2008 (9) TMI 27 - AAR - Income Tax

Contract Research Org Fees for Bioequivalence Tests Not Taxable in India under DTAA

The Authority ruled that the fees received by the Canadian contract research organization from Indian pharmaceutical companies for bioequivalence tests ... Applicant provides clinical & bioanalytical services to various pharmaceutical companies including some Indian companies – held that consideration received by applicant would be its business income - In view of Article 7 read with Article 5 of DTAA, such income can be taxed only if the applicant has a Permanent Establishment in India - fee received by applicant is in the nature of ‘business profits’ under Article 7 & the same is not taxable in India as the applicant does not have a PE in India Issues Involved:1. Taxability of fees received by the applicant from Indian pharmaceutical companies under the Income Tax Act, 1961 and the Double Taxation Avoidance Agreement (DTAA) between India and Canada.2. Classification of the fees as 'fees for included services' or 'royalty' under the DTAA.Detailed Analysis:1. Taxability of Fees under the Income Tax Act, 1961 and DTAA:The applicant, a Canadian contract research organization, sought a ruling on whether fees received from Indian pharmaceutical companies for clinical and bioanalytical studies are taxable in India under the Income Tax Act, 1961 and the DTAA between India and Canada. The applicant argued that the fees are 'business profits' and not taxable in India due to the absence of a permanent establishment (PE) in India under Article 7 read with Article 5 of the DTAA.The Director of Income-tax (International Taxation), Mumbai, contended that the fees qualify as 'fees for technical services' under section 9 of the Income-tax Act, 1961, and 'fees for included services' under Article 12 of the DTAA. The Revenue also suggested that the fees could be considered 'royalty income.'2. Classification as 'Fees for Included Services' or 'Royalty':A. Fees for Included Services:The main issue was whether the services provided by the applicant 'make available' technical knowledge, experience, skill, know-how, or processes to the Indian companies, as required under Article 12(4)(b) of the DTAA. The applicant argued that it does not transfer any technical knowledge or processes to the clients, only providing final reports and conclusions, which do not enable the clients to perform the tests independently.The Revenue argued that the applicant's services involve high technical expertise and the test results constitute know-how, thus making the technology available to the Indian companies.The Authority examined the agreements with Sandoz and Ranbaxy, noting that the applicant retains ownership of the methods and protocols used in the tests. The agreements and declarations from Sandoz and Ranbaxy confirmed that no technical knowledge or processes were transferred to the Indian companies. The Authority concluded that the services did not 'make available' technical knowledge, and thus, the fees do not qualify as 'fees for included services' under Article 12(4)(b) of the DTAA.B. Royalty:The Revenue's argument that the fees could be considered 'royalty income' was also examined. According to Article 12(3) of the DTAA, royalty includes payments for the use of or the right to use intellectual property or information concerning industrial, commercial, or scientific experience. The Authority found that the applicant's agreements involve the provision of services using its expertise, without imparting any technical knowledge or processes to the Indian companies. Therefore, the fees do not qualify as 'royalty income.'Conclusion:The Authority ruled that the fees received by the applicant from Sandoz and Ranbaxy for bioequivalence tests are 'business profits' under Article 7 of the DTAA and are not taxable in India, as the applicant does not have a permanent establishment in India. The services provided do not 'make available' technical knowledge or processes, nor do they qualify as 'royalty income.'