Charles River Laboratories Inc Vs ACIT (ITAT Bangalore)
ITAT Bangalore held that pre-clinical laboratory services rendered by the assessee (non-resident) to its customers in India would not be chargeable to tax in India as the technical services rendered by the affiliates do not “make available” technical knowledge, experience, skill, know-how or process while preparing these reports for their, Indian customers/ clients.
Facts- The assessee is a non-resident incorporated under the laws of United States of America (“USA”) on 25.07.1996. It is engaged in rendering pre-clinical laboratory services to enable the determination of a safe dose and assess the potential toxicity of new drugs prior to human clinical trials by way of conducting in vitro and in vivo tests and trials.
For the year under consideration, the assessee received sum of Rs.9,77,31,642/- from its various Indian customers / clients including M/s. Syngene International Ltd. for the services rendered. The Ld.AO noted that the assessee had not offered the income in the return filed, and that, M/s. Syngene International Ltd. also failed to deduct TDS. Accordingly, notice u/s. 148 was issued to assessee on 31.03.2021.
AO was of the opinion that the payment made to assessee was taxable under IT act and also taxable under DTAA as FTS/FIS in the hands of the assessee in India.
Conclusion- Under the India US DTAA, a service would not be FTS unless technical knowledge, experience, skill, know-how or processes is made available to the person making the payment, even where other ingredients are satisfied.
Held that in the instant case, the Indian customers/clients have to repeatedly seek the assessee’s services in respect of testing/research followed by a report on the outcome of such testing/research undertaken by the assessee. The utility of the services available in the form of a report, though highly technical in nature, comes to an end, little thereafter, if not immediately, after its rendition. The Support that the Indian entity seeks after the report is delivered is to understand the report from the The elements necessary for “make available” is absent in the services rendered by the assessee to its Indian customers/ clients, inasmuch as even for the said reports, the customers have to continuously refer to the assessee and the same is not freely made available to the Indian customers. Thus, technical services rendered by the affiliates do not “make available” technical knowledge, experience, skill, know-how or process while preparing these reports for their, Indian customers/ clients. In light of the aforementioned judicial decisions, we are of the considered view that the service recipient of the assessee is unable to make use of the said technology only by itself in its business or for its own benefit without recourse to the assessee year after year.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
Present appeals has been filed by non-resident assessee against separate final assessment orders all dated 20.12.2022 passed by Ld.ACIT (International Taxation), Circle – 2(1), Bangalore for A.Ys. 2013-14, 2014-15 and 2017-18.
2. For the sake of convenience, we reproduce the issues raised by assessee for A.Y. 2013-14 based on the submissions by the Ld.AR that all the issues raised in all the assessment years under consideration are common and based on identical facts. Grounds of appeal – Assessment Year 20 13-14:
“On the facts and circumstances of the case and in law. the learned Assistant Commissioner of Income Tax, International Taxation. – Circle 2(1). Bengaluru (*the learned AO’). has erred in assessing the total income of the Appellant in the assessment order passed under section 143(3) read with section 147 read with section 144C of the Income Tax Act. 1961 (“the Act”) for the captioned Assessment Year (“AY”).
Each of the ground is referred to separately, which may be kindly considered independent of each other.
1. Ground 1: Income earned by the Appellant erroneously characterized to be in the nature of Fees for Included Services/ Fees for Technical Services under the Act and the India – USA Tax Treaty (“Tax treaty”) and is consequently subject to tax in India
1.1 On the facts and in the circumstances of the case, and in law, the learned AO erred in holding that the income earned by CRL Inc from its various customers in India is in the nature of Fees for Included Services (‘FIS”) / Fees for Technical Services (“FTS”) and consequently liable to tax in India, without having due regard to Article 12(4) of the Tax Treaty.
1.2 The Hon’ble DRP/Iearned AO has failed to appreciate that the testing services provided by CRL Inc does not make available its services to the recipient in accordance with Article 12(4) of the Tax Treaty.
2. Ground 2: Consequential levy of interest under section 234A and section 234B of the Act
On the facts and in the circumstances of the case and in law, the learned AO erred in levying consequential interest under section 234A and section 234B of the Act.
3. Ground 3: Initiation of penalty proceedings under section 271(1)(c) and section 271F of the Act
On the facts and in the circumstances of the case and in law. the learned AO erred in initiating penalty proceedings under section 271 (1)(c) and section 271F of the Act. All the above grounds are without prejudice to each other. The Appellant craves for leave to add. amend, vary, omit or substitute or withdraw any of the aforesaid grounds at any time before or at the time of hearing of the matter with the Income Tax Appellate Tribunal. The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the case.”
3. Brief facts of the case are as under:
The facts and circumstances in all the three assessment years under consideration are identical as submitted by the Ld.AR as well as the Ld.DR. It is also submitted that the issue alleged by the assessee in all the three appeals are on common grounds. For the sake of convenience, we refer to the facts for A.Y. 20 13-14 and the decision shall be applied mutatis mutandis to the other two assessment years being 2014-15 & 2017-18.
We refer to the facts as narrated in A.Y. 20 13-14.
3.1 The assessee is a non-resident incorporated under the laws of United States of America (“USA”) on 25.07.1996. It is engaged in rendering pre-clinical laboratory services to enable the determination of a safe dose and assess the potential toxicity of new drugs prior to human clinical trials by way of conducting in vitro and in vivo tests and trials. It is submitted that, these services are largely catered towards Indian customers in the pharmaceutical, medical device and biotechnology industries. It was submitted by the assessee that the Indian customers provide samples prior to undertaking human clinical trials, which is tested by the assessee, by rendering such preclinical laboratory services. It is submitted that the assessee provides report to its customers containing a generic protocol of the test procedure and results to conclude the preclinical phase of testing. The assessee submitted that in rendering the above services, no technology / know-how / knowledge is transferred to the customers nor any right to access/ use of such property is granted.
3.2 For the year under consideration, the assessee received sum of Rs.9,77,31,642/- from its various Indian customers / clients including M/s. Syngene International Ltd. for the services rendered. The Ld.AO noted that the assessee had not offered the income in the return filed, and that, M/s. Syngene International Ltd. also failed to deduct TDS. Accordingly, notice u/s. 148 was issued to assessee on 31.03.202 1.
3.3 In response to notice issued u/s. 148 of IT Act, the assessee filed its return of income for the A.Y. 2013-14 on 30.04.2021. Further, a notice u/s. 143(2) along with the reasons recorded for reopening was issued to the assessee on 25.06.2021 for furnishing details, documents, accounts, and other evidences in support of the return of income filed by the assessee. Thereafter notice 142(1) of the act was issued to the assessee on 09.02.2022 for furnishing details called for as prescribed manner, which was submitted by the assessee on 03.03.2022.
3.4 After issuance of notice u/s. 142(1), the assessee also filed objection against the 147 proceeding through communication letter dated 15.07.2021. The same were disposed of through a speaking order dated 09.03.2022.
3.5 The Ld.AO dealt with the objections raised by the assessee in paras 6 – 6.3 of the draft assessment order. While dealing with the objections, the Ld.AO observed as under:
“6.3 Preclinical laboratory services are not liable to be taxed as FTS in India on account of the beneficial provisions of the Treaty, although such services could be characterized as FTS under the Act. The company submitted that it does not make available any technical knowledge, experience, skill, know-how or processes which enables the person acquiring the services to apply the technology therein. Thus, in absence of ‘make available’ the services cannot be characterized as FTS under the treaty. The assessee has contended that pre-clinical laboratory services are not liable to tax as FTS in India on account of beneficial provisions of treaty. However, this contention of the assessee is not acceptable because Charles River Laboratory has provided laboratory services through test reports to various Indian entities, which was disposed of vide speaking order dated 09.03.2022”
3.6 The Ld.AO thereafter noted that as M/s. Syngene International Ltd. did not deduct TDS along with other Indian entities who had made payments to assessee, proceedings u/s. 201 of the act were initiated in case of M/s. Syngene International Ltd. for non-deduction of tax at source on the payments made to assessee towards obtaining laboratory services through test report. The Ld.AO was of the opinion that the payment made to assessee was taxable under IT act and also taxable under DTAA as FTS/FIS in the hands of the assessee in India.
3.7 The assessee was issued show cause notice dated 11.03.2022 as to why the said amount received as laboratory service charges from the various Indian entities should not be brought to tax as fees from technical services for A.Y. 2013-14. During the course of the assessment proceedings, the assessee, has submitted the following –sample agreements, TRC and details of income received from various Indian customers. The Ld.AO has not considered the above documents nor appreciated the true import of the words “make available” used in Article 12(4) (b) while arriving at the conclusion.
3.8 The assessee filed various submissions in order to counter the observations of the Ld.AO during the assessment proceedings and also relied on various decisions of Coordinate Bench of this Tribunal as well as the decision of Hon’ble Karnataka High Court in case of CIT & Ors. vs. De Beers India Minerals (P.) Ltd. reported in (2012) 21 taxmann.com 214. The Ld.AO however dealt with the issue by observing as under:
“11.4 Judicial Precedents
11.4.1 Legal issues are susceptible to interpretations and judicial precedents serve as guiding principles. Therefore, the decisions related to the issues on hand are also examined in the subsequent paras:
11.4.2 Hyderabad Tribunal ruling, in Dr Reddy’s Research [TS-683-ITAT-2014(HYD)], Preclinical research studies conducted by the foreign companies make available skill knowledge, expertise etc. to the Indian Company. Therefore, such services are taxable as Fee for Technical Services under the Tax Treaty
11.4.3 In the case of Stempeutics Research Pvt. Ltd., the Bangalore Income Tax Appellate Tribunal ruled that payments by the taxpayer to its Malaysian subsidiary (MS) for carrying out clinical trials and R&D pursuant to a product development agreement (PDA) with Cipla Ltd. would constitute fees for technical services (FTS) under Article 13 of the India-Malaysia DTAA.
11.4.4 The Hon’ble High Court of Karnataka has in the case of CIT & Ors V De Beers India Minerals Pvt Ltd in 346 ITR 467 held that the expression ‘make available’ only means that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilise the knowledge or know-how in future on his own. In the instant case the Indian entity derive an enduring benefit in the form of research.
11.4.5 In the case of M/s. XYZ Ltd. AAR, New Delhi A.A.R. No. 928 Of 2010, the applicant a tax resident of Hong Kong had provided inspection, verification, testing and certification (IVTC) services to Indian customers and payment received/receivable by applicant in relation to said services would be chargeable to tax in India as ‘fees for technical services’ under section 9(1)(vii)(b) and liable for deduction of TDS u/s 195. (XYZ Ltd. In re [2012] 348 ITR 20 (AAR-New Delhi) technical services utilized in India.
11.4.6 In view of the facts in above paras, it is clear that, payments received by the assessee for providing laboratory services through test reports are in the nature of fee for technical services as defined U/s 9 (1)(vii) of the Income of the Income Tax Act as well Article 12 of IndoUSA DTAA which is taxable in India.
12. Finding:
12.1 The consideration received by the assessee is towards the testing charges which is technical in nature. It also ensures that the primary consideration for laboratory services is served by being an ancillary. Thus, the consideration received fulfils the conditions laid out in the DTAA of being ancillary as well as the make available of the skills, processes and knowledge to qualify it as fee for technical services
12.2 This apart the fact that the technical services rendered abroad are subsequently utilized by the Indian entity to test the products manufactured on the basis of the tested sample is a transfer of skill and knowledge which falls within the ambit of the term technical services are included services as the case may be.
12.3 The findings can be tabulated as under:
