TMI Blog2013 (7) TMI 1146X X X X Extracts X X X X X X X X Extracts X X X X ..... mited { 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 ₹ 40,85,09,332/=, which was revised and the loss was reduced at ₹ 40,98,79,267/=. The Assessing Officer raised certain queries in respect of research and development expenses. These were replied to by the petitioner-company. The Annual Report 2005-06 indicated transfer of technology by Sun Pharmaceutical Industries, INC. to Caraco Pharmaceutical Laboratories Limited, USA. The Annual Report also reflected accounts of Sun Pharmaceutical Industries INC and Caraco Pharmaceutical Laboratories Limited, USA specifying transfer of technology. 3.1 Return of income filed by the petitioner-Company was duly processed and was tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bited in the books of account of Sun Pharmaceuticals Industries Limited the petitioner, thereby reducing its profit and correspondingly, inflating the profit of both SPS SPI to that extent. 3.7 It would be necessary to reproduce the gist of reasonings given for reopening, which reads thus - Reasons for reopening : A survey operation u/s. 133A was conducted in the case of Sun Pharmaceutical Industries Limited [hereinafter referred to as SPIL] by the Assistant Director of Income-tax [Inv.] Unit VII (1), Mumbai on 08.11.2011 at the six business premises belonging to the above assessee. Large number of incriminating documents were found and impounded during the course of survey operation and the same were forwarded to this office alongwith the survey report. On analysis of the impounded material and after going through the survey report, it is noticed that huge amount of income has escaped assessment. The reasons for the aforesaid conclusion / satisfaction are as under :- Diversion of profits on transfer of Technology to Caraco through Sun BVI This is in view of the device adopted by the assessee to evade Tax in India and show profit in the case of a subsidiar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 Risperidome Tablets SPIL Baroda Master Formula 8 Cetrizine Immediate Release Tablets SPIL Mumbai Executive Summary 9 Cetirizine Hydrochloride Chewable Tablets SPIL Mumbai Executive Summary 10 Repaglinide Tablets SPIL Mumbai Executive Summary 11 Glipizide Metformin Hydrochloride Tablets SPIL Mumbai Executive Summary 12 Lamotrigine Tablets SPIL Mumbai Executive Summary 13 Modafinil Tablets SPIL Baroda Master Formula Card 14 Glipizide Immediate Release Tablets SPIL Mumbai Executive Summary 15 Baclofen Tablets SPIL Mumbai Executive Summary 16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Research Development [R D] work for the entire Sun Pharma Group. This includes research and development of the products which are manufactured by the firm SPIl [Jammu Dadra units] and subsequently by SPS (Sikkim) as well. However, it can be seen from the annual accounts of both SPI and SPS that the amount of R D expenditure debited in their books of account is NIL. During the course of survey at SPIL, Tandalja Akota Road, Baroda, Gujarat, Dr. T. Rajamannar, Director Executive Vice President of SPARC Limited [previously working in SPIL as Incharge of Organic Chemistry Team at the time of development of these products] was asked to furnish a list of all the products developed at SPIL, Baroda along with the locations where they are being manufactured. This list showed that R D for the formulations which are being manufactured at SPI [Jammu Dadra units] and SPS, Sikkim unit is being done by SPIL, Baroda. xx xx Therefore, it can be seen that the products which are manufactured at SPI and SPS are being developed at the R D facilities of SPIL and the expenditure related to such R D is debited in the books of account of SPIL thereby reducing its profit. The profit o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Officer has the occasion to examine the possibility of taxation of the same in the hands of SPIL arising out of the above transactions. Similarly, the assessee has never disclosed the fact that Research and development work of all the group concerns were done at the facilities of SPIL and even expenses pertaining to those concerns were accordingly debited in the books of SPIL instead of debiting the same in all the concerns separately and proportionately. In fact, as discussed in detail, as above, the assessee has intentionally indulged into such activities with a motive to reduce its taxable income by not disclosing the true nature of transactions in its books of account and the return of income. In fact, it would not have been possible for the Assessing Officer to know about the mechanism adopted by the assessee to evade the tax liability but for the evidences gathered during the course of survey operation conducted by the Asstt. Director of Income Tax [Inv.] Unit VI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hased 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 assessment, all the details have been revealed by the petitioner assessee but in the Annual Report of the petitioner, which was part of this compilation clearly reflects all transactions; including the transfer of 25 technologies to Unimed Technologies Limited and M.J Pharmaceuticals Limited. These companies are incorporated from the year 1991 and 1996 respectively who have sold the technology to Sun BVI, which is a wholly owned subsidiary of the petitioner, which in turn transferred the technology to Caraco, USA, which is also a wholly owned subsidiary. He further urged that in case of Unimed Technologies Limited and M.J Pharmaceuticals Limited for the A.Y 2005-06, assessment has been acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 133A of the I.T Act by the Assistant Director of Income Tax [Inv.] Unit VII (1), Mumbai in case of SPIL 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 Limited M.J Pharmaceuticals Limited. Sun BVI since is situated at British Virgin Islands, which is a tax heaven for the Company, huge amount has escaped the assessment on account of true nature of transactions not having come on the record. He urged that large number of documents unearthed on 8th November 2011 have led the Assessing Officer to formulate a reasonable belief that income has escaped the assessment for the assessment year in question. 6.1 Learned counsel further urged that for the A.Y 2006-07, prior to the survey, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed challenging such action of reopening on the part of the respondent. Factual and legal aspects, except some of the dates and of course the figures in both the petitions are identical. We have decided such petition partly in favour of the petitioner and hence, rather than giving separate reasonings by reiterating what has been held and observed on law as well as on facts in the said Special Civil Application No. 2965 of 2013, this petition is also decided along the same line. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the ground that income had been under-assessed owing to the failure on the part of the assessee to disclose truly and fully all necessary facts for assessment. He observed that the assessee had misled the Income-tax Officer [ ITO for short] into believing that there was a genuine arrangement with 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 disco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not a permissible deduction. He issued a notice under section 148 of the Act seeking to reopen the assessment under section 147 (a) of the Act. In challenge to the notice under a writ petition, the Apex Court held that neither the Income-tax Officer had reason to believe that income of the assessee had escaped assessment 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 Income-tax 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the applicability of Section 147 (a) of the Act since was found satisfied in this case, the notice issued was held without jurisdiction. 9.6 In case of Calcutta Discount Company Limited v. Income-tax Officer [Supra], the Apex Court has held that it is the duty of assessee to disclose fully and truly all primary relevant 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 di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ometax Officer has reason to hold a reasonable belief. When the Constitution confers on the High Courts, the power to give relief, it becomes the duty of the Courts to give such relief in fit cases and the Courts would be failing to perform their duty if relief is refused without adequate reasons. The condition precedent for assumption of jurisdiction under 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, observed thus - 37. In the present case, as already noted, the only disclosure was that the assessee had earned interest income of ₹ 3,03,48,973/-. There was no further information available on record that such interest included overdue payment charges at the rate of 24% received from the sister concern, viz. Aditya Medisales. Even without the aid of explanation (1) to 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, prima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrectly and fully and there was failure on its part to disclose fully and truly all material facts necessary for his assessment as per the proviso to section 147 of the Act, by reason of which there was escapement of income chargeable to tax. The reasons also refer to the fact that in the course of the assessment proceedings for the year 2007-08 the licence agreement entered into in June, 2001 was examined 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 2003-04, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 63 ITR 638, the Supreme Court held as under: - . It is clearly implicit in the terms of sections 23 and 34 of the Income-tax Act that the assessee is under a duty to disclose fully and truly material facts necessary for the assessment of the year, and that the duty is not discharged merely by the production of the books of account or other evidence. It is the duty of the assessee to bring to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot furnished, there was in our opinion such failure on the part of the petitioner as would attract the provisions of section 147 of the Act; it is a case to which Explanation 1 is attracted. 10.4 This Court in I.P Patel Company [Supra] has held that, for the purpose of invoking section 147 of the Income-tax Act, 1961, beyond a period of four years, the Assessing Officer is required to record a two-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 exerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 92 {C} (A) of the Act to the Transfer Pricing Officer for verification of the Arm s length price in respect of international transactions, as detailed in the audit report in Form 3CEB vide communication dated 29th September 2008. 10.7 A notice under section 92CA (2) was issued to the petitioner on 16th October 2008 with a questionnaire directing the petitioner to furnish all necessary details and documents in respect 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 2006-07, it entered into international transactions with its associate enterprises to the tune of more than ₹ 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 unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder this agreement and became a beneficial owner of approximately 48% of the outstanding common stock of the Caraco. It is therefore evident that the transfer of the technology formula for 25 generic products as per the 1997 agreement was not completed within the stipulated period through August, 2002 and even till 31st December 2003. It was further claimed by the petitioner that with expiration of the 1997 agreement, 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 ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents were found impounded, which were analyzed and after going through the survey reports, the Assessing Officer formed a reason to believe that a huge amount of income has escaped the assessment. A stand taken by the assessee is to the effect that 25 technologies transferred by Sun BVI to Caraco, USA were acquired by Sun BVI from either Unimed Technologies Limited or M.J Pharmaceuticals Limited, which acquired the same from the 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tain a stand of its having done the job work for M/s. MJ Pharmaceuticals Limited and Unimed Technologies Limited. However, prima facie, the material that emerged from the record indicated completely contrary facts, and therefore, 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 under-assessment 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 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allocation of the R D expenses to the Units producing formulation products. Thus, for the detailed reasons given in the assessment order for A.Y 2003-04; 2004-05 and 2005-06 expenses are distributed in the ratio of turnovers of various units. Although the total R D Expenses are ₹ 222,84,31,778/= but as per para 5 above, overseas registration charges of ₹ 1,36,83,318/= and trade mark expenses of ₹ 80,57,41; marriage gifts of ₹ 70,013/=; repairs to buildings of ₹ 33,86,824/= and Municipal taxes of ₹ 3,60,989/= are disallowed. Hence the amount of R D expenses which is available for distribution is only ₹ 220,28,73,221/=. 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 78426.72 52.59 2 Silvassa-I 8726.08 5.85 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5-96, the CIT (A) vide order No. CAB/II- 41/98-99 dated 10.09.1998, had given the finding that the R D expenses are to be allocated to the units claiming deduction u/s. 80IA and the same has been accepted in principle by the assessee also, because in subsequent years, it had not appealed against the allocation of the R D expenses to the Units producing formulation products. Thus, for the detailed reason given in the assessment order for A.Y 2002-03; 2003-04 and 2004-05, the R D expenses are distributed in the ratio of turnover of various units. Although, the total R D Expenses are ₹ 1,70,79,54,685/= but as per the para 8 above, overseas registration charges of ₹ 66,66,836/= and trade mark expenses of ₹ 80,85,432/= are disallowed. Hence, the amount of R D Expenses, which is available for distribution is only ₹ 1,69,32,02,417/= ie., the total amount of R D expenses, which are required to be debited in Silvassa-II Unit. 10.2 I have carefully considered the contentions of the Appellant as well as gone through the records. The similar question had arisen during the assessment year 2002-03; 2003-04 and 2004-05. Further, there is no change in the facts and circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rged that on analyzing the impounded material and on going through the survey report, huge amount is believed to have escaped assessment. 12.5 We are of the opinion that the ground on which reopening is sought, is essentially in respect of allocation of R D expenses and the details furnished in the reasons recorded essentially are concerning allocating between SPI and SPS [Sikkim] and it is apparent from the record that SPS was not even in existence during the year under question. 12.6 When on R D expenses of the Company issue has been scrutinized extensively during the year under question, we are unhesitatingly of the opinion that this ground is nothing but an attempt to review its own decision and therefore, the same must fail on the jurisdictional ground alone. Not only the Assessing Officer has under scrutiny assessment dealt with the same in the previous years as well as in the year under question extensively, but, the same was also carried to CIT [A] which had finalized the said issue of allocation of R D expenses by re-allocating 12.5% of all R D expenditure as relating to formulations during the year under question, as detailed hereinabove while dealing with the same. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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