By Geeta Jani, Dhishat B. Mehta Chartered Accountants
fiogf49gjkf0d
Section 9(1)(vii) – Pre-clinical research payments held as FTS under the Act as well as India-UK and India-Netherlands DTAA.
Facts:The Taxpayer, an Indian pharmaceutical research company, was carrying on drug discovery research. Taxpayer discovered a new chemical compound and applied for a patent. The Patent was granted for 20 years. After obtaining the patent, Taxpayer was required to conduct certain pre-clinical research before it could utilise the exclusive marketing rights granted under the Patent. In order to reduce the cost of research and maximise the time available to commercially exploit the patent before its expiry, appropriate parts of research were allocated to companies situated in the UK (UK Co) and Netherlands (N Co) and payments were made to them without withholding tax at source.
The Tax authority concluded that the payments made to UK Co and N Co for pre-clinical studies constituted FTS under the Act as well as under the India-UK and India- Netherlands DTAA . Since the Taxpayer had not withheld tax at source, the Tax Authority passed an order u/s. 201(1) of the Act.
The Taxpayer contended that the payments made to UK Co and N Co were not taxable in India as it did not constitute FTS under the relevant DTAA as the services did not satisfy the make available condition not warranting withholding of taxes. Thus the Taxpayer appealed before the First Appellate Authority against the orders passed by the Tax Authority.
On appeal, the First appellate Authority held that the pre-clinical research satisfies the make available condition and thus constitutes FTS under the relevant DTAA . A reference was made to the agreement between the Taxpayer and UK Co as well as with N Co and observed that the agreements clearly provided that all the intellectual property including rights to patents, which would be generated in the course of clinical research conducted by UK Co and N Co, would belong solely to the Taxpayer. The Taxpayer had complete control over the know-how, experience of the field trials and skills generated in the field trial. The Taxpayer had obtained the services from UK Co and N Co to speed up the “clinical research time” so that the time available for exclusive marketing rights could be maximised. Thus, the services of UK Co and N Co results in transfer of technical know-how and hence will constitute FTS under the relevant DTAA .
Aggrieved, the Taxpayer preferred an appeal before the Tribunal.
