2025 (11) TMI 198 - AT - Service Tax

Foreign clinical trial testing taxable as Technical Testing and Analysis under section 65(105); extended-period demands and penalties set aside

M/s. Biocon Limited Versus Commissioner of Central Excise & Service Tax, Bangalore

CESTAT held that services comprising clinical trials and analysis procured from foreign laboratories under a master agreement are taxable as Technical ... Classification of service - Technical Testing and Analysis Services or not - clinical trials and test provided by the foreign companies and used by the appellants - Extended period of limitation - penalty - HELD THAT:- It is not in dispute that the appellant had entered into Master Laboratory Agreement based on which the foreign companies undertook clinical trials and tests of the drug and formulations developed by the appellant were used by the appellant in India. Hence regarding taxability of the service, the Tribunal has taken a view in the matter of B.A. Research India Ltd [2009 (11) TMI 213 - CESTAT, AHMEDABAD], wherein it was observed that delivery of report to its clients was held to be an essential part of the service. Thus, following the ratio of the above decision and considering the terms of the agreement, it is found that appellant had received service of clinical trial study/analysis from the service providers based outside India and when making payment in foreign currency, it is classifiable under the taxable category of TTA Services in terms of Section 65 (105) of the Act as held by Adjudication Authority. Extended period of limitation - penalty - HELD THAT:- It is found that even if appellant had discharged the service tax, the same would be eligible for CENVAT Credit. As held in the matter of Dineshchandra R Agarwal Infracon Pvt. Ltd. vs. CCE, Ahmedabad [2009 (10) TMI 395 - CESTAT, AHMEDABAD], when appellant can take the credit and utilized it further for the payment of tax, naturally he would not get benefit for not paying such tax and attracting penal provision of law. Thus, there is no intention of evading taxes as alleged. Demand confirmed by invoking extended period of limitation and penalty imposed by adjudication authority are set aside. The demand along with interest is sustained only for the normal period and all other penalties are set aside - appeal allowed in part. ISSUES PRESENTED AND CONSIDERED 1. Whether clinical trials and tests conducted by foreign service providers and paid for in foreign currency fall within the definition of 'technical testing and analysis' (TTA) services under the Finance Act, given that the physical testing was performed outside India but reports/certificates were delivered to the Indian recipient. 2. Whether delivery of the testing/analysis report to the service recipient in India (or delivery outside India on their behalf) constitutes a part-performance in India such that the service is taxable under the Import of Services Rules/Export of Services Rules or otherwise qualifies as taxable TTA service. 3. Whether invocation of extended period of limitation and imposition of penalties for alleged non-payment/suppression are justified where the service tax, if charged, would have been eligible for CENVAT credit and where the appellant acted under a bona fide belief about taxability. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Classification of clinical trials/tests as 'technical testing and analysis' services Legal framework: The definition of 'technical testing and analysis' excludes testing relating to human beings or animals but expressly declares inclusion of testing and analysis undertaken for clinical testing of drugs and formulations. 'Technical testing and analysis agency' is any agency providing such services. The relevant statutory scheme treats certain services performed outside India as taxable/imported services under the Import of Services Rules and treats specified services performed outside India as export of service if conditions are met. Precedent treatment: The Tribunal has previously examined whether services consisting of clinical testing and delivery of reports fall within the TTA definition and how completion/delivery affects territorial treatment. Earlier Tribunal authority held that delivery of the testing/analysis report is an essential part of the service and may determine territorial character. Interpretation and reasoning: The Court examined the contractual scheme where foreign entities carried out the laboratory testing/clinical trials abroad and produced reports used by the Indian recipient. Given the statutory inclusion of clinical testing within TTA, the essential question becomes where the service is performed. The Tribunal found that, following the earlier reasoning, the production and delivery of the testing/analysis report are integral to the service's value - the analysis has no commercial utility to the client until the report/certificate is delivered. Where payment is made in foreign currency to foreign providers and the substantive testing activity occurred abroad, the activity nevertheless falls within the statutory description of TTA services when considered in light of how the service is completed and delivered. Ratio vs. Obiter: Ratio - Clinical testing and analysis of drugs/formulations (even when testing occurs abroad) fall within the statutory definition of TTA services where delivery of the testing/analysis report is an essential component of the service. Obiter - ancillary observations about contractual auxiliaries and broad commercial distinctions not necessary to the finding. Conclusion: The activities under the Master Laboratory Agreement are classifiable as TTA services under the Finance Act because they constitute clinical testing/analysis for drugs/formulations and the delivery of the report forms an essential component of that service. Issue 2 - Territorial treatment: whether delivery of report completes or partly performs the service outside India and effect on exemption/import rules Legal framework: Export/Import of Services Rules and Notification schemes provide that certain taxable services are treated as export when performed outside India (or partly performed outside India) and meet conditions such as delivery/use outside India and receipt of payment in convertible foreign exchange. Conversely, recipient-based provisions may bring services received in India within tax net if performance/part performance occurs in India. Precedent treatment: A prior Tribunal decision interpreted the Rules to hold that testing/analysis services are not complete until the report is delivered, and where reports were delivered to clients outside India the services were partly performed outside India and could be treated as export (with resulting exemption under relevant notification). Revenue relied on that view to contend delivery in India can make the service taxable as import. Interpretation and reasoning: The Court considered the competing positions: (a) delivery of report is merely communication of results and not separate taxable performance by the Indian recipient or (b) delivery is essential to completion of the TTA service and therefore drives territorial character. The Tribunal here followed the earlier view that delivery of the report is essential to completion; consequently, where the report is delivered outside India or used outside India, the service may qualify as performed outside India (or partly outside). However, in the present record the appellant received services from foreign providers and made payment in foreign currency; the adjudication concluded that the service constituted imported TTA service subject to tax under the pre-amendment rules because the performance (including report delivery) had territorial attributes bringing it within taxable ambit. Ratio vs. Obiter: Ratio - Delivery/use of the testing report is an essential element in determining where a TTA service is performed; territorial character depends on where the report is delivered/used. Obiter - hypotheticals about how prospective amendments would operate in all scenarios and policy observations on unintended breadth. Conclusion: Applying the statutory scheme and prior Tribunal reasoning, the Tribunal sustained classification of the services as taxable TTA services for the relevant periods because the completion/delivery aspects brought the services within the taxable ambit when considered with payment in foreign currency and the contractual arrangements. Issue 3 - Extended limitation and penalties where service tax would have been eligible for CENVAT credit and appellant acted in bona fide belief Legal framework: Extended period of limitation and penal provisions require a finding of suppression or deliberate evasion; ordinary or normal limitation applies absent such suppression. Section 80 (savings/protection) and principles allowing relief where there is bona fide belief and revenue neutrality (i.e., tax, if paid, would have been available as CENVAT credit) are relevant to penalty mitigation. Precedent treatment: Tribunal authority recognizes that where payment of tax would have been eligible for CENVAT credit, the taxpayer suffers no revenue advantage by non-payment and, absent evidence of suppression/intent, extended limitation and penalties may be inappropriate. Prior decisions have set aside penalties and extended limitation where there was bona fide confusion over classification/territorial treatment. Interpretation and reasoning: The Court found no evidence of suppression or dishonest intention. Even if service tax should have been discharged for the relevant periods, the appellant would have been eligible for CENVAT credit, rendering the matter revenue neutral. Applying precedent, the Tribunal held that invoking extended limitation and imposing penalties in such circumstances was not justified. The adjudicated demand was restricted to the normal limitation period, interest was sustained for the normal period, and all penalties and extended-period demands were set aside. Section 80 principles and the appellant's bona fide belief further supported relief from penalties. Ratio vs. Obiter: Ratio - Extended limitation and penalties cannot be sustained where there is no suppression/evasion and where the tax liability (if any) would have been revenue-neutral by reason of available CENVAT credit; bona fide belief can warrant relief from penalties. Obiter - specific observations on the effect of post-period amendments and future voluntary compliance. Conclusion: The Tribunal set aside demands raised by invoking the extended period of limitation and all penalties, sustained only the demand for the normal period (with interest), and applied protective provisions to relieve penalties in view of bona fide belief and revenue neutrality. Overall disposition The Tribunal held that the clinical testing/analysis services at issue are classifiable as TTA services under the Finance Act because clinical testing of drugs/formulations falls within the statutory definition and delivery of the report constitutes an essential part of the service for territorial characterization; the tax demand was sustained for the normal limitation period but extended-period demands and penalties were set aside in the absence of suppression and in light of revenue neutrality and bona fide belief.