SUN PHARMACEUTICALS INDUSTRIES LTD.,,BARODA vs. THE ACIT, CENTRAL CIRCLE-1, BARODA

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, AHMEDABAD BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER And MS. MADHUMITA ROY, JUDICIAL MEMBER 1. आयकर अपील सं./ITA No.1659/Ahd/2015 2. आयकर अपील सं./ITA No.1689/Ahd/2015 (�नधा�रण वष�/Assessment Year : 2008-09 ) बनाम/ 1. Sun Pharmaceuticals 1. The ACIT Industries Ltd. Cen.Cir-1 Vs. “SPARC” Tandalja Baroda – 20 2. The ACIT 2. Sun Pharmaceu- Central Circle-1 ticals Industries Baroda Ltd. Baroda. �थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AADCS 3124K (अपीलाथ�/Appellant) (��यथ� / Respondent) .. अपीलाथ� ओर से/ Appellant by : Shri S.N. Soparkar, AR ��यथ� क� ओर से/Respondent by: Shri R.C. Panday, CIT-DR सुनवाई क� तार�ख/ Date of Hearing 28/03/2019 घोषणा क� तार�ख /Date of Pronouncement 20/06/2019 आदेश / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned cross-appeals have been filed at the instance of the assessee and Revenue against the order of the Commissioner of Income Tax (Appeals)–2, Vadodara [CIT(A) in short] vide appeal no.CAB/(A)- 2/387/2014-15 dated 31/03/2015 arising in the assessment order passed under s.143(3) r.w.s.147 of the Income Tax Act, 1961(hereinafter referred to as "the Act") dated 14/02/2014 relevant to Assessment Year (AY) 2008-09.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 2

The Appellant submits the following grounds, which are without prejudice to one another: 1. The order passed by the learned Commissioner of Income Tax (Appeals) [hereinafter referred to as 'the learned CIT(A)'] is bad in law and on facts. 2. Re: Notice issued u/s. 148 t.w.s. 147 was bad in law and needs to be quashed as void ab initio: 2.1. The Learned CIT(A) has grossly erred in upholding the order of Assessing Officer who has reopened the Assessment under section 147 without appreciating that there is a mere change of opinion on issues which had akeady been considered in the assessment order framed u/s 143(3). 3. Re: Addition on account of transfer of Technology to Foreign Subsidiary- Rs. 45.35.30.353/-: 3.1 In the facts and circumstances of the case and in law, the learned CIT(A) grossly erred in upholding the order of the Assessing Officer in adding income to the extent of Rs,45,35,30,553/-on sale of technology by Sun PharmaGlobal, Inc. (hereinafter referred to as "SPG"), to Caraco without appreciating that: .1 die said technologies have been developed by Unimed Technologies Limited (hereinafter referred to as "UTL") and M.J. Pharmaceuticals Limited (hereinafter referred to as "MJPL") who are both independent companies (and also not subsidiary companies of SPIL as alleged by the Assessing Officer) not covered as related parties u/s. 40A(2)(b) by their independent effort and also on the basis of facilities obtained on hire from SPIL; .2 SPG had acquired these technologies from UTL and MJPL and hence the question of SPG not having R&D facilities and/or fixed assets was not relevant to the issue beforehand; .3 the income statements of SPG were examined in detail during the course of assessment by the Transfer Pricing Officer (TPO) wherein these transactions were duly reflected;

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 3 .4 the alleged statements made by the technical personnel of SPIL during the course of survey proceedings cannot be relied upon with regard to financial transactions which are duly reflected in the books of accounts and accepted by the tax authorities.

3.2 Without prejudice to the above, the CIT(A) has grossly erred in upholding the order of the Assessing Officer in considering the value of the shares of Caraco issued in favour of SPG as the basis for the valuation of the technology without appreciating that the shares were issued under pre-agreed arrangement based on milestones agreed between the parties and that the higher market value of the shares at the time of completion of these milestones cannot be the basis for the valuation of the technology. The CIT(A) grossly erred in not appreciating that the value of each of the product technology could not have been same.

3.3 Without prejudice to the above, the CIT(A) has grossly erred in upholding the order of the Assessing Officer who has failed to appreciate the fact the Appellant is not in the business of sale of technology and therefore, the alleged consideration received on sale of technology is a capital receipt and thereby not chargeable to tax as no cost has been incurred by the Appellant for the same. 3.4 Without prejudice to the above, the CIT(A) has grossly erred in upholding the order of the Assessing Officer who has carried out the adjustment and has made addition to the income of the Appellant without referring the transaction to the TPO or benchmarking the said transaction in accordance with the method prescribed under the TP Regulations. 4. Re: Disallowance on account of R&D expenses incurred by the Appellant alleged to have been incurred for products manufactured by SPI debited in the books of the Appellant - Rs 1744.56 lakhs: 2.1 On the facts and in the circumstances of the case and in law, the learned CIT(A) grossly erred in upholding the actions of the Assessing Officer relating to allocation of R&D expenditure, without appreciating that: 2.1.1 The product technologies developed are completely owned by the Appellant and that no part of the ownership of the product technologies or processes developed during such R&D work is for any other party; 2.1.2 The Appellant being a working partner had in pursuance of the obligation undertaken by the Appellant under the partnership deed, had provided these services in relation to the manufacturing activities and that no

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 4 R&D activity was carried out for SPI. For the services rendered by the Appellant it was receiving remuneration and share in profit from SPI. 2.2 Without prejudice to the above, the learned CIT(A) grossly erred in rejecting the Appellant's contention, that only expenditure amounting to Rs 13.49 lakhs incurred for specific products manufactured in SPI ought to have been disallowed and in further stating that specific details of expenditure was not available during the course of appellate proceedings. 2.3 Without prejudice to the above, the learned CIT(A) grossly erred in considering Rs 4075.49 lakhs as allocable R&D expenditure without appreciating that only Rs 1651.48 lakhs ought to have been considered as expenditure to be allocated between the Appellant and the said partnership firm. 2.4 Without prejudice to the above, the learned CIT(A) grossly erred in upholding the actions of the Assessing Officer relating to allocation of R&D expenditure, without appreciating that the allocation of expenditure incurred by the Appellant as a working partner for SPI was already a subject matter of appeal and hence was beyond the jurisdiction of the Assessing Officer as per third proviso to S. 147. 2.5 Without prejudice to the above, the deduction u/s. 10B ought to be increased on account of allocation of R&D expenses to SPI.

The first issue raised by the assessee in the ground no. 1 is general and therefore no separate adjudication is required for the same.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 5

The third issue raised by the assessee in the ground no. 3 is that the ld. CIT-A erred in partly confirming the addition made by the AO for Rs. 45,35,30,553.00 only on account of transfer of technology to a foreign subsidiary.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 6 1. The assessee had several subsidiaries in India and outside India. One of the subsidiary company of the assessee namely SUN BVI transferred certain technologies to CARACO, the USA over a certain period. The SUN BVI acquired these technologies from Unimed technologies Ltd/MJ Pharmaceuticals Ltd (in short UTL/MJPL), and UTL/MJPL acquired these technologies from SPIL.

6.1. These details were confronted to Dr. T. Rajamannar (now director of SPARC Ltd but during the relevant time he was acting as in-charge of Organic Chemistry team in SPIL) during the course of his statement

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 7 recorded u/s 131 of the Act wherein he admitted that SPIL developed the said technologies for the use of CARACO. The relevant extract of the statement is available on pages 5 to 8 of the AO order.

6.2. During the course of the survey, Shri Dilip Sanghvi chairman of Sun Pharma Group in his statement admitted that Sun BVI had no fixed assets, factory, manufacturing facility or R&D facility. There was not any value addition in the said technologies acquired from the SPIL. The relevant extract is available on pages 9 & 10 of the order of the AO.

6.3. The brief history of the case is that SPIL before 2002, i.e. agreement between SUN BVI & UTL directly transferred these technologies to CARACO. After that Sun BVI entered into an agreement with CARACO dated 21-11-2002 to develop and transfer of these technologies. However, these technologies were developed at the R&D facility of assessee located at Baroda & Mumbai.

6.4. On the basis of the above, the AO was of the view that the profit of SUN BVI on the transfer of these technologies for Rs. 45,35,30,553/- is taxable in India in the hands of the assessee. It is because of all these arrangements between SUN BVI, UTL, CARACO were made to evade the taxes in India. Therefore the same should be taxable in the hands of the assessee. Accordingly, the AO sought clarification from the assessee.

6.5. In response, the assessee submitted its reply as detailed under:

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ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 9 staff to carry out the research. UTL is in the field of Pharma manufacturing & selling for the last 20 years.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 10

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 11 Accordingly, he has given his statement under section 131 of the Act.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 12 between SPIL and CARACO on 21/04/97 and second between SUN global and CARACO on 21/11/02) the consideration in the number of shares was uniform at 5,44,000 shares for each technology.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 13

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 14 cannot be presumed that alleged technologies were transferred by the SPIL.

6.6. However, the AO disregarded the contention of assessee by observing as under: 1. As per the information available with this office UTL was primarily functioning as a job worker of assessee therefore, there is no reason to believe that it had proper R&D facilities to develop such a sophisticated generic product. 2. The difference in rate is very high i.e. it was sold by UTL for $4,00,000 to SUN BVI which was subsequently sold as $1,17,19,362/- to CARACO. 3. CARACO, a 100% subsidiary of assessee had earlier the same agreement with the SPIL (assessee). In the given circumstances and being a close connection between the concerns UTL/MJPL and the assessee as sister concerns and without proper and sufficient R&D facility, there is a strong reason to believe that they have not actually developed these technologies. As such SPIL actually developed the products. 4. As per the agreement in 1997, the assessee had to invest $7.5 million in stock which was to be issued as a consideration of technology transfer. However, it was mentioned that till Dec, 31, 2003 SPIL had delivered only 13 formulas and became the beneficiary owner for approximately 48% of the total shares. Assessee also submitted that after expiration of agreement in 1997 a new agreement in Nov 2002 with SUN BVI was entered. Therefore, there is contradiction in the submission of assessee itself that 2002 agreement was made after the expiration of 1997 whereas on the other side it is claiming that agreement was continued till Dec. 2003 and even as on that date all the technologies could not be transferred.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 15

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 16 4. Question of providing ‘look through’ in the statute or treaty is a matter of policy. It cannot be implied or brought by construction or interpretation to bring the income to tax in the hands of the assessee. 5. SPIL had an interest in the business of CARACO, and hence the technical team of SPIL visited CARACO for various other business purposes. 6. Without prejudice, the assessee submitted that it has offered to tax a sum of Rs. 646.07 lacs received from UTL as facility charges. In case any addition is made to the total income of the assessee then the deduction for the same should be allowed. 7. Without prejudice, the assessee also submitted that price per share as consideration should be taken as on the day of the agreement because at that time the consideration was fixed. 8. Apart from above assessee also reiterated its most of submission made before AO. 7.1. In view of above submission, assessee prayed before ld. CIT(A) to delete the addition made by AO.

7.2. However, Ld. CIT (A) disregarded the submission made before him and partly confirmed the addition made by AO by making following observation:

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 17 1. The AO correctly held that the new agreement was nothing but the extension of old agreement as there was already an old agreement of same nature which could not be complied with. This new agreement was made between CARACO and 100% subsidiary company of same group, which is in the tax heaven after acquiring 48% of shares of CARACO.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 18 5. The nature of receipt cannot be held as capital as this is not the case that transferred technology were already owned by the assessee rather it was developed by the assessee in pursuance of agreement. 6. The consideration value of shares cannot be taken on the date of agreement as nowhere it is demonstrated by the assessee on the basis of documentary evidence or agreement providing such clause that value of technologies should be computed on the day of agreement. 7. The contention of assessee that without disturbing the completed assessment of UTL, no addition can be made in the hands of assessee, the same contention was raised in the writ petition filed before the Hon’ble Gujrat HC which was rejected. 8. The alternate contention of assessee that deduction of hire charges of Rs. 660.7 lakhs is admissible, which have already been offered to tax by the assessee. In view of the above the ld. CIT-A partly confirmed the order of the AO.

Aggrieved by the order of ld. CIT(A), assessee is in appeal before us.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 19 “1. Diversion of Profits on transfer of Technology to Caraco through Sun Global BVI:

1.1 The assessee company had transferred the technology to Caraco by Sun Global BVI (Sun BVI) which was acquired from Unimed Technologies Ltd. (Unimed). As per the information available with this office, Unimed was primarily functioning as a job worker for the assessee and there are reasons to believe that it did not have proper R&D facilities to research and develop such a sophisticated generic products, the formula of which have been claimed to have been purchased by Sun BVI. Further it has been noted that the rate of sale of formula for generic products from Unimed to Sun BVI is very less as compared to the rate charged by Sun BVI to Caraco. It is an admitted fact that Sun BVI was not making any value addition to the product as Sun BVI did not have R&D facility which was duly accepted by Shri Sudhir Valia, the Director of Sun India and Sun BVI (Upto FY.2006-07) in the statement recorded u/s 131 before the ADIT (Inv.) Unit-1, Baroda on 21.3.2011. The difference in value was highly excessive and unbelievable that the technologies was sold by Unimed to Sun BVI for US$ 4,00,000 & Sun BVI sold to CARACO for US$ 1,17,19,362 which raises serious doubt as to the genuineness of the transaction and further strengthens the fact that actual vendor was none other than SPIL. The Caraco, a 100% subsidiary of the assessee, was earlier having an agreement with assessee for purchase of formula of generic products and subsequently it had another agreement with another 100% subsidiary of the assessee which is Sun BVI for purchase of generic products and it has claimed to have purchased such formula from two of the subsidiaries of the assessee which apparently did not have sufficient R&D facility for developing such products and hence it is believed that R&D facility of the assessee have been used for developing the products which have been purchased by Sun BVI form Unimed and other subsidiary of the assessee. Since both the concerns i.e. Unimed and M J Pharmaceuticals were sister concerns of the assessee at the given point of time and these concerns did not had proper and sufficient R&D facility to develop such products there was a reason to believe strongly that they had not but SPIL actually had developed the products purchased by Sun global BVI. Secondly a survey operation u/s 133A was conducted in the case of SPIL by the Asst. Director of Income tax (Inv.), Unit-VII(l), 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 forward to this office along with the survey report. On analysis of the impounded material and after going through the survey report, it was held by the AO that it is a device adopted by the assessee to evade tax in India and show profit in the case of a subsidiary company Sun BVI based in British Virgin Island, a tax heaven. Therefore

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 20 the profit of Sun j BVI on the transfer of these 25 technologies is held as taxable in India which is tabulated hereunder for the assessment year under consideration: Sr. Asst. Year Amount in Average rate of US Dollar Amount in Rs. No. USD for the year 1 2008-09 112,70,640 40.24 45,35,30,553

In view of the above information and evidences, the AO held that the assessee has adopted dubious devices and diverted its profit and thereby income to the extent of Rs. 45,35,30,553/- and added the same to the total income of the assessee. 1.2 Decision of Ld.CIT (Appeals)-2, Vadodara: During the appellate proceeding Ld.CIT(Appeals) upheld the inference drawn by the AO that the second agreement between Sun BVI Caraco USA was an extension of the original agreement between assessee and Caraco USA & that it had diverted the profit to the Sun BVI, which is not paying any tax. Hence, on the basis of these discussions, it is held that the AO has rightly taxed the income receivable on account of transfer of technology to Caraco by Sun BVI in the hands of the appellant.

So far as the alternate contention of the appellant that if the entire consideration is taxed in its hands, then the hire charges received from M/s. UTL should be reduced from the income of the appellant is concerned, the same is acceptable. The hire charges of Rs. 660.7 lakhs shown by the appellant in its income as having received from UTL, is a part of consideration which was receivable by the appellant from M/s. Caraco USA. Hence, the AO is directed to reduce this amount while i computing the taxable income of the appellant for this year.

1.3. Remarks: The decision of the Ld.CIT (A) was not accepted by the Department. The Ld CIT(A) erred in holding that hire charges received from M/s. UTL is a part of consideration receivable from M/s. Caraco USA whereas the AO has only taxed the income receivable on account of transfer of technology to Caraco by Sun BVI and which did not include profit earned by the Unimed Technologies Ltd. It has been clearly mentioned by the AO that the technologies had been sold by Unimed Technologies Ltd. to Sun BVI for US$ 4,00,000 and Sun BVI sold the same technologies to Caraco for US$ 1,17,19,362. Accordingly, the AO held that the assessee diverted its profit and suppressed the actual value of transaction which resulted into the taxation of profit in India, as tabulated hereunder:

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 21 Sr. Asst. Year Amount in Average rate of US Dollar Amount in Rs. No. USD for the year 1 2008-09 112,70,640 40.24 45,35,30,553

Thus, the AO has not taxed any income earned by M/s. Unimed Technologies Ltd. on account of aforesaid transaction (US$ 4,00,000) as mentioned above and also the said hire charges was not part of consideration which was brought to tax in the hands of assessee on account of aforesaid transaction. 1.3.1. Further regarding nature of such receipts on account of sale of technology, the Id. CIT (A) held that the assessee has developed these technologies for M/s. Caraco, USA as per the agreement entered in this regard. This is not a case where the assessee has transferred a technology already owned by it to M/s. Caraco USA. Under such circumstances, the assessee's claim that the receipt from Caraco USA is in the nature of capital receipt is not correct and is accordingly required to be rejected. Such sale of technology is in the nature of revenue receipt. 1.3.2. Further regarding the claim of the assessee regarding computation of consideration is concerned, the Id. CIT(A) held that the assessee has nowhere demonstrated that the agreement provided for computation of consideration on the basis of the price of shares of Caraco, USA on the date of agreement itself. In the absence of any such condition, the consideration has been rightly computed by the AO on the basis of share price of Caraco USA prevailing on the date of transfer of technology to Caraco USA. Hence, these contentions of the assessee are also required to be rejected.”

9.1 The ld. DR also contended that it is not possible for UTL to carry out R&D process at the Baroda facility of the assessee when only Mumbai facility is mentioned in the agreement.

9.2 The ld. DR vehemently supported the order of the lower authorities.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 22 1. ADDITIONAL SUBMISSIONS The above matter was heard by the Hon'ble Bench from time to time. We are extremely obliged to the Hon'ble Bench for the patient hearing granted in the above matter. As directed by the Bench with respect to certain queries on Unimed Technologies Ltd (UTL), the Appellant, after obtaining certain factual information from UTL, wishes to state and submit as under: 1.1 UTL is a public limited company, bearing CIN number U65999GJ1988PLC010304. It was incorporated as Unimed Technologies Private Limited' on January 27, 1988. Further it was converted to Public Company as 'Unimed Technologies Limited' on April 3, 1996 under the provisions of Companies Act, 1956. The registered office of UTL is situated at Survey No. 22&24, Village Ujeti Post Baska, Baska - Ujeti Road, Dist. Panchmahal, Halol - 389350, Gujarat. UTL had 4 Directors on its Board for the year under consideration. 1.2 UTL is engaged in the business of pharmaceutical products as manufacturers, dealers, job workers, processors, sellers, retailers, wholesalers, importers and exporters. UTL sells pharmaceutical products in domestic and overseas market. UTL also has its own dedicated and exclusive research and development facility having requisite infrastructure, | personnel and resources. 1.3 With respect to the question pertaining to the manner in which the valuation of shares was carried out to discharge the consideration paid by Caraco Pharmaceuticals Laboratories Ltd. ('Caraco'), it is submitted that pursuant to the agreement entered in to between the Caraco and SPG BVI, for each of the product delivered, SPG BVI was entitled to receive 5,44,000 shares as consideration. ' The number of shares as consideration were determined considering the long-term strategic interests serving dual purpose of (i) transfer of technology and (ii) increase in the stake in Caraco. The agreement determining the consideration in form of shares was entered in the year 2002. It was further agreed that the consideration was to become due as on such time when the respective product passed its applicable bio-

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 23 equivalency studies. The fair value of such shares is based upon an independent valuation and its includes a discount for marketability. 1.4 With respect to the details required by your Honours pertaining to the R&D facilities, it is submitted that the UTL had R&D facility, located in Panchmahal district, Halol, Gujarat. The R&D facility had a strength of around iTpersonnel engaged in performing various activities in this R&D facility. The R&D facility is having requisite equipment and apparatus like HPLC System, Analyser, OSMO Meter, Moisture Analyser, Tester, Tablet Coating Machine, RMG etc. The R&D facility was primarily engaged in conducting research and development in the field of development of pharmaceutical formulations and products for captive use and others. In its facility, UTL has undertaken R&D activity for development of the product technologies and also included Analysis, scaling-up, validation, exhibiting batches etc. Further, it is submitted that UTL has not undertaken any R&D activity for the Appellant. However, it had taken some support from the Appellant for performing certain R&D operations. 2. REBUTTAL TO ARGUMENTS RAISED BY LD. DR In response to the certain arguments raised by the Id. DR, the Appellant wishes to State and submit as under: 2.1 It is the contention of the Id. DR that the statement given by Dr. T. Rajmannar is extremely relevant as he, being the executive director of the R&D operations of the Appellant, is supposed to be in knowledge of the entire affairs of the Appellant including the contract entered into with UTL. 2.1.1 In response to the above contention, at the very outset, it is submitted that the statement of Dr. T. Rajamannar was retracted by him and hence reliance placed on same is uncalled for. Further, it is submitted that the statement recorded during the course of survey proceedings is illegal and hence cannot be relied upon. In this

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 24 regard, it is submitted that the power to record statement of employees and directors on oath is available under section 131 read with section'133(6) of the Income-tax Act, 1961 ('the Act'). As per the said provisions of the Act, the power can be exercised only in case where the assessee has not afforded facility to income-tax authority to inspect books of account or other documents or to check or verify any cash, stock or other valuable article or thing or to furnish any information. In the present case, the learned assessing officer has not recorded any satisfaction regarding the Appellant's non-co-operation during the course of Survey proceedings. Thus, the statement recorded, which is itself not as per law, cannot be considered as relevant for the purpose of determining the case. Also, it is settled legal principle that the statement recorded u/s. 133A of the Act in themselves have no evidentiary value. Hence, in the facts of the present case, no substantial relevance should be placed upon the statements recorded u/s. 133A of the Act. 2.1.2 Also, it is the contention of the Id. DR that Dr. T. Rajmannar being executive director of the R&D operations of the Appellant, is supposed to be in knowledge of the entire affairs of the Appellant including the contract entered into with UTI. In this regard, it is submitted that it is not at all practical to say that the Dr. T. Rajmannar, being executive director of the R&D activities, is supposed to be aware about the entire affairs of the Appellant. The Appellant carries out the business operations on a very extensive and large-scale basis. In such a scenario, it is not possible that a person responsible for looking after the R&D operations will be aware about all the agreements entered in to by the Appellant in its entirety. He may possess detailed knowledge about the R&D operations carried out by the Appellant but may have very limited knowledge in respect of the agreements entered in to by the Appellant pursuant to which such R&D operations are carried out. Also, being a scientist, he shall not be expected to possess detailed understanding about the legal, finance, accounting and tax implications of each and every transaction undertaken by the Appellant.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 25 Further, the statement was recorded in such an atmosphere where he was pressured was to accept and confirm the facts to which had very limited understanding. Also, the statements were recorded when he was extremely tired and fatigued which is clearly evident from the Affidavit filed by Dr. T. Rajmannar retracting his statement dated 11th November, 2011. (page no. 259 to 262 of Paper Book). Thus, in the present circumstances, the statement given by Dr. T. Rajmannar should not be considered as material for the purpose of ; adjudicating upon the case. 2.2 The Id. DR also refers to the statement given by Shri Dilip Shanghvi, Chairman, who has accepted that SPG BVI does not have any immovable assets and any R&D facility of its own. 2.2.1 In this regard, it is submitted that the SPG BVI had acquired the technologies from UTL. It was never claimed by the Appellant that SPG BVI was having its own R&D facility and immoveable assets. Thus, the question of SPG BVI having immovable assets and R&D facility of its own is not even relevant as the technologies were acquired by SPG BVI from UTL. 2.2.2 Furthermore, it is not the case that SPG BVI, as a company, does not own any assets of its own. SPG BVI is an entity engaged in the pharma business and that IPs constitutes its major assets base. Hence the argument raised by the Id. DR that SPG BVI does not own any assets is false as it owns various IPRs / ANDAs right. Thus, SPG BVI owns the most important assets that drive the generics pharma business i.e., ANDA approval under the Para IV filing of the product IPRs and that it also faces the biggest risk of prolonged litigation arising therefrom. In support of our above argument, we would also like to highlight the fact that for the year under consideration, the issue in connection to the sale of the Pantaprazole Sodium tablets by SPG BVI to Caraco was raised by the Transfer Pricing Officer (TPO) in connection to the ownership of SPG BVI over the IPRs / ANDAs rights of the products in

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 26 question. Against the order of the TPO as further enhanced by the CIT (A), the Appellant had preferred an appeal before the Hon'ble Bench of this Tribunal. The Hon'ble Bench after verifying the documents and duly considering the submissions made I by the Appellant and Revenue in this regard, had come to the finding that the ownership of IPR/ANDA rights was with SPG BVI. Thus, the fact that the ownership of the IPR / ANDA vested with UTL has also been confirmed by the Hon'ble Tribunal which is being the final fact-finding authority under the Act. Thus, the arguments made by the Id. DR questioning the asset base of SPG BVI are repetitive and devoid of merit. Hence, the argument raised by the .Id. DR in connection to the statement given by Shri Dilip Shanghvi is not at all relevant in the facts and circumstances of the present case. SPG BVI does exist in substance as it possessed significant number of intangibles like IPR / ANDA rights and other assets in its name. 2.3 The Id. DR has also been placing reliance on the statements given by Dr. T. Rajamannar to establish that the UTL is a part of the Appellant group of companies. 2.3.1 In response to this, based on the afore-mentioned submissions in point 2.1, it is reiterated that statement given by Dr. T. Rajamannar should not be considered as relevant for the purpose of deciding the present case. 2.3.2 Without prejudice to the above, it is hereby clarified that UTL and the Appellant are independent entities. They are not even related in context of the provisions of section 40A(2)(b) of the Act. Shareholding pattern of UTL is attached vide Annexure-B. Further, the Appellant is a listed company which is required to follow various | Accounting Standards ('AS') issued by The Institute of Chartered ,

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 27 Accountants of India. Accordingly, the Appellant is mandated to follow AS-18 - Related Party Disclosures which is much wider in its scope and application as compared to provisions of section 40(A)(2)(b) of the Act. However, even as per the enlarged scope of definition of the term "Related Party" as stated in AS-18, UTL is not related party of the Appellant. Thus, by no instance it can be said that the UTL is a part of Appellant group of companies. 2.4 The Id. DR has referred certain clauses of the agreement dated 4.4.2007 entered in to between UTL and the Appellant (the 'said agreement') (page no. 283 to 290 of the paper book) to point out that the technologies are developed and owned by the Appellant. 2.4.1 At this juncture, it is important to highlight the clause 11 of the said agreement which specifically states that the intellectual property rights belong to Unimed Technologies Ltd. and the Appellant shall be having no rights whatsoever on the dossiers developed in its premises. The relevant extract is reproduced as under: ".... Any and all Information, inventions and discoveries, whether or not patentable, whether complete or incomplete, which SPIL develops and/or makes as the result of services performed by SPIL under this Agreement, UTL shall be the sole and exclusive property of the Client and shall be assigned/transmitted to UTL on termination/expiry of the respective work or on request by UTL. It is a primary rule that firstly, entire agreement is to be read and secondly, it is to be interpreted in the way parties intend it to be. Thus, on reading the said agreement in its entirety it can be concluded that the intellectual property rights shall belong to UTL and the Appellant shall be having no rights whatsoever on the dossiers developed in its premises. 2.5 It is also the argument of the Id. DR that the consideration payable by UTL to the Appellant was vague and not specifically stated in the said agreement. The Id. DR also highlighted the clause in the said agreement

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 28 wherein it has been mentioned that both the parties would mutually decide upon the consideration from time to time. 2.5.1 In this regard, it is submitted that the Id. DR has once again failed to read and consider the entire agreement. The relevant clause 3 of the said agreement which deals with the consideration explicitly specified the price which shall be charged by the Appellant to UTL. Attention is invited to the clause 3 of the said agreement. The relevant extract is reproduced for ready reference: "For consideration of carrying out of research and development activities for the Products for UTL by SPIL and transfer of the know-how for manufacturing of the same to UTL by SPIL, SPIL has agreed to charge the price being estimated cost of carrying out such research and development activities as increased by the margin not exceeding 15% of such estimated cost which would be mutually agreed upon by both the parties from time to time." [Emphasis supplied] It may be noted that what was agreed to be decided from time to time was the percentage of the margin which shall be charged by the Appellant to UTL and not the entire consideration. The consideration was fixed which was estimated cost of carrying out research and development activities + margin (%). Thus, the Id. DR has once again failed to interpret the terms of the agreement in right perspective. 2.5.2 Without prejudice to the above, it is also submitted that in the present case, the terms agreed upon between the parties are commercially accepted and are also quite normal under the ordinary course of business. Further, it is at the sole discretion of the parties to decide the terms of agreement. In case where a commercial agreement is entered into between the two entities carrying on business, the Revenue cannot enter into the arrangement and dictate as to what should be the terms of the agreement. It is for the entities to decide what kind of agreement to be executed after taking into consideration, questions of commercial

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 29 expediency. It is not open for anyone else to question or decide the best business strategy for the parties carrying on the business. Also, it has been time and again upheld by the judicial authorities that the assessing officer cannot step into the shoes of the businessman to decide upon how the business is to be conducted.

Thus, in the present case, the Revenue has no power to question the terms of the agreement entered in to by the Appellant which are normal under ordinary course of business. 2.6 It is the argument of the Id. DR that the Appellant had let out the R&D facility located at Mumbai to Unimed Technologies Ltd. without any agreement. In this regard, it is submitted that the argument raised by the Id. DR is factually incorrect. The Id. DR has proceeded on the wrong understanding of facts of the case. The agreement entered in to with Unimed Technologies Ltd. specifically states that the research and development activities shall be carried out at both the research facilities located at Mumbai and Baroda ; premises respectively. Attention is invited to the clause 1 of the said agreement. Relevant extract is reproduced as under for ready reference: "SPIL agrees to carry out such pharmaceutical research and development activities as may be mutually agreed y UTL and SPIL from time to time, for development of various pharmaceutical products ....... at SPIL's Research Centres at 17/B, Mahal Industrial Estate, Mahakali Caves Road, Andheri (E), Mumbai- Maharashtra 400 093 and at SPIL, Tandalja, Vadodara - 390 020, Gujarat. " [Emphasis supplied] Thus, the argument raised by the Id. DR cannot be considered since it is factually incorrect.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 30 2.7 The Id. DR has also pointed out that the SPG BVI has no risk appetite to absorb any losses of claims arising on account of the litigation. In this regard, it is submitted that SPG BVI by acquiring these technologies has been subjected to very high risk. Risk is a very subjective term and depends upon the several factors. It is not at all pragmatic to judge risk appetite of an entity carrying on business as it depends on several factors and which varies from case to case. At this juncture, attention is also invited to the fact which is well in public domain that SPG BVI had to face severe litigation for some of the products registered in its name. The litigation subsequently resulted into significant amount of infringement claims arising which were borne and paid by SPG BVI. It is submitted that the arguments raised by the Id. DR have already been raised before and also been subject matter of discussion before the Hon'ble Bench of this Tribunal for the year under consideration. The Hon'ble Bench was dealing with the issue of applicability of ALP and the most appropriated method that ought to have been applied on sale of Pantaprazole product. In the arguments raised by the Revenue then, it was one of its main contention that the SPG BVI has not assumed any risk nor did it have ownership of IPRs / ANDAs and accordingly it was the claim that the profits from transaction from sale of product/s by SPG BVI to Caraco were to be attributed to the Appellant in the ratio of 80:20. The said contention have been dealt with and discussed by this Hon'ble Bench and after deliberation thereon the matter had been decided in favor of the Appellant. Thus, the Id. DR by the arguments raised in the present matter is trying to make same arguments as have been made before and which has been explicitly discussed and dismissed, deciding the matter in favor of Appellant and also upholding that SPG BVI had significant substance, it was holding substantial assets and bearing various risks associated thereto. Thus, the arguments raised by the Id. DR are repetitive and devoid of merits.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 31 Thus, there is no base in the argument raised by the Id. DR to say that the SPG BVI has no risk appetite to absorb losses of claims arising on account of the litigation. Hope the above submissions suffice your Honours requirement. In case your Honours requires any further information and/or clarification in relation to the above, we shall be pleased to furnish the same.

I. Whether UTL was a name lender in the impugned transactions, II. Whether the statement of Dr. T. Rajamannar, Hemang Seth recorded under section 131 of the Act was valid. III. Whether the SUN BVI is a paper company IV. Whether the impugned transaction is a Colourable Device V. Whether the Sale Consideration received by SUN BVI belongs to the assessee

I. Whether UTL was a name lender in the impugned transactions,

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 32 12. The AO in his order has held that there was no infrastructure facility owned by the UTL for the development of the technologies as discussed above. As such UTL has not developed the technologies as claimed by the assessee. The ld. CIT-A also confirmed the view of the AO. Regarding this finding of the lower authorities the assessee submitted as under: i) The infrastructure facility of assessee was given on rental basis to M/s UTL for the development of the technologies. ii) UTL is a 20 years old company having expert knowledge in the development of technology as discussed above. iii) The technologies developed by UTL were directly sold to BVI and the consideration received by it was recorded in its books of accounts which was offered to tax. iv) There was also an assessment under section 143(3) of the Act in the case of UTL where the transaction of sale to BVI and the payment of rent to the assessee were duly accepted by the Revenue. 13. Regarding the observation of the Revenue, we note that the assessee has furnished all the necessary details about UTL during the assessment proceedings. These details include agreement for using the facility of the assessee, copy of the assessment order for the AY 2008-09 which are placed on pages 283 to 290 AND 559 to 566 of the paper book. In respect of these documents, there was no defect pointed out by the Revenue.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 33 14. There is no dispute to the fact that the impugned technologies were developed at the premises of the assessee. Thus the issue whether UTL owns any infrastructure facility does not has much relevance in the given facts and circumstances. The issue which needs to be addressed is whether UTL has developed these technologies or these were developed by the assessee. 15. All the necessary details about the UTL were furnished by the assessee to the AO during the assessment proceedings. Therefore in case of any doubt about the infrastructure facility owned by the UTL, the AO should have verified from the UTL by issuing notice under section 133(6) of the Act. But the authorities below failed to do the same. 16. The learned AR for the assessee during hearing before us has also filed the details of the persons who visited the infrastructure facility of the assessee in connection with the development of the impugned technologies. The correspondence by UTL to the assessee and the list of the persons is available on record. 16.1. Similarly, the learned AR also submitted that UTL is not an associated party in pursuance to the provisions of section 40A(2)(b) of the Act. The details filed by the assessee in Annexure 2 are available on record. 17. We also note that AO in his assessment order has made the observation as detailed under: As per the information available with this office Unimed was primarily was functioning as job worker.

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17.1. From the above observation of the AO, it is transpired that UTL was very much engaged in the development activity of the technology but indirectly as job worker. Thus the role of UTL in the development of the technology cannot be ruled out completely as alleged by the Revenue.

17.2. We also note that UTL has developed the technologies in pursuance to the agreement with SUN BVI dated 03/04/2007 which is available on record. As such we are of the view that the assessee has discharged its onus by furnishing the details as discussed above. In this regard, we find the support and the guidance from the judgment of Hon’ble Supreme Court in the case of PCIT Vs. Adamine Constructions Pvt. Ltd. reported in 99 taxmann.com 45 wherein the head note reads as under:

“Commissioner (Appeals) as well as Tribunal deleted said addition holding that relevant enquiry based upon materials furnished by assessee had not been made - High Court also found that assessee had discharged onus initially cast upon it by providing basic details which were not suitably enquired into by Assessing Officer - Accordingly, High Court upheld order passed by Tribunal - Whether, on facts, SLP filed against order of High Court was to be dismissed - Held, yes [Para 4] [In favour of assessee]”

II. Whether the statement of Dr. T. Rajamannar, Hemang Seth recorded under section 131 of the Act was valid.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 35 section 131(1) of the Act if the assessee doesn’t cooperate during the survey and after taking the approval from the appropriate authority. However, we note that there was no allegation of the Revenue that the assessee did not co-operate during the survey proceedings. Thus we are reluctant to place our reliance on the statement recorded under section 131 of the Act. Regarding this we find support and guidance from the judgment of Hon’ble Madras High Court in the case of CIT Vs. S. Khader Khan son reported in 300 ITR 157 wherein it was held as under: “An admission is extremely an important piece of evidence but it cannot be said that it is conclusive; and it is open to the person who made the admission to show that it is incorrect. The word 'may' used in section 133A(3)(iii ), viz., 'record the statement of any person which may be useful for, or relevant to, any proceeding under this Act', makes it clear that the materials collected and the statement recorded during the survey under section 133A are not conclusive piece of evidence by themselves. The statement obtained under section 133A would not automatically bind upon the assessee. Section 133A does not empower any ITO to examine any person on oath. In contradistinction to the power under section 133A, section 132(4) enables the authorized officer to examine a person on oath and any statement made by such person during such examination can also be used in evidence under the Income-tax Act. On the other hand, whatever statement is recorded under section 133A is not given an evidentiary value. The statement obtained under section 133A would not automatically bind upon the assessee. Therefore, admission made during such statement cannot be made the basis of any admission.”

18.1. It is also important to note that the above judgment of Hon’ble Madras High Court was upheld by the Hon'ble Supreme Court in the case of CIT vs. S. Khader Khan Son (2013) 352 ITR 480 (SC) wherein the head note reads as under:

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 36 Section 133A of the Income Act, 1961 - Survey - Whether Section 133A does not empower any ITO to examine any person on oath; so statement recorded under section 133A has no evidentiary value and any admission made during such statement cannot be made basis of addition - Held, yes [In favour of assessee]

18.2. Now coming to the case law relied by the learner DR as detailed under: i. Raj Hans Towers (P) Ltd. Vs. CIT reported in 56 taxmann.com 67 ii. Pr.CIT Vs. Avinash Kumar Setia reported in 395 ITR 235. iii. Pebble Investment & Finance Ltd. Vs. ITO reported in 98 DTR 247

18.3. In the above cases, we find that the issue was in relation to the statement recorded under section 133A of the Act. But in the case before us there is no doubt that the statement was recorded under section 131 of the Act. Therefore, in our considered view the principles laid down by the Hon’ble Court in the cases cited above cannot be relied upon as the facts are different with the facts of the case of the assessee.

18.4. In view of the above we disagree with the finding of the learned CIT (A) that the statement recorded under section 131 of the Act during survey under section 133A of the Act can be used in conjunction with the materials found during the survey operation. Accordingly we conclude that no reference can be made to the statement recorded under section 131 of the Act while framing the assessment for the year under consideration.

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18.5. It is established law that the statement recorded on oath under section 131 of the Act cannot be the basis of any disallowance/addition until and unless it is supported on the basis of some tangible material. Here it is pertinent to note that the CBDT has discouraged to its officers to make the addition on the basis of the statements and without bringing any tangible materials for any addition/disallowance. The relevant extract of CBDT instructions issued vide F. No. 286/98/2013-IT(Inv.II) dated 18th of December 2014 reads as under:- “Instances/complaints of undue influence/coercion have come to notice of the CBDT that some assessees were coerced to admit undisclosed income during Searches/Surveys conducted by the Department. It is also seen that many such admissions are retracted in the subsequent proceedings since the same are not backed by credible evidence. Such actions defeat the very purpose of Search/Survey operations as they fail to bring the undisclosed income to tax in a sustainable manner leave alone levy of penalty or launching of prosecution. Further, such actions show the Department as a whole and officers concerned in poor light. 2. I am further directed to invite your attention to the Instructions/Guidelines issued by CBDT from time to time, as referred above, through which the Boards has emphasized upon the need to focus on gathering evidences during Search/Survey and to strictly avoid obtaining admission of undisclosed income under coercion/undue influence. 3. In view of the above, while reiterating the aforesaid guidelines of the Board, I am directed to convey that any instance of undue influence/coercion in the recording of the statement during Search/Survey/Other proceeding under the IT Act, 1961 and/or recording a disclosure of undisclosed income under undue pressure/coercion shall be viewed by the Board adversely.”

18.6. From the above circular, it is clear that the CBDT has emphasized to its officers to focus on gathering evidences during search/survey operations and strictly directed to avoid obtaining admission of undisclosed income under coercion/ undue influence. Keeping in view

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 38 the guidelines issued by the CBDT from time to time regarding the statements obtained during search and survey operation, it is undisputedly clear that the lower authorities have not collected any other evidence to prove the impugned transaction as bogus other than the statement.

18.7. It is also important to note that the statement furnished under section 131 of the Act dated 8-11-2011 was retracted by way of filing an affidavit dated 11-11-2011 immediately after 3 days.

III. Whether the SUN BVI is a paper company

i) There is no doubt that BVI was registered company in tax heaven in British Virgin Islands. ii) There were several transactions carried out by the assessee with the BVI which was subject matter of transfer pricing adjustments in the proceedings framed under section 143(3) read with section 92CA(3) of the Act. iii) The income of SUN BVI can be taxed in India if the residential status of SUN BVI is determined as resident of India as per the provisions of section 6(3) of the Act. However, none of the authorities below has alleged that M/s SUN BVI is resident of India. iv) If the transaction for the sale of technology is treated as international transaction between the associated enterprises as per the provisions of section 92C of the Act, then the same needs to be determined as per the arm length as per the

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 39 provisions of law. But the Revenue in the case on hand has not invoked the provisions of transfer pricing adjustments. v) SUN BVI cannot be treated as the paper company merely on the fact that it doesn’t own any factory, fixed assets, and infrastructure facility. It is because SUN BVI has been dealing with the assessee on various purchase and sales transactions which have been subject matter of dispute under transfer pricing regulations. vi) There is no DTAA between British Virgin Islands and the government of India which governs the transaction between these 2 countries. Thus the transactions between the assessee and sun BVI will be governed as per the provisions of the income tax Act. There is no provision under the Act under which the income of sun BVI can be taxed in India. vii) The SUN BVI owes IPR and some samples showing the registration with the USFDA are available on record. IV. Whether the impugned transaction is a Colourable Device

18.8. The allegation of the Revenue is that the sale of technology by UTL to the SUN BVI is nothing but a colorable device. As such the assessee after the involvement of UTL and BVI has made the sale of the technology to the CARACO in the USA to avoid the tax liability. However, if the transactions are treated as colorable device to escape from the tax liability then it should be treated it in its entirety meaning thereby the part of the transaction cannot be treated as genuine and part as non-genuine. As such the Revenue has treated the part of the transaction of sale of the technology by the UTL to SUN BVI as colorable device whereas the part of transaction i.e. the rental charges

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 40 from UTL as income under the head business and profession of the assessee has been accepted. 18.9. The main allegation/finding of the AO, which was later confirmed by the ld. CIT(A), that assessee has used this transaction as a colorable device to reduce its tax liability by diverting the income. Regarding this we note that Honorable Supreme court in case of McDowell & Co. Ltd vs. Commercial tax officer (154 ITR 148) dated 17-4-1985 wherein apex court observed that tax planning within the law is permitted, but colorable devices cannot be part of tax planning.

18.10. In the case of McDowell & Co, the assessee was not collecting the sales tax liability on the excise duty even after the amendment in the distillery rules 76 & 79 w.e.f. 4-8-1981. As such before the amendment in the rules, i.e., distillery rules 76 & 79 w.e.f. 4-8-1981, the buyers were liable to deposit the excise duty directly to the state government. Therefore the assessee did not collect the sales tax on such excise duty. It is pertinent to note that the Hon’ble SC before the amendment in the rules 76 & 79 decided the issue in favor of the assessee reported in 1 SCR 914 dated 25-10-1976. Thus the assessee defaulted to complying the amended distillery rules 76 & 79 w.e.f. 4- 8-1981. Thus the Hon’ble Apex Court decided the issue in favor of Revenue. Hence we are of the considered view that the principles laid down by the Hon’ble Apex Court cannot be applied in the case before us as the facts are different.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 41 18.11. It is also pertinent to note here that the Hon’ble apex court in case of Union Of India And Anr vs. Azadi Bachao Andolan (263 ITR 705) discussed the case McDowell & Co. Ltd vs. Commercial tax officer (supra) in detail and distinguished from it by observing as under: “We may in this connection usefully refer to the judgment of the Madras High Court in M.V.Vallipappan and others v. ITO , which has rightly concluded that the decision in McDowell cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavour. Though the Madras High Court had occasion to refer to the judgment of the Privy Council in IRC v. Challenge Corporation Ltd. , and did not have the benefit of the House of Lords's pronouncement in Craven , the view taken by the Madras High Court appears to be correct and we are inclined to agree with it.”

18.2. Further, we also note that Hon’ble Jurisdictional High Court in case of Banyan And Berry Vs. Commissioner Of Income Tax (222 ITR 831) held that tax planning within the law is permissible and only if any transaction which is reducing the tax liability cannot be regarded as a colorable device. The court also discussed the meaning of colorable device and case of McDowell & Co. Ltd vs. Commercial tax officer (supra) in detail. The relevant extract of the order is read as under:

“From the aforesaid, it is apparent that on the factual aspect the Court was considering the case where in a going business a liability to pay duty which was legally of the assessee and which on such payment was to become part of its cost of commodity sold by it and to become part of its selling price to the buyers, was as a result of arrangement between the seller and buyer split into two, namely - duty so far paid separately directly to the tax authorities and the balance so paid to the seller; the arrangement was existing solely for the purpose of not paying the tax and it is not a transaction in reality of

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 42 receiving less price than the one on which it was marketing. The Court no where said, that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell's case (supra). Ratio of any decision has to be understood in the context it has been made. The facts and circumstances which led to McDowell's decision (supra) leaves us in no doubt that the principle enunciated in the above case has not affected the freedom of citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the frame work of law, unless the same fall in the category of colorable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity. It was with this consciousness that the Court has used these expressions while depreciating the schemes of tax avoidance in the name of tax planning. All the expressions used by their Lordships in depreciating the methodology of tax avoidance through tax planning of resorting to 'colorable device', 'dubious methods or subterfuge' have special significance in legal world. In the context of the present discussion, the meaning assigned to 'colorable' in Brown's Judicial Dictionary has been defined as 'reverse of bona fide'. Black's Law Dictionary explain 'colorable' to mean 'that which is in appearance only, and not in reality, what it purports to be, hence, counterfeit, feigned having the appearance of truth'. So also a device. The context in which the expression device has been used in its ordinary dictionary meaning as per Shorter Oxford Dictionary means 'inneuity, something device, arrangement, plan, contrivance, a plot or a trick. Black's

Dictionary refers to device as contrivance, a scheme, trick. Subterfuge - according to ordinary meaning as per the Shorter Oxford English Dictionary - means that to which one refers for escape or concealment. Subterfuge on historical principles means, an article or device to which a person

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 43 refers in order to escape the force of an argument, an excuse with which conceals a clue. So also the expression dubious refers to a doubtful or of questionable character. That is to say what has been deprecated as tax planning for avoidance of tax are those acts which have doubtful, or questionable character as to their bona fide and righteousness. Not all legitimate acts of a taxpayer which in ordinary course of conducting his affairs a person does and are under law he is entitled to do, can be branded of questionable character on the anvil of McDowell (supra). We are unable to read in the aforesaid decision that any act of an assessee which results in reduction of his tax liability or expectation of tax benefit in future amounts to colorable device, a dubious method or subterfuge to avoid tax and can be ignored if the acts are unambiguous and bona fide, merely on the ground that treating those as deliberate would result in tax liability in future. While the planning adopted as a device to avoid tax had been deprecated, principle cannot be read as laying down the law that a person is to arrange his affairs so as to attract maximum tax liability, and every act which results in tax reduction, exemption of tax or not attracting tax authorised by law is to be treated as device of tax avoidance.”

18.3. It is also pertinent to mention here that whenever assessee has two options, any layman will always go for one which reduces its tax liability but to hold that the transaction as a colorable device Revenue needs to see it in entirety, as held by the Hon’ble Gujarat high court in the abovementioned case.

18.4. However, we further note that before applying the aforesaid principles laid down by the Hon’ble Apex court in case of McDowell (supra) to the case on hand certain facts needs to be considered for

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 44 arriving at a finding whether a particular series of the transactions is a colourable device or not the onus is on the AO to find out:

(i) whether the parties to the transactions have concealed or hidden any fact and/or whether what is shown to be done could have actually happened in different time or at different place; Ans: Regarding the facts of the transactions, we note that all the necessary facts were duly disclosed by the assessee, UNIMED, Sun BVI in the financial statements. The following facts were duly disclosed: a) the sale price of the technologies by the UNIMED to sun BVI were duly disclosed in the income tax return which was also accepted by the Revenue in the assessment framed under section 143(3) of the Act. b) The fact that UTL used the premises the assessee for the development of the lodges against the rental payment was disclosed in the income tax return of the assessee as well as UTL which was also accepted by the Revenue in the assessment framed under section 143(3) of the Act. c) The aforesaid transactions were duly supported on the basis of the agreements which are available on record. Thus, we are of the view no facts were concealed or hidden. (ii) whether it could be a normal business practice;

Ans: In today’s time the entire world has become a Global village for the business. The business men with the help of the technology are able to work effectively worldwide. The Government of all the countries are also promoting the same. But at the same time there are many threats to the Governments for charging the tax on the income of the business men having businesses in the different part of the

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 45 world. Therefore there are frequent of changes under the Income Tax procedure worldwide including India such as Transfer pricing, POEM, GAAR, and BEPS etc to meet such challenges. (iii) Even where individual transactions of the device are legal or legitimate, whether combination of these steps creates an effect which is abnormal in the business world and could not have been otherwise undertaken in normal circumstances; Ans. In the present case there was no reference made by the authorities below suggesting that the transaction is carried illegally. As the transaction in the instant case were within the ambit of the law as nothing being illegal/illegitimate was brought to our notice. (iv) These individual transactions create an effect which is contrary to human probabilities; Ans. The transactions carried out by the parties were very much normal transaction. (v) whether actions of the parties finally are at variance with the terms of the agreement; Ans. There was no variance in the impugned transaction with regard to the terms of the agreement.

18.5. In view of the above we hold that the impugned transaction cannot be regarded as colorable device merely on the reasoning that there is no tax liability arising in the hands of the assessee.

V. Whether the Sale Consideration received by SUN BVI belongs to the assessee

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 46 18.6. We also note that the consideration between SUN BVI and CARACO, USA was fixed in kind i.e. the CARACO was under the obligation to issue the shares to SUN BVI against the supply of the technology in pursuance to the agreement dated 21-11-2002. The relevant extract of the agreement stands as under: 2002 agreement between CARACO and SUN BVI: “4. CONSIDERATION 4.1. Consideration. In consideration of the obligations of Sun Global set forth in Section 1 and Section 3, for each Product delivered by Sun global to Caraco Sun Global shall receive five hundred fort-four thousand (544,000) shares of Convertible Preferred Steel containing those items and conditions as set forth in that certain Certificate of Determination of Rights Privileges and Preferences, Series B Preferred Stock No. Par Value (“Certificate of Determination”) of Caraco (the form of which is attached hereto) (the “Preferred Shares”). The consideration will become due with respect to each Product and such time as such Product passes the applicable bioequivalency study or studies (the “Target Date”). Caraco shall notify Sun Global when a Target Date has been triggered. Sun Global shall then notify Caraco as to when, where and in whose name (Sun Global’s or an affiliate’s) Sun Global wishes the Preferred Shares to be issued. Within fifteen business days of Caraco’s receipt of such notice from Sun Global, it shall, as applicable, either directly issue and deliver such Preferred Shares to Sun Global and/or its affiliates or send to its transfer agent an instruction directing such transfer agent to issue and deliver such Preferred Shares to Sun Global and/or its affiliates promptly after the transfer agent’s receipt of such notice from Caraco.

4.2. Validity Issued Preferred Shares. The Preferred Shares issued and delivered by Caraco to Sun Global pursuant to this Section 4, when issued shall be duly authorized and validly issued, fully paid and non-assessable and not subject to any preemptive or similar rights.”

18.7. We further note that at the relevant time when the agreement was made between SUN BVI and CARACO the share price of CARACO was low than the price when the technology was actually delivered to the

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 47 CARACO. Thus, by the time when these technologies were transferred by SUN BVI to CARACO USA, the share price has increased many folds. As a result, the transaction of supplying the technology to CARACO resulted huge profit to SUN BVI. However, it is important to note that it was not possible to forecast/ predict the price of the shares in future at the time of actual delivery of the technologies. Therefore, the increase in the price of the shares cannot be held as colourable device in the hands of the Sun BVI. As such there was no role of the assessee in the market price of the shares of CARACO USA which is regulated by the stock exchange.

18.8. In view of the above, we are of the opinion that it is not possible to predict profit in 2002 i.e. on the date of agreement for the future years. Furthermore, it is also not possible to plan the profit on transactions which will be due on future date. It is because the consideration in shares but its value cannot be fixed. As such the value of shares at the time of actual delivery can fluctuate downwards also and thus in the event of downward fluctuation in the price, the loss would not be allowed by the Revenue.

18.9. In view of the above, we are of the prima facie opinion that it is not possible that a person can predict the profit for a future date on the date of agreement itself specially, when the consideration is in shares whose price is not fixed. But at the same time we are also of the view that in the long run on the basis of past history i.e. technologies transferred in

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 48 pursuant of 1997 it is possible for the assessee to predict/forecast these transactions and use them as a colorable device to shift the profit from India to BVI, a tax heaven, . In this regard we have already raised a specific query from the bench to the ld. DR as discussed in preceding Para, but there was no reply from the ld. DR.

18.10. It is also important to note that the new agreement i.e. between the SUN BVI & CARACO is almost same as old one except the party i.e. assessee has been replaced by the SUN BVI. Further the doubt arises that since SUN BVI is the AE as per the provisions of Act, therefore, to avoid the TP provisions, the assessee involved third party i.e. UTL for the development of such technology. But we note that the AO has accepted the transaction of sale by the UTL to SUNBVI and the payment of rent to SPIL in the assessment framed under section 143(3) of the Act vide order dated 29-10-2010. Similarly, the rent income received by the assessee from UTL for allowing the use of Infrastructure facility to UTL has been accepted by the Revenue. Therefore, we are of the view that no addition can be made on the basis any doubt unless it is based on some documentary evidence. Regarding this we place our reliance on the order of Hon’ble Supreme Court in the case of Union Of India And Anr vs. Azadi Bachao Andolan (263 ITR 705)wherein it was held as under:

“134. We may also refer to the judgment of Gujarat High Court in Banyan & Berry v. CIT [1996] 222 ITR 831/ 84 Taxman 515 where referring to McDowell & Co. Ltd.'s case (supra), the Court observed: ". . . The court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 49 subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell case [1985] 154 ITR 148 (SC). The ratio of any decision has to be understood in the context it has been made. The facts and circumstances which lead to McDowell's decision leave us in no doubt that the principle enunciated in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity." (p. 850) This accords with our own view of the matter.”

18.11. Further, the AO also observed that assessee used the name of UTL being a related party of assessee, therefore, it was not very much difficult for assessee to enter into all these transactions. However, the assessee categorically denied the fact that UTL is a related party not even as per AS-18 of the assessee which is much wider than section 40A(b)(2) of the Act. In this regard we raised a query from the bench to the ld. Counsel who has furnished the shareholding pattern of UTL for the year under consideration and contended that UTL is not a related party as per this shareholding. The copy of the shareholding pattern and the specified person is available on record. The ld. DR has not brought anything on record to controvert the argument of the ld. AR for the assessee.

18.12. Even assuming that the impugned technologies were developed by the assessee, the question arises how to tax the income of the assessee. If it is so then the transaction for the sale of technological will be treated

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 50 between the assessee and the SUNBVI being the associated enterprise. It is settled law the international transactions between the 2 associated enterprises are governed by the provisions of transfer pricing as per section 92 of the Act. Thus the impugned transaction between the assessee and its associated enterprises can be determined at the arm length price under the provisions of section 92 of the Act. However it is important to note that the Revenue has not invoked the provisions of section 92 of the Act to determine the arm length price for the impugned transaction. Thus we are of the considered view that there is no provision under the Act to tax the international transaction between the 2 associated enterprises other than the provisions contained under section 92 of the Act. In our considered view the revenue has erred by not referring the impugned transaction to the TPO for determining the arm length price.

18.13. Once the reassessment proceedings have been initiated against the assessee, the AO was empowered to refer the matter the TPO for determining the price at Arm’s length. But the AO has not done so. Once the matter has not been referred to the TPO for determining the arm length price, then normal provisions of the Act will be applied. Under the normal provisions of the Act the purchase and sale price between the associated enterprises cannot be disturbed even these are not at Arm’s length price. In this regard we find support and guidance from the judgment of Hon’ble Gujarat High Court in the case of Marghabhai Kishabhai Patel & Company Vs. CIT reported in 108 ITR 54 wherein it was held as under:

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 51 In view of the decision of this High Court in CIT v. Keshavlal Chandulal [1966] 59 ITR 120 , unless it has been shown that the transaction in question was a sham one or unless the value shown was not the value in the books of accounts or unless it was not a bona fide transaction, it was not open to the taxing authorities to disregard the figures of the transactions shown in the books of account of the firm. In the instant case, it was nobody's case that the transactions of sale from the partners and 'C' to the assessee were not bona fide transactions nor was it the case of the department that they were sham transactions or that the price paid in respect of each of these transactions by the assessee-firm was other than the one set out in the books of account of the firm. Under these circumstances it appeared that the taxing authorities had no right to substitute either the market price or the average price in place of the price or value agreed to between the parties to the transaction, since the transaction had not been shown to be a sham one nor had it been shown that the value was not the value in the books of account. Further, it was not clear how the ITO arrived at the figures of addition back for each of these assessment years without comparing the prevailing market price of the tobacco of the particular quality purchased from the partners and 'C' on the dates of purchase with the purchase price actually paid to the partners and 'C'. The qualities of tobacco differ very widely and also there may be fluctuations in the market from time to time and striking an average of the price of all tobacco purchased during the entire season irrespective of qualities and irrespective of the fluctuations in the market rates, was a very unscientific method followed by the department in arriving at its conclusion but in any event he had no right to depart from the prices shown in the books of account unless he found the transaction not to be a bona fide one or to be sham one or unless he found that the prices paid were not what was shown in the books of account and since none of these three conclusions had been reached by him, he had no right to depart from the books of account of the assessee. It was, therefore, held that the Tribunal was not justified in disallowing a part of the actual price of tobacco paid to the partners.

18.14. We further note that even if we assume that SUNBVI is the paper company which was created only to divert the income of the assessee, then the transaction for the sale of transaction will be treated between the assessee and CARACO. Thus such transactions will be governed under the provisions of section 92C of the Act for determining

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 52 the ALP. But the AO failed to invoke the provisions of the transfer pricing under section 92 of the Act.

18.15. It is also important to note that the assessee has shown rental income received from UTL which has been duly accepted by the Revenue as income of the assessee. Thus we note that the revenue has taken contradictory stand while holding the transaction between the assessee, UTL & sun BVI as colorable device. In our considered view once the transaction has held as colorable device then the assessee should not suffer tax on the income disclosed by it by way of rent from UTL.

18.16. Regarding the contention of the ld. DR for the use of the R & D facility at Baroda, we note that there was also the rent agreement for the use of both the facility for carrying out R&D process as evident from page 2 of agreement placed on page 284 of the paper book.

18.17. In view of the above and after considering the facts in totality, we reverse the order of the authorities below and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 53

“2. On the facts and in the circumstances of the case, the Ld.CIT(A) erred in law and on facts in restricting the disallowance of R&D expenses after excluding the export turnover of the assessee for the purpose of computing the allocation of R&D expenses without appreciating that the AO had applied the same pro-rata method of allocating the R&D expenditure which the assessee itself was applying for allocation of the R&D expenditure within its units in the ratio of their turnover.”

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 54 “49. no. 12 relates to the disallowance on account of R&D expenses incurred by the assessee for products manufactured by Sun Pharmaceuticals Industries. 50.During the course of the assessment proceedings and survey operation conducted u/s. 133A of the Act, it was found that the assessee is the flagship company of Sun Pharma Group and it is carrying out the Research and Development work for the entire Sun Pharma group which includes Research & Development of the products which are manufactured by a firm called Sun Pharmaceuticals Industries (SPl) having manufacturing units at ' Jammu and Dadra. The A.O. found that the assessee is holding 97.5% share of the said firm SPl. 51.On perusal of the returns of income filed by the partnership firm SPl, it was observed that it is showing huge profit margins and claiming deductions u/s. 80IC of the Act. It was observed by the A.O. that substantial part of this profit is coming back to the assessee. The A.O. was of the opinion that since the huge profit received by the assessee from the firm is exempt from tax. Therefore, the assessee has debited all the expenditure in its books of accounts whereas the partnership firm has not debited any expenditure under the head 'Research & Development'. 52.The A.O. was of the firm belief that the entire R&D expenditure claimed by the assessee in its books of accounts cannot be allowed in the hands of the assessee. 53.. The assessee strongly objected to this proposition on the ground that R&D facility is wholly and exclusively owned by the assessee and is approved by the DCIR u/s. 35(2AB) of the Act. and the products developed by this R&D facility are owned up by the assessee.

54.The contentions of the assessee were dismissed by the A.O. who was of the firm belief that the assessee is incurring expenses at R&D activity on behalf of the partnership firm SPI in which the assessee has substantial interest. Further, the substantial profit received from the firm SPI is exempt, therefore, the expenditure incurred by the assessee under the head R&D activity could not be said to have been incurred wholly and exclusively for the purpose of business of the assessee. The A.O. concluded by disallowing Rs. 5,3,02,95,255/-. 55.Aggrieved by this, the assessee carried the matter before the Id. CIT(A) but without any success.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 55 56.Before us, the Id. counsel for the assessee reiterated what has been stated before the lower authorities. It is the say of the Id. counsel that in earlier years also, similar reasoning were given for disallowing certain expenditures on the allegation that the expenditures were incurred on half of Sun Pharmaceuticals Industries. The Id. counsel pointed out that ih^Tribunal had deleted those additions while deciding the appeal for A.Y. 2-03, 2003-04 & 2004-05. 57. Per contra, the Id. D.R. supported the findings of the lower authorities. 58.We have given a thoughtful consideration to the facts in issue before us. There is no dispute that the assessee did incurred expenditure under the head "Research & Development" activity. The only dispute relates to the allegation that part of such expenditure belong to the business activity of the partnership firm SPI. There is also no denying by the lower authorities that the entire Research arid Development activities are done by the appellant company only being the flagship company of Sun Pharma Group. In our understanding of the facts, the appellant company had assisted the partnership firm in carrying on its business by using its network for marketing the pharmaceuticals products successively. Since the assessee is holding 97.5% of share in the partnership firm, SPI it becomes the duty of the assessee to promote the business of the partnership firm in the capacity of the majority stake holders. Incidentally, the revenue authorities have not brought anything on record which could suggest that the expenditures have not been incurred for the purposes of business. Be it assessee's business or the business of the partnership firm where the assessee is a majority stake holder. In our understanding of the law an expenditure is allowable if it is incurred for the purposes of the business of the assessee. Finding that the assessee is having 97.5% share in the profits the firm SPI, we do not find any merit in the disallowance made by the A.O. and confirmed by the First Appellate Authority. We, accordingly, direct the A.O. to delete the addition of Rs. 5,30,29,5255/-. Ground no. 12 is accordingly allowed.”

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 56 25. The issue raised by the assessee in ground No. 5 is consequential in nature and therefore no separate adjudication is required for the same. Accordingly we dismiss the same.

Now we take up Revenue’s appeal in ITA No.1689/Ahd/2015 for AY 2008-09

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 57 4. "On the facts and in the circumstances of the case, the Ld. CIT (A) erred in law and on facts in holding that the expenses incurred on clinical trial outside approved facility is eligible for weighted deduction without appreciating the fact that expenditure incurred for in-house research and development facility only is entitled for deduction u/s. 35(2AB) read with Explanation to section 35(2AB) of the Act, which finds support from the decision of I.T.A.T. Mumbai Bench "C" in the case of Concept Pharmaceuticals Ltd. v. CIT[2011] 43 SOT 423 (Mum.) 5. "On the facts and in the circumstances of the case, the Ld. CIT (A) erred in law and on facts in relying upon the judgement of Hon'ble Gujarat High Court in the case of Cadila Health Care Ltd. 214 Taxmann 672 (Guj.), without appreciating that the phraseology used is 'on in-house research or development facility’ and not 'by in-house research and development facility' and, therefore, only the expenditure incurred on in-house research can be allowed under section 35(2AB) and not any expenditure incurred outside such facility and explanation to section 35(2AB)(1) has only clarified that expenditure incurred on clinical trial in relation to drugs and pharmaceuticals will be part of the expenditure on scientific research and the said explanation no where states that expenditure incurred on clinical trials outside the in-house research and development facility can be allowed. 6. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary. Relief claimed in appeal The order of the CIT(A) on the issues raised in the aforesaid Grounds be set aside and that of the Assessing Officer be restored.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 58 account of higher charges will be restored in the hands of the assessee in view of the above order. Hence the ground of appeal of the Revenue is allowed.

At the outset we note that the issue raised by the Revenue in the above ground of appeal has already been adjudicated by us on merit in favour of the assessee and against the Revenue vide Para No. 37 of the this order. Accordingly we hold that the issue raised by the Revenue becomes infructuous. Hence we dismiss the same.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 59 The issue raised by the Revenue in ground No. 4 and 5 is that the learned CIT (A) erred in deleting the addition made by the AO for Rs. 2,50,44,500.00 on account of the weighted deduction under section 35(2AB) of the Act.

However the AO was of the view that the expenditure incurred outside the approved facility will not be eligible for weighted deduction under section 35(2AB) of the Act. Therefore the AO disallowed the same and added to the total income of the assessee.

Being aggrieved by the order of the ld. CIT-A, the Revenue is in appeal before us.

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 60

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 61 research and development facility, we would on one hand be completely diluting the deduction envisaged under sub-section (2AB) of section 35 and on the other, making the explanation noted above quite meaningless. We have noticed that for the purpose of the said clause in relation to drug and pharmaceuticals, the expenditure on scientific research has to include the expenditure incurred on clinical trials in obtaining approvals from any regulatory authority or in filing an application for grant of patent. The activities of obtaining approval of the authority and filing of an application for patent necessarily shall have to be outside the in-house research facility. Thus the restricted meaning suggested by the Revenue would completely make the explanation quite meaningless. For the scientific research in relation to drugs and pharmaceuticals made for its own peculiar requirements, the Legislature appears to have added such an explanation. 17.In the case Dy. CIT v. Mastek Ltd. [2012] 210 Taxman 432/25 taxmann.com 133 (Guj.) and connected matters, a Division Bench of this Court had touched on the aspect of what can be termed as scientific research. In the context, certain observations made by the Bench may be of some relevance. "25. It can thus be seen that the term scientific research in the context of the deduction allowable under section 35(1) of the Act would include wide variety of activities. It can also be appreciated that every scientific research need not necessarily result into the ultimate goal with which it may have been undertaken. Often times in the field of research and invention, the efforts undertaken may or may not yield fruitful results. What is to be ascertained is whether any scientific research was undertaken and not whether such scientific research resulted into the ultimate aim for which such research was undertaken. It can be easily envisaged that the scientific research undertaken often times would completely fail to achieve desired results. That by itself does not mean that no scientific research was undertaken. What the Legislature desired to encourage by granting deduction under section 35(1) of the Act was a scientific research and not necessarily only the successful scientific research undertaken by an assessee." 18. We are, therefore, of the opinion that the Tribunal committed no error. Merely because the prescribed authority segregated the expenditure into two parts, namely, those incurred within the in-house facility and those can were incurred outside, in our opinion, by itself would not be sufficient to deny the benefit to the assessee under section 35(2AB) of the Act. It is not as if that the said authority was addressing the issue for deduction under section 35(2AB) of the Act in relation to the question on hand. The certificate issued was only for the purpose of listing the total expenditure under the Rules. Therefore, no question of law arises.”

ITA Nos.1659/Ahd/2015 (by assessee) and ITA No.1689/Ahd/2015 (by revenue) Sun Pharmaceuticals Industries Ltd. vs. ACIT Asst.Year - 2008-09 62 In view of the above, we do not find any infirmity in the order of the ld. CIT-A. Accordingly we direct the AO to allow the weighted deduction under section 35(2AB) of the Act in respect of the expenditure discussed above. Hence, the ground of appeal of the Revenue is dismissed.

This Order pronounced in Open Court on 20/06/2019

-Sd- -Sd- (MS.MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 20/06/2019 ट�.सी.नायर, व.�न.स./T.C. NAIR, Sr. PS