9911796707
TMI Blog2013 (7) TMI 1146X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aroda Master Formula Card 14 Glipizide Immediate Release Tablets SPIL - Mumbai Executive Summary 15 Baclofen Tablets SPIL - Mumbai Executive Summary 16 Amlodipine Besylate Tablets SPIL - Mumbai -- -- 17 Escitalopram Oxalate Tablets SPIL - Mumbai Executive Summary 18 Paoxetine Hydrochloride Tablets Equivalent to Paroxetine SPIL Mumbai 19 Atenolol Tablets SPIL Baroda Master Formula 20 Methimazole Tablets SPIL Baroda Master Formula 21 Allopurinol Tablets SPIL Baroda Master Formula 22 Venlafaxine Hydrochloride Tablets equivalent to Venlafaxine SPIL Mumbai Executive Summary 23 Amitriptyline Hydrochloride Tablets SPIL Mumbai Executive Summary 24 Haloperidol Tablets SPIL Baroda Master Formula 25 Clonidine Hydrochloride Tablets SPIL Mumbai Master Formula Card xx xx In view of the above information and evidences in my possession, I have reason to believe that the assessee has adopted dubious device and thereby income to the extent of ₹ 1,51,90,41,340 [US$ 343,05,360] has escaped assessment." 3.8 The second ground raised is in respect of allocation of Research & Development Expenses, which reads thus - "..It is pertinent to note th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 "Therefore, an amount of ₹ 33.2 Crores incurred as R&D expenditure by SPIL should have been debited in the books of SPI for Assessment Year 2006-07. In view of the above information in my possession, I have reason to believe that income to the extent of ₹ 33.2 Crores has escaped assessment which requires to be taxed under provisions of Income Tax Act, 1961. As per proviso to Section 147 of the Income-tax Act, 1961, where an assessment under sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on 20th September 2012, the assessee emphasized that both the grounds have already been considered in the scrutiny assessment. Moreover, for the Assessment Year 2006-07, these very details have been accepted in toto in case of the present petitioner as also in the case of Unimed Technologies and M.J Pharmaceuticals Limited. Therefore, in absence of any new material and in absence of any allegation of the petitioner having not disclosed truly and fully all material facts necessary for the purpose of assessment, the issuance of notice for reopening is bad 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. It is also contended reiteratively that the assessment is sought to be reopened beyond the period of four years; as the four years in case of the assessment under question expired on 31st March 2011, and the impugned notice is issued on 30th March 2012. Original assessment had been completed under section 143 (3) of the Income-tax Act, 1961, accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to learned counsel, it is only at the time of survey carried out at the premise of the petitioner company, certain material were found which surely does not bring the case of the Revenue within the purview of Section 147 of the Act. He urged that once having disclosed all the details, the assessee is not under obligation to let the Assessing Officer know as to how to conduct his affairs. These transactions not only are reflected in the return of income but the T.P.O has also been referred to these transactions and on his report, additions also have been made by the concerned authority. He further urged that the CIT [A] having decided the appeal, the order of Assessing Officer is merged into that of CIT [A], and therefore, the Assessing Officer has no business to reopen the assessment. He has sought to rely upon the following 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veloped by the petitioner for none other than Caraco, USA. He, therefore urged that on the question of jurisdiction, when the Revenue is able to satisfy the Court that there is no true disclosure and that too true and full on the part of the petitioner, no interference at the stage of the notice be done as the assessee is likely to get the fullest opportunities to raise its defence in the re-assessment proceedings. He further urged that the entire channel of statutory appeals would also be available to the petitioner and therefore, at this stage, this Court may not interfere. 6.2 Learned counsel Shri Bhatt further urged that as far as second question is concerned, whereby the expenses of R&D is required to be bifurcated amongst other units, that if on those grounds which were raised and decided by the CIT [A], the question of merger would arise but not on the ground that are not at all touched by the CIT [A] and re-assessment can be made permissible on such fresh ground, even when the order of CIT [A] has been merged with 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 & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me and the Assessing Officer shall require to record his reasons before issuing any such notice. Therefore, the requirement under the law for issuance of the notice is that the Assessing Officer must have a reason to believe that the income has escaped assessment on account of failure on the part of the assessee to disclose fully and truly all the material facts necessary for the assessment, after expiry of four years from the end of relevant assessment year. This being the case of notice under section 148 of the Act having been issued beyond the period of four years from the end of relevant assessment year, conditions required to be fulfilled is that the assessee failed to make a return under section 139 or in response to a notice under sub-section (1) of section 142 or Section 148 or it failed to disclose fully and truly all material facts necessary for his assessment. 9. Admittedly, in the instant case, notice has been issued beyond a period of four year after the survey was conducted on 8th November 2011.It is not on the basis of material or evidence available with the Assessing Officer but the material collected during the survey proceedings that a notice has been issued to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of interest paid to creditor on borrowed moneys and hundies. However, subsequently, the assessment was reopened on the ground that during the course of assessment proceedings for subsequent assessment years, it was noticed that various items shown as loan against security of Hundies in assessee's books of account for assessment year under question were in fact fictitious. The Income-tax Officer in the challenge to such reopening by way of a writ petition, did not set-out any material on the basis of which he arrived at such a belief. On having found that the assessee had produced all Hundies on the strength of which it had obtained loan as also the entries in the books of account showing payment of interest, the Court held the notice issued under section 147 of the Act as void. The Court also held that the Income-tax Officer had not given any satisfactory reason to uphold its belief that a part of income of the respondent has escaped assessment by reason of its failure to make a true and full disclosure of the material facts. 9.4 In the case of Ganga Saran & Sons (P) Limited v. Income-tax Officer, in a proceeding under section 147 of the Act of re-assessment of the income al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under section 147 (a). If there is no rational and intelligible nexus between the reasons and the belief, so that, no such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the ITO could not have reason to belief that any part of the income of the assessee had escaped assessment and such escapement was by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to be struck down as invalid." 9.5 In the said decision, the Supreme Court noticed that the statement of accounts of the director for the relevant accounting year and also for the previous year were with the ITO at the time of original assessment and such statements of account clearly reflected that out of the amount of remuneration credited to his account, gift was made to Managing Director, who was his brother-in-law. The Income-tax Officer also was aware that this man was the managing director of the assessee company. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether of facts or law, should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what interferences - whether of facts or law - he would draw from the primary facts. If from primary facts more inferences than one could be drawn, it would not be possible to say that the assessee should have drawn any particular inference and communicated it to the assessing authority. How could an assessee be charged with failure to communicate an inference, which he might or might not have drawn? It may be pointed out that the Explanation to the sub-section has nothing to do with "inferences" deals only with the question whether primary material facts not disclosed could still be said to be constructively disclosed on the ground that with due diligence the ITO could have discovered them from the facts actually disclosed. The Explanation has not the effect of enlarging the section, by casting a duty on the assessee to disclose "inferences" - to draw the proper inferences being the duty imposed on the Income-tax Officer. Therefore, it can be concluded th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut that is a different matter altogether. The person lawfully liable to be taxed can claim no immunity because the Assessing Officer [ITO] has taxed the said income in the hands of another person contrary to law." 10. This Court in case of Sun Pharmaceutical Industries Limited v. Deputy Commissioner of Income-tax, reported in [2013] 353 ITR 450 was dealing with the income escaping the assessment when the issue of notice under section 147, the assessee sold certain goods to its sister concern, it was found by the Assessing Officer that on delayed payment of such goods, interest @ 24% per annum was paid, which was higher than the prevailing market rate of interest which was between 15% - 18%. According to the Assessing Officer, by adopting such modality, the assessee reduced taxable profit and at the same time, increased the profit of its unit which was eligible for deduction under section 80IH of the Act. Certain essential facts like - assessee received interest on overdue payments from "A" and that "A" was a sister concern of the assessee company and that such interest charged was 24% per annum were not discernible from record at all. It was therefore held that the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to reopen the assessment of an earlier year on the basis of his findings of facts made on the basis of fresh materials in the course of assessment of the next assessment year. The appeal is dismissed. No order as to costs." 10.3 Delhi High Court, in case of Remfry & Sagar v. Commissioner of Income-tax, reported in [2013] 351 ITR 75 (Delhi) was examining the question of jurisdiction of issuance of notice under section 147 of the Act. The assessee firm made payment to a company under a licence agreement for use of goodwill and name of the said company. Assessee filed return and claimed that payment made to company under licence agreement was a revenue expenditure and such claim was allowed for the years under consideration. However, in course of assessment proceeding, the Assessing Officer examined licence agreement which was not filed in earlier years and on going through its claim for deduction of licence fee, payment was not found allowable. On reopening of the assessment of the relevant years, the Court held that since the assessee did not furnish licence agreement before the Assessing Officer in course of original assessment proceedings and only an appraisal of various claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been brought out in sufficient relief, it is not necessary to insist on the specific failure of the assessee being stated in the reasons. A parrot-like repetition of the statutory language without any substance would certainly not amount to satisfying the jurisdictional conditions but if the language used coupled with the context is sufficiently capable of conveying the fact that there was failure on the part of the assessee to furnish primary facts fully and truly at the time of original assessment, that should be sufficient compliance with the requirements of section 148(2) of the Act. In this view of the matter we are unable to accept the contention of the petitioner that the failure to refer to the omission of the petitioner specifically to file the licence agreement (in the reasons recorded) is fatal to the validity of the reassessment proceedings. 17. We now proceed to a consideration of the question whether the licence agreement dated 05.06.2001 is a primary fact which ought to have been placed by the petitioner before the assessing officer in the course of the original assessment proceedings. In Calcutta Discount Co. Ltd. v. Income-tax Officer (1961) 41 ITR 191 a constitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... officer at the time of original assessments and there was thus no failure on its part to furnish the primary facts. The Supreme Court, reversing the judgment of the Rajasthan High Court, held that the primary fact in the case was the lease agreement and since the same had been placed before the income tax officer at the time of original assessment, there was no failure to furnish primary facts. It was further held that it was not the duty of the assessee to draw the attention of the income tax officer to any particular clause or portion of the agreement and invite him to draw a particular inference from the same. It would thus appear that whenever a claim is made for any deduction or allowance or relief in the computation of the total income, and if the claim is based on the terms and conditions of a document or documents, it is the duty of the assessee to place before the assessing officer the document or documents; the document would constitute the primary fact. The word "primary" means "that which is first in order, rank or importance; anything from which something else arises or is derived" (P. Ramanatha Aiyar‟s The Major Lexicon, IVth Edition 2010). In the petitions bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) of section 142 or Section 148 (1) or (2) to disclose fully and truly all material facts necessary for assessment of the year under question. 10.5 The first condition does not exist in the instant case, and therefore, the second condition shall have to be closely examined as to whether there is anything to indicate that there was any failure on the part of the petitioner to disclose fully and truly all material facts necessary for assessment in the year under question. Since the notice under section 148 had been issued on expiry of period of four years from the end of relevant assessment year, mere mechanical reproduction of provisions or expression of having fulfilled its obligation of revealing all primary facts would not satisfy the jurisdictional requirement. At the time of original assessment, if there is a failure to furnish the primary facts; fully and truly, it should not be a sufficient compliance of the requirement of section 148 (2) as held in catena of decisions and what would amount to primary facts would depend on each case from its facts and circumstances. The endeavour hereinafter therefore would be to examine as to on the basis of which material, the assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been made and the total income of the company was assessed at ₹ 28,92,24,784/= by the A.O in its order of scrutiny assessment dated 26.08.2009. 10.8 It is to be noted here that in the brochure of the Company [at Annexure B-2], the details of Caraco Pharmaceutical Laboratories Limited is also provided. Sun BVI account is already provided which had transferred the technology to Caraco Pharmaceutical Laboratories Limited. It also mentions that upto 2002, there was an agreement with the petitioner for transferring the technology formulations for 25 generic pharmaceutical products for a period of five years in exchange of 5,44,000 shares of Caraco common stock. The agreement expired on November 21, 2002 and the Caraco Pharmaceutical Laboratories Limited entered into a new technology transfer agreement with Sun Global - an affiliate of Sun Pharmaceutical Industries Limited. Under such agreement, Sun Global agreed to provide the formulations for 25 new generic drugs over a period of five years. Caraco's right to the products are limited to the United States and the territories or possessions, including Puerto Rico. 10.9 The petitioner has claimed that Caraco had an agreement for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds and battery of lawyers etc can wipe off the company. Hence from a strategic and commercial point of view, it was conscious call taken by the management that the technology to be transferred to Caraco will not be developed by SPIL ie., the assessee as any potential litigation would threaten the very survival and existence of SPIL. The entire legal and commercial ownership of the technology was kept in Sun BVI to isolate SPIL from any potential litigation." In view of the above, it could be believed that in such regulated market, the company was taking extreme care in avoiding any potential litigation. Hence, it is also logical that the product purchased by Caraco which is a subsidiary of the assessee company would be resourced from best possible source so as to avoid any possible litigation as to the quality of the product. However, it has been noticed that the products supplied to Caraco by Sun BVI have been claimed to have established reputation in the matter of having proper R&D facility for developing such a sophisticated generic pharmaceutical products. Besides as per the 1997-98 agreement, the petitioner was directly supplying such generic products to Caraco apparently wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produced by the petitioner at the time of original assessment, the details of price at which Sun BVI transferred 25 technologies to Caraco, USA may be a part of this dossier and of the proceedings before TPO who had determined the arm's length price of international transactions, the fact remains that when from the material other than those which were available at the time of original assessment, the Assessing Officer has a reason to believe that the income has escaped assessment and when such belief is formed not simply on the basis of doubt or suspicion, but from the material unearthed during the survey operation and is further substantiated by the statements of senior officers executing the very work forming part of the team working on formulating and developing these technologies, it would not be possible for this Court to uphold the contention of the petitioner that the Assessing Officer has assumed jurisdiction contrary to the requirements of the provisions of Section 148 of the Act. 11. As mentioned hereinabove, what amounts to primary facts, the disclosure of which truly and fully would discharge the obligation of the assessee would need to be determined on the basis of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound of allocation of R&D expenses, we notice that in a notice issued under section 142 (1), at the time of scrutiny assessment, information was called for on 16th January 2009, which reads thus - "[11] You have claimed R & D revenue expenses of ₹ 1,69,28,48,989/= and R&D capital expenses of ₹ 4,45,90,802/= and ₹ 49,09,91,987/=. Please give reasons as to why the same should not be allocated amongst various units in the ratio of their turnover." 12.1 A detailed note on allocation of R&D expenditure was prepared and submitted by the petitioner and the same has been submitted as a part of compilation from page nos. 84 to 89, which does not require reproduction in this order so as to avoid unnecessary bulk. Suffice it to hold that this had been examined and the Assessing Officer in its assessment order vide para 8.3.3, in detail, had dealt with the issue as follow :- "8.3.3 The reply of the assessee has been considered. In fact, the R & D Expenses are basically pertaining to the head office expenses which are not directly relatable to a particular unit. Hence, in order to scientifically distribute these expenses, they should be apportioned in the ratio of turnove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls submitted by the assessee, it is noticed that the assessee has allocated only ₹ 4,34,25,000/= on account of R&D expenses in Silvassa- II Unit. This is not a correct way of treatment as these expenses should be proportionately distributed amongst various units. In fact, the R& D Expenses are basically pertaining to the head office expenses which are not directly relatable to a particular unit. Hence, in order to scientifically distribute these expenses, they should be apportioned in the ratio of turnover of various units. If that is not done, it may lead to excess deduction to the assessee u/s. 80IB or 10A or 10B. This issue of allocation of R&D expenses to the Units claiming deduction u/s. 80IA/80IB is in dispute for last many years. In A.Y 1995-96, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufactured at SPI-Jammu and Dadra Units as well as at SBS, Sikkim, being done at SPIL, Baroda. 12.4 Therefore, the Assessing Officer formed a belief that SPI & SPS which had manufactured the products developed at R&D facility of the petitioner-SPIL, the expenditure of such R&D is debited in the books of account of SPIL, which reduces its profit and the profit of SPS &SPI is inflated to that extent. It was also urged before us that allocation amongst various units of M/s. Sun Pharmaceutical Industries Limited was the question raised vide communication dated 2nd August 2007 at the time of scrutiny assessment. However, this was not in respect of allocation between M/s. SPIL [the petitioner] and M/s. Sun Pharmaceutical Industries [SPI]. It is further urged 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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