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rules payments to foreign firms not taxable merely due to Indian payer
In a significant ruling on international taxation, the on , held that payments made by an Indian resident to a foreign entity do not automatically become taxable in India. The bench of Justice Dinesh Mehta and Justice Vinod Kumar quashed reassessment notices issued against and set aside an order of the , directing the refund of approximately ₹783 crore in tax deducted at source by .
The Atorvastatin Dispute and the Tax Battle
The case arose from a complex set of transactions surrounding the generic version of the blockbuster drug Lipitor (Atorvastatin) in the United States. , an Indian company, held the first-filer exclusivity for a 180-day period under regulations. After regulatory hurdles threatened its ability to market the drug, Ranbaxy entered into agreements with and its US subsidiary, () .
Under a settlement reached in , Ranbaxy manufactured and sold Atorvastatin in the US and paid Teva Israel 50% of the profits—amounting to ₹1,851 crore across three assessment years (2012-13 to 2014-15). Ranbaxy deducted tax at source (TDS) at around 42% before remitting the funds.
Teva Israel sought an from the AAR on whether the payment was taxable in India, arguing it was not chargeable due to the absence of a . , however, contended that the income belonged to —not Teva Israel—and that the arrangement was a designed for . The AAR, in its order dated , declined to rule on taxability, observing that the transaction was designed for and that the income belonged to .
Consequently, initiated under against for all three years, while also framing a against Teva Israel. This led to a batch of writ petitions before the High Court.
Arguments: Nexus vs. Payer Location
, appearing for the petitioners, argued that the payment had no with India. He emphasized that the contractual rights, the ANDA exclusivity, the litigation, and the settlement all pertained to the US market. The mere fact that Ranbaxy was an Indian resident and made the payment from India did not trigger taxation under Section 5(2)(b) or Section 9 of the Act. Mr. Salve also contended that the AAR had exceeded its jurisdiction by evaluating the of the settlement and branding the transaction a without any evidence of illegality.
, representing , argued that the payer's location in India constituted a sufficient source rule. He submitted that the payment was for an illegal (as opined by the ) and that the assignment of income from to Teva Israel was a device. maintained that the income "arose" in India because the payer was located here, and that India's tax base had been eroded.
Court's Legal Analysis: Rejecting the
The High Court delivered a decisive analysis of the interplay between Section 5(2)(b) and Section 9 of the Income Tax Act. It held that 's argument—that the payer's residence alone constitutes a —was unsupported by the statutory scheme.
The Court observed that Section 9 enumerates specific categories of income (such as interest, royalty, and fees for technical services) that are deemed to accrue or arise in India. These are and cannot be extended to create a general source rule based solely on the payer's location. The Court clarified:
“Mere payment by an Indian resident to a non-resident does not constitute an income accruing or arising in India. The transaction neither falls within any of the specific under nor of Section 9. In the absence of both, the jurisdictional foundation for issuance of notice under section 148 collapses.”
The Court distinguished the decision, noting that it dealt with the specific provision for fees for technical services and did not establish a . Similarly, the case was confined to its facts and did not support 's broad proposition.
The Court also rejected 's reliance on the Office of the Attorney General of New York's opinion on anti-competition, holding that an opinion not resulting in a judicial finding of illegality could not be elevated to a basis for Indian tax liability.
The AAR's Overreach
The High Court severely criticized the AAR's order, finding it exceeded the authority conferred under Chapter XIX-B of the Act. The Court noted that the AAR was required to answer the specific question posed by Teva Israel—whether the payment was taxable—but instead went on a "" into the of the parties and the legality of the transaction under US law.
The Court held that the AAR could not determine the tax liability of a third party () who was not before it. By recording findings of and without any evidentiary foundation, the AAR acted beyond its jurisdiction. The Court stated:
“What was expected of the AAR was to examine the transaction before it and record a finding… The AAR's opinion, rather apprehension, that the transaction in question was conceived to avoid tax under United States' or Israel's laws is too farfetched. Whether or not or Teva Israel had paid tax in their respective country or not, should not and cannot be a concern of the AAR and for that matter any tax authority in India.”
Key Observations
- On the source rule: “The statutory scheme neither contains any such provision nor does it contemplate that every payment by a resident to a non-resident shall constitute income arising in India, merely by reason of the payer's residence.”
- On the AAR's approach: “The AAR is not equipped with US competition/patent laws nor is it in know of the US litigation and commercial environment. The AAR is not cognizant of the cost and consequences which a litigation may entail in US.”
- On : “Though there is a concept of , but there is no concept of . The respondents' action of sitting over the refund of the petitioners for assessment years 2012-13, 2013-14 and 2014-15 for more than 10-15 years is utterly arbitrary, to the extent of being .”
The Final Decision
The High Court allowed all five writ petitions:
- W.P.(C) 10711/2017 & 10714/2017 (AY 2012-13 & 2013-14): The Section 148 notices against were quashed as .
- W.P.(C) 12721/2019 : The AAR's order was set aside, and Teva Israel's application for was allowed—the payment is not taxable in India.
- W.P.(C) 1295/2023 (AY 2014-15): The Section 148 notice was quashed as both and .
- W.P.(C) 4065/2022 : was directed to refund the TDS of approximately ₹783 crore to Teva Israel with applicable interest within two months, subject to and Teva Israel furnishing corporate guarantees to secure any future tax demand if liability is ultimately established.
The ruling reaffirms the fundamental principle that Indian tax jurisdiction over non-residents cannot be assumed merely because the payer is located in India. It underscores the need for a genuine and limits the scope of tax authorities to re-characterize genuine commercial transactions. The decision also serves as a check on the AAR's tendency to venture into areas beyond its statutory mandate, such as evaluating the of foreign settlements or the legality of transactions under foreign law.
