Introduction
This Case Commentary examines the cross appeals filed by Sun Pharmaceutical Industries Limited and the Revenue against the order dated 25.03.2019 passed by the Ld. Commissioner of Income-tax (Appeals)-2, Vadodara under section 250 of the Income-tax Act, 1961 for Assessment Year 2014-15. The matter was heard by the Ahmedabad “D” Bench of the Income Tax Appellate Tribunal (ITAT) on 04.05.2026 and the consolidated order was pronounced on 31.07.2026. The source text sets out the procedural history and grounds of appeal, but does not include the Tribunal’s final reasoning. This commentary is therefore confined to the legal issues raised on the record and the assessment order challenged before the appellate authorities.
Facts
The assessee, Sun Pharmaceutical Industries Limited, is the appellant in ITA No.885/Ahd/2019, while the Deputy Commissioner of Income-tax, Circle 2(1)(1), Baroda/Vadodara is the appellant in the cross appeal, ITA No.969/Ahd/2019. Both appeals arise from the same order of the Ld. CIT(A) and were heard together and disposed of by a consolidated ITAT order.
The assessee’s appeal challenges several core additions:
– Transfer pricing adjustment of Rs.13,43,19,516 on transfer of electricity by the Captive Power Plant;
– Disallowance of Rs.9,20,833 under section 14A read with Rule 8D;
– Disallowance of Rs.602,39,80,000 paid to Pfizer Inc pursuant to an out-of-court settlement;
– Addition of the same amount under section 115JB;
– Disallowance of interest of Rs.15,81,50,414 relating to the settlement;
– Addition of that interest under section 115JB;
– Disallowance of computer software expenses of Rs.12,81,93,468.
The Revenue’s cross appeal, according to the summary, challenges the Ld. CIT(A)’s deletions relating to transfer pricing on interest on loans, price difference on sales to associated enterprises, bad debts, weighted deduction under section 35(2AB), and other issues. Since the excerpt does not reproduce the Revenue’s detailed grounds, the analysis below focuses on the assessee’s grounds.
Reasoning
Transfer Pricing Adjustment on Electricity
The assessee argued that the AO/TPO erred in rejecting its transfer pricing benchmarking and in determining the Arm’s Length Price by taking the average of two rates: the rate fixed by GERC and the market clearing price as per IEX. The assessee emphasised that the power was generated by the captive power plant for captive consumption and not for sale to any distribution entity. Therefore, adopting the rate at which a distribution entity purchases power from a CPP unit was legally incorrect. The assessee also contended that, since there was only one prime seller in its region, namely GEB, the open market rate paid by all buyers to GEB/distribution companies ought to be treated as a comparable uncontrolled price. This ground raises important questions about the choice of comparables, the ALP computation methodology, and the treatment of intra-company captive electricity transfers.
Disallowance under Section 14A read with Rule 8D
The assessee contested the disallowance of Rs.9,20,833 under section 14A read with Rule 8D. The core submission was that invocation of Rule 8D is not automatic. Recording of satisfaction and establishing a direct nexus between the expenditure incurred and the exempt income is a sine qua non. The assessee further argued that it had sufficient interest-free funds to make investments and had not incurred any expense to earn exempt income. In such circumstances, a mechanical disallowance under Rule 8D cannot be sustained. This ground reflects the settled legal position that the Assessing Officer must examine the assessee’s accounts and record satisfaction before applying the rule.
Compensation Paid under Out-of-Court Settlement with Pfizer Inc
The most substantial ground relates to the disallowance of Rs.602,39,80,000 paid in pursuance of an out-of-court settlement with Pfizer Inc. The Ld. CIT(A) confirmed the disallowance, holding that the expenditure was not for the purposes of the assessee’s business. The assessee challenged this finding on multiple fronts:
– With effect from the appointed date of demerger, the specified undertaking belonged to the assessee, and any expenditure incurred in relation to it was wholly and exclusively for the assessee’s business.
– The assessee is a pharmaceutical company, and its objects cannot be restricted to generic business alone; Para IV filing is also part of the generic business carried on by the assessee.
– The demerger was not a colourable device and was backed by valid business and commercial rationale.
– The amount paid was civil and compensatory in nature, not for any purpose which is an offence or prohibited by law.
– The assessee was not convicted by any competent court, and mere accusations or allegations do not prove guilt.
– The Explanation relied upon is restricted to laws prevailing in India and cannot cover infringement of foreign laws.
– Entering into an out-of-court settlement is a commercial decision and does not, by itself, imply any infraction of law.
– Commercial expediency is the assessee’s prerogative and must be viewed from the perspective of a prudent businessman.
– The expenditure did not create an enduring advantage in the capital field and did not form part of the profit-making apparatus.
– The expenditure crystallised during the year under consideration and cannot be treated as a prior period item.
These sub-grounds collectively raise fundamental questions about the scope of business expenditure, capital versus revenue character, and the relevance of foreign regulatory disputes in Indian tax proceedings.
Interest Payment Relating to Settlement
The assessee also challenged the disallowance of interest of Rs.15,81,50,414. It was argued that the interest was incurred as part of the assessee’s business and satisfied all conditions of section 36(1)(iii). The assessee pointed out that, after the appointed date of demerger, business activities were undertaken by Sun Pharma Global FZE on behalf of the assessee, and therefore all liabilities and expenditures arising thereafter were incumbent on the assessee. The assessee also submitted that borrowed funds were not utilised for any infraction of law, and that allowability of interest is independent of the nature of expenditure for which the borrowed funds were utilised. Alternatively, the interest payment should have been allowed under section 37(1).
Addition under Section 115JB
The assessee challenged the confirmation of additions under section 115JB in respect of the Pfizer compensation and the related interest. The assessee contended that the accounting treatment was in accordance with Schedule VI of the Companies Act, 1956 and was duly accepted by the statutory auditor and the shareholders. In the absence of any adjustment prescribed under Explanation 1 to section 115JB(2) mandating the addition of the impugned amounts, it was not open to the tax authorities to deviate from the net profit. Deeming provisions must be construed strictly. The assessee also argued that the liabilities had duly crystallised during the year and were not unascertained.
Software Expenses
The assessee contended that the expenditure of Rs.12,81,93,468 on computer software was revenue in nature. It was argued that book treatment is not conclusive for income-tax purposes, as judicially settled in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC). The software did not add to the profit-earning apparatus, and the expenses were routine and recurring, incurred in the ordinary course of business. The source text is truncated at this point, so the remaining sub-grounds are not available for commentary.
Conclusion
The consolidated cross appeals before the ITAT raise substantial and high-stakes questions on transfer pricing, disallowance of business expenditure, section 14A, section 115JB, and classification of software costs. The assessee’s grounds, as framed, challenge the legal validity of the assessment order and the CIT(A)’s findings on the basis of commercial expediency, strict construction of deeming provisions, and the need for nexus in disallowances. The present excerpt does not disclose the Tribunal’s decision. Nevertheless, the issues framed will have significant implications for pharmaceutical companies, captive power arrangements, and cross-border litigation settlements.