The Ahmedabad Bench “D” of the Income Tax Appellate Tribunal (ITAT) on 15 May granted substantial relief to Cadila Pharmaceuticals Ltd. in a batch of cross-appeals concerning transfer pricing adjustments and weighted scientific research deductions for AY 2013-14. A Bench comprising Accountant Member Smt. Annapurna Gupta and Judicial Member Shri Siddhartha Nautiyal deleted major additions made by the Transfer Pricing Officer (TPO) on Advertisement, Marketing and Promotion (AMP) expenses and reduced the adjustment on corporate guarantees extended to foreign subsidiaries.

The dispute arose after the Transfer Pricing Officer treated domestic AMP expenditure incurred by Cadila Pharmaceuticals as an international transaction allegedly benefiting its Associated Enterprises (AEs). Applying the Bright Line Test, the TPO proposed a substantial transfer pricing adjustment. The TPO also determined a 6% arm’s length commission on corporate guarantees issued by the assessee in favour of its overseas subsidiaries and further made adjustments relating to outstanding receivables from AEs.

On the corporate tax side, the Assessing Officer restricted the weighted deduction claimed under Section 35(2AB) of the Income-tax Act, 1961 on scientific research expenditure. The disallowance was made on the ground that certain expenditure figures were not specifically reflected in Form 3CL issued by the Department of Scientific and Industrial Research (DSIR).

Before the Tribunal, Cadila Pharmaceuticals contended that there was no agreement or arrangement with its foreign AEs requiring AMP expenditure sharing and therefore domestic marketing expenses could not be characterised as an international transaction. It was further argued that once the DSIR-approved facility was recognised, the deduction under Section 35(2AB) could not be curtailed merely because of variations in figures reflected in Form 3CL.

The Tribunal observed that AMP expenses incurred for domestic business operations cannot automatically be treated as an international transaction in the absence of any arrangement or understanding with Associated Enterprises for brand promotion or cost sharing.

The ITAT deleted the AMP adjustment and held that the Bright Line Test could not be mechanically applied in such circumstances. On the issue of corporate guarantees, the Bench rejected the 6% adjustment adopted by the TPO and directed that the arm’s length commission rate be restricted to 0.5%, following settled judicial precedents. The Court held that:

The Bench further held that once an R&D facility is approved by the DSIR, the weighted deduction under Section 35(2AB) cannot be denied merely because certain expenditure figures vary from the amounts reflected in Form 3CL, so long as the expenses are otherwise verifiable from the books of account.

Thus, the Tribunal dismissed the Revenue’s appeal and partly allowed the assessee’s appeal by deleting key transfer pricing additions and restoring the weighted deduction claimed on scientific research expenditure.