GST Liability on Clinical Trial Services Rendered to Foreign Recipients: Karnataka High Court's Landmark Clarification

Overview of the Karnataka High Court Ruling

The Karnataka High Court delivered a significant judgment in the matter of Iprocess Clinical Marketing Pvt Ltd. Vs Asst. Commissioner of Commercial Taxes, wherein it was determined that clinical trial services provided to foreign entities are not subject to Goods and Services Tax (GST). The court's decision hinged on the principle that when the location of the service recipient falls outside India's territorial boundaries, such services qualify as exports and consequently fall outside the GST net.

The judicial pronouncement brought much-needed relief to pharmaceutical companies engaged in clinical research activities for international clients, settling a contentious issue regarding the applicability of GST on such specialized services.

Background and Facts of the Case

Nature of Business Operations

The petitioner company was primarily engaged in conducting clinical trial services for clients located overseas. The fundamental contention raised before the court was whether these clinical trial services constituted export of services under the IGST Act provisions.

Dispute with Tax Authorities

The tax authorities had initiated adjudication proceedings against the petitioner, proposing to levy GST on the clinical trial services rendered during the assessment period from April 2018 to March 2019. The respondents took the position that despite services being rendered to foreign recipients, the place of supply would be India since the services were physically performed within Indian territory.

Petitioner's Contentions

The petitioner argued that:

  • Clinical trial services rendered to recipients located outside India constitute export of services
  • Section 13(2) of the IGST Act governs the determination of place of supply in such cases
  • Section 13(3)(a) of the IGST Act was not applicable to their service arrangement
  • Notification No.04/2019 – Integrated Tax dated 30.09.2019 issued by the Central Government clarified this position
  • The said notification was clarificatory in nature and therefore operated retrospectively

Position Taken by Revenue Authorities

The respondent authorities contended that:

  • The notification dated 30.09.2019 operated prospectively only
  • It could not be applied to periods prior to its issuance
  • The petitioner remained liable for GST payment for the disputed assessment period
  • The impugned orders demanding GST were justified

Section 13(2) of the IGST Act

This provision addresses the determination of place of supply for services when the location of the service recipient is outside India. The general principle is that the place of supply would be the location of the service recipient.

Section 13(3)(a) of the IGST Act

This section creates an exception where services are supplied in respect of goods that require physical availability to the service provider. In such scenarios, the place of supply becomes the location where services are actually performed, regardless of where the recipient is located.

The critical question was whether clinical trial services fell within this exception.

Section 13(13) of the IGST Act

This provision empowers the Central Government to issue notifications specifying the place of supply for specific services to prevent double taxation or non-taxation situations. The place of supply in such cases can be declared as the place of effective use or enjoyment of the service.

The 37th GST Council Meeting and Its Significance

Context and Background

During the 37th GST Council Meeting held on 20.09.2019, a crucial agenda item concerning GST on export of services in the pharmaceutical sector came up for deliberation. The Association of Biotechnology Led Enterprises (ABLE) had raised concerns about Indian pharmaceutical companies losing competitive advantage due to GST levy on R&D services provided to foreign clients.

Key Issues Identified

The pharmaceutical industry highlighted that:

  • Indian pharma companies were paying 18% GST on services rendered to international clients
  • This additional cost burden made Indian service providers less competitive internationally
  • Export contracts worth approximately Rs. 170 crores annually were being lost to competitors in other countries
  • Clarity was needed on whether such services qualified as export of services

Types of R&D Services in Pharmaceutical Sector

The GST Council examined various categories of research and development services, including:

  1. Integrated discovery and development services - involving research, development, prototype creation, and manufacturing arrangements
  2. Integrated development processes - concerning in-house development of molecules and subsequent testing procedures
  3. Processing and analytical testing services
  4. In vivo and assay evaluation services - testing on animal models
  5. Drug metabolism and pharmacokinetics research
  6. Safety assessment and toxicology studies
  7. Analytical testing procedures
  8. Bio-equivalence and bio-availability studies
  9. Clinical trials - the service category directly relevant to the petitioner
  10. Bio-analytical studies

Analysis of Section 13(3)(a) Applicability

The Council undertook a detailed analysis of whether pharmaceutical R&D services fell within the ambit of Section 13(3)(a) of the IGST Act. The key considerations were:

Whether samples and reference materials provided by foreign clients to Indian pharmaceutical companies constitute "goods" that need to be made physically available to the service provider for rendering the service.

The analysis revealed that:

  • Sample molecules provided by overseas clients are chemical or biological entities
  • These samples are consumed during the development process
  • Such samples lack the characteristics of "marketable commodities"
  • They do not possess intrinsic transferable value

The Education Guide on Service Tax clarified that merely providing samples for service delivery does not automatically trigger Section 13(3)(a). The provision applies only when goods temporarily come into physical possession of the service provider and such possession is essential for service delivery.

GST Council Recommendations

After thorough deliberation, the Council recommended:

  • Issuance of a notification under Section 13(13) of the IGST Act
  • Declaration that place of supply for specific R&D services provided to foreign recipients shall be the location of service recipient
  • Recognition that such services constitute export of services
  • Specific inclusion of clinical trials in the list of covered services

Notification No.04/2019 – Integrated Tax dated 30.09.2019

Content and Scope

Pursuant to the GST Council's recommendations, the Central Government issued Notification No.04/2019 – Integrated Tax dated 30.09.2019 under Section 13(13) of the IGST Act.

The notification specifically declared that for certain research and development services in the pharmaceutical sector provided to foreign service recipients, the place of supply shall be the location where the service recipient is situated.

Services Covered Under the Notification

The notification encompassed various R&D services including: