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 transaction requiring benchmarking at 0.50% commission. For interest on receivables, credit period extended to non-associated enterprises must also apply to associated enterprises, with interest rate set at LIBOR+200 points. Regarding weighted deduction under section 35(2AB), expenditure on clinical trials qualified for weighted deduction when approved by prescribed authority, following Cadila Healthcare Ltd. precedent, though unapproved R&D expenses received only 100% deduction.

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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

Detailed 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.

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