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TMI Blog2019 (10) TMI 1399X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wards 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. - A.A.R. No. 1476 of 2013 - - - Dated:- 25-10-2019 - Justice Mrs. Ranjana P. Desai, Chairperson Narendra Prasad Sinha And Ramayan Yadav, Member For the Appellant : Ajay Vohra, Sr. Counsel and Nitin Vaid, Sanjam Goel, Sukhsagar Syal, Rishabh Malhotra, Mohak Gupta, CA's Ravid Barzilay and Vishal Kulkarni, AR's For the Respondent : Himanshu Sinha, Special Counsel and Yash Varmani, Ms. Vrinda Tulshan, Advs. Sanjay Pandey, Abhishek Tripathy, Ratan Kumar Yadav and Partha Pratim Ghosh RULING NARENDRA PRASAD SINHA, MEMBER (REVENUE) BP , Israel ( the Applicant or BP Israel ) is a pharmaceutical company headquartered in Israel and is a tax resident of Israel. It is one of the largest generic drug manufacturers worldwide. BP Israel is having a wholly owned subsidiary BP USA Inc ( BP USA ) in the United States. Ranbaxy Laboratory Limited ( Ranbaxy India ) is one of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . US FDA allows the generic manufacturers to seek market entry prior to expiration of the pioneer's patent term by challenging the patent as invalid or not infringed by its generic product. A generic drug applicant has to include one of the following certifications in its ANDA for each listed patent: I. that no patent information on the listed drug has been submitted to the FDA; II. that such patent has expired; III. the date on which such patent will expire; or IV. that such patent is invalid, unenforceable, or will not be infringed by the manufacture, use or sale of drug product for which ANDA is submitted These certifications are referred to as paragraph I paragraph II paragraph III and paragraph IV certifications respectively. 4. The first generic applicant, who challenges a listed patent by filing a Paragraph IV certification, runs the risk of having to defend a patent infringement suit but is entitled to an incentive in the form of 180-day marketing exclusivity. It is an incentive given to the first generic applicant, since no other generic competitor can enter the market during this exclusivity period and only the pioneer drug manufacturer and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence of a triggering event, the first applicant may relinquish its eligibility for exclusivity entirely and by doing so would permit the FDA to approve immediately any subsequent ANDA which is eligible for approval. In short, an applicant may relinquish its exclusivity before the exclusivity period has been triggered but it may selectively waive it after the exclusivity has been triggered. 6. Mr. Ajay Vohra, Sr. Counsel, appearing for the Applicant explained that in the present case Ranbaxy was the first filer of ANDA (No. 76477), which was filed on 19-8-2002, much prior to Applicant's ANDA application (No.78773) filed on 29-12-2006, and would have been entitled to 180 days exclusivity period under the US FDA regulations. However, the US FDA had imposed an Import Alert on September 16, 2008 barring the entry of finished drug product and active pharmaceutical ingredients from Ranbaxy's Dewas, Paonta Sahib and Batamandi Unit facilities due to violation of US Good Manufacturing Practices requirements. Further, the FDA had invoked Application Integrity Policy (AIP) which stopped all substantive scientific review of any new or pending drug approval applications that contai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime milestone payment ( Milestone Payment ) to Ranbaxy in the amount on One Hundred Fifty Million Dollars (U.S. $ 150,000,000); provided, however, that such milestone payment shall be reduced to Seventy-five Million Dollar (U.S. $ 75,000,000) in the event of a Relinquishment at any time after September 2011, so long as a delay in the Relinquishment until after September 1, 2011 was not due to any breach by BP . Applicable Percentage Payment: For all sales of the BP Product during the Applicable Percentage Period, BP shall pay to Ranbaxy, within thirty (30) Business Days following the end of each Calendar Quarter, an amount equal to the Applicable Percentage of the Contract Margin in effect at the time of the sale of the BP Product in the applicable Calendar Quarter . 8. The Ld. Counsel for the Applicant explained that one of the main purpose of entering into the business arrangement by Ranbaxy with BP USA was to address an eventually where Ranbaxy was not able to take benefit of 180 days marketing exclusivity period in case it's ANDA was approved by the US FDA. As per common practice in the pharmaceutical industry, if the first applicant was unable to take benefit of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufacturing facility to BP USA, prior to final approval of BP's ANDA. On November 21,2011, BP USA received an email confirmation from the US FDA allowing importation of pre-launch quantities in response to PLAIR request filed by BP. Thereafter, on November 23, 2011, BP USA issued a ready date notice to Ranbaxy, requesting Ranbaxy to either relinquish or effectuate selective waiver in accordance with the terms of the original agreement. 10. Recounting the turn of events it was submitted that the uncertainty regarding FDA approval got finally settled on November 30, 2011, when Ranbaxy was awarded final approval by the FDA. Thereupon, BP USA and Ranbaxy mutually agreed to supersede terms of original agreement by entering into an amended/restated agreement dated December 7, 2011, which was made effective from November 30,2011. As per the terms of amended agreement, Ranbaxy having obtained necessary approvals from US FDA and also having the right to exclusively market its generic version of Lipitor tablet in the US market for a period of 180-days, entered into business relationship with BP USA. It was mutually agreed vide amended agreement that during the stipulated 180-days perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 days period would also belong to BP Israel and not to BP USA. Accordingly, on 22nd March 2012 BP USA assigned the agreement in full in favour of BP Israel, which was in accordance with clause 10.2 of the amended agreement, which permitted assignment of whole or part of the agreement to any of the affiliates without prior consent of the other party. The one time commitment of USD 15,000,000 which was initially paid by BP US to Ranbaxy under the original agreement was also subsequently refunded/adjusted by BP Israel to BP USA. It was clarified that though the assignment of contract to BP Israel was done on 22nd March, 2012, it was made effective from the inception date of amended agreement i.e. December 1, 2011. It was also submitted that all the payments under the agreement were made by Ranbaxy India to BP Israel and not to BP USA. It was further submitted that even in the absence of such formal assignment, share of contract margins received by BP USA from Ranbaxy under the amended agreement would have belonged to BP Israel, being economic owner. 14. The Ld. Counsel for the Applicant submitted that the amended agreement between Ranbaxy and BP Israel (pursuant to assignment by B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit and gain. The existence of business connection required an element of continuity and a solidarity transaction cannot be regarded as constituting a business connection in India. It was submitted that the Applicant had not carried out any business activity in India and, therefore, no business connection can be said to be constituted in India and no income can be said to be deemed to accrue in India u/s 9(1)(i) of the Act. It was further pointed that as per Article 7(1) of India-Israel Treaty, profit of BP Israel was taxable only in Israel unless it carried on business in India through a Permanent Establishment (PE). It was submitted that BP Israel did not have any business in India and,, therefore it did not have any PE as well. The Ld. Counsel also submitted that the payment was neither in the nature of royalty nor fee for technical services as the consideration received was not for rendering any managerial, technical or consultancy services. It was accordingly submitted that the consideration received by the Applicant was not taxable in India at all. Submissions of the Revenue Whose income? 16. At the outset Sh. Himanshu Sinha, Special Counsel appearing for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Both these obligations were not assigned to BP Israel because the right to sue and right to sell generics arising out of the ANDA were vested solely in BP USA. It was further submitted that even after the assignment of Agreement in March 2012, BP USA had executed the Assurance Agreement with the OAG in February, 2014 and BP Israel, as an assignee, did not step into the shoes of BP USA. This clearly established that it was a case of assignment of income and not the source of income. 19. The Revenue submitted that the stand of the Applicant that being the intellectual property rights (IPR) owner of the generic medicine and by virtue of being the 'intended manufacturer' of generic medicine, it was entitled to receive the entire payment from Ranbaxy as the de-facto economic owner of this income, was grossly erroneous position in law. Firstly, BP Israel had neither granted any right in any IPR to Ranbaxy nor had manufactured and sold even a single tablet of Atorvastatin for the US market. Secondly, BP USA and BP Israel were two distinct separate corporate entities located in US and Israel respectively having their own separate and distinct businesses. The Revenue submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its favour. It was further submitted that even if it is presumed that assignment of agreement had happened, Section 60 would still apply because the source of income (rights under the ANDA filed by BP USA) had not been transferred to BP Israel. Therefore, in view of the clear statutory mandate, the income had to be treated as that of BP USA and not of BP Israel. 22. According to Revenue the assignment of income to the Applicant (who is a tax resident of Israel) had been done with the sole intention of shifting the income to Israel where the Applicant was not liable to income tax in respect of the income on account of a special status enjoyed by it. Further, by shifting the income/profit from the USA to Israel, an attempt had been made to take shelter of the India-Israel Double Tax Avoidance Agreement (Indo-Israel DTAA). The Revenue submitted that the Applicant enjoyed a special tax exemption in Israel and the income in question, if held to be taxable in Israel, would go completely untaxed. On the other hand, if the income was held to be assessable in the hands of BP USA, the India-USA Double Taxation Avoidance Agreement (Indo-US DTAA) would apply which allocates taxing right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the settlement agreement. The pre-launch importation request (PLAIR) and its acceptance by FDA cannot be treated as a written confirmation for eligibility for final approval. This was evident from the text of the Memorandum issued by the FDA on 30-11-2011. The tentative approval granted by the FDA also stated that amendments to ANDA were filed by BP USA on 23-11-2011 which was subsequent to the PLAIR acceptance on 21-11-2011 and BP USA could not have become eligible for final approval before filing the amendment. 25. The Revenue contended that the second condition for having Initial Launch Quantities (as defined in Annexure A to the Original Agreement) ready before the Ready Date Notice was also not met by BP USA as was evident from the PLAIR request. The quantities of Atorvastatin sought to be imported as Initial Launch Quantities under the PLAIR was only 50% of the agreed quantities under the Original Agreement. It is thus quite clear that BP USA had not met both the conditions stipulated in the Original Agreement to force a relinquishment/selective waiver on Ranbaxy. Despite the same, the two parties had settled for this extraordinary and improbable arrangement where Ranbaxy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t had not sold a single tablet of Atorvastatin in the US market. The Revenue submitted that it had specifically sought copies of correspondence between BP USA and the OAG to ascertain the facts but the Applicant had refused to furnish the same citing that these were irrelevant and a request was made to draw an adverse inference in the matter. According to Revenue, the payments made under the Revised agreement pertained to this unenforceable and void obligation of not suing each other and an understanding that BP would not challenge Ranbaxy's FFE right and not sell Atorvastatin even after the end of the FFE period. We were informed that based on the premise that the payments were illegal payments made in contravention of law, the AO had sought to tax this income in the hands of BP USA as other income under the India-US DTAA and income from other sources under section 56 (1) of the IT Act. 28. The Revenue pointed out that the revised agreement under which ₹ 1851 crores had been paid provided for only three obligations of BP USA, which were as below: (a) not to sell or market Lipitor generics in the US market during the 180 days exclusivity period; (b) provide Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly emerged from the aforesaid facts is that BP was incapable of competing with Ranbaxy during the FFE period as it was precluded to do so under law, and after the FFE period it chose not to compete which was against the competition laws of the US. The tentative approval received by BP from the FDA on 1 December 2011 made it abundantly clear that on account of FFE right of Ranbaxy, final approval cannot be granted to them. Accordingly, no value can be assigned to this obligation as BP USA did not have any right to sell its generics during the term of the agreement. 30. The Revenue has also drawn our attention to the inherent contradictions in the stand of the appellant. It was submitted that the consideration attributable to right to use commercial, scientific or technical information would comprise Royalty income under the IT Act as well as the Indo-US DTAA. In the proceedings before this Authority, the Revenue had raised a query with the Applicant that it should provide the information regarding commercial, scientific and technical information shared between the parties. However, the Applicant had failed/refused to produce any detail in this regard. On the other hand, the Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ack-record of the two parties, i.e., BP and Ranbaxy - both these companies have had a poor record of following ethical business practices. Our attention was drawn to press reports which show that two pharma companies share profits by combining their efforts and resources or by transferring their valuable rights under ANDA. It was submitted that in the present case, Ranbaxy had done everything and had all the rights under ANDA and was under no compulsion (legal or commercial) to enter into this kind of improbable arrangement other than to advance the illegal objective of anti competitive practices. Income from other sources and not business income 33. The Revenue strongly refuted the contention of the Applicant that the amount received from Ranbaxy was business income and not taxable in India as BP Israel did not have a business connection in India under section 5 of the IT Act or a permanent establishment (PE) under Article 5 of the Indo-Israel DTAA. According to Revenue the income in question was not business income but income from other sources and the tests of business income and PE were not applicable at all. On the submission of the Applicant that the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue the income in question may have arisen in the course of business, but it did not have any immediate nexus with the revenue generating activity of BP Israel/USA. It was not generated by any of their business activities - i.e., manufacturing, distribution or licensing of IPRs. It was submitted that the Courts in India have held that payments which are revenue receipts and arise in the course of business but do not fall under any of the heads of income specified u/s 14 of the IT Act are to be taxed under section 56 (1) of the IT Act under the head income from other sources . Reliance was placed in this respect on the decisions of Madhya Pradesh High Court in the case of CIT v. Alpine Solvex Ltd. [2005] 276 ITR 92 (Madhya Pradesh), of Kerala High Court in the case of Malabar Industrial Co. Ltd. v. CIT [1992] 198 ITR 611 (Kerala), which was upheld by the Supreme Court reported in [2000] 243 ITR 83 (SC). BP USA's income under the Act and Indo-US DTAA 36. The Revenue submitted that under the IT Act, scope of taxable income of a non resident is limited to income that accrues or arises or is received in India and also that income which is deemed to accrue or arise or rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head of income specified in Section 14 of the IT Act has its own unique principles governing accrual or arising of income. For salary income it is the place where employment is exercised. For house property income, the location of the property governs. Similarly, for capital gains, the situs of the capital asset is the basis of determining the place of taxation. For business income, it is the place where the business activities are undertaken. However, for income from other sources, which is the residuary category of income in which the income in question falls, the location of the payor is a recognized basis of determining the place where the income arises. In this situation, ordinarily, if the right had been enforceable, the income would have accrued in the USA, but since the payments were under a colourable arrangement which was collusive and contrary to the law, the place where the decision to pay was taken should be treated as the place where the income arose. 38. It was further pointed out that the deeming provision of Section 9 (1) (i) of the IT Act provides that all incomes accruing or arising, whether directly or indirectly, through or from any source in India is deeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icant submitted that the whole arrangement was between two unrelated parties who were competitors. Thus, no negative inference could be drawn about the contractual arrangement as no third party would be assumed to agree to give up fifty percent of its share of profit just for the sake of tax benefit to the other unrelated party. The original agreement was signed between the parties at the time when there was complete uncertainty about the receipt of final approval by either Ranbaxy or BP USA of their pending ANDAs. Ranbaxy, by virtue of being the first filer, had entered into this agreement to secure benefit for itself. It was submitted that in order to effectuate the said Agreement, resulting in relinquishment/selective waiver of Ranbaxy's exclusivity, BP was required to issue Ready Date Notice, and the following twin conditions needed to be satisfied were duly met by BP: (i) BP to be ready with the initial launch quantities; and (ii) BP to obtain tentative approval of its ANDA OR receive written confirmation from the US FDA that its ANDA is elegible for the final approval. It was submitted that BP had already manufactured the initial launch quantities in Israel and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cement of the original agreement as also the approval to Ranbaxy's ANDA, while at the same time, restraining BP USA from directly or indirectly manufacturing and marketing the Drug in the US market. Furthermore, Ranbaxy secured 'step-in rights' from BP in the eventuality Ranbaxy was not able to utilise the exclusivity to the fullest. In that case, BP would launch its drug and share profits with Ranbaxy. It was emphasized that in view of this clear business rationale, the payment made by Ranbaxy was for BP to: (i) give up the right to sue Ranbaxy for breach of the binding Agreement dated 7th December 2010 and not recovering loss of Millions of Dollars, inter alia, on account of manufacturing of the drug pursuant to 'initial launch quantity' condition as per original agreement; (ii) for accepting the negative covenant of not competing with Ranbaxy in the US market during the exclusivity period by accepting a restraint on its capability to manufacture and market the Drug in the US market during that period, and (iii) offering step-in rights to Ranbaxy in case it was enjoined from marketing its drug in the US market. 44. It was submitted that the source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovide both parties not to challenge each other's SFFE. It was submitted that when both these clauses are read in conjunction, the objective becomes clear that 'no challenge' was restricted for drugs other than atorvastatin, for which ANDAs had been filed and were pending. It was contended that the findings by the OAG does not render the Agreement dated 7th December 2010 or the Amended Agreement dated 7th December 2011 to be illegal/void in entirety; the said order had the effect of deeming clause 6.10 of the 2010 Agreement and clause 6.10(f) of the 2011 Agreement only to be null and void and, therefore, not enforceable. It was also pointed out that both the agreements provided for separability clause that if any part of the Agreement was held to be unenforceable or in conflict with the applicable law, the invalid or unenforceable part of the provision shall not affect the essence of the agreement and the balance of the agreement shall remain in full force and binding on the parties. It was also submitted that no cognisance should be taken of the assurance given by the parties to the OAG in any proceedings and the cognisance of OAG order taken by the Revenue in the Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement could only be viewed as a reciprocal arrangement, when the OAG order accepts the same to be a collaboration for marketing one drug . Further, the media had also viewed this arrangement as a 'step in right' or insurance by BP to Ranbaxy to support in case of difficulty during 180 days exclusivity. It was submitted that though during the 180 days exclusivity no other generic players except the first filer could directly enter the market, still the other generic players could very well enter the market indirectly:- (i) By way of becoming authorised generic manufacturers/suppliers of the patented/pioneer drug (like Watson's arrangement with Pfizer); or (ii) By acting as a contract manufacturers for either the Pioneer or the authorised generic manufacturer; or (ii) By challenging Ranbaxy's 180-days exclusivity (by following up on the order of the District Court in the case of Mylan v. US FDA) 50. On the contention of the Revenue regarding the conditions for the Ready Date Notice, it was submitted that the twin conditions for issuing the Ready Date Notice were duly met by BP as it had already manufactured the initial launch quantities in Israel and obt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rug, post receipt of final approval was based on commercial considerations. Merely because the Applicant did not ultimately market the Drug in the US market cannot be the basis to allege that the arrangement was sham/collusive. It was submitted that BP did launch its Drug in 2017 when it was found that it was commercially viable to do so. The Applicant pointed out that it was a settled position of law that the taxing authorities cannot sit in the armchair of the businessman and scrutinise their affairs with the benefit of hindsight. 53. Responding to the Revenue's argument that the income was assessable in the hands of BP USA and the Applicant had no locus/right to the receipt from Ranbaxy it was submitted that the Applicant was the rightful and ultimate owner of the subject receipts which cannot be disputed or questioned. The assignment of the 2011 Agreement was a case of assignment of source of income and not assignment of income, as sought to be contended by the Revenue. The stipulation agreed by BP USA in the 2011 Agreement, in lieu of receipt of payment from Ranbaxy placed a restraint on BP USA and its affiliates (including the Applicant) to directly or indirectly, manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itially in the 2010 Agreement and revised subsequently vide the 2011 Agreement. It was submitted that merely because Ranbaxy obtained the final ANDA approval on 30th November 2011, it cannot be said that the obligation accepted by BP USA of not competing with Ranbaxy was not capable of being performed in law, in the absence of final approval of BP's ANDA. It was submitted that the payment under the revised Agreement was for BP USA to withdraw its complaint before the US District Court, paving way for Ranbaxy to market its Drug during the exclusivity period and to not compete directly or indirectly with Ranbaxy during the said period. 56. With regard to the submission made by the Revenue that such an agreement was against the normal human conduct, it was submitted that litigation in the US was common place and was an accepted phenomenon in the US pharmaceutical market. The fact that Ranbaxy's right to exclusivity period was under threat of litigation was accepted in the memorandum issued by the US FDA clarifying the PLAIR procedure with regard to Atorvastatin ANDAs. It was further submitted that almost 40% of the litigation at the US District Court level comprised of comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent on the 2011 agreement. The Agreement was not struck down by any statutory authority as being null and void and the payment received by the Applicant under a binding and enforceable contract, for obligations assumed thereunder cannot be said to be illegal and void. 59. The Applicant reiterated that the income in question having no nexus with India, as the source of income was the Agreement executed in 2011, cannot be brought to tax in India, even if it was construed as income from other sources as the charging provisions of section 5(2) of the Act to bring to tax in India such income in the hands of the non-resident was not satisfied. It was contended that the reliance of the Revenue on the provision of section 9(1)(i) of the Act, read with Explanation 4, was misplaced. The Applicant relied on the observations of the Supreme Court in Mathuram Agarwal v. State of M.P. 1999(8) SCC 667. SC on the test for interpreting a taxing statue. 60. It was further submitted that even if it was assumed, without admitting, that the consideration was 'other income'; yet mere presence of the payer in India cannot make the income as deemed to accrue or arise in India having sour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we had kept all contentions of both sides open to be decided at the final hearing of this application. Accordingly, this issue also needs to be examined and decided. 63. We have pondered over the submissions of the Applicant with all seriousness and sincerity that they deserve. The Applicant has come before us with the questions of 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. It will, therefore, be relevant to examine as to what were the conditions of the original agreement which were not performed and whether the genesis of restated agreement was correct. The Applicant had come into picture much later on 22nd March 2012 when BP USA had assigned the amended agreement to BP Israel. As the Revenue has raised the issue of illegality of the agreements, it will be prudent to examine the two agreements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80mg tablets 479,359 4,783,649 As all the tablets were in the pack of 30, the total number of tablets for which importation was sought was 143,509,470 (4783649 x 30). It is thus found that BP USA had manufactured and sought PLAIR for 143,509,470 tablets only as against the initial launch quantity of 302,146,6170 as per original agreement. It is also found that as per the requirement of US FDA on the PLAIR request of BP USA it was categorically mentioned that only one shipment ready for launching referring to one import entry regardless of the quantity, batches or lot numbers offered for imports will be acceptable. Thus, BP USA could not have imported any further tablets for the initial launch. In view of these facts it is found that the first condition for manufacture of requisite number of atorvastatin calcium tablets for initial launch, as stipulated in the original agreement, was not satisfied. 66. The second condition stipulated in the original agreement was issue of Ready Date Notice which was prescribed in clause 2.2 as under: Ready Date Notice. Within two (2) Business Days following the later ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the original agreement stipulated that if the Ready Date Notice was issued by BP after September 1, 2011, the Ranbaxy had the option to delay effectuating the relinquishment until December, 1, 2011. The said clause is reproduced below: If BP issues the Ready Date Notice after September 1, 2011 and (i) the Ranbaxy ANDA does not have Final Approval or Tentative Approval, (ii) Ranbaxy's First to File Exclusivity has not been triggered pursuant to a decision of a court of competent jurisdiction from which no appeal (other than by a petition for writ of certiorari) can be taken under 21 USC 355(j)(5)(B)(iv)(II)(2002), and (iii) Ranbaxy believes in its good faith judgment that either (A) the Ranbaxy ANDA is likely to obtain Final Approval, or (B) that Ranbaxy's First to File Exclusivity will be triggered pursuant to a decision of a court of competent jurisdiction from which no appeal (other than by a petition for writ of certiorari) can be taken under 21 USC 355(j)(5)(B)(iv)(II)(2002), in each case on or by November 30, 2011, then Ranbaxy shall have the option to delay effectuating the Relinquishment until December 1, 2011, which option Ranbaxy may exercise by providing wr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s filed a copy of Stipulation of Dismissal of US District Court wherein it is mentioned that the plaintiff BP USA and the defendants Ranbaxy USA Ranbaxy India have executed a definitive form of settlement agreement reached on November 30, 2011 and accordingly the litigation initiated by BP was dismissed. Though this order of Stipulation of Dismissal of US district court is found undated, the Applicant has submitted that this order was passed on 30th November 2011 itself. The Applicant has also filed a copy of the press release dated November 30, 2011 informing the public that BP and Ranbaxy had reached an out of court settlement with respect to the litigation initiated by BP. The said news report is found to be as under: BP Announces Agreement with Ranbaxy Regarding Generic Lipitor Jerusalem, Israel, November 30, 2011- BP Pharmaceutical Industries Ltd. (Nasdaq: BP) announced today that pursuant to an agreement between its subsidiary, BP Pharmaceuticals USA, Inc. and Ranbaxy Laboratories Limited ( Ranbaxy ), a portion of the profits from Ranbaxy's sales of Atorvastatin Calcium Tablets during Ranbaxy's 180- day first-to-file exclusivity period, will be paid to BP. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's contract margin in connection with the sale of the Ranbaxy Product by or on behalf of Ranbaxy during the first one hundred and eighty (180) days following such commercial launch of the Ranbaxy Product, which contract margin shall be calculated in the same manner as the Contract Margin hereunder and shall be subject to the same true-up, record keeping and audit provisions in Sections 3.4, 3.5, 4.1 and 4.2 but reversing the roles of BP and Ranbaxy therein. (Emphasis supplied). 72. It is crystal clear from the above facts and discussions that BP USA had no legal right and could not have legally compelled Ranbaxy to relinquish/selectively waive its FFE rights in its favour as it had not fulfilled the conditions as stipulated in the original agreement. BP USA had neither manufactured the Initial Launch Quantities as per agreement nor did it have requisite tentative approval when the Ready Date Notice was issued by it on 23rd November 2011. The tentative approval, which confirmed that BP ANDA was eligible for final approval but for Ranbaxy's FFE rights for the product, was received much later on 01st December 2011. As Ranbaxy's ANDA was finally approved on 30-11-20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement stipulated that the revised agreement was effective from the effective date i.e. 30th November 2011 and shall automatically expire upon the end of the FEE period (of 180 days). However, the clause 6.10(f) extended the term of the agreement to a further period of two years. Thus, this clause had an overriding effect on the general time period of effectiveness of this agreement. The essence of this clause is that the parties have agreed upon to not challenge each other's FFE right for any ANDA filed as on the original effective date. The effective date of the revised agreement was with effect from 30th November 2011. However, this clause for not challenging the FFE right of any ANDA was made effective from effective date of the original agreement i.e. from 7th December, 2010. In view of this overriding clause of the agreement one can only conclude that the payment under the agreement had nothing to do with Ranbaxy's right to sale atorvastatin tablets during its exclusivity period of 180 days as no other person could have competed during this period. Rather the real purpose of the payment under this agreement was not to challenge each other's FFE right for an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut earlier, there was no breach of the original agreement on the part of Ranbaxy, rather all the defaults were on the part of BP. The original agreement did not provide that Ranbaxy had to compensate for loss on account of initial launch quantity in case the proposals as per the agreement did not materialize on the part of BP. Once the product of Ranbaxy was launched as per terms of the original agreement, what the BP was entitled to receive was 15% of the contract margin and it has never been alleged that Ranbaxy had refused to share this profit. Therefore, these submissions of the Applicant are also found to be without any merit. 78. In respect of the order passed by the OAG, the Applicant has submitted that the same was in the context of clause 6.10.6 of the original agreement. It was clarified that no challenge provision contained in the said clause was in respect of drugs other than atorvastatin for which ANDA had been filed and were pending. It is further submitted that the final findings of the OAG does not render the original agreement illegal and void in entirety as the agreement had a separatability clause. In this context it will be relevant to consider the findings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... btained from the collaboration. (c) There were numerous alternatives available to the parties for addressing any legitimate confidentiality concerns that would have been less restrictive than the broad No Challenge Provision. For example, the Parties could have reduced the scope of information shared under the agreement, and/or agreed to strict firewalls limiting who at each company received access to information shared during the collaboration. 25. OAG believes that the No Challenge Provision is either per se unlawful or presumptively unlawful, and thus illegal regardless of whether any real-world anticompetitive effects can be identified that were caused by it. The OAG did not identify any such effects. 79. It is thus evident from the order of OAG that this no challenge provision was, not at all, necessary to share confidential information in respect of atorvastatin collaboration. While the agreement was in respect of marketing of one drug only, the no challenge provision was made effective in respect of dozen of drugs whose ANDA applications were pending. The OAG has categorically held that this no challenge provision was unlawful and illegal which has not been disputed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thought to the submissions of Revenue and minutely gone through the materials placed on record. There is no dispute to the fact that both the original agreement as well as the amended and reinstated agreement were made by BP USA and BP Israel was never into picture. As per Supply and Distribution Agreement between BP USA and BP Israel, BP Israel had granted the non-exclusive right to sell and distribute the Products and to Promote the ANDA products in the Territory of USA to BP USA. This agreement also stipulated that BP Israel will receive arm's length consideration for the sale of manufactured generics to BP USA. Clause 14.6 of the Supply and Distribution Agreement stipulated that the two parties were transacting on principal to principal basis and they were not working as agent of each other. The said clause is found to be as under: This Agreement does not appoint either Party as the agent or legal representative of the other Party for any purpose whatsoever. Neither Party is granted any right or authority to assume or to create any obligation or responsibility, express or implied, on behalf of or in the name of the other Party, with regard to any manner or thing whats ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts under the amended agreement were assigned to BP Israel. As already discussed earlier BP Israel, even if it was entitled to receive anything, was not entitled to receive the entire receipt; as the bulk of the activity to enter into the agreement and to take necessary action as per the terms of the agreement was undertaken by BP USA, who also need to be compensated for the marketing risks and the functions as performed. In fact all the income as per the terms of the agreements had accrued to BP USA only. The real character of the assignment as made by BP USA in favour of BP Israel is not found to be assignment of income rather it was a case of application of income. As per the agreements BP USA was entitled to receive all the payments, which was its legal right and was its own income. By assigning the payments to BP Israel, BP USA had merely diverted or applied the income already earned by it. The assignment clause 10.2 of the amended agreement stipulated that even after the assignment, the assigner will continue to remain liable and responsible for the obligations undertaken in the agreement. The same is reproduced below: In the case of an assignment to an Affiliate, the assig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India and is taxable in India, is also required to be decided in the hands of BP USA only and is not relevant for the present application. These issues have to be considered in the hands of BP USA and it will not be proper for us to adjudicate the matter without allowing an opportunity to the concerned party and particularly when the said party is not before us. 86. From the factual position and turn of the events as discussed above we are of the considered opinion that the 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 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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