Rendition of scientific research services does not qualify as export of service

This update is to apprise you about a recent decision of Tribunal in case of Sai Life Science Limited, 2019-VIL-357-CESTAT-MUM-ST. In this case, the foreign customer provided drugs to the service provider (‘the Appellant) located in India for research studies. The drugs were converted to formulations and thereafter tested on animals. The consideration for the said services was received in convertible foreign exchange.

The Department contented that the Appellant is providing services in respect of goods. In accordance with Rule 4 of the Place of Provision of Services Rules, 2012 (‘POPS Rules’), the place of provision of said services will be the place where the services are actually performed i.e. India. Resultantly, the services provided by the Appellant do not qualify as export of services and it is liable to pay tax on such services.

The Appellant contended that Rule 4 of POPS Rules is applicable where the service is provided ‘in respect of’ goods. In the research undertaken by the recipient, drugs are firstly converted into a formulation and then the same is given to animals. Therefore, the research is not undertaken ‘in respect of’ or ‘on’ such drugs.

The Appellant relied on the Tribunal ruling in its own case as reported at 2016-TIOL-433-CESTAT-MUM-ST. This judgment was followed by Tribunal in the case of Advinus Therapeutics Limited, 2016-VIL-1066-CESTAT-MUM-ST wherein it was held that where the goods ceases to exist in the form in which they were supplied, the services cannot be said to have been provided in respect of goods and will be outside the scope of Rule 4 of the POPS Rules.

The Tribunal noted the Advance Ruling in case of Step Pharmaceuticals, 2017 (49) STR 114 AAR wherein it has been held that in a case drugs are received from the service receiver and consumed in the process of undertaking research or testing, it would be covered under Rule 4 of the POPS Rules. The Tribunal further held that the earlier ruling in Appellant’s own case (supra) is per incuriam as it failed to follow the POPS Rules. In respect to Advinus Therapeutics (supra), Tribunal held that Rule 4 does not provide any stipulation as to alteration of goods and therefore, Tribunal has read beyond what is provided in the statute. Basis this, it held that service tax is payable by the Appellant.

NITYA Comments: 

This dispute is equally relevant under GST law as well since Rule 4 of the POPS Rules is verbatim to Section 13(3)(a) of the Integrated Goods and Services Tax Act, 2017 (‘IGST Act’). Recently, in the case of Cliantha Research Limited, 2019 (6) TMI 1307 AAR-Maharashtra, it was held that place of supply of clinical research services (performing technical testing on drugs) shall be the place of performance of test. Thus, such services will be liable to GST if provided to foreign customer.

The entire controversy revolves around the expression ‘in respect of goods’. This expression was discussed by the Supreme Court in the case of State of Madras v. Swastik Tobacco Factory, AIR 1966 SC 1000 wherein the Court held that Indian Tax Laws use the expression ‘in respect of’ as synonymous with the expression ‘on’. In our view, basis this, Rule 4 of the POPS Rules would not apply where the services are provided using the goods and not ‘on’ the goods (like in this case).

Interestingly, the Bombay High Court and the Gujarat High Court in the cases of Commissioner v. SGS India Private Limited 2014 (34) STR 554 (Bombay) and Commissioner v. B.A. Research India Ltd. 2013 (31) STR 663 (Gujarat) respectively, dealt with testing services. The Courts noted that though tests were conducted and reports thereof were prepared in India, certificates were forwarded to clients located abroad. Basis above, such services were held to qualify as export of services as the performance of the testing service complete only on delivery of report to foreign client. Basis these decisions as well, the taxpayers can contend that such services qualify as export of service.

Considering the disputable nature of the issue, the taxpayers can consider structuring their transactions and buy the goods required for testing / research (instead of being supplied on FOC basis by the client).