2024 (7) TMI 1372 - AT - Income Tax

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 ... Corporate guarantee as international transaction - arm's length price / benchmarking - interest on delayed receivables as international transaction - credit period as per invoices for computation of interest - LIBOR+200 basis points as applicable benchmark rate - weighted deduction under section 35(2AB) - clinical trials expenses outside approved R&D facilityCorporate guarantee as international transaction - arm's length price / benchmarking - Whether corporate guarantees furnished by the assessee constitute an international transaction and the appropriate arm's length commission to be adopted - HELD THAT: - Following the decision of the Hon'ble Madras High Court in PCIT v. Redington (India) Ltd., the Tribunal holds that corporate guarantees qualify as an international transaction and therefore require benchmarking. No contrary binding authority or fresh material was shown to displace that principle. On the question of quantification, the Tribunal followed the view of a Coordinate Bench in the assessee's own case and several other Tribunals that corporate guarantee commission be fixed at 0.50% of the amount guaranteed. In view of lack of persuasive recent material to adopt a different rate, the Assessing Officer/TPO is directed to apply 0.50% as the arm's length commission on the guaranteed amount. [Paras 9, 11, 12]Corporate guarantees are international transactions requiring benchmarking; commission fixed at 0.50% of the amount guaranteed.Interest on delayed receivables as international transaction - credit period as per invoices - arm's length price / benchmarking - Whether interest on outstanding receivables from associated enterprises is an international transaction requiring separate benchmarking and how the credit period for computation should be determined - HELD THAT: - The Tribunal follows binding precedents (including DCIT v. McKensey Knowledge Centre and related Tribunal views) that, post-introduction of the explanation to section 92B, delay in realization of trade receivables arising from business transactions attracts transfer pricing adjustment by treating the delay as a notional loan and requires separate benchmarking of interest. The CIT(A)'s direction to compute interest only for the period beyond the credit period agreed between the parties as reflected in the invoices was upheld. The Tribunal noted that in the assessee's own case for AY 2018-19 the DRP directed application of invoice credit periods and that finding has become final; accordingly, the credit periods extended to non-AEs (ranging between 60 and 240 days) shall be extended to AEs for benchmarking purposes. The Assessing Officer/TPO is directed to verify invoices and compute interest beyond the agreed invoice credit period. [Paras 21, 22, 25]Interest on delayed receivables is an international transaction requiring separate benchmarking; credit period for computing interest shall be the period agreed in the invoices and those credit periods extended to non-AEs shall be applied to AEs.LIBOR+200 basis points - arm's length price / benchmarking - Appropriate benchmark rate for computing arm's length interest on delayed foreign currency receivables - HELD THAT: - The Tribunal prefers and follows the decisions of the Hon'ble Bombay High Court (PCIT v. Tecnimont (P.) Ltd.) and the Hon'ble Delhi High Court (CIT v. Cotton Naturals) which hold that the market determined interest rate applicable to the currency concerned should be applied. Applying that principle, and having regard to precedent, the Tribunal directs adoption of LIBOR plus 200 basis points as the appropriate rate to compute the notional interest on delayed foreign currency receivables/advances for transfer pricing purposes. [Paras 30, 31]Adopt LIBOR+200 basis points for computing arm's length interest on similar foreign currency receivables/advances.Weighted deduction under section 35(2AB) - clinical trials expenses outside approved R&D facility - Allowability of weighted deduction under section 35(2AB) for (a) expenditure not quantified in DSIR approval and (b) clinical trials expenses incurred outside approved R&D facility - HELD THAT: - For expenditure incurred that was not quantified in the DSIR approval (such as rates, taxes and travelling expenses of research units), the authorities correctly held that such expenditure does not qualify for weighted deduction because it was not approved by the prescribed authority; however, since the expenditure was incurred in relation to scientific research, it is allowable as a 100% deduction. Concerning clinical trials expenses incurred outside the approved R&D facility, the Tribunal follows the Gujarat High Court decision in CIT v. Cadila Healthcare Ltd. and subsequent judicial treatment (including Sun Pharmaceuticals) holding that clinical trials and related regulatory approval expenses, which normally occur outside an approved facility, can qualify for weighted deduction where the prescribed authority's approval covers such expenses. Respectfully following a Coordinate Bench in the assessee's own case, the Tribunal allows weighted deduction for clinical trials expenses insofar as they are approved by the prescribed authority. [Paras 32, 36, 37]Expenditure not quantified in DSIR approval does not qualify for weighted deduction but is allowable as 100% deduction; clinical trials expenses outside approved facilities are eligible for weighted deduction if approved by the prescribed authority.Final Conclusion: Revenue's appeal dismissed; assessee's appeal partly allowed. Adjustments sustained and quantified as directed: corporate guarantee commission limited to 0.50% of amount guaranteed; interest on delayed receivables to be computed beyond invoice credit periods and benchmarked at LIBOR+200 basis points; unapproved R&D expenditures not eligible for weighted deduction but allowable as 100% deduction; clinical trials expenses allowed for weighted deduction where approved by the prescribed authority. Issues Involved:1. Corporate Guarantee Commission2. Interest on Receivables3. Weighted Deduction under Section 35(2AB) of the Income Tax Act, 1961Detailed Analysis:1. Corporate Guarantee CommissionThe 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 ReceivablesThe 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.