Sun Pharma Advance Research Co. Ltd Vs DCIT (ITAT Ahmedabad)
Research for Group Companies Fails Section 35(1)(iv) Test; Transfer Pricing Valuation Remanded for Prescribed Method
Background of the Case
In a consolidated order disposing of ten appeals, the Ahmedabad Tribunal examined associated-enterprise status, valuation of transferred pharmaceutical technology, scientific research deductions and the treatment of software and research expenditure.
The outcome was mixed. The Tribunal upheld the applicability of transfer pricing provisions but restored arm’s length valuation for fresh determination. It denied deductions under Section 35(1)(iv) on its finding that the research benefited associated enterprises rather than satisfying the required nexus with the assessee’s own business.
Other issues received separate treatment according to the nature of expenditure and the evidence available.
Common Shareholding Establishes Associated-Enterprise Status
The assessee disputed treating Sun Pharma Global Inc., BVI, and Sun Pharma Global FZE as associated enterprises.
It argued that Sections 92A(1) and 92A(2) had to be satisfied together and that shareholding under Section 92A(2)(b) did not dispense with examination of participation in management, control or capital.
The Tribunal rejected that contention. It interpreted the opening words of Section 92A(2) as creating a mandatory deeming rule when a specified condition is satisfied.
On the admitted common shareholding and wholly owned subsidiary structure, it held that the entities were associated enterprises under Section 92A(2)(b).
Transfer Pricing Adjustment Requires a Prescribed Method
For Assessment Year 2009–10, the dispute included an approximately ₹17.92 crore adjustment concerning transfer of technology and drug-related intangibles.
The assessee relied on independent valuation reports. However, the Tribunal found that the TPO had not selected and applied a permissible method under Section 92C.
It accepted that the existing arm’s length determination could not stand. Nevertheless, it declined to delete the adjustment finally, noting that the assessee had also failed to discharge its transfer pricing obligations, including filing Form No. 3CEB, while disputing associated-enterprise status.
The matter was therefore remanded to the AO/TPO for fresh determination under Chapter X. Corresponding transfer pricing issues in subsequent assessee appeals followed that direction.
Research Must Relate to the Assessee’s Own Business
The principal deduction dispute concerned capital expenditure on scientific research under Section 35(1)(iv).
The Tribunal emphasised that expenditure must concern scientific research related to the business carried on by the assessee.
It accepted the lower authorities’ finding that the research expenditure in this case was incurred for the benefit of associated enterprises or sister concerns. On that factual premise, it held that the statutory business nexus had not been established.
The Tribunal referred to Enem Nostrum Remedies (P.) Ltd. v. ACIT (2009) 119 ITD 427 in the discussion reproduced from the lower orders, and relied on SI Group India Ltd. v. CIT [2017] 85 taxmann.com 307.
The Section 35(1)(iv) disallowances were sustained. Applying the same reasoning, the Revenue’s appeals concerning claims of ₹7,18,01,217 for AY 2017–18 and ₹6,65,76,987 for AY 2018–19 were allowed.
Revenue R&D Expenditure Requires Fresh Examination
A separate dispute concerned research expenditure claimed under Section 37.
The CIT(A) had accepted the claims partly because research outcomes were uncertain and the activities did not necessarily generate intangible assets.
The Tribunal disagreed with that reasoning. It held that failure to achieve the intended result does not, by itself, change the character of expenditure. The intended enduring benefit remained relevant.
However, it did not finally classify every disputed item as capital expenditure. Since the necessary expenditure bifurcation was unavailable, it restored the issue to the Assessing Officer for fresh adjudication, with an opportunity to furnish evidence.
That direction covered the relevant Revenue appeals for AYs 2013–14, 2014–15 and 2015–16.
Software Expenditure Distinguished by Duration of Benefit
The Tribunal upheld capital treatment of disputed software expenditure for AY 2012–13, while sustaining revenue treatment of software expenses for AYs 2013–14 and 2014–15.
For the latter years, the software had validity limited to one year. The Tribunal therefore found no enduring benefit extending across multiple years.
The differing outcomes demonstrate that the decision turned on the particular software rights and period of benefit.
Leave Encashment and Cameras Provided to Doctors
For AY 2009–10, the Tribunal sustained disallowance of the unpaid leave encashment provision under Section 43B, finding that payment had not been made within the relevant return-filing deadline.
It also sustained the ₹1,74,533 disallowance concerning Sony handy cameras provided to doctors. The assessee’s explanation that these were supplied for recording clinical trials did not persuade the Tribunal, which upheld the disallowance by reference to Apex Laboratories.
Author’s Comments
The Section 35(1)(iv) finding is particularly significant for businesses that develop and commercialise research. The Tribunal treated research benefiting group entities as failing the own-business nexus, despite the assessee’s technology-development activities. The precise business model, ownership of research outputs and commercial exploitation arrangements therefore require close attention when applying this ruling.
The order also draws a useful distinction between an invalid valuation exercise and final deletion of a transfer pricing adjustment: failure to apply a prescribed method resulted here in remand.
Finally, neither uncertain research outcomes nor the accounting description of expenditure settled its deductibility. The Tribunal required examination of the statutory provision, purpose, evidence and duration of benefit.
Cases Discussed
- Commissioner of Income Tax v. Kodak India Pvt. Ltd., [2017] 79 taxmann.com 362 (Bombay)
- Wartsila India Limited v. Assistant Commissioner of Income Tax, [2019] 102 taxmann.com 564 (Mumbai Tribunal)
- Enem Nostrum Remedies (P.) Ltd. v. ACIT (2009) 119 ITD 427
- SI Group India Ltd. v. CIT [2017] 85 taxmann.com 307
- Apex Laboratories Pvt. Ltd. v. DCIT (Supreme Court)
