9911796707
TMI Blog2013 (7) TMI 1034X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Constitution of India, challenges the notice dated 30th March 2012 issued under section 148 of the Income-tax Act, 1961 {"Act" for short} whereby, the respondent has chosen to reopen the assessment of the petitioner for the Assessment Year 2005-06 on the ground that the same is contrary to law and without jurisdiction. 3. The petitioner-company viz., Sun Pharmaceutical 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 ₹ 21,90,62,215/=, which was revised and the loss was reduced at ₹ 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 Annua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en issued - Firstly, the diversion of profit by transfer of technology by Sun BVI to Caraco, USA; and secondly, allocation of R & D expenses, whereby the products manufactured at Sun Pharma Industries [SPI] & Sun Pharmaceuticals, Silvassa [SPS] are being developed at the R&D facilities of Sun Pharmaceutical Industries Limited [SPIL] and the expenditure related to such R&D is debited 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit. The profit of SPS and SPI is inflated to that extent. The products manufactured in units under SPS and SPI are formulations whereas both the formulations and bulk drugs are manufactured by nits under SPIL. The ratio in which the R&D expenditure is allocated between formulations and bulk drugs within the units of SPIL is 3:1 or in other words 75% of the R&D expenditure debited in the 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 assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in law. It is further alleged that only on two grounds, such notice is permissible to be issued - Firstly, when in the return of income, details are not provided and secondly, income has escaped assessment on account of petitioner not having disclosed truly and fully all material facts. As the assessment is sought to be reopened beyond the period of four years; as the four years in case 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing authorities :- [1] Commissioner of Income Tax v. Durlop Dealers Limited, reported in [1971] 79 ITR 609 (SC); [2] Income Tax Officer v. Madnani Engineering Works Limited, reported in [1979] 118 ITR 1 (SC); [3] Ganga Saran & Sons {P} Limited v. Income Tax Officer, reported in [1981] 130 ITR 1 (SC); [4] Calcutta Discount Company Limited v. Income-tax Officer, reported in [1961] 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 Techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the CIT [A]. Reliance is also placed on the following decisions :- [1] Income Tax Officer v. Ch. Atchaiah, reported in [1996] 218 ITR 239 (SC); [2] Remfry & Sagar v. Commissioner of Income Tax, reported in [2013] 351 ITR 75 (Delhi); [3] Sun Pharmaceutical Industries Limited v. Deputy Commissioner of Income Tax, reported in [2013] 353 ITR; 7. Upon thus hearing both the sides and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se assessment for the assessment year 1949-50 was reopened by the Assessing Officer 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n paid to the director by the assessee company was sham, bogus and 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment. Neither of the two conditions necessary for attracting 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a question whether the Income-tax 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' i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment, 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 obviousl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not 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 exercise powers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 1st October 2007. 10.7 A notice under section 92CA (2) was issued to the petitioner on 16th October 2007 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 2005-06, 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 under section 37 (1) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 above a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und 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 his statement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 resulted into es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the R&D expenses to the Units producing formulation products. Thus, for the detailed reasons given in the assessment order for A.Y 2002-03; 2003-04 and 2004-05 expenses are distributed in the ratio of turnovers of various units. Although the total R & D Expenses are ₹ 170,79,54,685/= but as per para 8 above, overseas registration charges of ₹ 66,66,836/= and trade mark expenses of ₹ 80,85,43/= are disallowed. Hence the amount of R & D expenses which is available for distribution is only ₹ 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, ₹ 8,61,84,003/= should be allocated to Silvassa-II Unit. However, already ₹ 4,34,25,000/= is allocated to Silv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2003-04 and 2004-05. Further, there is no change in the facts and circumstances of the case during the year under appeal. Therefore, Assessing Officer is directed to re-work the deduction on this account as per the directions contained in the Appellate Order of CIT [A] IV, Ahmedabad vide Order dated 28.02.2006 for assessment year 2000-01 to reallocate 12.5% of all R&D expenses as relating to formulation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question, as detailed hereinabove while dealing with the same. And therefore, without going into the larger issue of as to whether a particular angle, if is missed out in a question determined on scrutiny in a regular assessment, whether reopening on such left out angle is permissible or not, as far as this ground is concerned, in wake of the reasonings given in the records of reasoning; particularly emphasizing on SPS which never existed and when all other angles otherwise are examined sufficiently and elaborately, this appears to be an attempt pure and simple to review its own order alongwith other materials found in relation to the first issue. Therefore, the notice for re-opening on this count shall need to fail. 13. Resultantly, this Special Civil Application is partly allowed. Notice of re-opening impugned in this petition on the first ground reflected in reasons of reopening is sustained whereas the same is not upheld on the second ground. 14. Interim relief granted in favour of assessee in respect of the second ground stands confirmed. Assessing Officer is permitted to proceed with the re-assessment proceedings on the first ground raised in reasons recorded without being ..... X X X X Extracts X X X X X X X X Extracts X X X X
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