Void Assessment Orders on Merged Entities: Biocon Biologics Limited v. Deputy Commissioner of Income Tax

Introduction

The case of Biocon Biologics Limited (formerly known as Biocon Biologics India Limited) versus the Deputy Commissioner of Income Tax, Circle-1(1)(1), Bangalore, adjudicated by the Income Tax Appellate Tribunal (ITAT) Bangalore Bench "B" on September 13, 2022, highlights significant legal principles regarding tax assessments post-merger. This commentary delves into the background, key issues, parties involved, and the implications of the Tribunal's decision.

Summary of the Judgment

Biocon Biologics Limited, engaged in Research and Development of drugs, filed a tax return declaring nil income for the assessment year 2017-2018 and claimed a refund of INR 4.68 crore. The return was scrutinized, leading to a Transfer Pricing Officer (TPO) adjustment proposing an addition of INR 2.31 crore on notional interest for delayed trade receivables. The assessee challenged this adjustment, resulting in a partial relief where the adjustment was reduced to INR 1.10 crore. The final assessment order still reflected the name of the now non-existent entity, Biocon Research Limited, leading the assessee to appeal.

The ITAT quashed the assessment order, declaring it void ab initio due to the assessment being conducted on a non-existing entity post-merger. The Tribunal emphasized that proper intimation about the merger was provided, distinguishing this case from previous precedents where lack of intimation nullified assessments. Consequently, the appeal was partly allowed.

Analysis

Precedents Cited

The Tribunal extensively referenced several key judgments to substantiate its decision:

Maruti Suzuki India Ltd. (2019) 416 ITR 613 (SC): Established that assessments on amalgamated entities without proper intimation are void.
Intel Technology India (P) Ltd. 380 ITR 272 (Kar.): Reinforced the principle that assessments should not be based on non-existent entities post-merger.
eMudhra Ltd. v. ACIT (2020) 117 taxmann.com 550 (Kar.): Affirmed that diligent intimation regarding mergers is crucial to valid assessments.
PCIT v. Mahagun Realtors (P.) Ltd. (2022) 443 ITR 194 (SC): Discussed the nuances of assessments post-merger, emphasizing the continuity of business undertakings.
Spice Enfotainment 247 CTR 500 (SC): Highlighted that corporate death upon amalgamation does not automatically invalidate tax assessments.

Legal Reasoning

The Tribunal analyzed whether the final assessment order on Biocon Research Limited was legally valid post-amalgamation. Key points in the legal reasoning included:

Existence of the Entity: Post-merger, Biocon Research Limited ceased to exist, making any assessments in its name inherently void.
Intimation of Merger: The assessee had duly informed the Assessing Officer (AO) about the merger through multiple communications and NCLT approvals, distinguishing it from cases where such intimation was absent.
Applicability of Precedents: Referencing Maruti Suzuki and others, the Tribunal underscored that assessments on non-existent entities without proper intimation are nullities.
Transfer Pricing Adjustments: While the Tribunal primarily focused on the void assessment, it acknowledged the merits of the remaining grounds related to transfer pricing, leaving them unadjudicated in this context.

Impact

The judgment reinforces the necessity for tax authorities to verify the continued existence of an entity before passing assessment orders. It sets a clear precedent that:

Assessments on entities that have ceased to exist due to mergers or amalgamations are void ab initio if proper intimation is provided.
Taxpayers undergoing structural changes must diligently inform tax authorities to prevent invalid assessments.
The decision provides clarity on handling transfer pricing matters post-merger, ensuring they are linked appropriately with primary transactions.

Future cases involving mergers and amalgamations will likely reference this judgment to ensure assessments are conducted on existent entities, promoting legal certainty and fairness in tax proceedings.

Complex Concepts Simplified

Amalgamation and Corporate Existence

Amalgamation: The merging of two or more companies into a single entity. Post-amalgamation, the original entities cease to exist, and the amalgamated company inherits their rights and obligations.

Non-Existent Entity: An entity that has ceased operations or ceased to exist legally due to events like amalgamation or dissolution. Assessments on such entities are invalid unless they reflect the new amalgamated entity.

Transfer Pricing Adjustments

Transfer Pricing: Pricing of transactions between related entities (e.g., parent and subsidiary) to ensure they are conducted at arm's length, preventing profit shifting and tax evasion.

Arm's Length Price (ALP): The price that would be agreed upon between unrelated parties in a free market. It's used to evaluate whether transfer pricing adjustments are necessary.

Assessment Orders

Final Assessment Order: A conclusive determination by tax authorities on a taxpayer's return after considering all pertinent information and adjustments.

Void Ab Initio: A legal term meaning that an act is invalid from the outset. In this context, assessments made on a non-existent entity are considered void from the beginning.

Conclusion

The ITAT's decision in Biocon Biologics Limited v. Deputy Commissioner of Income Tax underscores the imperativeness of accurate and updated information regarding corporate structures during tax assessments. By declaring the assessment order on a non-existent entity void ab initio, the Tribunal upheld principles of legal validity and fairness. This judgment not only provides clarity on handling tax assessments post-merger but also reinforces the obligations of both taxpayers and tax authorities to maintain precise records of corporate changes. As mergers and amalgamations become more prevalent, such precedents ensure that tax proceedings remain just and aligned with the evolving business landscape.