2024 (7) TMI 1237 - AAR - GST

Applicability of N/N. 04/2019 - Integrated Tax, issued dated 30th September 2019 - services supplied by the applicant, i.e., research and development services provided in relation to agro-chemical sector - services are rendered in the taxable territory or not - Place of supply - HELD THAT - The Applicant undertakes testing for the products of their clients (hereinafter referred to as sponsors ), and the Applicant provides the test results in the form of a report. Applicant has a standard practice to execute an agreement/document with the sponsor(s). The sponsor makes available a certain quantity of material (hereinafter referred to as the test item ) based on the agreement pursuant to which the research, development, testing and analysis will be carried out and methodologies adopted for the research, development and testing are well documented as per the global guidelines and standards - The applicant has been supplying the services to its sponsors outside India under tax invoice with 18% GST as the applicant s understanding was that the place oi supply for such services falls in India under Section 13 (3) of the IGST Act, 2017. The Applicant is of the view that with respect to Research, Development and Testing process, the activities carried out by both the industries are inter linked with each other and in few cases, the Research, development, testing and analysis are the same and considering the similarities between pharmaceutical and agro-chemical sectors, the research and development services provided by the applicant squarely falls under the various types of services provided in the notification. Whether N/N. 04/2019-Integrated Tax, issued dated 3O h September 2019 shall be applicable on the services supplied by the Applicant, i.e., research and development services provided in relation to agrochemical sector? - HELD THAT - Any discussion about the supply of such services rendered within the Taxable Territory is not relevant to the issue in question. However, it is important to delve into the Agreements executed by the IIBAT /Applicant with the sponsors located outside India, in order to ascertain the applicability of the Notification 4/2019, on the facts of the applicant s case. Agreements Entered into with Foreign Service Recipients by the Applicant - HELD THAT - The Applicant has to analyse the test sample, i.e., in this case, the Mosquito net, received from the service recipient and determine the weight in grams of the alpha-cypermethrin active ingredient content in one kilogram of the Mosquito net (test sample) and weight in milligram of the same in cm square meter of the Mosquito net (test sample) and similarly, has to determine the weight in grams of the BPO active ingredient content of pooled samples present in one kilogram of the test sample as well as weight in milligram of the same in one square-meter of the test sample - The most important condition is that service provider shall follow international best practice guidelines to ensure reliability of results and the personnel involved in the activities should be trained in concerned diagnostic chemical science. On careful reading of the list of services enumerated, it is seen that every line entry of the Table 2 of the Notification No.4/2019, involves research and development services in pharmaceutical Sector in connection with study of drugs or disease. But, on perusal of the services rendered by the Applicant from the copies of the agreement filed in paper book, as discussed in para 18.0 to 18.8, we have no doubt that the said services are not circumscribed under the services enumerated as supply of research and development services related to pharmaceutical sector as specified in the Table B of the notification, but found to be relating to the quality studies in respect of long lasting insecticide infused Bed Nets, which are used to give better protection from mosquitoes, bedbugs, cockroaches, houseflies by keeping them away or by killing them. But, the services enumerated under the Notification No. 04/2019 -Integrated Tax, pertaining to research and development in the field of pharmaceutical sector are with the aim of producing new and potential drugs into the market, ensuring the safety and validity of medical drugs and in the evaluation of safe drugs, which enable quicker patient recovery from diseases. The place of supply in the instant case continues to be covered under Section 13 (3) of the IGST Act, 2017 and are accordingly taxable. Further the provisions of Notification No. 04/2019 - Integrated Tax, dated 30th September 2019 are applicable to research and development services related to Pharmaceutical sector only and shall not be applicable on the services supplied by the applicant, in terms of the agreements entered into with the foreign Service recipients, as there are no provisions to include or consider Agro-chemical sector within the ambit of the impugned notification.

Summary

Issues Involved:
1. Applicability of Notification No. 04/2019 - Integrated Tax on services supplied by the applicant in relation to the agro-chemical sector.
2. Determination of place of supply for the services provided by the applicant.
3. Comparison and nexus between pharmaceutical and agro-chemical sectors.

Detailed Analysis:

Issue 1: Applicability of Notification No. 04/2019 - Integrated Tax on Agro-chemical Sector Services
The applicant, a society registered under the Tamil Nadu Societies Registration Act, 1975, engaged in research and development services related to the agro-chemical sector, sought clarity on whether Notification No. 04/2019 - Integrated Tax, dated 30th September 2019, applies to their services. The notification specifies that the place of supply for research and development services related to the pharmaceutical sector shall be the location of the recipient of services, provided certain conditions are met. The applicant argued that their services, though related to the agro-chemical sector, should be treated similarly due to the similarities in the research and development processes of both sectors.

Issue 2: Determination of Place of Supply
The applicant has been charging GST at 18% on their services, considering the place of supply to be in India under Section 13(3) of the IGST Act, 2017. This section states that the place of supply for services related to goods made physically available to the supplier is the location where the services are actually performed. The applicant contended that the place of effective use and enjoyment of the services is outside India, thus qualifying as export of services under Notification No. 04/2019 - Integrated Tax.

Issue 3: Comparison and Nexus Between Pharmaceutical and Agro-chemical Sectors
The applicant highlighted the similarities between the pharmaceutical and agro-chemical sectors, noting that both undergo similar research, development, and testing processes. They argued that the principles of Good Laboratory Practice (GLP) apply to both sectors, and thus, the same treatment should be extended to services related to the agro-chemical sector.

Analysis and Findings:

Applicability of Notification No. 04/2019 - Integrated Tax
The authority noted that Notification No. 04/2019 - Integrated Tax explicitly applies to research and development services related to the pharmaceutical sector. The notification does not extend to the agro-chemical sector. The authority emphasized that the power to notify any description of services or circumstances where the place of supply shall be the place of effective use and enjoyment of a service lies with the Government under Section 13(13) of the IGST Act. The clear and unambiguous language of the notification restricts its applicability to the pharmaceutical sector only.

Determination of Place of Supply
The authority examined the agreements entered into by the applicant with foreign service recipients. The services involved quality analysis of Long Lasting Insecticidal Nets (LLIN) by determining the quantity of active ingredients like alpha-cypermethrin and BPO. These services are related to the agro-chemical sector and not the pharmaceutical sector. As per Section 13(3) of the IGST Act, the place of supply for these services is where the services are actually performed, i.e., in India. Therefore, the services do not qualify as export of services under the existing notification.

Comparison and Nexus Between Sectors
The authority acknowledged the similarities between the research and development processes of the pharmaceutical and agro-chemical sectors. However, they reiterated that the notification specifically applies to the pharmaceutical sector. The applicant's argument that the same principles should apply to the agro-chemical sector was not accepted, as the notification's language is clear and does not include the agro-chemical sector.

Conclusion:
The authority ruled that Notification No. 04/2019 - Integrated Tax does not apply to the research and development services provided by the applicant in relation to the agro-chemical sector. The place of supply for these services remains in India under Section 13(3) of the IGST Act, 2017, and the services are subject to GST at 18%.

Ruling:
The Notification No. 04/2019 - Integrated Tax, issued on 30th September 2019, shall not be applicable to the services supplied by the applicant, i.e., research and development services provided in relation to the agro-chemical sector.