Court holds mere payment by Indian resident does not constitute income arising in India without specific nexus under Income Tax Act; directs refund of TDS to Teva Israel and finds Authority for Advance Rulings exceeded jurisdiction.
In a landmark judgment delivered on 15th September 2026, the Division Bench of the Delhi High Court comprising Justices Dinesh Mehta and Vinod Kumar addressed a complex batch of writ petitions involving international taxation issues between Ranbaxy Laboratories Limited (Ranbaxy India), Teva Pharmaceutical Industries Ltd. (Teva Israel), and Teva Pharmaceuticals USA Inc. (Teva USA). The Court's decision provides significant clarity on the taxability of cross-border payments and the jurisdictional limits of the Authority for Advance Rulings (AAR) in India.
The dispute centered around payments made by Ranbaxy India to Teva Israel, which were part of a settlement related to marketing rights and exclusivity arrangements for the generic drug Atorvastatin (generic Lipitor) in the United States. Ranbaxy India had deducted tax at source (TDS) at approximately 42% on payments totaling about Rs. 1851 crore made to Teva Israel. Teva Israel filed an application before the AAR seeking a ruling that these payments were not taxable in India, contending that it had no permanent establishment or business connection in India and the income did not arise or accrue in India under Sections 5 and 9 of the Income Tax Act, 1961 (the Act).
The AAR declined to rule on the taxability question, holding that the income belonged to Teva USA and not Teva Israel, and further suggested that the arrangement was prima facie designed for tax avoidance. Consequently, reassessment proceedings were initiated against Teva USA for Assessment Years 2012-13 to 2014-15, while protective assessments were framed against Teva Israel. Teva Israel also sought refund of the TDS withheld by Ranbaxy India.
The Delhi High Court, after exhaustive analysis of the facts, statutory provisions, and precedents, overturned the AAR order and quashed the reassessment notices issued under Section 148 of the 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. A specific real and substantive nexus between India and the income-producing activity or a statutory deeming provision under Section 9 is necessary to establish taxability. The Court noted that the income in question arose out of ANDA rights and exclusivity arrangements governed by US law, with no business connection or permanent establishment in India.
Further, the Court found that the AAR had exceeded its jurisdiction by refusing to decide the taxability question and by making adverse findings regarding collusion and sham arrangements without jurisdiction over the non-applicant Teva USA. The Court emphasized that the AAR's mandate is limited to ruling on the questions raised by the applicant and cannot adjudicate issues involving third parties.
The judgment also clarified the legal position on protective assessments and refunds. While protective assessments are permissible where there is uncertainty about the correct recipient of income, protective recovery of tax is not allowed. Consequently, the Court directed the Revenue to refund the TDS of approximately Rs. 783 crore deducted by Ranbaxy India from payments to Teva Israel, subject to the furnishing of corporate guarantees by Teva USA and Teva Israel.
On the limitation aspect, the Court ruled that notices issued beyond the prescribed period under Section 148 and orders under Section 148A(d) are void. The Revenue's attempt to invoke extended limitation under Section 149(1)(b) by treating the bank receipt in Teva Israel's account as an escaped income asset of Teva USA was rejected, as such a presumption is impermissible without prior notice and opportunity to the assessee.
The Court also rejected the Revenue's reliance on the opinion of the US Attorney General regarding alleged anti-competitive clauses as a basis for taxing the payments in India, holding that such opinions are not judicial findings and cannot render an otherwise lawful agreement illegal for Indian tax purposes.
This judgment significantly affirms the principles that Indian tax jurisdiction over non-residents must be grounded in clear statutory provisions or a real connection with India, and that tax authorities cannot claim jurisdiction merely on the basis of the payer's residence. It also reinforces the limited and specific jurisdiction of the AAR, the sanctity of limitation periods, and the rights of non-resident taxpayers to refunds of wrongly withheld tax.
Bottom Line:
Income Tax - Taxability of payments made by an Indian company to foreign entities - Mere payment by an Indian resident to a non-resident does not ipso facto constitute income accruing or arising in India - Specific nexus or statutory deeming provisions under Section 9 of the Income Tax Act, 1961 required to establish taxability - Authority for Advance Rulings (AAR) exceeded jurisdiction in refusing to decide taxability and made findings on collusion and sham arrangement without jurisdiction - Protective assessments permissible but protective recovery not allowed - Limitation under Section 148 strictly to be adhered to - Refund of tax deducted at source to be released where tax not payable.
Statutory provision(s):
Income Tax Act, 1961 Sections 5, 9, 148, 149, 195, 245Q, 245R, 245S
