Sun Pharmaceutical Industries Ltd. V. Deputy Commissioner of Income Tax

SCA/2965/2013

AI Insights

The case involves Sun Pharmaceutical Industries Ltd. challenging a notice issued under section 148 of the Income-tax Act, 1961, for reopening the assessment for the Assessment Year 2005-06. The notice was based on two grounds: the diversion of profit through transfer of technology to Caraco Pharmaceutical Laboratories, USA, via Sun BVI, a subsidiary in a tax haven, and the allocation of R&D expenses which allegedly inflated profits in certain units. The court found sufficient grounds to sustain the reopening on the first issue but not on the second, where it was noted that the issue had been previously addressed in scrutiny assessments.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 818695 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 29-07-2013
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax v. Durlop Dealers Limited, Income Tax Officer v. Madnani Engineering Works Limited, Ganga Saran & Sons {P} Limited v. Income Tax Officer, Calcutta Discount Company Limited v. Income-tax Officer, I.P Patel & Company v. Deputy Commissioner of Income-tax, Sun Pharmaceutical Industries Limited v. Deputy Commissioner of Income Tax
• Laws Referred To: Income-tax Act, 1961, Constitution of India, 1950
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: M R BHATT; MAUNA M BHATT
• Assessee Lawyers: S N SOPARKAR; B S SOPARKAR
• Keywords: Income escaped assessment; International Transactions; Reassessment; Research and development expenses; Transfer of Technology
• Section: 148; 143(3); 92CA; 139; 131A

Judgement Text

"C/SCA/2965/2013 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 2965 of 2013 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MS JUSTICE SONIA GOKANI ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ SUN PHARMACEUTICAL INDUSTRIES LTD....Petitioner(s) Versus DEPUTY COMMISSIONER OF INCOME TAX....Respondent(s) ================================================================ Appearance: Mr SN SOPARKAR Sr Advocate with Mr B S SOPARKAR, ADVOCATE for the Petitioner Mr MR BHATT Sr Advocate with Mrs MAUNA M BHATT, ADVOCATE for Respondent ================================================================ CORAM: HONOURABLE Mr. JUSTICE M.R. SHAH and HONOURABLE Ms. JUSTICE SONIA GOKANI 29 th July 2013 ORAL JUDGMENT (PER : HONOURABLE Ms. JUSTICE SONIA GOKANI) Rule. Learned advocate Ms. Mauna Bhatt appears and waives service of notice of rule on behalf of the respondent. With the consent of the learned advocates appearing for the respective parties, the matter is heard today and disposed of by this judgment. Page 1 of 46 C/SCA/2965/2013 JUDGMENT 2. This petition, preferred under Article 226 of the Constitution of India, challenges the notice dated 30th March 2012 issued under section 148 of the Income-tax Act, 1961 {“Act” for short} whereby, the respondent has chosen to reopen the assessment of the petitioner for the Assessment Year 2005-06 on the ground that the same is contrary to law and without jurisdiction. 3. The petitioner-company viz., Sun Pharmaceutical Industries Limited {“SPIL” for short} is engaged in the manufacturing, trading and export of bulk drugs and formulations. The Company has its registered office at Baroda and has six associated enterprises at USA, Bangladesh, Brazil, British Virgin Islands and Mexico. During the year under consideration, it entered into international transactions with its associate enterprises. The details of such transactions have also been furnished by the petitioner in Form 3 CB. The petitioner filed its original return of income under section 139 of the Act declaring total loss at Rs. 21,90,62,215/=, which was revised and the loss was reduced at Rs. 18,91,32,791/=. The Assessing Officer raised certain queries in respect of research and development expenses. These were replied to by the petitioner- company. The Annual Report 2004-05 indicated transfer of technology by Sun Pharmaceutical Industries, INC. to Caraco Pharmaceutical Laboratories Limited, USA. The Annual Report also reflected accounts of Sun Pharmaceutical Industries INC and Caraco Pharmaceutical Laboratories Limited, USA specifying Page 2 of 46 C/SCA/2965/2013 JUDGMENT transfer of technology. 3.1 Return of income filed by the petitioner-Company was duly processed and was taken up for scrutiny assessment. Notices were also issued under sub-clause (2) of Section 143 of the Act and the reference was also made under Section 92CA of the Act to the Transfer Pricing Officer for verification of Arm’s Length Price in respect of the international transactions. After the review and inquiries, the Transfer Pricing Officer had, on due deliberations, made certain additions with regard to the transactions between the petitioner and Sun Pharmaceutical Industries INC. and thereafter under section 143 (3) of the Act, an order was passed on 25th March 2008 whereby the assessee’s total income was assessed at Rs. 25,20,66,051/=. 3.2 Such order came to be challenged before the Commissioner of Income-tax [Appeals]-IV, Ahmedabad [hereinafter referred to as, “CIT (A)”] which passed an order on 24th February 2009 where detailed discussion had taken place on the Research & Development expenses and the Assessing Officer was directed to recalculate the arm’s length price with regard to the commission paid to the associate enterprise. Hence, such ground of appeal was partly allowed. 3.3 Thereafter, notice under section 148 of the Act for reopening of the assessment came to be issued on 30th March 2012. 3.4 A letter dated 26th April 2012 was addressed by the petitioner to the respondent requesting to furnish copy of the reasons Page 3 of 46 C/SCA/2965/2013 JUDGMENT recorded and it filed revised return of income in pursuance to such notice under section 147 read with section 148, after making certain adjustments. 3.5 A copy of the reasoning was furnished to the assessee on 1st August 2012. The petitioner raised various objections vide its communication dated 20th September 2012 and requested the respondent to drop the re-assessment proceedings. Such objections came to be disposed of by the respondent on 16th January 2013. Therefore, the petitioner has preferred the present petition challenging issuance of notice under section 148 of the Act. 3.6 On two counts, the notice of reopening of assessment has been issued – Firstly, the diversion of profit by transfer of technology by Sun BVI to Caraco, USA; and secondly, allocation of R & D expenses, whereby the products manufactured at Sun Pharma Industries [SPI] & Sun Pharmaceuticals, Silvassa [SPS] are being developed at the R&D facilities of Sun Pharmaceutical Industries Limited [SPIL] and the expenditure related to such R&D is debited in the books of account of Sun Pharmaceuticals Industries Limited – the petitioner, thereby reducing its profit and correspondingly, inflating the profit of both SPS & SPI to that extent. 3.7 It would be necessary to reproduce the gist of reasonings given for reopening, which reads thus - “Reasons for reopening : A survey operation u/s. 133A was conducted in the case of Sun Pharmaceutical Industries Limited [hereinafter Page 4 of 46 C/SCA/2965/2013 JUDGMENT referred to as SPIL] by the Assistant Director of Income-tax [Inv.] Unit VII (1), Mumbai on 08.11.2011 at the six business premises belonging to the above assessee. Large number of incriminating documents were found and impounded during the course of survey operation and the same were forwarded to this office alongwith the survey report. On analysis of the impounded material and after going through the survey report, it is noticed that huge amount of income has escaped assessment. The reasons for the aforesaid conclusion / satisfaction are as under :- Diversion of profits on transfer of Technology to Caraco through Sun BVI This is in view of the device adopted by the assessee to evade Tax in India and show profit in the case of a subsidiary company M/s. Sun Pharmaceutical Global Inc. [hereinafter referred to as Sun, BVI] based in British Virgin Island, a tax heaven. The assessee has got several subsidiaries within India and also outside India. On perusal of the impounded material and survey report it is seen that 25 technologies have been transferred by Sun BVI to Caraco, USA. These technologies were acquired by Sun BVI from either Unimed Technologies Limited [hereinafter referred to as, “Unimed”] or M.J Pharmaceuticals Limited, who in turn had acquired the same from SPIL. The cost of acquisition of these technologies in the hands of Sun BVI is normal as compared to the value at which the same are transferred by Sun BVI to Caraco. The huge profits ranging from 95 to 97% earned in Sun BVI are exempt from tax since Sun BVI is incorporated in British Virgin Islands which is a tax haven. During the course of survey dossiers and other technical details pertaining to the above mentioned 25 technologies were found at the R&D office of SPIL in Baroda and Mumbai. These dossiers and technical details were examined and relevant extracts of the same were obtained. These dossiers and technical details show that these Page 5 of 46 C/SCA/2965/2013 JUDGMENT technologies were developed at SPIL in Mumbai and Baroda and at the time of developing these technologies itself, the fact that these technologies were to be used by Caraco in USA was known and recorded in the dossiers and technical documents. xx xx xx xx In view of the above information and evidences in my possession, I have reason to believe that the assessee has adopted dubious device and thereby income to the extent of Rs. 115,88,76,177 [US$ 257,81,450] has escaped assessment.” 3.8 The second ground raised is in respect of allocation of Research & Development Expenses, which reads thus - “Therefore, it can be seen that the products which are manufactured at SPI and SPS are being developed at the R&D facilities of SPIL and the expenditure related to such R&D is debited in the books of account of SPIL thereby reducing its profit. The profit of SPS and SPI is inflated to that extent. The products manufactured in units under SPS and SPI are formulations whereas both the formulations and bulk drugs are manufactured by nits under SPIL. The ratio in which the R&D expenditure is allocated between formulations and bulk drugs within the units of SPIL is 3:1 or in other words 75% of the R&D expenditure debited in the books of SPIL is allocated to R&D of formulations and 25% to the R&D of bulk drugs. Thereafter, the R&D expenses amongst formulations are distributed by SPIL on the basis of turnover of formulations. This fact is evidentially corroborated by loose paper 21 of Annexure A5 impounded from the premises of SPIL, Mumbai [Mahal Industrial Estate, Mahakali Caves Road, Andheri (E), Mumbai]. So, if the entire R&D activity of SPI and SPS is taking place in SPIL, then the expenses for the same should be re-allocated in the ratio of turnover of formulations manufactured in SPIL, SPI Page 6 of 46 C/SCA/2965/2013 JUDGMENT and SPS. xx xx xx xx In view of the above, I have gone through the return of income originally filed and revised by the assessee, the tax audit report, balance sheet and P&L account, details submitted during the course of assessment proceedings and query raised by the then Assessing Officer and finally assessment order passed in the case of Sun Pharmaceutical Industries Limited [SPIL] for A.Y 2005-06. On the basis of above, I found that at no point of time, the assessee informed about the said transactions made through Unimed and M.J Pharmaceuticals and it is also found that at no point of time the then Assessing Officer has the occasion to examine the possibility of taxation of the same in the hands of SPIL arising out of the above transactions. Similarly, the assessee has never disclosed the fact that Research and development work of all the group concerns were done at the facilities of SPIL and even expenses pertaining to those concerns were accordingly debited in the books of SPIL instead of debitting the same in all the concerns separately and proportionately. In fact, as discussed in detail, as above, the assessee has intentionally indulged into such activities with a motive to reduce its taxable income by not disclosing the true nature of transactions in its books of account and the return of income. In fact, it would not have been possible for the Assessing Officer to know about the mechanism adopted by the assessee to evade the tax liability but for the evidences gathered during the course of survey operation conducted by the Asstt. Director of Income Tax [Inv] Unit VII (1), Mumbai and the enquiry and investigation conducted by the ADIT [Unit I] Baroda. Hence, this was a new fact and information for this office and in view of the same, I am satisfied that the above income has escaped assessment by reasons of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the assessment year under consideration. Page 7 of 46 C/SCA/2965/2013 JUDGMENT Issue Notice under section 148 of the Act.” 4. While raising the objections, the assessee has emphasized that both the grounds have already been considered in the scrutiny assessment. Moreover, for the Assessment Year 2003-04, these very details have been accepted in toto in case of the present petitioner as also in the case of Unimed Technologies and M.J Pharmaceuticals Limited. Therefore, in absence of any new material and in absence of any allegation of the petitioner having not disclosed truly and fully all material facts necessary for the purpose of assessment, the issuance of notice for reopening is bad in law. It is further alleged that only on two grounds, such notice is permissible to be issued – Firstly, when in the return of income, details are not provided and secondly, income has escaped assessment on account of petitioner not having disclosed truly and fully all material facts. As the assessment is sought to be reopened beyond the period of four years; as the four years in case of the assessment under question will get over on 31st March 2010, and the impugned notice is issued on 30th March 2012. 4.1 In affidavit-in-reply filed by the Revenue, it is urged that while disposing of the objections, the objections raised by the petitioner are duly dealt with. It is further urged that both the concerns ie., Unimed & M.J Pharmaceuticals Private Limited were sister concerns of the petitioner ie., SPIL at a given point of time and these concerns had not had proper and sufficient R&D facility to develop such products have had the Assessing Officer a reason Page 8 of 46 C/SCA/2965/2013 JUDGMENT to believe that those generic products were actually developed by the petitioner but shown to have been purchased by Sun Global BVI from Unimed and M.J Pharmaceuticals Private Limited. It is also alleged by the respondent that the assessee has intentionally indulged in the activities with a motive to reduce its taxable income by not disclosing the true nature of transactions in its books of account and its return of income. 5. Learned senior counsel Shri S.N Soparkar appearing with learned advocate Shri Bandish S. Soparkar forcefully submitted that not only in the queries raised during the scrutiny assessment, all the details have been revealed by the petitioner assessee but in the Annual Report of the petitioner, which was part of this compilation clearly reflects all transactions; including the transfer of 25 technologies to Unimed Technologies Limited and M.J Pharmaceuticals Limited. These companies are incorporated from the year 1991 and 1996 respectively who have sold the technology to Sun BVI, which is a wholly owned subsidiary of the petitioner, which in turn transferred the technology to Caraco, USA, which is also a wholly owned subsidiary. He further urged that in case of Unimed Technologies Limited and M.J Pharmaceuticals Limited for the A.Y 2005-06, assessment has been accepted. If at all income has escaped assessment and is required to be taxed, it would be in the case of both these companies for whom, the job work has been done by the petitioner and the petitioner’s assessment is wrongly re-opened. It is emphasized that nowhere it emerges from the Page 9 of 46 C/SCA/2965/2013 JUDGMENT entire set of documents that the petitioner has not disclosed fully and truly all material facts which it was required to reveal and on account of that, any taxable income has escaped the assessment. According to learned counsel, it is only at the time of survey carried out at the premise of the petitioner company, certain material were found which surely does not bring the case of the Revenue within the purview of Section 147 of the Act. He urged that once having disclosed all the details, the assessee is not under obligation to let the Assessing Officer know as to how to conduct his affairs. These transactions not only are reflected in the return of income but the T.P.O has also been referred to these transactions and on his report, additions also have been made by the concerned authority. He further urged that the CIT [A] having decided the appeal, the order of Assessing Officer is merged into that of CIT [A], and therefore, the Assessing Officer has no business to reopen the assessment. He has sought to rely upon the following authorities :- [1] Commissioner of Income Tax v. Durlop Dealers Limited, reported in [1971] 79 ITR 609 (SC); [2] Income Tax Officer v. Madnani Engineering Works Limited, reported in [1979] 118 ITR 1 (SC); [3] Ganga Saran & Sons {P} Limited v. Income Tax Officer, reported in [1981] 130 ITR 1 (SC); [4] Calcutta Discount Company Limited v. Income-tax Officer, reported in [1961] 41 ITR 191 (SC); [5] I.P Patel & Company v. Deputy Commissioner of Page 10 of 46 C/SCA/2965/2013 JUDGMENT Income-tax, reported in [2012] 346 ITR 207 (Guj). 5.1 In essence, learned senior counsel Shri Soparkar urged that without disturbing the assessment in case of both Unimed Technologies Limited and M.J Pharmaceuticals Limited, no reopening is permissible in case of the present petition particularly on expiry of period of four years, in absence of any failure on the part of the petitioner to disclose truly and fully all the material facts. 6. Per contra, learned senior advocate Shri Manish R. Bhatt urged fervently that it is only during the course of survey carried out on 8th November 2011 that the material came out indicative of the fact that in correct facts have not been provided by the petitioner and as a result, M/s. Unimed Technologies Limited and M.J Pharmaceuticals Limited have been put up as a front to shield the true income of the petitioner. Till the year 2002, transfer of technology to Caraco, USA was directly by the assessee. However, after such agreement came to an end, this modus is adopted of transferring the technology to SUN BVI through its wholly owned subsidiaries viz., Unimed Technologies Limited & M.J Pharmaceuticals Limited. Sun BVI since is situated at British Virgin Islands, which is a tax heaven for the Company, huge amount has escaped the assessment on account of true nature of transactions not having come on the record. He urged that large number of documents unearthed on 8th November 2011 have led the Assessing Page 11 of 46 C/SCA/2965/2013 JUDGMENT Officer to formulate a reasonable belief that income has escaped the assessment for the assessment year in question. 6.1 Learned counsel further urged that for the A.Y 2003-04, prior to the survey, the assessment has been completed and accepted and as the period of six years also was over for the A.Y 2003-04, assessment could not be re-opened. He heavily relied upon some of the statements recorded under section 131 of the Act which came to be recorded during the course of survey proceedings. He urged that senior scientist heading the team of developing twenty five technologies for Caraco, USA had admitted of these technologies being developed by the petitioner for none other than Caraco, USA. He, therefore urged that on the question of jurisdiction, when the Revenue is able to satisfy the Court that there is no true disclosure and that too true and full on the part of the petitioner, no interference at the stage of the notice be done as the assessee is likely to get the fullest opportunities to raise its defence in the re- assessment proceedings. He further urged that the entire channel of statutory appeals would also be available to the petitioner and therefore, at this stage, this Court may not interfere. 6.2 Learned counsel Shri Bhatt further urged that as far as second question is concerned, whereby the expenses of R&D is required to be bifurcated amongst other units, that if on those grounds which were raised and decided by the CIT [A], the question of merger would arise but not on the ground that are not at all touched by the CIT [A] and re-assessment can be made Page 12 of 46 C/SCA/2965/2013 JUDGMENT permissible on such fresh ground, even when the order of CIT [A] has been merged with the CIT [A]. Reliance is also placed on the following decisions :- [1] Income Tax Officer v. Ch. Atchaiah, reported in [1996] 218 ITR 239 (SC); [2] Remfry & Sagar v. Commissioner of Income Tax, reported in [2013] 351 ITR 75 (Delhi); [3] Sun Pharmaceutical Industries Limited v. Deputy Commissioner of Income Tax, reported in [2013] 353 ITR; 7. Upon thus hearing both the sides and on giving thoughtful consideration to these submissions as also all the material placed before this Court, this petition is not being entertained for the reasons to be followed hereinafter. 8. Before adverting to the facts of the instant case, the law on the subject needs to be briefly recapitulated. 8.1 Section 147 of the Act permits the Assessing Officer to assessee or re-assess the income chargeable to tax, which has escaped assessment and which come to his notice, if he has a reason to so believe it, subsequently, in the course of proceedings under this section; subject to provision of Sections 138 to 153. First proviso to this section provides that no action shall be taken under this section after expiry of four years from the end of relevant assessment year, unless any income chargeable to tax has escaped assessment for the assessment year under consideration on Page 13 of 46 C/SCA/2965/2013 JUDGMENT account of failure on the part of the assessee to make a return under section 139 or in response to notice issued under sub-section (1) of section 142 or Section 148, or on account of failure of assessee to disclose fully and truly all material facts necessary for his assessment. The Assessing Officer under sub-section (1) of Section 148, before making the re-assessment or re-computation under section 147 of the Act is required to serve on an assessee, a notice requiring him to furnish; within such period as may be specified in the notice, a return of his income and the Assessing Officer shall require to record his reasons before issuing any such notice. Therefore, the requirement under the law for issuance of the notice is that the Assessing Officer must have a reason to believe that the income has escaped assessment on account of failure on the part of the assessee to disclose fully and truly all the material facts necessary for the assessment, after expiry of four years from the end of relevant assessment year. This being the case of notice under section 148 of the Act having been issued beyond the period of four years from the end of relevant assessment year, conditions required to be fulfilled is that the assessee failed to make a return under section 139 or in response to a notice under sub-section (1) of section 142 or Section 148 or it failed to disclose fully and truly all material facts necessary for his assessment. 9. Admittedly, in the instant case, notice has been issued beyond a period of four year after the survey was conducted on 8th November 2011.It is not on the basis of material or evidence Page 14 of 46 C/SCA/2965/2013 JUDGMENT available with the Assessing Officer but the material collected during the survey proceedings that a notice has been issued to the petitioner under section 148 of the Act. A moot question therefore would be whether the Revenue would assume jurisdiction to issue a notice under section 148 of the Act from the material collected during the course of survey to hold a belief that the income chargeable to tax has escaped the assessment on account of failure on the part of the assessee to disclose truly and fully all material facts. 9.1 The Apex Court in case of Commissioner of Income-tax v. Burlop Dealers Limited [Supra] was dealing with a case where the assessee was a limited company whose assessment for the assessment year 1949-50 was reopened by the Assessing Officer on the ground that income had been under-assessed owing to the failure on the part of the assessee to disclose truly and fully all necessary facts for assessment. He observed that the assessee had misled the Income-tax Officer [“ITO” for short] into believing that there was a genuine arrangement with “R” and had stated in the Profit & Loss Account that the amount paid to “R” was share of the later in the partnership firm where no such share was payable to “R”. The Tribunal was of the opinion that the assessee had produced all the relevant accounts and documents necessary for competing the assessment and the assessee was under no obligation to inform the I.T.O about the true nature of the transactions. Page 15 of 46 C/SCA/2965/2013 JUDGMENT 9.2 The Apex Court held that if the assessee has disclosed primary facts relevant to the assessment, he is under no obligation to instruct the Income-tax Officer about the inference which the Income-tax Officer may raise from those facts. The terms of the Explanation to section 34 (1) of the Income-tax Act, 1922 also do not impose a more onerous obligation. Mere production of the books of account or other evidences from which material facts could with due diligence have been discovered does not necessarily amount to disclosure within the meaning of section 34 (1), but where on the evidence and the materials produced, the Income-tax Officer could have reached a conclusion other than the one which he has reached, a proceeding under section 34 (1)(a) will not lie merely on the ground that the Income-tax Officer has raised an inference which he may later regard as erroneous. 9.3 In the case between Income-tax Officer v. Madnani Engineering Works Limited [Supra], while completing the assessment, the assessee company allowed deduction of interest paid to creditor on borrowed moneys and hundies. However, subsequently, the assessment was reopened on the ground that during the course of assessment proceedings for subsequent assessment years, it was noticed that various items shown as loan against security of Hundies in assessee’s books of account for assessment year under question were in fact fictitious. The Income- tax Officer in the challenge to such reopening by way of a writ petition, did not set-out any material on the basis of which he Page 16 of 46 C/SCA/2965/2013 JUDGMENT arrived at such a belief. On having found that the assessee had produced all Hundies on the strength of which it had obtained loan as also the entries in the books of account showing payment of interest, the Court held the notice issued under section 147 of the Act as void. The Court also held that the Income-tax Officer had not given any satisfactory reason to uphold its belief that a part of income of the respondent has escaped assessment by reason of its failure to make a true and full disclosure of the material facts. 9.4 In the case of Ganga Saran & Sons (P) Limited v. Income- tax Officer, in a proceeding under section 147 of the Act of re- assessment of the income alleged to have escaped the assessment, the Income-tax Officer had a reason to believe that on non- disclosure of primary facts, the Income-tax Officer’s action under section 147 of the Act was justifiable. D, a director of company and brother-in-law of assessee’s managing director G, was looking after assessee’s Delhi branch on full time basis. The Director gifted/loaned a major part of remuneration received by him from assessee company to his brother-in-law who was the managing director. On the basis of such facts, the Income-tax Officer held that the remuneration paid to the director by the assessee company was sham, bogus and was not a permissible deduction. He issued a notice under section 148 of the Act seeking to reopen the assessment under section 147 (a) of the Act. In challenge to the notice under a writ petition, the Apex Court held that neither the Income-tax Officer had reason to believe that income of the Page 17 of 46 C/SCA/2965/2013 JUDGMENT assessee had escaped assessment nor was he right in concluding that the assessee omitted or failed to disclose fully and truly any material facts relating to its assessment, and hence, section 147 (a) was not applicable and the impugned notice issued by the Income- tax Officer under section 148 of the Act was without jurisdiction. The Court held, thus - “6. It is well settled as a result of several decisions of this Court that two distinct conditions must be satisfied before the ITO can assume jurisdiction to issue notice under section 147 (a). First, he must have reason to believe that the income of the assessee has escaped assessment and secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the ITO would be without jurisdiction. The important words under section 147(a) are “has reason to believe” and these words are stronger than the words “is satisfied”. The belief entertained by the ITO must not be arbitrary or irrational. It must be reasonable or in other words, it must be based on reasons which are relevant and material. The Court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the ITO in coming to the belief, but the Court can certainly examine whether the reasons are relevant and have a bearing on the matters in regard to which he is required to entertain the belief before he can issue notice under section 147 (a). If there is no rational and intelligible nexus between the reasons and the belief, so that, no such reasons, no one properly instructed on facts and law could reasonably entertain Page 18 of 46 C/SCA/2965/2013 JUDGMENT the belief, the conclusion would be inescapable that the ITO could not have reason to belief that any part of the income of the assessee had escaped assessment and such escapement was by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to be struck down as invalid.” 9.5 In the said decision, the Supreme Court noticed that the statement of accounts of the director for the relevant accounting year and also for the previous year were with the ITO at the time of original assessment and such statements of account clearly reflected that out of the amount of remuneration credited to his account, gift was made to Managing Director, who was his brother- in-law. The Income-tax Officer also was aware that this man was the managing director of the assessee company. The assessee, according to the Apex Court, could not be said to be under obligation to disclose to the Income-tax Officer in the course of assessment as to how the director, who was in the sole charge of the management of the assessee company and who was being paid remuneration for services rendered by him to the assessee company, had utilized the amount of remuneration received by him. Therefore, the Apex Court held that it was not possible to sustain the conclusion that the assessee omitted or failed to disclose truly and fully any material facts relating to the assessment. Neither of the two conditions necessary for attracting the applicability of Section 147 (a) of the Act since was found satisfied in this case, the Page 19 of 46 C/SCA/2965/2013 JUDGMENT notice issued was held without jurisdiction. 9.6 In case of Calcutta Discount Company Limited v. Income-tax Officer [Supra], the Apex Court has held that it is the duty of assessee to disclose fully and truly all primary relevant facts and once all primary facts are before assessing authority, he requires no further assistance by way of disclosure and what factual inference to be drawn from such material is not for the assessee to tell the ITO. If there is reasonable ground of there being non-disclosure as regards any primary facts, which would have a material bearing on the question of under assessment, that would give jurisdiction to the Income-tax Officer to issue notice under section 34 of the Income Tax Act, 1922. The Apex Court held that, “there can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet the possible contention that when some account books or other evidence has been produced, there is no duty on the assessee to disclose further facts, which on due diligence, the Income-tax Officer might have discovered, the Legislature has put in the Explanation to Section 143 (1) of the Act. The duty, however, does not extend beyond the full and truthful disclosure of all primary facts. Once all the primary facts are before the assessing authority, he requires no further assistance by way of disclosure. It is for him to decide what inferences of facts can be reasonably drawn and what legal Page 20 of 46 C/SCA/2965/2013 JUDGMENT inferences have ultimately to be drawn. It is not for somebody else- far less the assessee – to tell the assessing authority what inferences, whether of facts or law, should be drawn. Indeed, when it is remembered that people often differ as regards what inferences should be drawn from given facts, it will be meaningless to demand that the assessee must disclose what interferences – whether of facts or law - he would draw from the primary facts. If from primary facts more inferences than one could be drawn, it would not be possible to say that the assessee should have drawn any particular inference and communicated it to the assessing authority. How could an assessee be charged with failure to communicate an inference, which he might or might not have drawn ? It may be pointed out that the Explanation to the sub-section has nothing to do with “inferences” deals only with the question whether primary material facts not disclosed could still be said to be constructively disclosed on the ground that with due diligence the ITO could have discovered them from the facts actually disclosed. The Explanation has not the effect of enlarging the section, by casting a duty on the assessee to disclose “inferences” - to draw the proper inferences being the duty imposed on the Income-tax Officer. Therefore, it can be concluded that while the duty of the assessee is to disclose fully and truly all primary relevant facts, it does not extend beyond this.” Page 21 of 46 C/SCA/2965/2013 JUDGMENT 9.7 The Apex Court also held therein that on the primary facts disclosed to the Income-tax Officer, it is for him to raise inferences of facts and to conclude on such primary as well as inferential facts, however, if he commits a mistake in arriving at such conclusion, he cannot commence re-assessment proceedings on being apprised of the error. 9.8 With regard to Article 226, the Court has held that the Court cannot seek to hold an inquiry into a question whether the Income-tax Officer has reason to hold a reasonable belief. When the Constitution confers on the High Courts, the power to give relief, it becomes the duty of the Courts to give such relief in fit cases and the Courts would be failing to perform their duty if relief is refused without adequate reasons. The condition precedent for assumption of jurisdiction under section 34 of the Act of 1992, if were not satisfied, then the Court would be needed to exercise writ jurisdiction. 9.9 Apex Court in case of Income-tax Officer v. Ch. Atchaiah [Supra] held that if certain income was income of association of persons [AOP] in law, AOP alone had to be taxed and merely because members of AOP had been taxed individually in respect of said income, Assessing Officer was not precluded from taxing AOP with respect to that income. The Court further held that, “..Under the 1961 Act, the Assessing Officer has no option like the one he had under the 1992 Act. He can, and he must, tax the right person and the right person alone. By ‘right person’ is meant the person Page 22 of 46 C/SCA/2965/2013 JUDGMENT who is liable to be taxed, according to law, with respect to a particular income. The expression ‘wrong person’ is obviously used as the opposite of the expression ‘right person’. Merely because a wrong person is taxed with respect to a particular income, the Assessing Officer is not precluded from taxing the right person with respect to that income. This is so irrespective of the fact as to which course is more beneficial to the revenue. The language of the relevant provisions of the 1961 Act is quite clear and unambiguous. Section 183 shows that where the Parliament intended to provide an option, it provided so expressly. Where a person is taxed wrongfully, he is no doubt, entitled to be relieved of it in accordance with law, but that is a different matter altogether. The person lawfully liable to be taxed can claim no immunity because the Assessing Officer [ITO] has taxed the said income in the hands of another person contrary to law.” 10. This Court in case of Sun Pharmaceutical Industries Limited v. Deputy Commissioner of Income-tax, reported in [2013] 353 ITR 450 was dealing with the income escaping the assessment when the issue of notice under section 147, the assessee sold certain goods to its sister concern, it was found by the Assessing Officer that on delayed payment of such goods, interest @ 24% per annum was paid, which was higher than the prevailing market rate of interest which was between 15% - 18%. According to the Assessing Officer, by adopting such modality, the assessee reduced taxable profit and at the same time, increased the Page 23 of 46 C/SCA/2965/2013 JUDGMENT profit of its unit which was eligible for deduction under section 80IH of the Act. Certain essential facts like – assessee received interest on overdue payments from “A” and that “A” was a sister concern of the assessee company and that such interest charged was 24% per annum were not discernible from record at all. It was therefore held that the Assessing Officer was justified in initiating re-assessment proceedings. This Court, relying upon a decision in case of Phool Chand Bajrang Lal v. Income-tax Officer, reported in 203 ITR 456, held as under :- “Where the transaction itself, on the basis of subsequent information was found to be a bogus transaction, mere disclosure of that transaction at the time of original proceedings could not be said to be a disclosure of true and full facts and officer would have jurisdiction to reopen the concluded assessment in such a case.” 10.1 This Court, while sustaining the order of re-assessment, observed thus - “37. In the present case, as already noted, the only disclosure was that the assessee had earned interest income of Rs.3,03,48,973/-. There was no further information available on record that such interest included overdue payment charges at the rate of 24% received from the sister concern, viz. Aditya Medisales. Even without the aid of explanation (1) to proviso to section 147, therefore, it was perhaps open for the Assessing Officer to contend that there was no true and full disclosure on the part of the assessee in this respect. At any rate, by applying such explanation, it can be easily gathered that the assessee Page 24 of 46 C/SCA/2965/2013 JUDGMENT failed to disclose fully and truly all material facts. Counsel for the petitioner, however, vehemently contended that these were not primary facts. Only primary fact was that the assessee had earned interest income. We are, however, of the opinion that in the context of the close connection between the petitioner and Aditya Medisales, the fact that the assessee was eligible for deduction under section 80IA of the Act and the interest income received from the sister concern had relevance to the provisions of section 80IA(10) of the Act, primary facts were not on record.” 10.2 Apex Court in case of Ess Ess Kay Engineering Company Private Limited v. Commissioner of Income Tax, reported in 247 ITR 818 held as under :- “This is a case of reopening. We have perused the documents. We find there was material on the basis of which the Income-tax Officer could proceed to reopen the case, it is not a case of mere change of opinion. We are not inclined to interfere with the decision of the High Court merely because the case of the assessee was accepted as correct in the original assessment for this assessment year. It does not preclude the Income Tax Officer to reopen the assessment of an earlier year on the basis of his findings of facts made on the basis of fresh materials in the course of assessment of the next assessment year. The appeal is dismissed. No order as to costs.” 10.3 Delhi High Court, in case of Remfry & Sagar v. Commissioner of Income-tax, reported in [2013] 351 ITR 75 (Delhi) was examining the question of jurisdiction of issuance of Page 25 of 46 C/SCA/2965/2013 JUDGMENT notice under section 147 of the Act. The assessee firm made payment to a company under a licence agreement for use of goodwill and name of the said company. Assessee filed return and claimed that payment made to company under licence agreement was a revenue expenditure and such claim was allowed for the years under consideration. However, in course of assessment proceeding, the Assessing Officer examined licence agreement which was not filed in earlier years and on going through its claim for deduction of licence fee, payment was not found allowable. On reopening of the assessment of the relevant years, the Court held that since the assessee did not furnish licence agreement before the Assessing Officer in course of original assessment proceedings and only an appraisal of various clauses of agreement would not enable the Assessing Officer to arrive at a conclusion regarding allowability of the payment as business expenditure, therefore, such failure on the part of the assessee could attract the provision of Section 147 of the Act. The Court held, thus - “16. It is in the light of the statutory language that we have to examine the reasons recorded under section 148(2) of the Act in the present case. A perusal of the reasons recorded shows that the respondent has clearly stated therein that the assessee has not disclosed all material facts correctly and fully and there was failure on its part to disclose fully and truly all material facts necessary for his assessment as per the proviso to section 147 of the Act, by reason of which there was escapement of income chargeable to tax. The reasons also refer to the fact that in the course of the assessment proceedings for the year 2007-08 the licence Page 26 of 46 C/SCA/2965/2013 JUDGMENT agreement entered into in June, 2001 was examined but the claim for deduction of the licence fee payment was found not allowable. It further refers to the fact that in the course of the assessment proceedings for the assessment years 2003- 04, 2004-05, 2005-06 and 2006-07 neither the assessee suo motu furnished information (regarding the licence fee payment) nor did it furnish reasons as to why the said claim is allowable. It is true that the genesis of the present proceedings was the scrutiny assessment made for the assessment year 2007-08 in the course of which the petitioner had furnished the licence fee agreement; it is equally true that the respondent has clearly stated in the reasons recorded that there was failure on the part of the petitioner to furnish full and true particulars. The reference to failure of the petitioner is obviously to the failure to file the licence fee agreement, if regard is had to the reasons read as a whole, and the specific reference therein to the petitioner having filed the agreement in the assessment proceedings for the year 2007-08 as contrasted with the petitioner’s failure to furnish full and true particulars or material facts at the time of the original assessments for the four earlier assessment years. It seems to us proper to understand and appreciate the reasons recorded in a fulsome manner and not to treat them as statutes and so long as the failure of the assessee to furnish primary or material facts has been brought out in sufficient relief, it is not necessary to insist on the specific failure of the assessee being stated in the reasons. A parrot-like repetition of the statutory language without any substance would certainly not amount to satisfying the jurisdictional conditions but if the language used coupled with the context is sufficiently capable of conveying the fact that there was failure on the part of the assessee to furnish primary facts fully and truly at the time of original assessment, that should be sufficient compliance with the requirements of section 148(2) of the Act. In this view of the matter we are unable to accept the Page 27 of 46 C/SCA/2965/2013 JUDGMENT contention of the petitioner that the failure to refer to the omission of the petitioner specifically to file the licence agreement (in the reasons recorded) is fatal to the validity of the reassessment proceedings. 17. We now proceed to a consideration of the question whether the licence agreement dated 05.06.2001 is a primary fact which ought to have been placed by the petitioner before the assessing officer in the course of the original assessment proceedings. In Calcutta Discount Co. Ltd. v. Income-tax Officer (1961) 41 ITR 191 a constitution Bench of the Supreme Court held that it was the duty of the assessee to furnish all the primary and material facts fully and truly before the assessing authority and failure to do so would invite action for reassessment. It was further held that the duty ends there and it is for the assessing authority to draw the appropriate inferences from those primary facts and it is not the duty of the assessee to advise him as to what inferences may be drawn, both of fact and law. In Kantamani Venkata Narayana and Sons Vs. First Additional Income-Tax Officer, (1967) 63 ITR 638, the Supreme Court held as under: - “………. It is clearly implicit in the terms of sections 23 and 34 of the Income-tax Act that the assessee is under a duty to disclose fully and truly material facts necessary for the assessment of the year, and that the duty is not discharged merely by the production of the books of account or other evidence. It is the duty of the assessee to bring to the notice of the Income-tax Officer particular items in the books of account or portions of documents which are relevant. Even if it be assumed that from the books produced, the Income-tax Officer, if he had been circumspect, could have found out the truth, the Income-tax Officer may not on that account be precluded from exercising the power to assess income which had escaped assessment.” 18. As to what would be a primary fact would largely depend on the facts and circumstances of each case. In Associated Stone Industries (Kotah) Ltd. v. CIT (1997) 224 Page 28 of 46 C/SCA/2965/2013 JUDGMENT ITR 560 the Supreme Court was concerned with the correctness of the action under section 34(1)(a) of the Indian Income Tax Act, 1922 which authorized the assessing officer to reopen an assessment on the ground of failure on the part of the assessee to disclose material facts. The assessee therein was granted a lease by the ruler of the State for quarrying stones. The assessee was to pay royalty inclusive of income tax. Subsequently, there was a merger of the princely State with Rajasthan and a triangular litigation between the assessee, the State of Rajasthan and the Union of India ensued. The assessing officer initiated action to reopen the assessment to disallow a part of the royalty. The assessee took up the plea that the lease agreement entered into with the Maharaja of Kota State dated 02.05.1945 had been filed before the income tax officer at the time of original assessments and there was thus no failure on its part to furnish the primary facts. The Supreme Court, reversing the judgment of the Rajasthan High Court, held that the primary fact in the case was the lease agreement and since the same had been placed before the income tax officer at the time of original assessment, there was no failure to furnish primary facts. It was further held that it was not the duty of the assessee to draw the attention of the income tax officer to any particular clause or portion of the agreement and invite him to draw a particular inference from the same. It would thus appear that whenever a claim is made for any deduction or allowance or relief in the computation of the total income, and if the claim is based on the terms and conditions of a document or documents, it is the duty of the assessee to place before the assessing officer the document or documents; the document would constitute the primary fact. The word “primary” means “that which is first in order, rank or importance; anything from which something else arises or is derived” (P. Ramanatha Aiyar‟s The Major Lexicon, IVth Edition 2010). In the petitions before us, it is an admitted position that the petitioner did Page 29 of 46 C/SCA/2965/2013 JUDGMENT not furnish the licence agreement dated 05.06.2001 before the assessing officer in the course of the original assessment proceedings for any year. The claim for deduction of the licence fee payment undeniably was based on the terms and conditions of the licence agreement. Only an appraisal of the various clauses of the agreement would have enabled the assessing officer to arrive at a conclusion regarding the allowability of the payment as business expenditure. Since the primary document, that is, the primary fact was not furnished, there was in our opinion such failure on the part of the petitioner as would attract the provisions of section 147 of the Act; it is a case to which Explanation 1 is attracted.” 10.4 This Court in I.P Patel & Company [Supra] has held that, “for the purpose of invoking section 147 of the Income-tax Act, 1961, beyond a period of four years, the Assessing Officer is required to record a two-fold satisfaction. Firstly, that income has escaped assessment and secondly, that such escapement is on account of failure on the part of the assessee to disclose fully and truly all material facts. Neither sub-section (2) of Section 148 of the Act nor the proviso to section 147, require the Assessing Officer to expressly state in the reasons that income has escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts. If, on the face of the reasons recorded, it is apparent that failure to disclose is made out, merely because a specific expression does not find place therein, it cannot be said that the Assessing Officer has not recorded satisfaction in this regard.” Page 30 of 46 C/SCA/2965/2013 JUDGMENT It can be thus deduced that the High Court can exercise powers under section 226 by issuing the writ of certiorari or prohibition, if the authority acts without jurisdiction. While issuing notice under section 148 of the Act, a person if is subjected to lengthy proceedings and unwarranted harassment, the Court can always issue a proper writ for precluding such undesirable acts and consequences. The two conditions which are required to be examined at this stage are – as to whether income chargeable to tax has escaped assessment by the reason of failure on the part of the assessee to file the return under section 139, or in response to the notice issued under sub-section (1) of section 142 or Section 148 (1) or (2) to disclose fully and truly all material facts necessary for assessment of the year under question. 10.5 The first condition does not exist in the instant case, and therefore, the second condition shall have to be closely examined as to whether there is anything to indicate that there was any failure on the part of the petitioner to disclose fully and truly all material facts necessary for assessment in the year under question. Since the notice under section 148 had been issued on expiry of period of four years from the end of relevant assessment year, mere mechanical reproduction of provisions or expression of having fulfilled its obligation of revealing all primary facts would not satisfy the jurisdictional requirement. At the time of original assessment, if there is a failure to furnish the primary facts; fully and truly, it should not be a sufficient compliance of the Page 31 of 46 C/SCA/2965/2013 JUDGMENT requirement of section 148 (2) as held in catena of decisions and what would amount to primary facts would depend on each case from its facts and circumstances. The endeavour hereinafter therefore would be to examine as to on the basis of which material, the assessing authority has drawn factual and legal inference and whether those primary facts were already furnished to the assessing authority by the assessee at the time of original assessment. 10.6 From the original order of Assessing Officer, it can be gathered that for the assessment year under question, on scrutiny assessment, the assessment has been finalized. Queries which were raised in respect of the first ground of reopening were in the nature of information called for vide communication dated 2nd August 2007. It also further appears that a reference was made under section 92 {C} (A) of the Act to the Transfer Pricing Officer for verification of the Arm’s length price in respect of international transactions, as detailed in the audit report in Form 3CEB vide communication dated 1st October 2007. 10.7 A notice under section 92CA (2) was issued to the petitioner on 16th October 2007 with a questionnaire directing the petitioner to furnish all necessary details and documents in respect of arm’s length price and the matter was fixed on 7th November 2007. The Joint Commissioner of Income-tax [TPO], Ahmedabad passed an order in respect of such reference under section 92C (3) of the Act noting the fact that the petitioner has been engaged in Page 32 of 46 C/SCA/2965/2013 JUDGMENT manufacturing, trading and export of bulk drug formulations and during the year under question ie., A.Y 2005-06, it entered into international transactions with its associate enterprises to the tune of more than Rs. 400 Crores. These international transactions in terms of Section 92B between the petitioner and its associate enterprises given in Form 3CEB has also been recorded. The Transfer Pricing Officer noted that the assessee claimed commission paid to its associate enterprise as the expenses under section 37 (1) and therefore, the provision of Section 92 would be attracted and arm’s length price has to be determined for such transactions and the total income of the assessee would be computed on the basis of arm’s length price so determined. It further noted that the assessee paid Rs. 5,17,21,555/= to its associated enterprises and since arm’s length price of these transactions is determined to be “NIL”, a similar amount is required to be added in the total income of the assessee. With this report of Transfer Pricing Officer, several additions to the income under different heads to the income of the company had been made and the total income of the company was assessed at Rs. 25,20,66,065/= by the Assessing Officer in its order of scrutiny assessment dated 25th March 2008. 10.8 It is to be noted here that in the brochure of the Company [at Annexure B-2], the details of Caraco Pharmaceutical Laboratories Limited is also provided. Sun BVI account is already provided which had transferred the technology to Caraco Page 33 of 46 C/SCA/2965/2013 JUDGMENT Pharmaceutical Laboratories Limited. It also mentions that upto 2002, there was an agreement with the petitioner for transferring the technology formulations for 25 generic pharmaceutical products for a period of five years in exchange of 5,44,000 shares of Caraco common stock. The agreement expired on November 21, 2002 and the Caraco Pharmaceutical Laboratories Limited entered into a new technology transfer agreement with Sun Global – an affiliate of Sun Pharmaceutical Industries Limited. Under such agreement, Sun Global agreed to provide the formulations for 25 new generic drugs over a period of five years. Caraco’s right to the products are limited to the United States and the territories or possessions, including Puerto Rico. 10.9 The petitioner has claimed that Caraco had an agreement for transfer of product technology from the petitioner in the year 1997, whereby the petitioner invested 7.5 million US Dollars into the common stock of the Caraco and was required to transfer the technology formula for 25 generic pharmaceuticals products over a period of 5 years through August 2002 in exchange for 5,44,000 shares of Caraco common stock to be issued issued for each ANDA product and 1,81,333 shares for each DESI products. However, it was mentioned that as of December 31, 2003 the petitioner had delivered to Caraco the formula for 13 products only under this agreement and became a beneficial owner of approximately 48% of the outstanding common stock of the Caraco. It is therefore evident that the transfer of the technology formula for 25 generic products Page 34 of 46 C/SCA/2965/2013 JUDGMENT as per the 1997 agreement was not completed within the stipulated period through August, 2002 and even till 31st December 2003. It was further claimed by the petitioner that with expiration of the 1997 agreement, a new agreement was reached in November 2002 with Sun Pharma Global [Sun Global] a wholly owned subsidiary of the petitioner by which Sun Global agreed to transfer to the Caraco the technology formulation for 25 generic pharmaceutical products over a period of five years through November 2007 in exchange for 5,44,000 shares of a new convertible preferred stock for each generic drug transferred. There appears to be a contradiction on facts since it is mentioned that the 2002 agreement was made in November 2002 after expiration of the 1997 agreement where as it was mentioned immediately before the above that the 1997 agreement was continued till December 31st 2003 and even as on that date formula for only 13 products were transferred instead of 25 products. From the above analysis, it can be easily construed that the transfer of formula as per 2002 agreement between Sun Global & Caraco was nothing but an extension of previous agreement between Sun Pharma and Caraco made in 1997 and hence, reopening of assessment is very much justified. 10.10 The petitioner further claimed before the Assessing Officer that “the technologies that have been transferred to Caraco are for marketing of the drugs in the regulated markets which are subject to very high rate of litigation from the large established pharmaceuticals players. Any potential litigation form any Page 35 of 46 C/SCA/2965/2013 JUDGMENT established player who has huge access to funds and battery of lawyers etc can wipe off the company. Hence from a strategic and commercial point of view, it was conscious call taken by the management that the technology to be transferred to Caraco will not be developed by SPIL ie., the assessee as any potential litigation would threaten the very survival and existence of SPIL. The entire legal and commercial ownership of the technology was kept in Sun BVI to isolate SPIL from any potential litigation.” In view of the above, it could be believed that in such regulated market, the company was taking extreme care in avoiding any potential litigation. Hence, it is also logical that the product purchased by Caraco which is a subsidiary of the assessee company would be resourced from best possible source so as to avoid any possible litigation as to the quality of the product. However, it has been noticed that the products supplied to Caraco by Sun BVI have been claimed to have established reputation in the matter of having proper R&D facility for developing such a sophisticated generic pharmaceutical products. Besides as per the 1997-98 agreement, the petitioner was directly supplying such generic products to Caraco apparently without having faced such litigation from other established players. Hence, the above logic does not appear to be justifying the resourcing of such generic products from obscure sister concerns which did not had proper R&D facilities.” 10.11 It is only pursuant to the survey operation conducted Page 36 of 46 C/SCA/2965/2013 JUDGMENT under section 131A in case of Sun Pharmaceutical Industries Limited [SPIL] – the present petitioner by the Asstt. Director of Income-tax on 8th November 2011 at six different business premises belonging to the petitioner that a large number of incriminating documents were found impounded, which were analyzed and after going through the survey reports, the Assessing Officer formed a reason to believe that a huge amount of income has escaped the assessment. A stand taken by the assessee is to the effect that 25 technologies transferred by Sun BVI to Caraco, USA were acquired by Sun BVI from either Unimed Technologies Limited or M.J Pharmaceuticals Limited, which acquired the same from the petitioner. The petitioner maintained that it had merely done the job work at the instance of M.J Pharmaceuticals Limited and Unimed Technologies Limited. The profit ranging from 90 – 95% earned by Sun BVI were exempt from tax since Sun BVI is incorporated in British Islands, which is a tax heaven. These technologies are developed by the petitioner admittedly, however, the stand of the petitioner that they were developed on job work basis at the instance of Unimed Technologies Limited and M.J Pharmaceuticals Limited was in complete contrast to the material received at the time of survey where from none other than the Director & Executive Vice President of Sun Pharma Advanced Research Centre [SPARC] who was previously working as Incharge in Organic Team in his statement under section 131 admitted that these technologies in respect of 25 formulations were developed by Page 37 of 46 C/SCA/2965/2013 JUDGMENT the petitioner for Caraco and these technologies were not developed for any other company but, they were meant to be transferred to M/s. Caraco Pharmaceutical Laboratories Limited directly. Not only his version, but, the material collected in essence during the course of survey together with the statements of other senior officers led the Assessing Officer to believe that the petitioner did not disclose truly and fully all material facts. Although, the transfer of technologies to Caraco USA from Sun BVI is a part of dossier produced by the petitioner at the time of original assessment, the details of price at which Sun BVI transferred 25 technologies to Caraco, USA may be a part of this dossier and of the proceedings before TPO who had determined the arm’s length price of international transactions, the fact remains that when from the material other than those which were available at the time of original assessment, the Assessing Officer has a reason to believe that the income has escaped assessment and when such belief is formed not simply on the basis of doubt or suspicion, but from the material unearthed during the survey operation and is further substantiated by the statements of senior officers executing the very work forming part of the team working on formulating and developing these technologies, it would not be possible for this Court to uphold the contention of the petitioner that the Assessing Officer has assumed jurisdiction contrary to the requirements of the provisions of Section 148 of the Act. 11. As mentioned hereinabove, what amounts to primary facts, Page 38 of 46 C/SCA/2965/2013 JUDGMENT the disclosure of which truly and fully would discharge the obligation of the assessee would need to be determined on the basis of the facts and circumstances of each case. These facts are crucial and vital and other aspects arise from them. Any facts revealed by the petitioner masquerading the same as primary facts without in fact disclosing facts truly and fully as warranted for the purpose of assessment can certainly not amount to assessee discharging onus under the law of truly and fully disclosing all the material facts. In the instant case as is evident from the material recovered during the survey conducted under section 133A of the Act that the petitioner continued to maintain a stand of its having done the job work for M/s. MJ Pharmaceuticals Limited and Unimed Technologies Limited. However, prima facie, the material that emerged from the record indicated completely contrary facts, and therefore, the Assessing Officer if has a reason to believe that there is a failure on the part of the petitioner to disclose fully and truly the facts which led to under-assessment of the income, and thereby when he has assumed the jurisdiction, such action of his will not entitle the petitioner to invoke the writ jurisdiction for quashing such a notice. It is prima facie apparent that the cost of acquisition of these technologies in the hands of Sun BVI is nominal, as compared to the value at which it has transferred it to Sun BVI at Caraco, USA. The profits earned by Sun BVI since would be exempt, the transfer of technologies through M.J Pharmaceuticals Limited and Unimed Technologies Limited by the Page 39 of 46 C/SCA/2965/2013 JUDGMENT petitioner, instead of directly transferring the same to Sun BVI is being questioned by the Revenue in wake of the material which is available with it, and therefore, if these are termed as dubious device to save the income, and if this, according to the Revenue, has resulted into escapement of tax in the hands of the petitioner as a result of arrangement made by the petitioner, the Assessing Officer has committed no wrong in exercising his jurisdiction under sections 147 & 148 of the Act. 11.1 We note at this juncture that we have restricted our scrutiny to initiation of re-assessment proceedings under section 147 as also to jurisdictional powers exercised by the Assessing Officer which culminated into the issuance of notice under section 148 of the Act, touching the merits of the matter, only for such restricted purpose, without delving into the merits of the matter. 12. With regard to second ground of allocation of R&D expenses, we notice that in a notice issued under section 142 (1), at the time of scrutiny assessment, information was called for on 2nd August 2007, which reads thus - “[11] You have claimed R & D revenue expenses of Rs. 1,10,99,69,871/= and R&D capital expenses of Rs. 6,26,67,140/= and Rs. 53,53,17,674/=. Please give reasons as to why the same should not be allocated amongst various units in the ratio of their turnover.” 12.1 A detailed note on allocation of R&D expenditure was prepared and submitted by the petitioner and the same has been Page 40 of 46 C/SCA/2965/2013 JUDGMENT submitted as a part of compilation from page nos. 84 to 89, which does not require reproduction in this order so as to avoid unnecessary bulk. Suffice it to hold that this had been examined and the Assessing Officer in its assessment order dated 25th March 2008 vide para 8.3.3, in detail, dealt with the issue as follow :- “8.3.3 The reply of the assessee has been considered. In fact, the R & D Expenses are basically pertaining to the head office expenses which are not directly relatable to a particular unit. Hence, in order to scientifically distribute these expenses, they should be apportioned in the ratio of turnovers of various unit. If that is not done, it may lead to excess deduction to the assessee u/s. 80IB or 10A or 10B. This issue of allocation of R & D expenses to the Units claiming deduction u/s. 80IA/80IB is in dispute for last many years. In A.Y 1995-96, the CIT (A) vide Order No. CAB/II-41/98-99 dated 10.09.1998 had given the finding that the R& D expenses are to be allocated to the Units claiming deduction u/s. 80IA and the same has been accepted in principle by the assessee also because in subsequent years, it had not appealed against the allocation of the R&D expenses to the Units producing formulation products. Thus, for the detailed reasons given in the assessment order for A.Y 2002-03; 2003-04 and 2004-05 expenses are distributed in the ratio of turnovers of various units. Although the total R & D Expenses are Rs. 170,79,54,685/= but as per para 8 above, overseas registration charges of Rs. 66,66,836/= and trade mark expenses of Rs. 80,85,43/= are disallowed. Hence the amount of R & D expenses which is available for distribution is only Rs. 169,32,02,417/=. The total amount of R&D expenses, which are required to be debitted in Silvassa II Unit is computed in the Page 41 of 46 C/SCA/2965/2013 JUDGMENT table below :- Sr. No. Unit Turnover [Rs. In Lakhs] Percentage Turnover R&D Expenses [To be allocated] 1 Vapi & Others 59651.63 51.38 2 Silvassa-I 5157.29 4.44 3 Silvassa-II 5913.35 5.09 8,61,84,003/ = 4 Nagar 17008.78 14.65 6 Panoli 13745.33 11.84 8 Ankleshwar 5231.38 4.51 9 Dadra 3404.09 2.93 10 PDCL 5560.55 4.79 11 Phlox 1.04 0 12 CPP Units 435.67 0.37 TOTAL 116109.11 100 Thus, Rs. 8,61,84,003/= should be allocated to Silvassa-II Unit. However, already Rs. 4,34,25,000/= is allocated to Silvassa II Unit. Hence, the extra allocation in Silvassa II unit is Rs. 4,27,59,003/=.” 12.2 This was challenged before the CIT [A], which decided the issue thus - “10.1 On perusal of assessment order, it has been noticed that the Assessing Officer allocated R&D expenses to Units claiming deduction u/s. 80IB. The assessee has claimed R&D Revenue Expenditure of Rs. 1,10,99,69,871/= and R&D Capital Expenditure of Rs. 59,79,84,814/-, the total being Rs. 1,70,79,54,685/=. However, from the details submitted by the assessee, it is noticed that the assessee has allocated only Rs. 4,34,25,000/= on account of R&D expenses in Silvassa-II Unit. This is not a correct way of treatment as these expenses should be proportionately distributed amongst various units. In fact, the R& D Expenses are basically pertaining to the head office expenses which are not directly relatable to a particular unit. Hence, in order Page 42 of 46 C/SCA/2965/2013 JUDGMENT to scientifically distribute these expenses, they should be apportioned in the ratio of turnover of various units. If that is not done, it may lead to excess deduction to the assessee u/s. 80IB or 10A or 10B. This issue of allocation of R&D expenses to the Units claiming deduction u/s. 80IA/80IB is in dispute for last many years. In A.Y 1995-96, the CIT (A) vide order No. CAB/II-41/98-99 dated 10.09.1998, had given the finding that the R&D expenses are to be allocated to the units claiming deduction u/s. 80IA and the same has been accepted in principle by the assessee also, because in subsequent years, it had not appealed against the allocation of the R&D expenses to the Units producing formulation products. Thus, for the detailed reason given in the assessment order for A.Y 2002-03; 2003-04 and 2004-05, the R&D expenses are distributed in the ratio of turnover of various units. Although, the total R&D Expenses are Rs. 1,70,79,54,685/= but as per the para 8 above, overseas registration charges of Rs. 66,66,836/= and trade mark expenses of Rs. 80,85,432/= are disallowed. Hence, the amount of R&D Expenses, which is available for distribution is only Rs. 1,69,32,02,417/= ie., the total amount of R&D expenses, which are required to be debited in Silvassa-II Unit. 10.2 I have carefully considered the contentions of the Appellant as well as gone through the records. The similar question had arisen during the assessment year 2002-03; 2003-04 and 2004-05. Further, there is no change in the facts and circumstances of the case during the year under appeal. Therefore, Assessing Officer is directed to re-work the deduction on this account as per the directions contained in the Appellate Order of CIT [A] IV, Ahmedabad vide Order dated 28.02.2006 for assessment year 2000-01 to reallocate 12.5% of all R&D expenses as relating to formulation during assessment year 2005-06 also. This will be done to Silvassa Unit in the ratio of turnover of Silvassa to turnover of all units manufacturing formulations. The Assessing Officer is also directed not to reallocate the weighted deduction u/s. 35(2AB) which is not permissible because it is the expenditure which can be considered and not the weighted deduction. Keeping in view of above facts and circumstances of the case as well as following the earlier decisions of the CIT [A], the eighth ground of appeal is partly allowed.” 12.3 It has been much emphasized by the Revenue that since CIT [A] has already decided the appeal, the order of the Assessing Page 43 of 46 C/SCA/2965/2013 JUDGMENT Officer merged with that of CIT [A], this is a new ground other than those grounds which are available, and therefore, re-assessment is permissible. As could be noted from the reasons recorded that under the flagship of the petitioner-company viz., Sun Pharmaceutical Industries Limited, units are operating at Jammu and at Dadra units and as per the audit report, petitioner holds 97.5% share of the firm-SPIL. During the survey at petitioner company, it was urged to furnish a list of all products developed at SPIL, Baroda alongwith the locations where they were being manufactured and the list indicating R&D formulations which were manufactured at SPI-Jammu and Dadra Units as well as at SBS, Sikkim, being done at SPIL, Baroda. 12.4 Therefore, the Assessing Officer formed a belief that SPI & SPS which had manufactured the products developed at R&D facility of the petitioner-SPIL, the expenditure of such R&D is debitted in the books of account of SPIL, which reduces its profit and the profit of SPS &SPI is inflated to that extent. It was also urged before us that allocation amongst various units of M/s. Sun Pharmaceutical Industries Limited was the question raised vide communication dated 2nd August 2007 at the time of scrutiny assessment. However, this was not in respect of allocation between M/s. SPIL [the petitioner] and M/s. Sun Pharmaceutical Industries [SPI]. It is further urged that on analyzing the impounded material and on going through the survey report, huge amount is believed to have escaped assessment. Page 44 of 46 C/SCA/2965/2013 JUDGMENT 12.5 We are of the opinion that the ground on which reopening is sought, is essentially in respect of allocation of R&D expenses and the details furnished in the reasons recorded essentially are concerning allocating between SPI and SPS [Sikkim] and it is apparent from the record that SPS was not even in existence during the year under question. 12.6 When on R&D expenses of the Company issue has been scrutinized extensively during the year under question, we are unhesitatingly of the opinion that this ground is nothing but an attempt to review its own decision and therefore, the same must fail on the jurisdictional ground alone. Not only the Assessing Officer has under scrutiny assessment dealt with the same in the previous years as well as in the year under question extensively, but, the same was also carried to CIT [A] which had finalized the said issue of allocation of R&D expenses by re-allocating 12.5% of all R&D expenditure as relating to formulations during the year under question, as detailed hereinabove while dealing with the same. And therefore, without going into the larger issue of as to whether a particular angle, if is missed out in a question determined on scrutiny in a regular assessment, whether re- opening on such left out angle is permissible or not, as far as this ground is concerned, in wake of the reasonings given in the records of reasoning; particularly emphasizing on SPS which never existed and when all other angles otherwise are examined sufficiently and elaborately, this appears to be an attempt pure and simple to Page 45 of 46 C/SCA/2965/2013 JUDGMENT review its own order alongwith other materials found in relation to the first issue. Therefore, the notice for re-opening on this count shall need to fail. 13. Resultantly, this Special Civil Application is partly allowed. Notice of re-opening impugned in this petition on the first ground reflected in reasons of reopening is sustained whereas the same is not upheld on the second ground. 14. Interim relief granted in favour of assessee in respect of the second ground stands confirmed. Assessing Officer is permitted to proceed with the re-assessment proceedings on the first ground raised in reasons recorded without being in any manner influenced by any of the observations made in this petition. 15. Petition stands disposed of accordingly with no order as to costs. {M.R Shah, J.} {Ms. Sonia Gokani, J.} Prakash* Page 46 of 46 "