TaxTMI 
TaxTMI 
TaxTMI 
2008 (9) TMI 27
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.... Limited and Ranbaxy Research Laboratories is enclosed with the application. 4. The applicant further states that it evaluates, on behalf of its clients, the bioequivalence and/or comparative bioavailability of the new generic drug vis-a-vis the reference drug which is already available in the market. The applicant has devised various methods / protocols for carrying out the evaluation work, which are in conformity with international regulations, such as International Committee for Harmonization, Good Clinical Practices, Good Laboratory Practices, etc. The reports produced by the applicant are acceptable to the regulatory authorities, including US Food and Drug Administration (FDA). The applicant states that all the methods/protocols developed by it are its own property. Neither these nor the specimen samples of human volunteers collected during the evaluation are given to the client. No technical plan or research process either is made available to it. What are furnished to the client are the final reports / conclusions of the evaluation. The applicant further states that these methods / protocols are product specific and cannot be used in evaluating other generic dr....
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....atisfy the test of 'make available' under Article 12 of DTAA, since it does not result in transfer of any technical experience, know-how or technical plan or technical design to the Indian pharmaceutical companies. According to the applicant, the income in question is 'business profits', and in the absence of permanent establishment (PE), the same is not taxable in India by virtue of Article 7 read with Article 5 of DTAA. 6. The Director of Income-tax (International Taxation), Mumbai is the jurisdictional Commissioner in this case. He has submitted his comments vide his letter dated 24.09.2007 in which he has referred to certain provisions of the agreements which the applicant has entered into with Sandoz Private Limited and Ranbaxy Research Laboratories respectively, and has drawn certain inferences from those provisions. So far as the applicant's agreement with Sandoz Private Limited is concerned, the jurisdictional Commissioner points out that the provision of the agreement relating to intellectual property as contained in clause 15 states that all data developed in the course of the study shall be the sole and exclusive property of Sandoz Private Limited which may use them fo....
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....a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : Explanation 1 - x x x x x x Explanation 2.— For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for— (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or proces....
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....plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 from activities described in paragraph 3(c) or 4 of Article 8. 4. For the purposes of this Article, 'fees for included services' means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design. 8.1 We see from the above that there ....
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....of all data related to a particular study, for 15 years. At the expiry of this period, before destroying the data it will first give opportunity to Sandoz for arranging alternative storage. 9. The relevant provisions of the agreement that the applicant has entered into with Ranbaxy Research Laboratories are given below : Article 3 - Property of Results This Agreement specifically acknowledges that the COMPANY is and shall remain owner of all rights on intellectual property; tested samples, test compound(s) and patents arising from the said research project. The COMPANY shall receive 1 copy of all reports in standard ANPHARM format, and will have the right to use the results freely. The COMPANY will remain owner of all proprietary products developed prior to this contract as well as tested samples and test compound(s). Article 5 - Storage of Study Samples Three months after the completion of sample analysis, the COMPANY will be offered the option of having the samples destroyed, stored or returned. An authorization request form will be sent to the COMPANY 30 days prior to end of that initial period. Should be COMPANY not respond within 30 days to this request, sa....
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.... experience and know-how known to the applicant. This amounts to making available technology or imparting technical knowledge to the applicant. Sandoz / Ranbaxy can use this knowledge for further research and development of drugs. Such payment made for the use of technology can thus be regarded as royalty income in the hands of the applicant. He seeks support for this proposition from paragraph 11 of OECD commentary and page 790 of Klaus Vogel on Double Taxation Conventions, in relation to article 12. According to him the Raymond case cited by the applicant, in fact, lends support to the case of the revenue. 12.1 As the main issue in this case is whether by providing its final test reports to Sandoz and Ranbaxy, the applicant 'makes available' to them its technical knowledge, experience, know-how, etc., we may first ascertain the true meaning of this expression. 12.2 DTAA does not define the expression 'make available' either in Article 12 or anywhere else. As such, we will have to look to other sources for understanding it. The Indo-US Convention on avoidance of double taxation contains a provision which is pari materia with Article 12(4) of the Indo-Ca....
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....pertise. It is not, however, making available to the Indian company any technical experience, knowledge or skill, etc., nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information service does not make the service a technical service within the meaning of paragraph 4(b)". 12.3. Though the MOU is not with reference to Indo-Canada DTAA, it is a valuable guide to understand the import of the expression 'make available'. It is, thus fairly clear that mere provision of technical services is not enough to attract Article 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 service....
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....cant, have neither been nor will they ever be transferred, assigned or handed over to Sandoz or any other Indian client. From the perusal of the relevant agreements, we have not found any provision which would entitle Sandoz/Ranbaxy to know the details of the analytical methods and procedures employed by the applicant in carrying out the bioequivalence tests. The only doubt cast by Clause 15 of the agreement with Sandoz is cleared by Sandoz statement that the said clause which was part of standard format was never given effect to. It seems to be inapplicable also having regard to the actual modalities of the transaction as set out in the application. Then agreement with Ranbaxy says that Ranbaxy shall be the owner of the tested samples and test compounds. Further, the applicant will store tested samples and test compounds for three months and make these available to Ranbaxy at the expiry of that period. Handing over tested samples and test compounds cannot be equated with making technology, know-how, etc., available to Ranbaxy. The agreement also states that Ranbaxy shall be the owner of all intellectual property rights resulting from the services. Thi....
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.... necessary for the industrial reproduction of a product or process directly. Know-how represents what a manufacturer cannot know from mere examination of the product and mere progress of the technique. The Commentary further states that a know-how contract differs from contracts for the provision of services, in which one party undertakes to use the customary skills of his calling to execute the work himself for the other party. Payment made under the latter contract generally come in the category of business income. We find that in the present case the agreements of the applicant fall in the latter category, as the applicant uses its experience and skill itself in conducting the bioequivalence tests, and provides only the final report containing conclusions, to the applicant. 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 meth....