In re PPD Pharmaceutical Development India Private Limited (GST AAR Maharashtra)
PPD Pharmaceutical Development India Private Limited, a firm involved in monitoring and managing clinical trials across India, has been denied Input Tax Credit (ITC) on Integrated Goods and Services Tax (IGST) paid on imported clinical trial samples and associated Central Goods and Services Tax (CGST) on services from Customs House Agents (CHA) and logistics providers. The ruling by the Maharashtra Authority for Advance Ruling (AAR) underscores the principle that ITC is not permissible for goods disposed of as free samples.
PPD India, an affiliate of the global PPD group, a Clinical Research Organization, coordinates clinical trials in India for pharmaceutical and biotech companies (“Sponsors”) based in the US or UK. PPD India receives payments from its global counterparts in convertible foreign exchange on a cost-plus basis for these services. The core activities include site identification, pre-study work, investigator meetings, and study monitoring, with a key responsibility being the management and reporting of clinical trial results.
The Issue: Free Supply of Sample Drugs
A central aspect of PPD India’s operations involves the import of investigational products (“IP”), comparator drugs, and ancillary equipment, collectively referred to as “sample drugs,” for use in clinical trials. As the “importer on record,” PPD India files Bills of Entry for home consumption and pays Basic Customs Duty (BCD), IGST, and other applicable taxes. Upon customs clearance, these sample drugs are dispatched directly to hospitals and clinics conducting the trials.
The critical point of contention was that PPD India supplies these sample drugs to the hospitals and clinics without any consideration. Neither commercial invoices are raised, nor any payment is received from these trial sites. The Drug Controller General of India (DCGI) license obtained by PPD India for importing new drugs for clinical trials also does not permit the supply of these samples with consideration.
ITC Eligibility: The Core Dispute
PPD India argued that the IGST paid on imported sample drugs should be eligible for ITC under Section 16(1) of the CGST Act, as these goods are used “in the course or furtherance of its business.” This section allows registered persons to take credit of input tax charged on supplies used for business purposes.
However, the jurisdictional officer contended that since the drugs were supplied free of cost to hospitals, ITC on the imported drugs should be restricted under Section 17(5)(h) of the CGST Act. This particular sub-section is a non-obstante clause, meaning it overrides Section 16(1), and specifically states that ITC is not available in respect of “goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.”
Judicial Precedents and Circulars
The AAR’s decision relied heavily on Circular No. 92/11/2019 – GST issued by the CBIC on March 7, 2019. This circular clarifies that goods or services supplied free of cost, without consideration, do not qualify as “supply” under GST, unless they fall within the ambit of Schedule I of the CGST Act (which deals with activities deemed as supply even without consideration). Crucially, the circular explicitly states that ITC is not available on inputs, input services, and capital goods to the extent they are used in relation to gifts or free samples distributed without any consideration.
The AAR emphasized that the sample drugs, supplied without consideration to the hospitals, acquire the character of “free samples.” Therefore, despite their use in the furtherance of PPD India’s overall business of clinical trial management, the direct provision of these drugs to trial sites free of cost triggers the restriction under Section 17(5)(h).
ITC on DDP Model and Associated Services
PPD India also explored a “Delivered Duty Paid” (DDP) model for shipment, where a logistics service provider or PPD Global/Sponsor would pay the BCD and IGST on import, although PPD India would remain the importer on record due to its DCGI license. The AAR ruled that even in this proposed model, since the sample drugs would still be supplied free of cost to hospitals, the ITC restriction under Section 17(5)(h) would apply.
Furthermore, PPD India sought ITC on CGST paid for services of Customs House Agents (CHA) and logistics service providers. These services are crucial for clearing and delivering the imported sample drugs to the trial sites. The AAR again cited Section 17(5)(h), reasoning that if the goods themselves are considered “free samples” and ineligible for ITC, then the input services directly utilized for the disposal of these goods (i.e., their clearance and delivery to hospitals without charge) would also be ineligible for ITC. The AAR underscored that Section 17(5) overrides Section 16(1) in such scenarios.
Judicial Precedent from West Bengal AAR
The AAR referenced a judicial precedent from the West Bengal AAR in the case of M/s. Indian Oil Corporation (dated September 18, 2018), which was upheld by the AAAR ruling dated March 8, 2019. In that case, GST paid on railway freight related to non-taxable supplies was deemed ineligible for ITC. This precedent supports the AAR’s current stance that if the ultimate supply of goods is non-taxable (due to being a free sample), then the ITC on services associated with that supply is also not available.
Ruling Summary
In its order, the Maharashtra AAR comprehensively answered all three questions posed by PPD Pharmaceutical Development India Private Limited in the negative:
