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Informist, Wednesday, Sept. 16, 2026

 

NEW DELHI – The Delhi High Court has observed that there is no concept of protective tax recovery under the Income Tax Act, 1961, which allows income tax authorities to collect tax solely on the basis of protective assessment. In the absence of any provision for protective recovery, the income tax department's action of sitting over the refund of Israel company Teva Pharmaceutical Industries Ltd. for assessment year (Apr- Mar) 2012-13 to 2014-15 for more than 10-15 years was utterly arbitrary, to the extent of being confiscatory, said the high court.

 

The income tax department cannot withhold the refund of Teva Pharmaceutical Industries, even in the guise of proceedings having been undertaken against Teva Pharmaceuticals USA Inc., because the proceedings against the latter initiated under Section 148 of the Income Tax Act were also stayed by the court, said a bench of Justice Dinesh Mehta and Justice Vinod Kumar. The high court ordered the income tax department to refund the entire amount of tax deducted at source of INR 7.83 billion to Teva Pharmaceutical Industries, which Ranbaxy Laboratories Ltd. had deducted from the payment made to the former. It also quashed notices issued to Teva Pharmaceuticals USA by the income tax department under Section 148 of the Income Tax Act.

 

The income tax department had argued that authorities in India had brought to the notice of US authorities the transaction and alleged evasion of tax by Teva Pharmaceuticals USA, but no action had been taken by the authorities of the US. If no action had been taken by US authorities, authorities of India cannot take action, simply because the authorities of US and Israel chose not to impose tax or have chosen not to exercise their right, said the court. The right to tax is not a right of exclusion but a right of exaction – a right conferred by statute, said the court. Unless the statute and Constitution confer such right, tax authorities couldn't impose tax, simply because some income had not suffered tax under any country‘s Income Tax Laws, it added.

 

The court was dealing with the taxability of payments made by Ranbaxy Laboratories to Teva Pharmaceutical Industries in connection with the commercial exploitation of Atorvastatin, a generic version of the drug Lipitor in the US. While Teva Pharmaceutical Industries had approached the Authority for Advance Ruling, New Delhi, seeking a determination that the payments received from Ranbaxy India were not chargeable to tax in India, the income tax department opposed the application principally on the ground that the income did not belong to the Israel company at all but pertained to Teva Pharmaceuticals USA. However, Authority for Advance Ruling concluded that the arrangement between all the companies was collusive and constituted a sham and make belief arrangement, and was prima-facie designed for avoidance of tax.

 

The high court pulled up the Authority for Advance Ruling, New Delhi, for going into the intricacies of the transaction and business wisdom of the contracting parties Ranbaxy Laboratories, Teva Pharmaceuticals USA and Teva Pharmaceutical Industries, and going on fishing and roving enquiry to the extent it had attempted to. What was expected of the Authority for Advance Ruling was to examine the transaction before it and record a finding, but its opinion rather apprehension that the transaction in question was conceived to avoid tax under US' or Israel's laws was too farfetched, said the court. Whether Teva Pharmaceuticals USA or Teva Pharmaceutical Industries had paid tax in their respective country or not, should not and could not be a concern of the Authority for Advance Ruling and for that matter any tax authority in India, it said.

 

The Authority for Advance Ruling is neither equipped with US competition or patent laws nor is it aware of the US litigation and commercial environment, said the court. The Authority for Advance Ruling is not cognisant of the cost and consequences that litigation may entail in the US, it said. Unlike India, in the US and other Western countries, many persons and companies enter into settlements to avoid the cost of litigation, to save time and energy, it said. It is all the more surprising given that on the one hand the Authority for Advance Ruling declined to answer the Indian taxability question itself - the moot question before it - and on the other, it embarked upon the adventurous journey in the no-go zone of commercial prudence and went on to record findings of sham and collusive transaction with an intent to tax avoidance, it said.  End

 

Reported by Surya Tripathi

Edited by Avishek Dutta

 

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