Israeli pharma giant Teva Israel wins tax battle before Delhi High Court against IT Department

In a major victory for Israeli pharmaceutical company Teva Israel, the Delhi High Court has held that a ₹1,851 crore payment made by Ranbaxy Laboratories to Teva Israel under a settlement agreement is not taxable in India [Teva Pharma Vs Union of India]..By way of an order passed on September 15, a bench of Justices Dinesh Mehta and Vinod Kumar said the payment could not be taxed merely because it was made by an Indian company to a foreign entity.“Mere payment by an Indian resident to a non-resident ipso facto does not constitute an income accruing or arising in India.The transaction neither falls within any of the specific deeming provisions under Section 5(2)(b) of the Act of 1961 nor of Section 9. In the absence of both, the jurisdictional foundation for issuance of notice under section 148 collapses,” the Court held.Ranbaxy had already deducted tax before making payment to Teva.The refund of the amount to Teva would be subject to Teva USA and Teva Israel furnishing the guarantees directed by the Court..The case concerned Atorvastatin, a cholesterol-lowering medicine sold by Pfizer under the brand name Lipitor.Ranbaxy was the first company to apply for US regulatory approval to sell a generic version of the drug. It was consequently entitled to a 180-day period during which no other applicant for the generic drug could receive approval.However, there was initially uncertainty over whether Ranbaxy would receive final approval on time. In December 2010, Ranbaxy India, its US subsidiary and Teva USA entered into an agreement governing what would happen if Ranbaxy was unable to use its exclusivity.Under the agreement, Ranbaxy would selectively waive or relinquish its exclusivity in favour of Teva USA if Teva issued a valid “Ready Date Notice” after satisfying stipulated conditions concerning regulatory approval and its readiness to launch the drug..Teva USA issued such a notice on November 23, 2011. Ranbaxy disputed its validity. Teva USA then instituted proceedings before a US court seeking enforcement of the agreement.The dispute was settled with effect from November 30, 2011, the same day on which Ranbaxy received final approval for its generic drug. Ranbaxy began selling Atorvastatin in the United States the following day.Ranbaxy earned around $700 million in profits during the six-month exclusivity period. Under the revised arrangement, 50 per cent of those profits, amounting to ₹1,851.07 crore, became payable to Teva..Teva USA subsequently assigned the right to receive the amount to its parent company, Teva Israel. Ranbaxy India paid the amount to Teva Israel over three assessment years after deducting approximately ₹783.83 crore as tax at source.Teva Israel declared nil taxable income in India and sought a refund. It argued that the payment arose from an agreement and settlement concerning rights, litigation and drug sales in the United States. It also had no permanent establishment in India.The Income Tax Department maintained that the income belonged to Teva USA and that its assignment to Teva Israel was intended to avoid tax. The Department also questioned the commercial rationale behind Ranbaxy agreeing to pay ₹1,851 crore after securing regulatory approval..The Court rejected these arguments. It said an Assessing Officer could not decide whether a businessman had acted prudently in entering into a settlement. “The Assessing Officer who does not wear the hat of an economist cannot and should not decide the prudence of a businessman, as to why an entrepreneur had entered into a settlement and paid the amount. After all nobody would pay Rs.1851 crore, just to save purported tax liability of 30% - one has to pay Rs. 1851 crore in any case,” the Court said..The Court found that the regulatory rights, the disputed notice, the litigation, the settlement and the market generating the profits were all situated outside India.The mere fact that Ranbaxy India made the payment could not determine where the income accrued. The Revenue was required to establish a sufficient connection between India and the activity or right that generated the income..The Court consequently quashed reassessment proceedings initiated against Teva USA for assessment years 2012-13 to 2014-15.It also set aside a 2019 decision of the Authority for Advance Rulings (AAR), which had declined to decide Teva Israel’s taxability plea after concluding that the income belonged to Teva USA and that the arrangement was collusive and designed to avoid tax.The Bench held that the AAR had decided a question that was not before it and recorded findings against Teva USA without the company being before the authority. It added that the AAR had entered a “no-go zone” by undertaking a roving inquiry into the commercial wisdom of the parties..The Court allowed Teva Israel’s advance ruling application and held that the payment received from Ranbaxy did not attract tax under the Income Tax Act.On the refund, the Bench clarified that while tax authorities could make a protective assessment when there was uncertainty over the person liable to pay tax, they could not make a protective recovery.It termed the withholding of the refund for more than a decade “utterly arbitrary, to the extent of being confiscatory”..Senior Advocates Harish N Salve and Sachit Jolly appeared for Teva Pharma, assisted by Advocates Anuradha Dutt, Sherry Goyal, Viyushti Rawat, Devansh Jain, Raghav Dutt, Sarthak Abrol and Abhyudaya Shankar Bajpai from DMD Advocates. .Special Counsel Himanshu S Sinha and Senior Standing Counsel Sunil Agarwal and Vipul Agrawal appeared for the Income Tax Department, assisted by Advocates Yash Varmani, Utkarsh Mittal, Ishita Sharma, Kshitiz Saxena, Monica Benjamin, Gibran Naushad, Adeeb Ahmad, Harshita Sharma, Laiba Arif, Sakshi Shairwal, Akshat Singh, Harshita Kotru, Gaoraang Ranjan and Sachin Singh..[Read Judgment]