By Geeta Jani | Dhishat B. Mehta
Chartered Accountants
13 [2019] 111 taxmann.com 218 (Ahm.) Sun Pharmaceuticals Industries Ltd. vs. ACIT [ITA No. 1659, 1689 (Ahm.) of 2015] A.Y.: 2008-09 Date of order: 20th June, 2019
Section 9 of the Act – Indian subsidiary
hired facility of Indian parent to develop technology and transferred it to BVI
sister subsidiary at nominal cost – BVI subsidiary transferred it to USA sister
subsidiary in consideration of shares of USA subsidiary – Price of shares was
determined at the time when agreement for transfer of technology was made but
was substantially higher when shares were issued, resulting in huge profit to
BVI subsidiary – On facts, Indian subsidiary not owning infrastructure was not
relevant; BVI subsidiary was not paper company since it owned IPRs and had
pharma registrations; the transaction could not be regarded as colourable
device merely because there was no tax liability in hands of parent company –
Other than section 92, no other provision permits taxing of international
transactions and since AO had not invoked transfer pricing provisions, sale
consideration received by BVI subsidiary could not be taxed in hands of Indian
parent
FACTS
The assessee was an
Indian company engaged in the pharmaceuticals business. In the course of
survey, the tax authority found various documents indicating that BVI
subsidiary of the assessee (‘BVI Co’) had transferred certain technology to the
American subsidiary of the assessee (‘USA Co’). BVI Co had acquired the said
technology from another Indian subsidiary of the assessee (‘Tech Co’) which had
allegedly acquired the same from the assessee. The AO noted that the cost of
acquisition of technology for BVI Co was quite nominal as compared to the value
at which BVI Co transferred the same to USA Co and earned substantial gain. As
BVI did not charge tax on income of BVI Co, it did not pay any tax on the gain.
The following is a
diagrammatic presentation of the transaction:
The tax authority
recorded the statements of two directors of the assessee admitting that the
assessee had developed the said technology for use of the USA Co. Hence, the AO
issued notice to the assessee to show cause why the profit of BVI on transfer
of technology to the USA Co should not be taxed in its hands.
The assessee explained that:
- it had allowed Tech Co to use its R&D
facility;
- factually, the said technology had been
developed by Tech Co;
- Tech Co had paid charges for use of R&D
facility of the assessee;
- the user charges were duly recorded in its
own books of accounts as well as those of Tech Co;
- the AO had ignored various relevant
documents, such as agreement between BVI Co and Tech Co, agreement between Tech
Co and assessee, transactions recorded in the books of all parties;
- the AO had not found any defect in those
documents;
- accordingly, it was mere presumption on the
part of the AO that Tech Co had acquired the said technology from the assessee
and the transaction was routed through Tech Co to evade tax.
Concluding that technology was developed by the assessee for transfer to
the USA Co but was routed through Tech Co and BVI Co only to evade tax in
India, the AO taxed the gain from transfer to the USA Co in the hands of the
assessee. The CIT(A) confirmed the addition made by the AO.
HELD
The Tribunal considered the following questions:
- Whether Tech Co was a
name-lender in the impugned transactions?
- Whether the statements of
directors recorded u/s 131 were valid?
- Whether BVI Co was a paper
company?
- Whether transfer of technology
was a colourable device?
- Whether the sale consideration
received by BVI Co belonged to the assessee?
- Whether Tech Co had merely lent name
for transfer of technology?
- The AO held that Tech Co had
not developed the technology because it did not own infrastructure for
development of technology.
- The assessee had furnished all
the necessary documents (including agreements pertaining to use of the R&D
facility and transfer of the technology) and details of persons who visited the
infrastructure facility of the assessee for development of the technology. The
AO had not pointed out any defect in the same.
- Based on details about Tech Co
which were furnished by the assessee to the AO, the AO could have exercised his
powers to issue notice u/s 133(6) to verify the facts from Tech Co. However, he
failed to do so.
- The observations of the AO
indicated that Tech Co was engaged in the development
of the technology but indirectly as a job worker. Thus, the role of Tech Co in
the development of the technology could not be ruled out completely as alleged
by the Revenue.
- In the given facts and circumstances,
whether Tech Co owned infrastructure for development was not relevant. What
mattered was whether Tech Co or the assessee had developed the technology.
- The assessee had also submitted that Tech Co
was not an associated party in terms of section 40A(2)(b) of the Act.
- Tech Co had developed the technology
pursuant to the agreement with BVI Co. Hence, the assessee had discharged its
onus.
2. Whether the
statements of directors recorded u/s 131 were valid?
- A statement recorded on oath u/s 131 cannot
be the basis of any disallowance / addition until and unless it is supported on
the basis of some tangible material. The CBDT has discouraged its officers from
making additions on the basis of statements without bringing any tangible
materials for any addition / disallowance.
- Except the statement, the lower authorities
had not collected any evidence to prove that the transaction was bogus.
3. Whether BVI Co was a paper
company?
- Several transactions
between the assessee and BVI Co were the subject matter of transfer pricing
adjustments.
- Income of BVI Co could be
taxed in India only if, in terms of section 6(3), it was resident of India
which was never alleged.
- If transaction of sale of
technology is treated as international transaction between the AEs in terms of
section 92C, it should be determined on arm’s length basis. However, the AO had
not invoked the said provision.
- BVI Co had various purchase
and sales transactions with the assessee, which had led to dispute under
transfer pricing regulations. Further, BVI Co owns IPR and also has
registrations with USFDA. Merely because BVI Co did not own infrastructure, it
could not be treated as a paper company.
- In the absence of DTAA between
BVI and India, the transactions between the assessee and BVI Co were subject to
the provisions of the Act. However, there is no provision under which income of
BVI Co could be taxed in India.
4. Whether the impugned
transaction is a colourable device?
- If the AO treats sale of technology by Tech
Co to BVI Co as a colourable device, then it cannot treat one part of the
transaction as genuine and another part as non-genuine. While the AO treated
the sale of technology by Tech Co to BVI Co as a colourable device, he accepted
rent for using facility for development of technology as genuine business
income.
- Merely because there was no tax liability could
not be the reason for regarding any transaction as a colourable device.
5. Whether the sale
consideration received by BVI Co belonged to the assessee?
- Consideration for supply of technology was
to be discharged by issue of shares of USA Co to BVI Co.
- Share price of USA Co was lower at the time
when the agreement between BVI Co and USA Co was made, whereas it had increased
when the technology was delivered to USA Co. As one cannot predict future price
of shares, increase in price of shares could not be treated as a colourable
device. Further, since shares of USA Co were listed on the stock exchange, the
assessee could not have any role in such increase.
- Share price at the time of delivery could
also have been lower. In such case, the AO would not have allowed the loss.
- Even if it was assumed that the technology
was developed by the assessee, income could be taxed in the hands of the
assessee by treating BVI Co as an AE and determining arm’s length price u/s 92.
However, the AO did not invoke section 92. Other than section 92, there is no
provision under the Act to tax international transactions between AEs.
- Despite having power to refer the matter to
the TPO, the AO did not do so. Since it was not referred, normal provisions of
the Act would apply under which purchase and sale prices between AEs cannot be
disturbed even if they are not at arm’s length price.
- Even if it was assumed that the purpose of
BVI Co was to divert income of the assessee, then the transaction should be
treated as between the assessee and USA Co. Such a transaction should be
subject to section 92C for determining arm’s length price. But the AO failed to
invoke the provisions of the transfer pricing.
By holding the
transaction between the assessee, Tech Co and BVI Co as a colourable device but
charging rent from Tech Co as income of the assessee, the Revenue had taken
contradictory stands. Once a transaction is treated as a colourable device, the
assessee should not have suffered tax on rent. Hence, the AO was directed to delete
the addition made by him.
