TMI Blog2016 (11) TMI 1358X X X X Extracts X X X X X X X X Extracts X X X X ..... a and in turn outcome of the R & D as well as clinical trials will be belonging to Cipla. Thus the outcome product of the R & D as well as clinical trials would not belong to the assessee or its subsidiary but the Cipla had the right over the same. Therefore the Cipla has right to acquire the outcome in the shape of technical information, technology documentation, know how and process involved in all clinical R&D. Though the assessee has reimbursed the expenses to its subsidiary however in case the payment is considered as tax for technical services then the element of profit becomes irrelevant as the gross payment is taxable. Thus it is clear under Article 13(3) of DTAA in question there is no clause of make available and the terms FTS means payment of any kind in consideration for rendering of managerial, technical or consultancy services/provision for services by technical or other personnel. Conducting clinical trials & R&D is clearly a service which is technical in nature therefore providing the outcome of the research to Cipla through the assessee clearly falls under the ambit of the term FTS as per the Article 13 of the DTAA between India & Malaysia. Thus, we do not find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cisions, which are not all applicable to the Appellant's case. (a) Van Oord ACZ Marine Contractors BV Vs. Asstt. Director of Income tax (International Taxation) (17 ITR [Trib] 103) Chennai Bench (b) Infosys Technologies Ltd., In re (350 ITR 178) (ARR). (e) The learned CIT(A)-IV, Bangalore has overlooked the appellant's alternative plea of treating the amount reimbursed as reimbursement of actual costs and not to treat as , 'fees for technical payment'. III. The Appellant craves leave to add, amend or alter any of the forgoing grounds. IV. For these and any other grounds that may be urged before the Hon'ble ITAT, it is prayed that the Hon'ble ITAT may allow the appeal with cost. 3. The assessee is a private limited company registered and incorporated under Companies Act, 1956. The assessee is a research driven company formed with a mandate of R D and manufacturing of Therapeutic Product based on stem cells. M/s. Stempeutics Research Malaysia SDN BHD, Malaysia (in short SRM, Malaysia ) is a subsidiary of assessee and based at Malaysia. Subsidiary SRM, Malaysia is a stem cell research company engaged in development and manufacturing of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idiary to Cipla on a principle to principle basis. Therefore the assessing authority has committed a patent error in considering this arrangement as the product developed for Cipla. Clinical trial of stem cell drugs are carried out by the subsidiary to provide any technical services to assessee to be utilized in India and the same are done by the subsidiary in Malaysia. In terms of MOU between the assessee and its subsidiary the details of various expenditure incurred by its subsidiary for any stem cell product research were to be furnished. In compliance of tax stipulation, the subsidiary furnished all the relevant details in debit note. It is not the case of the assessee that its subsidiary which is not carrying on any clinical trial as it is an integral part of the R D of new drug. In fact it is the main expenditure of reimbursement by the assessee to a subsidiary for which funds are granted by Cipla. The clinical trial carried out by the subsidiary in Malaysia in no way make out a case of rendering a technical services to assessee in India. The learned Authorised Representative has then referred to the provisions of section 9(1)(vii)(b) of the Act and submitted that it is stipu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntative has submitted that the meaning of FTS as provided in the Act as well as under DTAA clearly brings their payment under the ambit of FTS. The learned Departmental Representative has relied upon the orders of the authorities below as well as the decision of Hyderabad Bench of this Tribunal in case of Dr. Reddy s Foundation Vs. DCIT (2015) 68 SOT 47 (Hyd-Trib.). 6. We have considered the rival submissions as well as the relevant material on record. The payment in question were made by the assessee in respect of research and development and operation towards clinical trial carried out by the Malaysian subsidiary of the assessee. As per the tripartite Memorandum of Understanding (MOU) between the assessee, its Malaysian subsidiary and Cipla, it was agreed upon between the parties that Cipla would make the payment towards product development fees to assessee to be utilized by it for its clinical trial, research and development and operational expenditure in India as well as in Malaysia. The relevant clause of the MOU is clause No.2 which reads as under : 2. Details of Understanding : Stempeutics India had entered into an agreement with Cipla Ltd on 11th day of June ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Malaysian company and whether there was any liability for taxation in India. Once both conditions are satisfied Tax deduction should have been effected. Chargeability happens on gross basis as per the DTAA and the IT Act, 1961 and once chargeability is defined as per the decision of Hon'ble Supreme Court in the case of GE Technology, it has to be brought to tax as per the mode of computation provided in the IT Act and the DTAA which is on a gross basis. The assessee s submission that no TDS is to be deducted is not acceptable for the reason that the agreement providing for Fee for Technical Services does not give an option to Indian company whether or not to incur such expenses. The agreement has to be understood and read in totality. Since it is incapable of being disintegrated the components of the contractual agreement cannot be placed in water tight compartments. It is an integral part of the agreement which binds the assessee to make the payment, in the absence of which there would be possibly be no rendering for Fees for Technical Services. If one was to accept the contention of the assessee, that TDS on FTS is to be done only for the component relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Article 13 Clause 3 as under : Article 13 (3) : The term fees for technical services means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personnel but does not include payments for services mentioned in Article 14 and Article 15 of this Agreement. Thus it is clear under Article 13(3) of DTAA in question there is no clause of make available and the terms FTS means payment of any kind in consideration for rendering of managerial, technical or consultancy services/provision for services by technical or other personnel. Conducting clinical trials R D is clearly a service which is technical in nature therefore providing the outcome of the research to Cipla through the assessee clearly falls under the ambit of the term FTS as per the Article 13 of the DTAA between India Malaysia. The learned Authorised Representative has relied upon various decisions however, we find that the decision in the case of CIT Vs. Dunlop Rubber Co. Ltd. (supra) there was no issue of FTS but it was only sharing of expenses by the parent and its subsidiaries for jointly c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee company. In fact, Assessee company did not get any benefit out of the said services in USA and assessee was only getting a report in respect of field study on its behalf, which would help it in getting registered with the Regulatory Authority. Since there is no making available of technical skill, knowledge or expertise or plans or designs in the present case, the amounts paid by Assessee do not fall under Article 12, but come within the purview of Article 7 of the DTAA. Therefore, the amounts paid are to be considered as business receipts of the said CROs and since they do not have any PE in India on which aspect there is no dispute, there is no need to deduct tax at source. Similar issue was analysed and considered by the AAR in the case of Anapharm INC (supra), which is one of the recipients in Assessee s case also. The AAR in that case held as under- Mere provision of technical services is not enough to attract art. 12(4)(b). It additionally requires that the service provider should also make his technical knowledge, experience, skill, know-how etc., known to the recipient of the service so as to equip him to, independently perform the technical function himself in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneric drugs developed by it, then the applicant shall not claim any interest whatsoever in such right. It is altogether a different aspect. By agreeing to this provision, the applicant has not made its technical expertise, know-how, etc., available to R. It is only natural that R which has developed the generic drug should enjoy the intellectual property rights in relation thereto. The analytical test has not contributed to the development of new generic drug. The test has only shown whether that drug is as efficacious as the reference drug. Development of new drug and testing its efficacy are not one and the same thing. By merely acquiring knowledge of the testing methods one does not get any insight as to how a new drug could be developed. In the light of the above discussion interpreting the expression 'make available', it follows that c1. (b) of art. 12(4) relied upon by the Revenue does not come into play and the services in question cannot be considered to be fees for included service within the meaning of this provision. The second limb of cl. (b) refers to development and transfer of a technical plan or technical design . Obviously, that has no application here. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taxable in India by virtue of relevant provisions of DTAA between India and Canada. 12. We agree with the above opinion expressed by the AAR and accordingly, we uphold that the amounts paid by Assessee company to the CROs are not taxable in India. That being so, there is no need for Assessee to deduct tax at source. Consequently, the impugned order of the CIT(A) is confirmed and the grounds raised by the Revenue in these appeals are rejected . 9. But In this case, Ld. CIT(A) who considered the case of Dr. Reddy Laboratories also earlier, distinguished the facts to state that these are not agreements with contract research organisations but with independent research entities. The clause of the agreement also indicate that assessee has rights over the patents, secret knowledge etc., attained during the course of conducting research. It was also further observed that assessee admits that the payments are taxable as fees for technical services (vide submissions made and extracted in para 15 of Ld. CIT(A) order), whereas, in the case of Dr. Reddy Laboratories the payments are not accepted as fees for technical services, even under the provisions of I.T. Act. Moreover, as rightl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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