AVESTHAGEN LTD. vs. DY DIT,

PER S. JAYARAMAN, ACCOUNTANT MEMBER :

These two appeals are filed by the assessee against the order of the

CIT (A) –IV, Bengaluru, dt.31.05.2010, for the assessment year 2008-09.

by Dr.Villoo Morawala Patell, incorporated on 20.04.1998 under

the Companies Act, 1956 as Avestha Gengraine Technologies Pvt.

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Ltd was converted into a Public Limited Company on 31.12.2007

and its name was changed to Avesthagen Ltd. The assessee with

its subsidiaries and joint venture companies is engaged in the

business of scientific research and product development to

provide preventive personalized medical care. It is providing Research

& Development (R&D) services in Bio-technology and Bio-informatics

mainly to its joint venture group company and a subsidiary

company.

2.1 During the f y 2007-08, it made the following payments to M/s

Selexis SA, a company incorporated under laws of

Switzerland ("Selexis") for providing certain services related to

development cell lines using the technology of Selexis under an agreement

dated 12.10.2007-

2.2 On perusal of records, the AO noticed that the assessee had

failed to deduct tax at source (TDS) on the said remittances as

required under Section 193. Although the said remittances were

characterized as "Fees for Technical Services" in the CA's

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certificate, the rate of withholding tax was wrongly taken at NIL

relying on clause I of Article 12 of the Tax Treaty with the Swiss

Confederation. It seemed to the AO that the assessee has

over-looked the provisions of Clause 2 of Article 12 as per which

"fees for technical services" could be charged to tax in India as well

@ 10% of' gross receipts. Accordingly, he initiated proceedings

against the assessee u/s 201 (1) fo r n o n- de duc tio n of TD S on

th e abo ve remittances and after perusal of the assessee’s

written submissions, issued a final show cause notice to t r e a t i t

a s as an assessee in default for non-deduction of TDS u/s 201(1).

After considering the assessee’s submissions, the terms of the

agreement and the relevant statutory provisions, the A.O. vide

his order dated.31.07.2008 came to the conclusion that the

payments made by it to Selexis for rendering services in

connection with the development of cell lines as "fees for

technical services" ("FTS") and it would constitute income

chargeable to tax in the hands of Selexis under the Act as well as

under the provisions of the Double Taxation Avoidance Agreement

( DTAA) between India and Switzerland. Since the assessee failed

to deduct TDS , the A O treated it as an assessee in default u/s

201(1) in respect of the tax deductible at source thereon and

the interest payable in terms of Section 201(1A). Ac c o r d in g l y ,

t h e A . O d e t e rm in e d t h e t a x p a y a b le u / s 2 0 1 ( 1 ) a t

Rs.20,11,607/- ie @ 10% of gross receipts and the interest payable

IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 4

u/s 201(1A) at Rs.1,34,492/-. Aggrieved by that order, the

assessee filed an appeal before the CIT (A) and the CIT (A)-IV,

Bangalore in his order in ITA No 28/Intl.Taxn.1(1)/CIT (A)-IV/08-09 dt

31.05.2010 dismissed the appeal. The assessee filed an appeal before

this Tribunal in ITA No 972 against the CIT (A) order. On being asked to

file a separate appeal for each of the demands, the assessee filed an

appeal in respect of the demand u/s 201(1A) in ITA No 884 and filed a

revised grounds on the original appeal towards the demand u/s 201(1) as

under:

of the assessee filed an affidavit as under :

“ 1. I am the Director of the petitioner company and I am fully conversant with the facts and circumstances relating to the present case and I am competent to affirm this affidavit.

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It is therefore prayed that this Hon'ble Tribunal may be pleased to condone the delay in filing of this appeal petition, admit the appeal petition and thus render justice. Dated at Bangalore this day the 29th day of May 2013.”

the ground are extracted as under :

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Since the facts are common, both the appeals are clubbed together, heard

and being disposed together.

submitted that the payment made is for import of goods and is not for

FTS as wrongly presumed by the AO. The AO is unsure of the nature of

payment as evident from the unsubstantiated observation in Para 5

of his order reading as "by common understanding these services

are undoubtedly technical in nature", he has misread the agreement

in bits and pieces as would be evident from Para 7 of his order wherein it

is wrongly observed that the payment is for launching of

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Biosimilars manufactured in India after undergoing clinical trials,

failed to appreciate that the agreement contemplates two phases. The

activity of clinical trials and manufacture happens in Phase 11 of the

agreement and the payment on which tax is demanded is for Phase I

for delivery of tangible property only. It is also submitted that the A O has

not considered the fact that the Phase I of the agreement envisages the

delivery of tangible property only and the Phase 11 of the agreement is

for licensing of Intellectual Property Rights. It is contended that huge

liability cannot be fastened on the assessee on conjecture and

misreading of the agreement particularly when the assessee had placed

substantial material to prove that the consideration is towards supply

of tangible property and is not for rendering of any technical service.

Further, it is contended that the impugned payment was made to the

non-resident for import of goods, which is not liable to tax

deduction at source u/s 195(1), and it is not for technical services.

In support of its contention, the AR sought our attention to a copy

of letter No. BT/BS/17/14/2000-pid dated 29.04.2008 of the Department

of Biotechnology, Ministry of Science & Technology, Government of India

and copies of Export invoice Nos. C-31 and C-38 dated 29.02.2008 and

18.04.2008 , respectively, raised by Selexis on the assessee

towards export of 45 vials and 42 vials, respectively, of "mammalian cell

lines expressing recombinant proteins" and submitted that the

former one permitted the import of Recombinant Mammalian Cell Lines

from Selexis, Switzerland. From perusal of Para 1 of the letter

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reading as "Description of Materials", it would be evident that the

import is of tangible goods and not of Technical Service as erroneously

concluded by the AO. On the other hand, the DR opposed the above

submissions relying on the order of the CIT (A). We heard the rival

submissions and gone through the relevant material. Since the assessee

has taken the same plea as was taken before the CIT (A) , let us examine

how the CIT (A) dealt the matter, by extracting the relevant portion , as

under :

“5.1 In the course of proceedings u/s 201(1) of the Act, the AO perused the terms and conditions of the "Cell Line Development Services Agreement dated 12.102007 (hereinafter referred to the Agreement) executed between the appellant and Selexis. According to the AO, Clause A and Clause B of the Preamble to the said Agreement clearly state the basic purpose of the Agreement as under:-

A. Avesthagen intends to engage Selexis in establishing cell lines useful for production of Avesthagens proprietary recombinant proteins (Prot'), which transgene DNA sequences and related information are being provided to Selexis pu rsuant to that certain Material Tran sfer Agreement (Exhibit A) executed by the parties on or about the effective date of this agreement (the “ MTA " and such transgene DNA sequences and related information defined as "Research Material' therein). B. Selexis has expertise in the development of mammalian cell 1 1n d c e ll l in e s f o r th e p r odu c ti on o f r e c o m bi n an t proteins and in this regard has developed its proprietary SURE Cell line Development platform, winch includes all patents and know-how owned or controlled by Selexis based on or relating to the use of Selexis proprietary Genetic Elements SGEs, about 3Kb) to control the dynamic organization of

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chromatin ("Selexis Technology ")".

From the above preamble, the AO inferred that the appellant had engaged Selexis for establishing cell lines which were useful for production of the appellant's proprietary recombinant proteins.

5.1.1 The AO then referred to the scope of services to be rendered by the non- resident company to the appellant as per Exhibit B to the Agreement. It was noted that there were following three modules in this project:- Module ONE-Project Kick-off & Technology Transfer Module TWO- Construction of Selexis Genetic Element Vectors containing Avesthagen Gene Module THREE- Establishment of High Performance Cell minipool(s) (LD1)

The objectives and activities of Module ONE were described as under:- 'Objectives:

a) Establishment of project team and Project communication plan b) Rapid and effective transfer of Avesthagen Technology

Activities:

b. Selexis and Aveshagen will review and agree upon cloning strategy. 2. Technology transfer a) Avesthagen will transfer to Selexis, electronically, DNA sequences coding for Avesth agen Product(s) furth er described in Attachment 1. b) Avesthagen will transfer prior data / results on expression of product [s] c) Avesthagen will transfer to Selexis Standard Operating Procedure (SOP) / protocols and standard materials is required for

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Selexis to establish ELISA assays for Product(s)". Similarly, objectives and activities of Module TWO were described in the Agreement as follows:-

"Objectives: a) Construction of optimized DNA expression vectors cloning with Selexis Genetic Elements (SGEs). Activities a) Codon Optimization and Gene Synthesis (Third party) b) Vector construction and validation at Selexis". Likewise, objectives and activities of Module THREE were enumerated as under:- “Objectives

a) Rapid development of stable cell minipools expressing product(s)

Activities

(a) Selexis will implement Sure Cell Line Development Program b) Quantification of production c) Cell rninipool selection d) Shipment" From perusal of the above, the AO noted that Selexis was engaged to develop different cell minipools which could be used for production of recombinant proteins. According to the AO, by common understanding, these services are undoubtedly technical in nature.

5.1.2 From perusal of the written submissions of the appellant, the AO also noted that the mammalian cell lines/ pools which would express recombinant proteins would be utilised by the appellant to produce the biosimilars for therapeutic use. The cell lines will undergo characterisation and process development to ensure the right product is being made. On receipt of approval, the protein produced will undergo preclinical trials on animals to test for safety and efficacy. The cell lines will be transferred to a eGMP (Good Manufacturing Practices) manufacturing facility. The material produced here under highly controlled environment on receipt of approval from the Indian regulatory authorities will undergo clinical trials on humans.

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On completion of clinical trials and receipt of license for commercial production, these biosimilars will be launched in the market for use in several therapies eg, several kinds of cancer, auto immune disorders and myocardial infarction. This led the AO to draw the inference that these were clearly in the category of new inventions which are useful in the health sector and mostly related t o bio-technological field and that undisputedly payments for these services fall under the category of "FTS" as defined under Explanation 2 to Section 9(l)(vii) of the Act. Similarly, the AO referred to Article 12 of the relevant DTAA which reads as follows:-

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tax @10% ” ……………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………… ………………………………………. 5.3 1 have considered the submissions of the appellant and perused the judicial decisions cited by it as well as the other materials on record. At the outset, it will be pertinent to consider the decision of Hon'ble jurisdictional High Court in the case of CIT and ITO v. Samsung Electronics Co. Ltd. and others (ITA N o . 28 08 o f 2 00 5) d at e d 24 . 09 .2 00 9. T h e q u e sti o n s f o r e x amination of the Hon'ble Court inter alia were whether there was an obligation to deduct tax at source in terms of Section 195 in respect of remittances made to the non-resident and whether the assessee can question the taxability of the recipient in a proceeding u/s 201(1) and 201(1A) of the Act when he has to show only good and sufficient reasons for his failure to deduct and pay the tax. Following the decision of the Hon'ble Supreme Court of India in Transmission Corporation of A.P. Ltd. v. CIT (supra) the Hon'ble Court examined the scope, operation and application of Section 195 of the Act. A number of broad principles emerge from this decision. Firstly, Section 195(1) of the Act is neither a charging section nor a section providing for determination of the tax liability of the non-resident who is in receipt of payments from a resident. The amount deducted by the resident who is responsible for making payments to the non-resident is only a provisional or tentative amount which is kept as a buffer for adjusting this amount against the possible tax liability of the non-resident assessee. Secondly, since Section 195(1) is not a provision for assessing the tax liability of a non- resident, the AO is not required to indulge in an exercise of determination of the income of a non-resident which can be done only on the basis of a return of income filed by the non-resident. Questions such as whether the amount remitted represents consideration for purchase of "goods" are not relevant while examining the question of obligation of a resident payer in terms

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of Section 195(1) of the Act. The judgment of the Hon’ble Supreme Court of India in Transmission Corporation's case is a binding authority for this proposition. Thirdly, Section 195(1) mandates that while making payment to a non-resident recipient in respect of any goods/services supplied by the non-resident which the resident payer is making use of in the running of its b u s i n e s s o r a n y o t h e r a c t i v i t y i n d u l g e d i n a s p a r t o f t h e business / professional activity of the resident, every resident payer must comply with the obligation to deduct tax at source thereon u/s 195(1) Act as the payment to the non-resident recipient prima-facie bears the character of an income. Fourthly, the obligation on the part of the resident payer who makes such a payment to the non-resident recipient is like a guided missile which gets itself attached to the target the moment tile resident assessee makes the payment to non-resident recipient. The only limited way of either avoiding or warding off the guided missile is by the resident payer invoking the provisions of Section 195(2) of the Act. If the resident payer has not filed an application u/s 195(2) of the Act, he cannot later, after having failed to deduct tax, turn around and contend that no part of the payment had resulted in any taxable income in the hands of the nonresident recipient and, therefore, it cannot be said that there was any failure on the part of the resident payer in fulfilling its obligation u/s 195(1) of the Act. And finally, it is not open to a resident payer to invite the AO to embark upon the exercise of determining the tax liability of the non-resident recipient on a mere filing of objections to a demand u/s 201 of the Act by merely contending that the payment did not result in any taxable income in the hands of the non-resident. Such an exercise can be undertaken by the AO only in an actual return of income filed by the non-resident recipient. Likewise, while examining an appeal arising out of an order u/s 201 of the Act, it is not permissible for the appellate authorities to embark upon the question of determination of the actual tax liability of a non-resident recipient in respect of the

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amount received from a resident taxpayer.

5.3.1 It is now proposed to examine the applicability of the said decision of the Honb1e Karnataka High Court to the facts of the instant case. It is clear that the appellant, a resident, has made payment to Selexis, a non-resident, towa r ds pro vi si on of cel l lin e dev el opmen t s er vi ce s i n te rms o f t h e ag re em en t wi thou t dedu cti on of ta x at s ou r ce as r equ i red u /s.1 95(1) of th e Act. It is claimed that no tax has been deducted at source u/s 195(1) of the Act since the impugned payment to Selexis is in the nature of business income (being consideration for sale of tangible goods) which is not taxable in India as Selexis has no PE in India. it is an admitted fact that the Impugned payment was made to Selexis on the strength of a CA's certificate and that no application was made by the appellant u/s 195(2) of the Act. Nothing prevented the appellant from approaching the A.O. for grant of such a certificate, if the appellant was convinced that income of Selexis from provision of cell line development services would not be chargeable to tax under the provisions of the Act. Similarly, no application was made by Selexis u/ss 195(3) or 197 of the Act for receiving the income from provision of cell line development services without deduction of tax at source. It is not the case of the appellant that Selexis has already paid tax in Switzerland in regard to the income earned from provision of cell line development services to the appellant. A perusal of CA's certificate issued by Mr. Prabhath P. Bhat, C.A., reveals that at Serial No.5 of the said certificate, the remittance of Euros 220,000 made by the appellant to Selexis has been certified as "towards Fee for Technical Services in connection with cell lines development services…", though the rate of withholding tax was taken by the CA concerned at NIL "as per Article 12 Clause (1) of the DTAA with the Swiss Confederation". The above certificate was issued by the CA concerned after examination of Invoice No.20070096 dated 28.09.2007 raised by Selexis on the appellant, books of account

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and other records of the appellant for ascertaining the nature of the impugned remittance etc. However, the appellant failed to take into account the fact that receipts in the nature of FTS were taxable in t h e h a n d s o f t h e n o n - r e s i d e n t i n In di a un d e r A r t i cl e 1 2 ( 2 ) o f th e r e l e v a n t D T A A @ 1 0 % o f the gross receipts. The appellant has not furnished any reasons or justification at the appellate stage for changing its stand (with regard to the nature of the remittance) from FTS to consideration for import of goods. Thus, it is clear that the appellant has not exercised due care and caution in the discharge of its mandatory statutory obligation U/S 195(1) of the Act. In view of the failure of the appellant to approach the AO for grant o f a l l c e r t i f i c a t e u / s 1 9 5 ( 2 ) o f t h e A c t , I h a v e n o h e s i t a t i o n i n holding that the AO was justified in treating the appellant as an assessee in default in respect of the tax deductible at source u/s 201(1) of the Act and levying interest u/s 201(1A) of the Act. As held by the Hon'ble jurisdictional High Court in the case referred to above, it is not required to go into the question whether the impugned payment to the non-resident has been made for purchase of 'goods' or whether the impugned payment represents business income of Selexis not taxable in India. In view of this position, the appeal filed by the appellant is liable to be dismissed on this ground alone.

5.3.2 Without prejudice to the above position and keeping in view the possibility of the judicial opinion oil issue undergoing some change in future it is nevertheless proposed to go into the merits of the contentions raised on behalf of the appellant. I am unable to accept the plea taken by the appellant at the appellate stage that the payment made to Selexis is towards import of tangible goods rather than provision of technical services for the following reasons:-

The payment to Selexis has been made in accordance with the terms agreed upon by the appellant under the Agreement.

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It is not an aeement for purchase or import of goods from Selexis. Rather, on the contrary, the appellant has engaged Selexis for the purpose of “establishing cell lines useful for production” of the appellant’s proprietary recombinant proteins, as evident from perusal of Preamble of the said Agreement reproduced in Para 5.1 above.

• Under Clause 1 of the Agreement, the "Subject of the Agreement" is not supply of goods or tangible property by Selexis to the appellant (as claimed by the appellant) but "certain services to be performed by Selexis". The scope of services to be provided by Selexis to the appellant has already been brought out in Para 5.1.1 above. Exhibit 13 contains the proposal for "generation of CHO (Chinese Hamster Ovary) Cell Minipools using Selexis Sure Cell Line Development Platform". From perusal of "Project Overview" on Page 24 of the Agreement, it is observed that the appellant requested Selexis to "rapidly develop high performance cell minipools for the production" of its products using Selexis Genetic Elements (SGEs) and the Selexis Sure Cell Line Development process. The objectives and activities of each of the three Modules of the project have already been highlighted in Para 5.1.1 above. "Rapid development of stable cell minipools expressing products" was the objective of Module Three when Selexis was required to implement Sure Cell Line Development programme and ship to the appellant top two or three (2-3) High Performance cell minipools (LDL) for each product and a sample ut the respective supernatant.

• A perusal of Invoice No.20070096 dated 28.09.2007 (which is prior to the Agreement executed on 12.10.2007) issued by Selexis to the 4p1iaiitfer Euros 220,000 shows that it has been raised on account Of "Cell line development services" and not on account of sale of any tangible goods which took place in February and April. 2008.

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• A perusal of Export invoice Nos. C-31 and C-38 dated 29.02.2008 and 18.04.2008 raised by Selexis on the appellant towards export of 45 vials and 42 vials respectively of "mammalian cell lines expressing recombinant proteins" reveals that these were declared to be "samples for laboratory use only" and "not for human use" and that these had "no commercial value'. The payment terms as well as the delivery terms mentioned on the said invoices provide for 'No charge". In view of these evidences, the appellant is patently wrong in con t en di n g th at th e r emi ttan ce m a de to Sel cxi s i s towa rds consideration for import of tangible property of vials of Cell minipools.

• The reliance placed by the appellant on the "Import Clearance Letter" dated 29.042008 issued by the Department of Biotechnology, Ministry of Science and Technology, Govt. of India, New Delhi to the appellant for import of recombinant mammalian cell lines over expressing eight different compounds from Selexis for biotech product development under R &D programme for R & D purposes only will not help the appellant because such import clearance is a regulatory requirement which has to be complied with. This will not change the character of cell lines development services rendered by Selexis to the appellant under the terms of the Agreement referred to above. • There is no mention at all of any "Phase I" or "Phase II" in recitals of the Agreement. The AR of the appellant has not been able to draw attention to the specific clauses of the Agreement in order to its claim that "the Agreement envisages in Phase I the delivery of tangible property only and in Phase II, the agreement is for licensing of Intellectual Property Rights". As stated above, the Agreement (Exhibit B) only speaks of' three modules of the project under which rapid development and shipment of high-performance cell minipools by Selexis to the appellant was to be the culmination ol various services to be rendered by Selexis in terms of the Agreement. It is an admitted fact that all the activities mentioned in Modules One to Three as stated above were carried out before delivery of cell lines or

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minipools by Selexis to the appellant. • No specimen Bill of Entry has been filed by the appellant in the course of appellate proceedings. Even otherwise, this would not make difference in view of the unambiguous terms of the Agreement. Merely because Recombinant Mammalian Cell Lines are classified as "Biological Substance" under Customs Tariff entry 3002.90.90 will not detract from the position that the payments made by the appellant to Selexis under the Agreement are for provision of technical services and not supply of cell lines. • It is verbally informed by the AR of the appellant that the cell lines developed by and procured from Selexis have been accounted for in the books of account / Balance Sheet of the appellant under the head "Intangible Assets". However, the details of exact accounting treatment have not been furnished in this regard. 5.3.3. It is observed that the contents of Para 7 of the impugned order have been extracted from the one-page note titled "Cell Line Development Services Agreement between Avesthagen & Selexis" furnished by the appellant to the AO in the course of proceedings u/s 201(1) of the Act. The AO has not added anything on his own. The AO has nowhere stated in Para 7 of the order (as claimed by the appellant) that the payment is for launching of bio- similars manufactured in India after undergoing clinical trials. The AO seems to be aware that after import of cell lines, R & D efforts/ experiments have to be carried out by the appellant for development of bio similar mammalian cell lines over expressing different compounds. From perusal of the Agreement, it is observed that within 60 days of receipt of High Performance Cell Minipools, the appellant was required to decide on the following:-

I) Execute an R&D license with Selexis; ii) Execute Manufacturing license with Selexis or iii) Return or destroy all materials generated using Selexis technology.

In the course of appellate proceedings, the appellant was asked to

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furnish a note (with supporting evidence viz, email correspondences etc.) on the subsequent developments with reference to the Cell Minipools received from Selexis. However, no such evidence has been furnished by the appellant. It is v e r b a l l y i n f o r m e d t h a t t h e a p p e l l a n t h a s n e i t h e r e x e c u t e d a n y R&D /Manufacturing license with Selexis nor returned/ destroyed materials generated from use of Selexis technology.

5.3.4 As per Explanation 2 to Section 9(l)(vii) of the Act, FTS means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel). Likewise, FTS under Article 12(4) of tie relevant DTAA also means payments of any kind to any person in consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personnel. Thus, the definition of FTS under the Act as well as the relevant DTAA is identical. It is observed that the restrictive phrase "make available" is not there in Article 12 of the relevant DTAA. This implies that mere rendering of technical services including provision of services of technical or other personnel is sufficient to attract liability. In other words, it is not required to be shown that the technical services rendered by the non-resident make available technical knowledge, experience, skill, know-how etc. to the resident taxpayer. Reference may also be made to the Explanation below Section 9 of the Act inserted vide the Finance Act, 2007 with retrospective effect from 01.06.1976, as per which the situs of utilisation of the services will alone determine the tax jurisdiction irrespective of whether or not the non-resident has a residence or place of' business or business connection in India. In the instant case, it is observed that the Agreement was executed in India and the services thereunder were utilised in a business carried on by the appellant in India. The attempt on part of the appellant to describe the services rendered by Selexis as not "technical services" but "technology driven services" has to be treated as an exercise in semantics. It has to be recognized

-

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that the development of cell lines is not child's play. It is a complex process involving a high degree of scientific and technical knowledge and skill. The appellant engaged Selexis for the purpose of establishing high performance cell minipools because the appellant knew that Selexis had the necessary expertise as well as the technology for the rapid development of mammalian cell Pools and cell lines used in recombinant proteins manufacturing of therapeutic drugs.

5.3.5 It is now proposed to examine the applicability of the judicial decisions relied upon by the appellant in support of its case. Reliance of the appellant on the recent decisions of the Hon'ble Delhi High Court and Chennai Special Bench of ITAT in the cases of Van Oord ACZ India (P) Ltd and M/s Prasad Production Ltd. (supra) respectively will not help the appellant, because of binding nature of the judgement of the Hon'ble jurisdictional High Court in the case of Samsung Electronics (supra). Similar is the position with regard to other cases such as Mahincira & Mahindra Ltd., Timken India Ltd. (supra) etc. cited by the appellant. The request: of the appellant to keep the present appeal pending till decision of SLP in the case of Samsung Electronics (supra) cannot be entertained, because the matter under dispute is being decided on merits as well. The decision of Hon'ble Bangalore Bench of Tribunal in the case of Wipro Ltd. (cited supra) has no relevance to the case of the appellant. No such plea is observed to have been taken before the AO. No evidence has been led by the appellant at the appellant stage to show that the development of cell lines using proprietary Selexis Technology is a standard facility that is made available to any willing customer. Rather, on the contrary, as brought out in Para 5.1.1 above, the establishment and development of high performance cell minipools useful for production of the appellant's recombinant proteins was a highly specialized and technical activity which was carried out in three modules over a period of time starting from the execution of the Agreement on 12.10.2007 and ending with the shipment of mammalian cell lines expressing recombinant proteins in February and April, 2008. The whole project of development of cell lines or cell minipools inter-alia involved establishment of project team, agreement

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upon-cloning strategy, electronic transfer of DNA sequence coding to Selexis by the appellant for its products, codon optimization and gene synthesis, construction of proteins i.e. establishment of ELISA assay for the products, cloning of the constructed proteins with us proprietary Selexis Genetic El emen ts, vector con stru cti on and validati on at th e en d of Sel exis, implementation of Sure Cell Line Development Program on the cloned recombinant proteins of the appellant, quantification of production by ELISA, cell minipool selection and ultimate shipment of cell minipools for each product and a sample of the respective supernatant. Selexis was also required to prepare and deliver to the appellant a cell line development report which included vector construction, cell line documentation, transfection and cell cloning strategies. If it had been a standard facility (as claimed by the appellant), there was no need for the appellant to transfer electronically to Selexis DNA sequence coding for its products, prior data/ results on expression of products and other materials etc. required for establishing ELISA assays for products. Nor was there any need For the appellant and Selexis to review and agree upon the cloning strategies. It was not required to carry out the project of developing cell lines in three elaborate stages or modules, with each having its specific objectives and activities. As a matter of fact, there was no need at all to enter into the "Cell Line Development Services Agreement". What the appellant could have clone was to conveniently place an order on Selexis for off-the--shelf purchase of standard products. All this clearly brings out that the cell lines or minipools had been developed by Selexis not by way of standard facility but based on the specification s and requirements of th e appellant overexpressing different compounds. 5.3.6 From the aforesaid discussion, it is crystal clear that the payments made by the appellant to Selexis for rendering cell line development services would be termed as “FTS” u/s.9(1)(vii) of the Act as well as Article 12(4) of the relevant DTAA and would, therefore, constitute income chargeable under the Act in the hands of the recipient,

IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 22

namely, Selexis. Thus the appellant was under a statutory obligation to deduct tax in terms of Section 195(1) on the impugned remittances. In view of the failure of the appellant to do so, the action of the AO in treating the appellant as an assessee in default u/s.201(1) in respect of the tax deductible at source u/s.195(1) on the remittances made to Selexis and levying interest u/s.201(1A) of the Act for the period of default is upheld. Ground no.3 is found to be devoid of substance and is accordingly dismissed.”

analyzing the agreement and other evidences held that there is no

mention of Phase I (for sale of tangible goods) and Phase II

( licensing of Intellectual property) in the agreement as contended by the

assessee. The payment of Rs. 2,10,16,078/- is fees for technical services

under Section 9(1)(vii) of the Act as well as under Article 12 of the DTAA

between India and the Swiss Confederation. Further, he found from the

Chartered Accountant's certificate that the impugned payment is

described as towards “Fee for Technical Services" and no

justification is stated for changing the assessee’s stance that it

is a consideration for import of goods. The CIT (A) also found from the

export invoice Nos C-31 & C-38 dated 29.02.2008 & 18.04.2008

raised by Selexis on the assessee towards export of 45 & 42 vials,

respectively, of "mammalian cell lines expressing recombinant

proteins" that they were declared to be "samples for laboratory use only",

"not for human use" , that they had "no commercial value" and

that the assessee is patently wrong in contending that the

remittance is towards import of tangible property of vials of cell

IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 23

Minipools . The import clearance letter dated 29.04.2008 issued

by the Department of Biotechnology, Ministry of Science and

Technology, Government of India is only a regulatory requirement

and the classification of Recombinant Mammalian Cell Lines under

Customs Tariff entry 3002.90.90 will not detract the position that

payment is for technical services and not for supply of cell lines. After a

detailed discussion , he has relied on the Jurisdictional Karnataka High

Court’s decision in Samsung 320 ITR 209(Kar). However, the

assessee could not lay any material to assail the above findings

and hence we find that the order of the CIT (A) does not

require any interference. In the result, both these appeals are

dismissed.

A.972/Bang/2010 & IT (IT) A.884/Bang/2013 are dismissed.

Order pronounced in the open court on 17th day of March, 2017.

Sd/- Sd/- (SUNIL KUMAR YADAV) (S. JAYARAMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MCN* Copy to: 1. The assessee 2. The Assessing Officer 3. The Commissioner of Income Tax 4. The Commissioner of Income Tax (A) 5. DR 6. GF, ITAT, Bangalore By Order

Assistant Registrar