2023 (6) TMI 1384 - AT - Income Tax

Tribunal restricts corporate guarantee fee to 0.5% of guaranteed amount, allows weighted deduction under section 35(2)(AB) for clinical trial expenses

ITAT Hyderabad partly allowed the appeal regarding transfer pricing adjustments. The tribunal restricted corporate guarantee fee addition to 0.5% of ... TP Adjustment - shortfall of Corporate Guarantee Fee - HELD THAT:- As relying on assessee own case [2023 (4) TMI 1254 - ITAT HYDERABAD] we hereby restrict the addition with respect to corporate guarantee fee to the tune of 0.5% on the amount granted on corporate guarantee commission. Thus, these grounds are partly allowed. Trade Receivables - We hereby direct the computation of interest on trade receivables adding notional interest of 6% on trade receivables beyond a period of 60 days. Thus, these grounds are partly allowed. Weighted Deduction u/s 35(2)(AB) - We hereby allow the weighted deduction u/s 35(2)(AB) for the expenditure incurred by the assessee after getting approval in Form 3CL from DSR approving the expenditure for clinical trial expenses incurred outside approved R & D facilities. Thus, this ground is allowed. Allocation of Head Office expenses - contention of the assessee that allocation of the Head Office expenses should be based on net sales as against the export sales made by the SEZ and the said method of accounting had been continuously followed by the assessee for the earlier assessment years also - HELD THAT:- No such submissions / practice were cited before the Assessing Officer/TPO or before the DRP or before us to buttress its contention. Further, the contention raised by the assessee in its written submissions were fully considered by the TPO while passing the order, reproduced hereinabove and we do not find any reasons to agree with the contentions of the assessee, more particularly, when the assessee has not filed any document in support of the bifurcation of forex exchange loss for import of raw material used for domestic sales as well as for the exports. Hence, we do not find any reasons to interfere with the order of the TPO and accordingly, this ground is dismissed. Issues Involved:1. Corporate Guarantee Fees2. Interest on Receivables3. Allocation of Forex Loss to SEZ Unit4. Weighted Deduction u/s 35(2AB) of the IT ActSummary of Judgment:Corporate Guarantee Fees:The Tribunal addressed the issue of whether the corporate bank guarantee provided by the assessee on behalf of its Associated Enterprise (AE) is an international transaction. The Tribunal confirmed that such guarantees fall u/s 92B of the Act, making them international transactions. The assessee's submission that the corporate guarantee fee should be 0.10% was rejected. The Tribunal followed precedents, including Vivimed Labs and Havells India Ltd., and restricted the addition to 0.5% of the amount guaranteed as corporate guarantee commission, thereby partly allowing ground nos. 2 to 7.Interest on Receivables:The Tribunal examined whether delayed trade receivables from AEs should be treated as a separate international transaction and benchmarked. The Tribunal upheld the lower authorities' decision to apply a notional interest rate of 6% on receivables delayed beyond 60 days, following its own decision in the case of Apache Footwear. The Tribunal dismissed the assessee's arguments, including those based on the decision in PCIT Vs. Boeing India Pvt. Ltd. and Betchal India Pvt Ltd., and partly allowed ground nos. 8 to 11.Allocation of Forex Loss to SEZ Unit:The Tribunal considered the allocation method of forex loss to the SEZ unit. The TPO had allocated the forex loss based on the proportion of export sales made by the SEZ unit on the total export sales, resulting in an adjustment of Rs. 1,39,35,455/-. The assessee's contention that the allocation should be based on net sales was rejected due to lack of supporting documentation. The Tribunal upheld the TPO's method and dismissed ground nos. 12 and 13.Weighted Deduction u/s 35(2AB):The Tribunal allowed the weighted deduction u/s 35(2AB) for the expenditure incurred by the assessee on clinical trials outside the approved R&D facilities, following its own decisions in earlier years and the approval in Form 3CL from DSIR. The Tribunal rejected the DRP's reasoning that the remand by the Supreme Court in the case of Cadila Healthcare Ltd. affected the decision. Ground no. 14 was allowed.Conclusion:The appeal was partly allowed, with specific directions issued for each issue as follows:- Corporate Guarantee Fees: Restricted addition to 0.5% on the amount guaranteed.- Interest on Receivables: Computed notional interest of 6% on receivables beyond 60 days.- Weighted Deduction u/s 35(2AB): Allowed for clinical trial expenses incurred outside approved R&D facilities.- Allocation of Forex Loss to SEZ Unit: Upheld the TPO's method based on export sales proportion.