Tax Law

Income From Bio-Analytical and Research Studies in India Exempt from Tax in Absence of PE

      In a ruling which will be welcomed by overseas companies engaged in research and bio-analytical studies in India, the Authority for Advance Rulings (AAR) hastaken a view that fees earned by such companies are not subject to tax if the companies do not have a permanent establishment (PE) in India. The ruling has been rendered in the case of Anapharm Inc., a company incorporated in Canada and engaged in providing research facilities for clinical and bio-analytical studies for pharmaceutical companies. These studies were undertaken by Anapharm as per the terms of certain agreements with some Indian pharmaceutical companies to assist them in the development of new drugs or generic copies of drugs already being marketed.
     On an application filed by Anapharm, an issue was raised before the AAR on whether such payments are liable to be taxed in India. The AAR considered fees earned by Anapharm under the contracts with Sandoz Ltd. and Ranbaxy Research Laboratories, two pharmaceutical companies in India.  Anapharm’s fees were related to bio-equivalence tests and research conducted by it in India for these companies. The AAR regarded these fees as “business profits” within the meaning of Article 7 of the India-Canada double tax avoidance agreement (DTAA), and the same is not taxable in India as Anapharm does not have a PE in India.
     The revenue had claimed that Anapharm had rendered services involving technology, know-how, skill and experience resulting in exclusive proprietorship rights to the Indian companies over the results of the research studies and tests including new products, technology, patents, tested samples etc. Accordingly, the revenue argued that the fees be taxed as “royalty” or “fees for technical or included services” in the hands of Anapharm.
     The AAR had rejected the argument raised by the revenue authorities that the income was taxable as “royalty” income or “fees for technical or included services.” The reason given for rejection of the argument was that the reports provided by Anapharm to the Indian companies were merely applicable to certain specific drugs, and those reports could not help the Indian companies to further carry out studies and tests or develop new drugs independently. Therefore, the income could not be taxed as “royalty” income or “fees for technical services,” as none of the skills, knowledge, know-how, experience or processes could be held to have been “made available” by Anapharm to the Indian companies within the meaning of Article 12 of the India-Canada DTAA. This was so because Anapharm had used its knowledge and skills in conducting the tests itself, and had only provided with the final results of those tests containing the conclusions to the Indian companies. It had not parted with the processes employed in the research, know-how and skills. Both the tests of rendering services and making technical knowledge and know-how available were not satisfied in the case, and hence the revenue’s argument of taxing the fees as “royalty” or “fees for technical services” was not accepted by the AAR.
     According to the AAR, unless there is a transfer of technology or know-how to the recipient of the service, it cannot be classified as “technical services.” The fees were therefore held as “business income” within the meaning of Article 7 of the India-Canada DTAA, but not liable to tax in India by virtue of the absence of a PE of Anapharm in India, as there was nothing on record to prove the existence of a PE.