2024 (8) TMI 423 - AT - Income Tax

Corporate guarantee treated as international transaction requiring 0.50% commission benchmarking under transfer pricing rules

ITAT Hyderabad ruled on transfer pricing and deduction issues. Following Redington India Ltd., corporate guarantee was held to be an international ... TP Adjustment - Corporate guarantee - international transaction or not? - HELD THAT:- As in view of the decision of Redington (India) Ltd. [2020 (12) TMI 516 - MADRAS HIGH COURT] we have no second thought, and this decision is applicable to the facts of the case. No further debate by the Tribunal is permissible, when the higher forum decided the issue. Corporate guarantee is an international transaction, requiring benchmarking. 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. Interest on receivables - AR argued that this particulars transaction is not covered in the definition of international transaction as defined under section 92B - HELD THAT:- 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. Ends of justice would be met by accepting the interest rate on similar foreign currency receivables/advances as LIBOR+200 points. We direct AO / TPO to adopt the same. Grounds are partly allowed accordingly. Weighted Deduction u/s 35(2AB) - weighted deduction claimed in respect of the expenditure incurred on the expenditure not quantified in the expenditure approved by the DSIR reflected in part B of form 3CL, and on clinical trials - HELD THAT:- Both the authorities held that for claiming weighted deduction, such an expenditure must have been approved by the prescribed authority and that no exceptions to this rule are provided in the Act. Though such an expenditure was incurred in relation to the scientific research and development, the requirement of approval by the prescribed authority is not fulfilled in this case and therefore, it is not qualified for weighted deduction, but at the same time since there is no dispute as to the incurring of such expenditure by the assessee, the said expenditure is qualified for hundred percent deduction. To the extent we approve the view taken in the impugned order. 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 under section 35(2AB) of the Act. Respectfully following the same 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 ActDetailed Analysis:1. Corporate Guarantee Commission:The assessee contended that the corporate guarantee provided to its subsidiaries should not be considered an international transaction requiring benchmarking, as it is a shareholder activity. The learned TPO disagreed and suggested an upward adjustment at 2%, which was reduced to 0.53% by the learned CIT(A) based on previous Tribunal decisions. The assessee argued that the 0.53% rate was excessive and should be 0.50%. The Revenue challenged the 0.53% rate as being incorrect. The Tribunal, referencing various decisions, including the assessee's own case for the assessment year 2018-19, concluded that the ALP for the corporate guarantee should be 0.50%. The Tribunal directed the learned Assessing Officer/learned TPO to adopt a 0.50% rate on the guaranteed amount.2. Interest on Receivables:The assessee argued that interest on receivables should not be considered an international transaction requiring separate benchmarking. The learned TPO and CIT(A) disagreed, citing the post-2012 amendment to Section 92B of the Act, which includes delayed trade receivables as international transactions requiring interest adjustments. The Tribunal upheld this view, referencing decisions from the Delhi High Court and various Tribunal benches. The Tribunal also agreed with the CIT(A) that the credit period should be as per the invoices rather than an ad hoc 90-day period. Regarding the interest rate, the Tribunal followed judicial precedents, including decisions from the Bombay and Delhi High Courts, and directed the interest rate to be LIBOR + 200 basis points.3. Weighted Deduction under Section 35(2AB):The issue concerned the weighted deduction for expenditures not quantified by the DSIR and for clinical trials. Both authorities agreed that expenditures not quantified by the DSIR do not qualify for weighted deduction but are eligible for a 100% deduction. For clinical trials, the Tribunal referenced the Gujarat High Court's decision in Cadila Healthcare Ltd., which held that clinical trials conducted outside approved facilities are eligible for weighted deduction. The Tribunal noted that this decision has not been overturned by the Supreme Court and has been followed in subsequent cases. Therefore, the Tribunal allowed the weighted deduction for clinical trial expenses.Conclusion:The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, directing specific adjustments and deductions as detailed above. The order was pronounced in open court on July 23, 2024.