Stempeutics Research Private Limited, Bangalore V. Joint Director of Income Tax, Bangalore

ITA 1450/BANG/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9352 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 10 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-09-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 27-07-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 22-10-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: RENUKADEVI
• Keywords: Business income; Double taxation relief; Permanent establishment
• Section: 201(1); 12; 10; 2; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH C BEFORE S HRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO , ACCOUNTANT MEMBER I.T . (I.T) A. NO. 1450 /BANG/20 13 & 1196/BANG/2014 (ASSESSMENT YEAR S : 20 11 - 12 & 2012 - 13 ) M/S. STEMPEUTIC S RESEARCH PVT. LTD., 9 TH FLOOR, MANIPAL HOSPITAL, OLD AIRPORT ROAD, RUSTOM BAGH, BANGALORE - 560 017 . . APPELLANT. PAN AAJCS 8177Q VS. JOINT DIRECTOR OF INCOME TAX, ( INTERNATIONAL TAXATION) RANGE 1, BANGALORE. .. RESPONDENT. APPELLANT BY : SMT. SHEETAL, ADVOCATE. R E SPONDENT BY : SMT. RENUKA DEVI, JCIT (D.R) DATE OF H EARING : 26.8.2016. DATE OF P RONOUNCEMENT : 16. 9 .201 6 . O R D E R PER SHRI VIJAY P AL RAO, J .M . : THESE TWO APPEALS BY THE ASSESSEE ARE DIRECTED AGAINST THE TWO SE PARATE ORDERS OF COMMISSIONER OF INCOME TAX (APPEALS) DT.16. 12.2012 AND 7.5.2013 ARISING FRO M THE ORDER PASSED UNDER SECTION 201(1) AND 2 IT A NO S . 1196/BANG/2014 & 1450 /BANG/201 3 201(1A) OF THE INCOME TAX ACT, 1961 (IN SHORT 'THE ACT') FOR THE ASSESSMENT YEARS 2011 - 12 AND 2012 - 13 RESPECTIVELY. 2. THE ASSESSEE HAS RAISED COMMON GROUNDS IN THE SE APPEALS. THE GROUNDS RAISED FOR THE ASSESSMENT YEAR 2011 - 12 ARE REPRODUCED AS UNDER : 3 IT A NO S . 1196/BANG/2014 & 1450 /BANG/201 3 3. THE ASSESSEE IS A PRIVATE LIMITED COMPANY REGISTERED AND INCORPORATED UNDER COMPANIES ACT, 1956. TH E ASSESSEE IS A RESEARCH DRIVEN COMPANY FORMED WITH A MANDATE OF R&D AND MANUFACTURING OF THERAP EU TIC PRODUCT BASED ON STEM CELLS. M/S. STEM PEUTICS RESEARCH MALAYSIA SDN BHD , MALAYSIA (IN SHORT SRM, MALAYSIA ) IS A SUBSIDIARY OF ASSESSEE AND BASED AT MA LAYSIA. SUBSIDIARY SRM, MALAYSIA IS A STEM CELL RESEARCH COMPANY ENGAGED IN DEVELOPMENT AND MANUFACTURING OF 4 IT A NO S . 1196/BANG/2014 & 1450 /BANG/201 3 PRODUCT BASED ON STEM CELLS. RESEARCH ACTIVITY WHICH ARE NOT BEING CARRIED OUT IN INDIA ARE DONE AT SRM, MALAYSIA. A PRODUCT DEVELOPMENT AGREEME NT (PDA), DT.11.6.2009 WAS ENTERED INTO BETWEEN THE ASSESSEE AND THE CIPLA LTD. WHEREIN A SUM OF RS.37 CRORES WAS PAID BY CIPLA LTD. FOR CARRYING ASSESSEE'S RESEARCH ACTIVITY AT ALL THE UNITS BOTH THE ASSESSEE AND ITS MALAYSIAN SUBSIDIARY. IN CONSIDERATI ON OF THE SAID AMOUNT THE ASSESSEE WOULD GRANT M/S. CIPLA LTD., THE EXCLUSIVE RIGHT TO PURCHASE ALL ITS PRODUCTS. MALAYSIA SUBSIDIARY CARRIED OUT CLINIC TRIAL AND R&D ON BEHALF OF THE ASSESSEE AND EXPENSES INCURRED TOWARDS RESEARCH ACTIVITY OF CLINICAL TR IAL AND R&D ARE REIMBURSED BY THE ASSESSEE. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE REMITTED CERTAIN PAYMENT TO THE NR SUBSIDIARY WITHOUT DEDUCTION OF TAX AT SOURCE FOR THE PURPOSE OF REIMBURSEMENT OF EXPENSES. THE ASSESSING OFFICER HELD THAT THE P AYMENT BY THE ASSESSEE TO ITS SUBSIDIARY IS FEES FOR TECHNICAL SERVICES (FTS) AND THEREFORE CHARGEABLE TO TAX IN INDIA ON GROSS BASIS AND CONSEQUENTLY THE ASSESSEE WAS UNDER OBLIGATION TO DEDUCT TAX AT SOURCE UNDER SECTION 195 FAILING WHICH THE ASSESSEE I S LIABLE AS ASSESSEE IN DEFAULT UNDER SECTION 201(1) AND 201(1A) OF THE ACT. THE ASSESSEE 5 IT A NO S . 1196/BANG/2014 & 1450 /BANG/201 3 CHALLENGED THE ACTION OF THE ASSESSING OFFICER BEFORE THE CIT (APPEALS) BUT COULD NOT SUCCEED. 4. BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESS EE HAS SUBMITTED THAT THE TRIPART ITE AGREEMENT BETWEEN THE ASSESSEE, CIPLA AND ITS SUBSIDIARY IS NOT LEGALLY ENFORCEABLE AGREEMENT. THIS AGREEMENT IS ONLY A FRAME WORK OF TRIPART ITE AGREEMENT MUTUALLY AGREED AMO NG THE PARTIES THEREFORE THERE IS NO PROVIS ION FOR MOU FOR RENDERING TECHNICAL SERVICES EITHER BY THE ASSESSEE TO ITS SUBSIDIARY OR BY THE SUBSIDIARY TO THE ASSESSEE. THE DEPOSIT MADE BY THE CIPLA TO THE ASSESSEE IS TO MEET THE R&D EXPENSES INCURRED BY THE ASSESSEE AND ITS MALAYSIA SUBSIDIARY. T HAT ITSELF DOES NOT MEAN THAT THE REIMBURSEMENT OF EXPENSES MADE BY THE ASSESSEE TO ITS MALAYSIAN SUBSIDIARY ARE IN THE NATURE OF FTS. THE SUBSIDIARY OF ASSESSEE IS CARRYING ON ITS OWN R&D ACTIVITY AND DOES NOT RENDER ANY TECHNICAL SERVICES TO THE ASSESSE E. FURTHER THE ASSESSEE AND ITS SUBSIDIARY ARE DEVELOPING PRODUCTS FOR THEIR OWN BUSINESS IN THEIR OWN INDEPENDENT STATUS. THE AGREEMENT WITH CIPLA IS TO SELL THE NEW PRODUCT MANUFACTURED BY THE ASSESSEE AND ITS SUBSIDIARY TO CIPLA ON A PRINCIPLE TO PRI NCIPLE BASIS. THEREFORE THE ASSESSING AUTHORITY HAS 6 IT A NO S . 1196/BANG/2014 & 1450 /BANG/201 3 COMMITTED A PATENT ERROR IN CONSIDERING THIS ARRANGEMENT AS THE PRODUCT DEVELOPED FOR CIPLA. CLINICAL TRIAL OF STEM CELL DRUGS ARE CARRIED OUT BY THE SUBSIDIARY TO PROVIDE ANY TECHNICAL SERVICES TO ASS ESSEE TO BE UTILIZED IN INDIA AND THE SAME ARE DONE BY THE SUBSIDIARY IN MALAYSIA. IN TERMS OF MOU BETWEEN THE ASSESSEE AND ITS SUBSIDIARY THE DETAILS OF VARIOUS EXPENDITURE INCURRED BY ITS SUBSIDIARY FOR ANY STEM CELL PRODUCT RESEARCH WERE TO BE FURNISH ED. IN COMPLIANCE OF TAX STIPULATION, THE SUBSIDIARY FURNISHED ALL THE RELEVANT DETAILS IN DEBIT NOTE. IT IS NOT THE CASE OF THE ASSESSEE THAT ITS SUBSIDIARY WHICH IS NOT CARRYING ON ANY CLINICAL TRIAL AS IT IS AN INTEGRAL PART OF THE R&D OF NEW DRUG. IN FACT IT IS THE MAIN EXPENDITURE OF REIMBURSEMENT BY THE ASSESSEE TO A SUBSIDIARY FOR WHICH FUNDS ARE GRANTED BY CIPLA. THE CLINICAL TRIAL CARRIED OUT BY THE SUBSIDIARY IN MALAYSIA IN NO WAY MAKE OUT A CASE OF RENDERING A TECHNICAL SERVICES TO ASSESSEE IN INDIA. THE LEARNED AUTHORISED REPRESENTATIVE HAS THEN REFERRED TO THE PROVISIONS OF SECTION 9(1)(VII)(B) OF THE ACT AND SUBMITTED THAT IT IS STIPULATED UNDER THIS PROVISION AS WHAT IS INCOME DEEMED TO ACCRUED OR ARISE IN INDIA. BY WAY OF FTS PAYABLE BY A RESIDENT IS NOT TAXABLE IF THE FEES IS PAYABLE IN RESPECT OF SERVICES UTILIZED IN A BUSINESS 7 IT A NO S . 1196/BANG/2014 & 1450 /BANG/201 3 OR A PROFESSION CARRIED ON BY SUCH A PERSON OUTSIDE INDIA OR FOR THE PURPOSE OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA. THE CASE OF THE A SSESSEE IS ON BETTER FOOTING AT AS THE RESEARCH CARRIED OUT BY SRM , MALAYSIA AND THEREFORE IT IS NOT CARRIED OUT BY THE ASSESSEE IN INDIA OR MALAYSIA. THE FEES FOR SERVICES NOT RENDERED IN INDIA CANNOT BE CHARGEABLE TO TAX IN INDIA. SH E HAS FURTHER CONTE NDED THAT IT IS REIMBURSEMENT OF EXPENDITURE WITHOUT ANY ELEMENT OF INCOME AND THEREFORE IT WILL NOT FALL UNDER THE AMBIT OF THE SUM CHARGEABLE TO TAX EITHER UNDER SECTION 9 OF THE I.T. ACT OR UNDER ARTICLE 2 OF THE INDO - MALAYSIA DTAA. IT IS NOTHING BUT T HE BUSINESS INCOME OF THE SRM, MALAYSIA ATTRIBUTABLE TO ARTICLE 7 OF DTAA THEREFORE , IN THE ABSENCE OF ANY PE IN INDIA IN TERMS OF ARTICLE 5 OF DTAA THE SAME IS NOT CHARGEABLE TO TAX IN INDIA. IN SUPPORT OF H ER CONTENTION S HE HAS RELIED UPON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE PVT. LTD. VS. CIT 327 ITR 456 (SC) AND SUBMITTED THAT THE OBLIGATION TO DEDUCT TAX AT SOURCE UNDER SECTION 195 OF THE ACT DOES NOT ARISE ON THE REMITTANCES MADE TO NON - RESIDENTS; IT ARIS ES ONLY WHEN SUCH REMITTANCE IS OF A SUM CHARGEABLE TO TAX UNDER THE ACT. THEREFORE 8 IT A NO S . 1196/BANG/2014 & 1450 /BANG/201 3 THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT BEING ANY SUM TO NON - RESIDENT IS LIABLE TO DEDUCT TAX IF SUCH SUM IS CHARGEABLE TO TAX UNDER THE ACT. THE REIMB URSEMENT OF EXPENSES MADE BY THE ASSESSEE TO SRM , MALAYSIA ARE ALL ON PRINCIPLE TO PRINCIPLE BASIS. AS PER THE AGREEMENT THE FINAL PRODUCT WAS TO BE SOLD TO CIPLA ON PRINCIPLE TO PRINCIPLE BASIS. HENCE THE AMOUNT PAID BY THE ASSESSEE TO SUBSIDIARY AT BEST BE TREATED AS BUSINESS INCOME UNDER DTAA AND IN THE ABSENCE OF PE IS NOT CHARGEABLE TO TAX IN INDIA. LEARNED AUTHORISED REPRESENTATIVE RELIED UPON THE FOLLOWING DECISIONS : I. DIRECTOR OF INCOME TAX (INTL. TAXATION) VS. SUN MICROSYSTEMS INDIA PVT. LTD. IN ITA NO.35/2010 DT.2.6.2014 (KAR) II. CIT VS. DUNLOP RUBBER CO. LTD. (1983) 142 ITR 493 (CAL) III. ISHIKAWAJMA - HARIMA HEAVY INDUSTRIES LTD. VS. DIRECTOR OF INCOME TAX (2007) 288 ITR 408 (SC) 5. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIV E HAS SUBMITTED THAT THE MEANING OF FTS AS PROVIDED I N THE ACT AS WELL AS UNDER DTAA CLEARLY BRINGS THEIR PAYMENT UNDER THE AMBIT OF FTS. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE DECISION OF HYDERABAD BENCH OF THIS 9 IT A NO S . 1196/BANG/2014 & 1450 /BANG/201 3 TRIBUNAL IN CASE OF DR. REDDY S FOUNDATION VS. DCIT (2015) 68 SOT 47 (HYD - TRIB.) . 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THE PAYMENT IN QUESTION WERE MADE BY THE ASSESSEE IN RESPECT OF RESEARCH AND DEVELOPMENT AND OPERATION TOWARDS CLINICAL TRIAL CARRIED OUT BY THE MALAYSIAN SUBSIDIARY OF THE ASSESSEE. AS PER THE TRIPARTITE MEMORANDUM OF UNDERSTANDING (MOU) BETWEEN THE ASSESSEE, ITS MALAYSIAN SUBSIDIARY AND CIPLA, IT WAS AGREED UPON BETWEEN THE PARTIES THAT CIPLA WOULD MAKE THE PAYMENT TOWARDS PRODUCT DEVELOPMENT FEES TO ASSESSEE TO BE UTILIZED BY IT FOR ITS CLINICAL TRIAL, RESEARCH AND DEVELOPMENT AND OPERATIONAL EXPENDITURE IN INDIA AS WELL AS IN MALAYSIA. THE RELEV ANT CLAUSE OF THE MOU IS CLAUSE NO.2 WHICH READS AS UNDER : 2. DETAILS OF UNDERSTANDING : STEMPEUTICS INDIA HAD ENTERED INTO AN AGREEMENT WITH CIPLA LTD ON 11 TH DAY OF JUNE 2009, WHEREBY CIPLA LTD. WOULD BE MAKING PAYMENT TOWARDS PRODUCT DEVELOPMEN T FEES TO STEMPEUTICS INDIA, TO BE UTILIZED BY IT FOR ITS CLINICAL TRIALS, R & D AND OPERATIONAL EXPENDITURE AT INDIA & MALAYSIA. STEMPEUTICS INDIA WOULD MAKE REGULAR REIMBURSEMENT OF EXPENDITURE TO STEMPEUTICS MALAYSIA OUT OF THE PAYMENT RECEIVED FROM C IPLA LTD. 10 IT A NO S . 1196/BANG/2014 & 1450 /BANG/201 3 THE ASSESSEE HAS CLAIMED RIGHT FROM BEGINNING THAT THIS PAYMENT IS ONLY REIMBURSEMENT OF EXPENDITURE AND THERE IS NO ELEMENT OF PROFIT THEREFORE THERE IS NO INCOME CHARGEABLE TO TAX IN INDIA. THE ASSESSING OFFICER DID NOT ACCEPT THE CONTENTIO N OF THE ASSESSEE AND HELD AS UNDER : THE ASSESSEE HAS ANNEXED DETAILS OF THE LEDGER ACCOUNT OF THE TRANSACTION WITH THE MALAYSIAN COMPANY SHOWING TOTAL CREDIT OF RS.;1,25,31,276 IN THE HANDS OF THE FOREIGN. IT IS NECESSARY TO POINT OUT AT THIS JUNCT URE THAT THE AGREEMENT SIGNED WITH THE MALAYSIAN COMPANY PROVIDES FOR. STEMPEUTICS INDIA HAD ENTERED INTO AN AGREEMENT WITH CIPLA LTD. ON 11 TH DAY OF JUNE, 2009, WHEREBY CIPLA LTD. ;WOULD BE MAKING PAYMENT TOWARDS PRODUCT DEVELOPMENT FEES TO STEMPEUTICS INDIA, TO BE UTILIZED BY IT FOR ITS CLINICAL TRIALS, R & D AND OPERATIONAL EXPENDITURE AT INDIA & MALAYSIA. STEMPEUTICS INDIA WOULD MAKE REGULAR REIMBURSEMENT OF EXPENDITURE TO STEMPEUTICS MALAYSIA OF THE PAYMENT RECEIVED FROM CIPLA LTD .. THEREFORE A LL EXPENDITURE INCURRED IN PURSUANCE TO THIS AGREEMENT HAVE BEEN TREATED IN LIEU OF THE SERVICES RENDERED BY THE FOREIGN COMPANY FOR WHICH PAYMENT IS BEING RECEIVED BY THE MALAYSIAN COMPANY. LOGICALLY SINCE THE EXPENDITURE FLOWS FROM THE AGREEMENT ITSELF, THEREFORE SUCH EXPENDITURE HAVE TO BE TREATED AS RECEIPTS RECEIVED IN LIEU OF THE SERVICES ITSELF. IF THE SAME HAD NOT BEEN GIVEN, IT WOULD NOT BE INCORRECT TO CONCLUDE THAT THERE WOULD BE NO SERVICES RENDERED. THEREFORE IF DUE TO FINANCIAL RELATIONS BET WEEN THE TWO COMPANIES AS BEING HOLDING AND SUBSIDIARY COMPANY, THE HOLDING COMPANY AGREED TO REIMBURSE ALL COSTS RELATING TO CLINICAL TREATS, IT DOES NOT ONE TAKE AWAY THE CHARACTER OF THE RECEIPT ITSELF WHICH IS FOR TECHNICAL SERVICES (AS PER THE LAW DIC TIONARY IT IS DESCRIBED AS A CHARGE FOR LABOR OR SERVICES ESP. PROFESSIONAL SERVICES). IT IS RELEVANT TO NOTE THAT THERE IS NO SEPARATE AGREEMENT BETWEEN CIPLA AND THE MALAYSIAN COMPANY. THE ESSENTIAL QUESTION IS WHAT IS THE SERVICES RENDERED FOR WHICH I NCOME ARISES FOR THE MALAYSIAN COMPANY AND WHETHER THERE WAS ANY LIABILITY FOR TAXATION IN INDIA. ONCE BOTH CONDITIONS ARE SATISFIED TAX DEDUCTION SHOULD HAVE BEEN EFFECTED. CHARGEABILITY HAPPENS ON GROSS BASIS AS PER THE DTAA AND THE IT ACT, 1961 AND O NCE CHARGEABILITY IS DEFINED AS PER THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF GE TECHNOLOGY, IT HAS TO BE BROUGHT TO TAX AS PER THE MODE OF COMPUTATION PROVIDED IN THE IT ACT AND THE DTAA WHICH IS ON A GROSS BASIS. 11 IT A NO S . 1196/BANG/2014 & 1450 /BANG/201 3 THE ASSESSEE S SUBMISSI ON THAT NO TDS IS TO BE DEDUCTED IS NOT ACCEPTABLE FOR THE REASON THAT THE AGREEMENT PROVIDING FOR FEE FOR TECHNICAL SERVICES DOES NOT GIVE AN OPTION TO INDIAN COMPANY WHETHER OR NOT TO INCUR SUCH EXPENSES. THE AGREEMENT HAS TO BE UNDERSTOOD AND READ IN T OTALITY. SINCE IT IS INCAPABLE OF BEING DISINTEGRATED THE COMPONENTS OF THE CONTRACTUAL AGREEMENT CANNOT BE PLACED IN WATER TIGHT COMPARTMENTS. IT IS AN INTEGRAL PART OF THE AGREEMENT WHICH BINDS THE ASSESSEE TO MAKE THE PAYMENT, IN THE ABSENCE OF WHICH THERE WOULD BE POSSIBLY BE NO RENDERING FOR FEES FOR TECHNICAL SERVICES. IF ONE WAS TO ACCEPT THE CONTENTION OF THE ASSESSEE, THAT TDS ON FTS IS TO BE DONE ONLY FOR THE COMPONENT RELATING TO THE DELIVERY OF THE SERVICES, THEN IT WOULD YIELD ONLY ABSURD RES ULTS BECAUSE THERE CAN BE NO NETTING OUT OF SUCH COMPONENT FROM THE GROSS PACKAGE THAT CONSTITUTES FREE FOR TECHNICAL SERVICES PER SE AS A WHOLE. IN FACT THERE IS NO OTHER HEAD UNDER WHICH THE SAME CAN BE INCORPORATED OTHER THAN FTS, THE SAME CANNOT BE IS OLATED AS A CHARGE TO BE BORNE BY THE INDIAN COMPANY WITHOUT TAKING COGNIZANCE OF THE PURPOSE AND CHARACTER OF SUCH A PAYMENT. THEREFORE THE SAME IS TO BE TREATED AS A INSEPARABLE PART OF FTS AND THE ADDITION IS MADE ACCORDINGLY, BY DISALLOWING THE SAID E XPENDITURE ON ACCOUNT OF NON - DEDUCTION OF TDS. THEREFORE BOTH AS PER THE DTAA AND THE PROVISIONS OF THE IT ACT, 1961, PAYMENT RECEIVED FOR THE PURPOSES FOR FEE FOR TECHNICAL SERVICES IS LIABLE TO BE TAXED IN INDIA. THE CIT (APPEALS) HAS CONFIRMED THE A CTION OF THE ASSESSING OFFICER BY HOLDING THAT THE PAYMENT IN QUESTION APPEARS AS FTS AS PER THE INCOME TAX ACT AS WELL AS UNDER ARTICLE 13 OF INDO - MALAYSIAN DTAA AS UNDER : 5.5 THE RELEVANT EXTRACTS OF THE DTAA BETWEEN INDIA & MALAYSIA ARE REPRODUCED AS UNDER : ARTICLE 13 FEES FOR TECHNICAL SERVICES. . THE TERM FEES FOR TECHNICAL SERVICES MEANS PAYMENT OF ANY KIND IN CONSIDERATION FOR THE RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES INCLUDING THE PROVISION OF SERVICES BY T ECHNICAL OR OTHER PERSONNEL BUT DOES NOT INCLUDE PAYMENTS FOR SERVICES MENTIONED IN ARTICLES 14 & 15 OF THIS CONVENTION. 12 IT A NO S . 1196/BANG/2014 & 1450 /BANG/201 3 THERE IS NO DISPUTE THAT AS PER THE MOU BETWEEN THE PARTIES, THE COST OF R & D AS WELL AS CLINICAL TRIALS UNDERTAKEN BY THE ASSESSEE AND ITS MALAYSIAN SUBSIDIARY WAS TO BE BORNE BY CIPLA AND IN TURN OUTCOME OF THE R & D AS WELL AS CLINICAL TRIALS WILL BE BELONGING TO CIPLA. THUS THE OUTCOME PRODUCT OF THE R & D AS WELL AS CLINICAL TRIALS WOULD NOT BELONG TO THE ASSESSEE OR ITS SUBSIDIA RY BUT THE CIPLA HAD THE RIGHT OVER THE SAME. THEREFORE THE CIPLA HAS RIGHT TO ACQUIRE THE OUTCOME IN THE SHAPE OF TECHNICAL INFORMATION, TECHNOLOGY DOCUMENTATION, KNOW HOW AND PROCESS INVOLVED IN ALL CLINICAL R&D. THOUGH THE ASSESSEE HAS REIMBURSED THE E XPENSES TO ITS SUBSIDIARY HOWEVER IN CASE THE PAYMENT IS CONSIDERED AS TAX FOR TECHNICAL SERVICES THEN THE ELEMENT OF PROFIT BECOMES IRRELEVANT AS THE GROSS PAYMENT IS TAXABLE. THE DEFINITION OF FEES FOR TECHNICAL SERVICES (FTS) OF THE INDO - MALAYSIA DTAA PROVIDES UNDER ARTICLE 13 CLAUSE 3 AS UNDER : ARTICLE 13 (3) : THE TERM FEES FOR TECHNICAL SERVICES MEANS PAYMENT OF ANY KIND IN CONSIDERATION FOR THE RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES INCLUDING THE PROVISION OF SERVICE S BY TECHNICAL OR OTHER PERSONNEL BUT DOES NOT INCLUDE PAYMENTS FOR SERVICES MENTIONED IN ARTICLE 14 AND ARTICLE 15 OF THIS AGREEMENT. 13 IT A NO S . 1196/BANG/2014 & 1450 /BANG/201 3 THUS IT IS CLEAR UNDER ARTICLE 13(3) OF DTAA IN QUESTION THERE IS NO CLAUSE OF MAKE AVAILABLE AND THE TERMS FTS MEANS PAYMENT OF ANY KIND IN CONSIDERATION FOR RENDERING OF MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES/PROVISION FOR SERVICES BY TECHNICAL OR OTHER PERSONNEL. CONDUCTING CLINICAL TRIALS & R&D IS CLEARLY A SERVICE WHICH IS TECHNICAL IN NATURE THEREFORE PROVI DING THE OUTCOME OF THE RESEARCH TO CIPLA THROUGH THE ASSESSEE CLEARLY FALLS UNDER THE AMBIT OF THE TERM FTS AS PER THE ARTICLE 13 OF THE DTAA BETWEEN INDIA & MALAYSIA. THE LEARNED AUTHORISED REPRESENTATIVE HAS RELIED UPON VARIOUS DECISIONS HOWEVER, WE F IND THAT THE DECISION IN THE CASE OF CIT VS. DUNLOP RUBBER CO. LTD. (SUPRA) THERE WAS NO ISSUE OF FTS BUT IT WAS ONLY SHARING OF EXPENSES BY THE PARENT AND ITS SUBSIDIARIES FOR JOINTLY CONDUCTING SOME RESEARCH ACTIVITY FOR THEIR OWN BUSINESS ACTIVITY. S IMILARLY IN THE CASE OF DIT VS. SUNMICRO SYSTEM INDIA PVT. LTD. (SUPRA), THE HON'BLE HIGH COURT HAS UPHELD THE FINDING OF THE TRIBUNAL BY RECORDING THE FACT THAT THE SERVICE WAS NOT MADE AVAILABLE THEREFORE THE SAID DECISION IS BASED ON THE MAKE AVAILABLE CLAUSE IN DTAA. AS REGARDS THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF ISHIKAWAJMA - HARIMA HEAVY INDUSTRIES LTD. VS. DIT 14 IT A NO S . 1196/BANG/2014 & 1450 /BANG/201 3 (SUPRA), IT WAS ALSO REGARDING THE BUSINESS CONNECTION AND PERMANENT ESTABLISHMENT AND THE QUESTION OF FTS WAS NOT INVOLVED. THUS THE DECISION RELIED UPON BY THE LEARNED AUTHORISED REPRESENTATIVE WOULD NOT HELP THE CASE OF THE ASSESSEE. 7. ON THE OTHER HAND, THE HYDERABAD BENCHES OF TRIBUNAL IN THE CASE OF DR. REDDY S FOUNDATION VS. DCIT (SUPRA), AN IDENTICAL ISSUE WAS CO NSIDERED AND DECIDED IN PARAS 8 & 9 AS UNDER : 8. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE FACTS ON RECORD. IT IS AN ADMITTED FACT THAT IN THE CASE OF DR. REDDY LABORATORIES P. LTD., (SUPRA) THE ISSUE WAS WHETHER THE PAYMENTS ARE TO BE TR EATED AS FEES FOR TECHNICAL SERVICES UNDER ARTICLE 12 OF THE DTAA OR AS BUSINESS PROFITS IN TERMS OF ARTICLE 7 OF DTAA WITH USA AND CONSIDERED IN THOSE CASES THAT THE PAYMENTS ARE IN THE NATURE OF BUSINESS RECEIPTS TO BE CONSIDERED UNDER ARTICLE 7 OF THE D TAA. THE FINDINGS ARE AS UNDER : 11. WE HAVE CONSIDERED THE ISSUE. KEEPING IN MIND THE DETAILED ORDER OF THE CIT(A), WHICH IS EXTRACTED ABOVE AND THE PROVISIONS OF THE INCOME - TAX ACT READ WITH DTAA WITH USA AND CANADA, WHICH ARE ALMOST SIMILAR, WE HAVE N O REASON TO DIFFER FROM THE ORDER OF THE CIT(A). EVEN THOUGH THE ASSESSING OFFICER CONSIDERED THAT THE PAYMENTS WERE MADE BY WAY OF FEE FOR TECHNICAL SERVICES AS PER ARTICLE 12 OF THE DTAA, THE SAME IS TAXABLE IN THE SOURCE COUNTRY ONLY IF SUCH SERVICES MAKE AVAILABLE ANY TECHNICAL KNOWLEDGE, EXPERTISE, ETC. OR THERE IS TRANSFER OF TECHNICAL PLAN OR DESIGN. IN THIS CASE, AS RIGHTLY CONSIDERED BY THE LEARNED CIT(A), ASSESSEE WAS CONDUCTING CLINICAL TRIALS THROUGH THE CROS IN USA TO COMPLY WITH THE REGULATI ONS THEREIN AND THE CROS WHO ARE EXPERTS IN THIS FIELD WERE ONLY CONDUCTING STUDIES AND SUBMITTING THE REPORTS IN RELATION THERETO. THEY ARE NEITHER TRANSFER OF TECHNICAL PLAN OR TECHNICAL DESIGN NOR MAKING AVAILABLE OF TECHNICAL KNOWLEDGE, EXPERIENCE OR K NOW - HOW BY THE CROS TO ASSESSEE COMPANY. IN FACT, ASSESSEE COMPANY DID NOT GET ANY BENEFIT OUT OF THE SAID SERVICES IN USA AND ASSESSEE WAS ONLY GETTING A REPORT IN RESPECT OF FIELD STUDY ON ITS BEHALF, WHICH WOULD HELP IT IN GETTING REGISTERED WITH THE RE GULATORY AUTHORITY. SINCE THERE IS NO MAKING AVAILABLE OF TECHNICAL SKILL, KNOWLEDGE OR EXPERTISE OR PLANS OR DESIGNS IN THE PRESENT CASE, THE AMOUNTS PAID BY ASSESSEE DO NOT FALL UNDER ARTICLE 12, BUT COME WITHIN THE PURVIEW OF ARTICLE 7 OF THE DTAA. THER EFORE, THE AMOUNTS PAID ARE TO BE CONSIDERED AS BUSINESS RECEIPTS OF THE SAID CROS AND SINCE THEY DO NOT 15 IT A NO S . 1196/BANG/2014 & 1450 /BANG/201 3 HAVE ANY PE IN INDIA ON WHICH ASPECT THERE IS NO DISPUTE, THERE IS NO NEED TO DEDUCT TAX AT SOURCE. SIMILAR ISSUE WAS ANALYSED AND CONSIDERED BY THE AA R IN THE CASE OF ANAPHARM INC (SUPRA), WHICH IS ONE OF THE RECIPIENTS IN ASSESSEE S CASE ALSO. THE AAR IN THAT CASE HELD AS UNDER - MERE PROVISION OF TECHNICAL SERVICES IS NOT ENOUGH TO ATTRACT ART. 12(4)(B). IT ADDITIONALLY REQUIRES THAT THE SERVICE PROV IDER 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 BIOAN ALYTICAL 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 QU ESTION ARE HIGHLY TECHNICAL IN NATURE WILL NOT MAKE A DIFFERENCE. IN ITS AFFIDAVIT THE APPLICANT AFFIRMS THAT ONLY FINAL RESULTS, CONCLUSION OF DATA OF BIOEQUIVALENCE TESTS ARE PROVIDED TO THE RECIPIENT. CLINICAL PROCEDURE, ANALYTICAL METHODS, ETC., WHICH ARE PROPRIETARY ITEMS OF THE APPLICANT, HAVE NEITHER BEEN NOR WILL THEY EVER BE TRANSFERRED, ASSIGNED OR HANDED OVER TO 5 OR ANY OTHER INDIAN CLIENT. FROM THE PERUSAL OF THE RELEVANT AGREEMENTS, NO PROVISION IS FOUND WHICH WOULD ENTITLE THE CLIENTS 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 C1. 15 OF THE AGREEMENT WITH 5 IS CLEARED BY S'S STATEMENT THAT THE SAID CLAUSE WHICH WAS PART OF STANDARD FORM AT 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 R SAYS THAT R 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 THE CLIENT AT THE EXPIRY OF THAT PERIOD. HANDING OVER TESTED SAMPLES AND TEST COMPOUNDS CANNOT BE EQUATED WITH MAKING TECHNOLOGY, KNOW - HOW, ETC., AVAILA BLE TO R. THE AGREEMENT ALSO STATES THAT R SHALL BE THE OWNER OF ALL INTELLECTUAL PROPERTY RIGHTS RESULTING FROM THE SERVICES. THIS WOULD MEAN THAT, IF ON THE BASIS OF THESE RESULTS, THE CLIENT IS ABLE TO ACQUIRE PATENT OR OTHER INTELLECTUAL PROPERTY RIGH TS IN RESPECT OF NEW GENERIC DRUGS DEVELOPED BY IT, THEN THE APPLICANT SHALL NOT CLAIM ANY INTEREST WHATSOEVER IN SUCH RIGHT. IT IS ALTOGETHER A DIFFERENT ASPECT. BY AGREEING TO THIS PROVISION, THE APPLICANT HAS NOT MADE ITS TECHNICAL EXPERTISE, KNOW - HOW, ETC., AVAILABLE TO R. IT IS ONLY NATURAL THAT R WHICH HAS DEVELOPED THE GENERIC DRUG SHOULD 16 IT A NO S . 1196/BANG/2014 & 1450 /BANG/201 3 ENJOY THE INTELLECTUAL PROPERTY RIGHTS IN RELATION THERETO. THE ANALYTICAL TEST HAS NOT CONTRIBUTED TO THE DEVELOPMENT OF NEW GENERIC DRUG. THE TEST HAS ONLY SHOWN WHETHER THAT DRUG IS AS EFFICACIOUS AS THE REFERENCE DRUG. DEVELOPMENT OF NEW DRUG AND TESTING ITS EFFICACY ARE NOT ONE AND THE SAME THING. BY MERELY ACQUIRING KNOWLEDGE OF THE TESTING METHODS ONE DOES NOT GET ANY INSIGHT AS TO HOW A NEW DRUG COULD BE DEVE LOPED. IN THE LIGHT OF THE ABOVE DISCUSSION INTERPRETING THE EXPRESSION 'MAKE AVAILABLE', IT FOLLOWS THAT C1. (B) OF ART. 12(4) RELIED UPON BY THE REVENUE DOES NOT COME INTO PLAY AND THE SERVICES IN QUESTION CANNOT BE CONSIDERED TO BE 'FEES FOR INCLUDED SE RVICE' 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 BIOEQUI VALENCE 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, TH E FEES RECEIVED BY THE APPLICANT ARE TO BE TREATED AS BUSINESS INCOME AND NOT ROYALTY INCOME. SINCE THE APPLICANT IS IN THE BUSINESS OF PROVIDING BIO - ANALYTICAL SERVICES TO VARIOUS PHARMACEUTICAL COMPANIES, THE CONSIDERATION RECEIVED BY IT FROM THEM WOULD BE ITS BUSINESS INCOME. IN VIEW OF ART. 7 R/W ART. 5, SUCH INCOME CAN BE TAXED IN INDIA ONLY IF THE APPLICANT HAS A PE IN THIS COUNTRY. THE APPLICANT HAS DENIED THE EXISTENCE OF ANY PE HERE AND THERE IS NOTHING ON RECORD TO INDICATE ANYTHING TO THE CONTRAR Y. ON THE FACTS STATED, THE EXISTENCE OF PE IN INDIA CANNOT BE INFERRED ALSO. IT IS, THEREFORE, RULED THAT THE FEE PAID BY S AND R TO THE APPLICANT IN RESPECT OF BIOEQUIVALENCE TESTS CONDUCTED BY IT IS IN THE NATURE OF 'BUSINESS PROFITS' UNDER ART. 7 AND T HE SAME IS NOT TAXABLE IN INDIA AS THE APPLICANT DOES NOT HAVE A PE SITUATED IN THIS COUNTRY. - RAYMOND LTD. VS. DY. CIT (2003) 80 IT] (MUMBAI) 120 : (2003) 86 ITD 791 (MUMBAI), MCKINSEY & CO. INC. (PHILLIPPINES) & ORS. VS. ASSTT. DIRECTOR OF IT (2006) 99 IT ] (MUMBAI) 857 CONCURRED WITH; DIAMOND SERVICES INTERNATIONAL (P) LTD. VS. UNION OF INDIA (2008) 216 CTR (BOM) 120 : (2008) 169 TAXMAN 201 (BOM) RELIED ON. CONCLUSION: 17 IT A NO S . 1196/BANG/2014 & 1450 /BANG/201 3 APPLICANT, TAX RESIDENT OF CANADA, ONLY PROVIDING FINAL RESULTS TO ITS INDIAN CLIENTS BY USING HIGHLY SOPHISTICATED BIO - ANALYTICAL KNOW - HOW, WITHOUT PROVIDING ANY ACCESS WHATSOEVER TO THE CLIENTS TO SUCH KNOW - HOW, FEE RECEIVED BY IT IS BUSINESS INCOME AND NOT FEE FOR TECHNICAL/INCLUDED SERVICES OR ROYALTY AND APPLICANT HAVING NO PE IN INDI A, SUCH INCOME WOULD NOT BE TAXABLE IN INDIA BY VIRTUE OF RELEVANT PROVISIONS OF DTAA BETWEEN INDIA AND CANADA. 12. WE AGREE WITH THE ABOVE OPINION EXPRESSED BY THE AAR AND ACCORDINGLY, WE UPHOLD THAT THE AMOUNTS PAID BY ASSESSEE COMPANY TO THE CROS ARE N OT TAXABLE IN INDIA. THAT BEING SO, THERE IS NO NEED FOR ASSESSEE TO DEDUCT TAX AT SOURCE. CONSEQUENTLY, THE IMPUGNED ORDER OF THE CIT(A) IS CONFIRMED AND THE GROUNDS RAISED BY THE REVENUE IN THESE APPEALS ARE REJECTED . 9. BUT IN THIS CASE, LD. CIT(A) WHO CONSIDERED THE CASE OF DR. REDDY LABORATORIES ALSO EARLIER, DISTINGUISHED THE FACTS TO STATE THAT THESE ARE NOT AGREEMENTS WITH CONTRACT RESEARCH ORGANISATIONS BUT WITH INDEPENDENT RESEARCH ENTITIES. THE CLAUSE OF THE AGREEMENT ALSO INDICATE THAT ASSESSEE HAS RIGHTS OVER THE PATENTS, SECRET KNOWLEDGE ETC., ATTAINED DURING THE COURSE OF CONDUCTING RESEARCH. IT WAS ALSO FURTHER OBSERVED THAT ASSESSEE ADMITS THAT THE PAYMENTS ARE TAXABLE AS FEES FOR TECHNICAL SERVICES (VIDE SUBMISSIONS MADE AND EXTRACTED IN P ARA 15 OF LD. CIT(A) ORDER), WHEREAS, IN THE CASE OF DR. REDDY LABORATORIES THE PAYMENTS ARE NOT ACCEPTED AS FEES FOR TECHNICAL SERVICES, EVEN UNDER THE PROVISIONS OF I.T. ACT. MOREOVER, AS RIGHTLY POINTED OUT BY THE LD. CIT(A), THE DTAA BETWEEN USA AND IN DIA, CANADA AND INDIA ARE ENTIRELY DIFFERENT WITH DTAAS OF UK AND NETHERLANDS. THESE ISSUES WERE CLEARLY ANALYSED BY LD. CIT(A) IN THE ORDER. ASSESSEE COMPANY IS ALSO SILENT ON THE ENQUIRY MADE BY LD. CIT(A) WITH REFERENCE TO TRANSFER OF KNOWLEDGE AS DETAI LED IN PARAS 26 AND 28 OF THE ORDER. NOTHING WAS BROUGHT ON RECORD BY ASSESSEE TO COUNTER THE FINDINGS OF LD. CIT(A) AND SIMPLY RELIED ON THE COORDINATE BENCH DECISION IN THE CASE OF DR. REDDY LABORATORIES, WHICH WE NOTICE THAT THE FACTS ARE DIFFERENT. CON SIDERING THE SUBMISSIONS MADE BY ASSESSEE, THE ORDERS OF THE AUTHORITIES AND AGREEMENTS PLACED ON RECORD, WE AGREE WITH THE FINDINGS OF LD. CIT(A) THAT THE PAYMENTS MADE ARE TAXABLE AS FEE FOR TECHNICAL SERVICES. SINCE ASSESSEE HAS NOT DEDUCTED TAX ON THE SAID PAYMENTS, AO IS CORRECT IN RAISING THE DEMANDS U/S 201 AND 201(1A). GROUNDS RAISED BY ASSESSEE ARE DISMISSED. 8. IN VIEW OF THE ABOVE DISCUSSION AS WELL AS THE DECISION OF THE HYDERABAD BENCH OF TRIBUNAL (SUPRA), WE DO NOT FIND ANY ERROR OR INFI RMITY IN THE ORDERS OF THE AUTHORITIES BELOW IN HOLDING THAT THE PAYMENT IN QUESTION IS FTS AND CONSEQUENTLY THE ASSESSEE WAS LIABLE TO DEDUCT TAX AT SOURCE UNDER SECTION 195 OF THE ACT. 18 IT A NO S . 1196/BANG/2014 & 1450 /BANG/201 3 9. IN THE RESULT BOTH THE APPEALS OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 16TH DAY OF SEPT., 201 6 . SD/ - ( INTURI RAMA RAO ) ACCOUNTANT MEMBER SD/ - ( VIJAY PAL RAO ) JU DICIAL MEMBER *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE. BY ORDER ASST. REGISTRAR, ITAT, BANGALORE