TaxTMI 
TaxTMI 
2026 (2) TMI 307
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....per Section 92CA(3A) read with Section 153(4) of the Act, thereby making the TP Order barred by limitation and invalid in law. 2. That the learned AO/TPO/Dispute Resolution Panel (DRP") has erred in law and on facts in making an addition of Rs 8,54,24,075/ on account of Corporate Guarantee Charges 3. That the learned AO/TPO/DRP has erred in law and on facts in making addition of Rs 2,65,51,520/- on account of interest Imputation on Optionally Convertible Loans advanced to Zydus International Pvt. Ltd. 4. That the learned AO/TPO/DRP has erred in law and on facts in making addition of Rs. 7,61,41,741/- on account of Reimbursement of Expenses to Zydus France SAS (Zydus France') and Zydus Healthcare SA (Pty) Ltd. 5. That the learned AO/TPO/DRP has erred in law and on facts in making an addition of Rs. 72.78,05,930/- on account of sale of finished products to Zydus Pharmaceuticals USA Inc (Zydus USA') Further, the learned AO/TPO/DRP has erred in law and on facts in not providing the benefit of +/- 3 percent variation as per second proviso to section 92C(2) of the Act. 6. That the learned AO / TPO / DRP has erred in law and on facts in....
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....,73,40,000/- 11. That the learned Assessing Officer erred in law and on facts in allowing short credit for TDS and TCS of Rs 9,02,68,127/- in the tax computation even though duly granted under an intimation processed u/s 143(1) by the CPC. 12. That the learned Assessing Officer erred in law and on facts in not allowing credit for relief claimed u/s 90 of Rs. 37,46,819/-. 13. That the learned Assessing Officer erred in law and on facts in inadvertently adjusting total amount of refund issued u/s. 143(1) amounting to Rs 33,98,42,871/- (including interest u/s 244A of Rs 3.64.11.732), instead of the only adjustment required to the extent of the tax refund amount of Rs 30,34,31,139/-. 14. That the learned Assessing Officer erred in law and on facts in mechanically initiating Penalty Proceedings u/s 270A of the I.T. Act in respect of each of the additions made in the assessment order u/s 143(3), on the ground that the Appellant has under reported its income for A.Y. 2017-18. 15. That the learned TPO erred in law and on facts in levying Penalty u/s 271G of the I.T. Act in respect to the international transaction of sale of finished goods by the....
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....lowing which the AO passed order making addition u/s 92CA(3) of the Act to Rs.92,57,65,000/- and u/s 35(2AB) of the Act to Rs.108,36,02,274/-. 5. Aggrieved by the same, the assessee has come up in appeal before us. 6. Ground No.1 was stated to be not pressed before us by the Ld. Counsel for the assessee. The same is, therefore, dismissed as not pressed. 7. Ground No.2 relates to transfer pricing adjustment made to the international transaction of corporate guarantee commission earned by the assessee amounting to Rs.8,54,24,075/-. 8. At the outset, Ld. Counsel for the assessee stated that this was a legacy issue which had arisen in the case of the assessee in the earlier years also and had repeatedly been decided in favour of the assessee by the ITAT. He contended that the adjustment on account of the impugned international transaction was made by the TPO based on his findings in the preceding years in the case of the assessee and the ITAT in all the preceding years had deleted the adjustment made by the TPO. 9. Drawing our attention to the facts of the case, Ld. Counsel for the assessee drew our attention to Page No.4 of the TPO's order pointing out the corporate gua....
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....ance (SAS) 11,45,163 Zyclus Pharmaceuticals (USA) Inc. 12,69,18,816 Zydus Healthcare S.A. (Pty) Limited 34,20,932 Zydus Noveltech Inc 1,71,10,811 Zydus Pharmaceuticals Mexico, S. A. de C. V., Mexico 4,50,700 Alidac Healthcare (Myanmar) Limited 15,51,101 Zydus International Private Limited 11,67,356 Total 17,08,48,149 ALP 43,05,37,335 Adjustment Amount 25,96,89,186 10. The DRP, it was pointed out, directed the restriction of the ALP of corporate guarantee commission to 1.5%, following the decision of the Hon'ble Bombay High court in the case of Everest Kanto and the case of Glenmark Pharmaceuticals Ltd.in ITA No.5031/Mumbai/2012 dated 13-11-2013 as affirmed by the Hon'ble High court. 11. Ld. Counsel for the assessee, thereafter, pointed out that the ITAT in the case of the assessee for A.Y.2015-16 had dealt with an identical issue and noting that identical adjustment made in the case of the assessee in A.Y. 2014-15 had been deleted by the ITAT, the adjustment made in A.Y. 2015-16 was also deleted. He drew our attention to para 4 to 11 of the order of the ITAT placed before us in paper book page nos. 111 to 117, more part....
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....study report, the assessee was noted to have benchmarked the interest on the said loans by following "Other Method" as the Most Appropriate Method (MAM). The assessee had claimed these transactions to have not given rise to any taxable income and that they had been identified as international transaction as a matter of abundant caution. Accordingly, the transactions had been claimed as to be at Arm's Length. The TPO however noted that in the orders passed in the case of the assessee from A.Ys. 2012-13 to 2016-17 onwards, the transaction was benchmarked at contractual rate applicable to the said loan by adopting the appropriate US LIBOR/EU LIBOR rates and after giving due opportunity of hearing to the assessee and adopting the same methodology as was adopted in the preceding years in case of the assessee, upward adjustment on account of interest on convertible loans was made amounting in all to Rs.2,65,51,520/-. The DRP, it was pointed out, dismissed the objection of the assessee in this regard following its directions in the preceding years in the case of the assessee. The DRP noted the issue to have been adjudicated in favour of the assessee by the ITAT in preceding years but find....
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....transactions to have been undertaken to ensure that business interest of the assessee is protected in those countries where the AEs distributed products and also to ensure that no intangibles are created in those countries. Thus, it was claimed by the assessee that the actual costs incurred by the AEs had been reimbursed without any mark up and these transactions were considered at arm's length. The TPO, however, held the arm's length price of these international transactions to be made following the order passed in the earlier years in the case of the assessee. His findings in this regard, Ld. counsel for the assessee pointed out, are contained at Para 8.3 to 8.3.5 of his order. Ld. Counsel for the assessee, thereafter, pointed out that identical adjustment made in the case of the assessee in A.Y. 2015-16 was deleted by the ITAT and he drew our attention to the findings of the ITAT in this regard at para 18 to 22 of the order placed at paper book page nos. 120 to 125 as under: "18. Ground No.1(c) (supra) relates to TP adjustment made to the income of the assessee on account of alleged reimbursement of expenses to its AE. This issue was also stated to be covered in....
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....asis to these overseas associated enterprises. With respect to reimbursements made to Zydus Mexico, the assessee's contention is that Zydus Mexico had incurred certain expenses related to clinical research and product registration for assessee's products. The assessee's contention is that the reimbursements have been made by the assessee for the products wherein the assessee is the IP owner and plays the role of entrepreneur whereas Zydus Mexico is only a distributor entity. With respect to reimbursement of expenses to Zydus France, the assessee submission was that the expenses have been reimbursed to Zydus France only for those matters where the assessee is acting as an entrepreneur (while the assessee admitted that for some products, he also acted as a contract manufacturer, but the assessee submitted that no reimbursements were made by the assessee to Zydus France in respect of the same). During the year, Zydus France had incurred certain expenses related to product submission and regulatory fees, control and testing fees, leaflet replacement cost and production sample cost for assessee's products. These costs have been reimbursed by the assessee to Zydus France ....
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....rest outside of India. He further drew our attention to the Transfer Pricing Study Report at pages 48 and 49 of the paper book to reiterate that the assessee is acting as an entrepreneur/IP owner and Zydus Mexico is acting as its distributor. He further drew attention to pages 593 to 613 of the paper book by giving necessary supporting for expenses reimbursed to Zydus Mexico for clinical research and product registration. The assessee further submitted that similar expenses were reimbursed by the assessee to Zydus USA, who is acting as a limited risk distributor for the assessee. The assessee obtained a favourable order of ITAT for assessment year 2012-13 (copy annexed at pages 166 to 168 of paper book) in respect of these reimbursements made by the assessee to Zydus USA. With respect to payments made to Zydus France, the counsel for the assessee submitted that the fact that the assessee is acting as an entrepreneur/IP owner and Zydus France is acting as its low risk distributor (LRD) is evident from the transfer pricing report at pages 48-49 of the paper book. He drew attention to the supply and distribution agreement at pages 491-498 of the paper book to reiterate that the assess....
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.... cost basis. We further note that the assessee for assessment year 2012-13 and assessment year 2013-14 had reimbursed similar expenses towards associated Enterprise in USA and the TPO had determined the arm's-length price at "Nil". In this respect, the key findings of the ITAT are reproduced below for reference. "23. We find that the TPO has, in essence, proceeded to make disallowance under section 37(1) by holding that there was no commercial expediency in making these reimbursements. That is certainly travelling beyond the domain of his powers under the scheme of the Act. The TPO only has to ascertain arm's length price of a transaction in the sense that if the same transaction was to be incurred between unrelated parties as to what would theoretically have been an arm's length price of the transaction in question, and that exercise is to be carried out on the basis of a permissible method of ascertaining arm's length price of a transaction. Whether the transaction should have taken place or not is not any of the TPO's business. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enter....
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....g the patents and the ANDAs- the assessee or the US AE, because, at the end of the day, the beneficiary is only the assessee company. Yet, the TPO has held the legal expenses to be not at an arm's length price only because the ANDA in question was held by the US AE. Whosever owns the IPRs in question, it is related only for the business of the assessee company and not the US AE. The approach adopted by the TPO is erroneous for this reason also. Similar is the position with respect to stability charges and analytical charges. The TPO has held that there is nothing to show that these expenses were for the purpose of business of the assessee, but then there is no dispute that these expenses pertains to the products owned by the company and in respect of which US AE is only an LRD. The expenses in question were thus clearly for the purpose of the business of the assessee, and deserved to be allowed in full. The TPO should not have ventured into the job of the AO, but that technicality apart, even on merits, entire related expenses, which have been wrongly disallowed by making an ALPsomething clearly contrary to the scheme of the Act, these expenses were fully admissible for deducti....
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....sonably demonstrated through documents that the expenses were incurred in respect of the assessee's business interest in the overseas jurisdiction and further noting that similar expenses reimbursed by AEs in Asst.Year 2012-13 and 2013-14 had been held to be at arm's length by the ITAT in its order passed for the said year. Since no distinguishing facts have been pointed out by the ld.DR from the facts of the preceding years, the decision rendered by the ITAT in Asst.Year 2014-15 will apply to the impugned year also, following which, we direct deletion of the adjustment made to the transaction of reimbursement of the expenses by AE to the assessee. Ground No.1(c) of the assessee is, accordingly, allowed." 24. Ld.DR was unable to draw our attention to any distinguishing facts from the preceding year and he fairly agreed that the TPO while making the impugned adjustment had followed his orders in the preceding years in the case of the assessee, which stood deleted by the ITAT. 25. In view of the same, we see no reason to confirm the addition made to the income of the assessee on account of adjustment/ upward adjustment made to the international transaction of reimburse....
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....nbsp; Sales 405.01 405.01 Expenditures Cost of Goods Sold (Transaction value to be benchmarked 368.62 379.85 11.23 Direct Costs 6.88 6.688 Common Costs 11.41 11.41 Depreciation 0.39 0.39 Total Operating Profit 387.3 398.53 Net Operating Profit 17.71 6.48 OM% 4.37 1.60 Amount of Adjustment USD (Million) 11.23 Exchange rate on 31st March 2017 64.81 Amount of Adjustment in INR 72,78,05,930 30. In Ground No. 5 raised before us, Ld. Counsel for the assessee contended, that the adjustment made has been challenged on the ground that it is within the benefit of plus minus 3% as provided in Rule 10CA of the Income Tax Rules, 1962. The contention of the Ld. Counsel for the assessee was that the TPO had worked out the weighted average of the operating margins of the comparables at 1.82% and applying the same while computing the arm's length price of the international transaction in the present case the adjustment made would fall within the accepted variation of 3%. In this regard, he....
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....ETO CORP, and PATTERSON COMPANIES INC. His arguments, in brief, were to the effect that the reasons for rejection by the TPO were all incorrect and they had been rightly selected as comparable by the assessee company. He contended that all the three companies were rejected by the TPO finding them to be not functionally comparable and to be having wider geographical or expanded territorial jurisdiction. 34. With respect to SCHEIN (HENRY) INC, Ld.Counsel for the assessee pointed out that it was noted to be engaged by the TPO in two segments healthcare distribution and technology and value added services and having operations all over the world. With respect to Aceto Corp also the company was found to be dealing in different and diversified product categories in the field of performance chemicals, such as, antioxidants, photo initiators, catalyst as well as in photo tooling of printed circuit boards and to have its operations in United States Europe and Asia territory. With respect to Patterson and company, it was found that the said company was engaged in the distribution of dental veterinary and rehabilitation supplies. The tested company selected for determination of ALP, was ho....
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.... find merit in the argument of the Learned Counsel for the assessee. The Learned Counsel for the assessee has agitated the rejection of three comparables selected by it while benchmarking its international transaction of sale made to its Associate Enterprise Zydus USA. The three entities rejected by the TPO are SCHEIN Henry Inc, ACETO Corp and Patterson Companies Inc. 38. Undoubtedly, these three entities have been found to be functionally not comparable, since, they have been noted by the TPO to have been dealing in products other than that in which the tested entity of the assessee company, ZYDUS USA, dealt with i.e. pharmaceutical products and they were also found to be operating in a wider territorial jurisdiction while the tested entity operated only in the jurisdiction of USA. The Learned Counsel for the assessee has pointed out that it had submitted segmental results of the pharmaceutical division of all the three entities to the TPO. This fact has not been controverted by the Learned DR. Learned Counsel for the assessee has demonstrated the same from relevant pages of the paper book reflecting the segmental results of these three entities, which was furnished to the TP. ....
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....he tested party and directed that the adjustment be made to impugned International transaction to the tune of Rs.98,41,734/-. Aggrieved by the aforesaid adjustment made to the International transaction of sale of finished goods to Zydus France, the assessee has raised ground no.7 and 8 before us. 42. We have heard both the parties. Undoubtedly, the adjustment to the International Transaction of sale of finished goods to Zydus France has been made by rejecting in all 8 comparables selected by the assessee in its benchmarking exercise. The facts on record show that that the assessee had benchmarked its transaction selecting 23 comparables companies, out of which four were rejected by the TPO and further four were rejected by the DRP. The four comparables rejected by the TPO were on account of the fact that the result for the Financial Year ending December 2016 had not been provided in case of the 3 companies and in one company the result for FY ending 2015 had not been provided. 43. One of the arguments of the Ld. Counsel for the assessee before us was that it was pointed that as per Rule 10CA of Income Tax Rules, 3 years data of each comparable company was to be taken for the ....
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.... relates to AY 2017-18 and pertains to unavailability of financial data of FY 2016 surely, the same must very well be available now in 2025. The assessee is directed to produce the data to the TPO for determining the arm's length price of the transaction and for this limited purpose, the issue is restored back to the TPO to take into consideration the missing data of the four comparables noted by the TPO and thereafter, determine the arm's length price of the international transaction of the sale of goods to Zydus France. 45. With respect to 4 comparables rejected by the DRP, it was pointed out that the same were rejected for the reason that DRP found was to be functionally non comparable with the tested party i.e Zydus France. While Zydus France was noted to be a wholesale distributor of the assessee products, the four comparables found to be rejected by the DRP were found to be operating for the retail segment. The argument of the Ld. Counsel for the assessee was that the tested party i.e Zydus France was operating both for the retail and wholesale segment and for the purposes of TNMM, which method was adopted as most appropriate method for benchmarking the transaction, a broa....
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....independent company. Noting so the DRP rejected benchmarking exercise of the international transaction of sale of finished goods to Zydus France based on DIANE data base. The Ld.Counsel for the assessee, before us, was unable to controvert the factual findings of the DRP that the search on the DIANE data base for comparable companies related to calendar year 2012 to 2014 only. The impugned year before us is AY 201718, therefore no comparables for the impugned year or the immediately preceding year was done on the DIANE data base which is the requirement for 10CA of the Rules. Therefore, we do not find any infirmity in the order of the DRP rejecting the assessee's search of comparables on the DIANE data base. This argument of the Ld. Counsel for the assessee is also rejected. 50. In view of the above grounds nos. 7 and 8 raised by the assessee relating to the issue of adjustment made to the international transaction of sale of finished goods to Zydus France is partly allowed for statistical purposes. 51. Ground Nos. 9 & 10 raised by the assessee relate to the issue of weighted deduction claimed by the assessee of Research & Development expenditure incurred by it in terms of th....
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.... competent authority only to approve the R&D facility and that the competent authority was not empowered to approve the quantum of eligible deduction. That subsequent to the amendment, the competent authority was to approve the quantum of expenditure on R&D eligible for deduction. Both the parties agreed that there were decisions of the ITAT holding so with respect to the position of law prior to the amendment to the Section alongwith the Rules. With regard to the decisions with respect to the position of law prior to the amendment in the Section to the effect that the competent authority i.e. DSIR was not empowered to approve the quantum of expenditure our attention was drawn to the following decision: Pharmanza Herbal (P) Ltd. Vs DCIT (2023) 155 taxmann.com 56(Ahd Trib) 54. With respect to the position of law post amendment holding that DSIR was entitled and empowered to approve the quantum of deduction, Ld.DR drew our attention was drawn to the following decisions: * Ashok Leyland Ltd. Vs ACIT (2025) 172 taxmann.com 42 (Chennai-Trib) * Mahle Behr India (P) Ltd.vs DCIT (2025) 171 taxmann.com 96 (Pune-Trib) * Britannia Industries Ltd.vs DCIT (2024)....
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.... ^43[(b) The prescribed authority shall furnish electronically its report,- (i) in relation to the approval of in-house research and development facility in Part A of Form No. 3CL; (ii) quantifying the expenditure incurred on in-house research and development facility by the company during the previous year and eligible for weighted deduction under sub-section (2AB) of section 35 of the Act in Part B of Form No. 3CL;" 58. The argument of the Ld. Counsel for the assessee before us is that the authority sought to be granted to the DSIR merely by an amendment to the Rule was not in consonance with the scope of the amended provisions of the Section 35(2AB) of the Act as made effective from A.Y.2016-17 and applicable to the impugned year before us. 59. The argument in effect of the Ld.Counsel for the assessee is with respect to the vires of the Rules. Determining the validity of Rules we may respectfully state, is beyond the scope of the powers of the ITAT. 60. Be that so we find no merit in the contention of the Ld.Counsel for the assessee that the amendment to the Rules was not in consonance with the scope of the amended provision of section 35(2AB) of the A....
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....y agreed that the AO had followed the directions of the DRP as above. 64. In view of the same the AO is directed to consider the claim of the assessee to deduction u/s 35(1)(i) & 35(1)(iv) of the Act as directed by the DRP. 65. The Ld.Counsel for the assessee has also raised a contention that weighted deduction be allowed on Clinical Trials and Bioequivalence study amounting to Rs.3,73,40,000/-. His contention is that the jurisdictional High court has held such expenses to be eligible to weighted deduction in the case of the assessee in preceding years. 66. Since, we have held that the assessee is entitled to weighted deduction only to the extent approved by DSIR in Form 3CL, as per law, this argument of the assessee merits no consideration. Even otherwise it has not been demonstrated before us that the expenses not approved by DSIR were in relation to that stated by the assessee, i.e clinical trials & Bio equivalence. Therefore, this contention of the assessee is also rejected. 67. Ground No.9 & 10 raised by the assessee are therefore partly allowed for statistical purposes. 68. In the result, appeal filed by the assessee is partly allowed for statistical purposes. ....