JANUARY 23, 2017

By Narendra Adawadkar

PHARMACEUTICAL companies in order to sustain in the market and to get an edge over competition always aim at discovering new and effective drugs. The drug discovery process is long, arduous / demanding and costly and each of such processes may require regulatory approvals. Further, the chance of getting a success i.e. to discover a new molecule (of a marketable drug) is quite marginal.

The Indian Pharmaceutical companies either set up standalone Research and Development Centers or In house Research and Development Centers as backward linkage for manufacturing and export of the products for overseas customer.

India alongwith other Asian Countries like China, Japan and South Korea is one of the preferred destinations for pharmaceutical companies for overseas companies as Indian Pharmaceutical Industry has created state of art infrastructure and pool of qualified scientists / chemists having technical expertise in the pharmaceutical field.

Many pharmaceutical companies have set up manufacturing units which are exclusively engaged in manufacture and export of the various pharmaceutical products.

The major export of goods is to the Regulated markets namely USA, UK, South Africa, Canada, Brazil, etc. As per the requirement of the Food & Drug regulatory authorities of the importing countries in case of commercial exports of pharmaceutical products, the Product registration in respective countries is essential and mandatory for the exporters.

For the purpose of said registration of the drugs, the manufacturer is required to manufacture the pilot batches/ small batches (submission batches) and prepare the Dossier of the final product giving complete details of the raw materials, packing materials, the list of machineries, equipments etc. The Dossier will also give complete details of testing of raw materials, packing materials alongwith the details/ source of input manufacturer.

Under various agreements, the Indian Pharmaceutical Industry is engaged by the Overseas Customer to manufacture the products at its site in India in accordance with the specifications, Goods Manufacturing Practices and any other mandatory regulations imposed upon the products in UK and to assist its customer in obtaining the regulatory approvals for marketing the said products in the retail market of UK. In order to obtain the said approval, Indian Pharmaceutical Industry would manufacture a trial product, undertake stability testing on the same and would send the report of the said testing along with the complete dossier to the overseas customer for obtaining the necessary regulatory approvals. It is to be noted that for manufacturing the trial product the inputs/raw materials would be either supplied by the Customer or the Customer would specify the vendors from which we can purchase those inputs. Further, there can also be a situation when the Customer would only mention the specifications/composition of these inputs/raw materials and the same would be purchased by us from local vendors.

Further, once the Overseas Customer obtains the necessary regulatory approvals, Indian Pharma Company would start the commercial production of the products based on the said approvals and these products would be purchased by the Customer on the basis of individual orders issued in this regard. For undertaking the above said site transfer activity, the Customer would pay a one-time site transfer cost to Indian Pharmaceutical Company and as far as the products are concerned the same would be purchased at a price mutually agreed.

In some cases Indian Pharmaceutical Company would manufacture validation/exhibit batches of certain products in India on the basis of the regulatory standards, cGMP and specifications provided by the Overseas Customer in order to support him to obtain regulatory approvals for the said products in USA. Indian Pharmaceutical Company would also be responsible to provide all the documents required for obtaining such approvals. And for undertaking the said activities Indian Pharmaceuticals Company would be paid the consideration as decided under the Agreement.

Thus, we submit that the sole intention of the Customers in both the above mentioned agreements is to get the complete Dossier prepared along with all the necessary documents required for obtaining the regulatory approvals in USA & UK. In this regard, it is to be noted that the sole intention of the parties being supply of the complete Dossier for obtaining the necessary regulatory approvals and not merely obtaining a testing report.

Therefore, it is submitted that the said transactions would not fall within the ambit of Rule 4 of the Place of Provision of Services Rules, 2012 (hereinafter referred to as 'PoP Rules').

1. In this regard, it is submitted that Rule 4 of the PoP Rules is applicable only when the service is performed on the goods supplied by the service recipient. It is submitted that a transaction would be covered under Rule 4 only when some goods are supplied by the service recipient and the service provider performs services on that goods and later on returns the said goods in the same condition to the service recipient. However, in the present case, the inputs/raw materials if any given by the Customer loose its existence and are never given back to the Customer in the same condition. In the present case, the entire intention of the parties is to prepare the complete Dossier along with the documents to get the necessary approvals in UK & USA and according to us, such a transaction would not be covered by Rule 4 of PoP Rules.

2. Thus, as the activity undertaken by us is not covered by any other rule of PoP Rules, the same would be covered by the residuary rule i.e. Rule 3 of PoP Rules which provides that the Place of provision of service generally would be the location of the service recipient. In the present case, as the service recipient i.e. the Customer is situated outside India, the Place of provision of service would be outside India. Accordingly, the said activities would not be liable to service tax under the Act as the Place of provision of service of the activities performed under the Agreement is outside India.

3. Hence, the site manufacturing activities performed by us would be covered by Rule 3 of PoP Rules and as the service recipient is located outside India, we would not be liable to pay service tax on the same.

4. Further, it is also submitted that, the said activity would be covered by Rule 6A of the Service Tax Rules, 1994 as all conditions as mentioned in the said Rule are fulfilled. Accordingly, the said site transfer activities would qualify as Export of Services and hence would not liable to be taxed in India.

5. Without prejudice to the above, we also submit that as subsequent to the approvals by the regulatory authorities, we would start the commercial manufacturing of the products, the entire process of preparing the Dossier and obtaining the approvals is incidental to the manufacturing activities which would be undertaken by us in future. Therefore, it is submitted that the consideration received by us from the customer which includes the one-time site transfer cost and the price of the products sold to the customer would fall within the ambit of Sub-section (f) of the Section 66D as the primary activity undertaken under the agreement is that of manufacturing and the site transfer activities are merely incidental to the said manufacturing activities. Therefore, as the service provided by us results in manufacture or production of goods the same would be covered under Negative list and accordingly, not liable to service tax.

6. Hence, according to us, the consideration received by us for supplying the complete Dossier to obtain the necessary regulatory approvals would not be liable service tax under the provisions of Finance Act, 1994 as the Place of provision of service of the said activities would be outside India.

7. Service tax authority has raised Demand Notices for service tax, interest and penalty.

8. The CBEC is requested to issue suitable clarification with retrospective effect as above activity is nothing but Export of Services as earnings are in foreign currency and without performing the above activities there will not be commercial export manufacturing in 100% EOU sector.

(The author is Associate Director, Emcure Pharmaceuticals Limited.)