S/s. 9, 195 – Procurement of information on clinical trials not used by the taxpayer for its own technical knowhow, but for onward transmission is not royalty
Facts:
The Taxpayer, an Indian Company (I Co.), entered into a master clinical services agreement (MCSA) with an overseas drug manufacturing company (FCo.) for clinical trials.
In pursuance thereto, I Co. entered into an arrangement with a Sri Lankan Company (SCo.) to undertake clinical trials in Sri Lanka. SCo. in turn had a tie-up with a clinical trial unit (CTU) of a Sri Lankan university for the conduct of clinical trials. The reports received from SCo. were passed on to FCo. by the Taxpayer.
I Co. applied for a nil withholding tax order on its payments to SCo. on the basis that the remittance was a business profit, not taxable in the absence of SCo.’s permanent establishment (PE) in India under the India-Sri Lanka DTAA. This DTAA does not have an article on technical services unlike many of the DTAAs signed by India.
The Tax Authority held that the payment was for imparting commercial experience to FCo. through the Taxpayer and hence constituted royalty under Article 12(3) of the India-Sri Lanka DTAA.
On appeal, the CIT(A) ruled in favour of I Co. The CIT(A) held that the nature of services rendered by SCo and CTU does not qualify as “royalty” either in terms of the Act or the India-Sri Lanka DTAA. The services may be characterised as fees for technical or professional services (FTS) or business profits. In the absence of the FTS article, these services are to be treated as business profits which can only be taxed in India if SCo. has a PE in India.
Aggrieved, the Tax Authority appealed before the Tribunal.
I Co. argued that the information provided is akin to providing study report or book which is general in nature. The payment is in fact for availing services from SCo. pursuant to which SCo. follows a standard protocol to generate data consistently with the practice adopted worldwide. SCo. is thus only compiling the data of a routine nature which cannot be called technical information which determines the decision to commercially manufacture the drug or not.
Held:
After considering the facts, the Tribunal upheld the reasoning of CIT(A) and ruled that, though, the payment is for procuring commercial information, it is not royalty because:
• The services rendered by SCo. are for supply of information which the I Co. is not using for any technical knowhow.
• The I Co. is acting as a conduit. The remittance is for procurement of commercial information for onward transmission to FCo.
