed by ancient spelling.

[1] Acronym for Legal Regime of Tax Arbitration.

[2] In accordance with the provision of articles 96 and 97 of Directive 2006/112/EC, of 28 November, the normal VAT rate was thus fixed at a percentage not lower than 15%.

[3] Rate fixed by the national legislator, in accordance with the possibility to that effect expressly admitted pursuant to articles 98 and 99 of the referred Directive 2006/112/EC. In accordance with the first: "1. Member States may apply one or two reduced rates. 2. Reduced rates shall apply only to the supplies of goods and services of the categories listed in Annex III. Reduced rates shall not apply to services supplied electronically. 3. When applying the reduced rates provided for in paragraph 1 to the categories relating to goods, Member States may use the Combined Nomenclature to delimit with exactitude each category". In accordance with no. 1 of the second, "Reduced rates shall be fixed at a percentage of the taxable amount which may not be less than 5%". Within Annex III, it is contemplated, in point 4: "Medical equipment, auxiliary material and other devices normally used to alleviate or treat deficiencies, for exclusive personal use of disabled persons, including their repair, as well as motor vehicle seats for children". This point of Annex III found equivalence in an identical point of Annex H of the Sixth Directive (Directive 92/77/EEC, of the Council, of 19 October 1992, implementing the principle of harmonization in VAT rates), pursuant to which reference was made to: "Medical equipment and other devices, normally used to alleviate or treat deficiencies, for exclusive personal use of disabled persons, including their repair and motor vehicle seats for children". The adoption of reduced rate represents, for each Member State, a possibility (not an obligation), as the CJEU emphasizes in its case law, namely in the decisions handed down in the cases Zweckverband zur Trinkwasserversorgung (of 3 April 2008, Case C-442/05) and Commission vs. Spain (of 18 January 2011, Case C-83/99). In the same sense, see the decision handed down in Case no. 171/2013-T, of the CAAD.

[4] This tax was introduced in Portugal through D.L. no. 394-B/94, of 26 December, in fulfillment of the duty of transposition of Directive 77/388/EEC of the Council, of 17 May 1977, corresponding to Directive no. 2006/112/EC, of 28 November, currently in force. Duty that arises from the circumstance that, in accordance with the provision of article 288 of the Treaty on the Functioning of the European Union, the directive constitutes (unlike what occurs with the regulation) a Community act that binds the Member States "as to the result to be achieved, whilst leaving to the national authorities competence as to form and means".

[5] "The interpreter cannot, however, consider the legislative intent that does not have in the letter of the law a minimum of verbal correspondence, even if imperfectly expressed". Provision applicable in accordance with the provision of article 11 of the General Tax Law, pursuant to which the meaning of tax norms and the qualification of facts to which such norms apply are determined according to the general rules and principles of interpretation and application of laws.

[6] Regarding the various elements (literal, teleological, historical and systematic) to be considered in the context of normative interpretation, see J. Baptista Machado, Introduction to Law and Legitimating Discourse, Coimbra, 1983, pp. 182 and 183.

[7] Note that, pursuant to recital 7 of the VAT Directive, the VAT system "should, even though rates and exemptions are not completely harmonized, lead to competitive neutrality, in the sense that, in the territory of each Member State, goods and services of the same type are subject to the same tax burden, regardless of the length of the production and distribution circuit". That is, moreover, a condition to be observed by Member States when they choose to introduce reduced VAT rates, as referred to by the CJEU, namely in the decisions handed down in the cases Commission vs. Germany (of 28 October 2003, Case C-109/02) and Commission vs. France (of 3 May 2001, Case C-481/98). On this point, see the decision handed down in Case no. 171/2013-T, of the CAAD. Within the scope of that decision, it was decided that the reduced VAT rate applies, whether to "wheelchair commercialized and invoiced in a single item", or to the one "in which, in view of the specificities of pathologies or for reasons relating to the internal organization system of the Claimant, the various items making up the wheelchair are invoiced separately. In both situations it is the sale of a wheelchair, although it may have different specifications depending on the case (disability). With regard to parts and components, such as batteries and motors, which are as a rule commercialized separately in the context of the maintenance or repair of a wheelchair or "scooter", no justifiable reason is envisaged that would favor the application of a reduced rate to a new wheelchair and a normal rate to a part of that wheelchair, for example the motor, for integration into a used wheelchair. Or, again, a taxation at the normal rate of the subsequent application (to the acquisition of the wheelchair) of a part that has become necessary, by virtue of the evolution of a degenerative disease". As to the notion of fiscal neutrality, see Xavier de Basto, Consumption Taxation and its International Coordination, CCTF, no. 164, Lisbon, 1991, pp. 39-73, Clotilde Celorico Palma, Introduction to Value Added Tax, IDEFF Notebooks, no. 1, Almedina, 6th Edition, September, 2014, pp. 19-34 and Maria Teresa Lemos, "Some observations on the possible introduction of a Value Added Tax system in Portugal", CTF, no. 156, December, 1971, p. 10.

[8] As to the differentiation between both types of interpretation, see Oliveira Ascensão, "The Law Introduction and General Theory", Almedina, 10th Ed., 1999, pp. 418-421.