ITAT deletes transfer pricing adjustments on corporate guarantees, loans, and reimbursements while allowing product registration expenses and section 35(2AB) deductions

The ITAT Ahmedabad ruled in favor of the assessee on multiple transfer pricing and tax issues. The tribunal deleted TP adjustments for corporate guarantee charges, holding that 1% rate was at arm's length based on previous years' decisions. TP adjustments on optionally convertible loans were deleted as they were deemed quasi-capital in nature. Reimbursement expense adjustments were also deleted following precedent. The tribunal allowed product registration expenses as revenue expenditure and granted weighted deduction under section 35(2AB) for clinical trials. Additionally, disallowance under section 14A was deleted from book profits under section 115JB, following the Vireet Investments precedent.

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Issues Involved:

1. Transfer Pricing Adjustments
2. Treatment of Expenses as Capital or Revenue
3. Weighted Deduction for Scientific Research Expenditure
4. Disallowance under Section 14A and Adjustment to Book Profits under Section 115JB

Summary:

1. Transfer Pricing Adjustments:

Corporate Guarantee Charges:
The assessee challenged an upward adjustment of Rs. 11,01,99,257/- on corporate guarantee charges. The ITAT noted that similar adjustments in previous years (2009-10 to 2014-15) had been decided in favor of the assessee, holding that a 1% corporate guarantee fee was at arm's length. The adjustment made by the AO/TPO at 1.5% was directed to be deleted, following the precedent set in earlier years.

Interest on Optionally Convertible Loans (OCL):
The assessee contested an adjustment of Rs. 13,54,90,598/- for interest imputation on OCLs advanced to its AE. The ITAT found that this issue had also been consistently decided in favor of the assessee in previous years, recognizing the loans as quasi-capital. The adjustment was directed to be deleted.

Reimbursement of Expenses:
The assessee disputed the adjustment of Rs. 2,94,40,667/- on account of reimbursement of expenses to its AEs. The ITAT noted that similar reimbursements in previous years were held to be at arm's length. The adjustment was directed to be deleted, following the ITAT's earlier decisions.

2. Treatment of Expenses as Capital or Revenue:

Product Registration and Trademark/Patent Fees:
The AO treated product registration expenses (Rs. 28,40,80,823/-) and trademark/patent fees (Rs. 9,89,85,304/-) as capital in nature. The ITAT noted that these issues had been decided in favor of the assessee in earlier years, with the expenses being treated as revenue. The additions were directed to be deleted.

3. Weighted Deduction for Scientific Research Expenditure:

Clinical Trials and Bio-equivalence Study:
The AO denied weighted deduction under section 35(2AB) for expenses incurred outside the R&D facility (Rs. 38,52,07,000/-) and for in-house R&D expenses not approved by DSIR (Rs. 42,37,38,000/-). The ITAT noted that similar claims had been allowed in previous years, and the additions were directed to be deleted.

4. Disallowance under Section 14A and Adjustment to Book Profits under Section 115JB:

Section 14A Disallowance:
The assessee disputed an additional disallowance of Rs. 1,84,16,462/- under section 14A. This ground was not pressed and was dismissed.

Adjustment to Book Profits under Section 115JB:
The assessee challenged the addition of Rs. 10,98,60,824/- to book profits under section 115JB. The ITAT, following the Special Bench decision in Vireet Investment P. Ltd., directed the deletion of the addition.

Conclusion:
The ITAT ruled in favor of the assessee on all contested grounds, directing the deletion of adjustments and additions made by the AO/TPO/DRP, following precedents set in earlier years. The appeal was partly allowed.

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