Delhi HC rules Indian payer’s location alone cannot make offshore income taxable; quashes Teva reassessments and orders ₹783-crore TDS refund

Teva Pharmaceuticals USA Inc. (“Teva USA”), a subsidiary of Teva Pharmaceuticals Industries Ltd., Israel (“Teva Israel”), and Ranbaxy entities entered into agreements concerning the United States market for generic Atorvastatin under the US Abbreviated New Drug Application (“ANDA”) regime.

The arrangement contemplated the transfer or waiver of Ranbaxy’s first-to-file exclusivity rights in favour of Teva USA if specified conditions were satisfied.

Teva USA issued a “Ready Date Notice” on 23 November 2011, but Ranbaxy disputed its validity.

The parties thereafter settled their US litigation through an amended agreement dated 7 December 2011, under which Ranbaxy marketed the product in the United States and paid Teva 50% of the relevant profits.

The payments, aggregating approximately ₹1,851.07 crore, were remitted by Ranbaxy India directly to Teva Israel after deduction of tax at source of approximately ₹783 crore.

Teva Israel applied to the Authority for Advance Rulings (“AAR”) under Section 245Q of the Income-tax Act, 1961, contending that the receipts were business profits not taxable in India in the absence of a business connection or permanent establishment.

The AAR declined to rule on taxability, holding that the income belonged to Teva USA and that the arrangement was prima facie designed for tax avoidance.

The Revenue subsequently initiated reassessment proceedings under Section 148 against Teva USA for Assessment Years 2012–13 to 2014–15, while making a protective assessment in the hands of Teva Israel.

Whether mere payment by an Indian-resident payer to a non-resident recipient is sufficient, by itself, to establish that the income accrued or arose in India under Section 5(2)(b) of the Income-tax Act, 1961?

Whether the reassessment notices issued under Section 148 against Teva USA for Assessment Years 2012–13 and 2013–14 were without jurisdiction in the absence of a sufficient territorial nexus between the receipts and India?

Whether the AAR exceeded its jurisdiction by determining that the income belonged to Teva USA, examining the commercial wisdom and validity of the US agreements, and declining to answer the taxability questions raised by Teva Israel?

Whether the reassessment proceedings for Assessment Year 2014–15 were barred by limitation under Sections 148A and 149 of the Income-tax Act, 1961?

Whether the Revenue could withhold the tax deducted at source from Teva Israel on the basis of a protective assessment or pending proceedings against Teva USA?

The Court applied Sections 5(2)(a) and 5(2)(b) of the Income-tax Act, 1961, under which a non-resident is taxable in India on income received in India or accruing, arising, or deemed to accrue or arise in India; and Section 9, which specifies statutory deeming provisions for income deemed to accrue or arise in India.

The Court held that the situs of the payer is not an independent or universal source rule and that a real and substantive nexus must exist between India and the income-producing right or activity.

It distinguished *GVK Industries Ltd. v. ITO*, holding that the decision recognised source-based taxation in the context of the specific statutory regime for fees for technical services and did not establish that every payment by an Indian resident to a non-resident is taxable in India.

It also distinguished *Johnson Matthey Public Ltd. Co. v. CIT*, where the income-producing obligation had a direct connection with Indian business operations.

Under Sections 245R(2) and 245R(4), the AAR may reject an application at the admission stage where the transaction is prima facie designed for tax avoidance, but once the application is admitted, it must determine the questions raised by the applicant and cannot adjudicate the tax liability of a non-applicant third party.

The Court further applied the limitation principles under Sections 148A and 149, including the principles stated in *Union of India v. Ashish Agarwal* and *Rajeev Bansal*.

Finally, although protective assessment may be permissible where the identity of the taxable recipient is uncertain, there is no corresponding concept of “protective recovery” enabling indefinite withholding of a refund.

The Court found that the income-producing transaction concerned US ANDA rights, US regulatory approvals, the US market, US contractual rights, and litigation and settlement proceedings in the United States.

The fact that Ranbaxy India made the remittance and claimed the payment as a deduction in India did not, without more, locate the accrual of income in India.

The Revenue failed to establish any business connection, Indian activity, or statutory deeming provision under Section 9 linking the receipt to India.

The Court also rejected the Revenue’s reliance on the US Attorney General’s observations, holding that they did not constitute a judicial finding that the agreement or payments were illegal, particularly because the parties had not admitted guilt.

The AAR had impermissibly determined that the income belonged to Teva USA, although Teva USA was not the applicant before it and was not bound by the AAR proceedings.

Having concluded that the taxability of the income in Teva USA’s hands was outside the scope of the application, the AAR could not nevertheless base adverse findings against Teva Israel on speculative conclusions regarding Teva USA’s conduct.

Its examination of the validity of the Ready Date Notice, the commercial rationale for settlement, the increase in the profit-sharing percentage, and the alleged anti-competitive understanding amounted to a roving inquiry into foreign contractual and commercial matters rather than a determination of the questions referred to it.

For Assessment Year 2014–15, the Revenue could not invoke the extended ten-year limitation period by treating the payment received in Teva Israel’s bank account as an “asset” of Teva USA without first establishing that jurisdictional fact.

Moreover, the limitation basis was introduced only in the Section 148A(d) order and had not been disclosed in the prior notice, depriving Teva USA of a meaningful opportunity to respond.

Applying the limitation framework recognised in *Rajeev Bansal*, the Court held that no surviving period remained for passing the Section 148A(d) order or issuing the consequential Section 148 notice.

Since the Revenue itself treated Teva Israel’s assessment as protective and asserted that the substantive liability, if any, lay with Teva USA, withholding Teva Israel’s refund was impermissible.

Protective assessment did not authorise protective recovery, particularly when the proceedings against Teva USA had been stayed and the tax had been deducted under Teva Israel’s PAN.

The receipts were not shown to fall within any applicable deeming provision under Section 9, and the reassessment notices issued against Teva USA for Assessment Years 2012–13 and 2013–14 were therefore without jurisdiction and were quashed.

The Court set aside the AAR’s order dated 25 October 2019, holding that the AAR had exceeded its jurisdiction and failed to decide the taxability questions properly raised by Teva Israel.

The application under Section 245Q was allowed, and the payment received from Ranbaxy was held not chargeable to tax under the Income-tax Act, 1961.

The Section 148A(d) order dated 28 July 2022 and the consequential Section 148 notice dated 29 July 2022 for Assessment Year 2014–15 were quashed as time-barred and without jurisdiction.

The Revenue was directed to refund approximately ₹783 crore of tax deducted at source, with applicable interest, within two months, subject to Teva USA furnishing a corporate guarantee or solvent security and Teva Israel furnishing a corresponding guarantee or surety in the event Teva USA ultimately became liable to tax.