Custom, Excise & Service Tax Tribunal
The Commissioner vs M/S Avra Laboratories Pvt.Ltd on 3 August, 2016
CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL REGIONAL BENCH AT HYDERABAD Bench Division Bench Court I Appeal No.ST/932/2012 (Arising out of Order-in-Appeal No.114/2011(H-III)ST, Dated 29-12-2011 passed by Commissioner of C.CE&ST(Appeals) Hyderabad) For approval and signature: Honble Ms. Sulekha Beevi, C.S., Member(Judicial) Honble Mr. Madhu Mohan Damodhar, Member(Technical) 1. Whether Press Reporters may be allowed to see the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982? 2. Whether it should be released under Rule 27 of the CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not? 3. Whether their Lordship wish to see the fair copy of the Order? 4. Whether Order is to be circulated to the Departmental authorities? The Commissioner. C&C.E, Hyderabad-III ..Appellant(s) Vs. M/s Avra laboratories Pvt.Ltd. ..Respondent(s)
Appearance Shri Nagaraj Naik, AR for the Appellant Shri T.Jagapathi Rao, Advocate for the Respondent Coram:
Honble Ms. Sulekha Beevi, C.S., Member(Judicial) Honble Mr. Madhu Mohan Damodhar, Member(Technical) Date of Hearing : 03/08/2016 Date of decision: 03/08/2016 FINAL ORDER No._______________________ [Order per: Madhu Mohan Damodhar,] 1.1 Avra Laboratories Pvt Ltd, the respondent/assessee herein registered under Scientific and Technical Service(STC) under Service Tax provisions, had undertaken organic synthesis and related process research for their client GRUNENTHAL, Germany and also to M/s UCL Business, London and declared such services as falling under Scientific and Technical Consultancy (STC) service. Show cause notice was issued to the appellants sought to classify their services under Technical Testing and Analysis (TTA) service.
1.2 After due process of law, Original authority vide Order dated 23-06-2011, confirmed the classification of services provided by the appellants to their foreign clients under TTA service. Aggrieved against the said order, assessee filed appeal with Commissioner Appeals, who vide Order dated 29-12-2011 allowed their appeal.
2. Aggrieved, Department has filed this appeal, inter alia, on the following grounds:
2.1 The activity of assessee does not involve in any knowledge sharing, advice, guidance or consultancy to be extended. All the related activities were undertaken by the appellants under the guidance of their clients. The activity results in creation of sample compound. The entire validity of service depends wholly on the Analytical testing of the resultant compound. This activity of analysis forms the basis for the entire activity of service. Finally, it is the analysis which is provided to the foreign clients and charged accordingly. Hence, the classification merits under Technical Testing and Analysis services (TTA).
2.2 Since all laboratory processes necessarily produce a compound which is later subjected to chemical laboratory analysis. These test reports are more about the produced compound in terms of its purity, the constituents, the degree of deviation from expect etc., 2.3 The explanation provided under Section 65(106) of the Finance Act, 1994 clarifies that Technical Testing and Analysis includes testing and analysis undertaken for the purpose of clinical testing of drugs and formulations, but does not include testing or analysis for the purpose of determination of the nature of diseased condition, identification of a disease, prevention of any disease or disease or disorder in human beings or animals.
2.4 As stated in the above explanation, assessee undertakes the testing and analysis of the chemical compounds prescribed by their clients. It is the analysis report which is the output and delivers same to the client. Contrary to the requirements of knowledge sharing, advice or consultancy under Scientific or Technical Consultancy, assessee delivers only customs synthesized chemical compound describing development synthesis work for intermediate.
2.5 For the purchase orders, it is clear that no advice or consultancy is being provided by assessee to their clients. The technical testing and analysis invariably require scientific expertise. It is that expertise of testing and analysis, assessee wants to project as major activity, to claim their services under Scientific or Technical Consultancy.
3. On behalf of the department, Ld. AR Shri Nagaraj Naik, reiterated the grounds of appeal.
4. Ld. counsel Shri T.Jagapati Rao, on behalf of the assessee, contended that the services carried out by them are Scientific and Technical Consultancy and not Technical Testing and Analysis and that the impugned order was correct in law and did not call for any interferenc.
5. Heard both sides and have gone through the records of the case. For better appreciation of the issue at hand, the definitions of the two services, at the relevant time, are extracted as below:
Section 65 (106) of the Finance Act, 1994 in relation to Technical Testing and Analysis Services defines as follows:
Technical Testing and Analysis means any service in relation to physical, chemical, biological or any other scientific testing or analysis of goods or material or any immovable property, but does not include any testing or analysis service provided in relation to human being or animals.
Explanation: For the removal of doubts, it is hereby declared that for the purposes of this clause, technical testing and analysis includes testing and analysis undertaken for the purpose of clinical testing of drugs and formulations, but does not include testing or analysis for the purpose of determination of the nature of diseased condition, identification of a disease, prevention of any disease or disorder in human beings or animals.
Technical Testing and Analysis Agency in terms of Section 65 (107) ibid means any agency or person engaged in providing service in relation to technical testing and analysis.
Taxable service as per Section 65 (105) (zzh) means any service provided or to be provided to any person, by a technical testing and analysis agency, in relation to technical testing and analysis.
Scientific or Technical Consultancy services in terms of Section 65 (92) means any advice, consultancy, or scientific or technical assistance, rendered in any manner, either directly or indirectly, by a scientist or a technocrat, or any science or technology institution or organization, to any person, in one or more disciplines or science or technology. Section 65 (105) (za) of the Finance Act, 1994 defines the term taxable service for Scientific or Technical Consultancy Services as under: Taxable service means any service provided or to be provided to any person, by a scientist or a technocrat, or any science or technology institution or organization, in relation to Scientific or Technical Consultancy.
6. The nature of the work carried out, as conveyed by the assessee, which is not disputed, has been taken note of by the original authority in the Order-in-Original is as follows:
(i) ALPL carries out the research activities as per the specifications of the customers. Customers provide basic reagents, solvents and other ingredients required for conducting the research activity.
(ii) On receipt of the lab reagents, solvents and other ingredients required for conducting the research, the real work of the scientist starts. Hereafter, a chemist working on a project will try to either (a) validate a theoretical process in real life by creating a certain compound form other compounds and inputs(b) create libraries of the same compound, Since all research will necessarily produce a compound, all research done in the chemistry Laboratories have to be necessarily tested in the Analytical labs. These tests tell us more about the produced compound in terms of its purity, the constituents, and the degree of deviation form expected etc. A slight difference in the impurity levels might alter the inherent properties of a compound. Hence, very often one comes across cases wherein Analytical testing results in the whole research process having to be re-done to rectify a small error, or to eliminate a small amount of some purity.
All clients demand the results of the Analytical Tests conducted on the sample compound which is produced during conducting the research. In fact, very often the tests form the basis of the acceptance or rejection of the research.
7. It is further seen that the Research Agreement dated 18-08-2003 between GRUNENTHAL GmbH and the assessee interalia, lays down the following scope of work to be performed:
1.1 The CONTRACTOR shall Three (3) months Pilot Project to synthesise chemical entities and carry out process research for GRUNENTHAL and provide technical expertise in the area of organic synthesis Including regular and final reporting in accordance to the provisions of this agreement and the protocol to be agreed upon (hereinafter the Services) The parties are aware that the final contents and requirements of the SERVICES may be established only during the research work and that certain adjustments or deviations from the services defined in Annex may have to be made.
1.2) The formal requirements in accordance to the SOP DI 0003 by GRUNENTHAL have to be met for protocols and reports.
2) Execution of the SERVICES 2.1) The CONTRACTOR shall exercise its best efforts to perform the SERVICES applying the state of the art in science and research and observing all applicable laws and regulations.
2.2) CONTRACTOR will provide an experienced PHD level chemist to carry out the work.
2.3) CONTRACTOR shall provide GRUNENTHAL with regular monthly brief reports summarising the progress of the SERVICES. Upon completion of the SERVICES CONTRACTOR shall provide GRUNENTHAL with a detailed final report. All reports will be transferred by hard-copy and in electronic from (MS-WORD chemical structures draw with chemDraw, settings, ACS-Documents, 1996). CONTRACTOR can be consulted at any time by telephone fax, or e-mail for any additional information.
2.4) The progress of SERVICES is to be monitored by biweekly telephone calls between designated representatives of GRUNENTHAL and CONTRACTOR.
2.5) GRUNENTHAL designated representative(s) shall have access to CONTRACTORs facilities at all reasonable times to observe the performances under this Agreement and to review any and all records generated therefrom.
8. From the foregoing, what emerges is that the assessee is required to synthesize chemical entities and submit monthly reports of the progress thereof. Merit is found in the departments contention that these test reports are more about the produced compound in terms of its purity, constituents, the degree of deviation from expected etc. There can be no doubt that such activity will involve innumerable trials, testing of intermediate and final resultant chemical entities and scientific analysis at every stage. In fact the service performed by the assessee is closely monitored by GRUNENTHAL by telephone, fax and e-mail( para 2.3 of agreement) . It is not the case that the assessee is in the position of a scientific or technical consultant to GRUNENTHAL. On the other hand, from the facts on offer, the assessee is only carrying out predominantly testing and analysis work outsourced by GRUNENTHAL to them. The testing and analysis are primary protocol for carrying out the process research. This conclusion is borne out by the fact that chemicals Euro 150 per item will be additionally reimbursed to the assessee (para 4.2 of agreement).
9. In the event, we are of the considered opinion that the services carried out by the assessee are nothing but technical testing and Analysis services as defined at the material time in Sec.65(105) of the Finance Act, 1994. This being so, the impugned order dated 29-12-2011 will require to be set aside, which we hereby do. Department appeal allowed.
(Operative part of this order was pronounced in court on conclusion of the hearing) (MADHU MOHAN DAMODHAR) MEMBER(TECHNICAL) ( SULEKHA BEEVI, C.S.) MEMBER(JUDICIAL) ..dks 9