DCIT vs. Dr. Reddy's Laboratories Limited [ITA No. 867 & 868/Hyd/03] (Hyderabad Tribunal) dated 24 May, 2013

Facts

The taxpayer was engaged in the business of manufacturing, trading and exporting of bulk drugs and pharmaceuticals. It was also engaged in research and development of bulk drugs and pharmaceuticals.

In order to market its products in USA and Canada, the taxpayer was required to get approval from the respective regulatory authorities. In USA, the authority is called as US Federal Drug Authority (USFDA) and in Canada, the authority is called as Therapeutic Product Programme Authority (TPPA).

For this purpose, the taxpayer was required to get its products tested through certain specialised organisations in USA/Canada which were called as Contract Research Organisations (CRO).

The testing process was called 'bio-equivalence study'. During the bio-equivalence study, the CROs do clinical research and analyse the impact of the drug on human beings.

Issue

Whether payments for bio-equivalent studies are taxable under India-USA and India-Canada tax treaty?

Held

Even though the AO considered that the payments were made by way of FIS as per Article 12 of the tax treaty, 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.

The Tribunal held that the CIT(A) was correct in holding that the taxpayer was conducting clinical trials through the CROs to comply with the regulations therein and the CROs who were experts in this field were only conducting studies and submitting the reports in relation thereto.

There was neither transfer of technical plan or technical design nor making available of technical knowledge, experience or know-how by the CROs to the taxpayer.

The taxpayer did not get any benefit out of the said services in USA and the taxpayer was only getting a report in respect of field study on its behalf, which would help it in getting registered with the regulatory authority.

Since there was no making available of technical skill, knowledge or expertise or plans or designs in the present case, the amounts paid by the taxpayer do not fall under Article 12, but come within the purview of Article 7 of the tax treaty.

Therefore, the amounts paid are to be considered as business receipts of the said CROs and in absence of CRO's PE in India, there was no need to deduct tax at source.

The Tribunal relied on the decision of Anapharm INC, where it was held that the taxpayer, 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. Therefore, fee received by the taxpayer was business income and not fee for technical/included services or royalty and applicant having no PE in India, such income would not be taxable in India.

In view of above it was held that the amounts paid by the taxpayer to the CROs are not taxable in India.