2016 (9) TMI 861 - HC - Income Tax

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 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 for disclosed consideration of 4 lac USD. Shortly thereafter, the same technology was transferred by Sun BVI to CARACO for 1.17 crores USD. According to the information of the Assessing Officer, Sun BVI did not have sufficient wherewithal to carry out research and technology development 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 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 evaded payment of tax through such process. In any case, therefore if the revenue contends that it is Sun Pharma from where the technology had originated and Unimed did not have the capability to do so in its own, the grounds mentioned in the reasons for reopening assessment of Unimed 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, technology was transferred by Unimed to Sun BVI for a declared consideration of 4 lac USD which, Sun BVI a subsidiary of Sun Pharma based in British Virgin Islands sold the same technology to M/s CARACO for 1.17 crores USD. The statement of Sudhir Valia key person 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 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 BVI and CARACO both were subsidiaries of assessee. The assessee company had capacity to produce such technology and in fact between 1997-02, Sun Pharma had supplied such technology developed by it to M/s CARACO. In view of such evidence on record, 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. 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 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, the Assessing Officer could form a valid belief that income chargeable to tax has escaped assessment.

Summary

Issues Involved:
1. Legality of reopening assessments beyond four years.
2. Validity of reasons for reopening assessments.
3. Alleged tax evasion through transfer of technology.
4. Adequacy of disclosure by the assessee.

Detailed Analysis:

1. Legality of Reopening Assessments Beyond Four Years:
The primary contention in both petitions was the legality of issuing reopening notices beyond the four-year limitation period. The petitioner argued that the original assessments were completed after scrutiny, and there was no omission on their part to disclose material facts fully and truly. The court noted that for reopening beyond four years, there must be a failure to disclose material facts by the assessee. In the case of Unimed, the court found no such failure and thus quashed the reopening notice. However, for Sun Pharma, the court upheld the reopening notice, indicating that there was a prima facie case of non-disclosure of material facts.

2. Validity of Reasons for Reopening Assessments:
The court examined the reasons recorded by the Assessing Officer (AO) for reopening the assessments. In Unimed's case, the AO alleged that the technology transfer to Sun BVI for USD 4 lacs was a device to evade taxes, as Sun BVI lacked the facilities to develop such technology. The court found that the reasons recorded in Sun Pharma's case contradicted this, as they suggested that Unimed itself lacked the capability to develop the technology. This inconsistency led the court to quash the reopening notice for Unimed. Conversely, the reasons for Sun Pharma's reopening were deemed valid, as they provided a detailed account of how the technology transfer was allegedly used to divert taxable profits to a tax haven.

3. Alleged Tax Evasion Through Transfer of Technology:
The core issue was the alleged tax evasion through the transfer of technology from Unimed to Sun BVI and then to CARACO. The AO argued that Sun BVI, being a shell company in a tax haven, was used to avoid taxes on the substantial profits generated from the technology transfer. The court found that the AO had prima facie reasons to believe that Sun Pharma used this arrangement to evade taxes, thus justifying the reopening of Sun Pharma's assessment. However, the court found no substantial evidence to support the reopening of Unimed's assessment on similar grounds.

4. Adequacy of Disclosure by the Assessee:
The petitioners contended that they had made full and true disclosures in their original returns. The court noted that while Unimed had disclosed the receipt of USD 4 lacs for the technology transfer, there was no evidence of non-disclosure of material facts. In contrast, Sun Pharma's disclosure was found lacking, as it did not reveal the lack of R&D capabilities of Unimed and Sun BVI, which were crucial to the AO's belief that taxable income had escaped assessment.

Conclusion:
The court quashed the reopening notice for Unimed, finding no failure to disclose material facts and inconsistencies in the AO's reasons. However, it upheld the reopening notice for Sun Pharma, citing valid reasons and prima facie evidence of tax evasion through the technology transfer arrangement. The court emphasized that its observations were limited to the validity of the reopening notices and did not preclude further assessment based on additional evidence.