TaxTMI 
TaxTMI 
2026 (9) TMI 1258
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....aushad, Junior Standing Counsel, Mr. Adeeb Ahmad, Ms. Harshita Sharma & Ms. Laiba Arif, Advocates. Mr. Vipul Agrawal, Senior Standing Counsel with Ms. Sakshi Shairwal, Junior Standing Counsel, Mr. Akshat Singh, Junior Standing Counsel, Ms. Harshita Kotru, Mr. Gaoraang Ranjan & Mr. Sachin Singh, Advocates. JUDGMENT REPORTABLE PER DINESH MEHTA, J. INDEX Particulars Page No. Para No. Prelude Given by Mr. Sachit Jolly 4-12 1-24 Submissions on behalf of the petitioners by Mr. Harish Salve 13-24 25-59 Submissions on behalf of the respondents By Mr. Himanshu S.Sinha 24-44 60-115 Rejoinder Arguments 44-50 116-132 Consolidated factual narration and statutory regime 50-57 133-151 Consideration of Rival 57-70 152 Contentions W.P.(C) 10711/2017 & W.P.(C) 10714/2017 70-79 153-175 W.P.(C) 12721/2019 79-90 176-203 W.P.(C) 1295/2023 90-93 204-215 W.P.(C) 4065/2022 93-95 216-221 Conclusion 95-96 222-226 Prelude Given by Mr. Sachit Jolly 1. When the matter was called, Mr. Sachit Jolly, learned senior counsel appearing for the petitioners, submitted that Mr....
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....ome did not belong to Teva Israel, the Revenue has withheld the refund or tax deducted from those remittances. 4. Mr. Jolly submitted that the genesis of the dispute lies in certain agreements executed between entities belonging to the Ranbaxy and Teva groups in connection with the commercial exploitation of 'Atorvastatin' (generic version of the drug Lipitor) in the United States, pursuant to the approval of the regulatory regime governing the Abbreviated New Drug Applications (hereinafter referred to as the "ANDA") under the US law. While Teva Israel approached the AAR seeking a determination that the payments received from Ranbaxy India were not chargeable to tax in India, the Revenue opposed the application principally on the ground that the income did not belong to Teva Israel at all but it pertained to Teva USA. Accepting the Revenue's contention, the AAR declined to determine the taxability of the receipts in the hands of Teva Israel and in the meantime the Revenue continued with reassessment proceedings initiated under Section 148 of the Income Tax Act, 1961 (hereinafter referred to as 'the Act of 1961') against Teva USA while also framing a protective assessment against....
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....the conditions for exclusivity, the other pharmaceutical company could take over, sharing a portion of its profits with the company that had originally obtained the exclusivity, which would in turn waive right of exclusivity of the first filer in favour of the subsequent company. 8. While clarifying that this entire mechanism operates under US law and has nothing to do with India, Mr. Jolly informed that Ranbaxy India along with its subsidiary Ranbaxy USA and Teva US entered into an agreement dated 07.12.2010 (Annexure A-4 to W.P.(C) 12721/2019) in the United States, agreeing that, although Ranbaxy USA had applied first and Teva USA second, in the event Ranbaxy did not obtain the approval by US Food & Drug Administration (hereinafter referred to as 'US FDA'), Teva would manufacture the drug and share 50% of its profit margin with Ranbaxy. During this interregnum period, if Ranbaxy's approval had not come through and Teva, in the meanwhile, obtained what is termed a "tentative approval" Teva USA would be entitled to issue a 'Ready Date Notice', provided it fulfilled the twin conditions as specified under the agreement dated 07.12.2010. 9. Mr. Jolly submitted that the Ready Dat....
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....erm the entire agreement to be a sham. He submitted that the AAR had, in effect, seated itself in the armchair of a US judge, without reference to the provisions of Indian Income Tax law, proceeding on the assumption that everything connected with the transaction was suspicious, without providing any answer as to how the matter became taxable under Sections 5 and 9 of the Act of 1961. 14. Mr. Jolly then submitted that even assuming the entirety of the Revenue's case to be correct, Sections 5 and 9 of the Act of 1961 could never be triggered on the facts of the present case. He submitted that the parties were not related parties, and there was no allegation that any money having flowed out of India and returned back through some circuitous route. He reiterated that more than fifteen years have passed since the transaction took place, assessments had been completed in both India and Israel, and the parties had remained before the AAR for a period of six years, yet, not even a shred of evidence has been produced to demonstrate that any money had come back. 15. He submitted that for a non-resident foreign company whether resident in Israel or the United States, the income in ques....
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....itted that without prejudice to petitioner's contention that there was no illegality in the transaction, even if it is assumed that there was some illegality or irregularity in the transaction there are numerous judgments under the Income Tax Act which demonstrate that, even in respect of income from illegal businesses, the character of the income as business income or business expenditure does not change. He submitted that the AAR, however, took the view that the character of the income got changed to "other income" by reason of the alleged illegality. 20. He submitted that a further reasoning given in the AAR's order was that since the payment was illegal, the income could never "accrue" in India, but could only "arise" in India as accrual requires a vested right to receive, and an illegal payment confers no such enforceable right and since the payer was located in India, the income was held to arise in India. Mr. Jolly submitted that even the concept of income "arising" would ordinarily require some vested right to receive, and that the reasoning adopted by the AAR that because the payment was illegal the recipient had no right to demand it, and that accrual could therefore n....
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....resting regulatory mechanism exists in the United States designed to encourage challenges to intellectual property rights, where a patent holder seeks to extend the life of its patent through "evergreening" by claiming that a variant of the original molecule constitutes a new invention warranting a further period of protection. Mr. Salve explained "evergreening" as a practice where pharmaceutical companies artificially extend monopoly protection by securing broad, blocking "Markush" patents in early research stages and subsequently obtaining secondary patents on deliverable formulations as they develop into viable drugs. He further explained that other manufacturers awaiting entry into the market upon expiry of the patent often challenges such extensions, and where such a challenge succeeds, the challenger obtains what is termed an ANDA, (Abbreviated New Drug Applications) carrying a 180-day period of exclusivity, during which the drug may be sold without competition from other generic manufacturers. 26. Mr. Salve submitted that both Ranbaxy Laboratories and Teva successfully challenged Pfizer's patent by way of ANDAs but in the meantime certain complaints were made regarding so....
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....nty-four hours, the AAR concluded that something was amiss. He argued that the AAR has examined and pronounced upon the commercial wisdom of the parties to the settlement, which it couldn't have done. 30. Mr. Salve submitted that there was, in addition, a subsidiary issue stemming from a non-compete clause contained in the agreement which prompted the OAG to raise an objection. While pointing out that both the parties decided to drop such clause and pay a sum of USD 1,50,000 each, he submitted that in any event, the original agreement had by then already been reversed. Mr. Salve highlighted that the AAR layered its reasoning further, observing that the reversal of the agreement was not in Ranbaxy's commercial interest, and that the payment made by Ranbaxy must therefore have been consideration for the non-compete clause. 31. The Court raised a query as to whether the OAG possessed the power to declare a clause illegal. Mr. Salve responded that the Attorney General could merely raise an objection, and only a court of law could thereafter pronounce upon questions of illegality. He submitted that no statutory text or judicial authority had been placed before the AAR to demonstra....
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....vent entitling it to issue such notice, namely, on receipt of the requisite FDA approval stood fulfilled. He submitted that Ranbaxy refused to accept the notice, because in the meanwhile, it had managed to resolve its issues with the FDA; Ranbaxy further took a plea that the trigger event entitling Teva to issue the notice had, in fact, not occurred. 35. On 29.11.2011, Teva initiated proceedings in the United States District Court seeking, inter alia, an injunction restraining Ranbaxy from launching its product in the US market. He submitted that had the injunction been granted, Ranbaxy would have lost the benefit of 180 days of exclusivity for whatever period the injunction remained in force. He submitted that unsurprisingly, the parties settled the dispute and entered into a fresh agreement on 07.12.2011 i.e. 'the Amended and Restated Agreement', under which with effect from 30.11.2011, Ranbaxy would be entitled to market its products under its ANDA; the proceedings instituted in the US courts would stand settled and be withdrawn by Teva; Ranbaxy would be supported by Teva in the event of any disruption to its market supply; Teva would relinquish its claims under the original ....
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....gibility for Final Approval. He highlighted that the notice could only be issued within the contractual window between 30.06.2011 and 30.11.2011 41. He submitted that the second sub-condition (B) was of particular importance to the case as it was a broader and lower threshold than the Tentative Approval. This distinction, he submitted, was directly relevant to the Revenue's argument that Teva's Ready Date Notice of 23.11.2011 was invalid on the ground that Tentative Approval had been received only on 01.12.2011. While highlighting that the contractual trigger under limb (B) did not require Tentative Approval at all, he submitted that Teva's position was that the PLAIR approval email received from the FDA on 21.11.2011 constituted precisely such a written confirmation, bringing Teva within limb (B) of the second sub-condition and entitling it to issue the Ready Date Notice on 23.11.2011. Whether that contention was correct or incorrect was a question of US contract law and the same was never judicially determined. He added that this question was not one that an Indian tax authority or the AAR had no subject expertise to resolve this question. 42. Mr. Salve highlighted Clause 2....
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....f the Attorney General, being a generic company's commitment not to challenge a brand manufacturer's patents, had the effect of prohibiting the parties from challenging each other's exclusivity claims across multiple of unrelated drugs. 48. Mr. Salve referred to paragraph 25 of the said document recording that the No Challenge Provision was either "per se unlawful" or presumptively unlawful, and thus illegal regardless of whether any real-world anti-competitive effects could be identified. He explained that Indian competition jurisprudence has historically proceeded on what is termed as "rule of reason," under which anti-competitive conduct must ordinarily be examined and justified by reference to its actual effects, and that even under present Indian competition law, there exist recognised gateways. By contrast, the United States, traditionally recognises the "per se" rule" in respect of certain categories of antitrust violations and that this was precisely what the Attorney General meant in describing the clause as "per se unlawful," namely, that proof of actual anti-competitive effect was not considered necessary. 49. Mr. Salve laid special emphasis on the fact that Ranbax....
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....as immaterial so far as the question before the AAR was concerned. 54. At this stage, the Court queried why the remittance had been made from India? Mr. Salve responded that the remittance was made because the parent company, Ranbaxy India, rather than routing the money through the American subsidiary and thereafter to Teva Israel directly sent it to Teva Israel. 55. Mr. Salve then took the Court through paragraph 86 of the order passed by the AAR where it held that the Amended Agreement lacked commercial sense and argued with vehemence that the AAR was not entitled to embark upon any such inquiry into the commercial wisdom of the parties, and that the entirety of the AAR's subsequent reasoning unwound from this flawed premise culminated in the conclusion that the arrangement was in the nature of a collusive arrangement. 56. Mr. Salve submitted that without prejudice to his previous argument, even assuming the reasoning of the AAR regarding there being an anti-competitive arrangement to be correct, and even also assuming the existence of some arrangement between the parties, the receipt would nonetheless remain business income even if the parties would have privately conti....
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....he law specifically provides otherwise. He added that if characterized as business income, the payment in question would fall outside Indian taxation under both the, India-US DTAA and India-Israel DTAA treaties. However, there exists a distinction between the two treaties in respect of "other income". Under the India-Israel DTAA, "other income" is not taxable in India and the right to tax rests solely with the country of residence, whereas the India-US DTAA follows the UN Model, under which primacy is accorded to the source country. 61. Mr. Sinha contended that the AAR had stopped short of recording a final adjudication on taxability, and had instead declined to answer the reference on the premise that there existed prima-facie evidence of tax avoidance and that the income in question did not belong to the applicant-Teva Israel (but to Teva USA). He further pointed out that proceedings under Section 148 of the Act of 1961 stood already initiated against Teva USA, wherein the issue of taxability would ultimately be decided. While submitting that only a protective assessment has been framed in the hands of Teva Israel, learned counsel submitted that once a substantive assessment r....
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....at answering the first question put before the AAR, it concluded that this was not a case of assignment of contract but a case of mere application of income. He added that a genuine assignment of contract presupposes assignment of both rights and obligations, whereas in the case on hands, only the money receivable has been assigned. 67. Mr. Sinha submitted that an important piece of evidence relied upon by the AAR was that the assurance agreement was signed by Teva USA and not by Teva Israel with the OAG of New York, under which a fine of USD 150,000 was paid. He submitted that the OAG had characterised the no challenge provision as anti-competitive under US law and the parties, though did not admit the liability, but instead of contesting it before a court, had gleefully paid the fine and executed the assurance agreement in 2014. 68. He submitted that the so-called 'assignment of the contract' had occurred as far back as 2012, whereas the assurance agreement with the OAG was signed in 2014. And, it was signed by Teva USA and not by Teva Israel: had there in fact been an assignment of the contract, it would have been Teva Israel that signed the agreement with the OAG. He subm....
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....s Limited, categorically stated that the entirety of the manufacturing had been carried out at the US plant, and that nothing had been manufactured in India. He submitted that the Department was relying upon a particular extract from an annual report containing a sentence to the effect that manufacturing had commenced in India, and the same has no real significance in the present matter. 73. Mr. Jolly also submitted that, even assuming manufacturing had taken place in India, the income would still not be taxable in India, since the payment was not for manufacturing at all and was not in the nature of royalty. He submitted that whatever payment had been made by Ranbaxy India to Teva, whether characterised as payment to the US or the Israeli entity, was made pursuant to a contract. 74. Mr. Sinha agreed, that without prejudice to his previous argument in the present case the location of manufacturing was immaterial as the receipt fell within the realm of income from other sources, where the mere location of Ranbaxy in India as payer is sufficient to confer upon the Revenue the right to tax Teva, since the payment received had eroded India's tax base. 75. Mr. Sinha argued that....
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.... 79. Mr. Sinha submitted that the diversion of income amounted to assignment and qua which, the Revenue has a favourable finding from the AAR. While explaining that the assignment would mean that the income belonged to Teva USA, he referred to accrual and the statutory source rule. He argued that under Section 5 of the Act of 1961, the basis of taxation is either source or residence. Section 5(1) addresses taxation on the footing of residence, a resident of India being taxed on worldwide income; Section 5(2) contains two limbs - clause (a), deals with income received in India, and Clause (b), dealing with income accruing or arising in India. He argued that Clause (b) confers jurisdiction to tax income accruing or arising in India. 80. Mr. Sinha responded that the 'source rule' can be understood by combined reading of Section 5(2)(b) of the Act of 1961 read with Section 9(1), and the same has been explained by Hon'ble the Supreme Court in the case of GVK Industries Ltd. v. ITO, reported in (2015) 371 ITR 453. 81. Mr. Sinha submitted that the basic source rule resides in Section 5(2)(b) of the Act of 1961, which has been further restated, expanded, modified, and explained in Se....
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....intended to eliminate ambiguity under the prior, broadly worded regime by codifying a clear-cut 'source rule' to govern the taxability of such cross-border payments in the hands of non-residents. 86. Mr. Sinha submitted that the preceding sentence of the Memorandum was significant, the absence of a clear-cut source rule having, in his submission, created uncertainty and the Parliament thereby sought to bring about clarificatory amendments in relation to fee for technical services, royalty, and interest, these being the categories in respect of which disputes had arisen. 87. At this juncture, Mr. Salve interjected and contended that these amendments, in any event, operated only prospectively and were the Revenue's argument to be accepted in its entirety, the consequence would be that any other species of income or receipt would equally be taxable in India on the basis of source alone, even where such income fell outside the specifically enumerated categories of interest, royalty, and fees for technical services as enumerated under section 9 of the act of 1961. 88. Mr. Sinha submitted that his submission was, more precisely, that the specific categories of income addressed i....
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....the payer was located in India, and that India's tax base had been eroded. The Revenue is seeking to tax the receipt on this footing, as a second and independent ground. The present case, however, was a case not merely of double, but of triple, non-taxation with no tax having been paid in India, the United States, and no tax in Israel. 92. Mr. Sinha, learned special counsel then submitted that the jurisdiction of the AAR is defined under Section 245R of the Act of 1961, which requires the AAR, upon receipt of an application, to examine whether the application discloses any element of tax avoidance before proceeding further. The AAR, in the present case, had examined this question in considerable detail, and the entirety of its findings on the question of collusion fell within the scope of the proviso to Section 245R(2). He submitted that in examining the application, the AAR is required first to consider the question framed, namely, whether the income was taxable under Section 9, as business profits, under Article 7 of the India-Israel DTAA, and so forth and to determine, as a threshold matter, whether it possesses jurisdiction at all. The AAR, in the present case, had concluded....
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....y, after examining the application and the material called for, either allow or reject the same, provided that the Authority shall not allow an application where the question raised therein is already pending before another authority or appellate tribunal, relates to the determination of fair market value, or relates to a transaction or issue designed prima-facie for the avoidance of income tax save in the case of a resident applicant, as specified. He submitted that the AAR, having examined the matter in detail, had concluded that its jurisdiction stood ousted on this third ground, and had declined to determine taxability, relegating the petitioners to proceedings before the Assessing Officer, a course of action, he submitted, to which no legal objection could properly be taken. 96. Mr. Sinha read paragraph 81 of the AAR's order, recording the Revenue's submission that the payment received from Ranbaxy was assessable in the hands of Teva USA, and not the applicant; that the assignment by Teva USA to Teva Israel in March 2012 was a mere afterthought, constituting an assignment of income rather than an assignment of contract; and that the source of the income had not, in truth, b....
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....he question of royalty had been specifically raised before the AAR. 100. The Court observed that the Revenue ought to have specifically inquired from the company as to the nature of the royalty claimed in its SEC filings. The Court also posed a question as to whether a US entity, not otherwise subject to Indian tax law, could be compelled to answer such question? Mr. Sinha responded that, since the company had submitted itself to the jurisdiction of the AAR, the Revenue was entitled to put such questions to it. 101. The Court at this juncture observed that the basic and simple question for consideration was whether the impugned transaction gave rise to any income in India at all, to which Mr. Sinha responded by submitting that the speaking order passed by the Assessing Officer specifically addressed this issue. He stated that the Assessing Officer had invoked Section 9 of the Act of 1961 while proceeding against Teva USA. He submitted further that the petitioners could not claim the benefit of the India-US DTAA, because under Article 24 of the India-US DTAA, where a company seeks to claims residency status under the treaty and the income in question is not derived from active....
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....g that a non-resident individual from Siam employed by the Government of Siam, had been stationed in British India to monitor timber extracted from Siamese forests and floated into Burmese territory. His salary was paid by the Siamese government in Bangkok. Since the salary income of a foreign government employee is not amenable to Indian tax, the tax authorities had instead sought to tax the receipt under the head "income from other sources," contending that the income was earned in India by reason of his having been stationed and having exercised his employment there. The Rangoon High Court held that the income was not taxable in India, even though the underlying activity giving rise to it had taken place in India. The Court held that the applicable default rule was the place where the income was due and was in fact paid, such place being Bangkok, and not Moulmein. 105. Mr. Sinha read the relevant portion of the judgment, holding that the definitions under consideration did not support the view that income "accrues or arises" in a country merely by reason of being "earned" in that country rather, income accrues and arises in the country where there exists a right to demand pay....
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.... the AAR was entitled to sit over the commercial expediency of business decisions as such, but that this was distinct from the recognised power to examine whether a transaction was designed solely for tax avoidance, in which event it was not entitled to be given effect, for tax purposes. 109. Mr. Sinha drew the Court's attention to the recent decision of Hon'ble the Supreme Court in Authority for Advance Rulings (Income Tax) & Ors. v. Tiger Global International II Holdings, (2026) 182 taxmann.com 375 (SC), addressing the jurisdiction of the AAR for the proposition that tax authorities, including the AAR, are entitled to examine the underlying intent of a transaction. He read the relevant extract from the judgment, where Hon'ble the Supreme Court held that the commercial motive underlying a transaction often reveals its true character and that a taxpayer cannot simultaneously claim exemption from Indian tax, while contending that the same transaction is also exempt under the law of the country of residence with such a position running contrary to the spirit of the relevant tax treaty. He argued that it may be permissible for an assessee to arrange its affairs so as to avoid the i....
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....ied, and could have continued to manufacture and sell the medicine itself while paying Teva only 15% under the terms of the original arrangement, yet Ranbaxy entered into a fresh agreement, agreeing to pay 50% and to undertake the manufacturing itself, which was commercially illogical. 114. Mr. Sinha also relied upon the test of human probabilities laid down by Hon'ble the Supreme Court in the judgment rendered in the case of Sumati Dayal v. CIT, reported in [1995] 214 ITR 801 (SC) and argued that a tax authority is entitled to examine whether a transaction is so improbable on its face that it may properly be disregarded. 115. He submitted that, under Explanation 2 to Section 147 of the Act of 1961, a deeming fiction operates in favour of the Revenue, once it is shown that the income in question was assessable in the hands of Teva USA. He argued that maybe on ultimate analysis it may not be found taxable, but it is sufficient for the purposes of issuing notice. Rejoinder Arguments 116. In rejoinder, Mr. Salve turned to his challenge to the reopening of assessment read paragraph 87 of the impugned order dated 25.10.2019, recording the AAR's conclusion that the source of ....
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....nacted in consequence of Hon'ble the Supreme Court's decision in Ishikawajima (supra), where the Court had held that, where part of a contract was performed outside India, that part could not be taxed in India. He argued that according to Hon'ble Supreme Court, where the relevant service is not performed in India, and no business connection exists in India, being tests under Section 9, not being applicable, Section 5 cannot independently apply, more particularly when the underlying contract is itself situated outside India. 119. Mr. Salve then navigated the Court through the reason for issuance of notice under Section 148 of the Act of 1961 and argued that the finding recorded in paragraph 9.1, that the agreements relied upon by Teva Israel before the AAR showed that the actual recipient and titleholder was Teva USA, whereas Teva Israel was merely an agent was a non-issue and had no bearing in the present matter. 120. He read the reasons recorded, which essentially proceed on a constructive receipt having arisen to Teva USA and the allegation that the transaction had been deliberately structured to avoid payment of tax both in the United States and in India ; and the Assessin....
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....pure contractual interpretation, unsupported by any independent evidence, that the entirety of the payment related to the single no-challenge clause. He argued that the AAR reached this conclusion solely by interpreting the contract in light of the OAG's opinion and also that all three limbs of the AAR's reasoning had no ground to rest. He added that AAR's finding that the applicant was the "wrong party" was equally flawed. He argued that the central question, namely, whether the income was taxable under Section 9(1), has not at all been answered by the AAR. 125. Mr. Salve submitted that the original agreement between Teva USA and Ranbaxy was the source of the parties' respective contractual rights and Ranbaxy, exercising its own commercial wisdom, had entered into the settlement and the second agreement. He argued that commercial wisdom of a party was not for the Department to evaluate and that the recipient of the payment had not avoided tax through any device. The income could not, on a proper application of law, be taxed in India at all and the question of the place where such income might be taxable whether in the United States or in Israel was not in the domain of the Indi....
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.... he submitted, could not be pressed into service for the broader proposition that source-based taxation operates independent of, and without the aid of, such specific statutory provisions. The default rule under the Act of 1961 is one of residence. A resident is taxed on global income and the extended rule being one of accrual, both being addressed within Section 5. 130. Mr. Salve submitted that unless the Revenue were able to point to some specific provision of Section 9 under which an inquiry into the matter could properly be undertaken, there was simply nothing further to investigate. He submitted that, whatever be the true nature of the underlying transaction, a conclusion premised solely upon the fact that India's tax base was being eroded, or that some Indian connection existed and India should accordingly receive some share of the tax on money leaving the country, was erroneous in law. 131. By way of a final submission, Mr. Jolly contended that the writ petition challenging the Section 148 notice for AY 2014-15 was, in any event, barred by limitation under the revised scheme contained in Sections 148A(b) and (d) of the Act of 1961, as introduced following the decision ....
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.... 137. Other company known as Ranbaxy India is an erstwhile Indian pharmaceutical company, engaged in production of generic medicines which had its wholly owned subsidiary in the USA, known as Ranbaxy Pharmaceutical Inc., Florida, USA 138. Lipitor is the largest selling pharmaceutical drug meant for lowering of cholesterol. Both Teva and Ranbaxy claimed to have developed their generic versions of drug Lipitor (generic name 'Atorvastatin'). On 19.08.2002, Ranbaxy India and Ranbaxy USA filed an Abbreviated New Drug Application No.76477 in relation to Atorvastatin. A few months later (on 21.02.2003), Pfizer filed an infringement suit against Ranbaxy USA alleging that the Atorvastatin violates its patent right qua the Lipitor, which had been launched by Pfizer in the year 1997. The said suit came to be settled on 17.06.2008, as Ranbaxy USA entered into a settlement agreement with Pfizer and Ranbaxy was allowed to market its product Atorvastatin in the USA market after 30.11.2011. 139. It is noteworthy that Teva USA filed its ANDA No.78773 with respect to the same generic drug -Atorvastatin. In June 2007, Pfizer filed an infringement suit against Teva USA as well, which too came....
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...., it was agreed that neither company would challenge each other's ANDA filed with the US FDA from the date of signing of the Original Agreement till 2 years post the expiry of the exclusivity period. This commitment included, inter alia, an agreement not to challenge (No Challenge Provision) each other's sole first-to-file exclusivity (SFFE) for the ANDAs that were filed as of the effective date of the Original Agreement. 143. The Original Agreement mandated a payment of one-time commitment of USD 15 million by Teva USA to Ranbaxy India which was done on 5.7.2011. On 18.11.2011, Teva USA filed Pre-Launch Activities Importation Requests (PLAIR) with the US FDA. On 21.11.2011, it received an email from the US FDA allowing the import of Atorvastatin by Teva USA from Teva Israel. On 23.11.2011, Teva USA served a Ready Date Notice on Ranbaxy USA claiming that the acknowledgement of PLAIR received from FDA amounted to FDA's confirmation that Teva USA was eligible for final approval. Further, Teva USA called upon Ranbaxy India to issue the relinquishment notice in terms of the Original Agreement and selectively waive or relinquish its rights under the ANDA in favour of Teva USA. 144....
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....sions of the Act of 1961 declaring 'Nil' income and claimed refund of the aforesaid amount of tax deducted at source by Ranbaxy India. 148. As a relevant fact, it may be noted that inspite of getting final approval on 29.05.2012 by the FDA in relation to its ANDA, Teva USA did not launch and sell Atorvastatin in the USA market. The Office of Attorney General of the State of New York (hereinafter referred to as 'OAG') in proceedings dated 18.02.2014, observed that Ranbaxy and Teva USA were guilty of entering into an Anti-Competition agreement. Ranbaxy and Teva USA, however, decided to settle the issue and paid a fine of USD 150,000 each, albeit without admitting their guilt. 149. An application no. 1476/2013 came to be filed by Teva Israel before the Authority for Advance Rulings, New Delhi (hereinafter referred to as 'AAR') under Section 245Q of the Act of 1961, seeking a ruling on the taxability of the payment received by Teva Israel from Ranbaxy India. Teva Israel contended that this payment was its business income and not taxable in India in absence of a Permanent Establishment (hereinafter referred to as 'PE'). Teva Israel also contended that the payment did not fall unde....
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.... on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or (c) accrues or arises to him outside India during such year : Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1- Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2-For the removal of doubts, it is hereby declared ....
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....clude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident ; or (b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident ; or (c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control as, that non-resident: Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business: Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the princ....
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....siness or profession carried on by such person in India ; (vi) income by way of royalty payable by- (a) the Government ; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : Provided that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, or trade mark or similar property, if such....
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.... mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; [(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;] (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to [(iv), (iva) and] (v). [Explanation 3.-For the purposes of this clause, "computer software" means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customize....
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....ses of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient16 or consideration which would be income of the recipient chargeable under the head "Salaries".] (2) Notwithstanding anything contained in sub-section (1), any pension payable outside India to a person residing permanently outside India shall not be deemed to accrue or arise in India, if the pension is payable to a person referred to in article 314 of the Constitution or to a person who, having been appointed before the 15th day of August, 1947, to be a Judge of the Federal Court or of a High Court within the meaning of the Government of India Act, 1935, continues to serve on or after the commencement of the Constitution as a Judge in India. [Explanation.-For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or aris....
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...., is an impermissible avoidance arrangement as referred to in Chapter X-A or not: [Provided that where an advance ruling has been pronounced, before the date on which the Finance Act, 2003 receives the assent of the President, by the Authority in respect of an application by a resident applicant referred to in sub-clause (ii) of this clause as it stood immediately before such date, such ruling shall be binding on the persons specified in section 245S;] (b) "applicant" means any person who- (i) is a non-resident referred to in sub-clause (i) of clause (a); or (ii) is a resident referred to in sub-clause (ii) of clause (a); or (iii) is a resident falling within any such class or category of persons as the Central Government may, by notification in the Official Gazette, specify in this behalf; [[and]] (iiia) [***] The following sub-clause (iiia) shall be inserted after sub-clause (iii) of clause (b) of section 245N by the Finance Act, 2013, w.e.f. 1-4-2015: (iiia) is referred to in sub-clause (iv) of clause (a); and (iv) makes an application under sub-section (1) of section 245Q;] (c) "applicatio....
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....l be given in the order. (3) A copy of every order made under sub-section (2) shall be sent to the applicant and to the Commissioner. (4) Where an application is allowed under sub-section (2), the Authority shall, after examining such further material as may be placed before it by the applicant or obtained by the Authority, pronounce its advance ruling on the question specified in the application. (5) On a request received from the applicant, the Authority shall, before pronouncing its advance ruling, provide an opportunity to the applicant of being heard, either in person or through a duly authorised representative. Explanation.-For the purposes of this sub-section, "authorised representative" shall have the meaning assigned to it in sub-section (2) of section 288, as if the applicant were an assessee. (6) The Authority shall pronounce its advance ruling in writing within six months of the receipt of application. (7) A copy of the advance ruling pronounced by the Authority, duly signed by the Members and certified in the prescribed manner51 shall be sent to the applicant and to the 51aCommissioner, as soon as may be, after such....
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..... 1851 crore was paid by Ranbaxy from India to Teva Israel directly and said amount did not even route through USA. It is not in dispute that Ranbaxy USA and Teva USA had entered into the agreement being the subsidiary companies of Ranbaxy India and Teva Israel respectively, and payment in lieu of the agreement was made by Ranbaxy India to Teva Israel, in pursuance of the assignment agreement dated 22.03.2013 made by Teva USA. 156. The bone of contention is that as per the respondent, the assignment of income by Teva USA to Teva Israel without there being any corresponding assignment of obligation was illegal and was intended only to avoid tax under US and Israel income tax laws. Such stance to our mind, is firstly misconceived, as the assessee had given a plausible explanation that Teva US being a subsidiary company was only a marketing company and manufacturing activities were being carried out by Teva Israel, hence, the amount of Rs. 1,851 crore was assigned to Teva Israel-the parent company. That apart, if for whatever motive, the assignment was made by Teva USA to Teva Israel to enjoy tax holiday or tax benefit in Israel, it should not and cannot trouble Indian tax authorit....
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....ncome belonged to the assessee, he could not initiate proceedings under Section 148 of the Act of 1961. The exercise or attempt being made by the Assessing Officer is not only without jurisdiction but also extra territorial and the same is impermissible in law. 160. In light of the stand of the respondent and what has been argued by Mr. Sinha, learned counsel for the respondents, the question which needs our consideration is, the applicability and/or interplay of Sections 5 and 9 of the Act of 1961. The moot question being- "whether the situs of the payer in India without anything further, is sufficient to constitute an income of a non-resident as income which "accrues or arises" in India within the meaning of Section 5(2)(b) of the Act of 1961?" 161. True it is, that Section 5(2)(b), has an independent field of operation in the sense that it brings within the fold of total income of a non-resident, the income which accrues or arises in India as well as the income which is deemed under the provisions of the Act of 1961 to have accrued or arisen in India, whereas Section 9 identifies specified circumstances in which income is statutorily deemed to accrue or arise in India. The....
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....e reliance placed upon the decision rendered in the case of GVK Industries Ltd. v. ITO (supra) by the Revenue is misplaced, as the said judgment though recognises source-based taxation as a legitimate basis for the exercise of taxing jurisdiction and affirms Parliament's competence to enact provisions founded upon an adequate territorial nexus with India, but the observations therein arose in the context of the specific statutory regime governing fee for technical services under Section 9(1)(vii). The decision cannot, in our opinion, be read as laying down the much wider proposition that, independent of and in absence of specific statutory provisions and irrespective of the juridical or commercial source of a receipt, every payment by an Indian resident to a non-resident would as a necessary corollary result in arising or accrual of income in India as per Section 5(2)(b) of the Act of 1961. 165. The decision rendered in Phra Phraison Salarak (supra) too does not establish such proposition. The Court therein, in substance, applied a source-of-income test by locating accrual by reference to where the right to receive the income crystallised and did not expound a free-standing ....
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.... for breach of a trading contract could be treated as profit "derived from" an industrial undertaking so as to qualify for deduction under Sections 80HH and 80-I of the Act of 1961. The Court held that the said provisions were incentive-specific and warranted a "narrow" rather than a "flexible or wider" construction of the phrase "derived from." The matters in hand do not involve any claim for the special deduction under Sections 80HH/80-I that was under consideration in Alpine Solvex (supra). The narrow interpretation adopted in that case was expressly confined to the statutory scheme of those incentive provisions and cannot be extended, without more, to determine the head of income under Section 14 for receipts of an altogether different character arising in an altogether different statutory context. It offers no support for the Respondent's contention that the receipt in question must be taxed under Section 56(1) of the Act of 1961 as 'income from other sources.' 170. Reliance was also placed by learned special counsel for the Revenue on the decision of the Hon'ble the Supreme Court in the case of Authority for Advance Rulings (Income Tax) v. Tiger Global Internationa....
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.... all the aforesaid reasons, we are of the view that the impugned notices dated 29.03.2016 issued under Section 148 of the Act of 1961 for the Assessment Years 2012-13 and 2013-14, and all consequential proceedings initiated thereunder, are without jurisdiction and are liable to be quashed. 175. Accordingly, the writ petitions are allowed. The impugned notices dated 29.03.2016 issued under Section 148 of the Income Tax Act, 1961 for Assessment Years 2012-13 and 2013-14, along with all proceedings consequent thereto, are hereby quashed and set aside. W.P.(C) 12721/2019 176. The instant writ petition has been filed by Teva USA and Teva Israel conjointly calling in question, the order of the AAR dated 25.10.2019, whereby the AAR had declined to give a ruling as claimed by Teva Israel. Said application under Section 245Q(1) of the Act of 1961 was filed in relation to the nature of income and taxability of the amount, it had received from Ranbaxy India, and following questions were proposed: (i). Whether the Applicant is justified in its contention that amount due/received from Ranbaxy Laboratories Limited ("Ranbaxy India") is in the nature of business profits and is no....
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.... applicants as well. 181. Hon'ble the Supreme Court, in Columbia Sportswear Company v. Director of Income Tax, Bangalore, reported in (2012) 11 SCC 224, while examining the nature and scope of the advance ruling mechanism under Chapter XIX-B, has emphasised that the scheme was devised as a alternative, expeditious forum to provide certainty to an assessee regarding the tax consequences of a transaction, without driving him to conventional and time-consuming assessment and appellate proceedings. This object of avoiding multiplicity of litigation and providing certainty of tax treatment continues to inform the working of the Board for Advance Rulings, constituted under Section 245-OB with effect from 1-9-2021, which now discharges the functions earlier performed by the Authority for Advance Rulings. It is in the backdrop of this legislative object i.e. expeditious and binding determination of tax liability that the advance ruling mechanism was brought in. 182. Section 245R(4) specifies that the AAR is empowered to pronounce its ruling upon a question specified in the application filed before it under sub-section (1) of section 245Q, in relation to a transaction entered into....
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.... scope of the present application, the Authority was supposed to dispose of the application by holding that Teva Israel was not liable to pay any tax under the Act of 1961, as no income has arisen or accrued to it in India. What the Authority was not entitled to do was, to record sweeping findings of collusion and avoidance and the subsequent agreement being a sham; that will follow both Teva Israel and Teva USA in every subsequent proceeding as their shadow. 187. Further, the Authority, having admitted the application under Section 245R(2), ultimately invoked clause (iii) of the proviso to that very provision in its final order dated 25.10.2019 and held that the transaction was prima-facie designed for avoidance of income-tax. The statutory scheme, however, draws a distinction between the stage of admission under Section 245R(2) and the stage of pronouncement of the advance ruling under Section 245R(4). The proviso to sub-section (2) specifies the circumstances in which the Authority shall not allow an application to proceed. However, once an application has been allowed, sub-section (4) mandates examination of the material and pronouncement of an advance ruling on the question....
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....e reason for refusal was that Teva USA was not before it. 192. We are of the considered opinion that having declined to examine that question, the Authority was nevertheless required to identify the juridical basis upon which it concluded that the assignment was designed to avoid Indian income-tax. In absence of a nexus being established in the reasoning of the Authority, the conclusion that the transaction was designed prima-facie for avoidance of tax rests without any factual fulcrum and jurisdictional foundation. The observations recorded in paragraph 86 of the impugned ruling read thus: "86. From the factual position and turn of the events as discussed above we are of the considered opinion that the amended agreement lacked commercial sense and was in the nature of collusive arrangement towards No Challenge Provisions, which was held as unlawful by OAG, and was intended for making illegal payments towards anti-competitive arrangements between Teva USA and Ranbaxy. It is imperative that the bulk of the payments in the amended agreement was towards anti-competitive clause of not to sue any of the pending ANDA as on the date of original agreement for a period of two ye....
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....al payments towards anti competitive arrangements between Teva USA and Ranbaxy. As the no challenge provision has been held to be illegal by OAG, the arrangement towards such illegal payment and assignment of mere receipts under the revised agreement without assigning the corresponding obligations was also prima-facie for avoidance of tax. The applicant and its affiliate had entered into a sham and make belief arrangement with excellent paper work to camouflage the real and bogus nature of the transactions." 194. We have no hesitation in observing that the AAR exceeded the contours set under Chapter XIX-B of the Act of 1961. Section 245R(4) of the Act of 1961 merely empowers the AAR to examine the material placed before it and to determine such incidental issues which are necessary for pronouncing on the questions specified in the application. The said power and scope of inquiry could not be enlarged or stretched to a general jurisdiction to adjudicate upon or a roving inquiry into the commercial wisdom of parties, or to resolve an underlying contractual controversy governed by foreign law, or infer an undisclosed anti-competitive understanding merely from subsequent commercial ....
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....icacies of the transaction and business wisdom of the contracting parties and going on fishing and roving enquiry to the extent, which it had attempted to. 199. What was expected of the AAR was to examine the transaction before it and record a finding, but AAR's opinion rather apprehension that the transaction in question was conceived to avoid tax under United States' or Israel's laws is too farfetched. Whether or not Teva USA or Teva Israel had paid tax in their respective country or not, should not and cannot be a concern of the AAR and for that matter any tax authority in India. The treaty and mutual trust enjoins upon them to report such transaction (which as a matter of fact the Indian authority had done). But if the country which is entitled to tax, for whatever reason does not levy tax, for that reason alone, the authorities cannot choose to impose tax - it is usurpation of jurisdiction. 200. The AAR is neither equipped with US competition/patent laws nor is it in know of the US litigation and commercial environment. The AAR is not cognizant of the cost and consequences which a litigation may entail in US. Unlike India, in United States and other western countries, ma....
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....2, to which the petitioner filed its reply on 16.06.2022. The order under Section 148A(d) was passed on 28.07.2022 and the impugned notice under Section 148 came to be issued on 29.07.2022. 205. The Assessing Officer passed the impugned order while observing that the assessee (Teva USA), through its assignee, Teva Israel, was in receipt of an income of Rs. 2,50,91,180/- from Ranbaxy India, for which, the petitioner-assessee was obligated to file a return of income in India. It is noteworthy that the Assessing Officer had sought to invoke the extended ten-year limitation under Section 149(1)(b) of the Act of 1961 by treating the bank receipt of Teva Israel as an 'asset' representing the escaped income in the petitioner's hands. 206. As per the material placed before this Court, it is not in dispute that the payments from Ranbaxy India were received in the bank account of Teva Israel, parent company of the petitioner-assessee, and not in any bank account of the assessee (Teva USA). The petitioner submitted that it is Revenue's case that the income, as a matter of fact or in substance, belongs to the petitioner, is stretching the scope of the taxability of the receipt. A dep....
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....(Relaxation and Amendment of Certain Provisions) Act, 2020 (hereinafter referred to as 'TOLA'), the number of days intervening between the date of the original notice and 30.06.2021 was, zero. 211. In terms of the law laid down by Hon'ble the Supreme Court in Rajeev Bansal (2024) 469 ITR 46 (SC), the clock would start ticking after receipt of the assessee's response to the show cause notice; however, the Assessing Officer could utilise only the surviving period available under the Act read with TOLA. Since the notice was issued on last day (30.06.2021), no surviving period remained in the present case, the subsequent proceedings could not have been continued beyond such period. 212. In the present case, no surviving period was available to the Assessing Officer once the exclusion period (running from 02.06.2022 to 16.06.2022 - the date of the petitioner's reply), came to an end, any action taken thereafter was, in the eye of law, barred by limitation. The order under Section 148A(d) which was passed only on 28.07.2022, i.e., 42 days after receipt of the petitioner's reply, and the notice under Section 148 followed on 29.07.2022, a further day later and were, therefore, void a....
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....sment has withstood the judicial scrutiny and therefore, there is no cavil, so far as legality of power of passing protective assessment is concerned, but we can't be oblivious of the legal position that protective assessment is made only in cases where there is doubt about the recipient of the income or the assessee in whose hands such income should be assessed. And when the Assessing Officer is of the view that the income should be assessed in the hands of one assessee then, he passes a substantive assessment order in the name of such assessee but alternatively frames order in name of other assessee so that such income does not escape assessment by expiry of the period of limitation. 217. In the instant case, the respondents have taken a specific plea that because of the transaction in question, income has accrued in the hands of Teva USA and therefore, if they have to succeed, they have to succeed in the case of Teva USA. Their case or plea in the case of Teva USA will either succeed or fail. Because it is the very nature of transaction - as to whether the same amounts to income liable to tax under the Act of 1961 or not is the basic question. Though there is a concept of pro....