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TMI Blog2014 (11) TMI 404X X X X Extracts X X X X X X X X Extracts X X X X ..... for condonation and considering the facts of the case, we condone the delay and admit the appeal. 2.1 Assessee has raised the following common grounds for both the assessment years i.e., 2002-03 and 2003-2004. "1. The learned Commissioner of Income Tax Appeals erred in law and as to the facts and circumstances of the case in considering the agreements involved appropriately and in applying the provisions of the relevant Double Taxation Avoidance Agreements with respective countries to the concerned agreements. 2. The learned Commissioner of Income Tax Appeals erred in law and as to the facts and circumstances of the case in holding that the payment made by the Assessee company to the foreign parties were fees for technical services which was subjected to tax in India. 3. The learned Commissioner of Income Tax Appeals erred in law and as to the facts and circumstances of the case in holding that the claim of the payments were business income earned by the foreign parties is of the no relevance because the business income of the foreign party may be taxed in their country as per the laws of their respective countries. 4. The learned Commissioner of Income Tax Appeals erred in la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and arguments filed before the learned assessing officer are a part of the record to which he himself referred to and the Assessees arguments did not go beyond. 11. The learned Commissioner of Income Tax Appeals erred in law and as to the facts and circumstances of the case in holding that the Assessee is relying on a legal provision which is not applicable to the facts of the case. 12. The learned Commissioner of Income Tax Appeals erred in law and as to the facts and circumstances of the case in holding that when the knowledge generated in the course of rendering of technical services will be transferred to the sponsor of the research and will be his sole property including the rights over the patents, which are likely to be generated in the course of the technical services. 13. For these and any other grounds that may be taken up with the permission of the Hon'ble members." 3. Briefly stated, Dr. Reddy's Research Foundation (DRF) is one of the leading pharmaceutical Research companies carrying out research and development activities in drug discovery. The R & D activities at DRF are centered on new molecule discovery involving related biological process and chemica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny has to conduct preclinical studies and also Phase-I, Phase-II and Phase-III studies. After taking the necessary approvals, once the drug is introduced in the market by the innovator company, the company has the exclusive marketing rights till the end of that 20 year period. Since pre-clinical and other studies take on an average of 14 to 15 years, the Innovator company tries to recoup all the expenses incurred for the research and development of the drug. Since the costs incurred on basic research is very high, and the time for exclusive marketing is less, the time factor is very crucial in drug discovery. Earlier a drug is introduced in the market, the better it is for the innovator company as it increases the "time for exclusive marketing rights". To increase this "time" and also to reduce the cost of research, appropriate parts of research are allocated by the patent holding Innovator Company to other research organizations. The payment to two such research organizations is subject matter of these proceedings. 3.3. Assessee-company namely DRF has entered into agreement with an UK company M/s. Simbec Research Ltd. and a Netherlands Company M/s. NDDO Oncology BV for conducting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y such person in India or for the purposes of making or earning any income from any source in India. Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976 , and approved by the Central Government.] Explanation 1- For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976 , shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. Explanation 4 2.- For the purposes of this clause," fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head" Salaries". 3.5. Before these are confronted to Assessee, the Assessing Officer also considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e payment net of taxes, assessee was liable for the consequences of violation of provisions of section 195A, which are re-produced as under. "where, under an agreement or other arrangement, the tax chargeable on any income referred to in the foregoing provisions of this Chapter is to be borne by the person by whom the income is payable, then, for the purposes of deduction of tax under those provisions such income shall be increased to such amount an would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement. " 3.7. On this basis, the Assessing Officer gave an opportunity to explain the reasons for which assessee had failed to deduct tax or had agreed to make the payment net of taxes. Assessing Officer was not satisfied with the arguments of assessee and therefore the short fall in tax deduction along with interest was quantified in the following manner. Amount Asst. Year 2002-03 Asst. Year 2003-04 Short deduction under sec.201(1) Rs.43,56,132 Rs. 5,08,399 Interest under sec.201(1A) till 31.1.2003 Rs.2,09,285 Rs. 37,507 Total Rs.50,65,417 Rs. 5,45 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices could not be brought to tax in India. 5. The above referred issues were discussed by Ld. CIT(A) in the following manner. 5.1. The first issue decided was the concept of "fees for technical services". Assessee company raised this argument vide its letter dated 04.02.2003. The Ld. CIT(A) reproduced the arguments of Assessee as also considered by the Assessing Officer in his order as under. "Simbec will conduct clinical test on cats and dogs with the compounds developed by DRF and DRF will make payments to Simbec against the study reports of investigation. These payments are taxable as per the provisions of sec. 9(i)(vii) of the Indian Income tax Act, 1961. However, in this case Simbec is not granting any patent or trademark to DRF. Further, it is not transferring any technical know-how or any technical plan or technical design to DRF. It is only conducting tests for investigation. "NDDO will conduct clinical trials on cats and dogs with the compounds developed by DRF and DRF will make payments to NDDO against the study reports of investigation. These payments are taxable as per the provisions of sec.9(i)(vii) of the Indian Income tax Act, 1961. However in this case, NDDO is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... communication with company (DRF) by telephone, facsimile, e-mail or correspondence and will promptly inform company of any unusual occurrences in the conduct of the research. 2. Page-4 of pre-clinical research master agreement : 6 : All Information/data/results collected during/derived from the conduct of the research shall be and remain the exclusive property of the company (DRF). Further, any ideas, know-how, inventions, processes or other intellectual property, which are generated under or in connection with the research shall belong to and shall be the sole and exclusive property of the company and Simbec will take all reasonable steps required to protect such ownership rights for the company. Agreement with M/s. NDDO Oncology BV : 1. Page 4 of pre-clinical research and development agreement : Article 4: All information, data and results directly related to study drug and derived from the conduct of studies under this agreement, excluding know-how owned by or developed independently from the conduct of services under this agreement by NDDO Oncology or delegates (including but not limited to Drug Development Master Plans, Master Protocols, Standard Operating Procedures and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The argument taken before the Ld. CIT(A) was that foreign party doesn't part with its technical skills, technical know-how with which it conducts the field trials and, therefore only thing which the local party (assessee) gets is a final report about the results and this final report cannot constitute transfer of technical know-how. The Ld. CIT(A) observed that this argument is not correct because the relevant clauses highlighted in preceding para No.16 clearly provide that all intellectual property including rights to patents which will be generated will belong to assessee only. The entire process by which this field trial research is conducted is defined and controlled with active participation of assessee. Assessee has complete control over the knowhow, experience of field trials and skills generated in the field trial. Otherwise, how will be assessee be in a position to claim ownership over the know-how generated and apply for patents. These facts show that foreign party had provided technical services to speed up the 'field trial time' so that assessee's time for exclusive marketing rights' could be maximized. Therefore, the claim of assessee is not upheld by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taxed in that other State. 13(2): However, such royalties and "fees for technical services" may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or "fees for technical services" is a resident of the other contracting State, the tax so charged shall not exceed". On the basis of article 13(2), it is seen that "fees for technical services" can be taxed in the contracting state in which they arises subject to a limitation that the tax charged will not exceed certain terms, which are defined therein. 21 Therefore, the claim of assessee that payments made by them are not "fees for technical services" which can be taxed in India but rather business income of the foreign party is not sound and not accepted. 22. This discussion can be further extended by referring to article 13(7) of DTAA with UK and article 12(8) of DTAA with Netherlands, which are reproduced as under: ARTICLE 13(7) OF DTAA BETWEEN INDIA & UK : "Royalties, "fees for technical services" or payments for the use of equipment shall be deemed to arise in one of the State when the payer is that state itself, a political sub-di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India and UK and India and Netherlands. Assessee had not submitted any written submissions and therefore, the Ld. CIT(A) found it really difficult to understand the argument of assessee. The Ld. CIT(A) gone through the entire DTAA agreements with both UK and Netherlands and have not found any such article No,12(2)(a)(ii) as is referred to by assessee in grounds of appeal as ground No.5 both the assessment years 2002-03 and 2003-04. 5.5. The Ld. CIT(A) has opined that he was not able to understand exactly what was the claim of assessee. He further states that assessee is carried away with its representation in the case of "Reddy's Laboratories" for the A.Ys. 2002-03 and 2003-04, wherein the DTA agreements between India and USA was under consideration. In that case, the issue for "fees for technical services" was considered. In that DTAA, there is a clause available in article No.12(2)(a)(ii) which refers to "fees for included services". It is therefore established that assessee is relying on legal provision, which is not applicable to the facts of this case and therefore this ground was also rejected by Ld. CIT(A) as it was raised without any application of mind. He accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01 and under sec. 201 (lA) and Assessee has no case. 6. Before the Tribunal, the Ld. Counsel relied on the Coordinate Bench decision in the case of Dr. Reddy Labs wherein in ITA.Nos. 867 and 868/Hyd/2003 for the assessment years 2002-03 and 2004-05 where in it was held that payments made to contract research organisations are not taxable in India. 7. Learned D.R. however, submitted that the facts in the case of Dr. Reddy Laboratories Ltd., (supra) are different whereas that company paid amounts to contract research organisations whereas, in assessee's case, amounts are paid to independent organisations and referred to the terms of the agreements to distinguish from the said facts. He relied on the orders of Ld. CIT(A). 8. We have considered the rival contentions and perused the facts on record. It is an admitted fact that in the case of Dr. Reddy Laboratories P. Ltd., (supra) the issue was whether the payments are to be treated as fees for technical services under Article 12 of the DTAA or as business profits in terms of Article 7 of DTAA with USA and considered in those cases that the payments are in the nature of business receipts to be considered under Article 7 of the DTAA. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly if the twin test of rendering services and making technical knowledge available at the same time is satisfied. In the present case, the applicant renders bioanalytical services which, no doubt, are very sophisticated in nature, but the applicant does not reveal to its clients as to how it conducts those tests or the inputs that have gone into it, so as to enable them to carry out those tests themselves in future. A broad description or indication of the type of test carried out to reach this conclusion does not enable the applicant's client to derive requisite knowledge to conduct the tests or to develop the technique by itself. The mere fact that the tests in question are highly technical in nature will not make a difference. In its affidavit the applicant affirms that only final results, conclusion of data of bioequivalence tests are provided to the recipient. Clinical procedure, analytical methods, etc., which are proprietary items of the applicant, have neither been nor will they ever be transferred, assigned or handed over to 5 or any other Indian client. From the perusal of the relevant agreements, no provision is found which would entitle the clients to know the detai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lient. The information concerning scientific or commercial experience of the applicant or relating to the method, procedure or protocol used in conducting bioequivalence tests is not being imparted to the pharmaceutical companies and the consideration is not paid for that purpose. On the basis of the final report, the pharmaceutical companies will not be able to find out what method, procedure or protocol was used in conducting the tests. Moreover, the test reports are drug specific. Hence the material furnished by the applicant will not in any way help the customers to facilitate further research and development of new drugs as contended by the Revenue. As such, the fees received by the applicant are to be treated as business income and not royalty income. Since the applicant is in the business of providing bio-analytical services to various pharmaceutical companies, the consideration received by it from them would be its business income. In view of art. 7 r/w art. 5, such income can be taxed in India only if the applicant has a PE in this country. The applicant has denied the existence of any PE here and there is nothing on record to indicate anything to the contrary. On the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X
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