Aurobindo Pharma Limited, Hyderabad V. ACIT, Central Circle-1(2), Hyderabad

ITA 485/Hyd/2022

AI Insights

The case involves Aurobindo Pharma Limited appealing against the assessment order by the Assistant Commissioner of Income Tax, which included adjustments for corporate guarantee commissions and disallowed weighted deductions on R&D expenditures. The Tribunal examined whether the corporate guarantees and the interest on receivables constituted international transactions and whether the expenditures were eligible for weighted deductions under Section 35(2AB) of the Income Tax Act. The Tribunal found that the corporate guarantees were international transactions and adjusted the commission to 0.5%. It also allowed the deductions for clinical trials and other R&D expenditures, emphasizing that such expenditures are integral to the company's R&D activities and should be eligible for deductions irrespective of the location of the trials.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 133155 (ITAT-HYDERABAD)
• Duration Of Justice: 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-04-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: DB-A
• Next Hearing Date: 11-04-2023
• Assessment Year: 2018-2019
• Appeal Filed On: 22-09-2022
• Other Referred Cases: DCIT vs. CCL Products (India) (P.) Ltd., M/s. Vivimed Labs Limited vs. ACIT, DCIT vs. Lanco Infratech Ltd, Videocon Industries Ltd Vs DCIT, Hindalco Industries Ltd. v, Addl. CIT, Manugraph India Ltd. v. Dy. CIT, Godrej Consumer Products Ltd. v. Asst. CIT, CIT vs. Cadila Health Care Ltd, PCIT vs. Sun Pharmaceuticals Industries Ltd, State of Andhra Pradesh Vs. Commercial Tax Officer, Mylan Laboratory vs. ACIT, CIT vs. Sandan Vikas (India) Ltd
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Gift; Depreciation; Transfer pricing; Search and seizure; International transaction; Retrospective amendment; Question of law; Competent authority; Notional interest; Capital expenditure; Set aside
• Section: 37; 6; 143(3); 92B; 144C; 13; 22; 92CA

Judgement Text

आयकर अपीलीय अधिकरण, हैदराबाद पीठ में IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “A”, HYDERABAD BEFORE SHRI RAMA KANTA PANDA, ACCOUNTANT MEMBER & SHRI LALIET KUMAR, JUDICIAL MEMBER आ.अपी.सं / ITA No. 485/Hyd/2022 (निर्धारण वर्ा / Assessment Year: 2018-19) M/s. Aurobindo Pharma Limited, Hyderabad [PAN No. AABCA7366H] Vs. Asst. Commissioner of Income Tax, Central Circle-1(2), Hyderabad अपीलधर्थी / Assessee प्रत्‍यर्थी / Respondent निर्धाररती द्वधरध/Assessee by: Shri B.G.Reddy, AR रधजस्‍व द्वधरध/Revenue by: Shri Rajendra Kumar, CIT-DR सुिवधई की तधरीख/Date of hearing: 12/04/2023 घोर्णध की तधरीख/Pronouncement on: 27/04/2023 आदेश / ORDER PER LALIET KUMAR, JM: This appeal of the assessee is directed against the assessment order of ACIT, Central Circle 1(2), Hyderabad dated 29.07.2022 passed u/s 143(3) r.w.s. 92CA r.w.s. 144C (13) of the Income Tax Act, 1961 (in short 'Act') in furtherance to the directions of Dispute Resolution Panel (DRP)-l, Bengaluru dated 27.06.2022 issued u/s 144C(5) of the Act. ITA No. 485/Hyd/2022 Page 2 of 32 2. The grounds raised by the assessee read as under : Transfer Pricing (TP) Grounds : a) Corporate Guarantee Commission: 1. The Learned DRP erred in law and on facts and circumstances of the case by holding that the appropriate corporate guarantee commission is 1% 2. The Learned AO/TPO, in pursuance of the directions of the ORP, erred in making an addition of Rs. 10,93,47,091/- on account of alleged shortfall in corporate guarantee fees on the corporate guarantees issued by the company on behalf of its Associated Enterprises namely Agile Pharma B.V. and Helix Healthcare B.V. being 100% subsidiaries of assessee. 3. The Learned DRP/AO ought to have appreciated the fact that corporate guarantee was given by the assessee company as a procedural compliance for availing of loan by its subsidiaries and for the overall benefit of the group and it was provided as part of the parental obligation to its subsidiaries and is in the nature of shareholder service. 4. Without prejudice to the above, the Learned DRP erred in adopting the corporate guarantee commission @1% without appreciating the fact that the guarantee fees charged by 581 from the assessee in respect of guarantees extended on its behalf was only 0.1%. b) Interest on Receivables from Associated Enterprises: 5. The Learned DRP/AO/TPO erred in law and on facts and circumstances of the case in treating Interest on Receivables as a separate International Transactions in terms of Sec 92B of the Income Tax Act, 1961. 6. The Learned TPO/AO, in pursuance of the directions of the DRP, erred in making an addition of Rs. 3,34,24,193/- in respect of notional interest on delayed receipt of trade receivables from Associated Enterprises. 7. The Learned DRP/AO/TPO ought to have appreciated that trade receivables arise in the normal course of business and are not to be treated as unsecured loans for the levy of interest. 8. The Learned DRP/AO/TPO ought to have appreciated that the Assessee has not received any amount in the form of interest on delayed receipt of receivables from either Associated enterprises or third-parties including indigenous parties and that not charging any interest from AEs on the trade receivables is consistent with the Arm's length principle. ITA No. 485/Hyd/2022 Page 3 of 32 9. The Learned DRP/AO/TPO erred in not appreciating the fact that all the trade receivables are received within the time permissible as per the RBI norms or, in a few rare cases, within the extended time as permitted by RBI. 10. Without prejudice to the above, the Learned DRP/AO/TPO ought to have appreciated that even if interest on trade receivables from Associated Enterprises is to be computed, the same shall not exceed the assessee's cost of borrowings which itself is 1.2979%. Non-Transfer Pricing Grounds: 11.The Learned DRP/AO erred in law and on facts and circumstances of the case in not allowing weighted deduction U/s 35(2AB) of the Income Tax Act, 1961 in respect of expenditure incurred in connection with Clinical Trials/ Bio-Analytical and Bio-Equivalence studies without appreciating the legal implications of Explanation to Sec 35(2AB) of the Income Tax Act which entitles the assessee company for its claim. 12. The Learned AO, in pursuance of the directions of the DRP, erred in law and on facts and circumstances of the case in disallowing the weighted component (50%) of clinical trials/ Bio Analytical/Bio-Equivalence studies expenditure being Rs. 51,57,35,500/-. 13. The Learned DRP/AO erred in law and on facts and circumstances of the case in not appreciating the fact that the Hon'ble Hyderabad ITAT, in the assessee's own case allowed the weighted deduction on Clinical Trial/ Bio- Analytical/ Bio-Equivalence studies expenditure for the AY 2011-12, AY 2012-13, AY 2013-14 & A Y 2014-15. 14. The Learned DRP/AO erred in law and on facts and circumstances of the case in disallowing the weighed component of Research and Development expenditure which is not quantified by DSIR in Form No 3CL being Rs. 4,48,96,794/-.” 3. Submissions of the Assessee on the grounds of appeal: A) Commission on Corporate Guarantee (CG) [Rs. 10,93,47,091/-]: The facts in brief in relation to this issue are that 'the company’ had given corporate guarantee on behalf of its 100% subsidiaries Agile Pharma BV and Helix Healthcare and the loan amount outstanding as on 31 st March, 2018 in respect of guarantees given on behalf of its AE's, Agile Pharma BV and Helix Healthcare B.V. is Rs. 238,38,21,250/- and Rs. 767,67,12,500/- respectively. In the Return of Income filed for the subject year, Assessee has made suo-motu adjustment @ 0.10% on the guarantee given to it's AEs amounting to Rs. 1,22,84,673/-. However, in the Draft Assessment Order u/s 143(3) read with sec. 144C of the Act dated 18th September, 2021, the TPO/AO proposed an adjustment of ITA No. 485/Hyd/2022 Page 4 of 32 Rs.22,11,24,119/- u/s 92CA with regard to corporate guarantee fees adopting average rate of 1.8%, stated to have been fixed by Indian bankers for financial guarantees. Against the proposed adjustment in the draft order, assessee filed objections in Form 35A before the DRP. Submissions of the Assessee before DRP: i) It is the onerous responsibility of the assessee company to provide guarantee to meet the credit requirements of its subsidiaries Agile Pharma BA and Helix Healthcare and therefore it is in the nature of shareholder activity as per OECD TP Guidelines 2010 and not an 'international transaction' under the Income Tax Act. ii] Without prejudice to the above submission that provision of corporate guarantee is not an international transaction under the IT Act, even if an addition in respect of Corporate Guarantee Commission is considered necessary, the same shall be restricted to the rate charged by the SBI @0.10% as evidenced by the schedule of fees and charges issued by SBI to the assessee (APB 53). Since the assessee has already made a suo-moto addition in the Return of Income @0.10%, it was submitted that no further adjustment on this ground is warranted. Observations/Directions of DRP: However, the DRP, after relying on certain precedents as discussed in the order of DRP, observed that the impugned guarantee transaction constitutes 'International transaction', as defined in Explanation to section 92B of the Act, and requires to be benchmarked. On the alternate plea raised by the assessee on without prejudice basis in respect of determination of ALP rate of guarantee fees at 0.10% as against 1.8% per annum adopted by the TPO based on the information called from the banks, the Panel after referring to June 2017 Notification of CBDT (APB 68) and other judicial precedents considered it appropriate to adopt 1% on the amount guaranteed as corporate guarantee commission. Aggrieved by the said directions of DRP, Assessee presented this appeal. 4. Feeling aggrieved by the order passed by the DRP/assessing officer, the assessee is in appeal before us on the grounds mentioned hereinabove. 5. The ld.AR for the assessee had made elaborate submission before us in support of the ground of the assessee and had also filed the written submission in support of the case of the assessee. ITA No. 485/Hyd/2022 Page 5 of 32 6. Submissions of the Assessee: “1. In the present case, it is not in dispute that that the AEs involved are 100% subsidiaries for which corporate guarantees are extended and the details in this respect were furnished to the TPO/DRP. We submit that the corporate guarantee was extended to AEs to protect the interest of the assessee company since the assessee was holding 100% shares in AEs. Corporate guarantee was given by the assessee as a procedural compliance for availing credit facilities by its subsidiaries and for the overall benefit of the group and it was provided as part of the parental obligation to its subsidiaries and is in the nature of shareholder activity. It is the obligation of the assessee to extend its support to its 100% subsidiaries to improve the business and smooth running of the AEs without any financial impediment, which ultimately benefits the assessee company, being a holding company. We also submit that that no direct financial benefit was extended to the overseas subsidiaries on account of corporate guarantee nor any cost or expenditure was incurred by the assessee company on behalf of its subsidiaries in providing such guarantee. A liability could arise for the Assessee guarantor only if a default took place, but this is hypothetical situation and such default never occurred during the relevant year. Even if there is an impact as observed by DRP in its order, such an impact on profits, income, losses or assets has to be on a real basis, whether in the present or in the future, and not on a contingent or a hypothetical basis, and there has to be some material on record to indicate that the arrangement had some impact on profits, income, losses or assets. In the present case, the DRP/AO, except referring to certain clauses in the guarantee document, could not bring any evidence to show that the assessee had incurred any cost or expenditure for extending the corporate guarantee to its AEs or Corporate guarantee had direct impact on profits, income, losses or assets on real basis. When a parent company extends an assistance to the subsidiary, being associated enterprise, such as corporate guarantee to a financial institution for lending money to the subsidiary, which does not cost anything to the parent company, and which does not have any direct bearing on its profits, income, losses or assets, it is outside the ambit of 'international transaction' as defined in the Explanation under section 92B (1) of the Act even after the amendment by the Finance Act, 2012 with retrospective effect. On the observation of the Panel that Assessee cannot take a contrary stand that the transaction is not an international transaction after it has offered on its own the corporate guarantee commission at 00.10% and made adjustment accordingly while filing the Return of Income, we submit that such adjustment was made on without prejudice basis by way of abundant caution rather than the requirement of law. 2 In support of our submission that CG does not constitute an 'international t.ransaction', we refer to the decision of ITAT, Visakhapatnam in the case of DCIT vs. CCL Products (India) (P.) ltd. [2019] 106 taxmann.com 11, which was rendered with reference to amended provisions of sec. 92B (amendment ITA No. 485/Hyd/2022 Page 6 of 32 to section 92B by the Finance Act, 2012 by inserting Explanation to extend scope of international transaction). It was held in that case that where corporate guarantee was given by assessee on behalf of its 100 per cent subsidiary AEs in its own commercial interest, it would not constitute international transaction under section 92B of the Act and since no expenditure was incurred in providing same, no adjustment in ALP was warranted. In the case of present assessee also, CG was given by the assessee on behalf of its 100% subsidiaries in its own commercial interest. The expectations from the provision of guarantee were not that of a guarantor i.e., to earn a guarantee fee but were rather of a shareholder. The guarantee was provided to protect its investment interest and obtain returns from investments by way of appreciation and dividends and therefore CG would not constitute an 'international transaction'. 3. In view of the foregoing, he submitted that when the Assessee has not incurred any costs or expenditure in providing corporate guarantee to its AES, it would not constitute 'International Transaction' even under amended law and consequently ALP adjustment on this ground is not warranted. 4. Without prejudice to above submission that TP adjustment in question is not warranted at all on the facts of the case, even in case an adjustment is considered necessary, the same at best should be restricted to the CG rate charged by SBI @0.10% as is evidenced by the Schedule of fees and Charges issued by State Bank of India to the assessee. (A copy of the Schedule is included in the assessee paper book compilation for immediate reference APB-53). Since the assessee has already made a suo-moto adjustment in the Return of Income @0.10%, we submit that no further adjustment on this ground is warranted. 5. Without prejudice to the above plea of the assessee that no TP adjustment is called for given the facts of the case, we also like to submit that even in case an upward adjustment is considered necessary, a rate of 0.25% to 0.5% on the amount involved is to be considered for Corporate Guarantee Commission as has been decided in several judicial precedents, which include the following: i) M/s. Vivimed Labs Limited vs. ACIT, ITA Nos.186 to 189/Hyd/2021 (ITAT, Hyd.) dated 12.04.2022 ".... we deem it appropriate in these peculiar facts and circumstances that a lumpsum commission rate of 0.5% qua the extent of amount of assessee's corporate guarantee(s) actually utilized only in all these four assessment years; would be just and proper." ii) DCIT vs. Lanco Infratech Ltd [2017] ITA Nos. 221/Hyd/2017 (ITAT, Hyd) dated 30.11.2017 “... However, considering the Co-ordinate Bench decision given in the case of Asian Paints Ltd. (supra) the Assessing Officer/TPO is directed to consider only 0.27 per cent as the guarantee commission on the amount involved." ITA No. 485/Hyd/2022 Page 7 of 32 iii) Videocon Industries Ltd Vs DCIT [2017] I.T.A. No. 149/Mum/2017 dated 26.07.2017 "11....Moreover, there is catena of decisions wherein this Tribunal has held that corporate guarantee commission around 0.50% can be accepted as ALP. Accordingly, we hold that the corporate guarantee commission fee which is to be recovered from AE should be 0.50% which would meet the arm's length requirement. Thus, under the facts and circumstances of the case, we direct the TPO/Assessing Officer to take the corporate guarantee fee @ 0.50% and make the adjustment accordingly." (iv) Hindalco Industries Ltd. v, Addl. CIT [2015] 62 taxmann.com 181 (Mum.), Parent company charged commission at 0.50% which was considered as at ALP. (v) Manugraph India Ltd. v. Dy. CIT [2015] 62 taxmann.com 347 (ITAT, Mum), The corporate guarantee was not treated as international transaction by the parent company but the Tribunal treated it as international transaction u/s 92B and upheld the ALP of 0.50%, following the order in the case of the assessee for the earlier year. (vi) Godrej Consumer Products Ltd. v. Asst. CIT [2016] 69 taxmann.com 436 (Mumbai - Trib.)- The assessee Suo motu bench marked the commission chargeable on bank guarantee @ 0.25%. It was determined at 0.50%. 6 Thus, the Tribunals have by and large accepted rate of 0.25 to 0.50% of corporate guarantee as the ALP of the commission between two independent enterprises. But, ignoring all these precedents rendered in relation to corporate guarantee, the Ld. DRP after referring to June 2017 Notification of CBDT and the decision of ITAT, Hyderabad in the case of GOCL Corporation Ltd. vs. DCIT in ITA No. 579/Hyd/17 dated 11.05.2021 and the decision of ITAT, Mumbai in the case of Grindwell Norton Limited in ITA No. 523/Mum/2014 dated 30.09.2016 considered it appropriate to adopt 1% on the amount guaranteed as corporate guarantee commission. 7 We submit that apart from this guidance from CBDT in the Notification dated 07.06.2017 that lacks any scientific measure or formula to determine ALP rate on the facts of a particular case, there is no specific method of determining the arm's length price of corporate guarantee transactions in the Act. We also submit that the decision in the case of GOCL Corporation Ltd. dated 11.05.2021 was rendered in a situation where assessee has not submitted any comparable or precedent for corporate guarantee commission ALP rates. Whereas in the present case, Assessee cited several precedents hereinbefore wherein Tribunals have by and large accepted rate of 0.25 to 0.50% of corporate guarantee as the ALP of the commission. It is also ITA No. 485/Hyd/2022 Page 8 of 32 important to note here that the Hon'ble Bench in GOCL case made it clear (Para 4.2 of the order) that the impugned estimation of 0.9% shall not be taken as a precedent in any other case. Similarly, decision of ITAT, Mumbai in the case of Grindwell Norton Limited dated 30.09.2016 was rendered in the year 2016 when the Mumbai Tribunal did not have the benefit of subsequent decisions referred above wherein rate of 0.25 to 0.50% of corporate guarantee as the ALP of the commission was considered as appropriate. 8 In the light of above pleading, and the legal precedents in favour of the assessee, the Hon'ble Bench may be pleased to allow the ground and delete the Transfer Pricing adjustment made in the assessment order under appeal.” 7. On the other hand, the Ld. DR relied upon the order passed by the DRP and submitted that the DRP had computed the bank guarantee charges in accordance with law and therefore, no interference is called for. 8. We have heard the rival contentions of the parties and perused the material available on record. The issue of whether the corporate bank guarantee given by the assessee on behalf of its AE is an international transaction or not, is no more res integra, as the explanation to section 92B of the Act itself had made it abundantly clear that if the assessee is providing the capital financing, including any type of long term or short term borrowing, lending or “guarantee”, purchase or sale etc., then such transaction shall be considered as international transaction. Undoubtedly, the assessee has given Corporate Guarantee on behalf of its AE, which fact has not been disputed by the assessee either before the TPO or before the DRP and, therefore, we are of the opinion that the corporate guarantee given by the assessee is an international transaction and, therefore, the same has rightly been held so by the lower authorities. ITA No. 485/Hyd/2022 Page 9 of 32 8.1 Having held that the corporate guarantee issued by the assessee on behalf of its AE is an international transaction, the sequator to that is whether the corporate guarantee estimated by the DRP to the tune of 1% on the amount guaranteed as a corporate guarantee commission as against 0.10% was justified or not. 8.2 In this regard, the assessee had made elaborate submissions which are reproduced elsewhere and submitted that the assessee is taking the financial facilities from the SBI and is paying 0.10% as schedule of fees and charges to the bank. 8.3. We have considered the submissions and found that the charges paid by the assessee cannot be compared for the purposes of determining the ALP of corporate guarantee commission. In our view, no third party would provide similar type of services/corporate guarantee on behalf of its AE and expose itself to the risk of giving the corporate guarantee. Therefore, the charges paid by the assessee to SBI cannot be compared for the purpose of determining the ALP of corporate guarantee commission. The Co-ordinate Bench in the case of Vivimed Labs vide its decision dated 12-04-2022 had adjudicated corporate guarantee commission @ 0.5% qua the extent of the amount of the assessee’s corporate guarantee actually utilised in these four assessment years. Thereafter, similar view had been taken by various Tribunals restricting the addition to 0.5% of the amount guaranteed as corporate guarantee commission. Recently, Delhi Tribunal in the case of Havells India Ltd. Vs. ACIT (LTU) in ITA No.6509/Del/2018 dt.09.05.2022 had also echoed the above said ITA No. 485/Hyd/2022 Page 10 of 32 view and held that the addition of 0.5% on the amount guaranteed would be the appropriate benchmark to determine the ALP. Similar decision was also passed by the Bangalore and Pune Benches of the Tribunals in the case of GMR Infrastructure Ltd in ITA No.344/Pun/2022 dt.25.05.2022 and Jain Irrigation Systems in ITA 822/Pun/2022 dt.22.12.2022, respectively. Respectfully following the view taken by the Delhi, Bangalore and Pune Benches of the Tribunals in the above cited cases and also in the case of Vivimed Labs (supra), we partly allow the ground of the assessee and restrict the addition to the tune of 0.5% on the amount guaranteed as corporate guarantee commission. Thus, ground nos. 1 to 4 are partly allowed. Interest on Receivables (Rs. 3,34,24,193): 9. The facts in brief are that the assessee had outstanding receivables during the year, which arise in the usual course of business of the assessee on sale of its products and being trade transactions, the assessee had extended normal credit for payment by trade debtors. These receivables are not in the nature of advances for 'capital financing' but in the nature of trade receivables. The debts shall be outstanding from both AEs and non-AEs purely because of business reasons and this is a common business practice prevailing in the industry and accordingly the Assessee does not charge any interest for delayed realizations in case of non-AE transactions as well as AE transactions. However, in the draft order, a credit period of only 60 days was allowed by AO/TPO and interest @6.75% was computed on delayed receivables after allowing credit period of 60 ITA No. 485/Hyd/2022 Page 11 of 32 days at Rs. 68,05,85,586/- and the same is proposed as an upward adjustment. Against this proposed adjustment in the draft order, Assessee filed objections in Form 35A before the DRP on this ground also. 10. Submissions of the Assessee before DRP: i) Extending credit for realization of revenue from the AE is a closely linked transaction with the transaction of selling products to the AE and therefore the same cannot be treated a separate international transaction. The arm's length price determination for the said consequential receivables is subsumed within the arm's length price determination of the principal international transaction itself. ii) When TNMM method has been applied to bench mark the transactions, it takes care of the interest income, if any, foregone by the assessee on account of late payment received from the associated enterprise. Once the TNMM method and its results are accepted, no further adjustment on account of notional interest from associated enterprise is warranted. iii) Company does not charge any interest on delayed realization even in the case of non-AE transactions. The credit period extended on sales to both AEs and Non-AEs ranges between 30 days and 270 days. The debts shall be outstanding from both AEs and Non-AEs purely because of business reasons and this is a common business practice prevailing in the industry. Hence without prejudice to the above submissions, even if receivables are considered as separate international transaction, interest on receivables can be benchmarked under Internal CUP and hence, no adjustment shall be made accordingly. iv) Reserve Bank of India permits realization in respect of export of goods or services up to a period of nine months from the date of exports. The relevant extract of RBI Master Circular issued in this regard is included in the Paper Book compilation for ready reference (APB-42). Since the credit period extended on sales to both AEs and Non-AEs ranges between 30 days and 270 days i.e., within the time permitted by RBI, no adjustment is warranted. v) Without prejudice to the above, even if receivables are considered as a separate international transaction, the credit period shall be the actual credit period as has been contracted with the AEs and shown in the Invoices. The credit period of 60 days as has been considered by the TPO is random and without any basis. vi) Without prejudice to the above, the rate that shall be adopted shall not exceed the actual cost of borrowing to the assessee i.e., 1.2979%. ITA No. 485/Hyd/2022 Page 12 of 32 vii) Without prejudice to the above, the rate that shall be adopted shall not exceed L1BOR rate since the adjustment is in respect of international receivables. 11. Based on the above submissions, Assessee urged the DRP to direct the AO to drop the upward adjustment proposed on account of deemed interest on receivables or in the alternative to compute interest at the rate of 1.2979% after considering actual credit period extended to AEs as per commercial invoices. Observations/Directions of DRP: i) Relying on certain judicial precedents, DRP observed that Deferred receivables constitute a separate international transaction and has to be benchmarked in regard to delay beyond the reasonable credit period as per TP regulations. The transaction, 'deferred receivable' cannot be bench marked in a combined approach along with the primary transaction. Therefore, the contention of the assessee that the TPO has re-characterized the transaction as loan transaction is liable to be rejected. ii) On the plea of the assessee that it has not charged interest from both AEs and non-AEs and hence interest cannot be imputed on the AE transactions, DRP rejected the contention stating that the assessee failed to submit any information in regard to the non-AE transaction, such as the terms of service and payment, the credit period along with the relevant agreement and documents. iii) With regard to rate of interest on so-called delayed receivables, DRP held that SBI short term fixed deposit interest rate may be the appropriate ALP rate to measure the interest compensation in these types of transactions. According to DRP, SBI short term deposit rate is an index rate adopted under Indian conditions to charge interest and accordingly the plea of the assessee to adopt L1BOR rate for the purpose of computing interest on outstanding receivables is rejected by DRP. iv) Credit period allowable should be as per the credit period agreed upon in the intercompany agreement or period/terms mentioned in the invoices wise. The plea of the assessee that a period of nine months should be allowed as the reasonable credit period, as allowed by RBI for export realisations is also brushed aside by DRP by stating that the purpose of RBI regulations is entirely different and the RBI regulations do not contemplate determination of arm's length price. Further, according to DRP, price is negotiated with reference to the agreed credit period, and the effect of extra credit is not factored in the price agreed and hence the entire issue of imputing interest arises when the amount is not realized within the agreed credit period. ITA No. 485/Hyd/2022 Page 13 of 32 v) With the above observations, DRP directed the TPO to verify the credit period invoice-wise and charge the interest wherever there is delay beyond the credit period mentioned therein by applying SBI short term deposit rate. 11. Aggrieved by the aforesaid directions of DRP to the Assessing Officer to charge of interest on so-called delayed realisations from AE debtors and recompute the TP adjustment on this ground, Assessee preferred present appeal. Submissions of the Assessee: 1. Firstly, extending credit for realization of revenue from the AEs is a closely linked transaction with the transaction of selling products to the AEs and therefore cannot be treated a separate international transaction. Secondly, even if receivables are considered as separate international transaction in the present case, these are outstanding trade balances for the sale of products but not in the nature of capital financing and therefore the same cannot be categorised as loans and advances so as to consider them for TP adjustment. Secondly, Assessees extends credit for a period ranging between 30 days and 270 days i.e., within the time permitted by RBI on its receivables to both its AE and non-AE. Assessee does not charge any interest on any delayed payments irrespective of whether other party was AE or not. Therefore, interest on receivables can be benchmarked under Internal CUP and no adjustment can be made when no interest is charged from non-AEs on similar receivables. In support of the claim that interest was not charged on delayed receipt of receivables from both AEs and non- AEs, a certificate from a Charted Accountant is obtained and included in the Paper Book compilation of the Assessee (APB-l). Thirdly, when transactions of the Assessee are bench marked under TNMM under which international transactions were accepted as at arm's length, further levy of interest is unjustified and unwarranted. 2. In support of our submission that adjustment in regard to levy of interest on trade receivables is unjustified on the facts of the case, we refer to the following decisions passed by the authorities of ITAT, Hyderabad, which are directly on the point: i) Cura Technologies Ltd. vs. DCIT [2019] 101 taxmann.com 68 (ITAT, Hyd.) "11. We have considered the issue and examined the contentions. As seen from assessee's contentions, assessee is neither charging ITA No. 485/Hyd/2022 Page 14 of 32 interest on any of the receivables outstanding. There is also no basis for adopting only two months as credit period. RBI itself allows a year for the amounts to be realised, if they are in foreign exchange. Whether it is AE or non-AE, it is in the interest of business that assessee receives the foreign exchange early so that it can claim deduction u/s. 10A. Therefore, in our view, putting a limit of two months of credit period itself is arbitrary..... Accordingly, we cancel the interest levied and allow assessee's contentions. Grounds are considered allowed". ii) Bartronics India Ltd. v. Dy. CIT [2017] 86 taxmann.com 254 (ITAT Hyd.) iii) GSS Infotech Ltd. v. Asstt. CIT [2016] 70 taxmann.com 356 (ITAT, Hyd.) Based on the above submissions, we urge the Hon'ble Bench not to consider trade receivables as a separate international transaction and even if it so considered, the addition/adjustment made on this ground in the assessment order may kindly be deleted in entirety as the realisations were made within the time allowed by RBI for export proceeds realisations as is evident from sale invoices. Without prejudice to the above submission, even if the Hon'ble Bench consider the trade receivables as a separate international transaction, we pray the Hon'ble Bench to consider average LI BOR rate for calculation of interest since the adjustment is in respect of international trade receivables in view of the decision of ITAT, Hyd. in the case of M/s. Vivimed Labs Limited vs. ACIT, ITA Nos.186 to 189/Hyd./2021 (ITAT, Hyd.) dated 12.04.2022, wherein it is observed as under (APB 80): "8. Next comes the adjudication of the impugned issue on merits. We notice with the able assistance of both the parties that the TPO in these four assessment years has not given any comparable instance in the very segment whilst charging the impugned interest on the assessee's receivables since he had adopted the SBI's short term deposit rates only for benchmarking purposes. 9. The Revenue's endeavour before us supports the lower authorities' action on the pretext that such receivables are very much akin to a financial transaction to be benchmarked as per the SBI's short term lending or deposit rates. We find no merit in the Revenue's instant argument since Chapter-X of the Act is a special provision wherein each and every adjustment could only be made going by the uncontrolled market price of the transactions in the very segment; followed by benchmarking thereof as per the international currency "LlBOR" rates only. We, therefore, reverse the TPO's identical action in all these Assessment Years in view of the foregoing twin reasons ITA No. 485/Hyd/2022 Page 15 of 32 regarding non-quantification of the impugned adjustment(s) segment wise and as per the LIBOR rates. We accordingly delete the impugned "ALP" adjustment in very terms." 12. The Ld.DR relied upon the order passed by the DRP and our attention was drawn to paragraph 2.11.13 to 2.11.16. Further, the ld.DR had drawn our attention to the order of the Tribunal passed in the following cases: i. ITA No. 254/Hyd/2021 Indeed India ii. ITA No. 6/Hyd/2022 Quislex Legal Services iii. ITA No. 1812/Hyd/2017 Zeta Interactive iv. ITA No. 362/Hyd/2021 Satyam Venture v. ITA No. 568/Hyd/2022 Apache Footwear 13. We have heard the rival contentions of the parties and perused the material available on record. This Tribunal while passing the decision in the case of Apache Footwear ITA No. 568/Hyd/2022 (supra) had considered the similar arguments raised by the assessee and thereafter, had decided the issue in the following manner: “9. We have heard the rival submissions and perused the material on record. From the perusal of the order passed by the TPO, it is clear that both the lower authorities have given an elaborate reasoning for coming to the conclusion that the delay in receiving the receivables is an international transaction and is required to be bench marked in accordance with law. We are reproducing hereinbelow the chart filed by the assessee which is to the following effect : APACHE FOOTWEAR INDIA PVT. LTD / AY 2018-19 Export Receivables Realisation pattern during A.Y. 2018-19 Particulars Total Number of Invoices Amount Export Invoice value in Rs. % of invoices realized to total ITA No. 485/Hyd/2022 Page 16 of 32 during the A.Y. 2018-19 invoices raised during the year A) Realised within credit period 3,001 6,48,15,77,864 91.22 B) Realised beyond credit period of 60 days <10 days 241 36,27,20,363 5.10 10-20 days 204 18,88,04,889 2.66 20-30 days 45 7,11,80,351 1.00 30-45 days -- -- -- 45-60 days -- -- -- >=60 days 29 11,63,338 0.02 Sub total (B) 519 62,38,68,941 Total (A) + (B) 3520 7,10,54,46,805 10. From the perusal of the Chart, it is absolutely clear that there were 519 invoices valued at Rs.62,38,68,941/- for which the payments were due beyond the credit period 60 days. In our view, the lower authorities have computed the Arm’s Length Price and have mentioned that the same being international transaction, the same is required to be bench marked by considering the SBI short term deposit interest rate. 11. The above-said issue of delay in receivables is no more res integra. The co-ordinate Bench in the cases relied upon by the Revenue examined the issue and thereafter directed the TPO / Assessing Officer to apply rate of interest of 6% on outstanding receivable at the year end. The assessee had relied upon various judgements. All these judgments have been considered by the coordinate Bench and thereafter, the above said direction was issued by the Bench. 12. The reliance of the assessee on the decision of Hon’ble Delhi High Court in the case of PCIT Vs. Boeing India Pvt. Ltd., reported in 2022 (10) TMI 498 is of no use to the assessee as in the said judgement, the Hon’ble Delhi High Court in Para 15 had mentioned that the issue receivable is essentially a question of fact. As mentioned hereinabove, in the present case, there is a delay in receiving the outstanding of Rs.62,38,68,941/- in respect of 519 invoices as mentioned hereinabove and there is no explanation given by the assessee for such a delay in receiving the amount. The very purpose of benchmarking the transaction is to ascertain whether assessee, who is similarly situated, would render the same kind of services at the same or similar price to a third party or not. If we examine the issue in the above-said 21 Apache Footwear India Pvt.Ltd. context, it would be clear that the assessee would charge bank interest or any other interest with a view to compensate itself on account of delay in making the payment. Hence, we do not find any error in the same. ITA No. 485/Hyd/2022 Page 17 of 32 13. The reliance of the assessee in the case of Betchal India Pvt Ltd (supra) is also not correct as A.Y. in that case was 2010-11. By the Finance Act, 2012, the Explanation was inserted in Sec.92B of the Act and by virtue of which “payment or deferred payment or receivable or any other debt arising during the course of business” has been considered to be an international transaction which is required to be benchmarked. Following the above said Explanation, the co-ordinate Bench for the subsequent assessment years vide order dt.16.05.2017 in the case of Betchal India Pvt. Ltd ITA No.6530/Del/2016 (supra) had decided the issue against the assessee. In view of the above, the decision relied upon by the assessee is of no help to assessee. 14. So far as the argument of the assessee that the assessee is a debt free company and therefore, no borrowed fund was used for making supplies to it’s A.E. and therefore, is not liable to be compensated for the delay in receiving the receivable is concerned, the same in our view, suffers from inherent flaw as in the T.P. analysis, the TPO is required to examine whether the assessee had supplied the product / services to it’s A.E. at Arm’s Length Price or not ? If by providing the services / goods at a discounted rate or permitting the assessee to receive the payment after a long period of 60 days or 90 days, then it will amount to permitting the A.E. to use the working capital of the assessee for the purposes of earning the profit. No prudent business man would venture into 22 Apache Footwear India Pvt.Ltd. this kind of activity and permit a third party to use the working capital of the assessee and earn profit thereon. In the present case, though the assessee was required to maintain the T.P. Study and file the same before the TPO to show that the assessee’s transactions with it’s A.E. were at Arms Length however, nothing has been brought to our notice that the assessee has brought any comparable instance. In these circumstances, the TPO had applied the banking rate as applicable to short term loans. In our view, the same is required to be corrected and instead thereof, ALP is to be computed by adding notional interest @ 6% on the receivable. Considering the totality of facts and circumstances, in view of the decisions cited supra and in view of foregoing discussion, we dismiss the appeal of the assessee. Accordingly, the appeal of the assessee is dismissed.” 14. Respectfully following our own decision, we direct the Assessing Officer to determine the ALP and compute the same by adding notional interest @ 6% on the receivable beyond a period of 60 days. Thus, ground nos. 5 to 10 are partly allowed. ITA No. 485/Hyd/2022 Page 18 of 32 C) Disallowance of weighted deduction claimed u/s 35(2AB) of the IT Act on R&D expenditure: 15. The facts of the case in brief are that in the Draft order, AO proposed disallowance of weighted deduction (50% of the actual R&D expenditure) of Rs. 56,06,33,276/- in respect of following items of R & D Expenditure incurred by the assessee: 1. R&D expenditure on clinical Trials Rs.103,14,71,655/- 2. In-house Revenue R&D expenditure Rs. 3,79,22,393/- 3. In-house capital R&D expenditure Rs. 5,18,71,194/- 16. In respect of expenditure on clinical drug trials, it was submitted before the AO that in view of Explanation to sec. 35(2AB)(I) inserted by the Finance Act, 2001 and decision of Hon'ble ITAT, Hyd. in assessee's own case for Asst Year 2011-12 to Asst Year 2014-15, the expenditure on clinical trials, which is an integral part of R&D activity and it is mandatory for obtaining product approvals, is also eligible for weighted deduction. In case of other two items of In-house R&D Revenue and capital expenditure, it was submitted that Form 3CL is only a report to be submitted by the prescribed authority to the Director General (Income Tax Exemptions) and simply because DSIR had not reported a particular amount, it should not be disallowed when the expenditure incurred by the company is wholly and exclusively for R&D and on its approved R&D facility. However, AO proposed addition of Rs.56,06,33,276/- in the draft order. Against the proposed additions on account of part disallowance of weighted deduction, Assessee filed objections before the DRP. ITA No. 485/Hyd/2022 Page 19 of 32 17. Submissions of the Assessee before DRP: Expenditure on clinical trials: Explanation to Section 35(2AB)(1) which was introduced by the Finance Act, 2001 with effect from 1.4.2002 as reads as under: "Explanation- For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970)." It was submitted before DRP that Expenditure on Bio-Analytical and Bio- Equivalence Studies is part of the clinical drug trials and is a must for obtaining product approvals. Further, the company's inhouse R&D facilities are duly approved by the prescribed authority DSI R and Form No. 3CMs were already submitted. Also, the expenditure is wholly and exclusively incurred by the company for Research & Development. In support of the claim, attention of the DRP was also drawn to the decision of Hon'ble ITAT, Hyd. in assessee's own case for the earlier years. Other R&D Expenditure not quantified in Form 3CL: . Assessee reiterated before DRP that Form 3CL is only a report to be submitted by the prescribed authority to the Principal CCIT etc. Simply because DSIR has not considered a particular amount of R&D Expenditure in Form 3CL, possibly based on their internal parameters or guidelines, it shall not be subjected to disallowance for weighted deduction when the said R&D expenditure incurred by the assessee is also wholly and exclusively for and on its approved R&D facility and when the Assessing Officer himself considered it as part of R&D expenditure and allowed normal deduction @ 100%. Once the R&D facility of the assessee is approved by the prescribed authority, the entire expenditure so incurred wholly and exclusively on R&D needs to be considered for weighted deduction notwithstanding the position that a part of the R&D expenditure was not quantified and reported in Form 3CL. In view of the above submissions, Assessee urged DRP to direct the AO to drop the proposed additions on account of disallowance of weighted deduction. ITA No. 485/Hyd/2022 Page 20 of 32 Observations/Directions of DRP: i) Expenditure on clinical trials: DRP observed that DSIR has issued Guidelines dated May 2014 which provides for approval of the R&D facility subject to fulfilment of certain conditions. It was pointed out that one of the conditions for granting approval of the R&D facility is that the company should not claim expenses which are specifically not permissible as per the DSIR Guidelines, which according to DRP, include expenses incurred on clinical trials conducted outside the approved R&D facilities. As per DRP, the other condition required to be fulfilled for claiming deduction u/s.35 (2AB) of the Act is that the prescribed authority has to quantify the items of the expenditure entitled for weighted deduction in Form 3CL post amendment of Rule 6(7A) and the expenditure on clinical trials outside approved R&D facility has been mentioned separately in Form 3CL next to row relating to quantification of expenditure eligible for weighted deduction and therefore the same is not eligible for deduction. It is also noted by DRP that the weighted deduction is given under this section, to encourage the research activity in the in-home facilities. In the opinion of DRP, if the clinical trials are done outside the in-house facility of assessee, the third-party clinical trial entity may also claim the weighted deduction depending on the approval from the competent authority. DRP further noted that the explanation may not enlarge the scope of main provision that the weighted deduction is restricted to the in-house expenses. DRP further observed that on the SLP of the Department, Hon'ble Supreme Court has set aside the decision of Gujarat High Court in the case of Cadila Health Care Ltd. (2013) 87 DTR 56 vide order No. SLP(Cl NO. 771/2015 dated 13.10.2015 with the following observations: "We have considered the materials on record and the reasons set out in the impugned order. It is our considered view that the three questions extracted are substantial questions of law which needed to be heard in the appeal(s) filed by the revenue. In expressing the above view, we should not be understood to have expressed any opinion on the merits of the contentions raised on the questions extracted above. We accordingly allow these appeals and request the High Court to hear the aforesaid three questions of law in the appeal(s) filed by the revenue along with the questions of law formulated by it in the appeal(s)." DRP accordingly upheld the action of the AO to deny the weighted deduction on clinical trials conducted outside R&D facility. In respect of claim of weighted deduction on the other two items of expenditure, mentioned below, DRP upheld the action of the Assessing ITA No. 485/Hyd/2022 Page 21 of 32 Officer on the ground that the same have not been quantified by the prescribed authority in Part-B of Form 3CL and accordingly not allowable in view of the amendment to Rule 6(7A) with effect from July 2016. 1) In-house revenue R&D expenditure – Rs. 3,79,22,393/- 2) In-house capital R&D expenditure - Rs.5,18,71,194/- Accordingly, the action of the AO in not granting weight deduction with regard to above expenditure is upheld by DRP. 18. Submissions of the Assessee : Expenditure on clinical trials: 21. The intent of providing weighted deduction under sec. 35(2AB) is to encourage indigenous R&D initiatives by industry and to make R&D an attractive proposition. By the very nature of things, clinical trials may not always be possible to be conducted in closed laboratory or in similar in- house facility of the assessee and approved by the prescribed authority. Clinical trials of the drugs need to be conducted in as many places as possible by the researchers to draw conclusions on the efficacy of a new formulation, possible reaction etc. Extensive clinical trials are an intrinsic part of development of any new pharmaceutical drug. It cannot be imagined that such clinical trial can be carried out only in the laboratory of the pharmaceutical company. Merely because such trial is carried out outside its approved research and development facility, it could not be a disqualification for allowance of weighted deduction. 35. The first observation of the DRP, while denying the weighted deduction on clinical trials expenditure, is that DSIR had issued Guidelines dated May 2014, which provides for approval of the R&D facility subject to fulfilment of certain conditions and one of the conditions for granting approval of the R&D facility is that the company should not claim expenses on clinical trials conducted outside the approved R&D facilities. We submit these guidelines were amended in 2017 and as per these guidelines only the following items of expenditure are excluded for deduction u/s 35(2AB). "x) Expenditure on manpower from departments, other than R&D centre, such as manufacturing, quality control, tool room etc. and expenses incurred on manpower engaged in non-R&D activities such as attending consultation meetings, ascertaining customer choice/response to new products under development and other liaison work shall not qualify for deduction under section 35(2AB) of IT. Act 1961. ITA No. 485/Hyd/2022 Page 22 of 32 xi) Capital expenditure on R&D, eligible for weighted deduction will include only plant and equipment or any other tangible item. Capitalized expenditure of intangible nature and expenditure reported as Capital Work in Progress (CWIP) will not be eligible for weighted deduction. Company to submit list of capital equipment, with date of purchase/installation & cost. Vehicles purchased for reference & testing purpose will not be admissible. xii) Grants/Gifts, donations, presents and payments obtained by the company for sponsored research in the approved in-house R&D centres shall be shown as credit to the R&D accounts for the purpose of Section 35(2AB) of IT. Act, 1961, and the R&D expenditure claimed for deduction under the sub-section shall be reduced to that extent. xiii) Expenditure of general nature, such as, expenditure on production, maintenance and quality control departments, manufacturing overheads/depreciation/interest/lease rentals on manufacturing/ quality control equipment, manpower expenditure in manufacturing/service departments, head office expenditure, expenditure on security, guest house and canteen and other overheads of common nature, shall not be admissible under Section 35(2AB) of LT. Act. The personnel with Degree/Diploma in Science or engineering discipline and above qualification will only be regarded as R&D manpower eligible for weighted tax deduction. Manpower under the category of retainership/trainees/consultants and manpower on contract (may include trainees based on employment status) will not be admissible for weighted tax deduction. xiv) The remunerations paid to the members of the Board of Directors, should not be included in the R&D expenditure for the purpose of Section 35 (2AB)." 36. This expenditure on clinical trials is not an item which is excluded for the purpose of sec. 35(2AB) and therefore directions of DRP by referring to DSIR guidelines 2014 are unjustified. 37. The second observation of the DRP in this regard is that the decision of the Hon'ble Gujarat High Court in the case of Cadila Healthcare Ltd cannot be applied as a judicial precedent in assessee's case as the order has been reversed by Hon'ble Supreme Court in as much as Hon'ble High Court has been directed to adjudicate the matter on merits. However, this observation of DRP is not tenable since the decision of Hon'ble Supreme Court does not dilute the judgment of the Gujarat High Court and the decision holds good even now. The Hon'ble Supreme Court has referred additional three questions to Gujarat High Court and has not stayed or set- aside the judgment already rendered as observed by the Hon'ble ITAT, Hyderabad in the decision rendered in assessee's own case for earlier years. In fact, in a subsequent and recent decision of Gujarat High Court in the case of PCIT vs. Sun Pharmaceuticals Industries Ltd. (R/TAX APPEAL No. 92 of 2020) dated 25.02.2020, Hon'ble Court affirmed that the issue same stands answered by this Court in CIT vs. Cadila Healthcare Ltd supra (APB-76). ITA No. 485/Hyd/2022 Page 23 of 32 38. As regards the third observation of the DRP that if the clinical trials are done outside the inhouse facility of assessee, the third-party clinical trial entity may also claim the weighted deduction depending on the approval from the competent authority, we submit that such an observation is totally misconceived and unwarranted for the reason that the expenditure incurred by the assessee for its business purposes cannot be claimed as an expenditure by a third party in its books of account, whether it is a basic R&D expenditure or weighted deduction. 39. Further, as submitted before the DRP, Explanation to Section 35(2AB)(1) which was introduced by the Finance Act, 2001 with effect from 01.04.2002 reads as under: "Explanation- For the purposes of this clause, "expenditure on scientific research", in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970)." 40. As per the above Explanation, expenditure on scientific research in relation to drug and pharmaceuticals shall include expenditure incurred on clinical drug trial and for obtaining approval from regulatory authorities. The expenditure to be incurred for obtaining approval from any regulatory authority cannot be incurred in-house and if this condition regarding in- house incurring of expenditure is not applicable to this part of expenditure covered by the Explanation, it cannot be said that the said condition can be applied to clinical drug trial because clinical drug trial also cannot be in- house in normal course. The rational and harmonious interpretation of the provisions of section 35(2AB) and its Explanation is that the expenses which are included in the Explanation, being expenditure for clinical drug trial and for approval of regulatory authority etc., should be in relation to scientific research carried out in in-house Research and Development facility and the said expenses should not be in relation to research result of which is not obtained from in-house research and development facility. It is not necessary that the expenditure itself on clinical drug trial should be incurred in-house. 41. It is thus expressly provided in Explanation to Sec 35(2AB) (1) that the expenditure on clinical drug trials in relation to drugs and pharmaceuticals is part of scientific research expenditure eligible for weighted deduction. For conducting Bio-Analytical and Bio-Equivalence Studies, it requires hospital type facility and hence normally these studies are conducted outside facility duly approved for this purpose. The Expenditure on Bio-Analytical and Bio-Equivalence Studies is part of the clinical drug trials and is a must for obtaining product approvals. Also, the expenditure is wholly and exclusively incurred by the company for Research & Development. ITA No. 485/Hyd/2022 Page 24 of 32 42. As per the DRP, the other condition required to be fulfilled for claiming deduction u/s.35 (2AB) of the Act is that the prescribed authority has to quantify the items of the expenditure entitled for weighted deduction in Form 3CL post amendment of Rule 6(7A) and the expenditure on clinical trials outside approved R&D facility has been mentioned separately in Form 3CL next to row relating to quantification of expenditure eligible for weighted deduction and therefore the same is not eligible for deduction. This observation is also not tenable in law. Merely because the prescribed authority segregated the expenditure into two parts, namely, those incurred within the in-house facility and those were incurred outside, by itself would not be sufficient to deny the benefit to the assessee under section35(2AB) of the Act. In the present case, it is not in dispute that the expenditure is quantified in Form 3CL as required under Rule 6(7A) and in view of Explanation to sec. 35(2AB) (1), we submit that expenditure on clinical trials, as quantified in Form 3CL, is also eligible for weighted deduction. In fact, following observations of Hon'ble Gujarat High Court in Sun pharma's case (supra) squarely cover this point: "18 We are, therefore, of the opinion that the Tribunal committed no error. Merely because the prescribed authority segregated the expenditure into two parts, namely, those incurred within the in- house facility and those were incurred outside, in our opinion, by itself would not be sufficient to deny the benefit to the assessee under section35(2AB) of the Act. It is not as if that the said authority was addressing the issue for deduction under section 35(2AB) of the Act in relation to the question on hand. The certificate issued was only for the purpose of listing the total expenditure under the Rules. Therefore, no question of law arises." 43. Further, in this regard, we would like to submit that the above issue was settled in favour of the assessee for the AYs 2011-12, 2012-13, 2013- 14 and 2014-15 by the Ld.CIT(A) which has also been upheld by the Hon'ble Hyderabad ITAT. 44. In the light of the above submissions and the favourable decision of ITAT in assessee's own case for earlier years, we pray the Hon'ble Bench to delete the disallowance of weighted deduction claimed on clinical trials expenditure, which is an integral part of R&D activity of the Assessee. Other R&D Expenditure not quantified in Form 3CL: We submit in this context that Form 3CL is only a report to be submitted by the prescribed authority to the Principal CCIT etc. Merely because DSIR has not considered a particular amount of R&D Expenditure in Form 3CL, possibly based on their internal guidelines, it shall not be subjected to disallowance for weighted deduction when the said R&D expenditure incurred by the assessee is also wholly and exclusively for R&D in its approved facility and when the Assessing Officer himself considered it as ITA No. 485/Hyd/2022 Page 25 of 32 part of R&D expenditure and allowed normal deduction @ 100%. When the R&D facility of the assessee is approved by the prescribed authority, the entire expenditure so incurred wholly and exclusively on R&D needs to be considered for weighted deduction notwithstanding the position that a part of the R&D expenditure was not quantified and reported in Form 3CL. 19. In view of the above submissions, learned AR of the assessee requested to direct the AO to delete the additions made on account of disallowance of weighted deduction on other items of R&D expenditure also. 20. Per contra, the ld.DR for the Revenue relied upon the orders passed by the lower authorities. It was the contention of the ld.DR that the matter is sub judice before the Hon’ble High Court, hence the lower authorities have not followed the decision passed by the tribunal in the earlier assessment years. 21. We have heard the rival contentions of the parties and perused the material available on record. Admittedly the tribunal in its earlier order had decided this identical issue in favour of the assessee in ITA No.1604 & 1605/HYD/2016 for A.Ys. 2011-12 and 2012-13 decided on 20.07.2018 wherein it was held as under : “8.4 As noted above the sum of Rs.2,632.50 lakhs (Rs.3,400.02 lakhs in A.Y. 2012-13) added by the Assessing Officer includes a sum of Rs.1,72,91,656/- (Rs.1,28,31,395/- in AY. 2012-13) on other expenses like Rates & Taxes, Travelling Expenses, etc. The Ld. AR. relied upon the case of Intas Pharmaceuticals Ltd supra for the proposition that any revenue expenditure incurred in respect of the approved R&D facility is eligible for the weighted deduction. It is seen that the Hon'ble ITAT relied upon its earlier decision in the case of ACIT v. Torrent Pharmaceuticals Ltd, ITA No. 3569/Ahd/2004 dt.13.11.2009 in the context of the fact that there was no dispute that the assessee had actually incurred the impugned expenditure on building repairs and maintenance. In this light of the matter this amount of Rs.1,72,91,656/- (Rs.1,28,31,395/- in AY. 2012-13) will be examined for broad account heads and the fact of which research unit the expenditure pertains to. To the extent it is a revenue expenditure pertaining to the approved R&D facility the assessee is eligible for weighted deduction. ITA No. 485/Hyd/2022 Page 26 of 32 Alternatively, the claim will be allowed in terms of section 37 if actually incurred. Subject to this factual verification the claim is allowed." 6. It was the submission of the Ld. CIT-DR that the decision relied upon by the Ld. CIT(A) was set-aside by the Hon'ble Supreme Court as the Court has not considered Revenue question that ITAT has not followed the decision in the case of Concept Pharmaceuticals Ltd vs. ACIT (43 SOT 423). Referring to the above decision, it was the submission that the coordinate Bench did not allow the weighted deduction on expenditure incurred outside the R & D facility. Ld. CIT- DR relied on the grounds raised. 7. In response, Learned Counsel for the Assessee referred to the decision of the Hon'ble Gujarat High Court in the case of CIT v. Cadila Health Care Ltd [2013] (214 Taxman.com 672) to submit that the issue has been crystallised in favour of the assessee and Hon'ble Supreme Court has referred further three questions which were not answered and that does not affect the decision already given and the order of Gujarat High Court has not been set-aside. He further referred to the Explanation-2 to section 32(2AB) and relied on the following case law:- (i) ITAT Ahmedabad decision in the case of Intas Pharmaceuticals Ltd v. DCIT (ITA Nos. 807/Ahd/2010 and others, dated 14.08.2015); (ii) CIT vs. Cadila Healthcare Ltd (214 Taxman 0672); (iii) SRI Biotech Laboratories India Ltd vs. ACIT (36 ITR (Trib) 88); (iv) CIT vs. Claris Lifesciences Ltd (326 ITR 251) (Guj) and (v) CIT vs. Sandan Vikas (India) Ltd (335 ITR 117) (Guj) 8. Referring to the decision of Concept Pharmaceuticals Ltd (supra) it was submitted that the later decision of the ITAT has analysed the Explanation to section 32(2AB) which was approved by the Gujarat High Court. Since the decision has not considered the Explanation given, the decision need not be followed. It was further contended that when there are two possible views, the one which is in favour of the assessee should be followed as held by the Hon'ble Supreme Court in the case of CIT vs. Vegetables Products Ltd (88 ITR 192) (SC). It was the submission that the Hon'ble Supreme Court has referred additional three questions to Gujarat High Court and has not stayed or set-aside the judgment already given, on which the Ld. CIT(A) relied upon. He also submitted that the objects of the assessee R & D facility as stated in Form 3CM has been analysed by the Ld. CIT(A) and even though the expenditure was incurred outside for field trials, the expenditure has to be considered for the purpose of 'in-house' research. He supported the order of the Ld. CIT(A). ITA No. 485/Hyd/2022 Page 27 of 32 9. We have considered the rival contentions and perused the case law placed on record. In the decision of Concept Pharmaceuticals Ltd (supra) the Coordinate Bench did not allow the expenditure spent outside the R & D unit but the Bench has not considered the explanation introduced with reference to 'Clinical Trials'. By very nature, the Clinical Trials cannot alone be done within research facility as they require cooperation from the Medical Doctors, Hospitals, Volunteers and patients, therefore such expenditure has to be necessarily spent outside the facility, but for the purpose of 'in-house' research. This issue was examined by the Coordinate Bench which was subject matter of appeal before the Gujarat High Court and Gujarat High Court has approved the same. As seen from the order of the Supreme Court in Special Leave to Appeal (C) No. 770/2015, dated 13.10.2015, the grievance of Revenue with reference to non-framing of three questions were considered by the Hon'ble Supreme Court as those three questions are considered to be 'substantial question of law' and referred to the Hon'ble High Court to hear the aforesaid three questions of law. However, the judgment already passed by the Gujarat High Court has not been set-aside. As Ld. CIT(A) has followed the Coordinate Bench decision, which was approved by the Gujarat High Court and as no contrary High Court judgment has been placed on record, we approve the order of the CIT (A) and reject the Revenue contentions. 22. Following the above order, the Tribunal again in assessee’s own case for A.Ys. 2013-14 and 2014-15 vide ITA Nos.1772 and 1773/Hyd/2017 order dt.14.09.2018 decided the issue in favour of the assessee by observing as under : “7. Considered the rival submissions and perused the material on record.We find that similar issue came up for consideration before the coordinate bench of this Tribunal in assessee’s own case for AYs 2011-12 and 2012-13 (supra), wherein the coordinate bench has held as under: “9. We have considered the rival contentions and perused the case law placed on record. In the decision of Concept Pharmaceuticals Ltd (supra) the Coordinate Bench did not allow the expenditure spent outside the R & D unit but the Bench has not considered the explanation introduced with reference to ‘Clinical Trials’. By very nature, the Clinical Trials cannot alone be done within research facility as they require cooperation from the Medical Doctors, Hospitals, Volunteers and patients, therefore such expenditure has to be necessarily spent outside the facility, but for the purpose of ‘in- house’ research. This issue was examined by the Coordinate Bench which was subject matter of appeal before the Gujarat High Court and Gujarat High Court has approved the same. As seen from the order of the Supreme Court in Special Leave to Appeal (C) No. ITA No. 485/Hyd/2022 Page 28 of 32 770/2015, dated 13.10.2015, the grievance of Revenue with reference to non framing of three questions were considered by the Hon’ble Supreme Court as those three questions are considered to be ‘substantial question of law’ and referred to the Hon’ble High Court to hear the aforesaid three questions of law. However, the judgment already passed by the Gujarat High Court has not been set-aside. As Ld. CIT(A) has followed the Coordinate Bench decision, which was approved by the Gujarat High Court and as no contrary High Court judgment has been placed on record, we approve the order of the CIT(A) and reject the Revenue contentions.” As the issue in both the years under consideration are materially identical to that of AYs 2011-12 and 2012-13, following the decision of the coordinate bench in those years, we uphold the order of the CIT(A) and dismiss the grounds raised by the revenue in both the years under consideration.” 23. In the present case, undisputedly, the facts of the assessee are identical to the facts of the earlier years. The DRP in its order had acknowledged that the assessee is having the requisite certificate from the DSIR form no 3CL dated 15.7.2021 mentioning therein that the eligible R&D expenditure for the assessment year 2018 – 19 was ₹ 33509.81 lakhs (para 2.15.5 and para 2.15.6). The Assessing Officer as well as the DRP after noticing the above said fact also mentioned in Para 2.15.11 though the order of the Tribunal in the assessee’s own case is available for earlier years, however, the DRP had mentioned that the order passed by the hon’ble Gujarat High Court in the case of Cadella has been remanded back by the Hon'ble Supreme Court, hence, DRP is not granting relief to the assessee for this year before it. 24. Admittedly, the Revenue had preferred appeal against the order of the Tribunal in the case of the assessee for A.Ys. 2011-12 to 2014-15 before the Hon’ble High Court and the same are pending for adjudication before the Hon’ble High Court. ITA No. 485/Hyd/2022 Page 29 of 32 25. In the present case, undisputedly, the assessee had filed letter from Axis Clinical along with its balance-sheet and profit and loss account which is on record wherein it is clearly mentioned that the said Axis Clinicals have not claimed any benefit / weighted deduction u/s 35(2)(AB) of the Income Tax Act, 1961. 26. In our view, the reasons for filing the appeal before the Hon’ble High Court cannot be said to be plausible reason for not accepting the decision passed by the co-ordinate Bench when admittedly, there is no change in facts. The Hon’ble jurisdiction High Court in the case of State of Andhra Pradesh Vs. Commercial Tax Officer and another reported in 169 ITR 564 and also in the case of Mylan Laboratory [2022] 137 taxmann.com 178 (Telangana) had reiterated that the decision of the Co-ordinate Bench of the Tribunal is binding on the Assessing Officer in the following manner : “34. We are afraid such a view taken by the Assessing Officer can be justified. Rather, it is highly objectionable for an Assessing Officer to say that decision of the Income Tax Appellate Tribunal is not acceptable; and that since it has been appealed against, the issue of allowability of depreciation on goodwill has not attained finality. Unless there is a stay, order/decision of the jurisdictional Income Tax Appellate Tribunal is binding on all income tax authorities within its jurisdiction. 35. In Union of India v. Kamlakshi Finance Corporation Ltd. 1992 taxmann.com 16, Supreme Court held and reiterated that the principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not acceptable to the department, which in itself is an objectionable phrase, and is the subject matter of an appeal can be no ground for not following the appellate order unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result will only be undue harassment to the assessee and chaos in administration of the tax laws. 36. Following the above decision, Supreme Court again in Collector of Customs v. Krishna Sales (P.) Ltd. 1994 Supp. (3) SCC 73, reiterated the ITA No. 485/Hyd/2022 Page 30 of 32 proposition that mere filing of an appeal does not operate as a stay or suspension of the order appealed against. It was pointed out that if the authorities were of the opinion that the goods ought not to be released pending the appeal, the straight-forward course for them is to obtain an order of stay or other appropriate direction from the Tribunal or the Supreme Court, as the case may be. Without obtaining such an order they cannot refuse to implement the order under appeal. 37. Following the above decisions of the Supreme Court, a Division Bench of the Bombay High Court in Ganesh Benzoplast Ltd. v. Union of India 2020 (374) ELT 552 held that non-compliance of orders of the appellate authority by the subordinate original authority is disturbing to say the least as it strikes at the very root of administrative discipline and may have the effect of severely undermining the efficacy of the appellate remedy provided to a litigant under the statute. Principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. 38. This principle has been reiterated by the Bombay High Court in Himgiri Buildcon & Industries Ltd. v. Union of India 2021 (376) ELT 257. 39. Therefore, the stand taken by the Assessing Officer that since the decision of the Income Tax Appellate Tribunal in the case of the petitioner itself for the assessment year 2014-15 has been appealed against the issue in question has not attained finality, is not only wrong but is required to be deprecated in strong terms being highly objectionable. 40. The second view expressed by the Assessing Officer vis-à-vis the decision of the Supreme Court in SMIFS (1 supra) is still more problematic. It is not open to the Assessing Officer to try to evade from the binding effect of a Supreme Court decision by trying to find out 'distinguishing features'. Though unnecessary, we are still compelled to refer to Article 141 of the Constitution of India which says that the law declared by the Supreme Court shall be binding on all Courts within the territory of India. Therefore, it is the bounden duty of all authorities whether administrative or quasi judicial or judicial to follow the law declared by the Supreme Court. 41. While we agree with the learned Standing Counsel that the draft Assessment Order has not yet attained finality as it still has to be placed before the Dispute Resolution Panel and therefore, in the circumstances, we feel that interfering at this stage may not be justified as it would pre-empt decision-making by the high-powered Dispute Resolution Panel. However, we hope and trust that the Dispute Resolution Panel shall look into all aspects of the matter, more particularly, the discussions made above while passing appropriate order(s) under sub-section (8) of section 144C of the Act, and if necessary further personal hearing shall be afforded to the petitioner. 42. We make it clear that we have not expressed any opinion on merit. However, the Dispute Resolution Panel shall look into and consider the objections raised by the petitioner more particularly, about the decision of the Income Tax Appellate Tribunal in its own case for the Assessment Year ITA No. 485/Hyd/2022 Page 31 of 32 2014-15 and the judgment of the Supreme Court in SMIFS (1 supra) keeping in mind the discussions made above.” 27. In the light of the above, respectfully following the decision of the Co-ordinate Bench of the Tribunal in the case of assessee for the earlier years and more particularly when the approval in Form 3CL had been granted by the DSR (requisite authority) approving the expenditure for clinical trial expenses incurred outside approved R & D facilities, the assessee is entitled to weighted deduction u/s 35(2)(AB) and accordingly, the grounds 11 to 14 raised by the assessee are allowed. 28. In the result, the appeal of assessee is partly allowed. Order pronounced in the Open Court on 27 th April, 2023. Sd/- Sd/- Sd/- Sd/- Sd/- Sd/- (RAMA KANTA PANDA) ACCOUNTANT MEMBER (LALIET KUMAR) JUDICIAL MEMBER Hyderabad, dated 27 th April, 2023. TYNM/sps ITA No. 485/Hyd/2022 Page 32 of 32 Copy to: S.No Addresses 1 Aurobindo Pharma Limited, Galaxy Towers, 22 nd Floor, Plot No.1, Survey No.83/1, Hyderabad Knowledge City, Raidurg, Panmaktha, R.R. District, Hyderabad – 500 032. 2 Asst. Commissioner of Income Tax, Central Circle-1(2), Hyderabad. 3 The Director of Income Tax (IT & TP), Hyderabad. 4 ACIT (Transfer Pricing), Hyderabad. 5 DR, ITAT Hyderabad Benches 6 Guard File By Order