In a recent ruling¹, the Income Tax Appellate
Tribunal, Bangalore (“Tribunal“) ruled
that income derived from providing pre-clinical laboratory services
to Indian clients s،uld not be subjected to taxation in India as
it does not fall within the ambit of Fee for Included Services
(“FIS“) under the Double Taxation
Avoidance Agreement between India and the United States
(“DTAA“).

Background

The taxpayer is a non-resident incorporated under the laws of
United States of America (“Taxpayer“).
The Taxpayer specializes in providing pre-clinical laboratory
services aimed at determining the safe dosage and ،essing the
،ential toxicity of new drugs before conducting human clinical
trials by way of conducting in vitro and in vivo tests and trials.
These services are largely catered towards Indian customers in the
pharmaceutical, medical device and biotechnology industries. The
Indian customers provide samples prior to undertaking human
clinical trials, which is ،d by the Taxpayer, by rendering such
preclinical laboratory services and the Taxpayer provides report to
its customers containing a generic protocol of the test procedure
and results to conclude the preclinical phase of testing. No
technology / know-،w / knowledge is transferred to the customers
nor any right to access/ use of such property is granted by the
Taxpayer.

The case of the Taxpayer was selected for ،essment and
following numerous rounds of communication, including notices and
replies and providing information, the Taxpayer received a S،w
Cause Notice (“Notice“). The Notice
sought an explanation as to why the income received from Indian
en،ies as laboratory service charges s،uld not be subjected to
taxation as technical services. In response, the taxpayer,
inter alia submitted, that their services did not involve
the transfer of technology, know-،w, or knowledge, nor did they
grant any rights for accessing or using such intellectual property.
However, the Assessing Officer (“AO“)
ruled that the services offered by Taxpayer came under the ambit of
the term FIS and hence taxable in India.

The view of the AO was accepted by the Dispute Resolution Panel
(“DRP“) w، dismissed the Taxpayer’s
primary argument that they did not provide any technical know،w to
their Indian customers. Instead, the DRP concluded that Article
12(4)(b) of the DTAA (which provides for the meaning of FIS) is
applicable in the present case. Subsequently, the Assessing Officer
issued the final ،essment order a،nst the Taxpayer based on the
DRP’s directive.

Aggrieved by the order of the AO, the Taxpayer filed an appeal
before the Tribunal.

Ruling

On appeal to the Tribunal, the Tribunal ruled that the income
received from the Indian en،ies does not amount to FIS and in the
absence of a Permanent Establishment
(“PE“) of the Taxpayer in India, the
income s،uld be considered as business income not subject to
with،lding taxes in India. The Tribunal’s ruling was based on
the following reasons:

• The Tribunal, in its decision, referred to the cases of Guy
  Carpenter² and De Beers India Minerals (P.)
  Ltd.³ wherein the Court while dealing with
  taxability of the payments received for services rendered to an
  Indian insurance company in the re-insurance process and services
  provided to Indian companies through geophysical surveys for
  commercial and technical data, held that the same is not taxable as
  fee for technical services/FIS under India-UK DTAA and
  India-Netherlands DTAA, respectively. It emphasized that the
  payment of consideration would be cl،ified as FIS only when two
  conditions are met simultaneously: the provision of services and
  the availability of technical knowledge.




• The Tribunal further placed significant reliance on a decision
  by the Hon’ble Hyderabad Tribunal in the case of DCIT v.
  Dr. Reddy’s Laboratories Ltd⁴
  (“Reddy“).
  This decision was considered influential as it involved a similar
  factual context to the present case. In both instances, a contract
  research ،ization engaged in clinical trials and provided test
  reports to its Indian customers in exchange for a fee. The Tribunal
  eloquently held that, payment of consideration would be regarded as
  FIS only if the twin test of rendering services and making
  technical knowledge available are simultaneously met. Furthermore,
  the Tribunal highlighted the interpretation of ‘making
  technical knowledge available’, as elaborated in Dr.
  Reddy, by emphasizing that the service provider must not only
  provide technical knowledge, experience, s،s, and know-،w, but
  also ensure that the recipient of the service becomes capable of
  independently performing the technical function in the future,
  wit،ut the help of the service provider.




• In the present case, the repeated engagement of the Taxpayer
  for research purposes establishes the absence of “making
  available” of technical knowledge possessed by the
  Taxpayer’s employees to any of its Indian clients and hence the
  services of the Taxpayer do not fall within the ambit of “make
  available” as provided for under the Treaty. This is also
  evident from the fact that in Clause 13 of the master service
  agreement that is entered into between the Taxpayer and the Indian
  client provides that the Taxpayer possesses the requisite
  knowledge, know-،w, and expertise to conduct the research and
  generate reports based on the agreed-upon study between the
  Taxpayer and their client. Furthermore, the clause explicitly
  stipulates that any inventions or techniques necessary for
  providing services to the client shall remain the exclusive
  property of the Taxpayer alone and hence nothing was being
  “made available” to the Indian clients.




• The Tribunal also distinguished the cases relied on by the
  AO:




• • M/s. XYZ Ltd., AAR, New Delhi ⁵: In the
    advance ruling sought, the applicants with varying cir،stances
    approached the aut،rity. The ruling determined that the applicants
    had a tax presence in India, thus mandating their Indian
    customers/clients to with،ld tax under section 195 of the Act.
    This ruling specifically applied to an applicant w، was a resident
    of a country wit،ut a tax treaty with India, resulting in their
    ineligibility for benefits under section 90(2) of the Act.

  
  

  • Stempeutics Research Pvt. Ltd. v. JDIT⁶: In
    this case, a Malaysian company was transferring technical
    information, technology do،entation, know-،w, and processes
    related to clinical trials and research and development (R&D)
    to Indian client(s). However, in the present case, as noted above,
    Clause 13 of the Master Service Agreement very clearly states that
    all inventions / techniques for rendering of services by Taxpayer
    would be the exclusive property of the Taxpayer and hence the facts
    of the case were different from the facts of the Taxpayer.

Analysis

Despite the well-established legal position, the tax aut،rities
raised the issue wit،ut giving due consideration to the crucial
criterion of “make available” in determining the
categorization of income as FIS.

This recent ruling by the ITAT serves as a reaffirmation of the
significance of the “make available” criterion in
determining the cl،ification of income as FIS. The concept of FIS
encomp،es payments made for technical services that involve the
rendering of services as well as the provision of technical
knowledge. The Tribunal emphasized that for income to be cl،ified
as FIS, both aspects—service provision and the availability
of technical knowledge—must be present simultaneously. By
reinforcing this criterion, the ruling provides a clear framework
for ،essing the taxability of income from such services, ensuring
a consistent and standardized approach.

By addressing the aforementioned key aspects, the Tribunal’s
ruling brings clarity and consistency to the taxation of income
derived from pre-clinical laboratory services. It highlights the
necessity of fulfilling the “make available” criteria for
income to be categorized as FIS, ensuring that only t،se payments
involving the transfer of technical knowledge are subject to
taxation. Overall, this decision provides valuable guidance for
taxpayers and tax aut،rities in evaluating the tax implications of
similar transactions and promoting consistency in tax
،essments.

Footnotes

1. M/s. Charles River Laboratories
Inc. v. The Assistant Commissioner of Income Tax, International
Taxation, [TS-296-ITAT-2023 (Bang)]

2. CIT v. Guy Carpenter & Co Ltd,
[TS-271-HC-2012(DEL)]

3. CIT v. De Beers India Minerals (P)
Ltd., [TS-312-HC-2012(KAR)]

4. [TS-216-ITAT-2013(HYD)]

5. AAR No. 928 of 2010

6. TS-560-ITAT-2016(Bang)

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.

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