ITAT Ahmedabad Dismisses Revenue's Appeal in Cadila Pharmaceuticals Case, Partly Allows Assessee's Cross-Appeal for AY 2013-14
The Ahmedabad Tribunal dismissed all twelve Revenue grounds covering transfer pricing, forex hedging losses and R&D deductions, while partly allowing Cadila Pharmaceuticals' cross-appeal on weighted deduction and bonus payment.
The Income Tax Appellate Tribunal, Ahmedabad “D” Bench, on 15 May 2026 disposed of cross-appeals filed by Cadila Pharmaceuticals Ltd. and the Revenue against the order of the Commissioner of Income Tax (Appeals)-13, Ahmedabad dated 19 November 2025 for Assessment Year 2013-14. The Revenue had challenged twelve deletions made by the CIT(A) spanning transfer pricing, interest disallowance, R&D weighted deduction, product registration expenses, section 14A disallowance, MAT book profit addition and a foreign exchange fluctuation loss of Rs.45.24 crores. The Tribunal dismissed every Revenue ground. On the assessee's side, the Tribunal dismissed grounds relating to doctor freebies and delayed welfare fund deposits, allowed the additional weighted deduction claim of Rs.3,06,35,101/- under section 35(2AB), and restored the bonus deduction claim of Rs.23,60,531/- under section 43B to the Assessing Officer for factual verification.
The Assessment and the Disputes Before the CIT(A)
Cadila Pharmaceuticals Ltd., a manufacturer and trader of pharmaceutical formulations, bulk drugs and healthcare products, filed its original return for AY 2013-14 declaring a loss of Rs.1,00,17,52,143/- under normal provisions and a book profit of Rs.56,46,07,739/- under section 115JB. A revised return was subsequently filed. The case was selected for scrutiny, and the Assessing Officer completed assessment at a total income of Rs.27,25,55,577/- after transfer pricing adjustments and several tax disallowances.
The disputes that reached the CIT(A) covered: a transfer pricing adjustment of Rs.74,02,428/- on a corporate guarantee extended to an overseas associated enterprise; an interest disallowance of Rs.63,27,480/- under section 36(1)(iii) on alleged diversion of borrowed funds to interest-free advances; a differential weighted deduction of Rs.2,34,58,952/- under section 35(2AB); product registration expenditure of Rs.1,10,90,165/- treated as capital; a section 14A disallowance under Rule 8D; a corresponding MAT book profit addition of Rs.78,62,65,505/-; and a foreign exchange fluctuation loss of Rs.45,24,80,000/- treated as speculative under section 43(5). The CIT(A) deleted all of these. It sustained the disallowance of doctor freebies under section 37(1) and the delayed welfare fund deposit disallowance under section 36(1)(va).
Transfer Pricing: Corporate Guarantee to Satellite Overseas Holdings Ltd.
The Transfer Pricing Officer had treated the corporate guarantee extended by Cadila Pharmaceuticals to Allahabad Bank on behalf of its UK-based associated enterprise, Satellite Overseas Holdings Ltd., as an international transaction under section 92B and benchmarked arm's length guarantee commission at 1.24%, proposing an upward adjustment of Rs.74,02,428/-.
The assessee argued that no fresh guarantee had been issued during AY 2013-14, that it had incurred no cost, financial burden or economic outflow in continuing the arrangement, and that passive guarantees without economic impact do not constitute international transactions. The CIT(A) accepted this and deleted the adjustment.
The Tribunal found the issue covered by its own earlier decisions in the assessee's case for AY 2010-11 and AY 2011-12. In ITA Nos. 848 & 918/Ahd/2016 for AY 2011-12, the Coordinate Bench had deleted an identical adjustment after noting that the factual backdrop was unchanged from the preceding year and that the AY 2010-11 decision in ITA No. 694/Ahd/2015 had already held the guarantee not to be an international transaction under section 92B. The Tribunal in the AY 2010-11 proceedings had observed that a corporate guarantee issued by a parent without any cost, outflow or economic sacrifice cannot be treated at par with a bank guarantee and that in the absence of any bearing on profits, income, losses or assets, the transaction falls outside section 92B. The Revenue produced no material to rebut the CIT(A)'s categorical finding that no fresh guarantee had been issued and no additional financial burden had been assumed. Ground Nos. 1 to 5 raised by the Revenue were dismissed.
Interest Disallowance, R&D Weighted Deduction and Product Registration Expenses
The Assessing Officer had disallowed Rs.63,27,480/- under section 36(1)(iii) on the basis that the assessee advanced interest-free loans to related entities — including Casil Health Products Ltd., Casil Industries Ltd., Karnavati Engineering Ltd., Omnicare Pharmaceuticals Ltd. and IRM Enterprises Pvt. Ltd. — while simultaneously carrying interest-bearing borrowings. The CIT(A) deleted the disallowance after finding no direct nexus between borrowed funds and the advances, and after accepting that the advances were commercially expedient. The Tribunal followed the Supreme Court's judgment in S.A. Builders Ltd. v. CIT [(2007) 288 ITR 1 (SC)] and the Gujarat High Court's ruling in CIT v. Raghuvir Synthetics Ltd. [(2013) 354 ITR 222 (Guj)], both of which had been applied in the assessee's own case for earlier years. Ground No. 6 was dismissed.
On the section 35(2AB) weighted deduction, the Assessing Officer had restricted the claim to the amount quantified by DSIR in Form No. 3CL, disallowing the balance of Rs.2,34,58,952/-. The Tribunal held that AY 2013-14 falls under the pre-amendment legal position, before the Finance Act 2016 changes and the Income Tax (10th Amendment) Rules, 2021 strengthened DSIR's certification role. Under the unamended provisions, the Gujarat High Court in CIT v. Claris Lifesciences Ltd. [(2010) 326 ITR 251 (Guj)] and CIT v. Cadila Healthcare Ltd. [(2013) 31 taxmann.com 300 (Guj)] had held that once the research facility is approved and expenditure is genuinely incurred, weighted deduction cannot be curtailed merely because the Form No. 3CL figure differs from the assessee's claim. The Tribunal held the post-2016 amendments to be prospective and dismissed Ground Nos. 7 and 8.
Product registration expenditure of Rs.1,10,90,165/- had been disallowed as capital expenditure on the ground that overseas regulatory approvals confer enduring benefit. The Tribunal disagreed. It found the issue covered by the Coordinate Bench decisions in the assessee's own case for AY 2011-12 and AY 2012-13, as well as the Gujarat High Court's judgment in CIT v. Torrent Pharmaceuticals Ltd. [(2013) 35 taxmann.com 300 (Guj)]. The Tribunal observed that pharmaceutical product registrations are product-specific, subject to periodic renewal, and do not create any proprietary or transferable capital asset. The test of enduring benefit cannot be applied mechanically in a sector where continuous regulatory approvals are an operational necessity. Ground No. 9 was dismissed.
Section 14A, MAT Book Profit and Foreign Exchange Hedging Loss
The Assessing Officer had invoked Rule 8D to compute a section 14A disallowance and then added the same amount to book profit under clause (f) of Explanation 1 to section 115JB(2). The CIT(A) restricted the section 14A disallowance to the actual exempt income earned during the year and deleted the corresponding MAT addition.
The Tribunal followed the Delhi High Court in Joint Investments Pvt. Ltd. v. CIT [(2015) 372 ITR 694 (Delhi)], the Punjab & Haryana High Court in PCIT v. State Bank of Patiala [(2017) 391 ITR 218 (P&H)] — whose SLP dismissal by the Supreme Court is reported at (2018) 99 taxmann.com 286 (SC) — and the Delhi High Court in Cheminvest Ltd. v. CIT [(2015) 378 ITR 33 (Delhi)]. On the MAT addition, the Tribunal relied on the Special Bench decision in ACIT v. Vireet Investment Pvt. Ltd. [(2017) 165 ITD 27 (Delhi)(SB)], which held that computation under clause (f) of Explanation 1 to section 115JB(2) must be made independently without importing the Rule 8D mechanism. The Tribunal held that once the section 14A disallowance itself had been restricted, adding the same amount again under section 115JB would amount to impermissible double disallowance. Ground Nos. 10 and 11 were dismissed.
The foreign exchange fluctuation loss of Rs.45,24,80,000/- had been treated as speculative under section 43(5). The assessee had entered into forward and derivative contracts with banks to hedge foreign currency exposure arising from its export-import business. The Tribunal found the issue covered by the Coordinate Bench decision in the assessee's own case for AY 2011-12, which had relied on the Gujarat High Court's ruling in CIT v. Friends & Friends Shipping Pvt. Ltd. [(2013) 35 taxmann.com 553 (Guj)], the Full Bench decision in Pankaj Oil Mills v. CIT [(1978) 115 ITR 824 (Guj)(FB)], and the Bombay High Court's judgment in CIT v. D. Chetan & Co. [(2016) 75 taxmann.com 300 (Bom)]. The Tribunal held that the Revenue had not placed any material on record to show the contracts were speculative rather than hedging transactions, and that mere absence of actual delivery cannot render a contract speculative when it is demonstrably linked to business exposure. Ground No. 12 was dismissed and the Revenue's appeal was dismissed in its entirety.
Assessee's Appeal: Freebies, Welfare Fund Deposits, Additional R&D Claim and Bonus Deduction
The assessee challenged the sustained disallowance of Rs.4,92,36,452/- on freebies and incentives provided to doctors under section 37(1). The Tribunal applied the Supreme Court's ruling in Apex Laboratories Pvt. Ltd. v. DCIT [(2022) 442 ITR 1 (SC)], which held that expenditure on freebies to medical practitioners is prohibited by law and inadmissible under Explanation 1 to section 37(1). The Coordinate Bench had already applied this ruling against the assessee for AY 2012-13. Ground No. 1 of the assessee's appeal was dismissed.
The disallowance of Rs.1,05,377/- under section 36(1)(va) read with section 2(24)(x) related to delayed deposit of employees' contributions towards Gujarat Labour Welfare Fund and Modi Benevolent Fund. The assessee argued that the Supreme Court's ruling in Checkmate Services Pvt. Ltd. v. CIT [(2022) 448 ITR 518 (SC)] should be confined to PF and ESI contributions and should not extend to these welfare funds. The Tribunal rejected this distinction. It held that the statutory scheme of section 36(1)(va) and section 2(24)(x) governs employees' contributions collected under welfare legislations generally, and that once the relevant welfare statute prescribes a due date, failure to deposit within that date attracts disallowance regardless of payment before the return filing date. Ground No. 2 was dismissed.
On the additional weighted deduction claim of Rs.3,06,35,101/- under section 35(2AB) — representing contract research receipts that had been reduced from eligible R&D expenditure — the Tribunal found the issue covered in the assessee's favour by the Coordinate Bench decision for AY 2011-12 and the Gujarat High Court judgments in CIT v. Cadila Healthcare Ltd. and CIT v. Claris Lifesciences Ltd. The Revenue had not disputed the genuineness of the expenditure. The Tribunal directed the Assessing Officer to allow the additional deduction of Rs.3,06,35,101/-. Ground No. 3 was allowed.
The additional claim of Rs.23,60,531/- under section 43B for bonus payment, which had been omitted from the original return due to an inadvertent computational error, was restored to the Assessing Officer for verification of actual payment within the time prescribed under section 43B read with section 139(1). Ground No. 4 was allowed for statistical purposes.
Outcome
The Revenue's appeal in ITA No. 288/Ahd/2026 was dismissed in its entirety. The assessee's appeal in ITA No. 202/Ahd/2026 was partly allowed. The Tribunal directed the Assessing Officer to allow the additional weighted deduction of Rs.3,06,35,101/- under section 35(2AB) and to verify the bonus payment claim of Rs.23,60,531/- under section 43B. The order was pronounced in open court on 15 May 2026 by Smt. Annapurna Gupta, Accountant Member, and Shri Siddhartha Nautiyal, Judicial Member.