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Pr. Commissioner of Income Tax, Vadodara 2 V/S Sun Pharmaceutical Industries Ltd


Company & Directors' Information:- SUN PHARMACEUTICAL INDUSTRIES LIMITED [Active] CIN = L24230GJ1993PLC019050

Company & Directors' Information:- SUN INDUSTRIES LIMITED. [Active] CIN = U51909DL1991PLC045798

Company & Directors' Information:- INCOME INDUSTRIES PRIVATE LIMITED [Active] CIN = U02411MP1989PTC005351

Company & Directors' Information:- A S PHARMACEUTICAL (INDIA) PRIVATE LIMITED [Active] CIN = U24230TN2010PTC076676

Company & Directors' Information:- SUN PVT LTD [Active] CIN = U24246RJ1984PTC003093

Company & Directors' Information:- G SUN INDIA PRIVATE LIMITED [Strike Off] CIN = U74899DL1995PTC071425

Company & Directors' Information:- S. B. PHARMACEUTICAL PRIVATE LIMITED [Active] CIN = U24231UP1994PTC017328

Company & Directors' Information:- P R A B PHARMACEUTICAL PRIVATE LIMITED [Active] CIN = U33111UP2013PTC054705

Company & Directors' Information:- C M C PHARMACEUTICAL PVT LTD [Strike Off] CIN = U24231WB1985PTC039722

Company & Directors' Information:- M S C PHARMACEUTICAL PRIVATE LIMITED [Strike Off] CIN = U24230MH2003PTC143605

Company & Directors' Information:- B P L PHARMACEUTICAL PRIVATE LIMITED [Active] CIN = U24239MH1978PTC020449

Company & Directors' Information:- R. N. PHARMACEUTICAL PRIVATE LIMITED [Active] CIN = U74999DL2017PTC314515

Company & Directors' Information:- D. R. Y. PHARMACEUTICAL PRIVATE LIMITED [Active] CIN = U52599DL2018PTC329353

Company & Directors' Information:- B K D PHARMACEUTICAL PRIVATE LIMITED [Strike Off] CIN = U52100WB2014PTC200227

Company & Directors' Information:- G B PHARMACEUTICAL PRIVATE LIMITED [Strike Off] CIN = U85121HR2006PTC036295

Company & Directors' Information:- SUN INDIA CORPORATION PRIVATE LIMITED [Strike Off] CIN = U65991TN1943PTC000994

Company & Directors' Information:- SUN INDUSTRIES LIMITED [Dissolved] CIN = U99999MH1947PTC005559

    R/Tax Appeal No. 316 of 2018

    Decided On, 23 April 2018

    At, High Court of Gujarat At Ahmedabad

    By, THE HONORABLE JUSTICE: AKIL ABDUL HAMID KURESHI AND THE HONORABLE JUSTICE: B.N. KARIA
    By, JJ.

    For Petitioner: Varun K. Patel And For Respondents: S.N. Soparkar, Senior Advocate and B.S. Soparkar



Judgment Text


1. Tax Appeal is admitted for consideration of following substantial questions of law:

"1. Whether on the facts and circumstances of the case and in law, the ITAT was justified in directing the AO to delete the transfer pricing adjustment of Rs. 5,21,70,765/- made by it on account of Interest on loan to Sun Pharma Global Inc (AE) at London Inter Bank Offer Rate (LIBOR) Plus 2% Rate=7.401% which is almost equal to the Prime Lending Rate or American Bank lending rate?

2. Whether on the facts and circumstances of the case and in law, the ITAT was justified directing the AO to restrict the entire transfer pricing adjustment of Rs. 12,55,719/- made by it on account of Interest on short term advances to Sim Pharmaceuticals U.K. Ltd., Sun Pharmaceuticals Ltd., and Sun Pharmaceuticals Peru SAC (Aes) at London Inter Bank Offer Rate (LIBOR) Plus 0.25%=5.651% instead of LIBOR Plus 2% Rate=7.401% which is almost equal to the Prime Lending Rate or American Bank Lending Rate?

3. Whether on the facts and circumstances of the case and in law, the ITAT was justified in directing the AO to delete the entire transfer pricing adjustment of Rs. 33,16,53,612/- made by it on account of interest on 0% OFCDs at London Inter Bank Offer Rate (LIBOR) Plus 2% Rate=7.401%?

4. Whether on the facts and circumstances of the case and in law, the ITAT was justified in setting aside the issue of transfer pricing adjustment of Rs. 39,48,000/- made by it on account of Corporate Guarantee fees to banks on behalf of AEs at London Inter Bank Offer Rate (LIBOR) i.e. 5.401% to the file of the A.O. with a direction that the issue must be considered afresh after the decision from the Hon'ble Jurisdictional High Court of Gujarat in the case of Micro Inks Ltd. In Tax Appeal No. 567 of 2016?

5. Whether on the facts and circumstances of the case and in law, the ITAT was justified in upholding the assessee's claim for weighted deduction u/s. 35(2AB) of the Income Tax Act in relation to the expenditure for registration of Foreign Trade Marks and Patents?"

2. We notice that the Revenue has suggested two more questions which read as under:

"(1) Whether on the facts and circumstances of the case and in law, the ITAT was justified in directing the AO to calculate amount of disallowance u/s. 14A of the Act as per Rule 8D on the issue of disallowance of expenses incurred by the assessee on behalf of M/s. Sun Pharmaceutical Industries?

(2) Whether on the facts and circumstances of the case and in law, the ITAT was justified in directing the Assessing Officer to consider Foreign Exchange Fluctuation Gain of Rs. 14,33,80,289/- on account of cancellation/renewal of forward contracts made by the assessee to protect the risk of investments in its subsidiary companies as capital receipts?"

3. Insofar as question No. (1) is concerned, broadly stated, it appears from the record that the expenditure incurred by the assessee for and on behalf of M/s. Sun Pharmaceutical Industries, partnership firm of which he is a partner, is a subject matter of dispute at the hands of the Revenue. The assessee contends that such expenditure is in the nature of his business expenditure and therefore, allowable under section 37 of the Income Tax Act, 1961. The Assessing Officer rejected such a contention upon which, the issue was carried in appeal before the CIT (Appeals). CIT (Appeals) did not approve the Assessing Officer's rejection of the applicability of section 37 of the Act but held that there should be disallowance in terms of section 14A of the Act. The issue pertains to assessment year 2007-08 when Rule 8D of the Rules was not yet inactive. CIT(Appeals) therefore, had no occasion to apply Rule 8D for such disallowance.

4. Both sides were aggrieved by this view of the CIT (Appeals) and therefore, filed cross-appeals before the Tribunal. The Tribunal did not accept the assessee's contention regarding non-applicability of disallowance under section 14A of the Act but perhaps on a concession, directed the Assessing Officer to compute such disallowance in terms of Rule 8D of the Rules which was by then enacted. The assessee has not carried any appeal before the High Court.

5. The Tribunal rejected the Revenue's appeal also. In other words, the Tribunal did not accept the Revenue's contention that section 37 itself was not applicable and the entire expenditure should have been disallowed. This view of the Tribunal, the Revenue has challenged in corresponding appeal being Tax Appeal No. 312 of 2018. However, in the present appeal, the question is confined to the disallowance under section 14A of the Act which arises out of the Tribunal's decision in assessee's appeal and which, as noted above, was not allowed by the Tribunal. Therefore, this question is not entertained in the present Tax Appeal making it clear that the corresponding question of applicability or otherwise of section 37 of the Act raised by the Revenue in Tax Appeal No. 312 of 2018 would be debated independently.

6. So far as question (2) is concerned, it pertains to taxing of gain arising out foreign exchange fluctuation gain of Rs. 14.33 crores (rounded off). This has two parameters. The facts on record would suggest that the assessee had entered into forward contracts to safeguard the value of investments fluctuation. The assessee had treated such foreign exchange rate gain as capital receipt. The Assessing Officer, however, is of the opinion that the same should be treated as Revenue receipts and taxed accordingly.

7. Assessee carried the matter in appeal and argued before the CIT(Appeals) that the gain accrued is not in the course of any trading activity but on account of the gain arising out of hedging in the foreign exchange and therefore, the same should be treated as capital receipt. The CIT (Appeals) accepted such contention upon which, the Revenue approached the Tribunal. The Tribunal relying on the judgment of Bombay High Court in case of Homi Mehta Sons Pvt. Ltd. [: 222 ITR 528] held that the forward contract in respect of investments were on capital account and not profit received by the assessee on cancellation of such contract would not change its character and the same has therefore to be treated as capital receipt.

8. We notice that as pointed out by the counsel for the assessee in case of Deputy Commissioner of Income Tax (Assessment) vs. Garden Silk Mills Ltd. reported in : 320 ITR 720, the Court was concerned with facts where the assessee had received a gain of Rs. 68.66 lacs on cancellation of forward foreign exchange contract and had treated such surplus as not allowable to tax. The Tribunal had added that it was a capital receipt not allowable to capital gains tax as cancellation of such a contract did not involve any transfer or assignment of any asset within the meaning of section 2(47) of the Act. The question of law framed at the instance of the Revenue in appeal before the High Court was "Is profit on cancellation of forward exchange contract, a capital receipt or a revenue receipt?". This Court answered the question against the Revenue making following observations:

"14. Thus, the finding by the Tribunal is that the foreign exchange was acquired under the contract for the purpose of discharging an obligation on capital account viz. towards borrowing for the purpose of import of capital assets, which would indicate that the surplus realised on cancellation of such contract would bear the same characteristic. As held by the Apex Court, the principle that is to be applied for determining the character of a receipt, whether result

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s in any profit or loss on account of appreciation or depreciation in the value of foreign currency held by the assessee, upon conversion into another currency, would depend on whether the transaction is relatable to a trading transaction or is in relation to a capital asset or in relation to fixed capital. On reading of the entire case law on the subject matter, it becomes clear that this principle has been reiterated by the Apex Court time and again. Applying the settled principles to the facts found by the Tribunal, it cannot be stated that the Assessing Officer and the Tribunal have committed any error in law in holding: that the surplus received by the assessee company upon cancellation of forward foreign exchange contract will partake character of a capital receipt." 9. Under the circumstances, this question is not considered.
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