ITAT Ahmedabad Validates ₹602 Crore Foreign Patent Settlement as Deductible Business Expense for Sun Pharma
The intersection of global intellectual property disputes and domestic taxation laws often creates complex litigation scenarios for multinational corporations. In a landmark ruling, the Income Tax Appellate Tribunal (ITAT), Ahmedabad, has provided massive relief to a leading pharmaceutical giant in the case of Sun Pharmaceutical Industries Limited Vs DCIT. The Tribunal ruled that a substantial out-of-court settlement paid to resolve a foreign patent infringement lawsuit is a deductible business expenditure under Section 37(1) of the Income Tax Act 1961.
The ruling clarifies that commercial settlements executed to protect an assessee's business interests do not automatically trigger the disallowance provisions of Explanation 1 to Section 37(1), especially when there is no formal admission of guilt or conviction under Indian law.
Background of the Dispute: The Demerger and the Patent Lawsuit
The factual matrix of the case revolves around the assessee, a flagship entity of the Sun Pharma Group, which is extensively engaged in the manufacturing, trading, and export of pharmaceutical formulations.
During the assessment year 2014-15, a Scheme of Demerger, duly sanctioned by the Hon'ble Gujarat High Court, resulted in the vesting of the Specified Undertaking of Sun Pharma Global FZE (a step-down wholly-owned subsidiary based in the UAE) into the assessee. The appointed date for this corporate restructuring was 01.05.2013. This offshore undertaking was primarily involved in the ulcer therapeutics segment, with the United States being its principal market.
Prior to the demerger, the offshore entity had filed a Paragraph IV certification with the US Food and Drug Administration (US FDA) to launch a generic version of the drug Pantoprazole. This regulatory filing triggered a patent infringement lawsuit from Wyeth LLC (a subsidiary of Pfizer Inc.) and Nycomed GmbH in the United States.
After years of protracted litigation, the parties opted for an amicable resolution in June 2013. To avoid further legal entanglements and business disruptions, an out-of-court settlement was reached, requiring a payout of USD 550 million to the patent holders. The assessee claimed its respective share of this compensation, amounting to ₹602,39,80,000/-, as a revenue expenditure under Section 37(1) of the Income Tax Act 1961.