TPO incorrectly calculated interest on installment loans to associated enterprises, tribunal deletes adjustment

ITAT Ahmedabad ruled on multiple issues in a transfer pricing case. The tribunal deleted TP adjustments for interest on loans to associated enterprises, finding the TPO incorrectly calculated interest for the entire 180-day period when loans were advanced in installments. Corporate guarantee fee adjustment was restricted to 0.5% based on banking commission rates. The tribunal upheld CIT(A)'s deletion of disallowances under section 36(1)(iii) for interest-free advances, confirming sufficient interest-free funds existed. Weighted deduction under section 35(2AB) at 150% for R&D expenses was allowed, with product registration expenses treated as revenue expenditure. The tribunal dismissed revenue's appeals on section 14A disallowance restriction and foreign exchange loss treatment as business loss rather than speculation loss.

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Issues Involved:
1. Transfer Pricing Adjustment of Interest
2. Deduction under Section 35(2AB)
3. Transfer Pricing Adjustment of Corporate Guarantee Fee
4. Disallowance under Section 36(1)(iii)
5. Depreciation on R&D Assets
6. Product Registration Expenses
7. Disallowance under Section 14A
8. Disallowance under Section 40(a)(ia)
9. Foreign Currency Loss
10. Adjustment under Section 115JB

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment of Interest:
The assessee contested the upward transfer pricing adjustment of Rs. 56,88,205/- towards interest by adopting the rupee loan rate instead of the LIBOR linked rate for foreign currency loans advanced to its subsidiary. The Tribunal held that the interest should be charged based on the rate prevailing in the country of the AE's residence. Since the loan was advanced from bank borrowings, the interest paid to the banks must be recovered from the AE. The Tribunal deleted the adjustment of Rs. 38,47,968/- and Rs. 6,78,168/- for interest from Corporation Bank and Allahabad Bank, respectively, as the loan was not advanced for the entire period considered by the TPO. The adjustment of Rs. 11,62,069/- was remanded to the AO for re-adjudication.

2. Deduction under Section 35(2AB):
The assessee claimed an additional deduction of Rs. 60,36,617/- for weighted deduction on gross R&D expenditure without reducing contract research income. The Tribunal directed the AO to verify the claim and allow the deduction on the gross expenditure as per the provisions of the Act. The Tribunal also addressed the excess claim of Rs. 2,94,52,415/- over the DSIR-approved amount, stating that prior to 01-04-2016, there was no requirement for DSIR approval for the quantum of eligible expenditure. The Tribunal upheld the CIT(A)'s decision to allow the deduction. The additional claim of Rs. 70,14,434/- for clinical trials outside the R&D facility was also allowed, subject to verification by the AO.

3. Transfer Pricing Adjustment of Corporate Guarantee Fee:
The Revenue's appeal on the upward adjustment of Rs. 61,27,088/- for corporate guarantee fees was partly allowed. The Tribunal held that corporate guarantees are international transactions subject to transfer pricing regulations. The adjustment was restricted to 0.5% of the guarantee amount, following the decision in Rubamin Ltd. vs. DCIT.

4. Disallowance under Section 36(1)(iii):
The AO disallowed Rs. 99,06,570/- on account of interest-free advances to associated companies. The CIT(A) deleted the disallowance, noting that the assessee had sufficient interest-free funds. The Tribunal upheld the CIT(A)'s decision, finding no merit in the AO's assumption that interest-bearing funds were utilized for the advances.

5. Depreciation on R&D Assets:
The Tribunal directed the AO to verify the claim that the entire cost of assets removed from the R&D facility in A.Y. 2009-10 was offered as income. If verified, the assessee is entitled to depreciation on the opening WDV of these assets. The disallowance of Rs. 68,96,075/- was also remanded to the AO for verification.

6. Product Registration Expenses:
The AO treated product registration expenses of Rs. 1,76,84,264/- as capital in nature. The CIT(A) deleted the addition, following the Tribunal's decision in earlier years that such expenses are revenue in nature. The Tribunal upheld the CIT(A)'s decision.

7. Disallowance under Section 14A:
The CIT(A) restricted the disallowance under Section 14A to Rs. 5,208/-, equal to the exempt income earned during the year. The Tribunal upheld this decision. The additional claim of Rs. 2,82,07,492/- suo motto disallowed by the assessee was also allowed, as the disallowance under Section 14A was restricted.

8. Disallowance under Section 40(a)(ia):
The AO disallowed Rs. 94,25,132/- for payments to non-residents without TDS deduction. The CIT(A) deleted the addition, noting that the payments were for lodging, boarding, and technical services not subject to withholding as per the Act or DTAA. The Tribunal upheld the CIT(A)'s decision, following the Tribunal's decision in A.Y. 2008-09.

9. Foreign Currency Loss:
The AO treated the foreign currency loss of Rs. 29,22,90,000/- as speculative. The CIT(A) allowed the relief, following the Tribunal's decision in A.Y. 2011-12. The Tribunal upheld the CIT(A)'s decision, noting that the nature of transactions was similar to those considered in A.Y. 2011-12.

10. Adjustment under Section 115JB:
The adjustment of Rs. 3,54,82,415/- under Section 115JB was deleted by the CIT(A) as it was based on the disallowance under Section 14A, which was deleted. The Tribunal upheld the CIT(A)'s decision.

Conclusion:
Both the assessee's and Revenue's appeals were partly allowed. The Tribunal provided detailed directions for verification and re-adjudication on specific issues, ensuring compliance with legal provisions and precedents.

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