TaxTMI 
TaxTMI 
2013 (7) TMI 1146
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....n. 3. The petitioner-company viz., Sun Pharmaceutical Industries Limited {"SPIL" for short} is engaged in the manufacturing, trading and export of bulk drugs and formulations. The Company has its registered office at Baroda and has six associated enterprises at USA, Bangladesh, Brazil, British Virgin Islands and Mexico. During the year under consideration, it entered into international transactions with its associate enterprises. The details of such transactions have also been furnished by the petitioner in Form 3 CB. The petitioner filed its original return of income under section 139 of the Act declaring total loss at Rs. 40,85,09,332/=, which was revised and the loss was reduced at Rs. 40,98,79,267/=. The Assessing Officer raised certain queries in respect of research and development expenses. These were replied to by the petitioner-company. The Annual Report 2005-06 indicated transfer of technology by Sun Pharmaceutical Industries, INC. to Caraco Pharmaceutical Laboratories Limited, USA. The Annual Report also reflected accounts of Sun Pharmaceutical Industries INC and Caraco Pharmaceutical Laboratories Limited, USA specifying transfer of technology. 3.1 Return of income ....
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....mited [SPIL] and the expenditure related to such R&D is debited in the books of account of Sun Pharmaceuticals Industries Limited - the petitioner, thereby reducing its profit and correspondingly, inflating the profit of both SPS & SPI to that extent. 3.7 It would be necessary to reproduce the gist of reasonings given for reopening, which reads thus - "Reasons for reopening : A survey operation u/s. 133A was conducted in the case of Sun Pharmaceutical Industries Limited [hereinafter referred to as SPIL] by the Assistant Director of Income-tax [Inv.] Unit VII (1), Mumbai on 08.11.2011 at the six business premises belonging to the above assessee. Large number of incriminating documents were found and impounded during the course of survey operation and the same were forwarded to this office alongwith the survey report. On analysis of the impounded material and after going through the survey report, it is noticed that huge amount of income has escaped assessment. The reasons for the aforesaid conclusion / satisfaction are as under :- Diversion of profits on transfer of Technology to Caraco through Sun BVI This is in view of the device adopted by t....
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.... Glipizide & Metformin Hydrochloride Tablets SPIL - Mumbai Executive Summary 12 Lamotrigine Tablets SPIL - Mumbai Executive Summary 13 Modafinil Tablets SPIL - Baroda Master Formula Card 14 Glipizide Immediate Release Tablets SPIL - Mumbai Executive Summary 15 Baclofen Tablets SPIL - Mumbai Executive Summary 16 Amlodipine Besylate Tablets SPIL - Mumbai -- -- 17 Escitalopram Oxalate Tablets SPIL - Mumbai Executive Summary 18 Paoxetine Hydrochloride Tablets Equivalent to Paroxetine SPIL Mumbai 19 Atenolol Tablets SPIL Baroda Master Formula 20 Methimazole Tablets SPIL Baroda Master Formula 21 Allopurinol Tablets SPIL Baroda Master Formula 22 Venlafaxine Hydrochloride Tablets equivalent to Venlafaxine SPIL Mumbai Executive Summary 23 Amitriptyline Hydrochloride Tablets SPIL Mumbai Executive Summary 24 Haloperidol Tablets SPIL Baroda Master Formula 25 Clonidine Hydrochloride Tablets SPIL Mumbai Master Formula Card xx xx In view of the above information and evidences in my possession, I have....
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....tions and bulk drugs are manufactured by nits under SPIL. The ratio in which the R&D expenditure is allocated between formulations and bulk drugs within the units of SPIL is 3:1 or in other words 75% of the R&D expenditure debited in the books of SPIL is allocated to R&D of formulations and 25% to the R&D of bulk drugs. Thereafter, the R&D expenses amongst formulations are distributed by SPIL on the basis of turnover of formulations. This fact is evidentially corroborated by loose paper 21 of Annexure A5 impounded from the premises of SPIL, Mumbai [Mahal Industrial Estate, Mahakali Caves Road, Andheri (E), Mumbai]. So, if the entire R&D activity of SPI and SPS is taking place in SPIL, then the expenses for the same should be re-allocated in the ratio of turnover of formulations manufactured in SPIL, SPI and SPS. xx xx "Therefore, an amount of Rs. 33.2 Crores incurred as R&D expenditure by SPIL should have been debited in the books of SPI for Assessment Year 2006-07. In view of the above information in my possession, I have reason to believe that income to the extent of Rs. 33.2 Crores has escaped assessment which requires to be taxed under provisions of I....
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....and information for this office and in view of the same, I am satisfied that the above income has escaped assessment by reasons of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the assessment year under consideration. Issue Notice under section 148 of the Act." 4. While raising the objections on 20th September 2012, the assessee emphasized that both the grounds have already been considered in the scrutiny assessment. Moreover, for the Assessment Year 2006-07, these very details have been accepted in toto in case of the present petitioner as also in the case of Unimed Technologies and M.J Pharmaceuticals Limited. Therefore, in absence of any new material and in absence of any allegation of the petitioner having not disclosed truly and fully all material facts necessary for the purpose of assessment, the issuance of notice for reopening is bad in law. It is further alleged that only on two grounds, such notice is permissible to be issued - Firstly, when in the return of income, details are not provided and secondly, income has escaped assessment on account of petitioner not having disclosed truly an....
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....hese companies for whom, the job work has been done by the petitioner and the petitioner's assessment is wrongly re-opened. It is emphasized that nowhere it emerges from the entire set of documents that the petitioner has not disclosed fully and truly all material facts which it was required to reveal and on account of that, any taxable income has escaped the assessment. According to learned counsel, it is only at the time of survey carried out at the premise of the petitioner company, certain material were found which surely does not bring the case of the Revenue within the purview of Section 147 of the Act. He urged that once having disclosed all the details, the assessee is not under obligation to let the Assessing Officer know as to how to conduct his affairs. These transactions not only are reflected in the return of income but the T.P.O has also been referred to these transactions and on his report, additions also have been made by the concerned authority. He further urged that the CIT [A] having decided the appeal, the order of Assessing Officer is merged into that of CIT [A], and therefore, the Assessing Officer has no business to reopen the assessment. He has sought to rel....
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....aterials having come to the notice of department leading to reasonably belief that true and full disclosure is not made. He heavily relied upon some of the statements recorded under section 131 of the Act which came to be recorded during the course of survey proceedings. He urged that senior scientist heading the team of developing twenty five technologies for Caraco, USA had admitted of these technologies being developed by the petitioner for none other than Caraco, USA. He, therefore urged that on the question of jurisdiction, when the Revenue is able to satisfy the Court that there is no true disclosure and that too true and full on the part of the petitioner, no interference at the stage of the notice be done as the assessee is likely to get the fullest opportunities to raise its defence in the re-assessment proceedings. He further urged that the entire channel of statutory appeals would also be available to the petitioner and therefore, at this stage, this Court may not interfere. 6.2 Learned counsel Shri Bhatt further urged that as far as second question is concerned, whereby the expenses of R&D is required to be bifurcated amongst other units, that if on those grounds whi....
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....under sub-section (1) of section 142 or Section 148, or on account of failure of assessee to disclose fully and truly all material facts necessary for his assessment. The Assessing Officer under sub-section (1) of Section 148, before making the reassessment or re-computation under section 147 of the Act is required to serve on an assessee, a notice requiring him to furnish; within such period as may be specified in the notice, a return of his income and the Assessing Officer shall require to record his reasons before issuing any such notice. Therefore, the requirement under the law for issuance of the notice is that the Assessing Officer must have a reason to believe that the income has escaped assessment on account of failure on the part of the assessee to disclose fully and truly all the material facts necessary for the assessment, after expiry of four years from the end of relevant assessment year. This being the case of notice under section 148 of the Act having been issued beyond the period of four years from the end of relevant assessment year, conditions required to be fulfilled is that the assessee failed to make a return under section 139 or in response to a notice under s....
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.... the evidence and the materials produced, the Income-tax Officer could have reached a conclusion other than the one which he has reached, a proceeding under section 34 (1)(a) will not lie merely on the ground that the Income-tax Officer has raised an inference which he may later regard as erroneous. 9.3 In the case between Income-tax Officer v. Madnani Engineering Works Limited [Supra], while completing the assessment, the assessee company allowed deduction of interest paid to creditor on borrowed moneys and hundies. However, subsequently, the assessment was reopened on the ground that during the course of assessment proceedings for subsequent assessment years, it was noticed that various items shown as loan against security of Hundies in assessee's books of account for assessment year under question were in fact fictitious. The Income-tax Officer in the challenge to such reopening by way of a writ petition, did not set-out any material on the basis of which he arrived at such a belief. On having found that the assessee had produced all Hundies on the strength of which it had obtained loan as also the entries in the books of account showing payment of interest, the Court held th....
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....) are "has reason to believe" and these words are stronger than the words "is satisfied". The belief entertained by the ITO must not be arbitrary or irrational. It must be reasonable or in other words, it must be based on reasons which are relevant and material. The Court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the ITO in coming to the belief, but the Court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under section 147 (a). If there is no rational and intelligible nexus between the reasons and the belief, so that, no such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the ITO could not have reason to belief that any part of the income of the assessee had escaped assessment and such escapement was by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to be struck down as invalid." 9.5 In the said decision, the....
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....ion 143 (1) of the Act. The duty, however, does not extend beyond the full and truthful disclosure of all primary facts. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal inferences have ultimately to be drawn. It is not for somebody else-far less the assessee - to tell the assessing authority what inferences, whether of facts or law, should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what interferences - whether of facts or law - he would draw from the primary facts. If from primary facts more inferences than one could be drawn, it would not be possible to say that the assessee should have drawn any particular inference and communicated it to the assessing authority. How could an assessee be charged with failure to communicate an inference, which he might or might not have drawn? It may be pointed out that the Explanation to the sub-section has nothing to do with "inf....
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....income, the Assessing Officer is not precluded from taxing the right person with respect to that income. This is so irrespective of the fact as to which course is more beneficial to the revenue. The language of the relevant provisions of the 1961 Act is quite clear and unambiguous. Section 183 shows that where the Parliament intended to provide an option, it provided so expressly. Where a person is taxed wrongfully, he is no doubt, entitled to be relieved of it in accordance with law, but that is a different matter altogether. The person lawfully liable to be taxed can claim no immunity because the Assessing Officer [ITO] has taxed the said income in the hands of another person contrary to law." 10. This Court in case of Sun Pharmaceutical Industries Limited v. Deputy Commissioner of Income-tax, reported in [2013] 353 ITR 450 was dealing with the income escaping the assessment when the issue of notice under section 147, the assessee sold certain goods to its sister concern, it was found by the Assessing Officer that on delayed payment of such goods, interest @ 24% per annum was paid, which was higher than the prevailing market rate of interest which was between 15% - 18%. Accord....
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....missioner of Income Tax, reported in 247 ITR 818 held as under :- "This is a case of reopening. We have perused the documents. We find there was material on the basis of which the Income-tax Officer could proceed to reopen the case, it is not a case of mere change of opinion. We are not inclined to interfere with the decision of the High Court merely because the case of the assessee was accepted as correct in the original assessment for this assessment year. It does not preclude the Income Tax Officer to reopen the assessment of an earlier year on the basis of his findings of facts made on the basis of fresh materials in the course of assessment of the next assessment year. The appeal is dismissed. No order as to costs." 10.3 Delhi High Court, in case of Remfry & Sagar v. Commissioner of Income-tax, reported in [2013] 351 ITR 75 (Delhi) was examining the question of jurisdiction of issuance of notice under section 147 of the Act. The assessee firm made payment to a company under a licence agreement for use of goodwill and name of the said company. Assessee filed return and claimed that payment made to company under licence agreement was a revenue expenditure and such cl....
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....e, and the specific reference therein to the petitioner having filed the agreement in the assessment proceedings for the year 2007-08 as contrasted with the petitioner's failure to furnish full and true particulars or material facts at the time of the original assessments for the four earlier assessment years. It seems to us proper to understand and appreciate the reasons recorded in a fulsome manner and not to treat them as statutes and so long as the failure of the assessee to furnish primary or material facts has been brought out in sufficient relief, it is not necessary to insist on the specific failure of the assessee being stated in the reasons. A parrot-like repetition of the statutory language without any substance would certainly not amount to satisfying the jurisdictional conditions but if the language used coupled with the context is sufficiently capable of conveying the fact that there was failure on the part of the assessee to furnish primary facts fully and truly at the time of original assessment, that should be sufficient compliance with the requirements of section 148(2) of the Act. In this view of the matter we are unable to accept the contention of the petitioner....
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....the ruler of the State for quarrying stones. The assessee was to pay royalty inclusive of income tax. Subsequently, there was a merger of the princely State with Rajasthan and a triangular litigation between the assessee, the State of Rajasthan and the Union of India ensued. The assessing officer initiated action to reopen the assessment to disallow a part of the royalty. The assessee took up the plea that the lease agreement entered into with the Maharaja of Kota State dated 02.05.1945 had been filed before the income tax officer at the time of original assessments and there was thus no failure on its part to furnish the primary facts. The Supreme Court, reversing the judgment of the Rajasthan High Court, held that the primary fact in the case was the lease agreement and since the same had been placed before the income tax officer at the time of original assessment, there was no failure to furnish primary facts. It was further held that it was not the duty of the assessee to draw the attention of the income tax officer to any particular clause or portion of the agreement and invite him to draw a particular inference from the same. It would thus appear that whenever a claim is made....
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....thority acts without jurisdiction. While issuing notice under section 148 of the Act, a person if is subjected to lengthy proceedings and unwarranted harassment, the Court can always issue a proper writ for precluding such undesirable acts and consequences. The two conditions which are required to be examined at this stage are - as to whether income chargeable to tax has escaped assessment by the reason of failure on the part of the assessee to file the return under section 139, or in response to the notice issued under sub-section (1) of section 142 or Section 148 (1) or (2) to disclose fully and truly all material facts necessary for assessment of the year under question. 10.5 The first condition does not exist in the instant case, and therefore, the second condition shall have to be closely examined as to whether there is anything to indicate that there was any failure on the part of the petitioner to disclose fully and truly all material facts necessary for assessment in the year under question. Since the notice under section 148 had been issued on expiry of period of four years from the end of relevant assessment year, mere mechanical reproduction of provisions or expressio....
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....ngth price has to be determined for such transactions and the total income of the assessee would be computed on the basis of arm's length price so determined. It further noted that the assessee paid Rs. 7,83,82,483/= to its associated enterprises and since arm's length price of these transactions is determined to be "NIL", a similar amount is required to be added in the total income of the assessee. With this report of Transfer Pricing Officer, several additions to the income under different heads to the income of the company had been made and the total income of the company was assessed at Rs. 28,92,24,784/= by the A.O in its order of scrutiny assessment dated 26.08.2009. 10.8 It is to be noted here that in the brochure of the Company [at Annexure B-2], the details of Caraco Pharmaceutical Laboratories Limited is also provided. Sun BVI account is already provided which had transferred the technology to Caraco Pharmaceutical Laboratories Limited. It also mentions that upto 2002, there was an agreement with the petitioner for transferring the technology formulations for 25 generic pharmaceutical products for a period of five years in exchange of 5,44,000 shares of Caraco common s....
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.... Sun Global & Caraco was nothing but an extension of previous agreement between Sun Pharma and Caraco made in 1997 and hence, reopening of assessment is very much justified. 10.10 The petitioner further claimed before the Assessing Officer that "the technologies that have been transferred to Caraco are for marketing of the drugs in the regulated markets which are subject to very high rate of litigation from the large established pharmaceuticals players. Any potential litigation form any established player who has huge access to funds and battery of lawyers etc can wipe off the company. Hence from a strategic and commercial point of view, it was conscious call taken by the management that the technology to be transferred to Caraco will not be developed by SPIL ie., the assessee as any potential litigation would threaten the very survival and existence of SPIL. The entire legal and commercial ownership of the technology was kept in Sun BVI to isolate SPIL from any potential litigation." In view of the above, it could be believed that in such regulated market, the company was taking extreme care in avoiding any potential litigation. Hence, it is also logical that the product purcha....
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....eloped by the petitioner for Caraco and these technologies were not developed for any other company but, they were meant to be transferred to M/s. Caraco Pharmaceutical Laboratories Limited directly. Not only his version, but, the material collected in essence during the course of survey together with the statements of other senior officers led the Assessing Officer to believe that the petitioner did not disclose truly and fully all material facts. Although, the transfer of technologies to Caraco USA from Sun BVI is a part of dossier produced by the petitioner at the time of original assessment, the details of price at which Sun BVI transferred 25 technologies to Caraco, USA may be a part of this dossier and of the proceedings before TPO who had determined the arm's length price of international transactions, the fact remains that when from the material other than those which were available at the time of original assessment, the Assessing Officer has a reason to believe that the income has escaped assessment and when such belief is formed not simply on the basis of doubt or suspicion, but from the material unearthed during the survey operation and is further substantiated by the s....
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....etitioner, the Assessing Officer has committed no wrong in exercising his jurisdiction under sections 147 & 148 of the Act. 11.1 We note at this juncture that we have restricted our scrutiny to initiation of re-assessment proceedings under section 147 as also to jurisdictional powers exercised by the Assessing Officer which culminated into the issuance of notice under section 148 of the Act, touching the merits of the matter, only for such restricted purpose, without delving into the merits of the matter. 12. With regard to second ground of allocation of R&D expenses, we notice that in a notice issued under section 142 (1), at the time of scrutiny assessment, information was called for on 16th January 2009, which reads thus - "[11] You have claimed R & D revenue expenses of Rs. 1,69,28,48,989/= and R&D capital expenses of Rs. 4,45,90,802/= and Rs. 49,09,91,987/=. Please give reasons as to why the same should not be allocated amongst various units in the ratio of their turnover." 12.1 A detailed note on allocation of R&D expenditure was prepared and submitted by the petitioner and the same has been submitted as a part of compilation from page nos. 84 to 89, which d....
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....CPP Units 504.7 0.35 TOTAL 149119.21 100 Thus, Rs. 13,54,76,703/= should be allocated to Silvassa-II Unit. However, already Rs. 8,10,00,000/= is allocated to Silvassa II Unit. Hence, the extra allocation in Silvassa II unit is Rs. 5,44,76,703/=." 12.2 This was challenged before the CIT [A], which decided the issue thus - "10.1 On perusal of assessment order, it has been noticed that the Assessing Officer allocated R&D expenses to Units claiming deduction u/s. 80IB. The assessee has claimed R&D Revenue Expenditure of Rs. 1,10,99,69,871/= and R&D Capital Expenditure of Rs. 59,79,84,814/-, the total being Rs. 1,70,79,54,685/=. However, from the details submitted by the assessee, it is noticed that the assessee has allocated only Rs. 4,34,25,000/= on account of R&D expenses in Silvassa- II Unit. This is not a correct way of treatment as these expenses should be proportionately distributed amongst various units. In fact, the R& D Expenses are basically pertaining to the head office expenses which are not directly relatable to a particular unit. Hence, in order to scientifically distribute these expenses, they should be ap....
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....e CIT [A] has already decided the appeal, the order of the Assessing Officer merged with that of CIT [A], this is a new ground other than those grounds which are available, and therefore, re-assessment is permissible. As could be noted from the reasons recorded that under the flagship of the petitioner-company viz., Sun Pharmaceutical Industries Limited, units are operating at Jammu and at Dadra units and as per the audit report, petitioner holds 97.5% share of the firm- SPIL. During the survey at petitioner company, it was urged to furnish a list of all products developed at SPIL, Baroda alongwith the locations where they were being manufactured and the list indicating R&D formulations which were manufactured at SPI-Jammu and Dadra Units as well as at SBS, Sikkim, being done at SPIL, Baroda. 12.4 Therefore, the Assessing Officer formed a belief that SPI & SPS which had manufactured the products developed at R&D facility of the petitioner-SPIL, the expenditure of such R&D is debited in the books of account of SPIL, which reduces its profit and the profit of SPS &SPI is inflated to that extent. It was also urged before us that allocation amongst various units of M/s. Sun Pharmace....