Aurobindo Pharma Ltd., a notable entity in the manufacture and sale of bulk drugs and Active Pharmaceutical Ingredients (APIs), filed its income return for the 2017-18 assessment year on November 28, 2017. Subsequently, the Transfer Pricing Officer (TPO) recommended upward adjustments concerning international transactions of corporate guarantee fees and interest on receivables, which the appellant did not contest initially. However, the resulting order by the Assessing Officer was subsequently challenged by Aurobindo Pharma, leading to an appeal by both the appellant and the Revenue before the Appellate Tribunal.
The Tribunal identified three pivotal issues in the appeal:
- Corporate Guarantee Commission
- Interest on Receivables
- Disallowance of Weighted Deduction under Section 35(2AB) of the Income Tax Act, 1961
Corporate Guarantee Commission: A Contentious Subject
Aurobindo Pharma argued that corporate guarantees do not constitute international transactions requiring benchmarking, classifying them as shareholder activities. The TPO dismissed this contention, levying a 2% charge on corporate guarantees exceeding Rs. 10 crores, a stance upheld by the Commissioner of Income Tax (Appeals). The appellant maintained that these guarantees, provided as part of parental obligations to subsidiaries, should not incur such high fees. They argued that the 0.53% commission rate was excessive, advocating for a 0.50% rate instead.
Conversely, the Revenue countered that the transaction involving corporate guarantees bore no costs to the assessee, and thus did not qualify as an international transaction under section 92B of the Act. They proposed a lower Arm’s Length Price (ALP) of 0.25% for corporate guarantee fees, referencing SEBI’s 0.20% charge for guarantees.
The Tribunal, reflecting on a precedent in Aurobindo Pharma’s own case from the 2018-19 assessment year, concluded that a 0.50% ALP on corporate guarantees was appropriate, directing the Assessing Officer/TPO to adopt this rate.
Interest on Receivables: Establishing a Precedent
The second issue mirrored the first in terms of stances taken by the appellant and the Revenue. The TPO used the SBI short-term deposit rate as the Comparable Uncontrolled Price (CUP) to determine the ALP for interest on overdue receivables. Post-amendment to section 92B by Finance Act, 2012, any delay in trade debt realization warranted a transfer pricing adjustment for uncharged interest. The Commissioner of Income Tax (Appeals) instructed the TPO to apply the SBI short-term deposit rates beyond the invoice-stipulated period.
The Revenue, citing a Delhi High Court judgment, affirmed that delays in credit realization necessitated benchmarking the arm’s length price of the interest on overdue receivables, with a proposed rate of 6% being deemed reasonable.
Aurobindo Pharma contended for an invoice-specified credit period rather than an arbitrary 90-day period, a stance upheld by the Commissioner of Income Tax (Appeals), who directed the Assessing Officer to verify invoices for accurate interest computation.
The Tribunal drew upon a Mumbai Bench decision, asserting that credit periods for non-AEs should extend to AEs, negating any additions for interest adjustments when credit periods varied up to 352 days for non-AEs. They determined that interest should accrue only beyond the agreed credit periods, aligning with established judicial precedents.
Disallowance of Weighted Deduction: A Nuanced Perspective
Aurobindo Pharma’s claim for weighted deduction on certain expenditures under section 35(2AB) was partially disallowed as these expenditures were not quantified by the DSIR in the approval reflected in Form 3CL, specifically regarding clinical trials. The Tribunal noted that unapproved expenditures, though related to scientific research, did not qualify for weighted deduction but were eligible for a 100% deduction.
Referencing a Gujarat High Court judgment, the Tribunal acknowledged that clinical trials might occur outside approved facilities, contradicting the Revenue’s restrictive interpretation. The Gujarat High Court emphasized that clinical drug trials and obtaining regulatory approvals, often conducted outside R&D facilities, should not be excluded from deductions.
Conclusion
The Tribunal partially upheld Aurobindo Pharma’s appeal while dismissing the Revenue’s appeal. This case underscores the complexities of transfer pricing adjustments and the intricate balance between statutory provisions and judicial precedents in determining corporate tax liabilities.
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