CHARLES RIVER LABORATORIES INC.,UNITED STATES vs. ASSISTANT COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION, CIRCLE-2(1), BANGALORE

This appeal by assessee is directed against final assessment order of the AO dated 1.7.2022 for the assessment year 2012-13. The assessee has raised following grounds of appeal:-

On the facts and in the circumstances of the case and in law, the learned AO erred in levying additional interest under section 234A of the Act. 3. Ground 3: Initiation of penalty proceedings under section 271(1)(c) 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) 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.”

Ground No.1: 2. Facts of the case are that Indian entity Syngene International Limited is a contract research and manufacturing organization, which supports R&D programs from lead generation to clinical supplies. Its multi-disciplinary skills in integrated drug discovery and development include capabilities in medicinal chemistry, biology, in vivo pharmacology, toxicology, custom synthesis, process R&D cGMP manufacturing, formulation and analytical development along with Clinical development services.

2.1 The Indian entity M/s Syngene International Limited has made payments in the tune of Rs.41,25,170/- to M/s. Charles River Laboratories, USA on account of obtaining laboratory services through test report which was chargeable to tax as FTS in the hands of M/s. Charles River Laboratories, USA.

2.2 Charles River Laboratory has provided laboratory services through test reports to Syngene International Ltd. The business of the Indian company is based on the reports provided by the Clients/Vendors or the service providers. Therefore, in the context of Business development of the Syngene, the services rendered by Charles River which was made use by the assessee in business development is in the nature of technical services/consultancy services which facilitate the Indian entity towards achievement of the desired objects and business goals.

2.3 According to AO the assessee has not explained technicalities involved in providing these services as specified in the Article 12(4). The A.O. observed that in absence of the details, it is not possible to analyze what is the nature of services which are rendered by assessee company and cannot be said that payments are not in the nature of FTS/FIS.

2.4 In view of the above facts, the ld. A.O. observed that payments made by the Indian entity to the assessee company on account of obtaining laboratory services through test reports are in the nature of fee for technical services as defined u/s 9(1)(vii) of the Income-tax Act,1961 ['the Act' for short] as well as Article 12(4) of Indo USA DTAA which is taxable in India. Thus, from the above discussion the ld. AO observed that the payments made by Indian entity on account of obtaining laboratory Services through test reports to the various vendors are in the nature of Fee for Technical Services both under the Income Tax Act and respective DTAA and hence it is taxable in India.

"given the broader definition provided under the Act, the preclinical services provide by the company could fall under the ambit of fees for technical service".

3.1 However, according to the assessee, it has not made available any technical knowledge, experience, skill, know-how or processes which enables the person acquiring the service to apply the technology contained therein. Hence, in view of the memorandum of understanding (MoU) on article 12 of the DTAA between India and US the assessee contends that the consideration received is not taxable in India.

3.2 The ld. DRP further observed that the services rendered by the assessee become part and parcel of the technical know-how of the client which will be further enhanced by future research. Thus, the ld. DRP was of the view that knowledge transfer has happened in this case and article 12(4)(b) of the lndo-US DTAA is applicable in the case of this transactions and the AO was right in holding that the consideration received in lieu of pre-clinical services is taxable in India.

1) CIT v. De Beers India Minerals Pvt Ltd (Karnataka HC (2012) (346 ITR 467), wherein held that:

“Para 31: “Therefore the assessees not being possessed with the technical know how to conduct this prospecting operations and reconnaissance operations, engaged the services of Fugro which is expert in the field. By way of technical services, Fugro delivered to the assessee the data and information after such operations. The said data is certainly made use of by the assessees.

Not only the said data and information was furnished in the digital form, it is also provided to the assessee in the form of maps and photographs. These maps and photographs which is made available to the assessee cannot be construed as technical made available. Fugro has not devised any technical plan and design. Therefore the question of Fugro transferring any technical plan and design did not arise in the facts of these cases. The maps which are delivered are not of kind of any developmental activity. As such, earlier the information which is furnished to the assessee by way of technical Page 6 of 10 services in the digital form is also given in the form of Maps. Therefore, the case on hand do not fall in the second part of the aforesaid clause dealing with the development and transfer of plans and designs. Therefore, the second substantial question of law is also answered in favour of the assessee and against the revenue.”

2) Dr. Reddy’s Laboratories v. Additional Commissioner of Income Tax, Circle 1(2), Hyderabad, (2017) 78 taxmann.com 63 (Hyderabad – Trib), wherein held that: “The applicant uses its experience and skill itself in conducting the bioequivalence tests, and provides only the final report containing conclusions, to the client. The information concerning scientific or commercial experience of the applicant or relating to the method, procedure or protocol used in conducting bioequivalence tests is not being imparted to the pharmaceutical companies and the consideration is not paid for that purpose. On the basis of the final report, the pharmaceutical companies will not be able to find out what method, procedure or protocol was used in conducting the tests. Moreover, the test reports are drug specific. Hence the material furnished by the applicant will not in any way help the customers to facilitate further research and development of new drugs as contended by the Revenue. As such, the fees received by the applicant are to be treated as business income and not royalty income. Since the applicant is in the business of providing bio- analytical services to various pharmaceutical companies, the consideration received by it from them would be its business income. In view of art. 7 r/w art. 5, such income can be taxed in India only if the applicant has a PE in this country. The applicant has denied the existence of any PE here and there is nothing on record to indicate anything to the contrary. On the facts stated, the existence of PE in India cannot be inferred also. It is, therefore, ruled that the fee paid by S and R to the applicant in respect of bioequivalence tests conducted by it is in the nature of 'business profits' under art. 7 and the same is not taxable in India as the applicant does not have a PE situated in this country.”

4.1 The ld. A.R. also relied on the following judgements:

Page 7 of 10 1) Cadila Healthcare Ltd. v Deputy Commissioner of Income-Tax (International Taxation) -1 (IT Appeal Nos. 711 & 1140 (Ahd.) of 2019) (Ahmedabad ITAT) 2) Lambda Therapeutic Research Ltd. v Income-tax officer (International Taxation) IT Appeal No. 3197 (Ahd.) of 2016 (Ahmedabad ITAT) 3) DCIT v Dr. Reddy’s Laboratories Ltd. (IT Appeal Nos 867 and 868 of 2003) (Hyderabad ITAT, 2013)

4) Hindustan Aeronautics Ltd v. Assistant Commissioner of Income-tax (IT Appeal No. 83 (Bang.) of 2018) (Bangalore ITAT) 5) Havells India Ltd. v Assistant Commissioner of Income Tax, New Delhi (IT Appeal No. 4965 of 2012) (Delhi ITAT)

6.1 A clinical trial is a systematic study to generate data for discovering or verifying the clinical and pharmacological profile (including pharmacodynamic and pharmaco-kinetic) or adverse effects of a new drug on humans. (1) It is the only way of establishing the safety and efficacy of any drug before its introduction in the market for human use and is preceded by animal trials where the efficacy and side effects are observed in animals and an estimated drug dose is established. It is important for anyone preparing a trial of a new therapy in humans that the specific aims, problems and risks or benefits of a particular therapy be thoroughly considered and that the chosen options be scientifically sound and ethically justified. Indian entity has obtained laboratory services through test reports through assessee company. These test reports are not mere data and it involves various stages in developing such reports. Assessee company have given the Indian company the right to use such test reports in its product development. The Indian entity has access to the technical information, technology, documentation, knowhow and process involved in the whole procedure of study through these test reports the assessee company made available skill, knowledge, expertise, etc. to the Indian entity. Therefore, such services are in the nature of fee for technical services. "fees for technical services" means payment of any kind in consideration for rendering of managerial, technical or consultancy services (including the provision of services by technical or other personnel.

6.2 The assessee has placed the reliance of High Court of Karnataka in the case of CIT v. De Beers India Minerals Pvt. Ltd (2012) 346 ITR 467, wherein the High Court has held that where technical services are rendered to the customers without making available any technical expertise to enable them to use such services independently in the future, payment made for such services could not be termed as FTS. The business profile of the Indian company is based on the reports provided by the Clients/Vendors. Therefore, in the context of Business development of the Syngene international, the services rendered by Charles River which was made use by the assessee in business development is in the nature of technical services/consultancy services which facilitate the Indian entity towards achievement of the desired objects and business goals in India. In view of the above, the reliance of the assessee in the above case is not relatable to the extent of the services provided to the Indian entity.

6.3 In the present case, the assessee has not placed and explained the details of Technicalities involved in deciding the impugned issue or specified in the Article 12(4). In my opinion, assessee has to furnish the details so as to analyze what is the nature of services which are rendered by assessee company and without this it is not possible to decide the nature of payments. Hence, in the interest of justice, I remit the entire issue to the file of AO/TPO to consider the issue afresh in the light of submissions made by assessee before me.

6.4 All other grounds of appeal are only academic at this stage, which do not require any adjudication.

Page 10 of 10 7. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.

Order pronounced in the open court on 8th Feb, 2023

Sd/- (Chandra Poojari) Accountant Member

Bangalore, Dated 8th Feb, 2023. VG/SPS

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Asst. Registrar, ITAT, Bangalore.