ITAT Ahmedabad deletes major TP additions, limits R&D deduction to DSIR approval

The assessee, Zydus Lifesciences Ltd., engaged in manufacture and trading of pharmaceutical products in India and abroad, filed its return for AY 2017-18. The case was assessed under Section 153C read with Sections 144C and 143(3), pursuant to transfer pricing proceedings. The Transfer Pricing Officer proposed multiple upward adjustments aggregating to Rs. 1,09,40,43,324 in respect of corporate guarantees, interest on optionally convertible loans, reimbursement of expenses, and sale of finished goods to associated enterprises in the USA and France.

The Assessing Officer also restricted the assessee’s claim of weighted deduction under Section 35(2AB) for R&D expenditure to the extent approved by DSIR in Form 3CL, resulting in disallowance of Rs. 1,08,36,02,274. After directions from the DRP, the AO passed the final order. Aggrieved, the assessee preferred appeal before the ITAT challenging both the TP adjustments and denial of R&D deductions.

Issue Raised: Whether the transfer pricing adjustments made on corporate guarantee commission, interest on convertible loans, reimbursement of expenses, and sale of goods to overseas AEs were sustainable despite identical issues having been consistently decided in favour of the assessee in earlier years, and whether weighted deduction under Section 35(2AB) could be allowed beyond the quantum approved by DSIR.

Tribunal Noted: The Tribunal held that the TP adjustments relating to corporate guarantee commission, interest on optionally convertible loans, reimbursement of expenses, and sale of finished goods to Zydus USA were squarely covered in favour of the assessee by its own decisions for earlier assessment years. Since the TPO had merely followed earlier orders which already stood deleted by the ITAT, and no distinguishing facts were shown, the adjustments were directed to be deleted. The rejection of certain comparables for Zydus USA was also set aside, with the Tribunal restoring the assessee’s benchmarking approach.

The Tribunal upheld the restriction of deduction to the extent approved by DSIR in Form 3CL, holding that post-amendment, DSIR was empowered to quantify eligible expenditure. However, the AO was directed to allow deduction under Sections 35(1)(i) and 35(1)(iv) for expenditure not approved under Section 35(2AB), in line with DRP directions. The appeal was thus partly allowed for statistical purposes.

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