By TIOL News Service

AHEMDABAD, SEPT 28, 2016: THE issue is - Whether where the AO has reopened the assessment of Entity 'A' in connection with transaction of technology transfer by recording reasons that the technology is developed by such entity only and Entity 'B' had no infrastructure necessary for developing such technology, it is not open to the AO to issue reopening notice on the very same ground to Entity 'B' also. NO IS THE ANSWER.

The facts of the case:

The assessee is engaged in the business of marketing and promotional activities of pharmaceutical products. For the year 2009, pharma division of Unimed Technologies Ltd. was demerged into Milmet Pharma Ltd. Subsequently, the company adopted the name Unimed Technologies Ltd. For the A.Y 2004-2005, Unimed Technologies Ltd. had filed its return and the same was accepted without scrutiny u/s 143(1). Subsequently, the AO noted that Unimed Technologies Ltd. had during the year 2003-04 had transferred technology to Sun Pharma Global Inc. (Sun BVI), a company based in British Virgin Islands for a sum of US$ 4,00,000. This technology was shortly thereafter, sold by Sun BVI to a US based company Caraco for USD 1.17 crores. According to the AO, Sun BVI did not have necessary establishment and wherewithals to make any significant value addition to the technology and in fact, it was a circuitous transfer by Unimed Technologies Ltd. to Caraco through Sun BVI in order to avoid taxation. Therefore, the AO initiated reassessment proceedings by holding that assessee's income chargeable to tax has escaped assessment.

On appeal, the High Court held that:

1. According to the AO, it was Sun Pharmaceutical Industries Ltd., which had developed the technology and got the same transferred to Sun BVI which is a subsidiary company of Sun Pharmaceutical Industries Ltd through which company the technology found its way to Caraco in USA. In a short time, the technology acquired by Sun BVI for US$ 4,00,000 was resold for USD 1.17 crores. In the reasons, specific averments have been made to the effect that Unimed Technologies Ltd did not have any infrastructure, manpower or wherewithals to develop such sophisticated technology. A question therefore, would immediately arise regarding the inconsistent stand of Revenue in two notices for reopening. If the Revenue is correct in contending that Sun Pharmaceutical alone had developed the technology and transferred through circuitous route to avoid taxation and Unimed Technologies Ltd. did not have any infrastructure facilities for such purpose, the question would be how would the Revenue in case of Unimed Technologies Ltd. contend that the technology was developed by Unimed Technologies Ltd and transferred at an understated price.

2. By a common judgement, this Court had allowed the petition of erstwhile Unimed Technologies Ltd. and rejected that in case of Sun Pharmaceutical Industries Ltd by observing that: "....As per the reasons recorded, previously Sun Pharma and Sun BVI had a Technology Transfer agreement. However, in the present case, technology was transferred by Unimed to Sun BVI for a declared consideration of 4 lac USD which, Sun BVI a subsidiary of Sun Pharma based in British Virgin Islands sold the same technology to M/s CARACO for 1.17 crores USD. The statement of Sudhir Valia key person in the group of companies and at that time director of Sun BVI and presently the director of Sun Pharma was recorded u/s 131(1A) in which he accepted that Sun BVI had no facility of R & D and manufacturing. During the inquiry, revenue also found material to suggest that Sun BVI had acquired technology from Unimed. Unimed also did not have elaborate R&D facility or necessary work force for such purpose. Such R&D facility was only available with the assessee and its research centre. The AO therefore formed a belief that Sun BVI is shell company used only as a device to deviate the taxable profits of Sun Pharma as Sun BVI had also not developed any technology on its own. It was found that Sun BVI and CARACO both were subsidiaries of assessee. The assessee company had capacity to produce such technology and in fact between 1997-02, Sun Pharma had supplied such technology developed by it to M/s CARACO. In view of such evidence on record, the AO concluded that technology in question transferred was actually done by the assessee to CARACO but was routed through other companies only to avoid payment of tax. In our opinion, these reasons do not lack validity. As noted, elaborate reasons have been recorded by the AO which demonstrate how prima facie it can be shown that technology developed by Sun Pharma through use of its research and development facilities was routed to CARACO through Unimed and Sun BVI in British Virgin Islands which ensured that the entire amount escaped assessment in the hands of Sun Pharma. At the stage of considering notice for reopening, one has to see only prima facie whether on the basis of tangible material on record, the AO could form a valid belief that income chargeable to tax has escaped assessment. At that stage, it is not necessary to verify whether invariably such income would be brought to tax. The contention that full and true disclosure have been made cannot be accepted. What was disclosed by Sun Pharma was that its subsidiary received consideration of 1.17 crores USD for transfer of penalty to CARACO. It obviously did not reveal whether Unimed or Sun BVI had any R & D development capabilities....".

3. In the present case, the issues are identical and therefore, the impugned notice for reopening is quashed, without recording any seperate reasons. Under the circumstances, it is not necessary to go into the question of responsibility of original Milmet Pharma Ltd. now called Unimed Technologies Ltd. to answer to the notice of reopening.

(See 2016-TIOL-2280-HC-AHM-IT)