Referring to the specific observations made in the 37th GST Council Meeting, the Karnataka High Court (Bengaluru Bench) has clarified that it was resolved to clarify the GST liability in relation to foreign recipients for Research & Development (R&D) services provided by Indian pharmaceutical companies. The clarification came in reference to the fact situation where the petitioner was involved in the activity of conducting clinical trials, which would amount to export of services, in terms of Section 13(2) of the IGST Act, since the place of the recipient of the services was situated outside the territory of India.
The Court pointed out that all amendments which are beneficial in nature, which are elucidatory and clarificatory, would operate retrospectively when they seek to clarify and elucidate certain existing facts and situations. Accordingly, the High Court ruled that since the place of the recipient of the services provided by the petitioner is in the USA, which is outside the territory of India and in a non-taxable territory, consequently, by virtue of the Notification No.04/2019 – Integrated Tax dated September 30, 2019, the petitioner could not have been saddled with the liability to pay GST.
A Single Judge Bench of Justice S.R. Krishna Kumar extensively reviewed the recommendations from the 37th GST Council Meeting held on September 20, 2019, where the Council had specifically discussed the challenges faced by the Indian pharmaceutical sector, where R&D services (including clinical trials) provided to foreign clients were being subjected to 18% GST. This was because the place of supply was considered to be in India under Section 13(3)(a) of the IGST Act, as the services were performed in India.
Observing that the GST Council recommended issuing a notification under Section 13(13) of the IGST Act to clarify that for specific R&D services, including clinical trials, the place of supply shall be the location of the service recipient, the Bench explained that Notification No. 04/2019, dated September 30, 2019, was issued as a direct consequence of the recommendations made in the 37th GST Council Meeting.
The Bench held that since the notification was intended to clarify an existing ambiguity regarding the place of supply for such services, it was “clarificatory and elucidatory in nature”. Relying on established legal principles, the Bench opined that any amendment or notification that is merely clarificatory or declaratory operates retrospectively. Therefore, the Respondents’ Department erred in concluding that the notification was only prospective.
The Bench, therefore, set aside the order passed by the Appellate Authority and the Adjudicating Authority, and concluded that the petitioner was entitled to the benefit of the notification and could not be saddled with the GST liability demanded by the respondents.
Briefly, the core issue revolved around services provided by the petitioner, specifically conducting clinical trials for a recipient located in the USA, for the period of April 2018 to March 2019. The petitioner contended that these activities amounted to an “export of services” because the recipient was located outside the territory of India, as per Section 13(2) of the IGST Act. The tax authorities, however, opined that the petitioner was liable to pay GST, asserting that Notification No. 04/2019, which clarified the taxability of such services, was prospective in nature and did not apply to the period in question.
Appearances:
Advocate Vikram Huilgol, for the Petitioner/ Taxpayer
Advocate K. Hema Kumar, for the Respondent/ Revenue
