It is a common lament among the tech savvy that laws do not keep pace with the rapid rate of innovation we are experiencing currently. Practicing in Bangalore popularly known as the Silicon Valley of India, I have come across new technologies such as 3-D Printing, IoT, etc. which makes me wonder as to the laws required to regulate the same. By the time you are reading this article the budget would have just been announced and it will be hard for me draw your attention away from the budget material. However, I will make an attempt to do the near impossible by discussing a futuristic scenario from the perspective of International Taxation.
Though IoT, 3 – D Printing, etc. may sound futuristic to a layman, in tech speak these technologies are old and boring. What is taking the tech world by storm currently is, innovation in Healthcare as this is the next area of disruption with trends like broader penetration of wearables etc. Therefore in my following narrative I am going to attempt to open your mind by weaving in a futuristic situation with a flavour of international tax, where my narrative is titled “Kidney and International Tax”.
Circa: Late 2016 AD
A pleasant Bangalore morning where Chartered Accountant Ramesh (All Characters are fictional) has just stepped into his office feeling great after his jog in Cubbon Park. However, as soon as Ramesh enters his cabin a call is forwarded to Ramesh, it’s Anitha, the daughter of his client and close friend Rizwan. Anitha sounds tensed and is speaking in a hurried tone until Ramesh calms her down and becomes aware of the situation.
The previous day Rizwan had been suffering from severe stomach pain and had admitted himself to the hospital with the assistance of his wife. He had been subjected to multiple tests and the doctor finally came in to the ward where Rizwan was resting, to announce the diagnosis which was bleak and with regret informed Rizwan that both his kidneys had failed. However, Doctor Ranganath was numero uno in Nephrology and advised Rizwan that there has been a path breaking innovation in the field of Nephrology, where Kidneys could now be 3 – D Printed and customised to a patients requirement in a lab in the United Kingdom (UK) and he would soon be getting in touch with his colleagues in the UK to put Rizwan back on the path of health.
Ramesh had just finished the phone call with Anitha and had become aware of Rizwan’s diagnosis and the future course of treatment. Ramesh sat down on his desk to call his secretary to postpone his appointments for the first half, as he was going to the hospital to visit Rizwan. But before he left as the laptop lay open before Ramesh he was overcome by a sense of curiosity to educate himself as to what is a 3 – D Printed Kidney, and therefore he googled the same. There he came across the following mind boggling ted talk of Dr Anthony Atala (Not Fictional Character - https://www.ted.com/talks/anthony_atala_printing_a_human_kidney?language=en) and obtained an understanding of 3 – D Printing of Human Organs.
Ramesh has driven down to the hospital and is in the waiting area of the hospital lobby for Anitha to take him to Rizwan’s room, while contemplating about the fragility of the human life. In a short while Anitha arrives and Ramesh is soon at Rizwan’s bedside comforting him and offering any help possible, knowing little, how Ramesh’s expertise will soon be called for in helping Rizwan.
Rizwan’s 3 – D Printed Organ transplant will be the first of its kind medical procedure in India. However, being an unique transaction the Hospital is unable to decide whether the payment being made to Advanced Laboratories PLC (UK) will be liable to tax deduction at source. Among many fine qualities possessed by CA Ramesh, he is also a popular expert on the matters of International Taxation and knowing he is inside the vicinity of the hospital campus, Prasad the CFO of the Hospital soon requests an urgent appointment with Ramesh, with whom he has had interactions on tax matters earlier as well. Ramesh who is ever so willing to offer his expertise is immediately at the CFO’s office, to assist in resolving the issue and expediting the payment.
Scene - 6
Ramesh and the CFO are grappling with the issue at hand, as this is first of such transaction and it is a challenge to determine whether the 3 – D Printed Kidney being procured from Advanced Labs PLC (UK) would be considered as an import of goods or is it payment of fees for technical services. What follows is a brainstorming session between the CFO and Ramesh:
CFO: Ramesh, can the payment for the organ be considered purchase of goods and therefore, we will not have to deal with the issue of tax deduction at source?
Ramesh: Prasad, the term Goods has been defined in Article 366(12) of the Constitution, to include all materials, commodities and articles.Sale of Goods Act, in Section 2(7) defines ‘goods’ as every kind of movable property other than actionable claims and money and includes stocks and shares, growing crops, grass and things attached to and forming part of land which are agreed to be severed before sale or under the contract of sale. Also under the Central Excise Laws the Courts have construed goods for the purpose of levy of excise duty and according to these judicial pronouncements, goods must satisfy the following requirements:
(a) They must be movable
(b) They must be marketable
As per my understanding Prasad, it would be a stretch to call this custom built 3-D Printed Kidney as import of goods, as the Revenue may take a stand that the same is not goods, as it is not marketable & also there is no mention of the 3-D Printed Kidney in the Customs Tariff Schedule.
CFO: Wow! Ramesh, I can always expect you to really lay it on me. So give me a solution.
Ramesh: As per my understanding, your hospital has to take a detailed scan of the kidney structure and also send the tissue to Advanced Labs in UK. On receiving the same, the lab in UK will manufacture scaffolds as per the structure scan sent by your hospital and using the scaffolds regrow the kidney tissue using the patient’s stem cells again sent by your hospital. In my opinion, the payment is being made for the technical services being rendered by the lab in UK who possess the specialised know-how.
CFO: I am impressed with your attention to detail Ramesh. On a lighter note you could very well pass of as a doctor and I would have been none the wiser about it. So to summarise, you’re saying its Fees for Technical Services (FTS) and we’ll be making the payments after grossing up, as the contract between our hospital and the UK PLC requires for all taxes to be borne by us.
Ramesh: You know Prasad, Benjamin Franklin once said "In this world nothing can be said to be certain, except death and taxes". Coming to the point, broadly there are two approaches which India has adopted in negotiating its DTAAs in case of FTS:
- The “broad approach” under which the term FTS is defined to include all managerial, technical or consultancy services (similar to the Act definition). DTAAs with countries such as Germany, Austria, Ireland, Japan, adopt this approach.
- The “narrow approach” under which the term FTS is defined to cover only those technical services which “make available” technical know-how, skill etc. to the recipient of the services. DTAAs with countries such as US, UK, Canada, Singapore, adopt this approach. This is popularly referred to as the FIS (Fees for included services) provision.
CFO: Ramesh earlier you had my curiosity, now you have my attention, go on I am listening
Ramesh: DTAAs entered into by India with USA, UK, Canada, Singapore cover only technical services which “make available” technical know-how, skill etc. to the recipient of the services and fall under the narrow approach. The concept of “make available” is explained in the memorandum of understanding (MoU) to the India – USA DTAA. The USA MoU explains that “Generally speaking, technology will be considered “made available” when the person acquiring the service is enabled to apply the technology.” The provision of service may at times require technical input by the service provider. This does not mean that technical knowledge, skills, etc. are “made available” to the service recipient. To conclude in simple terms, the idea of not making available vs make available can be equated with giving a man a fish vs. teaching him to fish. The fact is that the service recipient must be equipped to do the service thenceforth is the key criteria of the ‘make available’ clause which therefore restricts from the classification of all and every technical service as FTS which is taxable in India.
CFO: So Ramesh as we’re making payments to a tax resident in UK and there is no ‘make available’ of service happening, we do not have to deduct any tax on the payments being made
Ramesh: Yes, subject to all other things remaining equal
CFO: Thank you Ramesh! For your valuable assistance. What would have we done without you.
Scene – 7
Two months after, Scene – 6, Mr. Rizwan is at Ramesh’s office, having a friendly chat.
As technology rapidly evolves and the time-gap between one disruption to another becomes ever so shorter, & as members of this noble profession, we are the first point of contact, to clients who are willing to take risks by dipping their feet into these disruptions. Through this article I hope to have captured your attention and provoked your curiosity on the myriad of transactions we would be staring at in the future and where our services will be called upon to provide our advice. I look forward to meeting you all at the many budget sessions we’ll be soon be attending and wish you all Happy Learning in Advance.