2024 (7) TMI 1372 - AT - Income Tax

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

Aurobindo Pharma Ltd Hyderabad Versus A.C.I.T Central Circle 1 (2), Hyderabad And (Vice-Versa)

The ITAT Hyderabad ruled on multiple transfer pricing and deduction issues. For corporate guarantee commission, the tribunal adopted 0.50% on guaranteed ... TP Adjustment - Corporate Guarantee commission - HELD THAT:- Coordinate Bench of this Tribunal in assessee’s own case for the assessment year 2018-19 [2023 (4) TMI 1254 - ITAT HYDERABAD] considered this issue in extenso and held that ALP on account of corporate guarantee at the 0.50% on the amount guaranteed is proper commission. We direct AO/TPO to adopt the same at 0.50% on the guaranteed amount. Relevant grounds are answered accordingly. Interest on receivables - We are of the considered opinion that when the assessee is extending the credit period between 60 days and 240 days to the non-AEs, and basing on this the learned DRP in the assessment year 2018-19 took a view that the credit period as agreed between the parties shall be respected and followed and such a finding of the learned DRP has become final without the Revenue challenging the same, the credit period which is extended to the non-AEs by the assessee shall be extended to the AEs also. On this reasoning we do not find any illegality or irregularity in the findings returned by the CIT(A) that the interest shall be record beyond the credit period as agreed between the parties. Rate of interest - We are of the considered opinion that the ends of justice would be met by accepting the interest rate on similar foreign currency receivables/advances as LIBOR+200 points. We direct the AO / TPO to adopt the same. Grounds are partly allowed accordingly. Disallowance of weighted deduction claimed u/s 35(2AB) - HELD THAT:- The issue has clearly been covered by the decision of Cadila healthcare Ltd [2013 (3) TMI 539 - GUJARAT HIGH COURT] referred to and followed in the case of M/s Sun Pharmaceuticals Industries Limited [2020 (3) TMI 345 - GUJARAT HIGH COURT] A coordinate Bench of this Tribunal in assessee’s own case for the assessment year 2018-19 having noticed the judicial review on this aspect, including the argument advanced in that case, and basing on CIT vs. Vegetable Products Ltd [1973 (1) TMI 1 - SUPREME COURT] reached a conclusion that when once the clinical trial expenses incurred outside the approved R&D facilities, were approved by the prescribed authority the assessee is entitled to claim deduction u/s 35(2AB) of the Act. We hold the issue in favour of the assessee and allow weighted deduction in respect of the expenses incurred on clinical trials. 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.