By TIOL News Service

MUMBAI, MAY 21, 2018: THE appellant is a wholly owned subsidiary of Watson Laboratories Inc., USA. and are engaged in the business of manufacturing of drugs on behalf of Watson USA at various locations and for providing various services.

The appellant is carrying out the function termed as 'site transfer activity' for Watson USA. Watson USA is the holder of ANDA (Abbreviated New Drug Application) of various products. As per the requirement of USFDA provisions, the facilities which are used for the manufacturing of the drugs/goods which are to be sold in USA are to be recognized/certified by USFDA and in case of USFDA ANDA holder manufacturing a product which is intended to be got manufactured from any other site or country (in the case of the appellant it is Goa factory) for sale in US market, then before commencing the commercial production of such goods in such other site/country, it is necessary that the ANDA holder in USA shows to the satisfaction of USFDA authorities that the particular product can be manufactured at that new location by complying with the same standards of quality, stability and safety.

The entire activity is called as "Site Transfer Activity" and in technical terms it is called as "Tech Transfer Activity".

The appellant raised debit note on 28.02.2007 for recovering the charges towards the site-transfer service rendered for the period April 2006 to December 2006. Consideration in convertible foreign currency was fully received on 15.03.2007.

The service tax of Rs.2,01,84,195/- was paid by the company vide TR-6 challan dated 29.03.2007. However, the service tax registration was taken under the category of "Technical Testing and Analysis Service".

It is the contention of the appellant that the said service amounts to production or processing of goods not amounting to manufacture and, therefore, the same is taxable under the category of "Business Auxiliary Service" and is covered by the rule 3 of Export of Services Rules, 2005.Accordingly, contending that they are eligible for rebate of service tax paid of Rs.2,01,84,195/- as per the provisions of Notification No. 11/2005-ST dated 19.04.2005, a rebate claim was filed but the same came to be rejected on the following grounds:

++ The appellant has conducted R&D work and, therefore, service is appropriately classifiable under the category of 'Technical Testing or Analysis Services'. Further the appellant themselves has declared and classified service under technical Testing or Analytical Services till the time of filing the ST-3 return and, therefore, service is not classifiable under Business Auxiliary Services.

++ The services of Technical Testing of the product such as studying how the product behaves at each stage, finalizing critical parameters towards quality control testing, etc. before the final product can be undertaken for manufacture are fully performed in India and, therefore, the same cannot be treated as export of services.

The appellant is before the CESTAT and reiterates their claim with the support of case laws.

The Bench considered the submissions and observed –

++ Site Transfer activities involved providing of space which are required to be taken and which includes developing the product based on technology pack provided by Watson USA, Trial batches are produced for new product. Exhibit batches are taken up upon successful completion of the trial or pre exhibit batches are subject to test for quality and stability, which is required as per US FDA to get an approval and the same are sent to USA for approval with report. Further we find that the activity of Site Transfer involves production or processing of goods not amounting to manufacture and, therefore, the same were taxable under the category of "Business Auxiliary Service".

++ We further note that even if for the sake of argument we assume that it is a "Technical Testing and Analysis Service" then still it will fall in the definition of "Export of Service" and the condition for treating it as export are the same as applicable to the category of "Business Auxiliary Service."

++ Further, we find that providing the results of Technical Testing and Analysis is also performance of service and the purpose of service is not complete until the testing analysis report is delivered to the client.

++ Further, we note that Export of Services Rules, 2005 provides criteria for considering any service as export of service. Rule 3 of the said Rules divides all these services into three separate classes and lays down the criteria for each of the class for considering the said service as 'Export of Service' -

++ Under Rule 3(1)(i) - The services classified under this class are considered as export of service when the services have been rendered in relation to immovable property situated outside India.

++ Under Rule 3(1)(ii) - The services classified under this class are considered as an export of service when services are performed outside India, The proviso to the sub-rule (ii) provides that services shall be considered as performed outside India even if services are partly performed outside India. Thus if services are partly performed outside India the same will also be considered as export of service.

++ Under Rule 3(1)(ii) (residual category) - The services classified under this class are considered as export of service when the recipient of service is located outside India and the services are in relation to business or commerce.

Concluding that the impugned order rejecting the rebate claim on the ground of technical violation is not sustainable in law, the same was set aside and the appeal was allowed with consequential relief.

(See 2018-TIOL-1570-CESTAT-MUM)