The Delhi High Court has held that the mere remittance of money by an Indian company to a non-resident cannot, by itself, result in income accruing or arising in India and quashed reassessment proceedings and directed the Income Tax Department to refund approximately ₹783 crore deducted at source from payments along with applicable interest.
The Bench of Justice Dinesh Mehta and Justice Vinod Kumar observed that the transaction under consideration had no real or substantive nexus with India. It arose from contractual arrangements and a commercial dispute concerning the marketing of a generic pharmaceutical product in the United States.
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The Court further declared that while the Income Tax Department may frame a protective assessment where there is uncertainty over the person in whose hands income should be taxed, there is no corresponding concept of “protective recovery” under income tax law.
“There is a concept of protective assessment, but there is no concept of protective recovery,” the Bench observed, while describing the withholding of Teva Israel’s refund for several years as arbitrary and virtually confiscatory.
The batch of five writ petitions arose from arrangements between entities concerning the commercial exploitation of Atorvastatin, the generic version of Pfizer’s cholesterol-lowering drug Lipitor, in the United States.
Under the US regulatory framework, the first generic manufacturer successfully filing an Abbreviated New Drug Application, or ANDA, may become entitled to a 180-day exclusivity period. During that period, other generic manufacturers are generally prevented from entering the market.
Ranbaxy had obtained the position of first ANDA filer for Atorvastatin. However, regulatory issues created uncertainty over whether it would be able to launch the product during the exclusivity period.
Consequently, Ranbaxy India, Ranbaxy Pharmaceuticals Inc. in the United States, and Teva USA entered into an agreement dated December 7, 2010. Under the arrangement, Teva USA could step in and market the drug if Ranbaxy failed to obtain the necessary approval.
Teva USA subsequently issued a “Ready Date Notice” claiming that it was prepared to launch the product. Ranbaxy disputed the validity of the notice, following which Teva USA initiated proceedings in a US court. The parties eventually settled the dispute through an amended agreement effective from November 30, 2011.
Ranbaxy ultimately obtained approval and commenced the commercial sale of Atorvastatin in the US market during the 180-day exclusivity period. It reportedly earned profits of approximately USD 700 million.
Under the amended agreement, 50% of the profits generated during the exclusivity period—approximately ₹1,851.07 crore—was paid to Teva Israel. Ranbaxy India deducted tax at source at a rate of about 42%, resulting in TDS of nearly ₹783.83 crore over Assessment Years 2012-13, 2013-14 and 2014-15.
Teva Israel maintained that the amount constituted business income that was not taxable in India because it had no business connection or permanent establishment in the country. It also contended that the payment did not qualify as royalty or fees for technical services under either the Income Tax Act or the India-Israel Double Taxation Avoidance Agreement.
The Revenue, however, claimed that the income actually belonged to Teva USA and that the assignment of the payment to Teva Israel was part of an arrangement designed to avoid Indian tax.
On this basis, reassessment notices were issued to Teva USA for Assessment Years 2012-13, 2013-14 and 2014-15. A protective assessment was also made in the hands of Teva Israel.
The High Court found that no transaction between Ranbaxy and Teva USA had taken place in India. The agreements concerned marketing and selling rights in the United States, the underlying litigation was instituted there, and the commercial sale of the pharmaceutical product also occurred in the US market.
The Court said the Revenue had failed to establish any real or substantive connection between the receipt and the territory of India.
It rejected the proposition that an income becomes taxable in India merely because it is paid by an Indian resident to a non-resident.
“Mere payment by an Indian resident to a non-resident ipso facto does not constitute an income accruing or arising in India,” the Bench held.
The transaction did not fall within the relevant provisions of Section 5 or any of the specific deeming provisions contained in Section 9 of the Income Tax Act. In the absence of such a statutory provision, the jurisdictional foundation for initiating reassessment proceedings collapsed, the Court said.
The Bench stressed that the right to tax must arise from the statute. It cannot be asserted merely because income has not been taxed in another jurisdiction.
“The right to tax is not a right of exclusion but a right of exaction—a right conferred by statute,” the Court observed.
If the authorities in the United States or Israel chose not to impose tax or exercise their taxing rights, that circumstance could not empower Indian tax authorities to tax an amount that otherwise lacked a sufficient nexus with India, it added.
The Court also set aside an October 25, 2019 ruling of the Authority for Advance Rulings, which had declined to decide the questions raised by Teva Israel regarding the taxability of the payment.
Instead of determining whether the amount received by Teva Israel was taxable in India, the AAR held that the income belonged to Teva USA. It further characterised the arrangement as collusive, a sham, and prima facie designed to avoid tax.
The High Court held that the AAR had exceeded its jurisdiction by deciding an issue that was neither referred to it nor properly before it.
Teva USA was not the applicant before the AAR. Therefore, the Authority could not determine Teva USA’s entitlement to the income or make adverse findings against it without giving it a proper opportunity to participate in the proceedings.
The Court said an advance ruling is applicant-specific and transaction-specific. The AAR has no inherent or appellate jurisdiction beyond the questions placed before it.
The finding that the income accrued to Teva USA was consequently without jurisdiction and amounted to a nullity, the Bench ruled.
It also criticised the AAR for undertaking a roving inquiry into the commercial wisdom of the contracting parties and the legality of their conduct under US competition and patent laws.
The AAR was not justified in inferring an undisclosed anti-competitive understanding merely from the parties’ subsequent commercial conduct, the Court said. Its conclusion that there “might have been a tacit understanding” between the parties was speculative and could not support definitive findings of collusion, sham transactions and tax avoidance.
The Court remarked that the AAR had ventured into a “no-go zone” by examining the commercial prudence of the parties while declining to decide the central question of Indian taxability.
Accordingly, the Court set aside the AAR’s order and held that the payment received by Teva Israel from Ranbaxy did not attract tax under the Income Tax Act.
The reassessment notices issued to Teva USA for Assessment Years 2012-13 and 2013-14 were quashed as being without jurisdiction.
The Court held that the payments did not constitute income accruing or arising in India and were not covered by any deeming provision under Section 9. Therefore, the Assessing Officer lacked the jurisdictional foundation required to reopen the assessments.
The Court also rejected the Revenue’s reliance on the opinion of the US Attorney General in antitrust proceedings. It held that an opinion expressed during such proceedings, particularly when it had not resulted in an admission of guilt, could not be treated as a judicial finding of illegality for initiating reassessment in India.
The reassessment proceedings for Assessment Year 2014-15 were quashed on the additional ground that they were barred by limitation.
The Revenue sought to invoke the extended 10-year limitation period under Section 149(1)(b) by treating the money deposited in Teva Israel’s bank account as an “asset” representing escaped income in the hands of Teva USA.
The Court rejected this approach, noting that the payments were received in Teva Israel’s bank account and not in an account belonging to Teva USA.
A deposit in the bank account of a third party could not be treated as the assessee’s asset merely on the assumption that the underlying income belonged to the assessee, the Court held.
The existence of a qualifying asset was a jurisdictional fact that had to be independently established before the extended limitation period could be invoked. The Revenue could not presume the answer to the very issue it proposed to examine during reassessment.
The Court also noted that the allegation concerning the existence of an asset was not disclosed in the show-cause notice issued under Section 148A(b). It appeared for the first time in the order passed under Section 148A(d), depriving Teva USA of a meaningful opportunity to respond.
Applying the principles governing limitation after the Supreme Court’s decisions in Union of India v. Ashish Agarwal and Rajeev Bansal, the Court concluded that the proceedings were initiated beyond the permissible period.
The Section 148A(d) order dated July 28, 2022, and the consequential reassessment notice dated July 29, 2022, were accordingly quashed as time-barred and without jurisdiction.
Teva Israel separately sought the refund of tax deducted by Ranbaxy India for the three assessment years.
The Department maintained that the substantive tax liability arose in the hands of Teva USA and had made only a protective assessment against Teva Israel.
The Court recognised the legality of protective assessments in cases where there is uncertainty over the person in whose hands a particular income is taxable. Such assessments protect the Revenue from the expiry of limitation while the identity of the proper assessee is determined.
However, the Bench made it clear that a protective assessment does not authorise the Department to make or continue a protective recovery.
Since the Department itself claimed that the income belonged to Teva USA and not Teva Israel, it could not indefinitely retain the tax deducted from the payments made to Teva Israel.
The Court described the Department’s action in withholding the refund for more than a decade as “utterly arbitrary” and “confiscatory.”
Allowing Teva Israel’s petition, the High Court directed the Income Tax Department to refund approximately ₹783 crore deducted at source by Ranbaxy, along with applicable interest, within two months.
The refund will be credited to Teva Israel’s bank account after Teva USA furnishes a corporate guarantee or solvent security to the satisfaction of the Assessing Officer.
The guarantee must provide that if Teva USA is ultimately held liable to pay tax in India in relation to the transactions, it will discharge the demand, subject to its right to pursue the legal remedies available to it.
Teva Israel must also furnish a guarantee or surety undertaking to pay the dues if Teva USA is unable to honour its guarantee.
The Court ultimately allowed all five writ petitions, quashed the reassessment proceedings, set aside the AAR’s ruling, declared the payment received from Ranbaxy non-taxable in India and ordered the refund of the TDS with interest.
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