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2013 (11) TMI 304 - AT - Income TaxRoyalties and fees for included services - whether the bio-equivalence study is a research activity - Non deduction of TDS - DTAA between India and Canada - Held that - Applicant, tax resident of Canada, only providing final results to its Indian clients by using highly sophisticated bio-analytical know-how, without providing any access whatsoever to the clients to such know-how, fee received by it is business income and not fee for technical/included services or royalty and applicant having no PE in India, such income would not be taxable in India by virtue of relevant provisions of DTAA between India and Canada. - Decided against the revenue.
Issues Involved:
1. Whether the payments made by the assessee company to Contract Research Organisations (CROs) are subject to tax deduction at source (TDS) under the provisions of the Income Tax Act. 2. Whether the payments constitute 'fee for included services' under Article 12 of the Double Taxation Avoidance Agreement (DTAA) with the USA and Canada. 3. Whether the payments should be classified as 'business profits' under Article 7 of the DTAA. 4. The applicability of the DTAA provisions between the USA and Canada to the payments made by the assessee. 5. The necessity for the assessee to obtain a non-deduction certificate under Section 195(2) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Tax Deduction at Source (TDS): The Revenue contended that the assessee should have deducted tax at source on payments made to CROs, as per the provisions of the Income Tax Act. The DCIT held that the assessee failed to deduct TDS and demanded payment of TDS and interest under Section 201(1A) of the Act. The CIT(A) and the Tribunal, however, found that the payments did not require TDS as they did not constitute 'fee for included services' and were instead classified as 'business profits' under the DTAA. 2. 'Fee for Included Services' under Article 12 of the DTAA: The Revenue argued that the payments were for obtaining technical knowledge or know-how from the CROs, which should be classified under 'fee for included services' as per Article 12 of the DTAA with the USA and Canada. The CIT(A) and the Tribunal disagreed, stating that the CROs were only conducting clinical trials and submitting reports without making any technical knowledge, expertise, or processes available to the assessee. Therefore, the payments did not fall under Article 12. 3. Classification as 'Business Profits' under Article 7 of the DTAA: The assessee contended that the payments were 'business profits' in the hands of the CROs, as they were derived from the trade or business of conducting clinical trials. The CIT(A) and the Tribunal agreed, noting that the CROs did not have a Permanent Establishment (PE) in India, and therefore, the payments were not taxable in India under Article 7 of the DTAA. 4. Applicability of DTAA Provisions: The Revenue argued that the DTAA with the USA and Canada should be interpreted differently due to their unique models (US Model and UN Model). The CIT(A) and the Tribunal found that the provisions of the DTAA with the USA and Canada were similar and could be interpreted in a consistent manner. The Tribunal upheld the CIT(A)'s view that the payments to Canadian CROs should also be treated as 'business profits' similar to the payments to US CROs. 5. Non-Deduction Certificate under Section 195(2): The Revenue contended that the assessee should have applied for a non-deduction certificate under Section 195(2) if it believed that the payments were not taxable in India. The Tribunal, however, upheld the CIT(A)'s decision that there was no need for TDS as the payments were classified as 'business profits' and not 'fee for included services'. Conclusion: The Tribunal upheld the CIT(A)'s order, concluding that the payments made by the assessee to the CROs were not subject to TDS as they constituted 'business profits' under Article 7 of the DTAA and not 'fee for included services' under Article 12. The appeals of the Revenue were dismissed, and the CIT(A)'s decision was confirmed.
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