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 ... International transaction - arm's length principle - transfer pricing adjustment - corporate guarantee commission - notional interest on receivables - allocation of forex loss - weighted deduction under section 35(2AB) - binding effect of coordinate Bench decisionsInternational transaction - corporate guarantee commission - arm's length principle - Restriction of transfer pricing adjustment in respect of corporate guarantee fee - HELD THAT: - The Tribunal held that a corporate guarantee given by the assessee on behalf of its associated enterprise is an international transaction within the scope of the Explanation to section 92B and therefore susceptible to TP scrutiny. Having regard to earlier coordinate bench decisions (including Vivimed Labs and other Tribunal precedents) and the distinct nature of corporate guarantees vis a vis bank charges, the Tribunal restricted the transfer pricing addition in respect of corporate guarantee commission to 0.5% of the amount guaranteed. The Tribunal applied its prior reasoning in ITA No.485/Hyd/2022 (A.Y.2018 19) and issued the same directional relief for the year under appeal. [Paras 8]Addition in respect of corporate guarantee fee restricted to 0.5% of the amount guaranteed; grounds partly allowed.Notional interest on receivables - arm's length principle - transfer pricing adjustment - Benchmarking of delayed trade receivables and computation of imputed interest - HELD THAT: - Relying on its decision in ITA No.485/Hyd/2022 and other coordinate bench precedents, the Tribunal treated delayed receivables from associated enterprises as an international transaction requiring benchmarking. In the absence of comparable evidence from the assessee, and following the approach of earlier decisions, the Tribunal directed computation of ALP by adding notional interest at 6% on receivables outstanding beyond 60 days. The Tribunal rejected the contention that trade receivables are not to be treated as unsecured loans for levy of interest where benchmarking obligations under the Explanation to section 92B apply. [Paras 8]Compute imputed interest by adding notional interest @ 6% on receivables beyond 60 days; grounds partly allowed.Weighted deduction under section 35(2AB) - binding effect of coordinate Bench decisions - Allowability of weighted deduction under section 35(2AB) for clinical trial related expenditure incurred outside the approved R&D facility after DSIR approval - HELD THAT: - The Tribunal followed its earlier coordinate bench decisions in the assessee's own cases for earlier assessment years and the reasoning approving expenditure on clinical trials (necessarily carried out outside the on site R&D facility) as in house research. Noting that the assessee had the requisite DSIR approval in Form 3CL and that facts remained unchanged, the Tribunal held that the assessee is entitled to weighted deduction under section 35(2AB) for the approved clinical trial expenditure. The Tribunal also observed that a pending appeal by Revenue against prior favorable Tribunal orders does not relieve the assessing authority from following binding coordinate bench decisions. [Paras 27]Weighted deduction under section 35(2AB) allowed for clinical trial expenditure approved by DSIR; ground allowed.Allocation of forex loss - most appropriate method - transfer pricing adjustment - Validity of TPO's reallocation of forex loss to SEZ unit on proportion of export sales - HELD THAT: - The Tribunal examined the TPO's conclusion that forex loss is directly linked to import/export transactions and that allocation on the basis of proportion of export sales is appropriate. The assessee's contention that allocation should be on net sales and that forex loss contains import related and capital components was considered but the assessee failed to produce supporting bifurcation documents. The Tribunal found no reason to interfere with the TPO/DRP conclusion and confirmed the adjustment made under section 92CA(3). [Paras 13]Adjustment for allocation of forex loss to SEZ unit upheld; ground dismissed.Final Conclusion: The assessee's appeal is partly allowed: corporate guarantee fee addition limited to 0.5% of amount guaranteed; notional interest of 6% to be added on receivables outstanding beyond 60 days; weighted deduction under section 35(2AB) allowed for DSIR approved clinical trial expenditure; the challenge to allocation of forex loss to the SEZ unit 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.