The Pharmaceuticals Export Promotion Council of India (Pharmexcil) has sought clarification from Service Tax department on the applicability of service tax on reverse charge basis on transactions undertaken outside India by non-trading offices (NTO) and subsidiary companies of Indian pharma companies.

In a letter to the Service Tax commissioner, Mumbai Commissionerate, Shushil Solanki, Pharmexcil executive director Reghuveer Kini has sought clarification on whether the Indian parent company is liable (pre and post July 2012) to pay service tax in India on reverse charge basis on transactions of service undertaken outside India by NTO established outside India. The Pharmexcil has also sought clarification on whether the Indian parent company is liable (pre and post July 2012) to pay service tax in India on reverse charge basis on payments of marketing fees (for marketing services provided outside India) made to a subsidiary company outside India.

The Pharmexcil's interference on this issue comes in the wake of widespread protest from the industry over the levy of service tax on transactions undertaken outside India by NTOs and subsidiary companies of Indian pharma companies.

Earlier in July this year, Sudhanshu Pandey, joint secretary in the union commerce ministry, had also asked the Service Tax commissioner to provide clarification on the issue.

The Pharmexcil in its letter clarified that many companies have established NTOs abroad in accordance with local regulations of destination country. These offices do not engage in any trading activities but actually undertake activities such as liaisoning with regulatory authorities to apply for and obtain registration of drugs, renewal of registrations and ensuring compliance of local drug laws on on-going basis, liaisoning with IPR authorities, liaisoning with distributors and hospitals, meeting doctors, etc.

Likewise, many Indian companies have also set up subsidiary companies abroad to facilitate business and grow thereof. The subsidiary companies purchase goods from the Indian parent company and in turn sells locally. This model is usually adopted when local customers prefer to purchase goods in local currency to guard against foreign exchange fluctuation risks. This also helps India parent to maintain and control inventory, Kini in his letter to the Service Tax commissioner said.