Sun Pharmaceutical Industries Limited Vs DCIT (ITAT Ahmedabad)
Ahmedabad ITAT Allows ₹602 Crore Pfizer Settlement as Business Expenditure, Holds Foreign Patent Settlement Not Hit by Explanation 1 to Section 37(1)
The Ahmedabad ITAT partly allowed the appeal of Sun Pharmaceutical Industries Ltd. and dismissed the Revenue’s appeal, holding that the ₹602.40 crore paid towards an out-of-court settlement with Pfizer Inc. in a US patent dispute was an allowable business expenditure under section 37(1). The Tribunal held that the settlement was entered into out of commercial expediency to protect the assessee’s business interests, reputation and market presence, and did not amount to expenditure incurred for an offence or a purpose prohibited by law. It further observed that Explanation 1 to section 37(1) could not be invoked in the absence of any finding of guilt and that alleged infringement of foreign patent laws did not automatically attract the disallowance contemplated under Indian tax law.
The Tribunal also allowed the consequential deduction of interest of ₹15.81 crore incurred on borrowings used to finance the settlement, while holding the corresponding MAT issues under section 115JB to be infructuous. On the issue of section 14A, it restricted the disallowance to the amount of actual exempt dividend earned and reiterated that such disallowance could not be added while computing book profits under section 115JB. However, it declined to interfere with the treatment of software expenditure as capital in nature since depreciation had already been allowed thereon.
The Tribunal followed its own earlier decisions in the assessee’s case on several recurring issues, including transfer pricing adjustments, R&D expenditure, wealth tax provision under section 115JB, Cephalon patent settlement, and gift expenses. Consequently, the assessee’s appeal was partly allowed, while the Revenue’s appeal was dismissed.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
