BIOCON BIOPHARMACEUTICALS PRIVATE LTD vs. THE INCOME TAX OFFICER

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ITA/410/2013HC KarnatakaKAHC01025947201306 February 2023Bench: P.S.DINESH KUMAR,RAMACHANDRA D. HUDDAR7 pages
AI SummaryAllowed

What did the High Court hold?

The High Court allowed the appeal, setting aside the ITAT's order. The Court held that the issuance of shares by the assessee to CIMAB did not constitute a payment to the foreign entity that would attract tax deduction at source under Section 195(1) of the Act. The Court reasoned that no actual transaction of money had taken place between the assessee and CIMAB. The investment by CIMAB was in the form of technical know-how. The revenue's argument that the phrase "other sums" in Section 195(1) encompassed the value of shares was considered misconstrued because no payment was made. The Court clarified that the issuance of share certificates does not amount to payment, and any tax implications would arise only when the shares are traded, attracting capital gains tax. Consequently, the view taken by the AO and appellate authorities was deemed perverse. Questions 1 and 2 were answered in favour of the assessee. Questions 3, 4, and 5 were rendered infructuous and not answered.

What were the facts?

The assessee, Biocon Biopharmaceuticals Private Ltd (now Biocon Limited), filed an appeal before the High Court of Karnataka against an order dated April 19, 2013, passed by the ITAT, Bengaluru. The appeal concerned assessment years 2004-05, 2005-06, and 2006-07. The dispute arose from the Assessing Officer's (AO) view that tax deduction at source under Section 195 of the Income Tax Act, 1961, ought to have been made based on the value of shares issued by the assessee to CIMAB SA, Cuba. The assessee, a joint venture company, was formed with Biocon investing capital and CIMAB providing technical know-how in exchange for 49% shareholding. The AO, CIT(A), and ITAT confirmed the view that the issuance of shares constituted a payment attracting tax deduction.

What were the issues?

The High Court was asked to decide the following substantial questions of law: 1. Whether the issuance of shares by the Appellant to CIMAB constituted ‘royalty’ under Section 9(1)(vi) of the Act, attracting tax deduction at source under Section 195(1)? 2. Whether the Appellant could have maintained an application for ‘nil’ withholding under Section 195(2) of the Act, rendering the ‘nil withholding order’ dated 22-02-2005 non est in law and not covering the issue of shares? 3. Whether the ITAT's finding that there was no transfer of know-how by CIMAB to the Appellant under the TTA read with the JVA was perverse? 4. Whether the provisions of Section 195(1) stood attracted on the issue of shares made by the Appellant to CIMAB? 5. Whether the issues of shares on 30.03.2004 and 30.09.2004 to CIMAB were covered by the order dated 22.02.2005 passed by the 1st respondent under Section 195(2)? Assessee's Contentions: The assessee argued that no payment was made to CIMAB; only shares equivalent to 49% of the company were issued. Shares are realizable only upon trading, at which point capital gains tax is attracted. Therefore, the AO's view was bad in law. Revenue's Contentions: The revenue contended that the phrase "other sums" in Section 195(1) should be treated as money paid to the foreign entity, and thus the value of the share should be considered as payment.

Which sections of the Income-tax Act were involved?

Section 9(1)(vi),Section 195,Section 195(1),Section 195(2)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, - 3 -

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ITA No. 410/2013

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 6TH DAY OF FEBRUARY, 2023 PRESENT THE HON'BLE MR. JUSTICE P.S.DINESH KUMAR AND THE HON'BLE MR. JUSTICE RAMACHANDRA D. HUDDAR INCOME TAX APPEAL NO. 410 OF 2013 BETWEEN:

BIOCON BIOPHARMACEUTICALS PRIVATE LTD (NOW BIOCON LIMITED) A COMPANY INCORPORATED UNDER THE COMPANIES ACT, 1956 HAVING REGISTERED OFFICE AT 20TH K.M., ELECTRONIC CITY HOSUR ROAD BANGALORE – 560 100 REPRESENTED HEREIN BY ITS DEPUTY GENERAL MANAGER TAX AND COMPLIANCE MR. SHIVADUTT B …APPELLANT

(BY SHRI. T. SURYANARAYANA, SENIOR ADVOCATE FOR Ms. TANMAYEE RAJKUMAR, ADVOCATE)

AND:

1.

THE INCOME TAX OFFICER (INTERNATIONAL TAXATION) WARD 19(1), NO.14/3 R.P BHAVAN, NRUPATHUNGA ROAD BANGALORE – 560 001

2.

DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) 6TH FLOOR, R.P BHAVAN NRUPATHUNGA ROAD BANGALORE – 560 001 …RESPONDENTS

(BY SHRI. K.V. ARAVIND, SENIOR STANDING COUNSEL)

Digitally signed by ANUSHA V Location: HIGH COURT OF KARNATAKA

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ITA No. 410/2013

THIS ITA IS FILED UNDER SEC.260-A OF INCOME TAX ACT, 1961, ARISING OUT OF ORDER DATED 19/04/2013 PASSED IN ITAs No.507-510/BANG/2009, FOR THE ASSESSMENT YEARS 2004-05, 2005-06, 2006-07 & 2006-07, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN AND ALLOW THE APPEAL, SET ASIDE THE ORDER PASSED BY THE ITAT, BANGALORE IN ITAs No.507-510/BANG/2009 DATED 19/04/2013 TO THE EXTENT QUESTIONED THEREIN.

THIS ITA, COMING ON FOR FINAL HEARING, THIS DAY, P.S.DINESH KUMAR, J., DELIVERED THE FOLLOWING:

JUDGMENT

This appeal by the assessee challenging the order dated April 19, 2013 in ITAs No.507-510/Bang/2009 for A.Ys. 2004-05, 2005-06, 2006-2007 passed by the ITAT1, Bengaluru, has been filed to consider nine questions raised in the memorandum of appeal. At the time of admission, this court has recorded following three questions for consideration: “1. The Hon’ble Tribunal was right in holding that the issue of shares by the Appellant to CIMAB constituted ‘royalty’ under Section 9(1)(vi) of the Act entailing tax deduction at source under Section 195(1) of the Act?

2.

The Hon’ble Tribunal was correct in holding that the Appellant could not have maintained an application for ‘nil’

1 Income Tax Appellate Tribunal

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ITA No. 410/2013

withholding under Section 195(2) of the Act and that therefore the ‘nil withholding order’ dated 22-02-2005 was non est in law and that the said does not cover the issue of shares by the Appellant to CIMAB either before or after passing of the said order?

3.

The finding of the Hon’ble Tribunal that there was no transfer of know-how by CIMAB to the Appellant under the terms of the TTA read with the JVA is perverse? ”

Today Shri T.Suryanarayana, learned Senior Advocate for the assessee and Shri K.V.Aravind, learned Senior Standing Counsel for the Revenue pray that the following two questions may be considered in addition to questions which were admitted on 20.01.2014: “4. the Hon’ble Tribunal was correct in holding that the provisions of Section 195(1) entailing tax deduction at source stood attracted on the issue of shares made by the Appellant to CIMAB?

5.

the Hon’ble Tribunal was correct in holding that the issues of shares on 30.03.2004 and 30.09.2004 to CIMAB were not covered by the order dated 22.02.2005 passed by the 1st respondent under section 195(2) of the Act?”

2.

Shri Suryanarayana submitted that appellant is a Joint Venture Company incorporated on 17.06.2002

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ITA No. 410/2013

pursuant to Joint Venture Agreement2 dated 22.02.2002 between the BIOCON Pharmaceuliticals Private Ltd3., and CIMAB SA, Cuba4. As per the terms of JVA, BIOCON would invest all the money and manufacturing unit would be situated in India and entitled for 51% of share. CIMAB would only give technical know-how and would be entitled for 49% of share in the company. After incorporation, shares equivalent to 49% were issued in favour of CIMAB during A.Ys. 2004-05 and 2006-07 and share certificates were issued during A.Ys.2004-05, 2005-06 and 2006-07. For the said years, the AO5 has held that deduction ought not to have been made under Section 195 of the Income Tax Act, 19616 based on the value of the share. The CIT(A)7 and the ITAT have confirmed the view taken by the AO. He submitted that as far as CIMAB is concerned, no payment was ever made by the assessee to either an individual or foreign company. All that has been done is issuance of shares equivalent

2 ‘JVA’ for short 3 ‘BIOCON’ for short 4 ‘CIMAB’ for short 5 Assessing Officer 6 ‘The Act’ for short 7 Commissioner of Income Tax (Appeals)

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ITA No. 410/2013

to 49% of share in the company. The shares are realizable only when they are traded and at that point of time, the transaction made attracts capital gains. Hence, the view taken by the AO and confirmed by higher authorities is bad in law.

3.

Shri K.V.Aravind, adverting to Section 195 of the Act, submitted that Parliament has used the phrase “other sums” so far as payment is concerned and therefore, value of the share must be treated as money paid to the foreign entity and therefore, the view taken by the AO and confirmed by the appellate authorities does not call for any interference.

4.

We have carefully considered rival contentions and perused records.

5.

Section 195 deals with deduction of tax at source when the payment is made. Undisputed facts of this case are, an Indian entity and Cuban entity have agreed to form a company. Indian entity made investment and the Cuban entity rendered technical know-how. The manufacturing unit is situated in India.

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ITA No. 410/2013

As per the JVA, Cuban entity is entitled for 49% of “share”. No transaction of money has taken place between the assessee and the foreign entity. On the other hand, in our view, investment made by the Cuban entity is in the form of technical know-how. The argument advanced on behalf of the Revenue that the phrase “other sums” must be treated as payment made to the foreign entity is misconstrued because no payment is made to the foreign entity. As and when the shares traded by any entity, such transaction attracts capital gains tax. By mere issuance of share certificate, it cannot be construed as any payment having been made to the foreign entity.

6.

In view of the above, the view taken by the AO and other authorities is perverse and requires to be set-aside.

7.

At this stage, Shri Suryanarayana submits that in view of this court holding questions No.1 and 2 in favour of the assessee, questions No.3, 4 and 5 do not arise for consideration. He is right in his submission.

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ITA No. 410/2013

8.

Hence, the following; ORDER (i) Appeal is allowed; (ii) Order dated 19.04.2013 in ITAs No.507-510/Bang/2009 passed by the ITAT, Bengaluru, is set-aside; (iii) Questions No.1 and 2 answered in favour of the assessee and against the Revenue; and (iv) Questions No.3, 4 and 5 do not arise for consideration and accordingly, they are not answered.

No costs.

Sd/- JUDGE

Sd/- JUDGE

AV List No.: 1 Sl No.: 18

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