2024 (8) TMI 1425 - AT - Income Tax

Accrual of income in India - receipt as FIS/FTS - scope of India - Canada Tax Treaty - assessee, incorporated under the laws of Canada, engaged in rendering pre-clinical laboratory services to enable the determination of a safe dose and assess the potential toxicity of new drugs prior to human clinical trials by way of conducting in vitro and in vivo tests and trials. These services are largely catered towards Indian customers in the pharmaceutical, medical device and biotechnology industries. The Indian customers provide samples prior to undertaking human clinical trials which is tested by the Assessee. HELD THAT - As pre-clinical laboratory services rendered by the assessee to its customers in India were quite limited items of the benefit which the client would derive from any intellectual property, hardware, software or knowledge of its employees. As decided in case of sister concern of assessee 2023 (6) TMI 176 - ITAT BANGALORE Charles River Laboratories Inc. utility of the services available in the form of a report, though highly technical in nature, comes to an end, little thereafter, if not immediately, after its rendition. The Support that the Indian entity seeks after the report is delivered is to understand the report from the assessee. The elements necessary for make available is absent in the services rendered by the assessee to its Indian customers/clients, inasmuch as even for the said reports, the customers have to continuously refer to the assessee and the same is not freely r made available to the Indian customers. Thus, technical services rendered by the affiliates do not make available technical knowledge, experience, skill, know-how or process while preparing these reports for their, Indian customers/clients. In light of the aforementioned judicial decisions, we are of the considered view that the service recipient of the assessee is unable to make use of the said technology only by itself in its business or for its own benefit without recourse to the assessee year after year The clients of the assessee, on receiving the report may use it for commercial or technical knowledge to evaluate the product and material, but that report is not of the nature by which, independently, any technological knowledge was transferred to the customers. This report does not contain any information that would enable the client to carry on the clinical test on new products in future on its own accord. It is not disputed that this study/testing of samples was conducted by the assessee outside India based laboratories and merely the samples were provided by the clients and the assessee was supposed to conduct the study only according to the protocol provided by the assessee. Thus, we are convinced that the ld. tax authorities below have fallen in error to consider the receipt as FIS/FTS and, consequently, we sustain the grounds and allow the appeal of the assessee.

Summary

Issues Involved:
1. Characterization of income as Fees for Technical Services (FTS) / Fees for Included Services (FIS) under the Income Tax Act and the India-Canada Tax Treaty.
2. Levy of interest under section 234B of the Income Tax Act.
3. Initiation of penalty proceedings under section 270A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Characterization of Income as Fees for Technical Services (FTS) / Fees for Included Services (FIS):
The assessee, incorporated under Canadian law, provides pre-clinical laboratory services to Indian clients in the pharmaceutical, medical device, and biotechnology sectors. These services include in vitro and in vivo tests and trials to determine the safety and potential toxicity of new drugs. The primary contention was whether the income earned by the assessee from these services should be classified as FTS/FIS under the Income Tax Act and the India-Canada Tax Treaty.

The Assessing Officer (AO) observed that the assessee received revenue amounting to Rs. 4,28,68,986/- but did not offer any revenue for taxation. Consequently, the AO issued a show-cause notice and, upon receiving no reply, proposed to add the revenue to the total income, treating it as FTS/FIS. The Dispute Resolution Panel (DRP) directed the AO to reconsider the submissions made by the assessee, emphasizing the need for a reasoned and speaking order.

The assessee argued that the services provided do not "make available" any technical knowledge, experience, skill, know-how, or processes to the clients, as required under Article 12(4) of the India-Canada Tax Treaty. The assessee relied on several judicial precedents, including CIT v. De Beers India Minerals Pvt Ltd and Director of Income-tax (International taxation) vs Sun Micro Systems India Private Limited, to support their claim that the services did not meet the "make available" criteria.

The AO, however, concluded that the services provided by the assessee, such as Toxicokinetic reporting and Immunogenecity analysis, were technical and specialized, thus qualifying as FTS/FIS. The AO also noted that the services provided enduring benefits to the clients, enabling them to use the knowledge in the future.

The Tribunal examined the master service agreements between the assessee and its clients, Dr. Reddy's Laboratories Ltd. and Vyome Biosciences Pvt. Ltd., and found that the services provided were limited to conducting studies as per the protocol provided by the clients. The Tribunal noted that the reports generated did not transfer any technological knowledge that would enable the clients to conduct similar tests independently in the future.

The Tribunal relied on the decision in the case of the assessee's sister concern, Charles River Laboratories Inc. vs. ACIT, and the interpretation of "make available" by the Karnataka High Court in CIT vs. De Beers India Minerals (P) Ltd. The Tribunal concluded that the services rendered by the assessee did not "make available" technical knowledge, experience, skill, know-how, or processes to the clients. Consequently, the income earned by the assessee was not liable to be taxed as FTS/FIS under the India-Canada Tax Treaty.

2. Levy of Interest under Section 234B:
The assessee contended that the AO erred in levying additional interest under section 234B of the Income Tax Act. Given the Tribunal's decision that the income earned by the assessee was not taxable as FTS/FIS, the levy of interest under section 234B was also deemed incorrect.

3. Initiation of Penalty Proceedings under Section 270A:
The assessee argued that the AO erred in initiating penalty proceedings under section 270A of the Income Tax Act. In light of the Tribunal's decision that the income was not taxable as FTS/FIS, the initiation of penalty proceedings was also considered unjustified.

Conclusion:
The Tribunal allowed the appeal of the assessee, concluding that the income earned from pre-clinical laboratory services was not in the nature of FTS/FIS under the India-Canada Tax Treaty. Consequently, the levy of interest under section 234B and the initiation of penalty proceedings under section 270A were also deemed incorrect. The Tribunal directed the AO to provide appropriate relief based on the said grounds of appeal.