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

SCA/3013/2013

AI Insights

The case involves Sun Pharmaceutical Industries Ltd. challenging a notice issued by the Deputy Commissioner of Income Tax under section 148 of the Income-tax Act, 1961, for reopening the assessment for the Assessment Year 2007-08. The notice was based on findings from a survey conducted at the company's premises, which revealed documents suggesting income had escaped assessment. The primary issues were the diversion of profits through technology transfers to a tax haven and the allocation of R&D expenses among various units. The court examined whether the reopening was justified based on new material discovered during the survey and whether the issues had been previously addressed in the original assessment.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 793979 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 29-07-2013
• Assessment Year: misc
• 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: Arm's Length Price; Income tax reassessment; International Transactions; Research and development expenses; Transfer of Technology
• Section: 148; 143(3); 92CA; 139

Judgement Text

"C/SCA/3013/2013 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 3013 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 Page 1 of 33 C/SCA/3013/2013 JUDGMENT 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. 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 2007-08 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. 70,56,89,010/=, which was revised and the loss was reduced at Rs. 69,75,45,650/=. Page 2 of 33 C/SCA/3013/2013 JUDGMENT The Assessing Officer raised certain queries in respect of research and development expenses. These were replied to by the petitioner-company. The Annual Report 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 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 30th April 2010 whereby the assessee’s total income was assessed at Rs. 57,06,90,295/=. 3.2 Such order came to be challenged before the Commissioner of Income-tax [Appeals]-IV, Ahmedabad Page 3 of 33 C/SCA/3013/2013 JUDGMENT [hereinafter referred to as, “CIT (A)”] and such appeal was pending where the very subject matter sought to be reopened are pending before the appellate forum. 3.3 A survey action was conducted at the premise of the assessee on 8th November 2011 and in course of such action, large number of documents revealing incriminating materials were impounded. 3.4 Thereafter, notice under section 148 of the Act for reopening of the assessment for A.Y 2007-08 came to be issued on 30th March 2012. 3.5 A application dated 27th April 2012 was addressed by the petitioner to the respondent requesting to furnish copy of the reasons recorded and it filed revised return of income in pursuance to such notice under section 147 read with section 148, after making certain adjustments. 3.6 A copy of the reasoning was furnished to the assessee on 1st August 2012. The petitioner raised various objections vide its communication dated 8th October 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. Page 4 of 33 C/SCA/3013/2013 JUDGMENT 3.7 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. 3.8 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 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 Page 5 of 33 C/SCA/3013/2013 JUDGMENT 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 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. Such evidences are tabulated as under :- Sr No Name of Technology Developed at Nature of document impounded/made annexure to the statements 1 Citalporm Hydrobromide Tablets SPIL-Mumbai Executive Summary Page 6 of 33 C/SCA/3013/2013 JUDGMENT 2 Carbamazepine Immediate Release Tablets SPIL-Mumbai Executive Summary 3 Tramadol Hydrochloride SPIL – Mumbai - - 4 Meloxicm Tablets SPIL – Mumbai Executive Summary 5 Carvedilot Tablets SPIL – Baroda Executive Summary 6 Zolpidem Tartrate Tablets SPIL – Mumbai Executive Summary 7 Risperidome Tablets SPIL – Baroda Master Formula 8 Cetrizine Immediate Release Tablets SPIL – Mumbai Executive Summary 9 Cetirizine Hydrochloride Chewable Tablets SPIL – Mumbai Executive Summary 10 Repaglinide Tablets SPIL – Mumbai Executive Summary 11 Glipizide & Metformin Hydrochloride Tablets SPIL – Mumbai Executive Summary 12 Lamotrigine Tablets SPIL – Mumbai Executive Summary 13 Modafinil Tablets SPIL – Baroda Master Formula Card 14 Glipizide Immediate Release Tablets SPIL – Mumbai Executive Summary 15 Baclofen Tablets SPIL – Mumbai Executive Summary 16 Amlodipine Besylate Tablets SPIL – Mumbai -- -- 17 Escitalopram Oxalate Tablets SPIL – Mumbai Executive Summary 18 Paoxetine Hydrochloride Tablets Equivalent to Paroxetine SPIL Mumbai 19 Atenolol Tablets SPIL Baroda Master Formula 20 Methimazole Tablets SPIL Baroda Master Formula 21 Allopurinol Tablets SPIL Baroda Master Formula 22 Venlafaxine Hydrochloride Tablets equivalent to Venlafaxine SPIL Mumbai Executive Summary 23 Amitriptyline SPIL Mumbai Executive Page 7 of 33 C/SCA/3013/2013 JUDGMENT Hydrochloride Tablets Summary 24 Haloperidol Tablets SPIL Baroda Master Formula 25 Clonidine Hydrochloride Tablets SPIL Mumbai Master Formula Card 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. 1,51,90,41,340 [US$ 343,05,360] has escaped assessment.” 3.9 The second ground raised is in respect of allocation of Research & Development Expenses, which reads thus - “..It is pertinent to note that analysis of profits and financial results of SPIL and SPI for the assessment year under consideration shows similar pattern and hence, it is clear that the assessee is showing huge profit margin in its controlled entity ie., partnership firm, wherein, it is claiming deduction under Chapter VIA and the share of profit/income from partnership firm is exempt in the hands of the main company ie., Messrs. Sun Pharmaceuticals Industries Limited. This gave credence to the allegation that M/s. Sun Pharmaceutical Industries Limited is diverting expenditure from the units eligible for deduction under Chapter VIA of the Income-tax Act, 1961 to the units which are not eligible for the said deduction. SPIL is carrying out the Research & Development [R&D] work for the entire Sun Pharma Group. This includes research and development of the products which are manufactured by the firm SPIl [Jammu & Dadra units] and subsequently by SPS (Sikkim) as well. However, it can be seen from the annual accounts of both SPI and SPS that the amount of R & D expenditure debited in their books of account is NIL. During the course of survey at SPIL, Tandalja Akota Road, Baroda, Gujarat, Dr. T. Rajamannar, Director & Executive Vice President of SPARC Limited [previously working in SPIL as Incharge of Organic Chemistry Team at the time of development of these products] was asked to furnish a list of all the products developed at SPIL, Baroda along with the locations where they are being manufactured. This list showed that R&D for the formulations which are being manufactured at SPI [Jammu & Dadra units] and SPS, Sikkim unit is being done by SPIL, Baroda.” Page 8 of 33 C/SCA/3013/2013 JUDGMENT xx xx “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 and SPS. xx xx “Therefore, an amount of Rs. 33.2 Crores incurred as R&D expenditure by SPIL should have been debited in the books of SPI for Assessment Year 2006-07. In view of the above information in my possession, I have reason to believe that income to the extent of Rs. 33.2 Crores has escaped assessment which requires to be taxed under provisions of Income Tax Act, 1961. As per proviso to Section 147 of the Income-tax Act, 1961, where an assessment under sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of Section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. 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 Page 9 of 33 C/SCA/3013/2013 JUDGMENT 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 debiting 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. Issue Notice under section 148 of the Act.” 4. While raising the objections on 20th September 2012, the assessee emphasized that both the grounds have already been considered in the scrutiny assessment. Moreover, for the Assessment Years 2005-2006 & 2006-07, 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 though the Page 10 of 33 C/SCA/3013/2013 JUDGMENT assessment is sought to be reopened before the expiry of period of four years from the end of relevant assessment year, with no new material having come to the notice of the tax department and with the assessee having made full and complete disclosure of all matters in the books of accounts and clarified everything in great details during the course of assessment, action of the respondent is of reviewing its own order. 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 did not have proper and sufficient R&D facility to develop such products. The Assessing Officer has reason to believe that those generic products were actually developed by the petitioner but they are 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. Page 11 of 33 C/SCA/3013/2013 JUDGMENT 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 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 Page 12 of 33 C/SCA/3013/2013 JUDGMENT learned counsel, at the time of survey carried out at the premise of the petitioner company, no new material were found which would 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. It is urged further that not only full and true disclosure is made in general, but, special disclosure is made in the Annual reports, Tax Audit Report and Transfer Pricing Certificate under section 92 furnished by the assessee alongwith the return of income, and therefore, the Assessing Officer has no reasonable belief to reopen the assessment. It is nothing but reviewing his own order. He has sought to reply upon various decisions in support of his case. 5.2 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 when no new material is found during survey and regular assessment is finalized on scrutiny made under section Page 13 of 33 C/SCA/3013/2013 JUDGMENT 143 (3) of the I.T Act where the petitioner has disclosed full and complete disclosure of all the materials. 6. Per contra, learned senior advocate Shri Manish R. Bhatt urged fervently that it is only during the course of survey carried out under section 133A of the I.T Act by the Assistant Director of Income Tax [Inv.] Unit VII (1), Mumbai in case of SPIL on 8th November 2011 that the material came out indicative of the fact that the correct facts have not been provided by the petitioner and 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 made by the assessee. However, after such agreement came to an end, 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 Officer to formulate a reasonable belief that income has escaped the assessment for the assessment year in question. Page 14 of 33 C/SCA/3013/2013 JUDGMENT 6.1 Learned counsel further urged that for the A.Y 2007-08, prior to the survey, the assessment though has been completed and accepted, and as the period of four years also is not over from the end of relevant assessment year, the assessment could be reopened. 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, re-assessment can be made permissible on such fresh ground. Page 15 of 33 C/SCA/3013/2013 JUDGMENT 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 partly 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 assess or re-assess the income chargeable to tax, which has escaped assessment and which comes 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 148 to 153 of the I.T Act. 9. Admittedly, in the instant case, notice has been issued before the expiry of period of four years from the end of the relevant assessment year ie., 2007-08, after the survey was conducted on 8th November 2011. It is not on the basis of material or evidence 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 reasonable belief that the income Page 16 of 33 C/SCA/3013/2013 JUDGMENT chargeable to tax has escaped the assessment, or it would amount to 'change of opinion' on the part of the Assessing Officer. 9.1 The provision of Section 147 of the IT Act reads as under :- “Section 147 – Income escaping assessment - If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. Provided further that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject-matter of any appeal, reference or revision, which is chargeable to tax and has escaped assessment. Explanation 1 : Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso. Page 17 of 33 C/SCA/3013/2013 JUDGMENT Explanation 2 : For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :- (a) Where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax; (b) Where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return; (c) Where an assessment has been made, but - (i) Income chargeable to tax has been under-assessed; or (ii) Such income has been assessed at too low a rate; or (iii) Such income has been made the subject of excessive relief under this Act; or (iv) Excessive loss or depreciation allowance or any other allowance under this Act has been computed.” 9.2 The Assessing Officer can assume jurisdiction to issue notice under section 148 if he has a reason to believe that the income of assessee has escaped assessment even when it comes to his notice subsequently in the course of proceedings under this provision, subject to the provision of Sections 148 to 153 of the I.T Act. The belief of Assessing Officer must not be arbitrary nor irrational, but, must be based on rational and relevant material. Adequacy or sufficiency of the reasons need not be gone into by the court, but, it can of course examine relevance of reasons and its bearing on the matter in respect Page 18 of 33 C/SCA/3013/2013 JUDGMENT of which Assessing Officer entertains the belief of escapement of income before issuance of such notice. 9.3 An assessment previously framed can be reopened within four years from the end of relevant assessment year, provided the Assessing Officer has some tangible materials on which he can form his belief that income chargeable to tax had escaped the assessment. Expression tangible material does not mean material alien to the original record, as held by this Court in Gujarat Power Corporation Limited v. Asstt. Commissioner of Income Tax, reported in (2012) 77 DTR (Guj) 99. 9.4 Thus, within a period of four years, the Assessing Officer can reopen assessment previously framed on his having reason to believe that income of assessee chargeable to tax has escaped assessment. It is not necessary that the additional requirement of the assessee not having disclosed fully and truly all material facts need to exist for reopening of such assessment. 9.5 Any assessment framed on due scrutiny when reopened, it involves considerable hardship to the assessee and therefore, not only the Legislature has made various safeguards to ensure that the very officer does not reopen previously scrutinized assessment, but, the Courts also time Page 19 of 33 C/SCA/3013/2013 JUDGMENT and again interpreted these provisions to ensure that on a mere change of opinion, proceedings of reopening are not sustained. Whenever new facts, information or materials which relate to material facts come to the knowledge of the Assessing Officer, which was not available at the time of original assessment, Assessing Officer would be within his right to initiate reassessment proceedings, if in his opinion, income chargeable to tax escaped assessment in the relevant assessment year and here the principle of 'change of opinion' may not apply. 9.6 When proviso to Section 147 of the Act does not apply, reassessment proceedings can be declared invalid on the ground of change of opinion. This expression 'change of opinion' contemplates formation of opinion and thereafter, making a change thereof. It surely connotes that at the time of scrutiny assessment, Assessing Officer formed his opinion and by initiation of proceedings of reassessment, he proposes to change the same. 10. 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. It also further appears that a reference was made under section 92CA (1) of the Act to the Transfer Pricing Officer for verification of Page 20 of 33 C/SCA/3013/2013 JUDGMENT the Arm’s length price in respect of international transactions, as detailed in the audit report in Form 3CEB vide communication dated 6th March 2009. 11. A notice under section 92CA (2) was issued to the petitioner on 13th March 2009 with a questionnaire directing the petitioner to furnish all necessary details and documents in respect of arm’s length price. The Addl. Commissioner of Income-tax [TPO]-I, Ahmedabad passed an order in respect of such reference under section 92CA (3) of the Act noting the fact that the petitioner has been engaged in manufacturing, trading and export of bulk drug formulations and during the year under question ie., A.Y 2006-07, 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 advanced Page 21 of 33 C/SCA/3013/2013 JUDGMENT huge sum to its associated enterprises and since arm’s length price of these transactions is determined to be “NIL”, a similar amount was required to be added in the total income of the assessee. Thus, difference in Arm's Length Price of the International transaction on account of interest as well as corporate guarantee fees was worked out at Rs. 39,00,28,096/=. With this report of Transfer Pricing Officer, on availing opportunities, several additions to the income under different heads to the income of the company had been made to the total income of the company, and Rs.39,00,28,096/= was added by the A.O in its order of scrutiny assessment dated 30th April 2010. 11.1 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 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 Page 22 of 33 C/SCA/3013/2013 JUDGMENT 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. 11.2 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 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 Page 23 of 33 C/SCA/3013/2013 JUDGMENT 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. 11.3 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 Page 24 of 33 C/SCA/3013/2013 JUDGMENT established pharmaceuticals players. Any potential litigation form any 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, Page 25 of 33 C/SCA/3013/2013 JUDGMENT 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.” 11.4 It is only pursuant to the survey operation conducted 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 Page 26 of 33 C/SCA/3013/2013 JUDGMENT 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 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 Page 27 of 33 C/SCA/3013/2013 JUDGMENT 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. 12. 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 on receipt of new information and materials, income chargeable to tax has escaped assessment and this belief of under assessment of the income led him to initiate reassessment proceedings and thereby, when he has assumed jurisdiction, such action of his will not entitle the petitioner to invoke writ jurisdiction for quashing such a notice. Page 28 of 33 C/SCA/3013/2013 JUDGMENT 13. 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 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. 14. 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. Assessing Officer may not get influenced by any of these observations. 15. With regard to second ground of allocation of R&D Page 29 of 33 C/SCA/3013/2013 JUDGMENT expenses, we notice that in a notice issued under section 142 (1), at the time of scrutiny assessment, information was called for on 5th October 2009, which reads thus- “[11] You have claimed R & D revenue expenses of Rs. 2,29,77,26,113/= and R&D capital expenses of Rs. 1,42,88,180/= and Rs. 20,99,93,826/=. Please give reasons as to why the same should not be allocated amongst various units in the ratio of their turnover.” 16. A detailed note on allocation of R&D expenditure was prepared and submitted by the petitioner and the same has been submitted, which does not require reproduction in this order so as to avoid unnecessary bulk. Suffice it to hold that this had been examined in the A.Y 2007-08 and also earlier and on scrutiny, the Assessing Officer in its assessment order has also dealt with the said issue in its order dated 30th April 2010. 17. 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 Page 30 of 33 C/SCA/3013/2013 JUDGMENT were manufactured at SPI-Jammu and Dadra Units as well as at SBS, Sikkim, being done at SPIL, Baroda. 17.1 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 debited 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 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 contended by the Department that on analyzing the impounded material and on going through the survey report, huge amount is believed to have escaped assessment. 17.2 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. 17.3 On R&D expenses of the Company of course the issue has been scrutinized extensively during the year under Page 31 of 33 C/SCA/3013/2013 JUDGMENT 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 partly reducing the disallowances on 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 review its own order alongwith other materials found in relation to the first issue. Therefore, the notice for re-opening on this count also need not fail. 18. Resultantly, this Special Civil Application stands partly Page 32 of 33 C/SCA/3013/2013 JUDGMENT allowed. Notice of reopening, impugned in this petition, on the first ground reflected in the reasons of reopening, is sustained. Whereas, the same is not upheld on the second ground. 19. 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 the reasons recorded, without being in any manner, influenced by any of the observations made in this petition. 20. Special Civil Application stands disposed of accordingly with no order as to costs. {M.R Shah, J.} {Ms. Sonia Gokani, J.} Prakash* Page 33 of 33 "