A tax tribunal today said overseas firms providing research facilities for clinical and bio-analytical studies to Indian companies for developing of new drugs are not liable to pay tax here, if they do not have a permanent establishment in the country.

"The fee paid by Sandoz Pvt Ltd, Ranbaxy Research Laboratories in respect of bioequivalence tests conducted by it is in the nature of business profits under Article 7 of DTAA (double taxation avoidance agreement) and the same is not taxable in India as the applicant does not have a permanent establishment," the Authority for Advance Ruling said.

The AAR ruling came following an application filed by Canada-based Anapharm Inc, which wanted to know whether the fee received by it from the Indian companies for undertaking clinical and bio-analytical studies would be taxed in India.

The tribunal said the Canadian company is in the business of providing bio-analytical services to various pharmaceutical companies, "the consideration received by it from them (Indian companies) would be its business income".

The AAR added that since there was nothing to prove that the Canadian company had a permanent establishment in India, the income earned by it cannot be taxed in India under the DTAA.

While giving its ruling, the AAR rejected the contention of the tax authority that payment for such activities can be regarded as royalty income under the DTAA.

"Moreover, the test reports are drug-specific hence the material furnished by the applicant (Anapharm Inc) will not in anyway help the customers to facilitate further research and development of new drugs as contended by the revenue," the AAR ruled.