Demand of Service Tax under Reverse charge - on the amounts of Fees paid to US FDA and Other Regulatory Authorities - An analysis

[surya narayana]

Dear Readers,

Through this article, I am putting an effort to analyze various aspects involved in the issue and to justify that the amounts paid towards fees to US FDA for Inspection, approval and Product registration etc., are not liable for service tax under reverse charge since, they are only in the nature of Fees and the activity carried out by the US FDA is only to perform the statutory and sovereign functions entrusted to it under the Federal Food, Drugs and Cosmetics Act,1938.

Background:

Manufacturer exporters in the Pharmaceutical Industry, to export their products to Regulated markets, need to comply with certain Regulatory requirements of those highly regulated markets like USA and Europe. These requirements generally include …

• Product filing - generally called as ANDA (Abridged New Drug Application).
• Facility inspection and Product approval by US FDA ( United States Food and Drugs Administration)
• Product Registration in the Regulated Markets to market their products etc.,

To obtain the above certifications / approvals, Pharmaceutical companies need to submit the required applications with all the relevant details / documents along with the prescribed fees to the US FDA or the Regulatory Authority of the country as the case may be where the products are going to be registered etc.,

Upon receipt of the applications and scrutiny thereof, the US FDA or the Regulatory Authority of a particular country where such approvals are required will carry out the necessary inspection for according the required approval or certification etc.,

The USFDA was empowered to take care of certain functions which includes monitoring the compliances and inspection etc., among others under Section 393 – Chapter X under the head Miscellaneous by the Federal Food, Drugs and Cosmetics Act, 1938 as amended from time to time.

In other words and for more clarity, one can say that the US FDA is similar to our Drugs Control Authority in India (under Ministry of Health and Family Welfare) under the control of Drug Control General of India (DCGI) who is authorized under the Drugs and Cosmetics Act,1954 to carry out similar functions in India to issue licences, approvals , Registrations etc., for which certain amount of fees is being collected at the time of making the application by the companies.

It is a known fact and settled principle that the activities carried out by these Authorities are statutory in Nature and they are covered under the Sovereign functions of the state.

Statutory Provisions under Service tax and Finance Act, 1994 & clarification s by CBE&C

• Every Provider of Taxable services required to pay the applicable service tax to the Government subject to the exemptions, conditions and threshold limits etc., ( Section 68(1) )
• Certain services are included under Negative list which are not subject to service tax. (Sec.66D)
• With respect to certain taxable services (as notified) rendered by service providers abroad ( foreign Service Providers), the Service tax required to be paid by the recipient of service in India subject to the provisions of place of provision of services (68C) under Section 68(2) of the Finance Act,1994 as a person liable to pay service tax.
• The person liable to pay service Tax under the said section is on par with the Taxable service provider for the purposes of payment of Service Tax in the taxable territory and all provisions of the Act shall apply to such person as if he is the person liable for paying Service Tax in relation to such services .
• Services provided by Government or a local authority except certain services are covered in the Negative list of services under Section 66 D (a) of the Finance Act, 1994.
• Fees and other charges paid to Government Authorities are not covered under the excluded services under Section 66D (a) and hence the activities carried out by the statutory Authorities to execute sovereign functions are covered under negative list which are not subject to payment of Service Tax.
• CBE&C vide Circular No. 89/7/2006-ST Dated 18.12.2006 clarified vide Para 2 & 3 that statutory or sovereign functions carried out by the Government or Government Bodies under constitution are not liable to Service Tax.
• The same was reiterated by the Board while consolidating the earlier clarifications vide circular 96/7/2007-ST Dated 23.08.2007.

Departmental Allegations / contentions:

Without considering the above provisions, the departmental officers issuing Show Cause Notices left right and centre to the Pharma companies who is making the payments towards fees to US FDA and other Regulatory Authorities in getting the certificates, approvals etc., demanding Service Tax under the head “ Inspection and certification services” under Section 65(105)(zzi) up to 30.06.2012 and under Section 65(44) of the Finance Act, from 01.07.2012 in terms of Section 68(2) of the Finance Act,1994 under Reverse charge mainly on the following grounds:

• The services received by the Pharma companies from US FDA and other Regulatory Authorities are Taxable services since they are not covered under Negative list and squarely fall under the ambit of reverse charge in terms of Section 68(2) of the Finance Act,1994;
• The said services rendered by the Government of other countries covered under Non-Taxable territory and hence the recipient has to pay the Service Tax;
• Categorically stating that Government defined in the Act refers only Government of India and hence other governments are not covered in the ambit of the said definition and hence the clarification issued by the Board vide TWO circulars dated 18.12.2006 and 23.08.2007 respectively are not applicable.
• In addition to the demand of service Tax, extended period also being invoked under Section 73(1) and proposing the penalties under Sections 77 and 78 of the Finance Act,1994.

Some Case law – where it was decided that certain services performed by Government/Government bodies are sovereign in nature and not liable for service Tax and considered the TWO board circulars cited supra while deciding the cases.

1. MAHARASHTRA INDUSTRIAL DEVELOPMENT CORPORATION Versus CCE, NASIK [2014 (11) TMI 311 - CESTAT MUMBAI]
2. Roha Dyechem (P) Ltd. and Other Versus CCE [2012 (7) TMI 945 - CESTAT MUMBAI]
3. UTI Technology Services Ltd. Versus Commissioner of Service Tax, Mumbai [2011 (11) TMI 220 - CESTAT, MUMBAI]
4. IN RE : MYSORE CITY CORPORATION [2009 (10) TMI 667 - COMMISSIONER OF CENTRAL EXCISE (APPEALS), MANGALORE]
5. ELECTRICAL INSPECTORATE, GOVT. OF KARNATAKA Versus C. ST [2007 (10) TMI 137 - CESTAT, BANGALORE]
6. DY. DIRECTOR OF MINES & GEOLOGICAL DEPARTMENT Versus CCE & C, BELGAUM [2007 (1) TMI 55 - CESTAT,BANGALORE]

Some case Law – where it was held what is not a Statutory & Sovereign Functions:

1. INFORMATION KERALA MISSION Versus COMMISSIONER OF CENTRAL EXCISE & CUSTOMS, THIRUVANANTHAPURAM [2012 (6) TMI 605 - CESTAT, BANGALORE]
2. Ideal Road Builders (P.) Ltd. Versus Commissioner of Service Tax, Mumbai [2012 (6) TMI 301 - CESTAT, MUMBAI ]
3. TT. ENTERPRISES LTD. Versus COMMISSIONER OF CENTRAL EXCISE, BANGALORE [2009 (2) TMI 180 - CESTAT, BANGALORE ]

Other points which are relevant to defend that the said services are sovereign in nature and not liable for S.T:

• In terms of Section 68(2) of the Finance Act, 1994, all the provisions of the Act is equally applicable to the person liable to pay service tax and the services of Government/Government Bodies are being covered under negative list under Section 66B(a), payment of Service Tax does not arise since the statutory or sovereign functions carried out by the Government of US or of the Regulated Markets also being covered under Government /Government Bodies.

• While conveying the highlights/changes proposed in the Union Budget, 2015, The Joint Secretary, TRU, clarified under Para 5.2 of the letter in D.O.F. No. 334/5/2015-TRU Dated 28.02..2015 as reproduced below:

1. Services, excluding a few specified services, provided by the government are included in the

Negative List. Further, specified services received by the government are also exempt.

Hitherto, the term “government” has not been defined in the Act or the notification. This has

given rise to interpretational issues. To address such issues, a definition of the term

“government” is being incorporated in the Act [section 65 B (26A)].

(Clause 105 of the Bill refers)

The above clarification gives a clear indication that the definition of Government is incorporated only to address such interpretational issues and otherwise there is no change either before or after the incorporation of the said definition (emphasis added).

• As long as the services provided by US FDA, is considered as sovereign functions in nature, the fees paid having been credited to the US Government treasury, to discharge the statutory obligations/functions entrusted to the said agency under the force of law, cannot be treated as consideration which is a prime requirement for levying service tax in terms of Finance Act, 1994. Hence, liability of payment of service tax on such amount paid to the US FDA towards fees, does not arise.

Conclusion:

In view of the above, it is sincerely hoped that a suitable clarification/ amendment is expected from the forthcoming Budget to address the anomaly of Service Tax liability on recipient under reverse charge on the subject services.