Clinical trial expenses outside approved R&D facilities qualify for weighted deduction under section 35(2AB)

The ITAT Hyderabad ruled on multiple transfer pricing and deduction issues. For corporate guarantee commission, the tribunal adopted 0.50% on guaranteed amount following its earlier decision for AY 2018-19. Regarding interest on receivables, credit periods extended to non-associated enterprises should also apply to associated enterprises, with interest rate set at LIBOR+200 basis points for foreign currency transactions. The tribunal allowed weighted deduction under section 35(2AB) for clinical trial expenses incurred outside approved R&D facilities, following Supreme Court precedent in Vegetable Products Ltd and Gujarat HC decisions in Cadila Healthcare and Sun Pharmaceuticals cases.

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Issues Involved:
1. Corporate Guarantee Commission
2. Interest on Receivables
3. Weighted Deduction under Section 35(2AB) of the Income Tax Act, 1961

Detailed Analysis:

1. Corporate Guarantee Commission
The primary issue was whether the corporate guarantee provided by the assessee to its subsidiaries constitutes an international transaction requiring benchmarking. The assessee argued that the corporate guarantee is a shareholder activity and should not be benchmarked. However, the Transfer Pricing Officer (TPO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, classifying it as an international transaction. The TPO suggested a 2% commission rate, which was reduced to 0.53% by the CIT(A) based on precedents such as Mylan Laboratories Ltd. and Rain Commodities Ltd.

The Tribunal, relying on the decision of the Hon'ble Madras High Court in PCIT Vs. Redington (India) Ltd., confirmed that corporate guarantees are international transactions requiring benchmarking. The Tribunal further referred to various cases, including Vivimed Labs, Havells India Ltd., and GMR Infrastructure Ltd., and concluded that a 0.50% commission rate is appropriate. Thus, the Tribunal directed the Assessing Officer/TPO to adopt a 0.50% commission rate on the guaranteed amount.

2. Interest on Receivables
The second issue concerned whether interest on receivables from associated enterprises (AEs) constitutes an international transaction requiring separate benchmarking. The TPO and CIT(A) held that trade receivables are international transactions and applied the SBI short-term deposit rate for benchmarking. The assessee contended that receivables are closely linked to the principal transaction and should not be separately benchmarked. The Tribunal referred to the decisions of the Delhi High Court in DCIT vs. McKensey Knowledge Centre India Pvt. Ltd. and Bhatia Airtel Services Ltd. vs. DCIT, which held that interest on delayed receivables is an international transaction requiring benchmarking.

Regarding the credit period, the Tribunal upheld the CIT(A)'s direction to consider the credit period as per the invoices rather than an ad hoc 90 days. On the interest rate, the Tribunal referred to the decisions in Tecnimont ICB House Vs. DCIT and CIT Vs. Cotton Naturals (I) (P.) Ltd., which supported using LIBOR + 200 basis points for benchmarking. Consequently, the Tribunal directed the Assessing Officer/TPO to adopt LIBOR + 200 basis points for determining the interest on receivables.

3. Weighted Deduction under Section 35(2AB)
The third issue involved the weighted deduction claimed by the assessee for expenditures not quantified in the DSIR approval and for clinical trials. Both authorities held that only expenditures approved by the prescribed authority qualify for weighted deduction, though 100% deduction is allowed for unapproved expenditures. The Tribunal upheld this view.

For clinical trials, the Tribunal referred to the Gujarat High Court's decision in CIT vs. Cadila Healthcare Ltd., which held that clinical trials conducted outside the approved facility qualify for weighted deduction. Despite the Revenue's contention that this decision is sub judice, the Tribunal noted that the Supreme Court's remand did not set aside the Gujarat High Court's judgment on this aspect. The Tribunal also referred to its own decision in the assessee's case for earlier years and concluded that clinical trial expenses incurred outside the approved facility qualify for weighted deduction under Section 35(2AB).

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal. The order was pronounced in the open court on July 25, 2024.

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