In a landmark decision, the Delhi High Court has ruled in favor of Teva Israel, an Israeli pharmaceutical giant, by determining that a ₹1,851 crore payment received from Ranbaxy Laboratories is not subject to taxation in India. This ruling was delivered in the case of Teva Pharma Vs Union of India on September 15 by Justices Dinesh Mehta and Vinod Kumar.
Background of the Case
The dispute centers around a settlement agreement involving Ranbaxy Laboratories and Teva Israel. Ranbaxy had initially deducted tax at source before transferring the sum, which was part of a settlement regarding the drug Atorvastatin, marketed by Pfizer as Lipitor. Ranbaxy, which was the first to seek US approval for a generic version of the drug, faced a potential delay in receiving final regulatory approval. To address this, Ranbaxy entered an agreement with Teva USA in December 2010 to potentially waive its exclusivity rights in favor of Teva.
Upon receiving a ‘Ready Date Notice’ from Teva USA, Ranbaxy contested its validity, leading to legal proceedings in the United States. The matter was resolved on November 30, 2011, coinciding with Ranbaxy’s receipt of final regulatory approval. During the exclusivity period, Ranbaxy accrued profits totaling approximately $700 million, of which ₹1,851.07 crore was payable to Teva.
Court’s Ruling
The Delhi High Court determined that the payment could not be taxed simply because it was made by an Indian company to a foreign entity. The Court emphasized that such transactions do not automatically constitute income accruing in India. It further clarified that the transaction did not fall under the specific provisions of Sections 5(2)(b) or 9 of the Income Tax Act of 1961, which were necessary to establish the jurisdictional basis for issuing a notice under section 148.
The Court also addressed the Income Tax Department’s contention that the income belonged to Teva USA and the assignment to Teva Israel was a tax avoidance strategy. The Court dismissed this argument, stating that an Assessing Officer is not equipped to judge the prudence of a business settlement.
Additionally, the Bench quashed the reassessment proceedings against Teva USA for the assessment years 2012-13 to 2014-15. The Court criticized the Authority for Advance Rulings (AAR) for overstepping its bounds by deciding on matters not presented to it, effectively conducting an unwarranted inquiry into the commercial reasoning behind the settlement.
Conclusion
The Court’s decision to quash the reassessment proceedings and allow Teva Israel’s advance ruling application underscores the importance of respecting the commercial decisions made by businesses. The ruling also criticized the prolonged withholding of the refund as “utterly arbitrary” and “confiscatory.”
Representing Teva Pharma, Senior Advocates Harish N Salve and Sachit Jolly, alongside a team from DMD Advocates, argued the case. The Income Tax Department was represented by Special Counsel Himanshu S Sinha and Senior Standing Counsel Sunil Agarwal, among others.
More Read
This decision marks a significant precedent in the taxation of cross-border settlements, especially involving multinational corporations.
