December 2008
Clinical trial test reports did not ‘make available’ technical knowledge, experience, know-how, etc. — Consideration is not fee for included services under India-Canada DTAA
By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
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Part C — International Tax Decisions
6 Anapharm Inc, In re
(2008) 305 ITR 394 (AAR)
S. 9(1)(vii) of IT Act; Articles 5, 7, 12 of India-Canada
DTAA
Dated : 11-9-2008
Issue :
Issuance of clinical trial test reports to clients did not
‘make available’ technical knowledge, experience, know-how, etc. and
consideration thereof is not fee for included services under India-Canada DTAA.
Facts :
The applicant, a Canadian company, was a contract research
organisation which assisted pharmaceutical companies globally by providing
clinical and bio-analytical services for development of new drugs or generic
equipments of drugs already being marketed.
The applicant had entered into agreement with two Indian
pharma companies for undertaking clinical and bio-analytical studies. The issue
before the AAR was whether the fee received by the applicant from the Indian
pharma companies is subject to tax in India in accordance with the provisions of
the Income-tax Act, 1961 (‘IT Act’) and DTAA between India and Canada.
For the purpose of undertaking clinical trials, the applicant
had devised product-specific methods/protocols which were in conformity with
international regulations and requirements of the drug authorities of the
various countries. Such methods/protocols belonged to the applicant and were not
shared with the clients. The applicant merely gave final reports/conclusions of
the trials to its clients. The applicant contended that the services rendered to
the Indian pharma companies did not result in transfer of any technical
experience, know-how or technical plan or technical design to the payers and
hence, did not satisfy the test of ‘make available’ under ‘Article 12 – Fees for
included services’ (‘FIS’) of the DTAA.
Held :
The AAR accepted the contention and held :
(i) There was some difference between S. 9 of the IT Act
and Article 12 of DTAA. Mere provision of technical services, in absence of
their being ‘made available’, was not enough to attract Article 12(4)(b).
(ii) To ascertain the meaning of the expression ‘makes
available’ as embodied in the treaty, the AAR referred to the similar
provision of India-USA DTAA and the annexed protocol. The AAR observed that
consideration paid can be regarded as ‘FIS’ only if the twin test of rendering
services and making technical knowledge available were satisfied. Reliance for
this was placed on the Bombay High Court decision in the case of Diamond
Services International Ltd. v. UOI, (2008) 169 Taxman 201.
(iii) Though the services rendered were sophisticated in
nature, the applicant did not reveal to Indian pharma companies the process of
how it conducted clinical trials and related tests. A broad description or
indication of the type of test carried out before issuance of reports did not
enable Indian pharma companies to derive requisite knowledge to conduct the
tests or to develop the technique on their own.
(iv) Clinical procedure, analytical methods, etc., which
were proprietary items of the applicant, were not transferred, assigned or
handed over to Indian pharma companies. Mere handing over of reports of tested
samples and test compounds cannot be equated with making technology, know-how,
etc., available to the pharma companies.
