TaxTMI 
TaxTMI 
2013 (11) TMI 304
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.... the findings or result of the study which will be consolidated in the report. The payments made by the assessee to the CROs is to obtain the study report or to obtain the technical knowledge/knowhow from the study. 'This attracts the provisions of para 4(b) of Article 12 of the DTAA with USA. 3. The Hon'ble Commissioner of Income-tax (Appeals) erred in his findings that the Protocol is developed in tune with the requirements of their respective regulatory authorities and there is no transfer of technical plan/design in it. This is like arguing that there is no transfer of technical plan/design when an architect designs and gives a building plan, simply because it is prepared in accordance with the norms laid down by the municipal authorities. Similarly, Protocol development/design of course is in accordance with the norms set apart by regulatory authorities, but for each bio-equivalence study separate plans (Protocols) are to he designed. Further the Protocols say clearly that is is developed for Dr. Reddy's Laboratories Ltd by the CRO. Protocol is the technical plan for bio- equivalence study of the assessee's drugs, which is developed by the CROs and the research is conducted b....
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....laws are very stringent that taxation is done transaction wise. Hence any payment from federal countries to India is made after withholding taxes at source. 7. The Hon'ble Commissioner of Income-tax (Appeals) erred in holding that even for Canada payments if the payment does not fall under the definition of fees for included services it falls under business profits. Clause 3 of Article 12 of DTAA with Canada says that any income that is taxable as per Indian Laws can be taxed in India but @ 15% only. Since the payments towards bio-equivalence studies are taxable in India U/s 9(1) (vii) r.w.sec.5(2)(b) of the IT. Act, 1961. Even it is not fees for included service it must be taxed in India @ 15% as per Clause 3 of Article 21 of the DTAA with Canada. 8. The assessee ought to have made an application to the Assessing Officer for non-deduction of tax at source Vis 195(2), had it felt that the payments are not taxable in India. The Supreme Court in the case of CIT Vs. S.F.Upper Sileru (239 ITR 587) held that the assessee is obliged to deduct tax at source U/s 195 even though the entire amount may not be income or profit of the non-resident. 9......" 3. Facts of the case in brief ar....
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....erms of Article 7 of the DTAA. It was further submitted that since the CROs did not have any Permanent Establishment (PE) in India, the amounts are not taxable in India and accordingly, there is no need for making any TDS by the assessee. The contentions of the assessee were not acceptable to the DCIT, who held that assessee should have deducted TDS at 15% of the amount or at least should have obtained non-deduction certificate at the time of remittance of the amount and on failure in doing so, he ordered the assessee to pay both the TDS and interest under S.201(1A) of the Act. Accordingly, he demanded a sum of Rs.3,44,53,108 for assessment year 2002-03 and Rs.3,81,78,026 for assessment year 2003-04, by passing detailed orders in that behalf. 7. Aggrieved by the said orders of the DCIT, assessee preferred appeals before the CIT(A) and reiterated the submissions that as per the DTAA, so as to fall within the purview of 'fee for technical services', the said party should make available technicality, experience, skill, know-how or process or consist of the development and transfer of the technical plan or technical design. It was submitted that the CROs are only conducting clinical t....
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.... four of the CROs were "business profits" in the hands of the CROs or "fees for included services". 2.12. Wile there is no definition of "business profits" in the DTAA with Canada, para 7 of Article 7 of DTAA with USA defines "business profits" as under:- "Business profits means income derived from any trade or business including income from the furnishing of services other than included services and including income from the rental of tangible personal property other than property described in paragraph 3(b) of article 12." Therefore, in order to bring a receipt under the head "business profits", the receipt should be proved to have been derived from any trade or business. For this purpose, furnishing of services (other than "included services" is also treated as business. It is the contention of the appellant's AR that the four CROs in USA and Canada have derived the sums paid by the appellant from trade/business. 2.13. We have to see whether the receipts of the CROs were "derived" from any trade or business. It may be stated that the Supreme Court, in the case of Cambay Electric Supply Industrial Co, Ltd. vs. CIT reported in (1978) 113 ITR 84 (SC), has interpreted the word "....
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....ine produced by the appellant on the human beings in USA and gives its findings at the end of the study. No doubt, the CROs prepare what is known as "Protocol" and the appellant and the CROs agree with each other that the studies are to be conducted according to the minute details mentioned in the protocol. As per the agreement, the appellant can check whether the CROs make the study according to the protocol and after satisfying that the studies were made according to the protocol and after obtaining a copy of the findings of the study, the appellant pays fees to the CROs. Therefore, the payment made by the appellant to the CROs can be treated only as fees and it cannot be a consideration paid for purchase of any commodity or merchandise. 2.17. On payment of fees. we have to see what does the appellant company gets back in return. Obviously, the appellant company gets back the finding of the study. Therefore, can we say that the CROs make available their technical knowledge~ experience, skill, know-how or processes to the appellant ? When I put this question to the appellant's AR, he argued that the CROs arc experienced in conducting the bio-equivalence studies and they do this n....
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.... not mean that we are prevented from giving such interpretation. In these circumstances I hold that the receipt in the hands of Canadian CROs should also be treated as "business profits 8. Before us, the Learned Departmental Representative reiterated the contentions as made out by the Assessing Officer vide his detailed order and referred to S.9(1)(vii) and S.5 of the Income-tax Act, besides Articles 12 and Article 7 of the DTAA, and reiterated that the payments made by the assessee company fall within the scope of 'fee for technical services' taxable under Income-tax Act, and accordingly, the assessee should have deducted tax at source before making remittances. 9. Per contra, the learned counsel reiterated the submissions made before the CIT(A), with reference to the activity undertaken by the CROs, as well as for paying the amounts without effecting TDS and also interpretation of Articles 12 and 7 of the DTAA. He relied on the decision of the Authority for Advance Ruling in the case of Anapharm INC., INC In RE (305 ITR 394), wherein similar issue was considered by the AAR. It was pointed out that Anapharm INC is also one of the CRO-recipients in the case of the assessee also w....
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.... attract art. 12(4)(b). It additionally requires that the service provider should also make his technical knowledge, experience, skill, know-how etc., known to the recipient of the service so as to equip him to, independently perform the technical function himself in future, without the help of the service provider. In other words, payment of consideration would be regarded as 'fee for technical/included services' only if the twin test of rendering services and making technical knowledge available at the same time is satisfied. In the present case, the applicant renders bioanalytical services which, no doubt, are very sophisticated in nature, but the applicant does not reveal to its clients as to how it conducts those tests or the inputs that have gone into it, so as to enable them to carry out those tests themselves in future. A broad description or indication of the type of test carried out to reach this conclusion does not enable the applicant's client to derive requisite knowledge to conduct the tests or to develop the technique 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 t....
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....stion cannot be considered to be "fees for included service" within the meaning of this provision. The second limb of cl. (b) refers to "development and transfer of a technical plan or technical design". Obviously, that has no application here. The applicant uses its experience and skill itself in conducting the bioequivalence tests, and provides only the final report containing conclusions, to the client. The information concerning scientific or commercial experience of the applicant or relating to the method, procedure or protocol used in conducting bioequivalence tests is not being imparted to the pharmaceutical companies and the consideration is not paid for that purpose. On the basis of the final report, the pharmaceutical companies will not be able to find out what method, procedure or protocol was used in conducting the tests. Moreover, the test reports are drug specific. Hence the material furnished by the applicant will not in any way help the customers to facilitate further research and development of new drugs as contended by the Revenue. As such, the fees received by the applicant are to be treated as business income and not royalty income. Since the applicant is in th....