TMI Blog2008 (9) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... s of drugs already being marketed. 3. As stated in the application, the applicant has entered into agreements with some Indian pharmaceuticals companies, namely Sandoz Private Limited, Ranbaxy Research Laboratories, etc., for rendering the above services. According to the applicant, these are standard agreements, similar to the one the applicant has signed with other companies. A copy each of the agreements entered into with Sandoz Private Limited and Ranbaxy Research Laboratories is enclosed with the application. 4. The applicant further states that it evaluates, on behalf of its clients, the bioequivalence and/or comparative bioavailability of the new generic drug vis-a-vis the reference drug which is already available in the market. The applicant has devised various methods / protocols for carrying out the evaluation work, which are in conformity with international regulations, such as International Committee for Harmonization, Good Clinical Practices, Good Laboratory Practices, etc. The reports produced by the applicant are acceptable to the regulatory authorities, including US Food and Drug Administration (FDA). The applicant states that all the methods/protocols dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luded services', provided such services make available technical knowledge, experience, skill, know-how or process or consist of the development and transfer of technical plan or technical design. According to the applicant, technology shall be considered to have been 'made available' only when the recipient is enabled to apply that technology. The applicant further states that in its case the services provided by it does not satisfy the test of 'make available' under Article 12 of DTAA, since it does not result in transfer of any technical experience, know-how or technical plan or technical design to the Indian pharmaceutical companies. According to the applicant, the income in question is 'business profits', and in the absence of permanent establishment (PE), the same is not taxable in India by virtue of Article 7 read with Article 5 of DTAA. 6. The Director of Income-tax (International Taxation), Mumbai is the jurisdictional Commissioner in this case. He has submitted his comments vide his letter dated 24.09.2007 in which he has referred to certain provisions of the agreements which the applicant has entered into with Sandoz Private Limited and Ranbaxy Research Laboratorie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d services as well as royalty, the relevant provisions of the Act and the DTAA are extracted below. The relevant provisions of the section 9 of the Act are as under : Income deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed to accrue or arise in India :— (i) to (v) x x x x x x (vi) income by way of royalty payable by— (a) the Government ; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : Explanation 1 - x x x x x x Explanation 2.— For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lties and fees for included services 3. The term 'royalties' as used in this Article means : (a) payment of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work including cinematograph films or work on film tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 from activities described in paragraph 3(c) or 4 of Article 8. 4. For the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall destroy them, with the approval of Sandoz at the expiry of that period. In case, however, Sandoz desires to store them for a longer period for archiving, the same shall be handed over to Sandoz after the mandatory storage period. 8.4 Clause 6 deals with record storage, data protection, FDA financial disclosure, etc. According to this provision, the applicant shall be responsible for safe-keeping and storage of all data related to a particular study, for 15 years. At the expiry of this period, before destroying the data it will first give opportunity to Sandoz for arranging alternative storage. 9. The relevant provisions of the agreement that the applicant has entered into with Ranbaxy Research Laboratories are given below : Article 3 - Property of Results This Agreement specifically acknowledges that the COMPANY is and shall remain owner of all rights on intellectual property; tested samples, test compound(s) and patents arising from the said research project. The COMPANY shall receive 1 copy of all reports in standard ANPHARM format, and will have the right to use the results freely. The COMPANY will remain owner of all proprietary products developed pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand, submits that the fees paid to the applicant are in the nature of 'fee for technical services' under section 9(1)(vii) of the Act, and 'fee for included services' and 'royalty' under article 12 of DTAA. According to him biotechnical services are, in fact, technical services and the test result is know-how of the applicant. By furnishing its report, the applicant makes its technical experience and know-how known to the applicant. This amounts to making available technology or imparting technical knowledge to the applicant. Sandoz / Ranbaxy can use this knowledge for further research and development of drugs. Such payment made for the use of technology can thus be regarded as royalty income in the hands of the applicant. He seeks support for this proposition from paragraph 11 of OECD commentary and page 790 of Klaus Vogel on Double Taxation Conventions, in relation to article 12. According to him the Raymond case cited by the applicant, in fact, lends support to the case of the revenue. 12.1 As the main issue in this case is whether by providing its final test reports to Sandoz and Ranbaxy, the applicant 'makes available' to them its technical knowledge, experience, kn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keting consulting firm to do a computer simulation of the world market for such oil and to advise it on marketing strategies. Are the fees paid to the U.S. company for included services ? Analysis : The fees would not be for included services. The American company is providing a consultancy service which involves the use of substantial technical skill and expertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc., nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information service does not make the service a technical service within the meaning of paragraph 4(b)". 12.3. Though the MOU is not with reference to Indo-Canada DTAA, it is a valuable guide to understand the import of the expression 'make available'. It is, thus fairly clear that mere provision of technical services is not enough to attract Article 12(4)(b). It additionally requires that the service provider should also make his technical kno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... que by itself. The mere fact that the tests in question are highly technical in nature will not make a difference. In its affidavit the applicant affirms that only final results, conclusion of data of bioequivalence tests are provided to the recipient. Clinical procedure, analytical methods, etc., which are proprietary items of the applicant, have neither been nor will they ever be transferred, assigned or handed over to Sandoz or any other Indian client. From the perusal of the relevant agreements, we have not found any provision which would entitle Sandoz/Ranbaxy 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 Clause 15 of the agreement with Sandoz is cleared by Sandoz 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 as set out in the application. Then agreement with Ranbaxy says that Ranbaxy shall be the owner of the tested samples and test compounds. Further, the applicant will store tested samples and test compounds for three months and m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticle 12 of DTAA. While discussing paragraph (2) of Article 12 of the OECD Model Convention, OECD Commentary at paragraph 11 states that information concerning industrial, commercial or scientific experience alludes to the concept of know-how which is all the undivulged technical information that is necessary for the industrial reproduction of a product or process directly. Know-how represents what a manufacturer cannot know from mere examination of the product and mere progress of the technique. The Commentary further states that a know-how contract differs from contracts for the provision of services, in which one party undertakes to use the customary skills of his calling to execute the work himself for the other party. Payment made under the latter contract generally come in the category of business income. We find that in the present case the agreements of the applicant fall in the latter category, as the applicant uses its experience and skill itself in conducting the bioequivalence tests, and provides only the final report containing conclusions, to the applicant. The information concerning scientific or commercial experience of the applicant or relating to the method, ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
