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2016 (9) TMI 861 - GUJARAT HIGH COURT

2016 (9) TMI 861 - GUJARAT HIGH COURT - TMI - Reopening of assessment - whether technology developed by Sun Pharma through use of its research and development facilities was routed to CARACO through Unimed and Sun BVI in British Virgin Islands? - Held that:- Both the notices for reopening cannot coexist. The reasons recorded in the case of Unimed and Sun Pharma pertain to the same transaction. The same income obviously cannot be taxed twice. Apart from this, the reasons recorded in the case of S .....

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evelopment which would ensure so much of value addition. In his opinion, therefore, Unimed had actually transferred technology to CARACO for a total sale consideration of 1.17 crores USD. On the other hand, in case of Sun Pharma, the Assessing Officer canvases that even Unimed did not have any such capability. It did not have full-fledged R & D facilities or sufficient man power for such research. It was primarily engaged in manufacturing of injections and eye drops. It was Sun Pharma who had de .....

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nimed must immediately fail. Even before us, counsel for the revenue showed preference for the reopening in the case of Sun Pharma on legal contentions. The sum total of this discussion, without any further consideration, notice for reopening in case of Unimed must fail. - Coming back to the notice for reopening in the case of Sun Pharma in the present case, as per the reasons recorded, previously Sun Pharma and Sun BVI had a Technology Transfer agreement. However, in the present case, techn .....

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nquiry, revenue also found material to suggest that Sun BVI had acquired technology from Unimed. Unimed also did not have elaborate R & D facility or necessary work force for such purpose. Such R & D facility was only available with the assessee and its research centre. The Assessing Officer therefore formed a belief that Sun BVI is shell company used only as a device to deviate the taxable profits of Sun Pharma as Sun BVI had also not developed any technology on its own. It was found that Sun B .....

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elaborate reasons have been recorded by the Assessing Officer which demonstrate how prima facie it can be shown that technology developed by Sun Pharma through use of its research and development facilities was routed to CARACO through Unimed and Sun BVI in British Virgin Islands which ensured that the entire amount escaped assessment in the hands of Sun Pharma. At the stage of considering notice for reopening, one has to see only prima facie whether on the basis of tangible material on record, .....

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e closely connected. They have been heard together and would be disposed off by this common judgment. 2. Brief facts are as under: 2.1 Special Civil Application No.18698 of 2011 is filed by one Unimed Investment Ltd., a company registered under the Companies Act (hereinafter to be referred to as Unimed'). The petitioner has challenged the notice dated 31.3.2011 issued by the respondent-Assessment Officer for reopening the petitioner's assessment for the assessment year 2003-04. For the s .....

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assessee. The Assessing Officer thereafter issued the impugned notice which, as can be seen was done, after a period of four years from end of the relevant assessment year. In order to issue the notice, the Assessing Officer recorded the following reasons: M/s. Unimed Technologies (PAN AACU2965P) is an associate concern of M/s. Sun Pharmaceutical Industries Ltd., a well known pharmaceutical company of India. The assessee has filed its return of income for A.Y.2004-05 on 30/10/2004 declaring tota .....

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uring the year under consideration, the assessee company has received US $4,00,000/- from M/s. Sun BVI, in lieu of transfer of technology. This technology was further transfer by M/s SUN BVI to M/s. CARACO, a sister concern of M/s. Sun Pharma India Ltd., for the consideration of US $1,17,19,362/-. M/s. SUN BVI is shown to be engaged in sale and distribution of Pharmaceutical products and investment activities. However, it is found that M/s. Sun BVI did not have any fixed assets during the financ .....

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h Virgin Island as it is a well known tax heaven country. An organization which does not have any plant and machinery research personnel, can not develop technology and than transfer such technology to M/s. CARACO and generate huge profits. These facts proves that the technology which is shown to have been sold for US $4,00,000 by the assessee company to M/s. Sun BVI, was in reality indirectly sold to M/s. CARACO for US $1,17,19,362/- in order to avoid payment of taxes on amount of US $1,13,13,3 .....

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see has claimed depreciation on goodwill as per company's Act. However, while claiming depreciation as per IT Act, the assessee has clubbed various fixed assets in plant and machinery as other assets. Therefore, it could not be verified due to non availability of details that whether the assessee has claimed depreciation on goodwill as per I.T. Act. In view of the above information in any possession, I have reason to believe that the assessee company has adopted dubious device and the income .....

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on No.17781 of 2011 has been filed by one Sun Pharmaceutical Industries Limited, a company registered under the Companies Act (hereinafter referred to as Sun Pharma'). In such petition, the petitioner has challenged the notice dated 30.3.2011 issued by the respondent-Assessing Officer to reopen the petitioner's assessment for the assessment year 2004-05. 2.5. For the said assessment year 2004-05, the petitioner had filed a return of income on 1.11.2004 which was revised on 31.3.2006. Suc .....

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gin Island, a tax heaven. The assessee has got several subsidiaries within India and also outside India. Caraco Pharmaceutical Laboratories Ltd (Caraco) a U.S.based subsidiary of the assessee had entered into a Technology Transfer Agreement with the assessee in 1997. In 2002, a new Technology Transfer Agreement was entered into between Caraco and Sun Pharma Global Inc.BVI (Sub BVI) with an intention to transfer profit from the assessee, to Sun BVI, assessee's subsidiary based in tax heaven&# .....

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ola, British Virgin Island popularly known as tax heaven as income is tax free. The very first thing that is noticeable in the aforementioned address is that the address is P.O.Box address. A subsidiary company of such a big concern like the assessee can not operate from a P.O.Box address. A research into the public domain has revealed that a large number of companies are registered at the same address. b) The assessee and its subsidiary in USA viz CARACO had entered into Technology Transfer Agr .....

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acts prove the lack of research facilities and resources at the disposal of Sun BVI. An organization which does not have any plant or machinery or research personnel, can not develop technology and then transfer such technology to CARACO and generate huge profits. c) Sun BVI has reflected significant income/turnover with a very low cost base. Auditor's reports of Such BVI for the different years suggest the same. On very low expenditure both direct and indirect, the Sun BVI has shown very hi .....

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ear from United Technologies Ltd. It was also found that Unimed Technologies Ltd., does not have a dedicated R&D facility. Further, it is found that Unimed Technologies Ltd., does not have a dedicated workforce of scientists that are required for R&D work. It has only a small lab and does mainly a job work for the assessee and produces injection and eye drops. These facts prove that Unimed Technologies Ltd., is not capable of transferring technology which can fetch such high premium subs .....

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9,262/- from Caraco on account of so called transfer of technology. It has been explained earlier that Sun BVI has not developed any technology on its own nor could it prove that technology have been purchased from any other concerns having capacity to develop such technology. Sun BVI and Caraco, both are subsidiaries of the assessee. The assessee company has capacity and produces such technology. From 1997 to 2002 the assessee has supplied such technology developed by its from its own R & D .....

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s the claim of expenditure). In view of the above information in my possession, I have reason to believe that the assessee has adopted dubious device and thereby concealed income to the extent of USD 1,17,19,362/- i.e. ₹ 53,57,62,353/-. I have, therefore, reason to believe that income to the extent of ₹ 53,57,62,353/- has escaped the assessment. Issue notice u/s 148 of the Act. 2.7 Upon being supplied such reasons, the petitioner raised the objections under communication dated 17.6.2 .....

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ith M/s Sun BVI an associate concern of Sun Pharma under which Unimed received a sum of Rs.USD 4 lacs for the transfer of technology. This technology was further transferred by Sun BVI to M/s CARACO, a sister concern of M/s Sun Phharma for consideration of 1.17 lac USD (rounded off). According to the Assessing Officer, Sun BVI did not have fix any assets during the financial year 2003-04 to 2006- 07 and had claimed very low operating expenses especially concerning salary. These facts would show .....

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USD 1,17,19,362 in order to avoid payment of taxes..... 4. In comparison, the reasons recorded by the Assessing Officer in case of Sun Pharma though concerning the same transfer of technology, gave a slightly different version. These reasons can be summarized as under: 4.1 CARACO is a US based subsidy of Sun Pharma. From financial statements filed by Sun Pharma with the return of the income for the assessment year 2004-05, it was found that Sun Pharma Global Inc of British Virgin Islands was al .....

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ave any fixed assets at its disposal. Its operating expenses especially salary were very low. These facts would show that Sun BVI did not have research facilities. Despite this, Sun BVI has reflected significant income and high profit margin which were not taxable in British Virgin Islands. 4.2. The statement under Section 131(1A) of the Act of Shri Sudhir Valia, a key person of group of companies and present director of Sun Pharma was recorded by the investigating wing of the Income Tax Departm .....

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is of such materials, Assessing Officer was of the belief that Sun BVI which is a subsidiary of the assessee based in British Virgin Islands is a shell company and is used as a device for diverting taxable profits of Sun Pharma to Sun BVI. During the year under consideration, Sun BVI had received 1.17 crores USD from CARACO on account of transfer of technology. Evidence would point to the fact that the technology was transferred by Sun Pharma to CARACO but routed through its subsidiary Sun BVI s .....

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nt assessment year, the original assessment was framed after scrutiny and there was no omission on the part of the assessee to disclose true and full material facts. Notice for reopening is therefore bad in law. (b) There is no material available with the Assessing Officer to come to the conclusion that the assessee received any consideration higher than 4 lacs USD for transfer of technology. Merely because, such technology was thereafter transferred by Unimed to CARACO at higher price would not .....

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s. (b) there is nothing on record to suggest that the technology was developed by Sun Pharma and was later-on transferred to Unimed. (c) There was full disclosure about the payment of 1.17 crores USD made by CARACO to Sun BVI along with the return since Sun BVI happened to be a subsidiary of the Sun Pharma. 6. On the other hand, learned counsel Shri Manish Bhatt for the department opposed the petitions and contended that the Assessing Officer has recorded elaborate reasons which are based on mat .....

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, at the outset, we may notice that both the notices for reopening cannot coexist. The reasons recorded in the case of Unimed and Sun Pharma pertain to the same transaction. The same income obviously cannot be taxed twice. Apart from this, the reasons recorded in the case of Sun Pharma substantially destroy the reasons recorded in the case of Unimed. We say so for the simple reason that as noted earlier in case of Unimed, the case of revenue was that Unimed had transferred technology to Sun BVI .....

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harma, the Assessing Officer canvases that even Unimed did not have any such capability. It did not have full-fledged R & D facilities or sufficient man power for such research. It was primarily engaged in manufacturing of injections and eye drops. It was Sun Pharma who had developed the technology which transferred it to Unimed who in turn had transferred it to Sun BVI who sold it to CARACO. Sun BVI being a subsidiary of Sun Pharma and being based in British Virgin Islands, Sun Pharma evade .....

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notice for reopening in case of Unimed must fail. 9. Coming back to the notice for reopening in the case of Sun Pharma, we may notice that in case of this very company in Special Civil Application No.2965 of 2013, the issue had arisen of reopening of assessment where allegedly according to the revenue, technology was transferred by Sun Pharma to CARACO taking exactly the same route as in the present case. In this context, the Assessing Officer had recorded elaborate reasons alleging that effecti .....

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espect may be noted. 11. As mentioned hereinabove, what amounts to primary facts, the disclosure of which truly and fully would discharge the obligation of the assessee would need to be determined on the basis of the facts and circumstances of each case. These facts are crucial and vital and other aspects arise from them. Any facts revealed by the petitioner masquerading the same as primary facts without in fact disclosing facts truly and fully as warranted for the purpose of assessment can cert .....

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the Assessing Officer if has a reason to believe that there is a failure on the part of the petitioner to disclose fully and truly the facts which led to underassessment of the income, and thereby when he has assumed the jurisdiction, such action of his will not entitle the petitioner to invoke the writ jurisdiction for quashing such a notice. It is prima facie apparent that the cost of acquisition of these technologies in the hands of Sun BVI is nominal, as compared to the value at which it ha .....

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in the hands of the petitioner as a result of arrangement made by the petitioner, 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 reassessment 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 mat .....

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erson in the group of companies and at that time director of Sun BVI and presently the director of Sun Pharma was recorded under Section 131(1A) of the Act in which he accepted that Sun BVI had no facility of R & D and manufacturing. During the inquiry, revenue also found material to suggest that Sun BVI had acquired technology from Unimed. Unimed also did not have elaborate R & D facility or necessary work force for such purpose. Such R & D facility was only available with the asses .....

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ord, the Assessing Officer concluded that technology in question transferred was actually done by the assessee to CARACO but was routed through other companies only to avoid payment of tax. 11. In our opinion, these reasons do not lack validity. As noted, elaborate reasons have been recorded by the Assessing Officer which demonstrate how prima facie it can be shown that technology developed by Sun Pharma through use of its research and development facilities was routed to CARACO through Unimed a .....

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t Commissioner of Income-Tax V/s Rajesh Jhaveri Stock Brokers P.Ltd., reported in [2007]291 ITR 500(SC), in this context had held and observed as under in paragraph 16. Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word reason in the phrase reason to believe would mean cause or justification. If the Assessing Officer has cause or justification to k .....

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