Delhi High Court Quashes Reassessment Notices And Aar Ruling In Teva Pharmaceuticals Transfer Pricing Dispute

The Case

TEVA PHARMACEUTICALS USA INC. Vs DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 3(1)(1), INTERNATIONAL TAXATION, NEW DELHI
Case No.: W.P.(C)/10711/2017
Decided on: 09/15/2026
CNR: DLHC015171612017 ·
High Court of Delhi

The Legal Issue

The Court decided whether the payments made by Ranbaxy Laboratories Limited to Teva Pharmaceutical Industries Ltd., Israel, were chargeable to tax in India under Sections 5 and 9 of the Income Tax Act, 1961, and whether the Authority for Advance Rulings was justified in declining to answer the question posed before it. The Court also examined the validity of reassessment proceedings initiated under Section 148 against Teva Pharmaceuticals USA Inc. for Assessment Years 2012-13 to 2014-15, including whether the extended period of limitation under Section 149(1)(b) was validly invoked. Further, the Court considered Teva Israel's claim for refund of tax deducted at source by Ranbaxy India.

Facts of the Case

The present batch comprises five writ petitions arising out of a common set of transactions involving the taxability of payments made by Ranbaxy Laboratories Limited to Teva Pharmaceutical Industries Ltd., Israel, the validity of reassessment proceedings against Teva Pharmaceuticals USA Inc., the correctness of the ruling rendered by the Authority for Advance Rulings, and the consequential claim by Teva Israel for refund of tax deducted at source by Ranbaxy India. The genesis of the dispute lies in certain agreements executed between entities belonging to the Ranbaxy and Teva groups in connection with the commercial exploitation of Atorvastatin (generic version of the drug Lipitor) in the United States, pursuant to the approval of the regulatory regime governing the Abbreviated New Drug Applications under US law. Ranbaxy India, through its US subsidiary Ranbaxy Pharmaceuticals Inc., USA, had filed an ANDA, and Teva Israel filed an ANDA through its US subsidiary Teva USA. Ranbaxy India along with its subsidiary Ranbaxy USA and Teva US entered into an agreement dated 07.12.2010 in the United States, agreeing that although Ranbaxy USA had applied first and Teva USA second, in the event Ranbaxy did not obtain the approval by US Food & Drug Administration, Teva would manufacture the drug and share 50% of its profit margin with Ranbaxy. Ranbaxy and Teva settled their dispute, and the agreement was accordingly flipped on 07.12.2011; Ranbaxy obtained its ANDA approval on 30.11.2011, and the agreement was flipped on that basis, with Ranbaxy now undertaking to manufacture the product and pay Teva 50% of the margin. Under the reinstated agreement, Ranbaxy manufactured the product and paid Teva 50% of the margin, and this payment was made from India in respect of products manufactured in the United States, for a market in the United States, pursuant to a settlement effected in the United States. The AAR, while refraining from pronouncing upon the taxability of the subject payment in India, held, inter alia, that the income in question belonged to Teva USA and not to Teva Israel, and declined to answer Teva Israel-applicant's question on its taxability after holding that Teva Israel was not the correct recipient of the income. The connected writ petitions, being W.P.(C) Nos. 10711/2017, 10714/2017 and 1295/2023, have been preferred by Teva USA challenging the reassessment proceedings initiated under Section 148 of the Income Tax Act, 1961, for Assessment Years 2012-13 to 2014-15. The remaining petition, W.P.(C) 4065/2022, has been instituted by Teva Israel seeking refund of the tax deducted at source by Ranbaxy from the payments remitted to it, wherein Teva Israel has contended that despite the Revenue itself asserting before the AAR that the income did not belong to Teva Israel, the Revenue has withheld the refund or tax deducted from those remittances.

Summary of the Decision

The Court set aside the impugned order of the AAR and allowed the application dated 15.04.2013 filed by the petitioner under Section 245Q of the Act of 1961, holding that the payment received by the petitioner from Ranbaxy Laboratory Limited does not attract any tax under the Act of 1961. The Court held that the AAR was not justified in going into the intricacies of the transaction and business wisdom of the contracting parties, and that the AAR's opinion that the transaction was conceived to avoid tax under United States' or Israel's laws is too farfetched. The Court observed that whether or not Teva USA or Teva Israel had paid tax in their respective country should not be a concern of the AAR or any tax authority in India, and that if the country entitled to tax does not levy tax, Indian authorities cannot choose to impose tax as it would be usurpation of jurisdiction. The Court further held that the payment was made in furtherance of a settlement or agreement that had taken place in USA between Teva USA and Ranbaxy USA, which agreement had no semblance or nexus with any activity in India, and as there was complete absence of business connection in India, tax under the Act of 1961 cannot be imposed. The Court quashed the notices issued under Section 148 for Assessment Years 2012-13 and 2013-14, and the order under Section 148A(d) dated 28.07.2022 and notice under Section 148 dated 29.07.2022 for Assessment Year 2014-15, as being time-barred and without jurisdiction. The Court allowed Teva Israel's writ petition seeking refund of tax deducted at source, directing the respondents to refund the entire amount of TDS approximately Rs. 783 crore along with applicable interest within two months, subject to Teva USA furnishing a corporate guarantee or solvent security. The Court observed that though there is a concept of protective assessment, there is no concept of protective recovery, and that the respondents' action of sitting over the refund for more than 10-15 years is utterly arbitrary, to the extent of being confiscatory.

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