BIOCON BIOPHARMACEUTICALS PRIVATE LTD V. THE INCOME TAX OFFICER

ITA/410/2013

AI Insights

The case involves Biocon Limited, which appealed against the ITAT's decision that classified the issuance of shares to CIMAB as 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961, thereby requiring tax deduction at source under Section 195(1). The ITAT's decision also held that the appellant could not maintain an application for 'nil' withholding under Section 195(2), rendering the 'nil withholding order' dated 22-02-2005 non est in law. The High Court examined whether the issuance of shares constituted a payment that would attract tax deduction at source and whether the shares issued were covered by the 'nil withholding order'. The court found that the issuance of shares did not constitute a payment to the foreign entity and thus did not attract the provisions of Section 195(1) for tax deduction at source.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 690283 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 06-02-2023
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K V ARAVIND
• Assessee Lawyers: T SURYANARAYANA; TANMAYEE RAJKUMAR
• Keywords: Income tax appeal; Royalty; Tax deduction at source; Transfer of Know-How; Nil Withholding Order
• Section: 9(1)(vi); 195(2); 195(1); 260-A

Judgement Text

"- 1 - ITA No. 410/2013 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 6TH DAY OF FEBRUARY, 2023 PRESENT THE HON'BLE MR. JUSTICE P.S.DINESH KUMAR AND THE HON'BLE MR. JUSTICE RAMACHANDRA D. HUDDAR INCOME TAX APPEAL NO. 410 OF 2013 BETWEEN: BIOCON BIOPHARMACEUTICALS PRIVATE LTD (NOW BIOCON LIMITED) A COMPANY INCORPORATED UNDER THE COMPANIES ACT, 1956 HAVING REGISTERED OFFICE AT 20TH K.M., ELECTRONIC CITY HOSUR ROAD BANGALORE – 560 100 REPRESENTED HEREIN BY ITS DEPUTY GENERAL MANAGER TAX AND COMPLIANCE MR. SHIVADUTT B …APPELLANT (BY SHRI. T. SURYANARAYANA, SENIOR ADVOCATE FOR Ms. TANMAYEE RAJKUMAR, ADVOCATE) AND: 1. THE INCOME TAX OFFICER (INTERNATIONAL TAXATION) WARD 19(1), NO.14/3 R.P BHAVAN, NRUPATHUNGA ROAD BANGALORE – 560 001 2. DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) 6TH FLOOR, R.P BHAVAN NRUPATHUNGA ROAD BANGALORE – 560 001 …RESPONDENTS (BY SHRI. K.V. ARAVIND, SENIOR STANDING COUNSEL) Digitally signed by ANUSHA V Location: HIGH COURT OF KARNATAKA - 2 - ITA No. 410/2013 THIS ITA IS FILED UNDER SEC.260-A OF INCOME TAX ACT, 1961, ARISING OUT OF ORDER DATED 19/04/2013 PASSED IN ITAs No.507-510/BANG/2009, FOR THE ASSESSMENT YEARS 2004-05, 2005-06, 2006-07 & 2006-07, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL, SET ASIDE THE ORDER PASSED BY THE ITAT, BANGALORE IN ITAs No.507-510/BANG/2009 DATED 19/04/2013 TO THE EXTENT QUESTIONED THEREIN. THIS ITA, COMING ON FOR FINAL HEARING, THIS DAY, P.S.DINESH KUMAR, J., DELIVERED THE FOLLOWING: JUDGMENT This appeal by the assessee challenging the order dated April 19, 2013 in ITAs No.507-510/Bang/2009 for A.Ys. 2004-05, 2005-06, 2006-2007 passed by the ITAT1, Bengaluru, has been filed to consider nine questions raised in the memorandum of appeal. At the time of admission, this court has recorded following three questions for consideration: “1. The Hon’ble Tribunal was right in holding that the issue of shares by the Appellant to CIMAB constituted ‘royalty’ under Section 9(1)(vi) of the Act entailing tax deduction at source under Section 195(1) of the Act? 2. The Hon’ble Tribunal was correct in holding that the Appellant could not have maintained an application for ‘nil’ 1 Income Tax Appellate Tribunal - 3 - ITA No. 410/2013 withholding under Section 195(2) of the Act and that therefore the ‘nil withholding order’ dated 22-02-2005 was non est in law and that the said does not cover the issue of shares by the Appellant to CIMAB either before or after passing of the said order? 3. The finding of the Hon’ble Tribunal that there was no transfer of know-how by CIMAB to the Appellant under the terms of the TTA read with the JVA is perverse? ” Today Shri T.Suryanarayana, learned Senior Advocate for the assessee and Shri K.V.Aravind, learned Senior Standing Counsel for the Revenue pray that the following two questions may be considered in addition to questions which were admitted on 20.01.2014: “4. the Hon’ble Tribunal was correct in holding that the provisions of Section 195(1) entailing tax deduction at source stood attracted on the issue of shares made by the Appellant to CIMAB? 5. the Hon’ble Tribunal was correct in holding that the issues of shares on 30.03.2004 and 30.09.2004 to CIMAB were not covered by the order dated 22.02.2005 passed by the 1st respondent under section 195(2) of the Act?” 2. Shri Suryanarayana submitted that appellant is a Joint Venture Company incorporated on 17.06.2002 - 4 - ITA No. 410/2013 pursuant to Joint Venture Agreement2 dated 22.02.2002 between the BIOCON Pharmaceuliticals Private Ltd3., and CIMAB SA, Cuba4. As per the terms of JVA, BIOCON would invest all the money and manufacturing unit would be situated in India and entitled for 51% of share. CIMAB would only give technical know-how and would be entitled for 49% of share in the company. After incorporation, shares equivalent to 49% were issued in favour of CIMAB during A.Ys. 2004-05 and 2006-07 and share certificates were issued during A.Ys.2004-05, 2005-06 and 2006-07. For the said years, the AO5 has held that deduction ought not to have been made under Section 195 of the Income Tax Act, 19616 based on the value of the share. The CIT(A)7 and the ITAT have confirmed the view taken by the AO. He submitted that as far as CIMAB is concerned, no payment was ever made by the assessee to either an individual or foreign company. All that has been done is issuance of shares equivalent 2 ‘JVA’ for short 3 ‘BIOCON’ for short 4 ‘CIMAB’ for short 5 Assessing Officer 6 ‘The Act’ for short 7 Commissioner of Income Tax (Appeals) - 5 - ITA No. 410/2013 to 49% of share in the company. The shares are realizable only when they are traded and at that point of time, the transaction made attracts capital gains. Hence, the view taken by the AO and confirmed by higher authorities is bad in law. 3. Shri K.V.Aravind, adverting to Section 195 of the Act, submitted that Parliament has used the phrase “other sums” so far as payment is concerned and therefore, value of the share must be treated as money paid to the foreign entity and therefore, the view taken by the AO and confirmed by the appellate authorities does not call for any interference. 4. We have carefully considered rival contentions and perused records. 5. Section 195 deals with deduction of tax at source when the payment is made. Undisputed facts of this case are, an Indian entity and Cuban entity have agreed to form a company. Indian entity made investment and the Cuban entity rendered technical know-how. The manufacturing unit is situated in India. - 6 - ITA No. 410/2013 As per the JVA, Cuban entity is entitled for 49% of “share”. No transaction of money has taken place between the assessee and the foreign entity. On the other hand, in our view, investment made by the Cuban entity is in the form of technical know-how. The argument advanced on behalf of the Revenue that the phrase “other sums” must be treated as payment made to the foreign entity is misconstrued because no payment is made to the foreign entity. As and when the shares traded by any entity, such transaction attracts capital gains tax. By mere issuance of share certificate, it cannot be construed as any payment having been made to the foreign entity. 6. In view of the above, the view taken by the AO and other authorities is perverse and requires to be set-aside. 7. At this stage, Shri Suryanarayana submits that in view of this court holding questions No.1 and 2 in favour of the assessee, questions No.3, 4 and 5 do not arise for consideration. He is right in his submission. - 7 - ITA No. 410/2013 8. Hence, the following; ORDER (i) Appeal is allowed; (ii) Order dated 19.04.2013 in ITAs No.507-510/Bang/2009 passed by the ITAT, Bengaluru, is set-aside; (iii) Questions No.1 and 2 answered in favour of the assessee and against the Revenue; and (iv) Questions No.3, 4 and 5 do not arise for consideration and accordingly, they are not answered. No costs. Sd/- JUDGE Sd/- JUDGE AV List No.: 1 Sl No.: 18 "