Appeal partially allowed: TP adjustment deleted, corporate guarantee upheld, R&D deduction granted. &DExpenditure

The Tribunal partly allowed the appeal, deleting the Transfer Pricing (TP) adjustment related to the export of goods, upholding the TP adjustment related to the corporate guarantee, and allowing the deduction under section 35(2AB) for research and development expenditure. The decision considered the impact of the COVID-19 pandemic on the delayed pronouncement of the order.

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Issues Involved:
1. Transfer Pricing Adjustment related to the export of goods.
2. Transfer Pricing Adjustment related to Corporate Guarantee.
3. Denial of deduction under section 35(2AB) of the Income Tax Act.

Detailed Analysis:

Transfer Pricing Adjustment related to the Export of Goods:
1. Issue Overview: The assessee contested an upward adjustment of INR 11,20,79,641/- made by the AO/TPO/DRP to the total income, arguing the international transaction related to the export of goods to its AE was at arm's length.
2. Rejection of TNMM: The AO/TPO/DRP rejected the Transactional Net Margin Method (TNMM) adopted by the assessee, which showed a profit level indicator (PLI) of 19.02% and 15.98% for operating profit/operating expenses and operating profit/operating revenue, respectively. Instead, the TPO adopted the Comparable Uncontrolled Price (CUP) method, leading to an adjustment of INR 11,20,79,641/-.
3. DRP’s Stand: The DRP upheld the AO's decision, citing consistency with previous years (AYs 2012-13 and 2013-14), where similar adjustments were made.
4. Tribunal's Decision: The Tribunal referred to its earlier orders for AYs 2012-13 and 2013-14, which favored the assessee, stating there was no justification for rejecting the TNMM method. The Tribunal reiterated that the TNMM method was appropriate and upheld the assessee's benchmarking, thus deleting the TP adjustment.

Transfer Pricing Adjustment related to Corporate Guarantee:
1. Issue Overview: The assessee contested an upward adjustment of INR 1,20,969/- made by the AO/TPO/DRP, arguing the corporate guarantee provided to its AE was at arm's length.
2. Benchmarking and Adjustment: The assessee had initially benchmarked the transaction with a spread of 1.25%, resulting in a TP adjustment of INR 18.74 Lacs. However, the TPO applied this rate to the gross amount of the guarantee, leading to an additional adjustment of INR 1.20 Lacs.
3. DRP’s Stand: The DRP confirmed the AO's decision, relying on previous directions for AYs 2012-13 and 2013-14.
4. Tribunal's Decision: The Tribunal upheld the DRP's decision, stating that the rate of 1.25% should apply to the gross amount of the guarantee, not just the actual loan availed by the AE, as per the precedent set in Laqshya Media Pvt. Ltd. The ground was dismissed.

Denial of Deduction under Section 35(2AB):
1. Issue Overview: The assessee contested the denial of a deduction of INR 10,54,524/- under section 35(2AB) for research and development expenditure.
2. AO’s Stand: The AO disallowed the deduction due to a discrepancy between the amount claimed and the amount mentioned in the certificate issued by the prescribed authority (DSIR).
3. DRP’s Stand: The DRP upheld the AO’s decision, citing consistency with the previous year's directions.
4. Tribunal's Decision: The Tribunal noted the difference in facts from the previous year, where the necessary certificate was not furnished. For the current year, the requisite certificates were provided. The Tribunal referred to the decision in Cummins India Ltd., which held that once the R&D facility is approved by DSIR, the expenditure should be allowed. The Tribunal concluded that the AO was not justified in curtailing the deduction and allowed the ground.

Conclusion:
The appeal was partly allowed. The Tribunal deleted the TP adjustment related to the export of goods, upheld the TP adjustment related to the corporate guarantee, and allowed the deduction under section 35(2AB). The order was pronounced after considering the exceptional circumstances caused by the COVID-19 pandemic, which delayed the pronouncement beyond the standard 90-day period.

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