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2019 (10) TMI 1399 - AUTHORITY FOR ADVANCE RULINGS, NEW DELHIAdvance ruling Application - Income accrued in India - holding - subsidiary company relations - nature of income and taxability of the amount received - admissibility on the ground that several aspects of illegality of the agreements entered between the two parties and also the applicability of Section 60 of the Act were not considered - BP Israel is having a wholly owned subsidiary BP USA Inc ("BP USA") in the United States and has received certain payments from Ranbaxy India in connection of marketing of the generic drug in the USA market - amount due/received from Ranbaxy Laboratories Limited is in the nature of 'business profits' and not chargeable to tax in India under the provisions of the Act in the absence of Business Connection in India as per section 9(1)(i) of the Act or under the provisions of Article 7 read with Article 5 of the India-Israel Double Taxation Avoidance Agreement ("DTAA") in the absence of Permanent Establishment in India ? - Whether the Applicant is justified in its contention that amount due/received from Ranbaxy India is not taxable as 'Royalty' or 'Fees for technical Services' both under the Act or under the relevant provisions of India-Israel DTAA read with the Protocol thereto? HELD THAT:- On taxability of the amounts received from Ranbaxy India it is relevant to consider here that the Applicant was not the signatory of either the original agreement or the amended agreement. The original agreement dated 07th December 2010 was between Ranbaxy USA, Ranbaxy India and BP USA and it has been submitted that the amended and restated agreement dated 07th December 2011 was pursuant to non-performance of the original agreement. 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 BP 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 years after the end of exclusivity period. The OAG had already held this clause as unenforceable and null and void. It is also relevant to consider that BP USA did not launch atorvastatin in the US market after the end of 180 days exclusivity period of Ranbaxy. As per amended agreement BP USA was ready and willing to step into the place of Ranbaxy during the exclusivity period in case of challenge to Ranbaxy's ANDA and any injunction by any court. This event could have taken place just before the end of exclusivity period in which case BP would have launched its product in US market. However, when the exclusivity period ended and the field was wide open, BP USA decided not to launch the product, when it was eligible to do so. The commercial market of atorvastatin in USA was quite lucrative and it is difficult to accept that a player like BP will not enter the market after making sustained efforts and facing litigation for years to get its ANDA approved. This shows that there might have been a tacit understanding between Ranbaxy and BP USA that BP USA will not launch its product in the US market even after the end of Ranbaxy's exclusivity period, for a further period concurrent with the time period of no challenge provision. Only such an understanding can justify the steep hike in sharing of profit from 15 % as stipulated in the original agreement to 50 % in the amended agreement. The source of payment to the Applicant was the revised and reinstated agreement, which was in the nature of collusive arrangement and designed prima-facie for illegal payments towards anti-competitive arrangements between BP 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. Applicant is not found to be real owner of the transactions and the income did not accrue in its hand but it was only a case of application of income of BP USA to the Applicant. Further, the basic condition of the transaction of the non-resident arising out of the transaction with a resident as stipulated u/s 245N(a)(ii) was not fulfilled as the transactions of the Applicant were not on own account but towards application of income of BP USA. The transactions were also hit by the mischief of clause (iii) of the proviso to Section 245R(2) of the Act, as they were designed prima-facie for avoidance of tax for the reasons as already discussed earlier. Therefore, the application is rejected.
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