TaxTMI 
TaxTMI 
2025 (5) TMI 496
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....EZ units. 2. The Learned DRP/TPO erred in law and on facts and circumstances of the case in rejecting the methodology adopted by the assessee consistently year-on-year and denying the range concept benefit for TP analysis. 3. The Learned DRP/TPO erred in law and on facts and circumstances of the case by making an inter-familial comparison of margins for the purpose of determining the Arms' Length price in respect of material transferred from non-SEZ units to SEZ units. 4. The Learned DRP/TPO erred in law by making a restricted interpretation of the OECD guidelines and not appreciating the principles laid out by the OECD. 5. The Learned DRP/TPO erred in law and on facts and circumstances of the case in taking into consideration only the margins of adverse variances instead of the overall profitability of the families or segments of 11.74% (after considering the 3% benefit as provided u/s 92C) which is much higher than the profitability relating to sales to third parties of 10.41%. 6. Without prejudice to the above, the Learned DRP/TPO erred in law in not considering the internal TNMM Workings furnished by the assessee that the operati....
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....t Order (Form 3CL was subsequently received). B) On disallowance of additional depreciation: 1. The Learned AO erred in facts and circumstances of the case in not deleting the disallowance pertaining to additional depreciation amounting to Rs. 27,19,777/- despite directions by the Honourable DRP in this regard allowing the same as eligible expenditure. General 1. Any other ground that may be urged at the time of hearing with the previous approval of the Hon'ble Tribunal." 3. Ground Nos.1 to 8 are regarding TP adjustments made by the TPO/AO in respect of specified domestic transactions. The assessee is in the business of manufacture and sale of API as well as generic pharmaceutical products. The assessee filed its return of income on 28/11/2019 declaring total income of Rs. 1177,63,84,700/- under normal provisions and Rs. 1979,75,97,126/- under MAT provisions. The assessee reported specified domestic transactions entered into between SEZ and non-SEZ Units. Accordingly, the Assessing Officer made reference u/s 92CA(1) of the I.T. Act, 1961 to the TPO for determination of Arms' Length Price (ALP). The details of specified domestic transaction....
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....opriate method and claimed that specified domestic transactions are at arms' length even comparing with external TNNM benchmarking having median operating margin at 20.61% in comparison to the margin of the assessee at 25.21% of non-SEZ Unit. The DRP did not consider the supplementary TP analysis study filed by the assessee and confirmed the adjustment as proposed by the TPO and made in the draft assessment order. 6. Before the Tribunal, the learned AR has submitted that the assessee has provided FAR analysis and business overview of each SEZ Units in the TP study submitted before the TPO. The TPO has himself accepted the FAR analysis but only picket up certain families of the products instead of taking the entire lot of specified domestic transactions for determining the ALP. The TPO has also adopted same economic analysis of comparing the sale of the product from non-SEZ Unit to SEZ Unit and to 3rd party. The only objection of the TPO was against the assessee applied range concept i.e. 35th percentile and 65th percentile. The learned AR has submitted that as per Rule 10CA(4), when the data set consisted of 6 or more comparable items, it is mandatory to apply the range concept ....
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....nit formulation segment which is within the arms' length in comparison to the operating margin of comparable companies operating within the same industry of manufacturing of drugs formulation. 7. The learned DR, on the other hand, submitted that the method adopted by the assessee for benchmarking its specified domestic transactions has given distorted result due to the reason that the assessee has adopted CPM as most appropriate method and compared the same with internal CPM. However, while determining the average price of comparable, the assessee has applied the median by taking 35 percentile and 65 percentile. The learned DR has submitted that the 11 transactions as taken by the assessee for determining the ALP are not of same product but these are 11 separate products of the assessee called as 11 families and therefore, taking 35 and 65 percentile of the margins of the products resulting exclusion of the 70% products in the process of determination of ALP which would represent only 30% of the products. Therefore, the TPO has rightly rejected the methodology applied by the assessee for determining the ALP for benchmarking specified domestic transactions. The learned DR has rel....
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....ts of the search is given in the following paras". 9. Further, for A.Y 2020-21, out of 11 comparable companies selected by the assessee for benchmarking its specified domestic transactions under TNNM, the TPO found 7 comparable companies having passed all the filters applied by the TPO as under: S. No Name of the company Remarks of the TPO 1 Alpha Laboratories Ltd Passed all filters adopted by TPO 2 Lincoln Pharmaceuticals Ltd Passed all filters adopted by TPO 3 Bliss GVS Pharma Ltd Passed all filters adopted by TPO 4 Gland Pharma Ltd Passed all filters adopted by TPO 5 Caplin Point Laboratories Ltd Passed all filters adopted by TPO 6 Natco Pharma Ltd Passed all filters adopted by TPO 7 Concord Biotech Ltd Passed all filters adopted by TPO 10. However, in the final set of comparables, the TPO has taken only 2 companies from the set of 7 as accepted having passed all the filters and then added 2 more companies while determining the ALP for the said A.Y without going into the comparability of the companies selected by the TPO as well as rejection of the 5 of the companies which were considered as passed all....
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....estricted the claim of weighted deduction u/s 35(2AB) only to the extent of the expenditure incurred for in house R&D facility and denied the claim in respect of the expenditure incurred on clinical drug trials outside the inhouse facility. The details of the expenditure incurred by the assessee on R&D are given in para 5.2 of the assessment order, held as under: Nature of expense Total expenses incurred (in Rs. ) Weighted Deduction @ 150% (in Rs. ) Weighted deduction @ 100% in (Rs.) Total deduction claimed (in Rs. ) Revenue expenses in house 3,69,59,95,521 5,48,39,93,282 - 5,48,39,93,282 Revenue 1,88,42,15,484 -0 - 1,88,42,15,484 Expenses - inhouse - - 1,88,42,15,484 - Revenue Expenses Clinical Expenses 1,05,18,47,348 1,57,77,71,022 - 1,57,77,71,022 Capital Expenses building and vehicles 3,23,23,418 3,23,23,418 3,23,23,418 Capital Expenses - others 56,34,60,622 84,51,90,933 - 84,51,90,933 Total 7,18,78,42,393 7,90,69,55,237 1,91,65,38,902 9,82,34,94,139 14. The deduction was restricted by the Assessing Officer in Para 5.4.4 and 5.1.5 as under: ....
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.... and are required to be conducted outside the approved facility and, therefore, the restrictive meaning suggested by the Revenue to the expenses mentioned in the explanation to the section such as a clinical drug trials and obtaining approvals from the regulatory authorities, which normally happens outside the approved R&D facility, make the explanation meaningless. 34. Learned DR submitted that this decision of the Hon'ble Gujarat High Court has not attained the finality because the Hon'ble Apex Court remanded the case to the file of the Hon'ble Gujarat High Court and therefore, the matter was sub judice before the Hon'ble High Court and that is the reason why the lower authorities are not following the decision rendered by the Tribunal in the earlier assessment years. 35. In reply, learned AR submitted that as could be seen from the order of the Hon'ble Supreme Court in special leave petition to appeal (C) No. 770/2015, dated 13/10/2015 the grievance of the Revenue was with reference to non-framing of certain questions, it was considered by the Hon'ble Apex Court and held that such questions were substantial questions of law, and thereupo....
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.... Ltd 88 ITR 192 (SC) 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." 16. We further note that the facts are identical for the year under consideration wherein the DSIR has approved the R&D facility and vide report dated 20/01/2023 given the details of R&D expenditure in Para-B of the said report as under: 5. Details of expenditure: (Rs. in lakhs) Assessment Years- 2019-2020 2020-2021 Land & Building 22.99 Capital Exp. (excl. Land & Building) 5626.95 1963.77 Revenue Exp. (excl. Land & Building) 36518.40 36799.54 Net R&D expenditure eligible for deduction U/s 35(2AB) of IT Act, 1961 42145.35 38763.31 Clinical Trials expenses conducted outside the approved R&D facilities not included in the above expenses 10518.18 12795.48 17. Accordingly, when the i....