9911796707
TMI Blog2013 (7) TMI 1034X X X X Extracts X X X X X X X X Extracts X X X X ..... ical 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. 21,90,62,215/=, which was revised and the loss was reduced at Rs. 18,91,32,791/=. The Assessing Officer raised certain queries in respect of research and development expenses. These were replied to by the petitionercompany. The Annual Report 2004-05 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 filed by the petitioner-Company was duly processed and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the assessee to evade Tax in India and show profit in the case of a subsidiary company M/s. Sun Pharma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 xx xx In view of the above, I have gone through the return of income originally filed and revised by the assessee, the tax audit report, balance sheet and P&L account, details submitted during the course of assessment proceedings and query raised by the then Assessing Officer and finally assessment order passed in the case of Sun Pharmaceutical Industries Limited [SPIL] for A.Y 2005-06. On the basis of above, I found that at no point of time, the assessee informed about the said transactions made through Unimed and M.J Pharmaceuticals and it is also found that at no point of time the then Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of the assessment under question will get over on 31st March 2010, and the impugned notice is issued on 30th March 2012. 4.1 In affidavit-in-reply filed by the Revenue, it is urged that while disposing of the objections, the objections raised by the petitioner are duly dealt with. It is further urged that both the concerns ie., Unimed & M.J Pharmaceuticals Private Limited were sister concerns of the petitioner ie., SPIL at a given point of time and these concerns had not had proper and sufficient R&D facility to develop such products have had the Assessing Officer a reason to believe that those generic products were actually developed by the petitioner but shown to have been purchased by Sun Global BVI from Unimed and M.J Pharmaceuticals Private Limited. It is also alleged by the respondent that the assessee has intentionally indulged in the activities with a motive to reduce its taxable income by not disclosing the true nature of transactions in its books of account and its return of income. 5. Learned senior counsel Shri S.N Soparkar appearing with learned advocate Shri Bandish S. Soparkar forcefully submitted that not only in the queries raised during the scrutiny assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 41 ITR 191 (SC); [5] I.P Patel & Company v. Deputy Commissioner of Income-tax, reported in [2012] 346 ITR 207 (Guj). 5.1 In essence, learned senior counsel Shri Soparkar urged that without disturbing the assessment in case of both Unimed Technologies Limited and M.J Pharmaceuticals Limited, no reopening is permissible in case of the present petition particularly on expiry of period of four years, in absence of any failure on the part of the petitioner to disclose truly and fully all the material facts. 6. Per contra, learned senior advocate Shri Manish R. Bhatt urged fervently that it is only during the course of survey carried out on 8th November 2011 that the material came out indicative of the fact that in correct facts have not been provided by the petitioner and as a result, M/s. Unimed Technologies Limited and M.J Pharmaceuticals Limited have been put up as a front to shield the true income of the petitioner. Till the year 2002, transfer of technology to Caraco, USA was directly by the assessee. However, after such agreement came to an end, this modus is adopted of transferring the technology to SUN BVI through its wholly owned subsidiaries viz., Unimed Technologies Limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on giving thoughtful consideration to these submissions as also all the material placed before this Court, this petition is not being entertained for the reasons to be followed hereinafter. 8. Before adverting to the facts of the instant case, the law on the subject needs to be briefly recapitulated. 8.1 Section 147 of the Act permits the Assessing Officer to assessee or re-assess the income chargeable to tax, which has escaped assessment and which come to his notice, if he has a reason to so believe it, subsequently, in the course of proceedings under this section; subject to provision of Sections 138 to 153. First proviso to this section provides that no action shall be taken under this section after expiry of four years from the end of relevant assessment year, unless any income chargeable to tax has escaped assessment for the assessment year under consideration on account of failure on the part of the assessee to make a return under section 139 or in response to notice issued 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-sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R" and had stated in the Profit & Loss Account that the amount paid to "R" was share of the later in the partnership firm where no such share was payable to "R". The Tribunal was of the opinion that the assessee had produced all the relevant accounts and documents necessary for competing the assessment and the assessee was under no obligation to inform the I.T.O about the true nature of the transactions. 9.2 The Apex Court held that if the assessee has disclosed primary facts relevant to the assessment, he is under no obligation to instruct the Income-tax Officer about the inference which the Income-tax Officer may raise from those facts. The terms of the Explanation to section 34 (1) of the Income-tax Act, 1922 also do not impose a more onerous obligation. Mere production of the books of account or other evidences from which material facts could with due diligence have been discovered does not necessarily amount to disclosure within the meaning of section 34 (1), but where on 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment nor was he right in concluding that the assessee omitted or failed to disclose fully and truly any material facts relating to its assessment, and hence, section 147 (a) was not applicable and the impugned notice issued by the Incometax Officer under section 148 of the Act was without jurisdiction. The Court held, thus - "6. It is well settled as a result of several decisions of this Court that two distinct conditions must be satisfied before the ITO can assume jurisdiction to issue notice under section 147 (a). First, he must have reason to believe that the income of the assessee has escaped assessment and secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the ITO would be without jurisdiction. The important words under section 147(a) 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t facts and once all primary facts are before assessing authority, he requires no further assistance by way of disclosure and what factual inference to be drawn from such material is not for the assessee to tell the ITO. If there is reasonable ground of there being non-disclosure as regards any primary facts, which would have a material bearing on the question of under assessment, that would give jurisdiction to the Income-tax Officer to issue notice under section 34 of the Income Tax Act, 1922. The Apex Court held that, "there can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet the possible contention that when some account books or other evidence has been produced, there is no duty on the assessee to disclose further facts, which on due diligence, the Income-tax Officer might have discovered, the Legislature has put in the Explanation to Section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 34 of the Act of 1992, if were not satisfied, then the Court would be needed to exercise writ jurisdiction. 9.9 Apex Court in case of Income-tax Officer v. Ch. Atchaiah [Supra] held that if certain income was income of association of persons [AOP] in law, AOP alone had to be taxed and merely because members of AOP had been taxed individually in respect of said income, Assessing Officer was not precluded from taxing AOP with respect to that income. The Court further held that, "..Under the 1961 Act, the Assessing Officer has no option like the one he had under the 1992 Act. He can, and he must, tax the right person and the right person alone. By 'right person' is meant the person who is liable to be taxed, according to law, with respect to a particular income. The expression 'wrong person' is obviously used as the opposite of the expression 'right person'. Merely because a wrong person is taxed with respect to a particular 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proviso to section 147, therefore, it was perhaps open for the Assessing Officer to contend that there was no true and full disclosure on the part of the assessee in this respect. At any rate, by applying such explanation, it can be easily gathered that the assessee failed to disclose fully and truly all material facts. Counsel for the petitioner, however, vehemently contended that these were not primary facts. Only primary fact was that the assessee had earned interest income. We are, however, of the opinion that in the context of the close connection between the petitioner and Aditya Medisales, the fact that the assessee was eligible for deduction under section 80IA of the Act and the interest income received from the sister concern had relevance to the provisions of section 80IA(10) of the Act, primary facts were not on record." 10.2 Apex Court in case of Ess Ess Kay Engineering Company Private Limited v. Commissioner 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 opini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xamined but the claim for deduction of the licence fee payment was found not allowable. It further refers to the fact that in the course of the assessment proceedings for the assessment years 200304, 2004-05, 2005-06 and 2006-07 neither the assessee suo motu furnished information (regarding the licence fee payment) nor did it furnish reasons as to why the said claim is allowable. It is true that the genesis of the present proceedings was the scrutiny assessment made for the assessment year 2007-08 in the course of which the petitioner had furnished the licence fee agreement; it is equally true that the respondent has clearly stated in the reasons recorded that there was failure on the part of the petitioner to furnish full and true particulars. The reference to failure of the petitioner is obviously to the failure to file the licence fee agreement, if regard is had to the reasons read as a whole, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the notice of the Income-tax Officer particular items in the books of account or portions of documents which are relevant. Even if it be assumed that from the books produced, the Income-tax Officer, if he had been circumspect, could have found out the truth, the Income-tax Officer may not on that account be precluded from exercising the power to assess income which had escaped assessment." 18. As to what would be a primary fact would largely depend on the facts and circumstances of each case. In Associated Stone Industries (Kotah) Ltd. v. CIT (1997) 224 ITR 560 the Supreme Court was concerned with the correctness of the action under section 34(1)(a) of the Indian Income Tax Act, 1922 which authorized the assessing officer to reopen an assessment on the ground of failure on the part of the assessee to disclose material facts. The assessee therein was granted a lease by 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o-fold satisfaction. Firstly, that income has escaped assessment and secondly, that such escapement is on account of failure on the part of the assessee to disclose fully and truly all material facts. Neither sub-section (2) of Section 148 of the Act nor the proviso to section 147, require the Assessing Officer to expressly state in the reasons that income has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts. If, on the face of the reasons recorded, it is apparent that failure to disclose is made out, merely because a specific expression does not find place therein, it cannot be said that the Assessing Officer has not recorded satisfaction in this regard." It can be thus deduced that the High Court can exercise powers under section 226 by issuing the writ of certiorari or prohibition, if the authority 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of arm's length price and the matter was fixed on 7th November 2007. The Joint Commissioner of Income-tax [TPO], Ahmedabad passed an order in respect of such reference under section 92C (3) of the Act noting the fact that the petitioner has been engaged in manufacturing, trading and export of bulk drug formulations and during the year under question ie., A.Y 2005-06, it entered into international transactions with its associate enterprises to the tune of more than Rs. 400 Crores. These international transactions in terms of Section 92B between the petitioner and its associate enterprises given in Form 3CEB has also been recorded. The Transfer Pricing Officer noted that the assessee claimed commission paid to its associate enterprise as the expenses under section 37 (1) and therefore, the provision of Section 92 would be attracted and arm's length 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. 5,17,21,555/= to its associated enterprises and since arm's length price of these transactions is determined to be "NIL", a similar amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a new agreement was reached in November 2002 with Sun Pharma Global [Sun Global] a wholly owned subsidiary of the petitioner by which Sun Global agreed to transfer to the Caraco the technology formulation for 25 generic pharmaceutical products over a period of five years through November 2007 in exchange for 5,44,000 shares of a new convertible preferred stock for each generic drug transferred. There appears to be a contradiction on facts since it is mentioned that the 2002 agreement was made in November 2002 after expiration of the 1997 agreement where as it was mentioned immediately before the above that the 1997 agreement was continued till December 31st 2003 and even as on that date formula for only 13 products were transferred instead of 25 products. From the above analysis, it can be easily construed that the transfer of formula as per 2002 agreement between 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he petitioner. The petitioner maintained that it had merely done the job work at the instance of M.J Pharmaceuticals Limited and Unimed Technologies Limited. The profit ranging from 90 - 95% earned by Sun BVI were exempt from tax since Sun BVI is incorporated in British Islands, which is a tax heaven. These technologies are developed by the petitioner admittedly, however, the stand of the petitioner that they were developed on job work basis at the instance of Unimed Technologies Limited and M.J Pharmaceuticals Limited was in complete contrast to the material received at the time of survey where from none other than the Director & Executive Vice President of Sun Pharma Advanced Research Centre [SPARC] who was previously working as Incharge in Organic Team in his statement under section 131 admitted that these technologies in respect of 25 formulations were developed 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 has transferred it to Sun BVI at Caraco, USA. The profits earned by Sun BVI since would be exempt, the transfer of technologies through M.J Pharmaceuticals Limited and Unimed Technologies Limited by the petitioner, instead of directly transferring the same to Sun BVI is being questioned by the Revenue in wake of the material which is available with it, and therefore, if these are termed as dubious device to save the income, and if this, according to the Revenue, has resulted into escapement of tax 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 re-assessment proceedings under section 147 as also to jurisdictional powers exercised by the Assessing Officer which culm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount of R & D expenses which is available for distribution is only Rs. 169,32,02,417/=. The total amount of R&D expenses, which are required to be debitted in Silvassa II Unit is computed in the table below :- Sr.No. Unit Turnover [Rs. In Lakhs] Percentage Turnover R&D Expenses [To be allocated] 1 Vapi & Others 59651.63 51.38 2 Silvassa-I 5157.29 4.44 3 Silvassa-II 5913.35 5.09 8,61,84,003/= 4 Nagar 17008.78 14.65 6 Panoli 13745.33 11.84 8 Ankleshwar 5231.38 4.51 9 Dadra 3404.09 2.93 10 PDCL 5560.55 4.79 11 Phlox 1.04 0 12 CPP Units 435.67 0.37 TOTAL 116109.11 100 Thus, Rs. 8,61,84,003/= should be allocated to Silvassa-II Unit. However, already Rs. 4,34,25,000/= is allocated to Silvassa II Unit. Hence, the extra allocation in Silvassa II unit is Rs. 4,27,59,003/=." 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion during assessment year 2005-06 also. This will be done to Silvassa Unit in the ratio of turnover of Silvassa to turnover of all units manufacturing formulations. The Assessing Officer is also directed not to reallocate the weighted deduction u/s. 35(2AB) which is not permissible because it is the expenditure which can be considered and not the weighted deduction. Keeping in view of above facts and circumstances of the case as well as following the earlier decisions of the CIT [A], the eighth ground of appeal is partly allowed." 12.3 It has been much emphasized by the Revenue that since 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 alongwit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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