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The Indian Medical
Device Industry
Regulatory, Legal and Tax Overview

March 2015

© Copyright 2015 Nishith Desai Associates

www.nishithdesai.com

The Indian Medical Device Industry
Regulatory, Legal and Tax Overview

About NDA
Nishith Desai Associates (NDA) is a research based international law firm with offices in Mumbai, Bangalore,
Silicon Valley, Singapore, New Delhi, Munich. We specialize in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner. We focus on niche areas in which we provide significant value and are invariably involved in select highly complex, innovative transactions. Our key clients include marquee repeat Fortune 500 clientele.
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Nishith Desai Associates has been ranked as the Most Innovative Indian Law Firm (2014) and the Second Most
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India Law Firm Awards 2009. Legal 500 (Asia-Pacific) has also ranked us #1 in these practices for 2009-2010. We have been ranked the highest for ‘Quality’ in the Financial Times – RSG Consulting ranking of Indian law firms in 2009. The Tax Directors Handbook, 2009 lauded us for our constant and innovative out-of-the-box ideas. Other past recognitions include being named the Indian Law Firm of the Year 2000 and Asian Law Firm of the Year (Pro
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Our research oriented approach has also led to the team members being recognized and felicitated for thought leadership. Consecutively for the fifth year in 2010, NDAites have won the global competition for dissertations at the International Bar Association. Nishith Desai, Founder of Nishith Desai Associates, has been voted ‘External
Counsel of the Year 2009’ by Asian Counsel and Pacific Business Press and the ‘Most in Demand Practitioners’ by
Chambers Asia 2009. He has also been ranked No. 28 in a global Top 50 “Gold List” by Tax Business, a UK-based journal for the international tax community. He is listed in the Lex Witness ‘Hall of fame: Top 50’ individuals who have helped shape the legal landscape of modern India. He is also the recipient of Prof. Yunus ‘Social Business Pioneer of India’ – 2010 award.

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Provided upon request only

We believe strongly in constant knowledge expansion and have developed dynamic Knowledge Management
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Please see the last page of this paper for the most recent research papers by our experts.

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The Indian Medical Device Industry
Regulatory, Legal and Tax Overview

Contents
1.
EXECUTIVE SUMMARY 01
2.
INTRODUCTION 02
3.
INVESTMENT 03
I.
India Entry Strategies 03
II. Direct Investment Policy 03
Foreign
III. Structuring Investment Into India – Use of Intermediate Jurisdictions

04

4.
REGULATORY FRAMEWORK 05
I.
Regulatory Regime 05
II.
Authorities 05
III. Licenses Required For The Import, Sale, Manufacture And Distribution Of
Notified Medical Devices Under The Rules

05

IV. Manufacturing a Notified Medical Device in India

07

V. Importing a Notified Medical Device Into India

07

VI. Manufacture/Import of New Notified Medical Device

08

VII. Change of Name, Registered Address or Acquisition of
License/ Registration Holder Company 09
VIII.
Clinical Trials 09
IX. Standards 10
Product
X.
Labeling 10
XI.
Good manufacturing practices (GMP) 11
XII.
Penalties 11
XIII. Proposed Legislations To Regulate The Medical Devices Sector

11

XIV. Government Control Over Prices Of Medical Devices

13

5. REGIME 14
LEGAL
I. – Import Restrictions 14
Export
II.
Advertising and Sales Promotion 14
III. Drugs And Magic Remedies (Objectionable Advertisements) Act, 1954 (DMRA)

14

IV.
The Competition Act, 2002 14
V. Legality of Business With Physician Owned Distributorships

15

6.
INTELLECTUAL PROPERTY REGIME 17
I. India’s Post-Trips Intellectual Property Environment

17

II.
Patent protection 17
III.
Data Exclusivity 19
IV.
Trademarks 19
7.
TAXATION REGIME 21
I.
Direct Taxes 21
II. Taxes 25
Indirect
8.
CONCLUSION 28
APPENDIX I 29

© Nishith Desai Associates 2015

The Indian Medical Device Industry
Regulatory, Legal and Tax Overview

1. Executive Summary
The Indian medical devices sector is worth approximately USD 3 Billion and is growing at a CAGR of
15%.1 The medical devices market in India is dominated by imported products, including products manufactured using imported material, which comprises approximately 75% of the total sales.2 The domestic companies are largely involved in manufacturing low-end products for local and international consumption. However lately, many multinational companies have established local presence in India.

approval. Certain laws, such as the foreign exchange regulations and the tax statutes, can directly affect the ability of a foreign investor to invest and draw out returns, and thus determine the degree of profitability. The application of these laws to the investment or business must be examined in detail.
Last but not the least, the Indian consumer mindset and local business practices are unique, and must be carefully studied while investing or developing a business model.

While the Indian medical devices sector offers an unrivalled investment and business opportunity, there are certain regulations that play a significant role for the industry in general. The Indian medical devices industry is, currently, facing a few legal challenges. For example, the regulatory framework in
India applicable to medical devices is still inadequate.
At present, only 14 types of medical devices are regulated. The rest are unregulated. Some players enjoy the absence of any regulation while others frown upon it. Various associations in the medical devices sector have lobbied hard for the introduction of a comprehensive regulatory regime and the government did propose a few changes. However, the proposals are yet to see the light of day. Clinical trials remain a major grey area because of the inadequate regulatory framework. The Government has, recently, clarified that medical devices with universal labeling (i.e., non-India specific labeling) will not be permitted to enter the territory of India effective
September 2014.

On a positive note, the Indian Government has introduced various fiscal measures to promote research, development, manufacturing and import of medical devices. There is no import duty on certain medical equipment. Similarly, a number of lifesaving medical equipment are exempt from payment of excise duty. Interestingly, the rate of customs duty on finished imported medical devices is less than the rate of excise duty paid for manufacturing the same medical devices domestically, leading to loss of tax credit. The Indian government has incentivized scientific research and development by providing weighted deduction.
Thus, at present, the Indian medical devices market presents a challenging yet exciting opportunity to foreign and domestic players alike. It is hoped that this research paper will act as a guide, from a legal, regulatory as well as tax perspective, to those interested and involved in this space.

Foreign direct investment into a new or existing company engaged in the activity of manufacturing medical devices does not require prior government

1.

http://www.espicom.com/india-medical-device-market.html (last accessed February 19, 2015).

2.

Times of India, “Higher duties hit local mfg of medical devices”, September 30, 2014. Available at http://timesofindia.indiatimes.com/business/indiabusiness/Higher-duties-hit-local-mfg-of-medical-devices/articleshow/43834255.cms (last accessed February 19, 2015).

© Nishith Desai Associates 2015

1

Provided upon request only

2. Introduction
The approximate USD 3 Billion worth Indian medical devices sector is Asia’s fourth largest market, and presents an exciting business landscape and opportunities for both multi-national and domestic players. Till the early 1990s, the medical devices sector was significantly dominated by domestic players. But after India opened up its markets in 1991, tables have turned. The technological advancement and expertise that the global market leaders offered has proved to be an advantage. Today,
India’s medical devices sector is dominated by multinational companies, which is evident from the fact that approximately 75% of the sales are generated by imported medical devices or devices which required imported material.3 The domestic players, on the other hand, were quick to adapt to the winds of change and started to focus on low cost devices.
It will come as a surprise to many that the domestic players who manufacture medical technology based products in India export more than 60% of their output as Indian markets are dominated by such imported medical devices. Over the years, many multi-nationals have set up operations in India.
However, the nature of a majority of the operations is only to distribute imported devices and provide support function. A few multi-nationals have started domestic production too. Some multi-nationals have also entered India by acquiring domestic manufacturers. For example, in 2008, Netherlandsbased Royal Philips Electronics acquired Meditronics, a leading manufacturer of General X-Ray and Alpha
X-Ray technologies, a leading manufacturer of cardiovascular X-Ray systems.
The sector is, at present, growing at an approximate
Compound Annual Growth Rate (“CAGR”) of 15% for a plethora of reasons. A significant percentage of purchasers of medical devices are private medical institutions and hospitals. Due to increased competition in Tier I cities, private enterprises have started to focus on Tier II and Tier III cities, a market which has, until now, been untapped in India.
As private enterprises expand in lesser explored markets, the demand for medical devices will expand proportionally. Other reasons for strong growth prospects of the industry are:

￭￭ Increased public spending in healthcare
￭￭ Increased penetration of health insurance

The sector is also witnessing strong foreign direct investment (“FDI”) inflows, which reflects the confidence of global players in the Indian market. As per official data, the medical and surgical equipment sector received an average of INR 2.202 Billion per year (approx. USD 367 Million) between 2000 and
2011. The numbers swelled in 2012 (INR 3.835
Billion or approx. USD 64 Million) and continued the upward march in 2013 (INR 9.198 Billion or approx.
USD 153.3 Million) and in 2014 (INR 8.061 Billion or approx. USD 134 Million up to November).4
The major players in the Indian market are (in no particular order): Hindustan Syringes & Medical
Devices, Opto Circuits (India), Wipro GE Healthcare,
3M India, Medtronic, Johnson & Johnson, Becton
Dickinson, Abbott Vascular, Bausch & Lomb, Baxter,
Zimmer India, Edwards Life Sciences, St. Jude
Medical, Stryker, Boston Scientific, BPL Healthcare
India, Sushrut Surgicals, Trivitron Diagnostics,
Accurex Biomedical, Biopore Surgicals, Endomed
Technologies, Forus Health, HD Medical Services
(India), Eastern Medikit, Harsoria Health Care,
Nidhi Meditech System, Philips Medical, Vascular
Concepts, Wipro Technologies, HCL Technologies and Texas Instruments.
Some of the major industry associations are:
Association of Indian Medical Device Industry and Association of Diagnostics Manufacturers of
India, All India Plastics Manufacturers’ Association,
Medical Disposables Manufacturers Association,
Society of Biomaterials & Artificial Organs, National
Biomedical Engineering Society and Medical Surgical and Healthcare Industry Trade Association.

￭￭ Economic growth leading to higher disposable

incomes

3.

Times of India, “Higher duties hit local mfg of medical devices”, September 30, 2014. Available at http://timesofindia.indiatimes.com/business/indiabusiness/Higher-duties-hit-local-mfg-of-medical-devices/articleshow/43834255.cms (last taccessed February 19, 2015).

4.

http://dipp.nic.in/English/Publications/SIA_Newsletter/2014/dec2014/TableNo4.pdf

2

© Nishith Desai Associates 2015

The Indian Medical Device Industry
Regulatory, Legal and Tax Overview

3. Investment
The multinationals looking to invest in the Indian medical devices sector must strategize their entry on the basis of certain key factors which will influence profitability of their investment. These key factors are listed and discussed next.

Strategy

I. India Entry Strategies
Multinational medical devices companies or investors seeking to do business with Indian medical devices companies need to appraise and structure their activities on three pillars:

Law

Tax

Exchange Control Laws: Primarily the
Observing the economic and political
Foreign Exchange Management Act, 1999 environment in India from the perspective and numerous circulars, notifications and of the investment press notes issued under the same
Understanding the ability of the multinational company to carry out operations in India, the location of its customers, the quality and location of its workforce Foreign Direct Investment Policy: The
FDI Policy (issued by the Department of
Industrial Promotion and Policy) Ministry of
Commerce, the Government of India, with, with respect to foreign investment in the medical devices sector

To strategize the business model by identifying the correct modality to do business in India

Domestic Taxation Laws: The Income
Tax Act, 1961; indirect tax laws including laws relating to value added tax, service tax, customs, excise

Corporate Laws: Primarily the Companies
Act, 1956, the Companies Act, 2013 and the regulations laid down by the Securities and Exchange Board of India (“SEBI”)

International Tax Treaties: Treaties with favorable jurisdictions such as Mauritius, Singapore and the
Netherlands

Sector Specific Laws: Drugs & Cosmetics
Act, 1940 and the Drugs & Cosmetics
Rules, 1945, The Patents Act, 1970 and other legislations, regulations and guidelines that affect the medical devices industry II. Foreign Direct Investment
Policy
On January 6, 2015, The Indian Government issued a press release [Press Note No. 2 (2015 Series)] announcing a much awaited clarification to its FDI policy with respect to the medical devices sector.
As per the press release, effective January 21, 2015, upto 100% FDI is permitted without government approval in new as well as existing companies that manufacture medical devices including in those companies that are engaged in the manufacture of medical devices that are regulated as drugs by virtue of a legal fiction under Drugs & Cosmetics Act, 1940
(“Act”). To remove any ambiguity that may arise, the expression “medical device” has also been defined, as follows: © Nishith Desai Associates 2015

i any instrument, apparatus, appliance, implant, material or other article, whether used alone or in combination, including the software, intended by its manufacturer to be used specially for human beings or animals for one or more of the specific purposes of ia. diagnosis, prevention, monitoring, treatment or alleviation of any disease or disorder; ib. diagnosis, monitoring, treatment, alleviation of, or assistance for, any injury or handicap; ic. investigation, replacement or modification or support of the anatomy or of a physiological process; id. supporting or sustaining life; ie. disinfection of medical devices; if. control of conception,

3

Investment
Provided upon request only

and which does not achieve its primary intended action in or on the human body or animals by any pharmacological or immunological or metabolic means, but which may be assisted in its intended function by such means; ii. an accessory to such an instrument, apparatus, appliance, material or other article; iii a device which is reagent, reagent product, calibrator, control material, kit, instrument, apparatus, equipment or system whether used alone or in combination thereof intended to be used for examination and providing information for medical or diagnostic purposes by means of in vitro examination of specimens derived from the human body or animals.
Since the policy, currently, includes a reference only to the manufacturing sector, it is unclear if this liberalization applies to medical devices companies engaged in an activity other than manufacturing.
Such investments may, perhaps, be treated as FDI in the pharmaceutical sector if the activity is related to Notified Medical Devices since Notified Medical
Devices are deemed to be drugs under the provisions of the Act (please refer to Regulatory Framework section for details on Notified Medical Devices).
In the pharmaceutical sector, FDI upto 100% is permitted. While no prior government approval is required for FDI in new companies (i.e., investments in greenfield companies), FDI in existing companies requires prior approval from the Foreign Investment
Promotion Board (“FIPB”) (i.e., investments in brownfield companies).
The definition of “medical device” in the press release is, essentially, similar to the one used in the amendment proposed to the Act by way of the Drugs and Cosmetics Amendment Bill, 2015.

4

III. Structuring Investment Into
India – Use of Intermediate
Jurisdictions
Foreign entities that are looking at incorporating subsidiaries in India for outsourcing research and manufacturing functions can achieve tax efficiency by use of a tax neutral intermediate jurisdiction which has signed an Indian Tax Treaty (“Treaty
Jurisdiction”) rather than directly investing into the
Indian company. The foreign entity can achieve tax efficiency by incorporating a company (or any other entity which is eligible to benefits of the relevant
Indian Tax Treaty) in the Treaty Jurisdiction which would, in turn, invest into the underlying Indian company. The choice of an appropriate Treaty Jurisdiction, apart from tax neutrality and a good treaty network, would depend on factors such as political stability, ease of administration, availability of reliable administrators, favorable exchange controls and legal system, certainty in tax and legal framework and ease of winding up operations.
Indian Tax Treaties aim to prevent double taxation of income and capital gains for a person or entity resident in another jurisdiction. For instance, under the India Mauritius tax treaty, capital gains earned on sale of Indian securities by a Mauritius company would be taxable only in Mauritius. Further, currently the Mauritius domestic tax laws provide an exemption on most categories of capital gains. By investing through such a jurisdiction, a foreign investor need only pay capital gains tax in its home jurisdiction. Further, in selecting an appropriate Treaty
Jurisdiction, it is important for a foreign investor to select a jurisdiction that gives it the specific benefits it requires.

© Nishith Desai Associates 2015

The Indian Medical Device Industry
Regulatory, Legal and Tax Overview

4. Regulatory Framework
I. Regulatory Regime
The medical devices industry in India is largely unregulated because of the absence of a medical devices specific legislation specifying standards of safety and quality for most of the medical devices.
There are certain medical devices which have been regulated by creating a statutory fiction and deeming these medical devices as “drugs”. By virtue of this fiction, these few medical devices get regulated by the Act and the rules framed thereunder viz., the
Drugs and Cosmetics Rules, 1945 (“Rules”). A list of these medical devices is described in APPENDIX 1.
They are referred to as “Notified Medical Devices”.
It has been clarified by the authorities, by way of a notification, that any device that does not appear in the said list of Notified Medical Devices, does not require any approvals from the authority (including any registration certificate).
The Act and Rules seek to:
￭￭ Regulate the import, manufacture, distribution

and sale of Notified Medical Devices;

￭￭ Ensure the availability of standard quality Notified

Medical Devices to the consumer

II. Authorities
The Central Government and the State Governments are responsible for the enforcement of the Act.
The Central Drugs Standard Control Organization
(“CDSCO”), headed by the Drugs Controller
General of India (“DCGI”) is primarily responsible for coordinating the activities of the State Drugs
Licensing Authorities, formulating policies, and

© Nishith Desai Associates 2015

ensuring uniform implementation of the Act throughout India. The DCGI is responsible for handling matters with respect to product approval and standards, clinical trials, the introduction of new medical devices, and import licenses for new Notified
Medical Devices as indicated above.

III. Licenses Required For The
Import, Sale, Manufacture
And Distribution Of Notified
Medical Devices Under The
Rules
Notified Medical Devices are regulated by both, the
Central Government and the State Governments.
Under the applicable regulatory framework, the functions of manufacture, import, distribution and sale of medical devices require licenses or permissions, as the case may be. In specific instances such as manufacture or import of new Notified
Medical Devices (discussed later), both, a permission from the Central Government, i.e., the central drug licensing authority and a license from the relevant
State Governments, i.e., the state drug licensing authority(ies) is required. The required licenses and permissions are described more specifically in the table below.
The Rules have prescribed the standard format of the application forms for relevant licenses for the benefit of the applicants. It has also prescribed the standard form (template) of the licenses that may be issued for the benefit of the regulatory authorities and the applicants. 5

Regulatory Framework
Provided upon request only

License for /
Registration
Certificate (as applicable) Form (template) of
Application form Relevant Rule the License

Licensing
Authority

Timelines (from the date of application) Certificate of registration of the foreign manufacturer and the medical devices to be imported
(Registration
Certificate)

Form 41

Form 40

Rule 24-A

DCGI

9 months

License to import
Notified Medical
Devices

Form 10

Form 8

Rule 24

DCGI

No time period prescribed (Usually within 3 months)

License to import of Notified
Medical Devices for examination, test or analysis
(including for clinical trials)

Form 11

Form 12

Rule 33

DCGI

No time period prescribed License to manufacture a
Notified Medical
Device for the purpose of examination, test or analysis
(including for clinical trial)

Form 29

Form 30

Rule 89

DCGI

No time period prescribed (usually between three to six months)

Permission to conduct clinical trial using new
Notified Medical
Device

No specified format

Form 44

Rule 122-DA

DCGI

No time period prescribed Form 45
Permission to import new Notified
Medical Device or marketing after satisfactory clinical trial Form 44

Rule 122-A

DCGI

Six months

Form 46
Permission to manufacture new
Notified Medical
Device after satisfactory clinical trials Form 44

Rule 122-B

DCGI

Six months

Retail sale of
Notified Medical
Devices

Form 20, Form
21(for sutures, ligatures, In-vitro diagnostic devices)

Form 19

Rule 61(1), Rule
State Drug
61(2) (for sutures, Licensing Authority ligatures, In-vitro diagnostic devices)

No time period prescribed (usually between three to six months)

Whole sale of
Notified Medical
Devices

Form 20-B, Form
21-B (for sutures, ligatures, In-vitro diagnostic devices)

Form 19

Rule 61(1), Rule
State Drug
61(2) (for sutures, Licensing Authority ligatures, In-vitro diagnostic devices)

No time period prescribed (usually between three to six months)

6

© Nishith Desai Associates 2015

The Indian Medical Device Industry
Regulatory, Legal and Tax Overview

License to manufacture Notified Medical
Devices

Form 28

Form 27

Rule 76

For certain specified Notified
Medical Devices5– the DCGI. For other Notified
Medical Devices6
– the State Drug
Licensing Authority.

No time period prescribed (usually between three to six months)

Loan License
(manufacture in facility owned by third party)

Form 25-A, Form
28-A (sutures, ligatures, In-vitro diagnostic devices)

Form 24-A, Form
27-A (sutures, ligatures, Invitro diagnostic devices) Rule 69-A, Rule
76-A

(Same as above)

No time period prescribed (usually between three to six months)

IV. Manufacturing a Notified
Medical Device in India
A separate license is required for each manufacturing location and for each Notified Medical Device at such manufacturing location.
Under the Act, “manufacturing” includes any process (or part) for making, altering, ornamenting, finishing, packing, labeling, breaking up or otherwise treating or adopting any drug with a view to its sale or distribution. However, “manufacturing” does not include dispensing or packing at the retail sale level.

V. Importing a Notified Medical
Device Into India
Importing a medical device into India requires the satisfaction of a few additional legal requirements than those indicated above. The import of all products in India, including medical devices, is governed under the provisions of the Export and
Import Policy. Before importing a device into India, the importer is required to obtain an Importer and
Exporter Code (“IEC”) Number from the office of the
Director General of Foreign Trade (“DGFT”). The
IEC Number is, then, required to be mentioned in the documents filed with Customs for clearance of the imported goods. For obtaining the IEC Number, an application, in the prescribed form, has to be submitted to the office of the jurisdictional Joint
Director of Foreign Trade.
Under the Act, importing a Notified Medical Device

into India requires an import license from the office of the DCGI. In order to get an import license, there is a mandatory requirement of registration of the medical devices sought to be imported, the name of the manufacturer and its manufacturing premises with the office of the DCGI.
The registration is certified by grant of a registration certificate. An application for grant of a registration certificate may be made by the foreign manufacturer itself if it has a valid wholesale license for sale or distribution of Notified Medical Devices under the Rules or through its authorized agent in India, who either has a valid license under the Rules for the manufacture (for sale) of a Notified Medical
Device or has a valid wholesale license for the sale or distribution of a Notified Medical Device in
India. Many a times, foreign manufacturers do not have an Indian subsidiary which has a wholesale license for sale or distribution of Notified Medical
Devices. Hence, the manufacturers choose to appoint a third party as an authorized agent to make the application (on the manufacturer’s behalf) for the grant of a registration certificate. The authorization by a manufacturer to its agent in India must be documented by a power of attorney.
Other documentation related requirements for import: ￭￭ Free Sale Certificate in the country of origin issued

by the Ministry of Health/National Regulatory
Authority is a pre-requisite; or

￭￭ Regulatory status of a medical device:
￭￭ In case of medical devices manufactured in USA,

USFDA approval for manufacture and free sale

￭￭ With respect to medical devices manufactured

5.

Cardiac Stents, Drug Eluting Stents, Catheters, Intra Ocular Lenses, I.V. Cannulae, Bone Cements, Heart Valves, Scalp Vein Set, Orthopedic Implants,
Internal Prosthetic replacements.

6.

Disposable Hypodermic Syringes, Disposable Hypodermic Needles, Disposable Perfusion Sets, In vitro Diagnostic Devices for HIV, HBsAg and HCV.

© Nishith Desai Associates 2015

7

Regulatory Framework
Provided upon request only

in Australia, Japan and Canada, approval for manufacture and free sale
￭￭ In case of medical devices manufactured in

European Countries, CE certification along with the approval for manufacture and Free Sale
Certificate

￭￭ Other countries: approval for manufacture and

free sale in the respective country of origin along with the approval from any one of the following viz. USFDA/TGA Australia/Health Canada/
Ministry of Health, Labour and Welfare, Japan or
CE Certification is to be submitted

Foreign manufacturers do not always have a local subsidiary or affiliate in India which has a wholesale license for sale or distribution of medical devices.
Hence, the foreign manufacturers, most often, choose to appoint a third party as an authorized agent to make the application for grant of the registration certificate. The law requires that the authorization by a manufacturer to his agent in India must be documented by a power of attorney. The power of attorney declares the concerned applicant (third party) to be the authorized agent of the foreign manufacturer for the purpose of fulfilling the requirements imposed on the manufacturer in connection with the registration certificate and import license. Under the power of attorney, the manufacturer undertakes to comply with any instruction or directions of the DCGI for the purpose of registration and import of medical devices into
India.
The Power of Attorney is signed by both, the foreign manufacturer and the authorized agent and authenticated by appropriate government bodies. Thus, the authorized agent is obligated to comply with requirements imposed on the foreign manufacturer of imported medical devices as applicable under the Act and Rules, including the obligations which the manufacturer has decided to undertake upon itself through the undertaking under Schedule D-I. The Registration Certificate, too, expressly states that the concerned party, who is the authorized agent of the manufacturer in India, will be responsible for the business activities of the manufacturer in India in all respects.

8

Owing to the fact that the authorized agent has taken up the responsibility of business activities of the foreign manufacturer in India, there may be cases when it may insist on being the exclusive importer of the medical devices. There have been instances where the authorized agent has claimed exclusive rights to import products in India based on the power of attorney. This may not be acceptable to most of the foreign manufacturers.
In order to avoid future disputes, manufacturers should consider introducing protective terms in the power of attorney itself or through a separate contract. VI. anufacture/Import of New
M
Notified Medical Device
A “new” medical device is a medical device which falls into the Notified Medical Device category, but which does not have a predicate Notified Medical
Device registered (for import) / approved (for manufacture) in India. A “predicate” is a Notified
Medical Device which is registered / approved in
India and has the same indications / intended use, material of construction and design characteristics as the device which is proposed for registration in India.
Notified Medical Devices for which predicate devices are not registered in India are classified as “new” medical devices. These medical devices are referred to the Medical Device Advisory Committee (“MDAC”) to comment on safety, effectiveness, essentiality and desirability of proposed new devices before the new medical device may be registered/approved.
MDAC comprises of a panel of experts chosen by the Health Ministry who advise the DCGI in matters related to review and regulatory approval of New
Medical Devices and clinical trials. The importer/ manufacturer of such new medical device may be required to furnish clinical data to satisfy the MDAC.
It is noteworthy that if the new medical device is not marketed in any of the following markets viz.
USA, Europe, Japan, Canada or Australia, then the marketing permission of such a device would depend on results of the local clinical trials conducted in
India. This, effectively, implies that conducting local clinical trials, then, becomes a mandatory requirement. © Nishith Desai Associates 2015

The Indian Medical Device Industry
Regulatory, Legal and Tax Overview

VII. Change of Name, Registered
Address or Acquisition of
License/Registration Holder
Company
All licenses issued under the Act are non-transferable.
Moreover, in case of any change of the name of the licensee / registration holder, change in the registered address or change in constitution of the partnership or company (i.e., in case of a company,
100% acquisition of the Company which also results in a change of directors or in case of a merger, the existing license or registrations are invalid after three months of the date of the occurrence of the event. It is expected that the license / registration holder must immediately intimate the concerned licensing authority about the change. Sometimes, the requirements may vary depending upon which authority has issued a license. For instance, in an import scenario, in case of a change in the address of the foreign manufacturer mentioned on the
Registration Certificate, a fresh application requires to be made. However, in case of a change in the registered address of licensee holding a whole sale or a retail license, a simple intimation of such change would suffice and a fresh application may not be required to be made. Further, it is in the interest of the license / registration holder that a fresh application for issue of the license / registration is made as soon as possible. It is likely that after the fresh application is made, the concerned licensing authority may take more than three months to issue the fresh license / registration. In such a case, the license / registration holder may continue to operate on the basis of the old license / registration until the new license / registration is issued, provided there was no undue delay in making the fresh application.

VIII. Clinical Trials
The applicable regulatory framework for clinical trials is drug-trial specific. There is no medical devices specific regulatory framework for clinical trials in
India. The DCGI, who regulates clinical trials, is aware of this fact and has, therefore, allowed for some tweaking in the drug-specific clinical trial regulatory framework to suit medical devices. For example, the
DCGI has exempted Phase I clinical trials of medical devices. A number of manufacturers of Notified Medial
Devices are interested in carrying out post-marketing

© Nishith Desai Associates 2015

observational studies of medical devices. The core difference between an observational study and a clinical trial is the degree of control which the sponsor (manufacturer) exercises in both the scientific studies. In observational studies, the manufacturer does not interfere in the use of the device by the subject and lifestyle of the subject but in a clinical trial, the manufacturer sets out the way
(design) in which the device would be used and requires the subject to adhere to a protocol. There is no requirement to obtain any permission for an observational study from the drug regulator but permission would be required to carry out a postmarketing clinical trial.
India witnessed significant increase in the conduct of clinical trials due to the advantages India was offering some time ago such as speedier clinical trials, large treatment population sharing diseases with the West, trained medical experts, multi-lingual skill set and costs. However, the clinical trials are on a decline since early 2013 due to regulatory issues. The sector has witnessed intense media scrutiny in recent times owing to allegations made by some non-governmental organizations that the present regulatory framework provides inadequate protection to clinical trial subjects. The Supreme
Court of India has issued certain guidelines to increase administrative oversight and to strengthen protection of interests of clinical trial subjects.
However, the turn of events has led to over-scrutiny and administrative delays. In January 2013, India formalized compensation rules for clinical trial related injury or death, which obligate the sponsor or the sponsor’s representative in India to pay for clinical trial related injury or death and for medical management of trial subjects. Later that year, guidelines for determination of compensation for clinical trial related death were released, followed by guidelines on clinical trial injury in 2014. It was perceived that the compensation amount which resulted from the guidelines was high. This also drove up the cost of insurance premium. Due to these reasons, manufacturers started shying away from conducting global clinical trials in India. This trend is likely to continue until the regulatory hurdles are eased out and compensation amounts get rationalized. Another important aspect of clinical trials is data protection at the level of the Investigator and the Institution, since patient identifiable data is never disclosed to the Sponsor. In India, every person or entity who collects, stores and uses identifiable health related information of an individual is supposed to comply with the data

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Regulatory Framework
Provided upon request only

protection requirements prescribed under the
Information Technology Act, 2000 (“IT Act”) and the Information Technology (Reasonable Security
Practices and Procedures and Sensitive Personal
Data or Information) Rules, 2011 (“IT Rules”) made under the IT Act. The IT Act and IT Rules regulate collection, storage, use, disclosure and transfer of sensitive personal data or information (“SPDI”).
SPDI is defined broadly, and includes information about “physical, physiological and mental health condition” as well as “medical records and history” that may be identified with a person. The IT Rules lay down strict disclosure and written informed consent requirements prior to collection of SPDI.
Similar strictures are imposed for use, disclosure and transfer of SPDI, mandating that such activity should take place, at all times, with the permission or prior agreement of the person who is the owner of SPDI. The IT Rules also mandate that ‘reasonable security practices and procedures’ must be employed for security of stored SPDI. Non-compliance with the requirements of the IT Rules as well as negligence in implementation of security features may lead to pecuniary liability.
There are two peculiar problems which manufacturers (Sponsors) of medical devices have faced in recent times. First, there is no other specific guidance document to rely on. The Indian Good
Clinical Practices guidelines were drafted from the point of view of a drug trial. Therefore, placing reliance on the guidelines may not be feasible in case of medical devices related trials. In the absence of any guidelines, the manufacturers often find themselves following the terms that may be set out by the
Institutional Ethics Committees.
Second, the DCGI has reportedly requested medical devices manufacturers who were conducting clinical trials of non-Notified Medical Devices to follow the
Act and Rules. Adherence to the Act and Rules may lead to a significant increase in the trial budget. The
Act and Rules require audio-visual recording of the entire informed consent process as well as storage of the video. Further, the Rules have formalized a system of compensation for trial related injury or death. The system is onerous for the Sponsor because it does not allow the Sponsor to present its case before a decision on compensation is taken. The
Act and Rules also contain stringent timelines for submission of reports on serious adverse events.
It is recommended that any medical devices company that wishes to conduct clinical trials of non-notified medical devices should intimate the office of the DCGI regarding the trial in order to be

10

able to budget the trial and avoid future regulatory surprises. IX. Product Standards
No Notified Medical Device can be imported, manufactured, stocked, sold or distributed unless it meets the quality and other standards defined in the
Act and Rules. For instance, Schedule R-1 of the Rules has prescribed standards for the following – Sterile
Disposable Hypodermic Syringes, Sterile Disposable
Hypodermic Needles and Sterile Disposable
Perfusion Sets. Similarly, Schedule M-III of the Rules lays down the requirements and standards for factory premises that a manufacturer of medical devices needs to comply with.
It is noteworthy that the Central Government has the power to prohibit the import, manufacture or sale of any Notified Medical Device. Moreover, the Central
Government may ban those medical devices which have been removed / withdrawn from the markets of two or more countries where they were marketed.

X. Labeling
Before a Notified Medical Device is sold or distributed in India, it must be labeled according to specifications outlined in the Act, Rules and The
Legal Metrology (Packaged Commodities) Rules,
2011.
For Notified Medical Devices, the Rules prescribe the contents of the label such as the name of the medical device, statement as to the net contents
(in terms of weight or measure), import license number (if imported), date of manufacture, expiry, the name and address of the manufacturer and the address of the premises where the Notified Medical
Device has been manufactured, the batch number, as well as the manufacturing license number under which it is manufactured (if manufactured in India or elsewhere). Imported products must display the expiry date in addition to the import license number.
The Legal Metrology (Packaged Commodities)
Rules, 2011, which are applicable to all medical devices, have identical requirements. One important additional requirement prescribed by the said rules is the need to publish the name, address, telephone number, e-mail of the person or office to contact in case of consumer complaints.
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The Indian Medical Device Industry
Regulatory, Legal and Tax Overview

All labels must be printed in English.
It is a common global practice to re-label imported medical devices after they have arrived in the country of import. In India, the re-labeling is carried out at the customs warehouses, or any other place, which is approved by the CDSCO.
However, after a notification issued in March 2014, it is now expected that the medical devices entering
Indian customs should already have been labeled as per Indian laws. This requirement was to be made mandatory from September 28, 2014 but does not appear to have been enforced yet. It remains to be seen if the requirement will be enforced, as the notification has not yet been withdrawn.
The requirement may lead to cost escalations and change in business plans because earlier relabeling was carried out by the importers in India but eventually will have to be carried out by the manufacturers themselves. The other essential question in such a circumstance is with respect to liability in the event of mis-labeling of products.
With Indian law being made applicable (for labeling of the devices) outside the territory of India, several clarifications are required pursuant to the decision of importing devices already labeled (as per Indian laws) outside the country.

XI. Good manufacturing practices
(GMP)
Schedule M-III of the Rules prescribes GMP guidelines for the manufacture of Notified Medical
Devices in India. Every company manufacturing
Notified Medical Devices in India has to comply with the provisions of Schedule M-III, else it may lead to cancellation or suspension of the manufacturing license. XII. Penalties
The Ministry of Health and Family Welfare,
Government of India (“Ministry”), in the year 2009, notified an amendment to the Act that attempts to strengthen the existing law against the menace of spurious and counterfeit medical devices in India.
This amendment has changed certain provisions of the Act that specifically relate to the offences of

© Nishith Desai Associates 2015

manufacture and trade of spurious Notified Medical
Devices.
The penalties under the Act were found to be inadequate to act as a deterrent for persons involved in offences. The penalties have been significantly enhanced, through the amendment, for manufacture, sale, distribution, stocking or exhibiting or offering for sale or distribution of spurious or counterfeit
Notified Medical Devices. The penalty payable is an amount up to INR 1,000,000 (approx. USD 16,667) or 3 times the value of the Notified Medical Device confiscated, whichever is higher, and imprisonment of not less than 10 years which may extend to life, for spurious or counterfeit Notified Medical Devices leading to death or grievous hurt. The entire amount of fine that is realized from the person convicted for the offence is now paid by way of compensation, to the person who is the victim of spurious or counterfeit Notified Medical Devices. If the victim has died due the effect of the spurious or counterfeit
Notified Medical Devices, the victim’s relative is entitled to receive the same amount by way of compensation. In case the spurious or counterfeit Notified Medical
Device does not lead to death or grievous hurt, then the penalty is a fine of up to INR 300,000 (approx.
USD 5000) or 3 times the value of the Notified
Medical Device confiscated, whichever is higher, and imprisonment of not less than 7 years which may extend up to life.
The Ministry also has set up a “whistle blower” policy that aims to reward citizens, who provide information on the trade and source of spurious
Notified Medical Devices.

XIII. Proposed Legislations
To Regulate The Medical
Devices Sector
There have been numerous proposals to introduce a comprehensive regulatory regime that would be applicable to all medical devices. A comprehensive regulatory regime will be welcomed by the serious players as well as the consumers as it brings regulatory certainty. Below, we have drawn a comparison between two most significant proposals which were circulated to the public for comments but could not be made into law. The Medical Devices
Regulation Bill, 2006 was the first proposal that intended to overhaul the regulatory framework
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Regulatory Framework
Provided upon request only

for medical devices in India. It proposed to adopt a broad and modern definition of medical devices and set up a separate regulatory authority to oversee regulatory affairs of the medical devices industry.
The proposal was, unfortunately, shelved. In 2013, another proposal, in the form of a Bill of Drugs and
Cosmetics (Amendment) Act, 2013, was made. This proposal was less ambitious as it did not propose setting up a separate regulatory authority, but was a step in the right direction as it adopted the wide and modern definition proposed earlier, but with notable additions such as medical device software.7

Unfortunately, the Health Ministry decided to shelve the 2013 Bill too. In December of 2014, the Health
Ministry released a draft of the Drugs and Cosmetics
Amendment Bill, 2015 for public consultation which retained most of the progressive provisions of the
2013 Bill. The table below summarizes important provisions of the 2006 Bill and the 2015 Bill by way of a comparison. Industry associations in India have been lobbying hard for a new regulatory regime, and with a new government in place, introduction of such a regime seems more likely than ever before.

Sr. No.

Medical Devices Regulation Bill, 2006

Drugs and Cosmetics (Amendment) Bill, 2015 [First
Draft]

1.

Regulates all medical devices

Regulates only notified medical devices

2.

Proposal to establish a separate regulatory authority Proposal to continue with exiting regime. No dedicated called Medical Devices Regulatory Authority regulator for medical devices.

3.

Definition of manufacture broad and includes customization for individual patients

Definition of manufacture broad 8, but does not include customization for individual patients

4.

Definition does not expressly include software

Definition includes software

5.

No industry representation on the advisory board of the regulatory authority. Industry representation in ‘technical committees’ which provides recommendations for setting standards and guidelines. Recommendations of the technical committees are not binding.

Creation of Medical Device Technical Advisory Board who shall be consulted by DCGI before taking any technical decision. No power to regulatory authority to ban medical devices in public interest

Power to Central Government to ban notified category of medical devices in public interest

6.

7.

‘ Medical device’ means any instrument, apparatus, machine, appliance, implant, in vitro reagent or calibrator, software, material or other similar or related article:
i.

intended by the manufacturer to be used, alone or in combination, for human beings for one or more of the specific purpose(s) of:
￭￭

diagnosis, prevention, monitoring, treatment or alleviation of disease,

￭￭

diagnosis, monitoring, treatment, alleviation of or compensation for an injury,

￭￭

investigation, replacement, modification, or support of the anatomy or of a physiological process,

￭￭

supporting or sustaining life,

￭￭

control of conception,

￭￭

disinfection of medical devices,

￭￭

providing information for medical or diagnostic purposes by means of in vitro examination of specimens derived from the human body;
And

ii. which does not achieve its primary intended action in or on the human body by pharmacological, immunological or metabolic means, but which may be assisted in its intended function by such means;
8.

Medical Device includes any instrument, apparatus, appliance, implant, material or other article, whether used alone or in combination, including the software, intended by its manufacturer to be used specially for human beings or animals for one or more of the specific purposes of,(A) diagnosis, prevention, monitoring, treatment or alleviation of any disease or disorder;
(B) diagnosis, monitoring, treatment, alleviation or assistance for, any injury or disability;
(C) investigation, replacement or modification or support of the anatomy or of a physiological process;
(D) supporting or sustaining life;
(E) disinfection of medical devices;
(F) control of conception; which does not achieve primary intended action in or on the human body or animals by any pharmacological or immunological or metabolic means, but which may be assisted in its intended function by such means;
(ii) an accessory to such an instrument, apparatus, appliance, material or other article;
(iii) in vitro diagnostic medical device including a reagent, reagent product, calibrator, control material, kit, instrument, apparatus, equipment or system, whether used alone or in combination;

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The Indian Medical Device Industry
Regulatory, Legal and Tax Overview

7.

Proposed risk-based classification of medical devices. Low risk devices to be marketed with selfcertification. High risk devices to be marketed after obtaining conformity assessment

No risk-based classification proposed

8.

Proposed registration of both domestic and foreign medical device manufacturers, including products manufactured or imported.

No new registration requirement. Under existing law, foreign manufacturers and imported products are required to be registered with the regulatory authority

9.

Recognition for use of refurbished medical device

No such express recognition

10.

Proposal for establishment of Appellate Tribunal comprising of experts to hear appeals from the decisions of the regulatory authority

No separate appellate tribunal. Under existing regime, all appeals are heard by the Minister / Secretary of the
Central Government / State Government. The Minister /
Secretary is most often not an expert on the subject

Between the Medical Devices Regulation Bill, 2006 and Drugs And Cosmetics (Amendment) Bill, 2015, the former has a significantly greater potential of bringing the much needed regulatory overhaul.
It remains to be seen if provisions from either of these two bills are considered, or if a new proposal altogether is introduced by the Indian government with the objective of bringing about the much needed regulations for medical devices.

XIV. Government Control Over
Prices Of Medical Devices
The State Drug Licensing Authority in the
State of Maharashtra, called as Food and Drug
Administration (“FDA”), recently issued a letter to the DCGI and the National Pharmaceutical Pricing
Authority making a case for bringing medical devices under price control. The assertion of the FDA was that medical devices in India are being sold at a huge margin. We have summarized the price control framework in India and analyzed the likelihood of price control over medical devices below.
In India, a legislation called the Essential
Commodities Act, 1955 (“ECA”) is invoked when the price of a commodity or a class of commodities is sought to be controlled. The ECA gives power to the Central Government to control production, supply, distribution etc. of essential commodities for maintaining or increasing supplies and for securing their equitable distribution and availability under fair prices. Under the ECA, if a commodity or a class of commodities, for example, medical devices, is notified as an “essential commodity” in the Official
Gazette of India, then the Central Government can, amongst other things, fix prices of the medical devices. However, medical devices have not yet been notified as an essential commodity. To control prices of medical devices, the Central Government will
© Nishith Desai Associates 2015

have to first notify ‘medical devices’ as an essential commodity. Interestingly, ‘drugs’ as a class of commodities have been notified as ‘essential commodities’. Thus, the
Central Government has the powers to fix prices of drugs. In fact, in furtherance of the said notification, the Central Government has issued an order called
The Drug Price Control Order, 2013 (“DPCO”) which provides a framework for controlling the prices of drugs. The main objective of the DPCO is to ensure the availability of essential, lifesaving and prophylactic medicines specified in the National List of Essential Medicines, 2011 (“NLEM”) at affordable prices. The government agency under DPCO which is responsible for controlling the prices of drugs is called the National Pharmaceutical Pricing Authority
(“NPPA”). The DPCO also provides for controlling the prices of non-NLEM drugs in two situations:
i. If the price of any non-NLEM drug increases by more than 10% of the maximum retail price within a span of 12 months, then the DPCO gives the NPPA the power to reduce the price to the level of 10% of the maximum retail price for the next twelve months. ii. At the discretion of the NPPA, in public interest and under extra-ordinary circumstances.
The catch here is that the definition of “drugs” under
ECA refers to the definition of “drugs” under the
Drugs and Cosmetics Act, 1940 (Act). The definition of “drugs” under the Act includes medical devices that have been notified by the Central Government
(See Appendix 1). Thus, the NPPA has held that all
Notified Medical Devices is covered under DPCO.
However, medical devices other than Notified
Medical Devices cannot be brought under price control unless “medical devices” as a class is notified by the Central Government to be an “essential commodity”, as discussed above

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Provided upon request only

5. Legal Regime
I. Export – Import Restrictions
Imports and exports are regulated by the Foreign
Trade (Development and Regulation) Act, 1992 along with the Customs Act, 1962 and the Export-Import
Policy (EXIM Policy), issued by the Ministry of
Commerce and Industry, Government of India. The
EXIM Policy is announced for a period of 5 years and is amended annually. The current EXIM policy, also known as the New Foreign Trade Policy, covers the period 2009 – 2014. A new EXIM policy is expected to be announced in 2015. Until then, the existing EXIM policy will have effect. The purpose of the EXIM policy is to develop export potential, improve export performance, encourage foreign trade and create a favorable balance of payments positions.

II. Advertising and Sales
Promotion
Advertising medical devices is strictly regulated. The
Rules prohibit labeling of Notified Medical Devices in a manner that may convey to the intending user that the enclosed device may be used for prevention or cure of certain ailments and diseases specified in Schedule J of the Rules. Some examples of such diseases and ailments are: Blindness, Bronchial
Asthma, Cataract, Growth of New Hair, Deafness,
Genetic Disorders, Improvement in vision,
Myocardial Infarction etc.
Please note that while the restriction on labeling applies only to Notified Medical Devices, some of the restrictions on advertisements are general in nature and are applicable to all medical devices.
These are dealt with in detail under the sub-heading of the Drugs and Magic Remedies (Objectionable
Advertisement) Act, 1944.
With respect to promotion of medical devices, there are no guidelines at present that are directly applicable to medical devices. Since Notified Medical
Devices are deemed as drugs, few companies have adopted the guidelines applicable to promotion of drugs, called the Uniform Code for Pharmaceutical
Marketing Practices (“UCPMP”) issued by the
Department of Pharmaceuticals (“DoP”). The UCPMP is a voluntary code that controls / places restrictions on aspects such as: (i) giving of gifts for the personal

14

benefit of HCPs, (ii) extending travel facilities to
HCPs for attending conferences / seminars as a delegate; (iii) extending hospitality to any HCP
(under any pretext). The applicability of UCPMP to Notified and non-Notified Medical Devices is, at present, not clear. The DoP is likely to issue clarification in that regard.

III. Drugs And Magic
Remedies (Objectionable
Advertisements) Act, 1954
(DMRA)
This legislation earlier applied only to drugs, but its application has been extended to medical devices by the Indian Courts. The DMRA prohibits advertisements containing references to diagnosis, cure, mitigation or prevention of a total of 54 diseases and disorders such as cancer, diabetes, epilepsy, leucoderma, paralysis, sexual impotence etc.

IV. The Competition Act, 2002
The growth of the medical devices industry, though protected under several IP laws, raises certain competition law issues (anti-trust). In India, the
Competition Act, 2002 is the principal legislation that regulates competition between market players.
Competition law scrutiny may trigger in three events: A. Anti-competitive Agreements
Medical devices companies enter into numerous agreements for doing business in India. From the lens of competition law, all agreements can be categorized as horizontal agreements and vertical agreements. Susceptible horizontal agreements would include agreements entered at the same level between medical devices manufacturers who trade in identical or similar products to restrict supply/ fix prices as a cartel whereas susceptible vertical agreements would include agreements between stake holders for exclusive distribution within a marked territory or a tie-in arrangement such as a health

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The Indian Medical Device Industry
Regulatory, Legal and Tax Overview

loan facility, for instance, extended exclusively on the purchase of a medical device. It is not necessary that an agreement has to be in writing for attracting competition law related scrutiny. Both horizontal and vertical agreements will be termed as anticompetitive only if they cause or are likely to cause appreciable adverse effect on competition.

B. Abuse of dominance
As innovation is the USP for many medical devices companies, it is likely that a few will attain monopoly or oligopoly like situation in the market.
When a company acquires market share to an extent that its pricing decisions affect the price of other products in the market as well, it is believed to have gain dominance. While dominance, as such, does not attract competition law related scrutiny, certain actions of a dominant company are looked at as ‘abuse of dominance’. Abuse of dominance is prohibited and penalized by the Competition Act,
2002. Selling products at a ‘predatory’ price, that is, at a price much below the cost price of manufacturing it, in order to make it unsustainable to competitors to manufacture similar or identical products with the intention of driving out competition, is a classic case of abuse of dominance.

C. Anti-competitive Acquisitions,
Mergers and Amalgamations
If any acquisition, merger or amalgamation (together referred to as ‘combination’) may lead to an adverse economic effect on competition, then the Competition
Act declares such a combination void. There are certain prescribed thresholds in terms of value of assets which trigger disclosure, documentation and consent requirement before the competition regulatory authority, the Competition Commission of India.
The need to provide protection to medical devices companies for their innovation is recognized under the Competition Act, 2002, however, the same is
9.

limited to a few instances as specified under Section
3(5) of the Competition Act.9

V. Legality of Business
With Physician Owned
Distributorships
Lately, in certain cities in India, the distribution arrangement which manufacturers and importers of medical devices have entered into is such where the distribution agency is owned or managed by individuals having a direct or indirect financial interest over certain hospitals or institutions which use the medical devices for patients (“Customers”).
Similarly, some physicians too, who prescribe medical devices are known to have a direct or indirect financial interest or control in the distribution agency.
The Indian Medical Council (Professional conduct,
Etiquette and Ethics) Regulations, 2002 (“MCI Code”) prescribes the code of medical ethics for the medical practitioners and, inter alia, covers under its ambit the requirements for the medical practitioners which regulate their relationships with pharmaceutical and medical devices companies. The MCI Code has laid down that certain acts, if undertaken by the medical practitioners, may be construed as unethical and amounting to misconduct, rendering him/her liable for disciplinary action which may extend to debarment from the practice of medicine.
Under Regulation 1.8, it is provided that “The personal financial interests of a physician should not conflict with the medical interests of patients.”
Therefore, where the professional judgment of a physician towards services rendered to a patient is influenced by a financial interest, it could lead to a violation of the above Regulation. However, note that the MCI Code is applicable only to medical practitioners (prescribing physicians). No legal liability vests on a medical devices company.

Section 3(5)of the Competition Act, 2002 reads as follows: Nothing contained in this section shall restrict—
i.

the right of any person to restrain any infringement of, or to impose reasonable conditions, as may be necessary for protecting any of his rights which have been or may be conferred upon him under:
(a) the Copyright Act, 1957 (14 of 1957);
(b) the Patents Act, 1970 (39 of 1970);
(c) the Trade and Merchandise Marks Act, 1958 (43 of 1958) or the Trade Marks Act, 1999 (47 of 1999);
(d) the Geographical Indications of Goods (Registration and Protection) Act, 1999 (48 of 1999);
(e) the Designs Act, 2000 (16 of 2000);
(f) the Semi-conductor Integrated Circuits Layout-Design Act, 2000 (37 of 2000);

ii. the right of any person to export goods from India to the extent to which the agreement relates exclusively to the production, supply, distribution or control of goods or provision of services for such export.

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Legal Regime
Provided upon request only

Doing business with physician owned distributorships may also trigger the provisions under anti-corruption legislations, such as the
Foreign Corrupt Practices Act in the US, the UK
Bribery Act, the Prevention of Corruption Act, 1988
(“PCA”), in certain situations, which could lead to penalties under such legislations. The PCA largely deals with the liability of public servants arising from their act of accepting or obtaining or agreeing to accept or attempting to obtain from any person, for himself or for any other person any gratification / things of value as well as the liability arising from the act for abetment in such events.
Medical practitioners appointed / hired by the
Government / Government-aided hospitals and institutions as employees and who are in the service of or remunerated (by way of fees or commission) by such Government / Government-aided hospitals and institutions will be deemed to be ‘public servants’ for the purposes of the provisions of the PCA.
The following actions of a Public Servant (as defined under the PCA) are punishable:
i. Accepting any gratification other than legal remuneration; ii. Taking gratification, in order, by corrupt or illegal means, to influence a Public Servant to forbear to do any official act, or in the exercise of their official functions to show favor or disfavor to any person, or to render or attempt to render any service or disservice to any person with the
Government;

connection with their official functions or of any
Public Servant to whom they are subordinate, or from any person whom they know to be interested in or related to the person so concerned.

A. Liability for Abetment
The PCA aims to control the source of bribery or corruption through the principle of “abetment”.
Thus, in addition to punishing the Public Servant who receives a bribe, the PCA also punishes the party abetting offences, whether or not the offence is committed as a consequence of abetment. Therefore, a person offering the bribe is also an offender under the PCA. Further, the principle of abetment is also provided under the Indian Penal Code .10
Whoever abets any offences / actions of the
Public Servants, as set out above, is punishable with imprisonment for a minimum term of six months extending up to five years along with fine irrespective of the fact as to whether or not that offence is committed in consequence of their abetment. A prescribing physician who is employed in a
Government / Government aided hospital or institution is a “Public Servant” for the purpose of the
PCA. Depending upon the facts and circumstances, it will have to be evaluated whether supplying medical devices to a distribution agency owned, directly or indirectly, by such a physician will trigger the provisions of the PCA which may lead to liability for the medical devices company.

iii. Obtaining valuable things, without consideration or for a consideration which the Public Servant knows to be inadequate from persons concerned in proceeding or business transacted by them or about to be transacted by them, or having any

10. Under the Indian Penal Code, bribery is an offence, whereby accepting or giving gratification for exercising or inducing the exercise of any electoral right is an offence, and both the acceptor and the giver of such bribe are liable to be punished under the code. Also, an act would be considered as an offence even if committed partially.[1] Further, abetment would also be considered as an offence, when a person offering a bribe, whether received or rejected, is held liable.

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6. Intellectual Property Regime
I. India’s Post-Trips Intellectual
Property Environment
In March 2005, new patent laws were passed in
India to comply with the World Trade Organization regulations and, specifically, the Trade Related
Aspects of Intellectual Property Rights Agreement
(“TRIPS”). Prior to the adoption of TRIPS, protection of intellectual property rights (“IPRs”) in India was of concern to the global and medical devices companies seeking to enter India. Post-TRIPS, India has wellestablished statutory, administrative, and judicial frameworks to safeguard IPRs. A patented invention
(including products) is given 20 years of protection in India. Well-known international trademarks such as Volvo and Whirlpool have been protected in India through judicial decisions even when they were not registered in India. Computer software companies have successfully curtailed piracy through court orders. Computer databases and software programs, which are widely used by the medical devices industry, have been protected under copyright.
Computer programs having technical application to the industry and computer programs in combination with hardware can now be patented in India. Though trade secrets and know-how are not protected by any legislation, they are protected under the common law and through contractual obligations. The courts, on the ground of breach of confidentiality, accord protection to confidential information and trade secrets. II. Patent Protection
The patent regime in India is governed by the Patents
Act of 1970 (“Patents Act”) and is supported by the
Patents Rules, 2003 (“Patents Rules”). The Patents Act provides for patenting of both, products and well as processes, for a span of 20 years from the date of filing of the patent application.

A. Patentability of Medical Devices
The term Invention is defined under the Patents Act as “a new product or process involving an inventive step 11 and capable of industrial application.12” The
Patents Act carves out an exception for medical, surgical, curative, etc., processes or other treatments for humans and animals and does not regard them as
“inventions”, thereby rendering these processes and treatments incapable of being patented. However, the carve-out does not extend to medical devices.
Thus, the invention of a medical device (or process) is granted a patent in India.
The patent rights with respect to any invention are created only upon grant of the patent by the Patent
Office following the procedure established by the
Patents Act and the Patents Rules. India follows a declarative system with respect to patent rights.
Patents are granted on a “first to file” basis. The patent application can be made either by (i) the inventor or
(ii) the assignee13 or (iii) legal representatives 14 of the inventor. B. Convention Applications
India is a signatory to both, the Paris Convention and the Patent Co-operation Treaty (“PCT”). Hence, foreign inventors have the option of taking benefits of both to obtain a patent. An application under the
Paris Convention should be preferred when time is of essence, whereas an application under the
PCT may be made when a patent is sought over the invention in multiple jurisdictions due to over-all cost-effectiveness. India, as a member of the Paris Convention, has published a list of convention countries under
Section 133 of the Patents Act. The convention application has to be filed within one year from the date of priority, that is, the date of filing of the first application in any Paris Convention country, and has to specify the date on which and the convention country in which the application for protection (first

11. Section 2(1) (ja) of the Patents Act: “inventive step means a feature of an invention that involves technical advance as compared to the existing knowledge or having economic significance or both and that makes the invention not obvious to a person skilled in the art.”
12. Section 2(1)(ac) of the Patents Act: “capable of industrial application in relation to an invention means that the invention is capable of being made or used in an industry.”
13. Section 2(1) (ab) of the Patents Act: “Assignee includes an assignee of the assignee and the legal representative of the deceased assignee and references to the assignee of any person include references to the assignee of the legal representative or assignee of that person”.
14. Section 2(1) (k) of the Patents Act: “Legal representative means a person who in law represents the estate of a deceased person.”

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application) was made. A priority document must be filed with the application.
As indicated above, since India is also a member of the PCT, a National Phase Application can also be filed in India, within 31 months from the priority date. C. Infringement
Section 48 of the Patents Act, 1970 provides that
(i) in case of product patents, the patentee has the exclusive right to prevent third parties, who do not have his consent, from the act of making, using, offering for sale, selling or importing for those purposes that product in India; and (ii) in case of process patents, the patentee has the exclusive right to prevent third parties, who do not have his consent, from the act of using that process, and from the act of using, offering for sale, selling or importing for those purposes the product obtained directly by that process in India. Any violation of the above rights will constitute an infringement of the patent. To seek remedy, the patentee is required to file a patent infringement suit before the appropriate Court. The
Court will, usually, injunct (i.e., direct) the infringing party to stop the use/sale immediately and, at the option of the patentee, may offer damages or account of profits.

D. Bolar Exception
If a patented invention is made, constructed, used, sold or imported ‘solely’ for uses reasonably related to the development and submission of information required under any law (Indian or foreign) that regulates such activities, then such acts do not amount to an infringement. This provision, known as the ‘Bolar provision, allows manufacturers to begin the research and development process in a timely manner in order to ensure that affordable equivalent generic medicines can be brought to the market immediately upon the expiry of the product patent. E. Parallel Imports
Import of patented products in India from a person authorized by the patentee to sell or distribute the product does not amount to an infringement.

F. Enforcement
In the case of infringement of an Indian patent, the patentee can file a suit in the appropriate court, which may be a District Court or a High Court. In case a patent infringement suit is filed in a district court and a counter claim is filed by a defendant, the patent infringement suit is transferred to a
High Court. In the infringement suit, the plaintiff can seek an injunction and damages or order for an account for profits from the potential infringer of the patent. Where the defendant proves that at the time of infringement he was not aware of and had no reasonable ground to believe that the patent existed, an order for damages or accounts for profits is not granted. Therefore, the patentee should take steps to convey to the general public that his product or process is patented. In an infringement suit, infringing goods, materials, and equipment used for their production can be seized, forfeited, or destroyed. The courts can appoint suo motu, or on the application by a party to the suit, scientific advisors to assist the court or to submit a report on a specified question.
The Patents Act does not provide for criminal action in case of patent infringement.

G. Rights prior to the Grant
From the date of publication of the application until the date of the grant of a patent, the applicant has the like privileges and rights as if a patent for the invention has been granted on the date of publication of the application. However, applicant is not entitled to institute any proceedings for infringement until the patent has been granted.

H. Secrecy Provisions 15
Any person resident in India is not allowed to apply for grant of patent outside India for any invention unless either of the following two conditions is satisfied: ￭￭ Obtaining written permission of the Controller

of Patents. The Controller is required to obtain consent of the Central Government before granting such permission for invention relevant for defense purpose / atomic energy. The application is to be disposed of within 3 months.
OR

15. Sections 35 to 43 of the Patents Act; Can you keep a secret? , February 13, 2005

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￭￭ Patent application for the same invention has

been first filed in India at least six weeks before the application outside India and there is no direction passed under Section 35 for prohibiting
/restricting publication/ communication of information relating to invention.

This section is not applicable to an invention for which an application for protection has first been filed in a country outside India by a person resident outside India. However, this provision will apply if the first filing is intended to be made in US, since US applications are required to be filed by the inventors and not assignees of the inventors.

III. Data Exclusivity
When the Indian Government began the process of introducing the 2nd Amendment to the Patents Act in 2002, multinational companies approached the
Government with a recommendation to introduce a data exclusivity provision consistent with Article
39.3 of TRIPS. However, the Government had refused to accede to such a request.
The Satwant Reddy committee that was formed to study and provide recommendations on data exclusivity submitted its report in 2007. In the report, it was recommended that India should aspire for a fixed period of data exclusivity (5 years). However, these recommendations were not implemented due to resistance from domestic manufacturers and strong disapproval of the Health Ministry. Recent reports suggest that the Government is thinking on the lines of accepting the recommendations on data exclusivity and may offer ‘protection against disclosure’ to the pharma/medical devices companies. However, the Government may take some more time to announce its decision on
‘Protection against unfair commercial use’ as the
Union Ministry of Health and the DoP wants further discussions with stakeholders.

IV. Trademarks
In India, trademarks are protected both under statutory and common law. The Trade and
Merchandise Marks Act, 1940 was India’s first legislation with respect to trademarks and was later replaced by the Trade and Merchandise Marks

Act, 1958 (TM Act, 1958). The TM Act was further updated in 1999 to comply with TRIPS and is now known as The Trade Marks Act, 1999 (“TM Act
1999”). The TM Act 1999 allows for the registration of service marks and three-dimensional marks. India follows the Nice Classification of goods and services, which is incorporated in the Schedule to the Rules under the TM Act, 1999. Medical devices are covered under Class 10.
Class 44 covers the services for medical services, veterinary services and cosmetics; and Class 42 covers scientific and technological services and research and design relating thereto 16.
Class 44: Medical services; veterinary services; hygienic and beauty care for human beings or animals; agriculture, horticulture and forestry services. Class 42: Scientific and technological services and research and design relating thereto; industrial analysis and research services; design and development of computer hardware and software.
The TM Act 1999 provides a procedure to search trademarks. It is a prudent practice that often prevents potential litigation or opposition to conduct the search for conflicting trademarks (whether registered or pending) before using or applying for any trademark.
The TM Act 1999 has set forth absolute and relative grounds of refusal of trademark registration. These grounds are akin to the provisions of the UK Trade
Mark Act of 1994. The trademark can be registered even if the mark is proposed to be used in India i.e., even if prior to the date of application no goods have been sold under the applied trademark. The term of registration and renewal is 10 years. Foreign companies can license trademarks in India under the appropriate license / Registered User Agreement.
The concept of “well-known trademark” has been recognized under the TM Act 1999. A well-known trademark prohibits registration of a mark which is merely a reproduction or imitation of a well-known mark - even if used in connection with different goods or services.
A trademark can be used without registration and can be protected under common law but not under

16. http://support.dialog.com/techdocs/international_class_codes_tmarks.pdf

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statutory law. Recently Indian courts have held that copying international names (even if the product is not made in India) is not permissible.
In 2013, India joined the international system of registration of trade marks, popularly known as the
Madrid Protocol. The effect of participating in the international system is that a domestic applicant who is granted a trade mark under the Madrid

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Protocol will be able to enforce his/her rights over the trade mark in foreign jurisdictions as if the trade mark was granted by the national trade mark registry of the foreign jurisdiction. Similarly, a trade mark granted to a company under the Madrid Protocol by an application in a foreign jurisdiction will be protected under the TM Act, 1999 as if the trade mark was registered in India.

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7. Taxation Regime
I. Direct Taxes
A. General overview
Taxation of income in India is governed by the provisions of the Income Tax Act, 1961, as amended annually by the Finance Acts (“ITA”). Under the
ITA, residents are subject to tax in India on their worldwide income, whereas non-residents are taxed only on Indian source income i.e., income that accrues or arises in India, is deemed to accrue or arise in India, or which is received or is deemed to be received in India. Section 9 of the ITA deems certain income of non-residents to be Indian source income.
Under section 9(1), “capital gains” are considered to have their source in India and are taxable in India if they arise, directly or indirectly, through the transfer of a capital asset situated in India. Similarly, the
“business income” of a non-resident is taxable in
India only if it accrues or arises, directly or indirectly, through or from any business connection in India.
The Indian tax rates applicable to non-residents could be up to 40% (all tax rates provided herein are exclusive of surcharge and cess discussed below) on taxable business income and capital gains.
Section 90(2) of the ITA is a beneficial provision which states that, where the taxpayer is situated in a country with which India has a double tax avoidance agreement (“Indian Tax Treaty”), the provisions of the ITA apply only to the extent that they are more beneficial to the taxpayer. Rules under the Indian Tax
Treaties are generally more beneficial to the taxpayer than those under domestic law (ITA) and hence, it is, typically, advantageous for a non-resident taxpayer to structure his investments or business through a jurisdiction which has signed an Indian Tax Treaty.
In recent times, the Indian income tax authorities have been adopting an aggressive approach to transactions where any form of exemption from taxation is sought by the taxpayer. Their approach is even more hostile when the transaction in question has an offshore element to it. Hence, it is has become critical to ensure that offshore transactions are structured in a manner such that legitimate tax exemptions are not challenged by the tax department. Before delving into specific tax issues with respect to medical devices, set out below is a snap shot of
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the taxation regime in India. All tax rates mentioned herein are exclusive of surcharge on tax (for companies with total income exceeding INR 10 million but less than 100 million) which is presently at 5% for domestic companies and 2% for foreign companies and an education cess on tax which is presently at 3%.
The 2015 Budget proposes to increase the rate of surcharge on domestic companies by 2%.

B. Taxes Applicable to Companies
Under the ITA, the corporate income tax rate is
30% for an Indian company and 40% for a foreign company (where such income is taxable in India).
Further, dividend paid by Indian companies is exempt from income tax in the hands of all shareholders, irrespective of their residential status.
However, the company distributing the dividends is required to pay a dividend distribution tax of 15% on a gross basis.
The 2015 Budget has proposed to reduce the corporate tax rate from 30% to 25% (excluding surcharge and cess) over the next four years, coupled with rationalization and removal of various exemptions and rebates.

C. Minimum Alternate Tax
If the tax payable by any company, including a foreign company taxable in India, is less than
18.5% of its book profits, it will be required to pay
Minimum Alternate Tax under the ITA which will be deemed to be 18.5% of such book profits. The carry over and set-off is allowed only up to ten assessment years immediately succeeding the assessment year in which such tax credit becomes allowable and is governed by the following basic principles:
i. The amount of tax credit that is allowed shall be the difference of the Minimum Alternate Tax paid and the amount of tax payable by the taxpayer on his total income as per the other provisions of the
ITA.
ii. Set off in a future assessment year in respect of brought forward tax credit is allowed only to the extent of the difference between the tax payable by the taxpayer on his total income and the tax that

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would have been payable under the Minimum
Alternate Tax provisions.

D. Interest
Interest received by or accrued to a non-resident from an Indian resident on foreign currency denominated loans currently attracts a withholding tax of 5% as per the Finance Act, 2014. On the other hand, a withholding tax of 40% is applicable to interest payments made to a non-resident arising out of rupee denominated loans (though it may be reduced to 10/15% under some of the Indian Tax Treaties).
Further, interest is a tax-deductible expense for the
Indian payer company, provided the applicable tax has been withheld before making the payments to the non-resident.

E. Royalties / Fees for Technical Services
Payments towards royalty and fees for technical services (“FTS”) currently attract a withholding tax at the rate of 25% as per the provisions of the ITA on gross basis as proposed in the 2014 budget. Further, where royalty or FTS is paid to a foreign company and is effectively connected to a PE of the foreign company in India, then such payments would be taxed as business profits on “net income” basis.
The 2015 Budget proposes to reduce the withholding rates applicable in case of royalty and FTS to offshore entities from 25% to 10% (on a gross basis).

F. Capital Gains

shares (that is, shares of a private limited company or unlisted public company including foreign companies) and units of mutual funds (except equityoriented funds) would be treated as long term only when they are held for more than 36 months rather than the current 12 months.17 These gains are taxed as follows: ￭￭ LTCG arising on transfer of listed equity shares

(including units of an equity oriented mutual fund) on a recognized stock exchange in India will be exempt from tax in India.

￭￭ STCG arising on transfer of listed equity shares

(including units of an equity oriented mutual fund) on a recognized stock exchange in India will be taxed at the rate of 15%.

￭￭ Capital gains realised on sale of listed equity

shares not executed on a recognised stock exchange in India would be taxed at the rate of
10% for long-term gains and as normal income in case of short-term gains.

￭￭ Capital gains realised on sale of unlisted Indian

securities would be taxed at the rate of 10% for long-term gains at the hands of a non-resident investor, 20% at the hands of a resident investor, and as normal income in case of short-term gains.

The exemption on long term capital gains and reduction of rate for short term capital gains on the sale/transfer of the equity shares on a recognised stock exchange in India is only allowed where the applicable Securities Transaction Tax has been paid on the transaction.

G. Incentives under the ITA

Under the ITA, capital gains earned on the transfer of capital assets are classified into short-term capital gains (“STCG”) and long-term capital gains (“LTCG”) depending on the period of holding. Earlier, gains from shares held for a period of more than 12 months were categorized as long term. If the holding period is less than 12 months, then was considered to be in the nature of short-term gains.

The Government of India has taken various policy initiatives in order to strengthen scientific research and development in the various sectors, including the medical device sector. The term “scientific research” has been defined in the ITA to include activities for the extension of knowledge in the fields of natural or applied science. Scientific research can be carried out either in-house or by contributing to outside agencies engaged in scientific research.

However, the Finance Act, 2014 amended the definition of a short term capital asset to restrict the beneficial holding period of 12 months only to listed securities, thereby excluding unlisted shares (whether of a public limited company or a private company) from this benefit. Thus, unlisted

Typically, in the medical device industry, fiscal incentives are awarded to research and development units towards the development of new technology that adds medical benefits and for life-saving medical equipment. For example, certain life-saving medical equipment such as D.C. defibrillators for internal

17. Section 2 (42A),Income – tax Act, 1961 as amended by the Finance (No. 2) Act, 2014

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use and pace makers, haemodialysors, heart lung machine, color doppler, magnetic resonance imaging system and bone marrow transplant equipment are allowed depreciation at the rate of 40%.

i. In-house Research and Development
Companies that have incurred any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the
Department of Scientific and Industrial Research, are allowed a deduction of 200% of such expenditure.
Expenditure on scientific research includes expenditure incurred on medical devices trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act.
It should be borne in mind here that no company would be entitled to the aforementioned deduction unless it enters into an agreement with the
Department of Scientific and Industrial Research for co-operation in such research and development facility and for audit of the accounts maintained for that research and development facility.
Currently, this deduction is available for expenses incurred prior to March 31, 2017.

ii. Contributions made to other Institutions for
Scientific Research
The ITA provides for a deduction of 200% of sums paid to any scientific research association (having, as its object, the undertaking of scientific research), or to any university, college or other institution, for the purpose of scientific research approved by the concerned authority.

iii. Capital Expenditure
Under Section 35(1)(iv) read with Section 35(2) of the ITA, the whole of any expenditure on scientific research (other than expenditure on acquisition of any land) being capital in nature, incurred after
March 31, 1967 is allowed as a deduction. Further, under Explanation 1 to Section 35(2) of the ITA, the aggregate capital expenditure on scientific research incurred three years immediately prior to the commencement of business is allowed as a deduction in the year in which the business is commenced.

H. Potential Permanent Establishment issues Under the ITA, business income of a non-resident is taxable in India (at the rate of 40%) if it accrues or arises, directly or indirectly, through or from any
‘business connection’ in India. Similarly, under the
Indian Tax Treaties, typically, the business income of a non-resident is taxable only to the extent that it is attributable to a Permanent Establishment (“PE”) of such non-resident in India. The concept of PE under typical Indian Tax Treaties is expressed as an exhaustive list of factors, as opposed to the “business connection” rule contained in the ITA, which has no exhaustive definition in the ITA and which has been afforded a wide interpretation by Indian courts in the past. Therefore, there may be situations where a nonresident is considered to have a business connection in India, but no PE. As mentioned earlier, since it is open for the non-resident taxpayer to choose to be treated under the more beneficial regime, a non-resident may rely on the PE rule under the applicable Indian Tax Treaty rather than the business connection rule in the ITA.
The term PE has been succinctly defined by the
Andhra Pradesh High Court in the case of CIT v.
Visakhapatnam Port Trust 18, as follows:
“In our opinion, the words ‘permanent establishment’ postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country.” The Indian Tax Treaties typically lay down certain criteria to determine whether a foreign enterprise earning business income from India would be construed to have a PE in India. Some of these tests are as follows:
i. Fixed place of business PE: A foreign enterprise is deemed to have a PE in India if the business of foreign enterprise is, wholly or partly, carried on through a fixed place of business in India. ii. Service PE – Further, under some Indian Tax
Treaties, a foreign enterprise may be considered to have a PE in India due to the presence of its

18. 1983 144 ITR 146 AP

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personnel in India, who render services beyond a specified time period or to a related enterprise. For instance, under the India-US tax treaty, a PE is said to be constituted where there is:
“(l) the furnishing of services, other than included services as defined in article 12 (royalties and fees for included services), within a Contracting State by an enterprise through employees or other personnel, but only if:
i. activities of that nature continue within that State for a period or periods aggregating to more than 90 days within any twelve-month period; or ii. the services are performed within that State for a related enterprise (within the meaning of paragraph 1 of article 9 (associated enterprises).” iii. Agency PE – Indian Tax Treaties typically contain a provision whereby an Indian entity may be treated as a PE of a foreign enterprise if the Indian entity, acting on behalf of the foreign enterprise, has and habitually exercises an authority to conclude contracts on behalf of the foreign enterprise. Moreover, some Indian Tax Treaties, such as the India-US tax treaty, also contain an additional provision whereby an Indian entity may be regarded as a PE of the foreign enterprise, if the Indian entity maintains a stock of goods from which it regularly delivers such goods on behalf of the foreign enterprise and contributes to the sale of such goods. An agent of independent nature is considered as an exception to the Agency PE rule.
As is clear from the discussion above, the issue as to whether any activity of a foreign entity in India results in a PE of that foreign entity in India depends on the facts and circumstances of each case.

Although there is no definition of AOP under the
ITA, there have been a number of cases in which this issue has been discussed. In the case of Commissioner of Income Tax v. Indira Balkrishna 19, the Supreme
Court has explained the concept of AOP as “an association of persons must be one in which two or more persons join in a common purpose or a common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains.”
Further, in the case of Deccan Wine and General
Stores 20, the Andhra Pradesh High Court further examined this concept and observed that “it is, therefore, clear that an association of persons does not mean any and every combination of persons. It is only when they associate themselves in an incomeproducing activity that they become an association of persons. They must combine to engage in such an activity; the engagement must be pursuant to the combined will of the persons constituting the association; there must be a meeting of the minds, so to speak. In a nutshell, there must be a common design to produce income. If there is no common design, there is no association. Common interest is not enough. Production of income is not enough.”
Although there is lack of clarity in the Indian law on the concept of an AOP, broadly the essential conditions for constituting an AOP may be said to be:
￭￭ Two or more persons
￭￭ Voluntary Combinations
￭￭ A common purpose or common action with object

to produce profit or gains.

￭￭ Combination in Joint Enterprise

I. Issue of Taxation as an Association of Persons
Depending on the manner in which it is structured, a collaborative research or manufacturing arrangement could run the risk of being taxed under the ITA as a separately taxable unit called an association of person (“AOP”). This is a significant issue for the foreign enterprise which outsources these functions, given that, if such arrangement is treated as an AOP, the share of profits of the
AOP attributable to the foreign enterprise, which otherwise would not have been subjected to tax in
India (in the absence of a PE of the foreign enterprise in India), could be taxable at the rate of 40%.

￭￭ Some kind of scheme for common management.

J. Indian Transfer Pricing Issues
Where related entities are looking to enter into any commercial arrangement, for example, to commercialize products in a foreign territory, or when one entity is looking to contract research or manufacturing functions to an associated enterprise
(definition below) as a service, the transaction value of goods or fees payable to the service provider should take into account transfer pricing issues.
In India, transfer pricing regulations (“TP
Regulations”) were introduced on April 1, 2001.

19. [1960] 39 ITR 546 (SC)

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The Indian Income Tax Act, 1961 lays down provisions that deal with the computation of income arising from “international transactions” between
“associated enterprises”. The basic rule enshrined in the TP Regulations is that any income arising from an
“international transaction” shall be computed having regard to the arm’s length price (discussed below).
The TP Regulations define “associated enterprise” to include any enterprise that participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of another enterprise. Enterprises may also be regarded as
“associated” as a result of circumstances such as interdependence by virtue of borrowings, guarantees, licensing of trademarks, purchase, sales or where enterprises have “mutual interest” as may be prescribed by the revenue authorities.
Here, “enterprise” is defined broadly and covers any entity (including a permanent establishment) which is or proposes to be engaged in any activity relating to the provision of goods / services of any kind, investment activity, dealing in securities and extending loans. The term “international transaction” has been defined as a transaction between two or more associated enterprises, either or both of which are non-residents. As mentioned earlier, the basic principle is that any income arising from such an
“international transaction” shall be computed having regard to the “arm’s length price”.

i. Arm’s length price
Arm’s length price is the price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. The OECD Transfer Pricing
Guidelines for Multinational Enterprises and Tax
Administrations, 2010 (“Guidelines”) provide that the application of the arm’s length principle is generally based on a comparison of all the relevant conditions in a controlled transaction with the conditions in an uncontrolled transaction. Under the Guidelines, comparability is achieved when there are no differences in the conditions that could materially affect the price or when reasonably accurate adjustments can be made to eliminate the effects of any such differences. The analysis of the controlled transactions with uncontrolled transactions is the very basis of ascertaining whether the controlled transactions adhere to the arm’s length standard.
The arm’s length price in relation to an international transaction is to be determined by any of the following methods depending on which is the most appropriate given the business of the enterprises:

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￭￭ Comparable uncontrolled price method;
￭￭ Resale price method;
￭￭ Cost plus method;
￭￭ Profit split method;
￭￭ Transactional net margin method;
￭￭ Such other method that may be prescribed by

the Central Board of Direct Taxes (till date, no other method that may be considered appropriate in determining the arm’s length price has been prescribed). A challenge faced by Indian medical devices companies with respect to transfer pricing is that the TP Regulations do not specifically deal with intangibles, or provide a basis of computing the arm’s length price, while dealing with the same.
As opposed to transactions involving tangibles, where a pricing situation in a controlled transaction can be compared with that of an uncontrolled transaction (provided all other conditions are similar or identical), in case of intangibles / intellectual property, it is very difficult to identify a comparable given the unique nature of the intellectual property involved. Hence, it becomes difficult to find a comparable based on which the arm’s length price may be ascertained.
It is important to note that the TP Regulations also require persons entering into international transactions to maintain prescribed documents and information, and to obtain and furnish to the revenue authorities an accountant’s report containing prescribed details regarding the international transactions. Stringent penalties have been prescribed for non-compliance with the procedural requirements and for understatement of profits.

II. Indirect Taxes
India has a well-developed tax structure with clearly demarcated authority between the Central and the State Government and local bodies. The
Indian Central Government levies taxes on income
(except tax on agriculture income, which the State
Government can levy), custom duties, central excise and service tax. On the other hand, Value Added Tax
(Sales tax in states where Value Added Tax (“VAT”) is not yet in force), stamp duty, land revenue and tax on professions are levied by the State Government.

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Although the cost of labour and production in
India is significantly lower than other countries, the ultimate price of the goods is on the higher side on account of a multi-layer and multi-stage levy of indirect taxes. As a result, the growth of the Indian industry, including the medical devices industry, has been stunted. Further, the greater concern is that the appreciation in the cost of goods, as a result of levy of such taxes, is indirectly passed on to the end customer, namely, the common man, who bears the brunt especially in case of essential products such as medical devices. It is for this reason that efforts are being made to replace the existing indirect tax system
(which provides for a multi-layer and multi-stage levy for goods and services) with a unified Goods and
Services Tax (“GST”) system.

A. Service tax
Service tax was introduced vide Chapter V to the
Finance Act, 1994 and further widened in scope by the subsequent Finance Acts. The Finance Act,
2012 has brought about substantial changes in the provisions of the Finance Act, 1994 dealing with levy and collection of service tax. Section 66B of the Finance Act, 1994 specifies the charge of service tax, which is essentially that the service tax shall be levied on all services provided or agreed to be provided in a taxable territory, other than services specified in the negative list or otherwise exempt under notification. Currently, service tax is levied at the rate of 12.36% on a gross basis on the specified taxable services. Service tax from
April 1, 2011 is payable on an accrual basis instead of realization of value of the taxable service. Some of the taxable services with respect to medical devices are maintenance services given to owners of medical equipment such as clinical establishments, management consulting services, consultancy or technical services by a consulting engineer, business auxiliary services, intellectual property services, etc.
The 2015 Budget proposes to increase the rate of service tax to from 12.36% (inclusive of cesses) to
14%.

B. Customs duty
Customs duties are levied whenever there is trafficking of goods through an Indian customs barrier, i.e., levied both for the export and import of goods. Export duties are competitively fixed so as to give advantage to the exporters. Consequently, a large share of customs revenue is contributed by

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import duty. Customs duty primarily has a ‘Basic
Customs Duty’ for all goods imported into India and the rates of duty for classes of goods are mentioned in the Customs Tariff Act, 1975 (the “Tariff Act”), which is based on the internationally accepted Harmonized
System of Nomenclature (“HSN”). The general rules of interpretation with respect to tariff are mentioned in the Tariff Act. The rates are applied to the transaction value of goods (for transactions between unrelated parties) as provided under the Customs
Act, 1962 (the “Customs Act”) or by notification in the official gazette. A further duty, known as
Additional Customs Duty or the Countervailing Duty
(“CVD”) is imposed to countervail the appreciation of end price due to the excise duty imposed on similar goods produced indigenously. To bring the price of the imported goods to the level of locally produced goods which have already suffered a duty for manufacture in India (excise duty), the
CVD is imposed at the same rate as excise duty on indigenous goods. In addition to the above, there are also Additional Duties in lieu of State and local taxes
(“ACD”) which are also imposed as a countervailing duty against sales tax and value added tax imposed by
States.
The instruments and appliances used in medical, surgical, dental or veterinary sciences are generally levied with a Basic Customs Duty of 7.5%, CVD of
6% and the ACD is currently levied at the rate of
4%. An exemption from customs duty is available for “Radioimmunoassay kits” (medical equipment containing radioactive isotopes) subject to the prior permission of the Atomic Energy Regulatory Board.
Further, the Central Government, if satisfied that circumstances exist which render it necessary to take immediate action to provide for the protection of the interests of any industry, from a sudden upsurge in the import of goods of a particular class or classes, may provide for a Safeguard Duty. Safeguard Duty is levied on such goods as a temporary measure and the intention for the same is protection of a particular industry from the sudden rise in import.
In the Indian medical devices Industry, given that a large number of companies are involved in the import and subsequent resale of unpackaged medical devices, such import is subject to a levy of a special duty termed as Special Additional Duty (“SAD”).
An exemption has been provided to pre-packaged goods where the sale price has been declared on the package. The SAD paid is only available as a refund if it is proved that state level VAT is paid on the subsequent sales of the imported products. The issue often faced by companies is that the process of obtaining refunds of SAD is tedious and time

© Nishith Desai Associates 2015

The Indian Medical Device Industry
Regulatory, Legal and Tax Overview

consuming and the time limit for filing the refund is stipulated as one year, which often leads to a failure in obtaining rightful refunds.
Under Section 9A of the Tariff Act, the Central
Government can impose an Anti-dumping Duty on imported articles, if it is imported into India at a value less than the normal value of that article in other jurisdictions. Such duty is not to exceed the margin of dumping with respect to that article. The law in India with respect to anti-dumping is based on the ‘Agreement on Anti-Dumping’ pursuant to
Article VI of the General Agreement on Tariffs and
Trade, 1994.

C. Sales Tax and VAT
Central Sales Tax (“CST”) is imposed on the sale of goods in the course of inter-state trade or commerce.
Sales of goods are deemed to take place in the course of inter-state trade if they result in the movement of goods from one state to another, or if such sales are effected by the transfer of documents of title to the goods during their movement from one state to another. No CST is levied on direct imports or exports or the purchase or sale effected in the course of imports or exports. The process of phasing out CST commenced with a reduction in the CST rate from
4% earlier to 2% on April 1, 2008.
VAT is levied on the sale of goods within a particular state at the two main VAT rates of 4% and 12.5%.
VAT is a state specific levy and most states in India have introduced specific legislations for VAT based on the Model VAT legislation circulated by the
Empowered Committee of State Finance Ministers.
Further, under the VAT regime, a system of tax credits on input goods procured by the dealer is also available, to avoid the cascading effect of taxes that was prevalent under the erstwhile sales tax regime.

© Nishith Desai Associates 2015

D. Cenvat
Cenvat is a duty of excise which is levied on all goods that are produced or manufactured in India, marketable, movable and covered by the excise legislation. The peak duty rate was reduced from
16% to 14% by the Finance Act, 2008 and was further reduced to 8%, although there are other rates ranging upwards, or based on an ad valorem/quantity rate.
The instruments and appliances used in medical, surgical, dental or veterinary sciences are generally levied with excise duty of 12%.
In order to avoid the cascading of excise duty and double taxation, the CENVAT scheme has been framed under the Central Excise Act and the
CENVAT Credit Rules. Under the CENVAT Credit
Rules, a manufacturer of excisable goods can avail of credit of duty paid on certain inputs and capital goods barring certain inputs used in the specified manufacture of certain products. The credit can be utilized towards the duty payable on removal of the final product. It must also be noted that the CENVAT scheme also takes into account credits with respect to any service tax paid by the manufacturer on input services received.

E. Research and Development Cess
All payments made towards the import of technology are subject to a cess of 5% under the Research and
Development Cess Act, 1986. Technology includes any special or technical knowledge or any special service required for any purpose whatsoever by an industrial concern under any foreign collaboration, and includes designs, drawings, publications and technical personnel.

27

Provided upon request only

8. Conclusion
The Indian medical device sector continues its upward march of growth and is strongly supported by India’s robust legal framework. The regulatory framework, though, is under-developed and poses a challenge. A new regulatory regime is the need of the hour. The new government, at the center, has shown promise and it is likely that a new law that will overhaul the regulatory framework applicable to medical devices may soon see the light of day.

28

The market, which was until now dominated by imported medical devices, may face fierce competition from domestically manufactured devices as many multi-nationals too have started shop locally. Thus, the sector presents an exciting investment opportunity to the players within India as well as outside.

© Nishith Desai Associates 2015

The Indian Medical Device Industry
Regulatory, Legal and Tax Overview

Appendix I
List of Notified Medical Devices
1.

Disposable Hypodermic Syringes

2.

Disposable Hypodermic Needles

It is noteworthy that in addition to the above medical devices, the following substances are also regulated as ‘Drugs’ under Drugs & Cosmetics Act, 1940 &
Rules, 1945 there under:-

3.

Disposable Perfusion Sets

1.

Blood Grouping Sera

4.

In vitro Diagnostic Devices for HIV,
HBsAgand HCV

2.

Skin Ligatures, Sutures and Staplers

5.

Cardiac Stents

3.

Intra-uterine devices (Cu-T)

6.

Drug Eluting Stents

4.

Condoms

7.

Catheters

5.

Tubal Rings

8.

Intra Ocular Lenses

6.

Surgical Dressings

9.

I.V. Cannulae

7.

Umbilical Tapes

10.

Bone Cements

8.

Blood/ Blood Component Bags

11.

Heart Valves.

12.

Scalp Vein Set

13.

Orthopedic Implants.

14.

Internal Prosthetic replacements

© Nishith Desai Associates 2015

29

Provided upon request only

The following research papers and much more are available on our Knowledge Site: www.nishithdesai.com
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E-Commerce in

and Operations

India

The Curious Case of the Indian Gaming
Laws

January 2015

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Corporate Social

Joint-Ventures in

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Social Business

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Models in India

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Doing Business in

The New Era of

India

September 2014

Private Equity and Private Debt

Convergence

Investments in
India

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July 2014

February 2015

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The Indian Medical Device Industry
Regulatory, Legal and Tax Overview

Research @ NDA
Research is the DNA of NDA. In early 1980s, our firm emerged from an extensive, and then pioneering, research by Nishith M. Desai on the taxation of cross-border transactions. The research book written by him provided the foundation for our international tax practice. Since then, we have relied upon research to be the cornerstone of our practice development. Today, research is fully ingrained in the firm’s culture.
Research has offered us the way to create thought leadership in various areas of law and public policy. Through research, we discover new thinking, approaches, skills, reflections on jurisprudence, and ultimately deliver superior value to our clients.
Over the years, we have produced some outstanding research papers, reports and articles. Almost on a daily basis, we analyze and offer our perspective on latest legal developments through our “Hotlines”. These Hotlines provide immediate awareness and quick reference, and have been eagerly received. We also provide expanded commentary on issues through detailed articles for publication in newspapers and periodicals for dissemination to wider audience. Our NDA Insights dissect and analyze a published, distinctive legal transaction using multiple lenses and offer various perspectives, including some even overlooked by the executors of the transaction. We regularly write extensive research papers and disseminate them through our website. Although we invest heavily in terms of associates’ time and expenses in our research activities, we are happy to provide unlimited access to our research to our clients and the community for greater good.
Our research has also contributed to public policy discourse, helped state and central governments in drafting statutes, and provided regulators with a much needed comparative base for rule making. Our ThinkTank discourses on Taxation of eCommerce, Arbitration, and Direct Tax Code have been widely acknowledged.
As we continue to grow through our research-based approach, we are now in the second phase of establishing a four-acre, state-of-the-art research center, just a 45-minute ferry ride from Mumbai but in the middle of verdant hills of reclusive Alibaug-Raigadh district. The center will become the hub for research activities involving our own associates as well as legal and tax researchers from world over. It will also provide the platform to internationally renowned professionals to share their expertise and experience with our associates and select clients. We would love to hear from you about any suggestions you may have on our research reports. Please feel free to contact us at research@nishithdesai.com © Nishith Desai Associates 2015

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The Indian Medical Device Industry
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