TMI Blog2010 (7) TMI 1081X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the AO on this issue u/s 201/201(1A) and allow the appeal of the assessee. TDS u/s 195 - Remittances made to the non-resident - nature of services rendered by CROs - liability u/s 201/201(1A) - assessee, here is a pharmaceutical company having in-house research facility generic drugs developed by the assessee-company are, therefore, sent for testing at the laboratories of CROs abroad. CROs conduct test and experiments on these drugs and send back analysis report containing results of such test and experiment - HELD THAT:- As rightly observed by the ld. CIT(A), the CROs, thus, use their own skills, equipments, etc., to prepare the report - what they ultimately supply to the assessee-company is the analysis report and there is no parting with their skills and know-how to the assessee-company. The services rendered by CROs, thus, are not technical in nature but are merely in the nature of commercial services. The fees paid for such services, in our opinion, therefore, does not amount to fees paid for technical services or fees paid for making available any technology to the assessee-company in order to enable to apply the same for developing/inventing new drugs in future ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade the payment of US $ 80,000 for the said services rendered by M/s. C.K. Prahlad Inc. of USA and no tax at source was deducted from the said payment because the amount so paid to M/s. C.K. Prahlad Inc. of USA was not taxable in India. It was submitted that the said company is a tax resident of USA and did not have any permanent establishment in India during the year under consideration as contemplated in Article 5 of the DTAA between India and USA. It was also submitted that the said company did not make available any technical knowledge to the assessee-company and, therefore, the payment made to the said company was not taxable in India. 4. The submissions made as above on behalf of the assessee-company before him was analysed by the Assessing Officer in para Nos. 3.3 to 3.5 of his order as under :- The payment by the assessee-company has to be either Business income or Fees for Technical Services . The basis character of the payment clearly shows that the payment is for certain services rendered by the non-resident company and there is no business connection between the assessee-company and the non-resident company. Hence, question of whether the non-resident company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the Assessing Officer under section 201/201(1A) treating it as assessee in default for the amount of ₹ 4,99,514 as a result of its failure to deduct tax at source from the payment made to M/s. C.K. Prahlad Inc. of USA, an appeal was preferred by the assessee before the ld. CIT(A) and in support of its case, the following submissions were made and the judicial pronouncements were relied upon on behalf of the assessee :- The appellant has, as background, stated that M/s. C.K. Prahlad Inc. of USA is a company supported by Mr. C.K. Prahlad who popularly is also called management expert or management guru. He conducts short-term lecture series for corporate with the object of motivating the employees, with a view to providing self-confidence and leadership to the employees. The appellant had also invited him for such short-term lecture series. It was a programme of 2 days where, in different sessions, he would explain personality development and personal development concepts to a group of people. The appellant has furnished to me list of 160 odd participants who were spread across various grades, functions, cadres who attended the group seminar. The appellant has fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in imparting the managerial knowledge on future strategy in India to the employees of the appellant. Thus the payment is covered by provisions of Explanation 2 to section 9(1)(vii) which reads as under :- 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 provisions 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 . Thus, it is seen that managerial services as imparted by Mr. CKP is covered in above definition. It is also seen that similar definition is given under Article 12(4) of India-US DTAA which reads as under :- Article 12(4) For purposes of this article, fees for included services means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons wherein the following propositions are put forth in support of the assessee s case that the amount paid to M/s. C.K. Prahlad Inc. of USA was not taxable in India and the assessee-company, therefore, was not under an obligation to deduct tax at source from the said payment :- u As per section 90 of the Income-tax Act ( Act ), an assessee is eligible to adopt provisions of tax treaties if the same are more beneficial to the assessee. Accordingly, we are relying on relevant provisions of India-US Tax Treaty to decide the taxability of payments made. u Relevant extract of Article 12 of India-US Tax Treaty is reproduced as under :- Article 12 - Royalties and fees for included services- For purposes of this Article, fees for included services means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services :- n are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or n make available technical knowledge, ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be in consideration for rendering of technical or consultancy services, but, in addition the services so rendered should also be such that make available technical knowledge, experience, skill, know-how, or processes, or consists of the development and transfer of a technical plan or technical design. Recipient of services should be able to apply the said technology in its business. u The presentation made by Mr. C.K. Prahlad was general in nature and was attended by M5 level employees (Senior Manager) from various departments (Please refer to list of participants at page No. 2.5 of PB). u Provisions of the Treaty are further explained by the technical explanation to said treaty. (Relevant extract is filed at page Nos. 82-85 of PB) wherein on the concept of fees for included services as per Article 12 it is stated that technology will be considered made available when the person acquiring the service is enabled to apply the technology in its own right without resources to the person providing the services. In the present case, no such technology has been transferred to the appellant-company by CKP Inc. u In this regard, it is pertinent to note that the AAR in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice will get equipped with that knowledge or expertise and be able to make use of its in future, independent of the service provider. In other words, to fit into the terminology make available , the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. The services offered may be the product of intense technological effort and a lot of technical knowledge and experience of the service provider would have gone into it. But that is not enough to fall within the description of services which make available the technical knowledge, etc. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in future without depending on the provider. u Further, even for the academic purpose if the services rendered by CKP Inc. are treated as consultancy in nature then also the services cannot be treated as fees for included services as per the Treaty. u As per Memorandum of Understanding (MoU) to the India-US Tax Treaty (Refer pages 82-85 of PB), consultancy services would fall in the definiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services such as marketing and sales strategy, business strategy and portfolio strategy, etc., are not technical in nature. 10. In addition to the above submissions, the ld. counsel has also relied on the decision of Authority for Advance Ruling in the case of Federation of Indian Chambers of Commerce Industry (FICCI), In re [2010] 323 ITR 399 1 (AAR - New Delhi) and that of Mumbai Bench of ITAT in the case of Wockhardt Life Sciences v. Dy. CIT [IT Appeal No. 3625 (Mum.) of 2005, dated 8-6-2005]. 11. The ld. D.R., on the other hand, has strongly relied on the impugned order of the ld. CIT(A) in support of revenue s case on this issue and has particularly invited our attention to paras 3.3 to 3.5 of the said order to submit that the amount in question paid by the assessee to M/s. C.K. Prahlad Inc., USA was taxable in India as held by the ld. CIT(A) for the reasons given therein and the assessee-company, thus, was under an obligation to deduct tax at source from the said payment as per the provisions of section 195. He has contended that the services rendered by the said company to the assessee-company were in the nature of managerial consultancy services and the amount p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elhi), the Authority for Advance Ruling has explained the meaning of the expression make available by observing that to fit into the terminology make available , the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. The services offered may be the product of intense technological effort and a lot of technical knowledge and experience of the service provider would have gone into it. But that is not enough to fall within the description of services which make available the technical knowledge, etc. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in future without depending on the provider. 13. As already observed, a perusal of the presentation made by CKP shows that the services rendered by them to the assessee-company were essentially in the nature of sharing management experiences and business strategies and the same having nothing to do with the pharma industry in particular, it cannot be said that the said services were technical in nature. As per Memorandum of Understand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in holding that the payments made by the assessee do not amount to fees for included services under Article 12(4) of the DTAA on the ground that no technology has been made available to the assessee to enable him to apply the same for future development of the drugs, thereby holding the payments are not taxable in India. 2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) failed to appreciate that technical knowledge and technical experience was made available to the assessee in India on the basis of which substantial modifications were made in the drugs/formulations, thereby satisfying the provisions of Article 12(4) of the Indo-US, Indo-UK and Indo-Canada DTAAs. 3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in relying upon the judgment of the Mumbai High Court in the case of Diamond Services International (P.) Ltd. v. Union of India and has failed to appreciate that in that case, no action was taken by the assessee on the date/information provided. 16. After having perused the Chartered Accountant s certificate and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at USA/Canada, the assessee-company approaches CRO for conducting bio-equivalence test for assessee s drug vis-a-vis that of inventor s drug. Thus, as part of its regulatory requirement, each country requires terms of protocol to approved by the state authority before CRO initiates his work. Accordingly, it has been claimed that services provided by the CRO appear to be outside the scope of Article 12 of the DTAA, i.e., Royalties and Fees for included services and, therefore, no tax is withheld as per DTAA. 17. The aforesaid submissions made on behalf of the assessee were not found acceptable by the Assessing Officer on the basis of following analysis made by him in the assessment order :- The submissions made on this behalf have been considered. The charging sections of the incomes is section 5 and the deeming provisions are in section 9(1) of the Income-tax Act. The relevant section 5(2)(b) of the Act states as under :- Subject to the provisions of this Act, the total income of any previous year of a person who is non-resident includes all income from whatever source derived which accrues or arises or is deemed to accrue or arise to him in India during such year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... talling to ₹ 1,89,08,962 is for Bio-equivalence Study of Terbifine Hydrochloride 250 Mg. tablets of Wokhardt against Lamisil 250 Mg. tablets of Novastis in healthy male Volunteers under fasting conditions, etc. Similarly, payments of ₹ 1,55,25,150 made to Toxicon Corporation is for 13 week Sub-chronic Toxicity Study Charges. The report of the study conducted by the CRO is sent to the assessee-company which the assessee makes used of it in its business carried on in India. Thus, these protocols make available technical knowledge, experience, skill process/procedure, etc., to the assessee-company and, hence, the same are in the purview of section 9(1)(vii) of the Income-tax Act. It also comes under the purview of Article 13 of DTAA with U.K. and Article 12 of DTAA with Canada and USA which clearly states that the fees for included 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 included services is a resident of the other Contracting State, the tax so charged shall not execeed . . . . Thus, the DTAA also does not prohibit from charging of tax in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such sum to deduct tax thereon before making the payment. Thus, the person making payment to non-resident cannot take unilateral decision that the payment made by him are not sums chargeable to income-tax and, therefore, he could made the payments without deduction of tax at source, without the concurrence of the Assessing Officer as provided in section 195(2). The above proposition has also been explained in detail by the Hyderabad Bench of ITAT in the case of Charminar Drugs Ltd. v. ITO ( 76 ITD 37 ). The Mumbai Bench of ITAT in the case of Satellite Television Arian Region Ltd. v. Dy. CIT has also taken the same view while considering the proceedings under section 201 of the Act. Thus, where there exists any doubt as to the chargeabi-lity of income to tax to the non-resident payee, tax must be deducted at source ex abundanti coutela as held by the Mumbai ITAT in the case of Dy. CIT v. Arthur Anderson Co. Ltd. [ITA No. 9125/Mum./1995, dated 29-7-2003]. 18. On the basis of the aforesaid analysis, it was held by the Assessing Officer that the total payment of ₹ 8,79,74,723 made by the assessee to the non-resident entities on account of bio-studies, clinical analysi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtificate from CRO. Therefore, the appellant approaches to CROs who carried tests of drugs sample on healthy volunteers who may be prepared to remain present before the doctors during the trial. The same drug may be got analysed by the appellant at different places through different CROs. During the year under consideration, the appellant has remitted an amount of ₹ 879.74 lakhs to various CROs without withholding tax under section 195 of the Act. It is seen that the Assessing Officer has given much emphasis on the document of protocol as opposed to the nature of service availed by the appellant. It is noticed that the generic drugs as developed by the appellant at its in-house research are being sent for testing at the laboratory of CROs. There is considerable force in the submissions of the appellant that the CRO is not providing or inventing any drug. The CRO conducts test and experiments on these drugs and sends back the appellant analysis report containing results of the experiment. Thus, it is akin to diamond testing and credit analysis report. The non-resident does not develop the drugs and only gives a clinical report of the experiment done by them. The fees paid for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orts. The question was whether the payment made under the agreement constituted fees for technical services. The Tribunal pointed out that Fugro compiled data, processed it and delivered the results to the assessee who would further process the date to determine probable targets. Payments in respect of the services rendered by Fugro could not be said to be fees for technical services for the reasons that - (i ) there was no transfer of technical knowledge to the assessee and (ii) there was no transfer of technical plans or designs. In the instant case also, the CROs has compiled the drugs sample, processed, experimented and delivered the result of the services to the appellant. Thus, in view of this finding, there was no transfer of technical knowledge, plan or design to the appellant, hence, I hold that the services rendered for furnishing clinical reports by CROs does not amount as fees for included services as no technical service is being imparted to appellant which can enabled it to use in future independently. The case of the appellant, I agree, is fully covered by Bombay High Court judgment in the case of Diamond Services International (P.) Ltd. v. UOI [ 304 ITR 201 ] w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent parties who are from countries other than USA, UK, Canada, Netherlands, France and Australia. Therefore, I hold that the Assessing Officer was justified in subjecting the amount to tax in India under section 195 of the Income-tax Act for the remittances of ₹ 1,79,726 made to persons who are resident other than USA, UK, Canada, Netherlands, France and Australia. In the light of above facts and circumstances and judicial pronouncements, I allow the appeal in favour of the appellant in respect of remittances made to persons who are residents of USA, UK, Canada, Netherlands, France and Australia and dismissed the appeal in respect to the remittances made to residents other than USA, UK, Canada, Netherlands, France and Australia. The Assessing Officer is, therefore, directed to recalculate the tax and in liability under section 201 and 201(1A) in accordance with this finding. Accordingly, this ground of appeal is partly allowed. 21. The ld. CIT(A) thus held that out of the remittances aggregating to ₹ 36.76 lakhs sent by the assessee abroad, only the payment of ₹ 1.79 lakhs made to persons who are residents other than USA, UK, Canada, Netherlands, France ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u Based on the above principles and further having regard to following facts, services provided by CRO fall outside the scope of Article-12 Royalties and fees for included services. n The methodology of working and execution by CRO is largely defined by the Assessee in the Protocol. n Predominant work of CRO is objective reading thrown up by the software which is pre-determined in the Protocol. n The services are pre-dominantly commercial or technology driven service rather than technical in nature. n The work done by CRO is of standardized nature; CRO does similar work for others also. Predominant part of fees is towards participation fees of volunteers and in respect of pathology reports. n Assessee is not enriched by CRO in any manner; assessee is already possessed of the knowledge. The Drug which is being tested is formulated and provided by the assessee. CRO neither does communicate any improvements therein nor does it have wherewithal to do it. n Even assuming the assessee did not have that know-how; CRO does not enrich the assessee such that it is able to apply the technology. n Even assuming the drug has failed in the bio-equivalence test, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). u Reliance is placed in the case of National Organic Chemical Industries Ltd. v. Dy. CIT ( 5 SOT 317) (Mum. - Trib.) where it has been held that the payments made by the assessee-company to Swiss Company for preparation of 22 MSDS (i.e., Material Safety Data Sheets) in EU format in English, which contained information required as per norms of European Union Regulations, was not covered by scope of expression fees for included services under Article 12(4) of Indo-Swiss Tax Treaty. u Further, reliance is placed on the following judicial precedents : n CESC Ltd. v. Dy. CIT ( 87 ITD 653) (Cal. - Trib.) (TM) n Raymond Ltd. v. Dy. CIT ( 86 ITD 791) (Mum. - Trib.) (Refer Page Nos. 116-125 of PB-II) n Mckinsey and Company Inc. ( 99 ITD 549 ) (Mum. - Trib.) (Refer Page Nos. 145-149 of PB-II) n BPCL v. Jt. DIT ( 14 SOT 307 ) (Mum. - Trib.) n ITO (Int. Tax) v. DeBeers India Minerals (P.) Ltd. ( 115 ITD 191 ) (Bang.) (Refer Page Nos. 182-185 of PB-II) n Kotak Mahindra Primus Ltd. v. Dy. DIT ( 11 SOT 578 ) (Mum. - Trib.) (Refer Page Nos. 186-191 of PB-II) n Dy. CIT v. Boston Consulting Group (P.) Ltd. ( 94 ITD 31 )(Mum. - Trib.) (Refer Page Nos. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... generic drug is equivalent to original reference drug, it has to adduce evidence in the form of certificates from CRO. The generic drugs developed by the assessee-company are, therefore, sent for testing at the laboratories of CROs abroad. CROs conduct test and experiments on these drugs and send back analysis report containing results of such test and experiment. As rightly observed by the ld. CIT(A), the CROs, thus, use their own skills, equipments, etc., to prepare the report. However, what they ultimately supply to the assessee-company is the analysis report and there is no parting with their skills and know-how to the assessee-company. The services rendered by CROs, thus, are not technical in nature but are merely in the nature of commercial services. The fees paid for such services, in our opinion, therefore, does not amount to fees paid for technical services or fees paid for making available any technology to the assessee-company in order to enable to apply the same for developing/inventing new drugs in future. 25. In the case of Anapharma Inc., In re [2008] 305 ITR 394 (AAR-New Delhi), a similar issue had come up for consideration before the Authority for Advance Ruling ..... X X X X Extracts X X X X X X X X Extracts X X X X
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