Foreign companies without a permanent establishment in India and providing research facilities to Indian firms for developing new drugs, are exempt from paying tax in the country. Further, unless there is a transfer of technology or know-how to the recipient of the service, it cannot be classified as technical services, the Authority for Advanced Rulings (Income Tax) has said.

The AAR's decision comes in the case of a Canadian company Anapharm Inc, which conducts bio-analytical tests on drugs, manufactured by Sandoz Pvt Ltd and Ranbaxy Research Laboratories. Anapharm has entered into agreements with the two Indian pharmaceutical companies for the purpose.

Anapharm had sought to know whether the fee it received from the pharmaceutical companies for undertaking clinical and bio-analytical studies under the agreements would be subject to tax in India under the DTAA between India and Canada.

The AAR has ruled that its fees should be considered as business income, but since it does not have a permanent establishment in India, it is not liable to pay tax in the country under the Indo-Canadian DTAA.

The authority also referred to previous judgements of the Bombay high court in the case of Diamond Services International Ltd and the decision of the Income Tax Appellate Tribunal (Mumbai bench) in the case of Raymond Ltd. "Payment of consideration would be regarded as 'fee for technical/included services' only if the twin test of rendering services and making technical knowledge is available at the same time," the AAR pointed out.

Rahul Garg, executive director PriceWaterhouseCoopers said, "The authority has been consistent in applying the definition of technical services and has once again upheld that unless there is a transfer of technology to the recipient of the service, it would not be classified as fee to be classified as fee for technical services under the Indo-Canadian treaty."