Teva Israel Wins Delhi High Court Tax Case Over ₹1,851 Crore Ranbaxy Settlement

The Delhi High Court has held that a ₹1,851 crore settlement payment made by Ranbaxy Laboratories to Teva Israel was not taxable in India merely because the payer was an Indian resident company.

Background to the tax dispute

The dispute arose from arrangements concerning the US market for a generic version of the cholesterol drug atorvastatin. Ranbaxy, its US subsidiary and Teva USA had entered into a commercial agreement connected with regulatory exclusivity. A later settlement resulted in the payment to Teva Israel.

How the Court analysed the tax question

The Income Tax Department argued that the income effectively belonged to Teva USA and that the assignment to Teva Israel was designed to avoid tax. It also questioned why Ranbaxy would agree to make such a large payment.

The Division Bench rejected that approach. It said an assessing officer cannot substitute his view of commercial prudence for that of the parties. The relevant regulatory rights, dispute, litigation, settlement and market were located outside India. The fact that Ranbaxy India made the payment was therefore not enough to establish accrual in India.

Result and practical effect

The Court held that Sections 5(2)(b) and 9 did not bring the receipt within the Indian tax net. It quashed reassessment proceedings against Teva USA and set aside the Authority for Advance Rulings decision. Refund of tax already withheld was directed subject to guarantees specified by the Court.