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 guaranteed amount, relying on assessee's own precedent. For trade receivables, 6% notional interest was directed on amounts outstanding beyond 60 days. Weighted deduction under section 35(2)(AB) was allowed for clinical trial expenses incurred outside approved R&D facilities after obtaining Form 3CL approval. However, the ground on head office expense allocation based on net sales versus export sales was dismissed due to lack of supporting documentation and insufficient evidence before authorities.

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Issues Involved:
1. Corporate Guarantee Fees
2. Interest on Receivables
3. Allocation of Forex Loss to SEZ Unit
4. Weighted Deduction u/s 35(2AB) of the IT Act

Summary 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.

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