Pre-clinical Laboratory Services Rendered by Non-resident to Customers in India would Not be Taxable in India: ITAT Quashes Assessment Order [Read Order]

The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) quashed the assessment order passed by the assessing officer for calculating the tax amount for the pre-clinical laboratory services rendered by the non-resident to the customers in India. 

Charles River Laboratories Inc, the appellant assessee was a non-resident incorporated under the laws of the United States of America (“USA”) and engaged in rendering pre-clinical laboratory services to enable the determination of a safe dose and assess the potential toxicity of new drugs before human clinical trials by way of conducting in vitro and in vivo tests and trials. 

The assessee appealed against the assessment order passed by the assessing officer for calculating the tax amount for the laboratory services rendered in India. 

Chavali Narayan, the counsel for the assessee contended that the assessee generates test reports for Indian customers, containing factual narrations of test procedures and results and these reports do not transfer technology or knowledge to customers. 

It was also submitted that the design and equipment are proprietary to another company making them not accessible to clients and thus the preclinical laboratory services are not taxable in India, as they do not qualify as Foreign Investment Services (FIS) under Article 12(4)(b) and the Memorandum of Understanding of the Treaty. 

Sankar Ganesh K, the counsel for the revenue contended that the payments made by the assessee company fall within the scope of ‘fee for technical services’ taxable under Information Technology Act,2000 and accordingly, the assessee should have deducted tax at source before making remittances and was liable to pay the tax amount calculated by the assessing officer. 

The bench observed that the assessee was not involved in supporting a system that was put in place or was already in place by the Indian customers and the assessee was not getting its Indian customers equipped to carry on the testing or research independently of the assessee. 

It was also observed that technical services rendered by the affiliates do not “make available” technical knowledge, experience, skill, or process while preparing these reports for their Indian customers and the service recipient of the assessee was unable to make use of the said technology only by itself in its business or for its benefit without recourse to the assessee.  The two-member panel comprising Chandra Poojari (Accountant) and Beena Pillai (Judicial) held that the pre-clinical laboratory services rendered by a non-resident to customers in India would not be taxable in India and the assessment order made by the assessing officer was not as per the law and are liable to be quashed while allowing the appeal filed by the assessee. 

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