No Separate DCGI Approval Needed For Service Tax Exemption On Drug Testing: CESTAT Chennai

The Chennai bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has recently held that Service Tax exemption for clinical testing of newly developed drugs cannot be denied merely because a Clinical Research Organisation (CRO) does not have a separate approval from the Drugs Controller General of India (DCGI).

The tribunal found that the drug Sponsors had obtained DCGI-approved permissions for the clinical trials. Consortium Clinical Research Pvt. Ltd. (CCRP), acting as the CRO, conducted the clinical trials under written agreements with the Sponsors.

The tribunal observed, "The impugned order too doesn't contradict that, the regulatory scheme nowhere empowers the DCGI to grant an approval to a Clinical Research Organisation independently of its approval of a Sponsor's trial. To read the exemption as additionally requiring a free-standing institutional approval that the regulator does not, and did not at the relevant time, issue to any CRO would impose a condition no CRO could ever satisfy. Such a reading offends the settled canon that the law does not require the performance of an impossibility, lex non cogit ad impossibilia"

The bench comprising Judicial Member Ajayan T.V. and Technical Member Vasa Seshagiri Rao was dealing with appeals by CCRP against a Service Tax demand of ₹65.25 lakh, along with interest and penalties.

CCRP, a Coimbatore-based CRO, provides contract research services to pharmaceutical, biotechnology and medical-device companies. Its activities include pre-clinical and clinical research, clinical trial management and pharmacovigilance in relation to testing and analysis of newly developed drugs on human participants.

The dispute involved a ₹63.06 lakh demand for technical testing and analysis of newly developed drugs on human participants. Another ₹2.19 lakh demand related to commercial training or coaching.

The tribunal noted that the exemption covered testing and analysis of newly developed drugs on human participants by a CRO approved to conduct clinical trials by the DCGI. The department's objection was that the DCGI approvals had been granted to the Sponsors and not CCRP.

The tribunal found that the Sponsors had obtained DCGI-approved permissions for the relevant trials. CCRP, as the CRO carrying out the clinical-trial work, conducted the trials under written agreements with the Sponsors, and its trial activity was registered with the Clinical Trials Registry of India.

Relying on its earlier decision in Deenanath Mangeshkar Hospital & Research Centre, the tribunal held that these circumstances were sufficient for CCRP to claim the exemption. It also distinguished a decision concerning an entity that merely functioned as a trial site, noting that CCRP was itself functioning as a CRO.

The tribunal accordingly held that the technical testing and analysis services were exempt. It set aside the ₹63.06 lakh demand under this head.

On the ₹2.19 lakh demand, CCRP had collected deposits from employees who were trained and appointed on the condition that they would serve for at least one year. Where an employee left before completing that period, the deposit was retained or an equivalent amount was recovered from the employee's dues.

The tribunal held that the recovery was not a fee for providing training. It represented compensation for breach of the employee's undertaking to complete the minimum service period and was therefore not consideration for a taxable service.

The tribunal also rejected the department's invocation of the extended limitation period. It noted that the department had examined CCRP's clinical research activities as early as 2010 and that CCRP had provided the information sought by it.

The tribunal observed, “It is difficult to conceive how CCRP can be said to have suppressed from the Department a fact the Department had itself elicited and was already investigating several years in advance of the show cause notices.”

It found that CCRP had consistently maintained that its testing services were exempt. The tribunal held that this was a tenable interpretation of the exemption and, in the circumstances, did not amount to deliberate suppression with an intent to evade tax.

Since no part of the Service Tax demand survived, the tribunal also set aside the interest and penalties. It set aside the impugned order in its entirety and allowed both appeals with consequential relief.

For Appellant: Advocate M. Karthikeyan,

For Respondent: Anandalakshmi Ganeshram, Authorised Representative