Fee paid to Canadian co for clinical studies not taxable in India
September, 24th 2008
Fees for clinical bioanalytical studies paid by Indian pharmaceutical companies to foreign research bodies are not taxable in India, the Authority for Advance Rulings (AAR), a quasi-judicial authority, has ruled. AAR gave this ruling on an appeal filed by a Canadian company Anapharm. It said the fees it received from the Indian pharma companies does not amount to fees for included services or royalties under article 12 of the India Canada Double Taxation Avoidance Agreement (DTAA).
Anapharm, a contract research organisation in Canada had formed agreements with Sandoz and Ranbaxy Research Laboratories for rendering clinical and bioanalytical services to assist them in the development of new drugs or for generic copies of drugs.
Both companies paid the fees for Anapharms services. The issue before AAR was whether such payments are liable to be taxed in India. AAR held that such payments are in the nature of business profits and hence not taxable in India. The authority considered the absence of a permanent establishment in India for Anapharm, a requirement for being taxed in India on business profits.
The Income-tax department claimed that Anapharm had imparted a service involving technology, knowhow, skill and experience which would result in the Indian companies having exclusive right over the result of the project which may include new products, technology, patents, tested samples etc. Therefore these transactions have the character of fee for technical services and royalty which are liable to be taxed in India.
AAR held that that providing a service requiring technical input does not imply that the technical knowledge and skills are made available to the person buying the service, within the meaning of the India-Canada DTAA. Also, use of a product that embodies technology does not imply that technology is made available. Payment would be regarded as fee for technical/included services only if the twin test of rendering services and making technical knowledge available at the same time, was satisfied.
Anapharms submission before AAR was as follows: There was no transfer of technology, technical plan, design, or knowhow to the Indian companies, a basic requirement to attract article 12 of the Treaty which emphasises on the word make available. Therefore the payments could not classified under the head fees for included services under the Treaty.
Technology was made available to the Indian companies only when they were equipped to apply that technology. Since Anapharm did not pass, reveal or transfer any knowhow or technology or skill to the Indian companies, such payment cannot be construed as royalty fees, which can attract tax in India.