AAR Bars ITC on Clinical Trial Imports, Says Free Drugs Are Not Business Supply [Read Order]

In a significant ruling that clarifies the scope of input tax credit (ITC) under the Goods and Services Tax (GST) regime, the Maharashtra Authority for Advance Ruling (AAR) has held that a company importing sample drugs for clinical trials cannot claim ITC on the Integrated GST (IGST) paid on the import or on the GST paid for ancillary services. The authority ruled that since the drugs are supplied to hospitals and clinics free of cost for trials, they are considered "free samples," and the tax paid on their import and clearance is not available as credit.

The order was passed in the application filed by PPD Pharmaceutical Development India Private Limited, a clinical research organization. The company is engaged in monitoring and managing clinical trials for global pharmaceutical and biotech clients, referred to as Sponsors. A key part of its service involves importing investigational drugs, comparator drugs, and ancillary products, collectively termed "sample drugs," into India under a license from the Drug Controller General of India (DCGI). These drugs are then sent to various hospitals and clinics for conducting clinical trials without any charge.

PPD India had approached the AAR with three key questions. It sought to know whether it could claim ITC on the IGST it pays directly when importing the sample drugs. Secondly, it asked if it could claim ITC on the IGST paid by a logistics service provider under a Delivered Duty Paid (DDP) shipment model, where the applicant remains the importer of record but the foreign supplier bears the taxes. Finally, it questioned the eligibility of ITC on the CGST paid for services rendered by Customs House Agents (CHA) for clearing the imported drugs.

The company argued that importing and coordinating the supply of these drugs is an integral part of the taxable services it provides to its global parent, PPD Global. It contended that the sample drugs are used in the course and furtherance of its business, making the associated input taxes eligible for credit. It relied on a ruling from the Karnataka AAR in the case of Kardex India Storage Solution Pvt. Ltd. (2020) to support its stance on the admissibility of ITC on imported goods.

However, the AAR bench, comprising members Shri D.P. Gojamgunde and Ms. Priya Jadhav, rejected the applicant's arguments. The ruling hinged on the interpretation of Section 17(5)(h) of the CGST Act, which specifically blocks ITC on goods lost, stolen, destroyed, written off, or disposed of by way of gift or free samples. The authority observed that the sample drugs were delivered to hospitals via delivery challans without any commercial invoice or consideration, squarely falling under the category of "free samples."

The AAR referenced the CBIC Circular No. 92/11/2019-GST, which clarifies that goods supplied without consideration do not constitute a 'supply' under GST, except in specific schedule I activities, and that ITC is not available on inputs used for such free samples. The bench noted that the non-obstante clause in Section 17(5) overrides the general eligibility for ITC under Section 16(1). Consequently, the denial of ITC was extended to the taxes paid on the CHA and logistics services, as these services were used for the ultimate disposal of the drugs as free samples. The authority also cited a ruling involving Indian Oil Corporation to reinforce that ITC is not available on input services used for making non-taxable supplies.

The bench, presided over by D.P. Gojamgunde and Priya Jadhav, therefore answered all three questions posed by PPD Pharmaceutical Development India Private Limited in the negative, barring the company from availing any of the disputed input tax credits.

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