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2016 (11) TMI 1358 - ITAT BANGALORE

2016 (11) TMI 1358 - ITAT BANGALORE - TMI - TDS u/s 195 - nature of payment made - reimbursement of expenses or payment towards product development fees to assessee - Double Taxation Avoidance Agreement - falling under the ambit of the term FTS - non deduction of tds - assessee treated as 'assessee in default' under Section 201(1) and 201(1A) - Held that:- The payment in question were made by the assessee in respect of research and development and operation towards clinical trial carried out by .....

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clinical trials undertaken by the assessee and its Malaysian subsidiary was to be borne by Cipla 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 .....

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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 any error or infirmity in the orders of the authorities below in holding that the payment in question is FTS and consequently the assessee was liable to deduct tax at source under Section 195 of the A .....

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01(1) and 201(1A) of the Income Tax Act, 1961 (in short 'the Act') for the Assessment Years 2011-12 and 2012-13 respectively. 2. The assessee has raised common grounds in these appeals. The grounds raised for the Assessment Year 2011-12 are reproduced as under : I. The order of the learned Commissioner of Income tax (Appeals)-IV, Bangalore is opposed to law and on facts of the case. II. (a) The learned CIT(A)-IV, Bangalore has erred in confirming the Assessing Officer's order wherein .....

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t' under Section 201(1) and 201(1A) read with Section 195 of the Income-tax Act, 1961. (c) The learned CIT(A)-IV, Bangalore has failed to applying the following decisions relied on by the Appellant. (i) ITO vs. Dr. Willmar Schwabe [2005] 3 SOT 71 (ITAT - Mumbai) (ii) CIT vs. Tata Engg. & Locomotive Co. Ltd. (245 ITR 823) Delhi (iii) CIT vs. Industrial Engg. Projects (P.) Ltd. (202 ITR 1014) Mumbai (iv) Clifford Chance, United Kingdom (82 ITD 106, Mumbai - ITAT) (v) CIT vs. Dunlop Rubber .....

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unt 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 .....

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tween the assessee and the Cipla Ltd. wherein a sum of ₹ 37 Crores was paid by Cipla Ltd. for carrying assessee's research activity at all the units both the assessee and its Malaysian subsidiary. In consideration of the said amount the assessee would grant M/s. Cipla Ltd., the exclusive right to purchase all its products. Malaysia subsidiary carried out clinic trial and R&D on behalf of the assessee and expenses incurred towards research activity of clinical trial and R&D are .....

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e as assessee in default under Section 201(1) and 201(1A) of the Act. The assessee challenged the action of the Assessing Officer before the CIT (Appeals) but could not succeed. 4. Before us, the learned Authorised Representative of the assessee has submitted that the tripartite agreement between the assessee, Cipla and its subsidiary is not legally enforceable agreement. This agreement is only a frame work of tripartite agreement mutually agreed among the parties therefore there is no provision .....

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o the assessee. Further the assessee and its subsidiary are developing products for their own business in their own independent status. The agreement with Cipla is to sell the new product manufactured by the assessee and its subsidiary 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 techni .....

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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 stipulated under this provision as what is income deemed to accrued or a .....

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rgeable to tax in India. She has further contended that it is reimbursement of expenditure without any element of income and therefore it will not fall under the ambit of the sum chargeable to tax either under Section 9 of the I.T. Act or under Article 2 of the Indo Malaysia DTAA. It is nothing but the business income of the SRM, Malaysia attributable to Article 7 of DTAA therefore, in the absence of any PE in India in terms of Article 5 of DTAA the same is not chargeable to tax in India. In sup .....

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uct tax if such sum is chargeable to tax under the Act. The reimbursement of expenses made by the assessee to SRM, Malaysia are all on principle to principle basis. As per the agreement the final product was to be sold to Cipla on principle to principle basis. Hence the amount paid by the assessee to subsidiary at best be treated as business income under DTAA and in the absence of PE is not chargeable to tax in India. Learned Authorised Representative relied upon the following decisions : i. Dir .....

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tive 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 Und .....

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June 2009, whereby Cipla Ltd. would be making payment towards Product Development Fees to Stempeutics India, to be utilized by it for its Clinical Trials, R & D and Operational Expenditure at India & Malaysia. Stempeutics India would make regular reimbursement of expenditure to Stempeutics Malaysia out of the payment received from Cipla Ltd. The assessee has claimed right from beginning that this payment is only reimbursement of expenditure and there is no element of profit therefore th .....

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2009, whereby Cipla Ltd. ;would be making payment towards Product Development Fees to Stempeutics India, to be utilized by it for its Clinical Trials, R & D and Operational Expenditure at India & Malaysia. Stempeutics India would make regular reimbursement of expenditure to Stempeutics Malaysia of the payment received from Cipla Ltd….. Therefore all expenditure incurred in pursuance to this agreement have been treated in lieu of the services rendered by the foreign company for wh .....

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clinical treats, it does not one take away the character of the receipt itself which is for technical services (as per the law dictionary it is described as a charge for labor or services esp. professional services). It is relevant to note that there is no separate agreement between CIPLA and the Malaysian Company. The essential question is what is the services rendered for which income arises for the Malaysian company and whether there was any liability for taxation in India. Once both conditi .....

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chnical 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 co .....

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pose and character of such a payment. Therefore the same is to be treated as a inseparable part of FTS and the addition is made accordingly, by disallowing the said expenditure on account of non-deduction of TDS. Therefore both as per the DTAA and the provisions of the IT Act, 1961, payment received for the purposes for FEE FOR TECHNICAL SERVICES is liable to be taxed in India. The CIT (Appeals) has confirmed the action of the Assessing Officer by holding that the payment in question appears as .....

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rvices mentioned in Articles 14 & 15 of this Convention. There is no dispute that as per the MOU between the parties, the cost of R & D as well as clinical trials undertaken by the assessee and its Malaysian subsidiary was to be borne by Cipla 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 .....

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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 c .....

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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 conducting some research activity for their own business activity. Similarly in the case of DIT Vs. Sunmicro System India Pvt. Ltd. (supra), the Hon'ble High Court has upheld the finding of the Tribunal by recording the fact that the service was not made available therefore the said decision is based on the make a .....

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cal issue was considered and decided in paras 8 & 9 as under : 8. We have considered the rival contentions and perused the facts on record. It is an admitted fact that in the case of Dr. Reddy Laboratories P. Ltd., (supra) the issue was whether the payments are to be treated as fees for technical services under Article 12 of the DTAA or as business profits in terms of Article 7 of DTAA with USA and considered in those cases that the payments are in the nature of business receipts to be consi .....

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source country only if such services make available any technical knowledge, expertise, etc. or there is transfer of technical plan or design. In this case, as rightly considered by the learned CIT(A), Assessee was conducting clinical trials through the CROs in USA to comply with the regulations therein and the CROs who are experts in this field were only conducting studies and submitting the reports in relation thereto. They are neither transfer of technical plan or technical design nor making .....

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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 .....

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ge available at the same time is satisfied. In the present case, the applicant renders bioanalytical services which, no doubt, are very sophisticated in nature, but the applicant does not reveal to its clients as to how it conducts those tests or the inputs that have gone into it, so as to enable them to carry out those tests themselves in future. A broad description or indication of the type of test carried out to reach this conclusion does not enable the applicant's client to derive requis .....

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ndian client. From the perusal of the relevant agreements, no provision is found which would entitle the clients to know the details of the analytical methods and procedures employed by the applicant in carrying out the bioequivalence tests. The only doubt cast by c1. 15 of the agreement with 5 is cleared by S's statement that the said clause which was part of standard format was never given effect to. It seems to be inapplicable also having regard to the actual modalities of the transaction .....

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ulting from the services. This would mean that, if on the basis of these results, the client is able to acquire patent or other intellectual property rights in respect of new generic 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 shoul .....

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ake 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. The applicant uses its experience and skill itself in conducting the bioequivalence tests, and provides .....

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reover, the test reports are drug specific. Hence the material furnished by the applicant will not in any way help the customers to facilitate further research and development of new drugs as contended by the Revenue. As such, the fees received by the applicant are to be treated as business income and not royalty income. Since the applicant is in the business of providing bioanalytical services to various pharmaceutical companies, the consideration received by it from them would be its business .....

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nd the same is not taxable in India as the applicant does not have a PE situated in this country.-Raymond Ltd. vs. Dy. CIT (2003) 80 IT] (Mumbai) 120 : (2003) 86 ITD 791 (Mumbai), McKinsey & Co. Inc. (Phillippines) & Ors. vs. Asstt. Director of IT (2006) 99 IT] (Mumbai) 857 concurred with; Diamond Services International (P) Ltd. vs. Union of India (2008) 216 CTR (Bom) 120 : (2008) 169 Taxman 201 (Bom) relied on. Conclusion: Applicant, tax resident of Canada, only providing final results .....

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essee 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 o .....

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