दिस्पैट्स: दिल्ली उच्च न्यायालय ने तय किया कि भारत से विदेश भुगतान पर स्वतः टैक्स नहीं लगेगा

NEW DELHI: Payments made by Indian companies to overseas entities are not automatically taxable in India, the Delhi High Court has ruled in a case involving Israeli drugmaker Teva and erstwhile Ranbaxy Laboratories.

The ruling may give multinational companies greater certainty on the tax treatment of payments from Indian entities, particularly where the underlying transaction and income-generating activity are overseas. It may also help foreign companies challenge similar tax demands and seek refunds where no Indian tax liability exists.

In a 15 September judgment, a bench comprising Justices Dinesh Mehta and Vinod Kumar held that Teva Israel was entitled to a refund of about ₹783 crore, along with applicable interest. The court found that payments received from Ranbaxy did not accrue or arise in India and were linked to the US market.

“The ruling significantly narrows the ability to tax non-residents merely because an Indian resident makes the payment,” said Dipesh Jain, partner at Economic Laws Practice.

The dispute involved payments made by Ranbaxy, now merged with Sun Pharmaceutical Industries Ltd, to Teva Israel under a 2011 settlement relating to the US launch of generic atorvastatin. The tax department argued that the payments were taxable in India because they were made by an Indian company. Teva maintained that the income was linked to activities and rights in the US.

The court said the tax department must establish a sufficient nexus between India and the income-producing right or activity, or bring the receipt within a specific statutory provision. In Teva’s case, the pharmaceutical rights, US regulatory process, litigation, settlement and market from which the economic return arose were substantially outside India.

The court therefore held that “mere payment by an Indian resident to a non-resident ipso facto does not constitute an income accruing or arising in India.”

Tax experts said the ruling could have wider implications for overseas companies receiving payments from Indian entities, particularly where the underlying transaction, rights and commercial activity are outside India.

Ankit Jain, partner at Ved Jain and Associates, said the implications could extend beyond pharmaceuticals to technology, telecommunications, media and global supply chains. The judgment could be relevant to cross-border dispute settlements, non-compete arrangements and commercial profit-sharing arrangements where the underlying activity takes place offshore, he added.

The court also rejected the idea that India could tax income simply because it had not been taxed in another jurisdiction. “The right to tax is not a right of exclusion but a right of exaction,” it said, holding that taxing power must come from statute.

“The court has rightly held that merely because no action was taken by the US authorities, India could not step into the void and claim that the transactions were subject to tax,” said Pallav Pradyumn Narang, partner at tax firm CNK. The tax department “must build its case on accrual and business connection, rather than merely on the location of the payer,” he added.

Lawyers said the ruling could also lead to refund litigation in similar cases.

“The judgment is equally important for refund litigation. The Court held that while the tax department may frame a protective assessment, it cannot indefinitely retain TDS through a protective recovery when it simultaneously argues that the income belongs to another taxpayer,” Jain said. “Refund claims cannot remain suspended merely because substantive proceedings are pending against another entity.”

The High Court also held that the Authority for Advance Rulings (AAR) had exceeded its jurisdiction because Teva USA was not the applicant. It criticised the authority for examining the commercial rationale behind the settlement and drawing conclusions about a possible understanding between the parties.

Describing this as a “fishing and roving enquiry”, the court said the AAR could examine material necessary to answer the question before it, but could not expand the proceedings into a wider review of commercial decisions or foreign contractual disputes.

“It’s a sharp rebuke. The AAR was held to have exceeded its mandate, venturing into a roving inquiry into commercial wisdom and branding a genuine settlement a sham, while declining to answer the very taxability question referred to it,” said Sherry Goyal, associate partner at DMD Advocates, which represented Teva.

The AAR allows taxpayers, including foreign companies, to seek clarity on how specific transactions will be taxed in India. Its rulings are generally binding on the applicant and tax authorities in relation to that transaction. In Teva’s case, the High Court set aside the AAR’s order.

The dispute dates back to 2010, when Ranbaxy and Teva entered into agreements relating to the US launch of generic atorvastatin. Following a legal dispute in the US, the parties reached a settlement in December 2011, allowing Ranbaxy to sell the drug while paying Teva 50% of its profit margin.

Teva USA assigned its right to receive the payment to Teva Israel, which received about ₹1,851 crore from Ranbaxy over three assessment years. The tax department deducted ₹783.83 crore as TDS. The arrangement was subsequently challenged by the tax authorities, leading to proceedings before the AAR and, eventually, the Delhi High Court after Teva filed a petition in 2017.

The Teva case follows earlier disputes over the taxation of payments to overseas entities. In 2021, the Supreme Court held that payments to foreign software companies did not constitute royalty where no copyright was transferred, and that Indian companies were not required to deduct TDS.

Queries sent to Sun Pharmaceutical and the Income Tax Department remained unanswered till press time.

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