Income Tax Appellate Tribunal - Bangalore
Avesthagen Ltd.,, vs Dy Dit, on 17 March, 2017
IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 1
IN THE INCOME TAX APPELLATE TRIBUNAL
BENGALURU BENCH 'B', BENGALURU
BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER
AND
SHRI. S. JAYARAMAN, ACCOUNTANT MEMBER
1. I.T (IT).A No.972/Bang/2010
(Assessment Year : 2008-09)
2. I.T (IT).A No.884/Bang/2013
(Assessment Year : 2008-09)
Avesthagen Ltd,
(Formerly Avestha Gengraine Technologies Ltd),
"Discoverer", 9th floor, International Tech Park,
Whitefield, Bengaluru 560 066 .. Appellant
PAN : AABCA7217K
v.
Deputy Commissioner of Income Tax,
(International Taxation), Circle -1(1), Bengaluru .. Respondent
Assessee by : Ms. Kusum R.H, CA &
Shri. B. E. Balasubramaniam, CA
Revenue by : Smt. Renuka Devi, JCIT
Heard on : 22.12.2016
Pronounced on : 17.03.2017
ORDER
PER S. JAYARAMAN, ACCOUNTANT MEMBER :
These two appeals are filed by the assessee against the order of the CIT (A) -IV, Bengaluru, dt.31.05.2010, for the assessment year 2008-09.
02. Avesthagen Ltd, the assessee, an Indian company promoted by Dr.Villoo Morawala Patell, incorporated on 20.04.1998 under the Companies Act, 1956 as Avestha Gengraine Technologies Pvt. IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 2 Ltd was converted into a Public Limited Company on 31.12.2007 and its name was changed to Avesthagen Ltd. The assessee with its subsidiaries and joint venture companies is engaged in the business of scientific research and product development to provide preventive personalized medical care. It is providing Research & Development (R&D) services in Bio-technology and Bio-informatics mainly to its joint venture group company and a subsidiary company.
2.1 During the f y 2007-08, it made the following payments to M / s Selexis SA, a company incorporated under laws of S w i t z e r l a n d ("Selexis") for providing certain services related to development cell lines using the technology of Selexis under an agreement dated 12.10.2007- 2.2 On perusal of records, the AO noticed that the assessee had failed to deduct tax at source (TDS) on the said remittances as required under Section 193. Although the said remittances were characterized as "Fees for Technical Services" in the CA's IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 3 certificate, the rate of withholding tax was wrongly take n at N IL re lying on clause I of Article 12 of th e T ax Tre aty with the Swiss Confederation. It seemed to the AO that the assessee has over-looked the provisions of Clause 2 of Article 12 as per which "fees for technical services" could be charged to tax in India as well @ 10% of' gross receipts. Accordingly, he initiated proceedings against the assessee u/s 201 (1) fo r n o n - d e d u c t i o n o f T D S o n t h e a b o v e remittances and after perusal of the assessee's written submissions, issued a final show cause notice to t r e a t i t a s as an assessee in default for non-deduction of TDS u/s 201(1).
After considering the assessee's submissions, the terms of the agreement and the relevant statutory provisions, the A.O. vide his order dated.31.07.2008 came to the conclusion that the payments made by it t o Selexis for rendering services in c o n n e c t i o n w i t h t h e d e v e l o p m e n t o f ce ll line s as "fee s for te chnical se rvices" ("FTS") and it would constitute income chargeable to tax in the hands of Selexis under the Act as well as under the provisions of the Double Taxation Avoidance Agreement ( DTAA) between India and Switzerland. Since the assessee failed to deduct TDS , the A O treated it as an assessee in default u/s 201(1) in respect of the tax deductible at source thereon and the interest payable in terms of Section 201(1A). Ac c o r d i n g l y , the A.O determined the tax payable u/s 201(1) at Rs.20,11,607/- ie @ 10% of gross receipts and the interest payable IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 4 u/s 201(1A) at Rs.1,34,492/-. Aggrieved by that order, the assessee filed an appeal before the CIT (A) and the CIT (A)-IV, Bangalore in his order in ITA No 28/Intl.Taxn.1(1)/CIT (A)-IV/08-09 dt 31.05.2010 dismissed the appeal. The assessee filed an appeal before this Tribunal in ITA No 972 against the CIT (A) order. On being asked to file a separate appeal for each of the demands, the assessee filed an appeal in respect of the demand u/s 201(1A) in ITA No 884 and filed a revised grounds on the original appeal towards the demand u/s 201(1) as under:
03. Shr i K oe n We ntin k , Dire ctor and t he Author ise d S igna tory of the asse sse e f il e d an a ff ida v it as unde r :
"
1. I am the Director of the petitioner company and I am fully conversant with the facts and circumstances relating to the present case and I am competent to affirm this affidavit.
IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 5
2. Against Orders of the Commissioner of Income Tax (Appeals) IV, Bangalore in ITA No.28/Intl. Taxn.I(1)/CIT (A)-IV/08-09, dated 31/05/2010 confirming the o r d e r s passed by the Deputy Director of Income Tax ( I n t e r n a t i o n a l Taxation), Circle I (1) demanding tax under section 201(1) and interest under Section 201(1A) in respect of the assessment year 2008-09 the appellant had filed an appeal before this Hon'ble Tribunal and the appeal is admitted as Appeal NO: ITA No 972/B/ 10.
3. The present appeal is filed pursuant to the direction of the Hon'ble Tribunal to file a separate appeal against the demand of Interest under Section 201 (1A) disputed in Appeal No: ITA No 972/B/ 10 for the Assessment Years 2008-09,
4. The appellant submit that the initial appeal filed disputing the demand of tax under Section 201(1) and the demand of interest u/s 201(1A) was filed within time.
5. Since the appeal is filed only in pursuant of the directions of the Hon'ble tribunal, the appeallant pray that the delay, if any, in filing of this appeal petition may pleased to be condoned and heard along with Appeal No: ITA No 972/B/10.
It is therefore prayed that this Hon'ble Tribunal may be pleased to condone the delay in filing of this appeal petition, admit the appeal petition and thus render justice.
Dated at Bangalore this day the 29th day of May 2013."
04. On hearing the rival contentions, this appeal is admitted and the ground are extracted as under :
IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 6 Since the facts are common, both the appeals are clubbed together, heard and being disposed together.
05. The AR of the assessee took us through the copy of agreement and submitted that the payment made is for import of goods and is not for FTS as wrongly presumed by the AO. The AO is unsure of the nature of payment as evident from the unsubstantiated observation in Para 5 of his order reading as "by common understanding these services are undoubtedly technical in nature", he has misread the agreement in bits and pieces as would be evident from Para 7 of his order wherein it is wrongly observed that the payment is for launching of IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 7 Biosimilars manufactured in India after undergoing clinical trials, failed to appreciate that the agreement contemplates two phases. The activity of clinical trials and manufacture happens in Phase 11 of the agreement and the payment on which tax is demanded is for Phase I for delivery of tangible property only. It is also submitted that the A O has not considered the fact that the Phase I of the agreement envisages the delivery of tangible property only and the Phase 11 of the agreement is for licensing of Intellectual Property Rights. It is contended that huge liability cannot be fastened on the assessee on conjecture and misreading of the agreement particularly when the assessee had placed substantial material to prove that the consideration is towards supply of tangible property and is not for rendering of any technical service.
Further, it is contended that the impugned payment was made to the non-resident for import of goods, which is not liable to tax deduction at source u/s 195(1), and it is not for technical services.
In support of its contention, the AR sought our attention to a copy of letter No. BT/BS/17/14/2000-pid dated 29.04.2008 of the Department of Biotechnology, Ministry of Science & Technology, Government of India and copies of Export invoice Nos. C-31 and C-38 dated 29.02.2008 and 18.04.2008 , respectively, raised by Selexis on the assessee towards export of 45 vials and 42 vials, respectively, of "mammalian cell lines expressing re c omb inan t p rote in s" and subm itted that the forme r one permitted the import of Recombinant Mammalian Cell Lines from Selexis, Switzerland. From perusal of Para 1 of the letter IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 8 reading as "Description of Materials", it would be evident that the import is of tangible goods and not of Technical Service as erroneously concluded by the AO. On the other hand, the DR opposed the above submissions relying on the order of the CIT (A). We heard the rival submissions and gone through the relevant material. Since the assessee has taken the same plea as was taken before the CIT (A) , let us examine how the CIT (A) dealt the matter, by extracting the relevant portion , as under :
"5.1 In the course of proceedings u/s 201(1) of the Act, the AO perused the terms and conditions of the "Cell Line Development Services Agreement d at e d 1 2. 102 007 ( h e r ei n af t er r efe r r e d t o t h e Ag r e e m en t ) ex e cu t ed between the appellant and Selexis. According to the AO, Clause A and Clause B of the Preamble to the said Agreement clearly state the basic purpose of the Agreement as under:-
A. Avesthagen intends to engage Selexis in establishing cell lin es u sefu l for prod u ction of Avesthagen s proprietary recombinant proteins (Prot'), which transgene DNA sequences and related information are being provided to Selexis pursuant to that certain Material Transfer Agreement (Exhibit A) executed by the parties on or about t h e effective d at e of th is ag reement (th e " MTA " an d su ch transgene DNA sequences and related information defined as "Research Material' therein).
B. Selexis has expertise in the development of mammalian cell 11nd cell lines for the production of recombinant proteins and in this regard has developed its proprietary SURE Cell line Development platform, winch includes all patents and know-how owned or controlled by Selexis based on or relating to the use of Selexis proprietary Genetic E l e m e n t s S G E s , about 3Kb) to control the dynamic organization of IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 9 chromatin ("Selexis Technology ")".
From the above preamble, the AO inferred that the appellant had engaged Selexis for establishing cell lines which were useful for production of the appellant's proprietary recombinant proteins.
5.1.1 The AO then referred to the scope of services to be rendered by the non- resident company to the appellant as per Exhibit B to the Agreement. It was noted that there were following three modules in this project:-
Module ONE-Project Kick-off & Technology Transfer Module TWO- Const ruction of Selexis Gen etic Elem ent Vectors containing Avesthagen Gene Module THREE- Establishment of High Performance Cell minipool(s) (LD1) The objectives and activities of Module ONE were described as under:-
'Objectives:
a) Establishment of project team and Project communication plan
b) Rapid and effective transfer of Avesthagen Technology Activities:
1. Kick-off meeting a Selexis and Avesthagen will participate in a p r o j e c t k i c k - o f f m e e t i n g organized by Selexis Project Manger.
b. Selexis and Aveshagen will review and agree upon cloning strategy.
2. Technology transfer
a) Avesthagen will transfer to Selexis, electronically, DNA sequences coding for Avesthagen Product(s) further described in Attachment 1.
b) Avesthagen will transfer prior data / results on expression of product [s]
c) A vest h ag en will t ran sfer t o Sel exis St an d ard Operatin g Procedure (SOP) / protocols and standard materials is required for IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 10 Selexis to establish ELISA assays for Product(s)". Similarly, objectives and activities of Module TWO were described in the Agreement as follows:-
"Objectives:
a) Construction of optimized DNA expression vectors cloning with Selexis Genetic Elements (SGEs).
Activities
a) Codon Optimization and Gene Synthesis (Third party)
b) Vector construction and validation at Selexis".
Likewise, objectives and activities of Module THREE were enumerated as under:-
"Objectives
a) Rapid development of stable cell minipools expressing product(s) Activities
(a) Selexis will implement Sure Cell Line Development Program
b) Quantification of production
c) Cell rninipool selection
d) Shipment"
F r om p e ru sal o f t h e ab o v e, t h e A O n ot e d t h at S el exi s w a s en g ag ed t o develop different cell minipools which could be used for production of recombinant proteins. According to the AO, by common understanding, these services are undoubtedly technical in nature.
5.1.2 From perusal of the written submissions of the appellant, the AO also noted that the mammalian cell lines/ pools which would express recombinant proteins would be utilised by the appellant to produce the biosimilars for therapeutic use. The cell lines will undergo characterisation and process development to ensure the right product is being made. On receipt of approval, the protein produced will undergo preclinical trials on animals to test for safety and efficacy. The cell lines will be transferred to a eGMP (Good Manufacturing Practices) manufacturing facility. The material produced here under highly controlled environment on receipt of approval from the Indian regulatory authorities will undergo clinical trials on humans. IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 11 On completion of clinical trials and receipt of license for commercial production, these biosimilars will be launched in the market for use in several therapies eg, several kinds of cancer, auto immune disorders and myocardial infarction. This led the AO to draw the inference that these were clearly in the category of new inventions which are useful in the health sector and mostly related t o bio-technological field and that undisputedly payments for these services fall under the category of "FTS" as defined under Explanation 2 to Section 9(l)(vii) of the Act. Similarly, the AO referred to Article 12 of the relevant DTAA which reads as follows:-
1. R o yal t i es an d f e e s f or t ech n ic al s e rvi c e s a ri sin g in a Contracting State and paid to a resident of the other Coruractinq State may be taxed in that other State.
2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed 10 pe r c en t o f t h e g r os s a mou n t of t h e r o yalt i es o r t h e f e es f or technical services.
.........................................................................................................................
4 . F o r p u r p o s e s o f t h i s a r t i c l e , t h e t e r m f e e s f o r t e c h n ic a l service? means payments of any kind to any person in consideration for the rendering of any managerial, technical or con su lt an cy services, in clud ing th e provision of services by technical or other personnel."
Thus, according to the AO, the appellant had omitted to read Clause 2 of Article 12 as per which FTS is also taxable in the other contracting state @ 10% on gross receipts. Moreover, the AO also took note of the fact that in the CA's certificate, the appellant itself had mentioned the nature of payment as "fees for technical services" but omitted to make any TDS which clearly showed that the services rendered by the non-resident were undisputedly "technical services" and taxes were to be deducted at source on the said p a y m e n t s . Accordingly, the remittances m a d e o n a c c o u n t o f s u c h s e r v i c e s were treated as FTS and charged to IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 12 tax @10% "
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5.3 1 have considered t he submissions of t he app ellant and peru sed th e judicial decisions cited by it as well as the other materials on record. At the outset, it will be pertinent to consider the decision of Hon'ble jurisdictional High Court in the case of CIT and ITO v. Samsung Electronics Co. Ltd. and others (ITA No. 2808 of 2005) dated 24.09.2009. The questions for e x a m i n at i o n of the H o n ' b l e C o u r t i n t e r al i a w e r e w h e t h e r t h e r e w a s a n ob li g ation t o d ed u ct t ax at sou r ce i n t erm s of S e ct i on 195 in resp e ct of remittances made to the non-resident and whether the assessee can question the taxability of the recipient in a proceeding u/s 201(1) and 201(1A) of the Act when he has to show only good and sufficient reasons for his failure to deduct and pay the tax. Following the decision of the Hon'ble Supreme Court of India in Transmission Corporation of A.P. Ltd. v. CIT (supra) the Hon'ble Court examined the scope, operation and application of Section 195 of the Act. A number of broad principles emerge from this decision. Firstly, Section 195(1) of the Act is neither a charging section nor a section providing for d et erminati on of th e tax liability of th e n on - resid en t wh o is in receipt of p a y m e n t s f r o m a r e s i d e n t . Th e a m o u n t d e d u c t e d b y t h e r e s i d e n t wh o i s responsible for making payments to the non-resident is only a provisional or tentative amount which is kept as a buffer for adjusting this amount against t h e p o s s i b l e t a x l i a b i l i t y o f t h e n o n - r e s i d e n t a s s e s s e e . S e c o n d l y , s i n c e S e ct i on 195( 1 ) i s n ot a p r o vi si on f o r as s e s si n g t h e t ax l i ab i li t y of a n on - resident, the AO is not required to indulge in an exercise of determination of the income of a non-resident which can be done only on the basis of a return of income filed by the non-resident. Questions such as whether the amount remitted represents consideration for purchase of "goods" are not relevant while examining the question of obligation of a resident payer in terms IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 13 of Section 195(1) of the Act . The j udgment of the Hon'ble Suprem e Cou rt of In dia in Tran smi ssion Corp orati on 's case i s a binding au th orit y for t his proposition. Thirdly, Section 195(1) mandates that while making payment to a n on- resid ent recipien t in resp ect of an y g oods/servi ces sup plied b y th e non-resident which the resident payer is making use of in the running of its b u s i n e s s or any other activity indulged in as part of the business / professional activity of the resi dent, every resi dent p a y e r m u s t com p l y wi t h t h e o b l i g at i on t o d ed u ct t a x at s ou r c e t h e r e on u / s 195 ( 1) A c t a s t h e p a y m e n t t o t h e n o n - r e s i d e n t r e c i p i e n t p r i m a - f a c i e b e a r s t h e character of an income. Fourthly, the obligation on the part of the resident p a y e r w h o m a k e s s u c h a p a y m e n t t o t h e n on - r e s i d e n t r e c i p i en t i s l i k e a g u i d e d m i s s i l e which gets itself attached to the target the moment tile resi d en t ass ess ee m akes t h e p aym en t t o n on - r esi d en t re ci pi en t. Th e on l y li mi t ed way of either avoiding or warding off the guided missile is by the resident payer invoking the provisions of Section 195(2) of the Act. If the resident payer has not filed an application u/s 195(2) of the Act, he cannot later, after having failed to deduct tax, turn around and contend that no part of the payment had resulted in any taxable income in the hands of the nonresident recipient and, therefore, it cannot be said that there was any failure on the part of the resident payer in fulfilling its obligation u/s 195(1) of the Act. And finally, it is not open to a resident payer to invite the AO to embark u p o n t h e e x e r c i s e o f d e t e r m i n i n g t h e t a x liability of the non-resident recipient on a mere filing of objections to a demand u/s 201 of the Act by merely contending that the payment did not result in any taxable income in the hands of the non- resident. Such an exercise can be undertaken b y the AO only in an actual return of income filed by the non-resident recipient. Likewise, while examining an appeal arising out of an order u/s 201 of the Act, it is not permissible for the appellate authorities to embark upon the q u e s t i o n o f d e t e r m i n a t i o n o f t h e a c t u a l t a x l i a b i l i t y o f a n o n - r e s i d e n t recipient in respect of the IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 14 amount received from a resident taxpayer.
5.3.1 It is now proposed to examine the applicability of the said decision of the Honb1e Karnataka High Court to the facts of the instant case. It is clear that the appellant, a resident, has made payment to Selexis, a non-resident, t o w a r d s p r o v i s i o n o f c e l l l i n e development services in terms of the agreement without deduction of tax at source as required u/s.195(1) of the A c t . It is claimed that no tax has been deducted at source u/s 195(1) of the A c t s i n c e t h e i m p u g n e d p a y m e n t t o S el e xi s i s i n t h e n at u r e o f b u si n e s s income (being consideration for sale of tangible goods) which is not taxable i n I n d i a a s S e l e x i s h a s n o P E i n I n d i a . i t i s a n a d m i t t e d f a c t t h a t t h e Impugned payment was made to Selexis on the strength of a CA's certificate and that no application was made by th e app ellant u/s 195(2) of th e Act. Nothing prevented the appellant from approaching the A.O. for grant of such a certificat e, i f t h e app ellant was con vinced th at in com e of Sel exis from provision of cell line development services would not be chargeable to tax under the p r o v i si on s of the Act. Si m i l a rl y , n o a p p l i ca t i o n w a s m ad e b y Selexis u/ss 195(3) or 197 of the Act for receiving the income from provision of cell line development services without deduction of tax at source. It is not the case of the appellant that Selexis has already paid tax in Switzerland in regard to the income earned from provision of cell line development services to the appellant. A perusal of CA's certificate issued by Mr. Prabhath P. Bhat, C.A., reveals that at Serial No.5 of the said certificate, the remittance of Euros 220,000 made by the appellant to Selexis has been certified as "towards Fee for Technical Services in connection with cell lines development services...", though the rate of withholding tax was taken by the CA concerned at NIL "as per Article 12 Clause (1) of the DTAA with the Swiss Confederation". The a b o v e c e r t i f i c a t e w a s i s s u e d b y t h e C A c o n c e r n e d a f t e r e x a m i n a t i o n o f Invoice No.20070096 dated 28.09.2007 raised by Selexis on the appellant, b ooks of accoun t IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 15 and oth er record s of t h e app ellant for ascert aining th e n at ure of t h e i m p u gn ed rem i t t an ce et c . How ev er , t h e ap p el l an t failed t o take into account the fact that receipts in the nature of FTS were taxable in t h e hands of the non-resident in India under Article 12(2) of the relevant DTAA @ 10% of t h e g r oss r e c ei p t s . Th e a p p el l an t h as n ot fu r n i sh ed an y r ea s on s or j u st i fi cat i o n a t t h e a p p el l at e s t ag e f o r c h a n g i n g i t s s t a n d ( wi t h regard to the nature of the remittance) from FTS to consideration for import of goods. Thus, it is clear that the appellant has not exercised due care and caution in the discharge of its mandatory statutory obligation U/S 195(1) of the Act. In view of the failure of the appellant to approach the AO for grant o f a l l c e r t i f i c a t e u / s 1 9 5 ( 2 ) o f t h e A c t , I h a v e n o h e s i t a t i o n i n holding that the AO was justified in treating the appellant as an assessee in default in respect of the tax deductible at source u/s 201(1) of the Act and levying interest u/s 201(1A) of the Act. As held by the Hon'ble jurisdictional High Court in the case referred to ab ove, it is not required to g o into t he question whether the impugned payment to the non-resident has been made f o r purchase of 'goods' or w h e t h e r t h e i m p u g n e d p a y m e n t r e p r e s e n t s business income of Selexis not taxable in India. In view of this position, the appeal filed by the appellant is liable to be dismissed on this ground alone.
5.3.2 Wi thout prejudice to the above posi tion and keeping in vi ew the possibility of the judicial opinion oil issue undergoing s o m e c h a n g e i n f uture it is nevertheless proposed to go into the merits of the contentions raised on behalf of the appellant. I am unable to accept the plea taken by t h e a p p el l an t a t t h e a p p e l l a t e s t a g e t h at t h e p a ym e n t m a d e t o S el ex i s i s towards import of tangible goods rather than provision of technical services for the following reasons:-
The payment to Selexis has been made in accordance with the terms a g r e e d u p o n b y t h e a p p e l l a n t u n d e r t h e A g r e e m e n t . IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 16 I t i s n o t a n a eem e n t for p u rch ase or i m p ort of g o ods f ro m Sel exi s. R at h er, on t h e c o n t r a r y , t h e ap p el l an t h a s e n g a g e d S e l e xi s f o r t h e p u rp o s e o f " e s t a b l i s h i n g c el l l i n e s u s e f u l fo r production" of the a p p el l an t ' s proprietary recombinant proteins, as evident from perusal of Preamble of the said Agreement reproduced in Para 5.1 above.
• Under Clause 1 of th e Ag reem en t, the "Subject of the Agreem ent" is not supply of goods or tangible property by Selexis to the appellant (as cl ai m ed by t h e ap p ell an t ) b ut "cer t ain ser vi ces t o b e p e rfo rm ed b y S e l e x i s " . T h e s c o p e o f s e r v i c e s t o be provided by Selexis to the appellant has already been brought out in Para 5.1.1 above. Exhibit 13 contains the proposal for "generation of CHO (Chinese Hamster Ovary) Cell Minipools using Selexis Sure Cell Line Development Platform". From perusal of "Project Overview" on Page 24 of the Agreement, it is observed that the appellant requested Selexis to "rapidly develop high performance cell minipools for the production" of its products using S e l e x i s G e n e t i c E l e m e n t s ( S G E s ) a n d t h e S e l e x i s S u r e C e l l L i n e Devel op m en t p roce ss. Th e ob j ect i ves an d acti vities o f each o f t h e t h ree Modul es of th e p roj ect have alread y b een highlight ed in Para 5.1.1 above. "Rapid development of stable cell minipools expressing products" was the objective of M o d u l e T h r e e w h e n S e l e x i s w a s req u i red t o i m pl em en t Su re Cell Lin e Dev el op m e n t p rog ram m e an d s hi p t o t h e ap pel l an t t op t wo o r t h re e ( 2- 3) Hi g h Perform an c e c ell m i ni p ool s ( L D L) fo r ea ch p r od u ct an d a sa m p l e u t t h e r e sp e ct i v e supernatant.
• A perusal of Invoice No.20070096 dated 28.09.2007 (which is prior to t h e A g r e e m e n t e x e c u t e d o n 1 2 . 1 0 . 2 0 0 7 ) i s s u e d b y S e l e x i s t o t h e 4p 1iaiitfer Eu ros 220,000 sh ows th at it h as b een rai sed on account Of "Cell line development services" and not on account of sale of any tangible goods which took place in February and April. 2008.
IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 17 • A perusal of Export invoice Nos. C-31 and C-38 dated 29.02.2008 and 18.04.2008 raised by Selexis on the appellant towards export of 45 vials and 42 vials respectively of "mammalian cell lines expressing recombinant proteins" reveals that these were declared to be "samples for laboratory use only" and "not for human use" and that these had "no commercial value'. The payment terms as well as the delivery terms mentioned on the said invoices provide for 'No charge". In v i e w o f t h e s e e v i d e n c e s , t h e a p p e l l an t i s p a t e n t l y w r o n g i n contending that the remittance made to Selcxis is towards consideration for import of tangible property of vials of Cell minipools.
• The reliance placed by the appellant on the "Import Clearance Letter"
dated 29.042008 issued by the Department of Biotechnology, Ministry of Science and Technology, Govt. of India, New Delhi to the appellant for import of recombinant mammalian cell lines over expressing eight different compounds from Selexis for biotech product development under R &D programme for R & D purposes only will not help the appellant because such import clearance is a regulatory requirement which has to be complied with. This will not change the character of cell lines development services rendered by Selexis to the appellant under the terms of the Agreement referred to above.
• There is no mention at all of any "Phase I" or "Phase II" in recitals of the Agreement. The AR of the appellant has not been able to draw a t t e n t i o n t o t h e sp e c i fi c cl au s e s o f t h e A g r e e m e n t i n o r d e r t o its claim that "the Agreement envisages in Phase I the delivery of tangible property only and in Phase II, the agreement is for licensing of I n t e l l e c t u a l P r o p e r t y R i g h t s " . A s s t a t e d a b o v e , t h e Agreement (Exhibit B) only speaks of' three modules of the project under which rapid development and shipment of high-performance cell minipools by Selexis to the appellant was to be the culmination ol various services to be rendered by Selexis in terms of the Agreement. It is an admitted fact that all the activities mentioned in Modules One to Three as stated above were carried out before delivery of cell lines or IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 18 minipools by Selexis to the appellant.
• No specimen Bill of Entry has been filed by the appellant in the course o f a p p e l l a t e p r o c e e d i n g s . E v e n o t h e r w i s e , t h i s w o u l d n o t make difference in view of the unambiguous terms of the A g r e e m e n t . Merely because Recombinant Mammalian Cell Lines are classified as "Biological Substance" under Customs Tariff entry 3002.90.90 will not detract from the position that the payments made by the appellant to Selexis under th e Agreem ent are for p rovision of t echnical services and not supply of cell lines. • It is verb ally inform ed b y th e AR of t h e ap p ellant that th e cell lines developed by and procured from Selexis have been accounted for in the books of account / Balance Sheet of the appellant under the head "Intangible Assets". However, the details of exact accounting treatment have not been furnished in this regard.
5.3.3. It is observed that the contents of Para 7 of the impugned order have b e e n e x t r a c t e d f r o m t h e o n e - p a g e n o t e t i t l e d " C e l l Line Development Services Agreement between Avesthagen & S e l e x i s " f u r n i s h e d b y t h e appellant to the AO in the course of proceedings u/s 201(1) of the Act. The AO has not added anything on his own. The AO has nowhere stated in Para 7 of the order (as claimed by the appellant) that the payment is for launching of bio- similars manufactu red in India after un derg oing clinical trials. The AO seems to be aware that after import of cell lines, R & D e f f o r t s / experiments have to be carried out by the appellant for development of bio similar mammalian cell lines over exp ressing different compound s. From perusal of the Ag reem ent, it is observed that within 60 days of receipt of High Performance Cell Minipools, the appellant was required to decide on the following:-
I) Execute an R&D license with Selexis; ii) Execute Manufacturing license with Selexis or
iii) Return or destroy all materials generated using Selexis technology.
In the course of appellate proceedings, the appellant was asked to IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 19 furnish a note ( wi t h supporting e vi d e n c e vi z , e m ai l correspondences etc.) on the subsequent developments with reference to the Cell Minipools received from Selexis. However, no such evidence has been furnished by the appellant. It is v e r b a l l y informed that the appellant has neither executed any R&D /Manufacturing license with Selexis nor returned/ destroyed materials generated from use of Selexis technology.
5.3.4 As p er Explanation 2 to Section 9(l)(vii) of the Act, FTS means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel). Likewise, FTS under Article 12(4) of t i e rel evan t DTAA al so m ean s p aym en t s of an y ki n d t o an y p ers on i n consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personnel. Thus, the definition of FTS under the Act as well as the relevant DTAA is identical. It is observed that the restrictive phrase "make available" is not there in Article 12 of the relevant DTAA. This implies that mere rendering of technical services including provision of services of technical or other personnel is sufficient to attract liability. In other words, it is not required to be shown that the technical services rendered by the non-resident make available technical knowledge, experience, skill, know-how etc. to the resident taxpayer. Reference may also be made to the Explanation below Section 9 of the Act inserted vide the Finance Act, 2007 with retrospective effect from 01.06.1976, as per which the situs of utilisation of the services will alone determine the tax jurisdiction irrespective of whether or not the non-resident has a residence or place of' business or business connection in India. In the instant case, it is observed that the Agreement was executed in India and the services thereunder were utilised in a business carried on by the appellant in India. The attempt on part of the appellant to describe the services rendered by Selexis as not "technical services" but "technology driven services"
has to be treated as an exercise in semantics. It has to be recognized IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 20 that the development of cell lines is not child's play. It is a co m p l ex p r o c e ss i n v ol vi n g a high d eg r e e of sci e n t i fi c an d t e ch n i cal knowledge and skill. The appellant engaged Selexis for the purpose of establishing high performance cell minipools because the appellant knew that Selexis had the necessary expertise as well as the technology for the rapid d e v e l o p m e n t o f m a m m a l i a n c e l l P o o l s a n d c e l l l i n e s u s e d i n r e c o m b i n a n t p r o t e i n s manufacturing of therapeutic drugs.
5.3.5 It is now proposed to examine the applicability of the judicial decisions relied upon by the appellant in support of its case. Reliance of the appellant on the recent decisions of the Hon'ble Delhi High Court and Chennai Special Bench of ITAT in the cases of Van Oord ACZ India (P) Ltd and M/s Prasad Production Ltd. (supra) respectively will not help the appellant, because of binding nature of the judgement of the Hon'ble jurisdictional High Court in the case of Samsung Electronics (supra). Similar is the position with regard to other cases such as Mahincira & Mahindra Ltd., Timken India Ltd. (supra) etc. cited by the appellant. The request: of the appellant to keep the p r e s en t a p p eal p en d i n g t ill deci si o n o f SL P i n the case of S am s u n g Electronics (supra) cannot be entertained, because the matter under dispute is being decided on merits as well. The decision of Hon'ble Bangalore Bench of Tribunal in the case of Wipro Ltd. (cited supra) has no relevance to the case of the appellant. No such plea is observed to have been taken before the AO. No evidence has been led by the appellant at the appellant stage to show that the development of cell lines using proprietary Selexis Technology is a standard facility that is made available to any willing customer. Rather, on the contrary, as brought out in Para 5.1.1 above, the establishment and development of high performance cell minipools useful for production of the appellant's recombinant proteins was a highly specialized and technical activity which was carried out in three modules over a period of time starting from the execution of the Agreement on 12.10.2007 and ending with the shipment of mammalian cell lines expressing recombinant proteins in February and April, 2008. The whole project of development of cell lines or cell minipools inter-alia involved establishment of project team, agreement IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 21 upon-cloning strategy, electronic transfer of DNA sequence coding to Selexis by the appellant for its products, codon optimization and gene synthesis, construction of proteins i.e. establishment of ELISA assay for the products, cl on i n g of t h e c on s t ru ct ed p r ot ei n s wi t h u s p r op ri et a ry S el e xi s G en et i c E l e m e n t s , v e c t o r c o n s t r u c t i o n a n d v a l i d a t i o n a t t h e e n d o f S e l e x i s , i m p l e m e n t at i o n o f Su r e C e l l Li n e D ev e l op m e n t P r o g r a m o n t h e cl o n e d r e c o m b i n a n t p r o t e i n s o f t h e ap p e l l a n t , q u an t i fi ca t i on o f p r o d u c t i o n b y ELISA, cell minipool selection and ultimate shipment of cell minipools for each p rodu ct and a sample of th e resp ective supernatant. Selexis was also r eq u i r ed to p r ep a r e an d d el i ve r t o t h e ap p el l an t a c el l li n e d ev el o p m en t report which included vector construction, cell line d o c u m e n t a t i o n , transfection and cell cloning strategies. If it had been a standard facility (as claimed by the app ellant), there was no need for th e app ellant to tran sfer electronically to Selexis DNA sequence coding for its products, prior data/ r e s u l t s o n e x p r e s s i o n o f p r o d u c t s a n d o t h e r m a t e r i a l s e t c . r e q u i r e d f o r est ablishing ELISA assays for p rodu ct s. Nor was t h ere an y n eed For th e appellant and Selexis to review and agree upon the cloning strategies. It was n o t required to carry out the project of d e v e l o p i n g c e l l l i n e s i n t h r e e el ab orate st ag es or m od ules, with each h aving its sp eci fic obj ectives and activities. As a matter of fact, there was no need at all to enter into the "Cell Line Development Services Agreement". What the appellant could have clone was to conveniently place an order on Selexis for off-the--shelf purchase of standard products. All this clearly brings out that the cell lines or minipools had been developed by Selexis not by way of standard facility but based on t h e s p e c i f i c a t i o n s a n d r e q u i r e m e n t s o f t h e a p p e l l a n t o v e r e x p r e s s i n g different compounds.
5.3.6 F rom t h e afo resai d di scu ssi on , it i s cryst al cl ear t hat t h e p aym en t s made by the appellant to Selexis for rendering cell line development services would be termed as "FTS" u/s.9(1)(vii) of the Act as well as Article 12(4) of the relevant DTAA and would, therefore, constitute income chargeable under the Act in the hands of the recipient, IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 22 namely, Selexis. Thus the appellant was under a statutory obligation to deduct tax in terms of Section 195(1) on the impugned remittances. In view of the failure of the appellant to do so, the action of the AO in treating the appellant as an assessee in default u/s.201(1) in respect of the tax deductible at source u/s.195(1) on the remittances made to Selexis and levying interest u/s.201(1A) of the Act for the period of default is upheld. Ground no.3 is found to be devoid of substance and is accordingly dismissed."
06. Thus, the Commissioner of Income Tax (Appeals) after analyzing the agreement and other evidences held that the re is no me ntion of Phase I ( for sale of tangible goods) and Phase I I ( licensing of Intellectual property) in the agreement as contended by the assessee. The payment of Rs. 2,10,16,078/- is fees for technical services under Section 9(1)(vii) of the Act as well as under Article 12 of the DTAA between India and the Swiss Confederation. Further, he found from the Chartered Accountant's certificate that the impugned payment is described as towards "Fee for Te chnic a l Se rv ice s " and no j ustif ica t ion is sta te d for c hang ing t he asse sse e ' s stance that it is a consideration for import of goods. The CIT (A) also found from the export invoice Nos C-31 & C- 38 dated 29.02.2008 & 18.04.2008 raised by Selexis on the assessee towards export of 45 & 42 vials, respectively, of "mammalian cell lines expressing recombinant proteins" that they were declared to be "samples for laboratory use only", " no t for hu m an u se " , th at th e y h a d " no co m me r c ia l va lu e " a nd t h a t t he assessee is patently wrong in contending that the remittance is towards i m p o r t o f tangible property of vials of cell IT(IT)A.972/B/2010 & IT(IT)A.884/B/2013 Page - 23 Minipools . T h e i m p o r t c l e a r a n c e l e t t e r d a t e d 2 9 . 0 4 . 2 0 0 8 i s s u e d b y t h e D e p a r t m e n t o f Biotechnology, Ministry of Science and Technology, Government of India is only a regulatory requirement and the classification of Recombinant Mammalian Cell Lines under Customs Tariff entry 3002.90.90 will not detract the position that payment is for technical services and not for supply of cell lines. After a detailed discussion , he has relied on the Jurisdictional Karnataka High Court's decision in Samsung 320 ITR 209(Kar). Howe ve r, the asse sse e could no t lay any mate r ia l to assa il the abo ve f ind ings and he nce we f ind that the orde r of the CI T ( A) does not re qu ire an y in te rf e re nce . I n the re s u lt, both the se ap pe a ls are d ism isse d .
07. In the result, the appeals filed by the assessee in IT (IT) A.972/Bang/2010 & IT (IT) A.884/Bang/2013 are dismissed.
Order pronounced in the open court on 17th day of March, 2017.
Sd/- Sd/-
(SUNIL KUMAR YADAV) (S. JAYARAMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
MCN*
Copy to:
1. The assessee
2. The Assessing Officer
3. The Commissioner of Income Tax
4. The Commissioner of Income Tax (A)
5. DR
6. GF, ITAT, Bangalore
By Order
Assistant Registrar