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TMI Blog2010 (7) TMI 1081X X X X Extracts X X X X X X X X Extracts X X X X ..... cular as well as RBI, Circular. On verification thereof, it was observed by the Assessing Officer that before making payment of US $ 80,000 to non-resident M/s. C.K. Prahlad Inc. of USA, the assessee-company had not deducted tax at source as required by section 195. While justifying the non-deduction of tax at source from the said payment, it was explained on behalf of the assessee -company that M/s. C.K. Prahlad Inc. of USA is a company incorporated under laws of USA and as per the agreement, the said company had sent one of its professionals to India for a period of two days to address the conference on future strategy held for the benefit of the assessee's employees. It was submitted that the assessee-company had made 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 submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessing Officer that the assessee was required to deduct tax at source from the remittances of Rs. US $ 80,000 made to M/s. C.K. Prahlad Inc. of USA as per section 195 of the Income-tax Act. Since the assessee-company had failed to do so, the Assessing Officer treated it as the assessee in default within the meaning of section 201 in respect of tax of Rs. 4,58,270 which was liable to be deducted at source. He held that the assessee-company was also liable to pay interest under section 201(1A) calculated at the rate of 12 per cent amounting to Rs. 41,244. Accordingly, the demand notice for Rs. 4,99,514 was issued by the Assessing Officer to the assessee. 6. Against the order passed by the Assessing Officer under section 201/201(1A) treating it as assessee in default for the amount of Rs. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssions made on behalf of the assessee and proceeded to uphold the action of the Assessing Officer in treating the assessee-company in default under section 201 for deduction of tax at source from the remittances sent to M/s. C.K. Prahlad Inc. of USA and also in charging the interest thereon under section 201(1A) for the following reasons given in paras 3.3 to 3.5 of the ld. CIT(A)'s order :- "I have considered the facts, finding of the Assessing Officer and submissions of learned AR. It is seen that Mr. C.K. Prahlad is a management guru as he is known to be. He therefore as a professional enriched with skills, experience, managerial expertise. Mr. CKP devoted 2 days 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 cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the Assessing Officer was right in treating the appellant in default under section 201 for the remittance of Rs. 40,84,403 with grossed up and charting TDS of Rs. 4,58,270 and interest on section 201(1A) at Rs. 41,244. In the light of the facts, ground No. 3 of the appeal is dismissed." 8. Accordingly, the demand of Rs. 4.99,514 raised by the assessee in pursuance of the order under section 201/201(1A) was confirmed by the ld. CIT(A). Aggrieved by the order of the ld. CIT(A), the assessee has preferred this appeal before the Tribunal. 9. At the time of hearing before us, the ld. counsel for the assessee has filed written submissions 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management experiences and business strategies which are based on common sense, past experience, etc., and has nothing to do with the pharma industry in particular. Please refer to the illustrative presentation made by Prof. C.K. Prahlad at page Nos. 10-65 of PB. u As per the Treaty, provisions of Article 12(4)( b) of the Treaty applies to rendering of only such technical or consultancy services which can 'make available' technical knowledge, experience, skill or know-how, etc. In other words, in order to attract the taxability of an income under Article 12(4)(b), not only the payment should 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). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e." u In the case of Intertek Testing Services India (P.) Ltd. ( 307 ITR 418 ), the Authority for Advance Ruling after extracting the relevant portion of MoU between India and US, clarified the meaning of the expression 'make available' as under : "The service should be aimed at and result in transmitting the technical knowledge, etc., so that the payer of service could derive an enduring benefit and utilize the knowledge or know-how in future on his own without the aid of the service provider. By making available the technical skills or know-how, the recipient of the service 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enabled to apply the technology. Further consultancy services of a non-technical nature are not taxable under Article 12(4) of the treaty. Geographical specific data and information inputs supplied by the appellant-companies were in the nature of commercial and industrial information and there was no material to suggest that such services enable the recipients of these services to apply the technology." u In Dy. CIT v. Boston Consulting Group (P.) Ltd. 94 ITD 31 (Mum. - Trib) (Refer Page Nos. 150-155 of PB-II), it has been held that strategy consultancy 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technology can be said to have been made available to the assessee-company by CKP Inc. as the services rendered by them to the assessee-company were merely in the nature of sharing management experiences and business strategies. As held by AAR in the case of Federation of Indian Chambers of Commerce & Industry (FICCI) (supra), entrepreneurial workshops does not make available any technology, knowledge or skill though they open up new vistas of thinking. In the case of Intertek Testing Services India (P.) Ltd., In re [2008] 307 ITR 418 2 (AAR - New Delhi), 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 sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not chargeable to tax in its hand in India. Consequently, the assessee-company was not liable to deduct tax at source from the said payment made to CSK and no liability could be fastened on it under section 201/201(1A). We, therefore, reverse the impugned order of the ld. CIT(A) upholding the order passed by the Assessing Officer on this issue under section 201/201(1A) and allow the appeal of the assessee. 15. Now, we shall take up the appeal of the revenue being ITA No. 4624/Mum./09 wherein the following grounds are raised :- "1. On the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities involved in the bio-equivalence clinical trials and analytical charges and stated that the assessee-company identifies the generic product for bio-equivalence study and the formulations of the bio-equivalent drug is developed by it in its laboratory. Further, the pre-clinical trials on animals and in law and clinical trials on healthy human on pilot study basis are already conducted by the assessee-company. However, in order to register, the drug and submit abbreviated. New Drug Application (ANDA) to the Authority 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... search International of Canada are towards BE Study of Amioclipine 10 Mg tablets of the assessee Co. v. Norvase 10 Mg. Tablets of M/s. Phizer in healthy male and female Volunteers under Tasting Conditions and Fed conditions. The total payment made is to the tune of Rs. 1,22,71,143. In the case of payments made to M/s. Ana Pharma Inc. totalling to Rs. 1,19,03,304 is for BE Study of Carvedilol 12.5 Mg. 2 way in fasting and fed conditions. In the case of payments to DMP Clinical Research totalling to Rs. 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 Rs. 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure income'. The language of section 195(1) for deduction of income-tax by the payer is clear and unambiguous and casts an obligation to deduct appropriate tax at the rates in force." The Apex Court of India, thus, laid down the principal that if no application under section 195(2), 195(3) or 197 of the Act is filed, income-tax on gross sum paid to the non-resident has to be deducted and it is the statutory obligation of the person responsible for making payment of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng pharmaceutical company and has in-house research facility approved by DSIR under section 35(2AB) of the Act. The appellant develops different new generic drugs which found to be equivalent to some other reference during patent protection life. If the appellant wants to claim newly developed generic drug as equivalent to original reference drug. The appellant has to establish its claim before FDA Authorities by leading evidence like certificate 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 Rs. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ITO v. De Beers India Minerals (P.) Ltd. [2008] 113 TTJ (Bang.) 101 : [2008] (297 ITR (AT) 176), the assessee was engaged in the business of prospecting and mining diamonds for which it was granted licenses by the State Governments of Karnataka, Andhra Pradesh and Chhattisgarh. It engaged Fugro of Netherlands for performing air-borne geographical services on the helicopter hired by the assessee, process data and provide reports. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been made to countries where the definition of expression "Fees for technical services" akin to section 9(1)(vii) is applicable. There is no merit in the submission that, even for these residents, the service cannot be considered to be technical service but should be regarded as commercial service. The appellant was definitely required to withhold tax while making remittances of Rs. 1.79 lakhs to different 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 Rs. 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P.) Ltd. ( 94 ITD 31 ) (Mum. - Trib.) (Refer Page Nos. 150-155 of PB-II). u The fact that the above definition creates charge only in respect of technical services, i.e., in respect of services which pertain to technology and does not extend to commercial services which do not relate to transfer of technology is supported by the protocol clarification. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices to apply the technology of GIA (Para 8) contained in the report. This, according to the Court, did not involve transfer of any technical knowledge or experience from GIA to the client nor the rendering of any service by GIA covered by Article 12 of DTAA, so as to warrant deduction to tax under section 195 of the Act (Para 11). 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 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Dy. CIT ( 91 ITD 133 ) (Delhi). 24. We have considered the rival submissions and also perused the relevant material on record. The assessee, in the present case, is a pharmaceutical company having in-house research facility. In order to claim that any newly developed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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