AAR rules Notification 04/2019 doesn't apply to agro-chemical R&D services, taxable at 18% GST under Section 13(3)

The AAR-TN ruled that Notification 04/2019-Integrated Tax dated 30th September 2019 does not apply to research and development services provided by the applicant in the agro-chemical sector. The applicant conducted testing and analysis of mosquito nets for foreign sponsors, determining active ingredient content. The AAR held that these services relate to quality studies of insecticide-infused bed nets for pest control, not pharmaceutical research aimed at drug development. The notification specifically covers pharmaceutical sector R&D services only, with no provisions extending to agro-chemical sector. Consequently, the place of supply remains under Section 13(3) of IGST Act 2017, making services taxable at 18% GST.

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Issues Involved:
1. Applicability of Notification No. 04/2019 - Integrated Tax on services supplied by the applicant in relation to the agro-chemical sector.
2. Determination of place of supply for the services provided by the applicant.
3. Comparison and nexus between pharmaceutical and agro-chemical sectors.

Detailed Analysis:

Issue 1: Applicability of Notification No. 04/2019 - Integrated Tax on Agro-chemical Sector Services
The applicant, a society registered under the Tamil Nadu Societies Registration Act, 1975, engaged in research and development services related to the agro-chemical sector, sought clarity on whether Notification No. 04/2019 - Integrated Tax, dated 30th September 2019, applies to their services. The notification specifies that the place of supply for research and development services related to the pharmaceutical sector shall be the location of the recipient of services, provided certain conditions are met. The applicant argued that their services, though related to the agro-chemical sector, should be treated similarly due to the similarities in the research and development processes of both sectors.

Issue 2: Determination of Place of Supply
The applicant has been charging GST at 18% on their services, considering the place of supply to be in India under Section 13(3) of the IGST Act, 2017. This section states that the place of supply for services related to goods made physically available to the supplier is the location where the services are actually performed. The applicant contended that the place of effective use and enjoyment of the services is outside India, thus qualifying as export of services under Notification No. 04/2019 - Integrated Tax.

Issue 3: Comparison and Nexus Between Pharmaceutical and Agro-chemical Sectors
The applicant highlighted the similarities between the pharmaceutical and agro-chemical sectors, noting that both undergo similar research, development, and testing processes. They argued that the principles of Good Laboratory Practice (GLP) apply to both sectors, and thus, the same treatment should be extended to services related to the agro-chemical sector.

Analysis and Findings:

Applicability of Notification No. 04/2019 - Integrated Tax
The authority noted that Notification No. 04/2019 - Integrated Tax explicitly applies to research and development services related to the pharmaceutical sector. The notification does not extend to the agro-chemical sector. The authority emphasized that the power to notify any description of services or circumstances where the place of supply shall be the place of effective use and enjoyment of a service lies with the Government under Section 13(13) of the IGST Act. The clear and unambiguous language of the notification restricts its applicability to the pharmaceutical sector only.

Determination of Place of Supply
The authority examined the agreements entered into by the applicant with foreign service recipients. The services involved quality analysis of Long Lasting Insecticidal Nets (LLIN) by determining the quantity of active ingredients like alpha-cypermethrin and BPO. These services are related to the agro-chemical sector and not the pharmaceutical sector. As per Section 13(3) of the IGST Act, the place of supply for these services is where the services are actually performed, i.e., in India. Therefore, the services do not qualify as export of services under the existing notification.

Comparison and Nexus Between Sectors
The authority acknowledged the similarities between the research and development processes of the pharmaceutical and agro-chemical sectors. However, they reiterated that the notification specifically applies to the pharmaceutical sector. The applicant's argument that the same principles should apply to the agro-chemical sector was not accepted, as the notification's language is clear and does not include the agro-chemical sector.

Conclusion:
The authority ruled that Notification No. 04/2019 - Integrated Tax does not apply to the research and development services provided by the applicant in relation to the agro-chemical sector. The place of supply for these services remains in India under Section 13(3) of the IGST Act, 2017, and the services are subject to GST at 18%.

Ruling:
The Notification No. 04/2019 - Integrated Tax, issued on 30th September 2019, shall not be applicable to the services supplied by the applicant, i.e., research and development services provided in relation to the agro-chemical sector.

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