When An Indian Company Pays A Foreign Firm: Is It Always Taxable?
Many young citizens and law students wonder how international business transactions are taxed in India. Can the Income Tax Department tax any money sent abroad by an Indian company? The Delhi High Court recently addressed this exact question in a high-stakes tax battle involving Israeli pharmaceutical giant Teva Israel and Ranbaxy Laboratories.
According to the report, a division bench of the High Court set aside a massive tax demand and quashed reassessment proceedings against the foreign entities. The court made it clear that mere payment by an Indian resident to a non-resident does not automatically mean the money is taxable in India.
The Background: The Battle Over Lipitor Generics
The dispute traces back to Atorvastatin, a popular cholesterol-lowering medicine sold under the brand name Lipitor. Ranbaxy had applied for US regulatory approval to sell a generic version of the drug, entitling it to a 180-day exclusivity period. However, delays created uncertainty.
Ranbaxy India, its US subsidiary, and Teva USA entered into an agreement where Ranbaxy would waive its exclusivity in favour of Teva USA under specific conditions. When Ranbaxy received final approval and began selling the drug in the United States, it earned around $700 million in profits during the exclusivity period.
Under a revised settlement agreement, 50 percent of those profits—amounting to ₹1,851.07 crore—became payable to Teva. Teva USA later assigned this right to its parent company, Teva Israel. Ranbaxy paid this amount over three assessment years after deducting approximately ₹783.83 crore as Tax Deducted at Source (TDS). Teva Israel declared nil taxable income in India and sought a full refund.
What The Law Says: Understanding Income Accrual in India
The core legal issue revolved around whether the settlement amount constituted income accruing or arising in India under the Income Tax Act, 1961.
The Delhi High Court examined Section 5(2)(b) and Section 9 of the Income Tax Act. The court held that:
- Mere payment by an Indian resident to a non-resident does not ipso facto constitute income accruing or arising in India.
- The transaction did not fall under any specific deeming provisions of the Act.
- Without a statutory foundation under Section 5 or Section 9, the jurisdictional basis for issuing tax notices under Section 148 collapses.
- The regulatory rights, litigation, settlement, and the market generating the profits were all situated outside India.
The court also strongly criticized the Authority for Advance Rulings (AAR) for questioning the commercial wisdom of the parties. The bench famously observed that tax officers cannot act as economists to judge whether a businessman acted prudently in entering into a settlement.
What Happens Next
With the High Court ruling in favor of Teva Israel, the reassessment proceedings initiated against Teva USA for the assessment years 2012-13 to 2014-15 stand quashed. The court also set aside the 2019 AAR decision that had termed the corporate arrangement collusive.
Regarding the delayed tax refund, the bench noted that withholding a legitimate refund for over a decade is utterly arbitrary and nearly confiscatory. The refund of the deducted amount to Teva is now subject to Teva USA and Teva Israel furnishing the necessary guarantees directed by the court.
Why This Matters For You
This ruling serves as a vital precedent in international taxation law in India. It reinforces the principle that tax authorities cannot stretch domestic tax laws to cover foreign transactions that lack a genuine economic connection to Indian territory.
Takeaway: Cross-border business settlements cannot be taxed in India merely because the paying entity is Indian; the income must legally accrue or arise within Indian borders under the Income Tax Act.
Story reported by Barandbench. This article is BareLaw’s independent explanation and analysis.
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