2023 (11) TMI 614 - AT - Service Tax

USFDA pharmaceutical approval fees exempt from service tax under reverse charge mechanism

The CESTAT NEW DELHI held that payments made to USFDA as fees for obtaining pharmaceutical approval do not attract service tax under reverse charge ... Levy of service tax - reverse charge mechanism - payments made by the appellant to USFDA as fees for obtaining approval - time limitation - penalty - HELD THAT:- On identical matter in the case of Vidhi Dyestuff Mfg. Ltd. versus Raigad [2016 (4) TMI 111 - CESTAT MUMBAI], a bench of this Tribunal held in similar set of facts the Tribunal in the case of M/S. KG. DENIM LTD. VERSUS CCE, SALEM [2014 (9) TMI 544 - CESTAT CHENNAI] had held that payment of charges for textile processing to M/s Testex, Swiss will not fall under the category of reverse charge mechanism. The ratio of the said judgment squarely covers the issue in the case in hand. As is evident from paragraph 3 of CBEC Circular No. 89/7/2006-ST dated 18.12.2006 even according to the Board, if an authority performs a service, which is in the nature of statutory activity and a fees is levied for the purpose it does not fall within the ambit of a taxable service, but if a service is performed by the authority, which is not in the nature of statutory activity it will be exigible to service tax. There cannot be any two opinions that USFDA is a statutory authority mandated by the US laws to regulate the import of pharmaceuticals into the country. It is the counterpart of the Drugs Controller General of India without whose approval pharmaceuticals manufactured abroad cannot be imported into India. Therefore, any fees paid to obtain the approval will get squarely covered even as per the CBEC Circular. The distinction drawn by the lower authorities between statutory authorities within India and the statutory authorities outside India has no legal basis. As the issue is found in favour of the appellant on merits itself, the submissions on the limitation and penalty need not be examined - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts paid to a foreign statutory authority as fees for obtaining approval to export pharmaceutical products constitute 'Technical Inspection and Certification Agency Service' liable to service tax under the reverse charge mechanism. 2. Whether fees paid to a foreign sovereign/public authority performing statutory functions are exempt from service tax under the Board's Circular distinguishing statutory functions from taxable services. 3. Whether, having been registered and filing returns, extended period of limitation and penalties could be invoked where the payment was disclosed in the appellant's records and the issue was primarily one of interpretation. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Exigibility of service tax on fees paid to a foreign statutory authority under reverse charge Legal framework: Service Tax provisions including definition of taxable services (section 65(105)), reverse charge mechanism (section 66C), and liability for non-payment (proviso to section 73(1)) were applied by the authorities in the impugned order. Precedent treatment: The Tribunal has in earlier identical fact situations held that payments to certain foreign testing/certification bodies for statutory approvals do not fall within the reverse charge net; those decisions were relied upon by the appellant and expressly followed by the Tribunal in the present matter. Interpretation and reasoning: The Tribunal examined the nature of the foreign authority's activity (approval/certification mandated by foreign law to regulate import of pharmaceuticals). It held that the activity is statutory in nature-analogous to domestic regulatory authorities performing mandatory functions-and that the fees are charged as part of the statutory regime. Applying the Board's Circular (discussing fees collected by sovereign/public authorities for statutory duties), the Tribunal reasoned that such statutory functions are not 'provision of taxable service' to any particular individual for consideration and thus fall outside service tax levy, even when performed by a foreign statutory authority. Ratio vs. Obiter: Ratio - The holding that fees paid to a foreign statutory authority for mandatory regulatory approval are not taxable services under the reverse charge mechanism (when the service is statutory) is treated as the dispositive reasoning. Obiter - Discussion distinguishing services that are non-statutory or purely commercial if performed by a public authority (not applicable on facts) serves as interpretative guidance. Conclusion: Fees paid to the foreign statutory regulator for mandatory approval of pharmaceuticals are not exigible to service tax under reverse charge; the Tribunal allowed the appeal on this ground. Issue 2 - Application of Board's Circular on fees collected by sovereign/public authorities, including foreign authorities Legal framework: The Board's Circular clarifies that activities performed by sovereign/public authorities under statutory provisions are not taxable services, while non-statutory, commercially provided activities by such authorities may be taxable. Precedent treatment: The Tribunal considered prior decisions where the Circular's rationale was applied to deny service tax on fees payable to foreign regulatory/testing bodies performing statutory duties and relied on that line of authority. Interpretation and reasoning: The Tribunal rejected the Revenue's distinction limiting the Circular's benefit to Central or State Governments of India. It held there is no legal basis for confining the exemption to domestic sovereign authorities; instead, the decisive criterion is whether the authority's activity is statutory in nature. As the foreign authority's approval was a statutory regulatory function under foreign law, the Circular's reasoning applied equally. Ratio vs. Obiter: Ratio - The Circular's principle applies to foreign statutory authorities when the activity concerned is a statutory obligation; thus fees are not taxable. Obiter - Comments on hypothetical situations where a public authority performs non-statutory services for consideration (which would attract tax) are advisory. Conclusion: The Board's Circular supports non-taxability of statutory fees paid to foreign regulatory authorities; the distinction urged by Revenue between domestic and foreign sovereigns was rejected. Issue 3 - Extended limitation period and penalty where records disclosed payment and issue was interpretational Legal framework: Provisions permitting extended period of limitation and imposition of penalty under the relevant service tax statute were invoked by Revenue in the original proceedings. Precedent treatment: The Tribunal noted contention and precedent that voluntary disclosure and absence of intent to evade can militate against invoking extended limitation and penalties; however, it did not need to decide these questions on the merits after deciding the primary taxability issue. Interpretation and reasoning: The Tribunal concluded that because it had decided the substantive issue in favour of the appellant (no tax exigible), challenges on limitation and penalty became unnecessary to decide. It observed appellant's registration and return-filing, and its argument that the matter was interpretational and that payments were in the records, but expressly refrained from ruling on limitation and penalty given the dispositive outcome on taxability. Ratio vs. Obiter: Obiter - Observations that the matter was at best an interpretational issue and that extended limitation and penalty need not be examined are non-decisional in light of the main ruling. Conclusion: Questions on invocation of extended period and imposition of penalty were not adjudicated because the Tribunal allowed the appeal on merits; consequential relief was directed accordingly. Cross-references and Final Disposition Cross-reference: The Tribunal expressly followed its prior decisions applying the Board's Circular to fees charged by foreign statutory regulators and reiterated that the statutory nature of the activity is the decisive test (see Issues 1 and 2 above). Disposition: The Tribunal set aside the impugned order sustaining service tax demand and directed consequential relief; having decided the core taxability issue in the appellant's favour, ancillary questions on limitation and penalty were left undecided.