Summary
Full Decision
ARBITRAL DECISION
Arbitral Process No. 801/2014-T
Claimant: A... – Orthopedic Material, Ltd. ("Claimant")
Respondent: Tax and Customs Authority ("TA")
ARBITRAL DECISION
I – REPORT
The request for constitution of the arbitral tribunal was presented on 5 December 2014.
A sole arbitrator, the undersigned, Marta Gaudêncio, was appointed and timely communicated acceptance of the position.
The arbitral tribunal was constituted on 12 February 2015 and, in August 2015, the deadline for issuing the decision was extended to 12 October 2015.
The company A... – Orthopedic Material, Ltd., holder of tax identification number ..., with registered office at ..., requested the constitution of the Arbitral Tribunal pursuant to article 2, paragraph 1, subparagraph a) and article 10 of Decree-Law No. 10/2011, of 20 January (hereinafter "RJAT").
The request for constitution of an arbitral tribunal concerns the declaration of illegality and consequent annulment of additional VAT assessments relating to the year 2012, in the total amount of €7,085.75, on the grounds of alleged breach of law, due to error in the assumptions for application of items 2.6 and 2.9 of List I attached to the VAT Code.
The Claimant further petitions for restitution of amounts already paid, annulment of the express dismissal decision of the administrative complaint presented and the fixing of compensation corresponding to the value of compensatory interest, calculated from the date of improper payment.
In fact, the Claimant presented an administrative complaint against the corrections to which it was subject and, following the dismissal of said administrative complaint, presented a hierarchical appeal against said decision.
As the TA did not decide within the legally established period of 60 days, pursuant to the provision in paragraph 5 of article 66 of the CPPT, the hierarchical appeal was presumed tacitly dismissed, and subsequently the constitution of the present arbitral tribunal was requested.
On 14 July 2015, the meeting provided for in article 18 of the RJAT was held and, on 3 September 2015, the hearing of witness B... took place, with the Claimant waiving the hearing of witness C....
The Claimant grounds its request presented on the following:
It is the Claimant's understanding that the reduced VAT rate applies (pursuant to items 2.6 and 2.9 of List I attached to the VAT Code) to the transfer of the following goods intended exclusively for persons with disabilities:
i. Accessories for scooters (baggage racks, seat bags, briefcases and cup holders) and for wheelchairs (bags and baggage racks);
ii. Accessories for manual wheelchairs (tables and respective assembly kits);
iii. Parts, components and pieces of products invoiced to resellers for application to wheelchairs and scooters previously sold (wheels, rims, tyres, casters, lights, staircase climbers, among others);
iv. Batteries and battery chargers.
The TA considers that the transfer of these goods is not covered by items 2.6 and 2.9 of List I attached to the VAT Code, and should therefore be taxed at the normal rate, disregarding from the outset that the objective of taxation at the reduced rate of these goods is to ensure equality for citizens with disabilities.
In fact, the users of the wheelchairs and scooters marketed by the Claimant need to use them on a full-time basis in order to satisfy their basic needs, and it is necessary that any upgrade or maintenance operation be carried out quickly, as users cannot wait long for auxiliary equipment.
It should be taken into account that both the parts and accessories only make sense if they are used together with the wheelchairs and scooters in that, with these, they compose a "single product", that is, they integrate with the wheelchair/scooter, completing it, and it would not meet its specifications if it did not include them.
However, the separate parts (batteries, motors, screws) are transferred by the Claimant to its resellers for application to wheelchairs/scooters previously sold to carry out maintenance, repair, replacement or updating operations and cannot be used in other products than those of the Claimant (which would not fulfil their intended functions if these operations were not carried out).
The mere fact that these parts are invoiced separately, whether at the time of sale of the wheelchair/scooter, or later, when its user, due to a change in their health condition, needs the wheelchair to be subject to upgrades, cannot alter its classification and qualification for VAT purposes.
Just as the fact that the same parts are subject to the reduced VAT rate when invoiced together with a wheelchair, applying the normal VAT rate when they are subject to separate invoicing, is indicative of poor interpretive technique on the part of the TA.
The VAT Directive (Directive 2006/112/EC, of the Council, of 28 November 2006) does not establish any impediment to the application of the reduced rate to accessories and components of wheelchairs and similar vehicles.
In fact, point 4 of Annex III of the Directive provides for taxation at the reduced VAT rate of "Medical equipment, auxiliary material and other apparatus normally used to alleviate or treat disabilities, for exclusive personal use by disabled persons, including their repair, as well as child car seats."
Therefore, the literal interpretation of the provision, as well as the principle of neutrality, justify the application of the reduced VAT rate to components of wheelchairs and scooters.
The rules of interpretation of legal norms allow us to conclude that only the application of the reduced VAT rate to these components, regardless of how they are sold, is an interpretation compliant with the law.
The assessment acts in question are affected by the defect of breach of law, due to non-conformity between their premises and the content and provision of the applicable national and community norms, which entails their voidability, and taxation should occur at the reduced VAT rate and not at the normal rate as the TA claims.
Given the invalidity of the VAT assessments, the inherent compensatory interest is also invalid, and the payments made are improper, and such amounts should be restituted to the Claimant, increased by compensatory interest.
The TA, in its response, alleged the following:
The TA considers that some of the products marketed by the Claimant, namely tables and assembly kits to attach to wheelchairs, do not fall within items 2.6 and 2.9 of List I attached to the VAT Code because they constitute an accessory, being subject to the application of the normal rate and not the reduced rate.
The TA further considered that, with regard to the invoicing of separate parts to resellers, it is "an autonomous transfer of parts, pieces and accessories intended for the utensils, apparatus or objects contained in Dispatch 26026/2006, which do not fall within items 2.6 and 2.9 of List I attached to the VAT Code, being subject to the application of the normal rate referred to in subparagraph c) of paragraph 1 of article 18 of the said Code."
The position of the VAT Services Directorate, conveyed in requests for clarification relating to the autonomous transfer of parts, pieces or accessories to be incorporated into wheelchairs, has been to the effect that the same should be taxed at the normal tax rate, provided for in subparagraph c) of paragraph 1 of article 18 of the VAT Code.
Just as has been considered correctly taxed at the reduced rate, the transfer of utensils and any apparatus or objects specifically designed for use by persons with disabilities, which are contained in the List approved by Dispatch No. 26026/2006, of 22 December, as determined by item 2.9 of List I attached to the VAT Code.
Taking into account that the situations of taxation at the reduced rate constitute exceptions to the application of the normal VAT rate and, by virtue thereof, represent a deviation from the application of the general system of the tax, the Court of Justice of the European Union (CJEU) has been guided, in this domain, by the application of the principle of strict interpretation, having demonstrated, in several judgments, the exceptional character of the cases in which the application of reduced rates is permitted.
Given the scope of the Directive's provision – that goods are used to alleviate and treat disabilities and for exclusive personal use by persons with disabilities – the national legislator made goods identified in item 2.6 taxable at the reduced rate, considering that they are in a phase in which they fulfil that function.
But this understanding does not extend to the transfer of accessories and components that are incorporated or integrated in the context of the marketing of wheelchairs and scooters.
Therefore it is concluded that what was intended to be included in item 2.6 were wheelchairs for disabled persons, as the final product, which means, consequently, that goods (parts, pieces and accessories) transferred separately by the Claimant, at the request of its resellers, cannot be considered as covered by said item.
It being true that the components are not provided for in Dispatch 26026/2006, of 22 December.
Therefore, the Respondent argues for the dismissal of the action.
II – SANITATION HEARING
The Tribunal is materially competent and is regularly constituted, pursuant to the provision in subparagraph a) of paragraph 1 of article 2, as well as articles 5 and 6 of the RJAT.
The parties have legal personality and capacity, are legitimate and are represented, pursuant to the provisions of articles 4 and 10 of the RJAT and article 1 of Ordinance No. 112-A/2011, of 22 March.
There are no nullities and preliminary issues affecting the entire process, therefore it is necessary to examine the merits of the request.
III. ISSUE TO BE DECIDED
The scope of application of the reduced VAT rate, provided for in items 2.6 and 2.9 of List I attached to the VAT Code, is at issue, namely whether the transfer of accessories and parts to be incorporated into scooters and wheelchairs intended for exclusive use by persons with disabilities is considered covered by these items, when the accessories and parts are sold and/or invoiced separately.
IV. FACTS
- Facts Found Proven
With relevance for the assessment and decision of the present case, the following facts are found to be proven:
The Claimant has been registered in the TA cadastre, since 01-12-2004, for the exercise of the activity of "Special Agents of Wholesale Commerce of Other Products - CAE 46180", falling, for corporate income tax purposes, under the general taxation regime and, in terms of VAT, under the normal monthly periodicity regime.
The Claimant belongs to the group A..., which is represented in several European countries, marketing, in national territory and, sometimes, European, materials intended for persons with disabilities, namely, manual wheelchairs, electric wheelchairs and scooters, bed elevators, walking aids, canes, sanitary material and orthopedic mattresses, also providing repair and maintenance services for the goods it markets.
The products that the Claimant markets are classified by INFARMED as "medical devices class I" and are required to comply with a set of European technical standards in order to guarantee their integrity and to ensure the safety of the user to which they are intended.
These products are subject, namely, to mandatory CE certification and TUV certification by product and are intended exclusively for persons with permanent or evolutionary/degenerative disabilities.
Each wheelchair order is specific according to the characteristics of the user's disability, which may evolve, requiring namely the future adaptation of the wheelchair and/or additional accessories, in the case of degenerative disabilities that worsen with disease progression.
As a rule, the Claimant has in stock wheelchairs ready for delivery, in blue colour, which are invoiced as a single item.
However, when the wheelchairs do not exist in stock and are ordered, invoicing is done by item, but what is sold is a wheelchair constructed from those items.
This situation results from the specificities of the billing system used by the Claimant, pursuant to instructions from the group in which it is inserted, and which have rules relating to the coding and classification of products themselves.
The needs of persons with disabilities to whom the products marketed by the Claimant are intended change over time, with disease progression, and the use of the same also leads to their wear, and at some point it becomes necessary to carry out repairs and replacement of parts.
The parts marketed separately by the Claimant are accessories forming part of the wheelchair unit and also products and parts intended to reconfigure and update existing wheelchairs to new situations, resulting from the evolution of the user's disease.
The repairs and upgrades are carried out by the Claimant, without charging for labour, with only the parts used in the repairs being invoiced.
The accessories and parts sold by the Claimant can only be applied and used in the specific products it markets, and some of these accessories and parts can only be used in a particular wheelchair model.
These accessories are intended for users of the products to be able to use all of its functionalities, satisfying various needs (mobility, feeding, among others), and the products would not meet all of its specifications if they did not include these parts.
The Claimant only sells to resellers.
In summary, the parts at issue here (built-in tables, batteries and boxes for wheelchairs, inner tubes, battery chargers, wheels, rims, tyres, casters, various kits) are sold either at the time of acquisition of the wheelchair, or due to the evolution of degenerative disease, or also for application to wheelchairs in the context of the maintenance, repair or updating of these.
Batteries have limited autonomy and periodically need to be replaced, always with brand-name models, and no others can be used, and these batteries cannot be used for other purposes.
All parts sold separately become part of the products marketed by the Claimant and cannot be used in products from other brands.
In the marketing of the products, the Claimant applies the reduced rate.
In 2013, the Claimant was subject to a tax inspection action for the periods of August to December 2012.
From that tax inspection action resulted the corrections at issue here, in the amount of €7,085.75.
These corrections are set out in the VAT assessment statement No. 2013..., from which results a value to be reimbursed of €171,205.18 and in the settlement of accounts made by the TA, deducting from that value to be reimbursed the value already reimbursed to the Claimant of €173,913.68 (document No. 2013... and document No. 2013...), from which resulted a balance in favour of the TA of €2,708.50, which the Claimant paid.
The value of VAT to be recovered by the Claimant relating to October, November and December 2013 was also rectified, in the total amount of €4,350.13.
The Claimant presented an administrative complaint against the corrections made, resulting from the difference between the application of the normal VAT rate to the goods and services made available by it and the application of the reduced rate to the same goods and services.
Following the dismissal of the administrative complaint, the Claimant presented a hierarchical appeal, which was not decided within the legally established period for this purpose.
On 5 December 2014, the Claimant requested the constitution of the arbitral tribunal, with the request being presented within the legally established period for this purpose.
- Facts Found Not Proven
There are no facts with relevance to the decision that have not been proven.
V. REASONING FOR THE FACTS PROVEN AND NOT PROVEN
With regard to facts, the Tribunal does not have to pronounce itself on everything that was alleged by the parties, but rather has the duty to select the facts that matter for the decision and to discriminate between the matter proven and not proven (cf. art. 123, paragraph 2, of the CPPT and article 607, paragraph 3 of the CPC, applicable ex vi article 29, paragraph 1, subparagraphs a) and e), of the RJAT).
Thus, the facts relevant to the judgment of the case are chosen and delimited according to their legal relevance, which is established in view of the various plausible solutions of the legal question(s) (cf. previous article 511, paragraph 1, of the CPC, corresponding to the current article 596, applicable ex vi of article 29, paragraph 1, subparagraph e), of the RJAT).
Therefore, taking into account the positions taken by the parties, the documentary evidence and the documents attached to the case, the facts listed above were considered proven, with relevance to the decision, moreover consensually recognized and accepted by the parties.
Ms. Dr. B..., Financial Director of the Claimant at the time of the facts, was also heard, who demonstrated direct knowledge of the Claimant's internal procedures and familiarity with the products marketed by the Claimant.
VI. ON THE LAW
By way of preliminary remark, an arbitral decision has already been issued on a matter entirely similar to that at issue here, within the scope of process No. 171/2013-T, with a decision handed down in favour of the Claimant. The reasoning of the present decision thus follows the reasoning of said judgment.
Application of Reduced VAT Rates
Directive 92/77/EEC, of the Council, of 19 October 1992, harmonized VAT rates, with a view to the functioning of the internal market on 1 January 2003, whereas previously each Member State had autonomy to set the number of existing rates and their respective amount.
According to this Directive, "From 1 January 1993, Member States shall apply a standard rate which, until 31 December 1996, may not be less than 15%." With regard to reduced rates, Member States "may also opt between one or two reduced rates, applicable only to the categories of goods and services specified in Annex H [of the Sixth Directive] and which may not be less than 5%."
This regime, previously contained in article 12 of the Sixth Directive (Directive No. 77/388/EEC, of 17 May 1977 – "VAT Directive"), remains in force in the current VAT Directive (Directive No. 2006/112/EC, of the Council, of 28 November).
Currently, the VAT Directive provides as follows, in Chapter 2 of Title VIII:
"Section 1
Standard Rate
Article 96
Member States shall apply a standard rate of VAT set by each Member State as a percentage of the taxable amount that is identical for the supply of goods and the provision of services.
Article 97
From 1 January 2011 to 31 December 2015, the standard rate may not be less than 15%.
Section 2
Reduced Rates
Article 98
-
Member States may apply one or two reduced rates.
-
Reduced rates shall apply only to supplies of goods and supplies of services belonging to the categories listed in Annex III.
Reduced rates shall not apply to services supplied by electronic means.
- When applying the reduced rates provided for in paragraph 1 to categories relating to goods, Member States may use the Combined Nomenclature to define precisely each category.
Article 99
-
Reduced rates are fixed as a percentage of the taxable amount that may not be less than 5%.
-
Each reduced rate is fixed such that the amount of VAT resulting from the application of that rate normally allows the total deduction of tax in respect of which the right to deduction is conferred in accordance with articles 167 to 171 and 173 to 177."
Currently, Annex III of the VAT Directive contains the list of supplies of goods and supplies of services to which the reduced rates provided for in article 98 may apply, providing in point 4: "Medical equipment, auxiliary material and other apparatus normally used to alleviate or treat disabilities, for exclusive personal use by disabled persons, including their repair, as well as child car seats."
This wording is entirely similar to that of Annex H of the Sixth Directive (meanwhile repealed) which provided: "Medical equipment and other apparatus, normally used to alleviate or treat disabilities, for exclusive personal use by disabled persons, including their repair and child car seats," the main difference being the subsequent broadening of its scope which came to contain "auxiliary material."
It should also be noted that the VAT Directive also refers in its recitals that "a VAT system achieves the greatest degree of simplicity and neutrality if the tax is levied as broadly as possible" (recital 5) and that "it should, even though the rates and exemptions are not completely harmonized, lead to competitive neutrality, in the sense that, within 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" (recital 7).
CJEU Case Law
As can be read in the arbitral decision handed down in Process No. 171/2013-T, of 12 June 2014:
"Regarding the application of reduced rates by Member States, the CJEU has repeatedly stated that it is a 'possibility recognized to Member States by derogation from the principle according to which the standard rate is applicable' and that 'reduced VAT rates [one or two] may only be applied to supplies of goods and supplies of service referred to in Annex H [current Annex III]' – cf. Judgment of 3 April 2008, Zweckverband zur Trinkwasserversorgung, case No. C-442/05 (point 39), and Judgment of 18 January 2001, Commission v Spain, case No. C-83/99 (point 18).
We are thus facing an option or faculty of the Member States, naturally limited to the list of operations contained in Annex III of the VAT Directive, and not a binding obligation of these in the transposition of operations subject to the reduced rate.
Moreover, Member States may make a selective application of the reduced rate (to specific and particular products or services), provided that the same does not create a risk of distortion of competition – cf. Judgment of 8 May 2003, Commission v France, case No. C-384/01 (points 25 to 28).
According to the CJEU, the introduction and maintenance of reduced VAT rates are only admissible if they do not violate the principle of fiscal neutrality inherent in the common VAT system, 'which prohibits similar goods, which are therefore in competition with each other, from being treated differently from the VAT point of view' – cf. Judgment of 3 April 2008, Zweckverband zur Trinkwasserversorgung, case No. C-442/05 (point 42); Judgment of 28 October 2003, Commission v Germany, case No. C-109/02 (point 20); Judgment of 8 May 2003, Commission v France, case No. C-384/01 (point 25), and Judgment of 3 May 2001, Commission v France, case No. C-481/98 (points 21 and 22).
It is, therefore, recurrent in the affirmation of the Court of Justice that Member States must respect the principle of fiscal neutrality when applying reduced rates.
Furthermore, as it constitutes an exception to the general principle (which is the application of a standard rate), the application of reduced rates should be, according to community case law, interpreted strictly, as highlighted in the Judgments handed down in cases Nos. C-83/99 (point 19) and C-384/01 (point 28), cited above.
However, in this regard, it should be clarified that strict interpretation is not equivalent to restrictive or restrictive interpretation. The CJEU case law uses the word 'strictly' (in English, 'strictly,' in French 'de manière stricte' and in Spanish 'estrictamente'), whose meaning is 'precise,' 'rigorous' (Dictionary of Contemporary Portuguese Language, Academy of Sciences of Lisbon, Verb, Volume I, 2001). Thus, what this European Court advocates is a literal interpretation, also called declarative, and not, as the TA states, a restrictive interpretation.
In reality, literal or rigorous correspondence with the text of the norm does not imply a restriction of its meaning, typical of restrictive interpretation based on the assumption that the text said more than what was intended, but rather the choice of a meaning that the text directly and clearly bears, because that [meaning] is the one that corresponds to the legislative intent (cf. João Baptista Machado, "Introduction to Law and Legitimizing Discourse," Almedina, 2010, 18th reprint, pp. 185 and 186).
In strict or declarative interpretation, "the literal meaning, or one of the literal meanings, covers what is definitively found to be what it intends to express" (cf. Oliveira Ascensão, The Law. Introduction and General Theory, Almedina, 10th ed., 1999, p. 418). In restrictive interpretation (as well as in extensive interpretation), by contrast, the text of the law is, in a sense, corrected, and the possible literal meaning or meanings are abandoned (cf. idem, 419-421).
Now, if there is any special principle of interpretation in the domain of the application of reduced VAT rates, such principle can only be that of integral and rigorous respect for the (possible) verbal meaning of the expressions contained in the law (principle of strict or declarative interpretation). By contrast, it appears inadmissible to consider a principle that takes as a general rule that the legislator was betrayed by the words he used, revealed a misuse of his language and expressed more than he intended (supposed principle of restrictive interpretation).
It should be noted that only in Judgment C-384/01 (point 28) is the phrase 'restrictively' employed, although this should certainly be due to a lapse, since such reference is made within the invocation of the principle developed by community case law 'according to which exemptions or derogations must be interpreted restrictively' and upon examining the CJEU case law we find that it refers consistently to strict (literal) interpretation and not restrictive.
Finally, and still on the matter of interpretation of the VAT Directive, the CJEU maintains that this should attend 'not only to the respective terms but also to their context and to the objectives pursued by the regulation in which it is integrated' – cf. Judgment cited above, Zweckverband zur Trinkwasserversorgung, case No. C-442/05 (point 30), in a clear appeal to the systematic and rational or teleological elements.
In this particular judgment (C-442/05), the application of the reduced rate provided for water supply to the operation of installation of an individual connection branch to water distribution networks was being discussed (point 11 of the Judgment).
The CJEU concluded that, although the installation of said connection branch was distinct from water distribution (point 12), because that branch was indispensable to making water available to the public (point 34), since without it water would not be distributable to the consumer, it should be considered that the installation (of the branch) itself is equally covered by the concept of water supply mentioned in category 2 of Annex H of the Sixth Directive (point 40), acknowledging the accessory and instrumental character of that provision within the context of water supply."
The VAT Code
The VAT Code provides in paragraph 1 of article 18 the following tax rates:
"a) For imports, supplies of goods and supplies of services contained in List I attached to this instrument, the rate of 6%;
b) For imports, supplies of goods and supplies of services contained in List II attached to this instrument, the rate of 13%;
c) For all other imports, supplies of goods and supplies of services, the rate of 23%."
In the situation under analysis, the following items of the said List I are at issue, through which the Portuguese legislator consecrated the faculty of application of reduced rates of this tax:
"2.6. Orthopedic apparatus, medical-surgical bandages and medicinal stockings, wheelchairs and similar vehicles, propelled manually or by motor, for disabled persons, apparatus, devices and other prosthetic or compensatory material intended to replace, in whole or in part, any limb or organ of the human body or for the treatment of fractures and lenses for correction of vision, as well as orthopedic footwear, provided that prescribed by medical prescription, according to regulations to be adopted by the Government within 30 days.
(...)
2.9. Utensils and any apparatus or objects specifically designed for use by persons with disabilities, provided that they appear on a list approved by joint dispatch of the Ministers of Finance, Social Solidarity and Social Security and Health."
The list referred to in item 2.9 was approved by Joint Dispatch No. 26026/2006, published on 22 December 2006 and includes, with relevance to the situation at issue here, the following products:
"9) Seats and supports for the head, back, arms and feet, specific for wheelchairs;
- Lifting aids to place persons with disabilities, or persons seated in wheelchairs, inside the car;
(...)
- Lifting platforms and elevators for wheelchairs (do not have a roof and do not work within a pit), elevators to adapt to stairs (devices with a seat or platform attached to one or more rods that follow the contour and angle of the stairway), stair climbers and portable ramps for wheelchairs;
(...)
- Systems for controlling movements, steering and braking of wheelchairs;"
The Situation under Analysis
It is necessary to determine whether the Portuguese legislator intended to restrict the application of the reduced rate to wheelchairs and similar vehicles (scooters) sold as a whole, not including in item 2.6 of List I attached to the VAT Code the autonomous transfer of accessories or components that form part of these wheelchairs.
According to article 98 of the VAT Directive, the application of reduced rates, within the scope of the categories contained in Annex III of the VAT Directive, is within the discretion of the national legislator, who may determine the transposition of these categories, in whole or in part, or not transpose them at all.
It also follows from reading category 4 of the mentioned Annex III of the VAT Directive that it covers the supply of any equipment and material normally used to alleviate or treat disabilities, for exclusive personal use by disabled persons, including their repair.
It is therefore concluded that from the perspective of the VAT Directive there is no impediment to the application of the reduced rate to the sale of accessories and components of wheelchairs and similar vehicles.
But, does domestic law also provide for this? To determine this, it is necessary to analyze the literal element, as well as the context and the objectives pursued by item 2.6, and this analysis should result in a declarative interpretation (and not a restrictive one, contrary to what the TA argues).
Considering the literal element, item 2.6 provides for "wheelchairs and similar vehicles, propelled manually or by motor." Thus, it permits that supplies of accessories or components that are incorporated or integrated into the marketing of wheelchairs and scooters be considered covered by the normative provision, regardless of the manner in which they are invoiced, as well as, in the context of post-sale support, repair or replacement of parts and components, without which the said wheelchairs would cease to be usable.
Indeed, it appears evident that parts such as batteries, motors, inner tubes and wheels are essential for wheelchairs and scooters to fully perform their two functions. The same will be said of parts such as tables, cup holders, among others, which are essential for disabled users to fully benefit from all the functionalities of the wheelchairs.
It is also important to note that all these elements produced and marketed by the Claimant are specifically designed for that purpose and incapable of use in other equipment and of autonomous use (that is, they are instrumental to the wheelchairs for which they are produced). These accessories and especially the parts are incorporated and form an integral part of the wheelchair, and are frequently usable only in a particular wheelchair model.
As can be read in the decision handed down within process No. 171-2013-T, "Having examined the CJEU case law, it is noted that, without prejudice to the establishment of the principle of strict interpretation in the domain of application of reduced VAT rates, that Court with competence to uniformly interpret the common VAT system harmonized by Directive 2006/112/EC considers that operations indispensable and instrumental (ancillary) to supplies covered by the reduced rate should also themselves be covered by the reduced rate, pursuant to the Judgment handed down in case No. C-442/05 mentioned above.
Similarly, the principle of neutrality advocates this understanding, for, otherwise, there would be a difference in treatment between the wheelchair marketed and invoiced in a single item and that in which, given the specificities of the pathologies or for reasons relating to the system of internal organization of the Claimant, the various items that make up the wheelchair are invoiced separately. In both situations it is the sale of a wheelchair, albeit with different specifications depending on the case (disability).
With regard to parts and components, such as batteries and motors, which are typically marketed separately in the context of maintenance or repair of a wheelchair or scooter, no justifiable reason is evident that would favour 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 incorporation into a used chair. Or, furthermore, a normal VAT rate taxation of the subsequent application (subsequent to the acquisition of the wheelchair) of a part that has become necessary, by virtue of the evolution of a degenerative disease.
Moreover, in view of the legal formulation, nothing indicates that such a restriction was included in the legislative intent, so as to remove accessories and parts from wheelchairs when invoiced or marketed separately, when it is known that their only possible destination is their integration into said wheelchairs, with no risk of diversion to other purposes than those that the law intended to protect with item 2.6.
It should be noted that accessories and parts that are incorporated in a production process are not at issue, but rather accessories and parts which, by their objective characteristics, can be applied, without being subject to any subsequent transformation, to wheelchairs forming part thereof.
With regard to the purpose of the regime, the extrafiscal reason that presided over the establishment of the reduced rate in item 2.6, which is embodied in a benefit of a social nature and financial, is present, whether in the sale and marketing of wheelchairs under a single item or as a single product, or in their transaction in separate components and spare parts essential to their functioning, maintenance and continuity in the evolution of the disability. What the national legislator intended to facilitate and protect was access by persons with disabilities to the special apparatus and equipment they need to move around. Now, as is known, without batteries and without motors, electric wheelchairs do not move...
On the other hand, the invocation, by the TA, of the argument of the Combined Nomenclature does not hold, since this Nomenclature was created for statistical purposes and for the application of the common customs tariff and has no relevance whatsoever in the classification of goods and services for VAT purposes in Portugal (with a single exception which is pointed out below).
If it is true that according to article 98, paragraph 3 of the VAT Directive Member States may use the Combined Nomenclature to precisely define each category subject to the reduced rate, it is also certain that the Portuguese legislator did not follow that path (nor was it obliged to).
Indeed, the only situation in which the VAT Code resorts to the Combined Nomenclature to define the scope of the tax regime for goods, for VAT purposes, is that provided for in article 14, paragraph 1, subparagraph i), for purposes of determining the exemption regime (complete or zero rate), according to which the supplies of "goods for provisioning placed on board warships classified by code 8906 00 10 of the Combined Nomenclature, when leaving the country destined for a port or anchorage located abroad" are exempt and which has no application in the concrete case under analysis.
It is therefore irrelevant, for VAT purposes, the classification that the parts in question have in the Combined Nomenclature. List I does not resort to that Nomenclature which thus does not serve as an interpretive guide for the norms defining goods subject to the reduced rate.
It is emphasized in this respect that in the draft inspection report the TA proposed the assessment of VAT on the marketing of vehicles called "scooters" based on the cited Combined Nomenclature argument, specifically because they have a different classification from that of wheelchairs.
This correction was abandoned by the TA itself in accordance with the position contained in the Binding Clarification, with Dispatch from the Deputy General Director of Taxes, issued in Process No. 1059, where it was established that "mobility scooters, as equipment specifically designed for use by persons with disabilities, by their technical characteristics of use can be considered vehicles similar to wheelchairs and as such classified in item 2.6 of List I attached to the VAT Code and, consequently, their supplies subject to the 6% rate."
In other words, it was the TA itself that in said Clarification downplayed and abandoned (and rightly so) the criterion of the Combined Nomenclature regarding the "scooters" segment. Thus, it is difficult to understand how it maintained this reasoning for the other corrections."
It therefore appears to us that a correct interpretation of item 2.6 of List I attached to the VAT Code covers the parts of wheelchairs and scooters that are the origin of the disputed VAT assessment acts.
And even if this were not the case, such parts would always be comprised within the normative hypothesis of item 2.9, as they constitute objects specifically designed for use by persons with disabilities. Indeed, such parts are provided for in the list approved by the joint dispatch referred to above (Joint Dispatch No. 26026/2006), since the mentioned list must not limit the normative hypothesis contained in the first part of item 2.9 which contemplates: "Utensils and any apparatus or objects specifically designed for use by persons with disabilities."
Indeed, we consider that the administrative typification by the mentioned Joint Dispatch, even though based on a norm of referral or delegation, cannot restrict the scope of the normative hypothesis contained in item 2.9, under penalty of formal and organic unconstitutionality, so that the enumeration of the utensils, objects and apparatus is either invalid (if it aims to restrict the scope of item 2.9 in question) or should only be recognized as having an illustrative character.
In view of the above, it is to be reiterated the understanding that the accessories and parts at the origin of the VAT assessment acts would always be classifiable in item 2.9 (if they were not in item 2.6) and taxed at the reduced VAT rate, given the specific characteristics of these accessories and parts explained above.
For this reason, the VAT assessments and the consequent compensatory interest lack legal foundation and cannot be maintained in the legal order.
Compensatory Interest
The Claimant accumulates with the request for annulment of the tax act subject of these proceedings, the request for condemnation of the TA to pay compensatory interest on the amount paid by it following notification of the assessments now annulled.
A prerequisite for the award of compensatory interest is that the error in which the TA labored be imputable to it (Cf. article 43 of the LGT).
In the case at issue in the present proceedings, it is manifest that, following the illegality of the assessment acts, for the reasons pointed out above, there is cause for reimbursement of the tax paid by the Claimant, by virtue of the provision in the cited articles 24, paragraph 1, subparagraph b), of the RJAT and 100 of the LGT, as this is essential to "restore the situation that would exist if the tax act subject of the arbitral decision had not been carried out."
It is also clear in the case that the illegality of the disputed tax assessment act is directly imputable to the Respondent, which, on its own initiative, carried it out without legal support, suffering from an erroneous assessment of the legally relevant facts and consequent application of legal norms to the concrete case.
Thus, the Claimant is entitled to receive compensatory interest, pursuant to the provisions of articles 43, paragraph 1, of the LGT and 61 of the CPPT.
Compensatory interest is owed to the Claimant from the date on which it made the payment of the tax provision in question in the proceedings/date on which the values in question were deducted from the VAT amount to be recovered by the Claimant, until the full reimbursement of the amount paid, at the legal rate.
C. DECISION
Therefore, this Arbitral Tribunal decides as follows:
a) Judge the request for arbitral pronouncement as well-founded and, consequently, declare the annulment of the additional VAT assessments and compensatory interest, the settlement of accounts carried out, the rectification of the amount of VAT to be recovered by the Claimant relating to the months of October, November and December 2013 and the decision of express dismissal of the administrative complaint presented;
b) Condemn the TA to reimburse the Claimant the amounts paid and compensated, increased by compensatory interest, pursuant to the provision in paragraph 1 of article 43 of the LGT;
c) Condemn the TA to pay the costs of the proceedings.
D. Value of the Proceedings
The value of the proceedings is set at €7,085.75, pursuant to article 97-A, paragraph 1, a), of the Code of Tax Procedure and Process, applicable by virtue of subparagraphs a) and b) of paragraph 1 of article 29 of the RJAT and paragraph 2 of article 3 of the Regulation of Costs in Tax Arbitration Proceedings.
E. Costs
The amount of the arbitration fee is set at €612, pursuant to Table I of the Regulation of Costs in Tax Arbitration Proceedings, to be paid by the TA, since the request was entirely well-founded, pursuant to articles 12, paragraph 2, and 22, paragraph 4, both of the RJAT, and article 4, paragraph 4, of the said Regulation.
The drafting of the present arbitral decision is governed by the old spelling conventions.
Lisbon, 14 October 2015
The Arbitral Tribunal
(Marta Gaudêncio)
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