Maharashtra AAR Denies ITC on Imported Sample Drugs for Clinical Trials: Insights from PPD Pharmaceutical Development India Pvt Ltd Case

Category: GST ARA 

Brief Description: - In a significant ruling that impacts the pharmaceutical and clinical research sectors, the Maharashtra Authority for Advance Ruling (AAR) has clarified the position on Input Tax Credit (ITC) eligibility for Integrated Goods and Services Tax (IGST) paid on imported sample drugs used in clinical trials. The case involves M/s. PPD Pharmaceutical Development India Pvt Ltd, a subsidiary of a global clinical research organization, which imports sample drugs from foreign sponsors and distributes them free of cost to hospitals in India for conducting trials. The AAR ruled that such imports qualify as free samples, thereby blocking ITC under Section 17(5)(h) of the CGST Act. This decision underscores the strict interpretation of GST provisions where goods are supplied without consideration, even if they support taxable output services.

Facts: - M/s. PPD Pharmaceutical Development India Pvt Ltd (GSTIN: 27AADCP2043E1ZT) is engaged in monitoring and managing clinical trials in India on behalf of overseas sponsors. As part of this, the company imports sample drugs from foreign entities and ships them to various hospitals across the country. These drugs are provided to the hospitals without any charge, as the trials are funded by the sponsors. The imports are subject to IGST under Section 3(7) of the Customs Tariff Act, 1975, read with Section 5(1) of the IGST Act. In some cases, imports occur under a Delivered Duty Paid (DDP) model, where the logistics provider pays the IGST, but PPD remains the importer on record. Additionally, the company avails services from Customs House Agents (CHA) for import clearance, on which CGST is paid.

The applicant filed for an advance ruling under Section 97 of the CGST Act and MGST Act to determine ITC eligibility on these taxes, given that the drugs are integral to their taxable services of clinical trial management.

 

Statement of Both: -

Applicant's Statement: - The applicant argued that the sample drugs are crucial inputs for delivering their taxable output services in clinical research. They emphasized that the bills of entry are issued in their name, making the IGST paid qualify as "input tax" under the GST framework. For the DDP model, they contended that as the importer on record, they should still be eligible for ITC. On CHA services, they claimed these are procured in the course of business and support the import process. PPD relied on precedents like Kardex India, Umax Packaging, Cadila Healthcare, and Alkem Laboratories, where ITC was allowed on inputs and services used in research or trial batches, asserting that the drugs are not mere gifts but essential for business operations.

Jurisdictional Officer's Statement: - The jurisdictional officer opposed the claim, citing Section 17(5)(h) of the CGST Act, which explicitly blocks ITC on goods disposed of as gifts or free samples. They referenced CBIC Circular No. 92/11/2019-GST dated March 7, 2019, which states that free samples do not constitute a supply and thus disqualify ITC. Since no consideration is received from hospitals and no invoices are issued for the drug distribution, the officer viewed this as a non-supply, rendering ITC ineligible.

Eligibility of ITC: - The core issue revolved around whether IGST on imported sample drugs and GST on related services qualify for ITC under Section 16(1) of the CGST Act, despite the drugs being distributed free of cost. Section 16(1) generally allows ITC on inputs used in the course or furtherance of business. However, Section 17(5)(h) overrides this with a non-obstante clause, disallowing ITC on goods given as gifts or free samples. The AAR examined if the sample drugs fit this category, considering their free distribution to hospitals. Additional scrutiny was applied to the DDP import model and CHA services, evaluating if these are inextricably linked to the ineligible goods.

Hearing: - Details of the hearing proceedings, including specific dates, attendees, or oral arguments presented, are not elaborated in the available records. However, the advance ruling process under Section 98 of the CGST Act typically involves a personal hearing where both the applicant and jurisdictional officer present their views before the authority finalizes the ruling.

Observations and Findings: - The AAR observed that while the sample drugs are imported for business purposes, their free distribution to hospitals classifies them as free samples under Section 17(5)(h). This provision takes precedence over the general eligibility in Section 16(1). For the DDP model, the authority noted that PPD's role as importer on record does not alter the fact that the drugs are supplied without consideration, thus blocking ITC.

Regarding CHA and logistics services, the AAR found these to be directly connected to the import and transport of ineligible free samples. Citing the West Bengal AAR in the Indian Oil case and the aforementioned CBIC circular, the authority concluded that ITC on such input services is also disallowed when tied to blocked goods.

The findings emphasize that ITC eligibility hinges not just on business use but on whether the goods involve consideration and qualify as a supply under Section 7 of the CGST Act. The absence of invoices or payments from hospitals sealed the classification as non-supplies.

Order with Question and Answer

Order No.: GST-ARA-94/2022-23/B-13 Date: 30/04/2025

Question	Answer/Ruling
Whether the Applicant is entitled to take credit of Integrated Goods and Services Tax (“IGST”) paid by the Applicant under section 3(7) of the Customs Tariff Act, 1975 r/w section 5(1) of the Integrated Goods and Services Tax Act, 2017 (“the IGST Act”) while importing the sample drugs, in terms of section 16(1) of the CGST Act?	No, ITC is not allowed as the drugs are classified as free samples under Section 17(5)(h) of the CGST Act.
Whether the Applicant is entitled to take credit of IGST paid by the “logistics service provider” [under DDP (Delivered Duty Paid) model of shipment] under section 3(7) of the Customs Tariff Act, 1975 r/w section 5(1) of the IGST Act while importing the sample drugs, in terms of section 16(1) of the CGST Act, where the Applicant is the Importer on Record?	No, ITC is not allowed since the drugs are supplied free of cost, invoking the blockage under Section 17(5)(h).
Whether the Applicant is entitled to take credit of Central Goods and Services Tax (“CGST”) paid by the Applicant under section 7 r/w section 9 of the CGST Act for the services of Customs House Agent received by the Applicant, in terms of section 16(1) of the CGST Act?	No, ITC is not allowed as these input services are tied to the ineligible free samples.

Disclaimer: - The information provided in this blog is for educational and informational purposes only and is based on the publicly available details of the Maharashtra AAR ruling. It does not constitute legal, tax, or professional advice. Readers are encouraged to consult qualified professionals for advice tailored to their specific circumstances. The views expressed are derived from the ruling and do not reflect any endorsement or opinion by the blog author or website.