ZYDUS LIFESCIENCES LTD.,AHMEDABAD vs. THE DY.CIT, CENTRAL CIRCLE-2(1), AHMEDABAD

PER ANNAPURNA GUPTA, AM:

The present appeal has been filed by the assessee against the order of the Ld. Dy. Commissioner of Income Tax, Ahmedabad (hereinafter referred to as “DCIT”), dated 30.03.2023 passed under Section 153C r.w.s. 144C r.w.s. 143(3) of the Income Tax Act,

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1961 (hereinafter referred to as the “Act”) and relates to Assessment Year (A.Y.) 2017-18.

“1. That the learned Transfer Pricing Officer (TPO) has erred in law and on facts in exceeding the jurisdiction by passing the TP Order under Section 92CA(3) of the Income-tax Act, 1961 (the Act) beyond the mandatorily prescribed time limit as 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 rejecting consistent benchmarking approach followed by the Appellant, rejecting functionally comparable companies and arbitrarily cherry-picking companies for the purpose of benchmarking the transaction of sale of goods to Zydus USA. 7. That the learned AO/TPO/DRP has erred in law and on facts in making an addition of Rs.98,41,734/-on account of sale of finished products to Zydus France. 8. That the learned AO/TPO/DRP has erred in law and on facts in rejecting consistent benchmarking approach followed by the Appellant, rejecting functionally comparable companies and not

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adhering to Rule 10CA of the Income-tax Rules 1962 for the purpose of benchmarking the transaction of sale of goods to Zydus France. 9. That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 15,81,02,870/- (Being 200% of Rs.7,90,51,435) by holding that the appellant was not entitled to the weighted deduction for expenditure on Scientific Research u/s 35(2AB) being non-eligible R&D capital expenditure merely on the basis of Form no. 3CL, issued by the DSIR, Delhi, without his own findings and verification of the facts. Further, the learned Assessing officer erred in law and on facts in even not allowing basic deduction of Rs.7,90,51,435/- at the rate of 100% u/s 35(1)(iv) as directed by the Hon'ble DRP vide their directions given under paras 5.3.4 and 5.3.5 of their order dated 28/06/2022. 10. That the learned Assessing Officer erred in law and on facts in making an addition of Rs. 92,54,99,404/- (Being 200% of Rs.46.27,49,702) by holding that the appellant was not entitled to the weighted deduction for expenditure on Scientific Research u/s. 35(2AB) being non-eligible R&D revenue expenditure merely on the basis of Form no. 3CL issued by the DSIR, Delhi, without his own findings and verification of the facts. Further, the learned Assessing officer erred in law and on facts in not allowing even basic deduction of Rs. 46,27,49,702/- at the rate of 100% u/s 35(1)(i) as directed by the Hon'ble DRP vide their directions given under paras 5.34 and 5.3.5 of their order dated 28/06/2022. The learned Assessing Officer also erred in law and on facts in not allowing weighted deduction for expenditure on Scientific Research u/s, 35(2AB) in respect of Clinical Trials and Bio-equivalence Study of Rs. 3,73,40,000/- 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/-.

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of the Act working out an upward adjustment amounting in all to Rs.1,09,40,43,324/- with respect to the international transaction tabulated at page 4 of the assessment order:

Sr. No. Particulars Amount INR 1 Benchmarking of Corporate 25,96,89,186 Guarantee 2 Benchmarking of Convertible 2,65,51,520 Loan 3 Benchmarking of 7,61,41,741 Reimbursement of Expenses 4 Benchmarking of transactions 72,78,05,930 entered into with M/s. Zydus Pharmaceuticals (USA). Inc. 5 Benchmarking of AEs based in 38,54,947 France Total Adjustment 109,40,43,324

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 6 – 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.

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so and confronting the same to the assessee and after considering the reply of the assessee, the TPO went on to apply the average rate of 2.52% for the commission earned on corporate guarantees. The TPO followed the benchmarking done in identical transactions of the assessee in A.Y. 2014-15, noting that the rate of 2.52% was the arithmetic mean of external CUP’s in the form of corporate guarantee fees charged by the State Bank of India @2.75% and Bank of India @2.16% and the coupon’s rate of A rated bonds and B rated bonds of 2.66%. Accordingly, he proposed an upward adjustment to the international transaction commission earned on corporate guarantees by the assessee amounting in all to Rs.25,96,89,186/-. Ld.Counsel for the assessee drew our attention to para 6.2.1 & 6.2.2 of the TPO’s order in this regard as under:

“6.2.1 During the TP proceedings, the assessee has provided the details of guarantees to banks with respect to borrowings of its AEs. On verification, it is seen that majority of the Corporate Guarantees were given in earlier years and it has continued in this year also. The contentions made in respect of corporate guarantee are identical to those made in AY 2014-15. In AY 2014-15, the Corporate Guarantee fee was benchmarked taking the rate of 2.52%. This rate is the arithmetic mean of external CUPs in the form of corporate guarantee fees charged by State Bank of India @2.75% per annum and Bank of India @2.16% charged by and the coupon rates of 'A' rated bonds and 'BB' rated bonds of 2.66%. The average of the above 3 CUPs comes to 2.52%. The issue is pending before various appellate authorities. 6.2.2 Therefore, applying the average rate of 2.52% as ALP rate, the adjustment in respect of corporate guarantee amounting to Rs.25,96,89,186/-is made. The details of working are given below: Associated Enterprise Amount Sentynl Therapeutics Inc., USA 1,75,56,411 Laboratories Combix S.L. 15,26,859

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Zydus France (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. 4,50,700 V., Mexico 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

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 9 – followed his order for A.Y. 2014-15, similar adjustment made in the impugned year also needed to be deleted.

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 10 – International Pvt. Ltd. and Zydus Worldwide amounting to Rs. 2,65,51,520/-.

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 11 – 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 finding the Revenue to have filed appeal against the orders of the ITAT, therefore to keep the issue alive the DRP rejected assesses objections.

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 12 – same, we find no reason to confirm the adjustment made to the international transaction of interest earned on convertible loans issued by the assessee, finding the same to be admittedly covered in favour of the assessee by the orders of the ITAT in the preceding years. The adjustment, therefore, made to the tune of Rs.2,65,51,520/- on this account is directed to be deleted.

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charges, legal expenses, clinical charges, product registration charges, regulatory fees, conference registration, etc. He stated these 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 favour of the assessee consistently by the decision of the ITAT in preceding assessment years. The ld.DR fairly conceded, though, he vehemently relied on the orders of the authorities below. 19. The facts relating to the issue find mentions at para 7.2 to 4.5 of the order of the TPO and emanate from the same that the assessee during the year had reimbursed expenses to its AE’s Zydus Pharmaceuticals, Mexico & Zydus France. The assessee’s contention was that all these expenses were made by way of reimbursement on cost-to-cost basis to this overseas enterprises.

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reimbursement of certain expenses in the nature of insurance for clinical trial studies on behalf of the assessee for administrative convenience. The TPO as well as the DRP however took the view that there was contradiction in the FAR analysis in the transfer pricing report and the submissions made while justifying the reimbursement of expenses. This was also observed by the TPO in the orders for assessment year 2012-13 and assessment year 2013-14. In the FAR in transfer pricing report for transactions with AEs viz. Zydus France, Zydus Japan, the assessee has been classified as a contract manufacturer. Since the assessee company has been taken to be a contract manufacturer and benchmarked as such, then the expenses incurred by the Associated Enterprises cannot be taken to have been incurred on behalf of the assessee company. The TPO to the view that no contract manufacturer, in similar uncontrolled transactions, would reimburse the expenses of another/third-party. Contract manufacturing is a very limited risk activity with low rewards and hence does not require incurring expenses of such nature. In view of this, the arms- length price (ALP) was taken as "Nil" by the TPO. 12. Before us, the counsel for the assessee reiterated the arguments taken before TPO/DRP to the effect that the assessee had reimbursed the Associated Enterprises on cost to cost basis. The counsel for the assessee submitted that the TPO and DRP has erred in facts in coming to the conclusion that the assessee was acting as a contract manufacturer for the above entities and the cost to cost reimbursements to these entities were in respect of its activities as a contract manufacturer. He submitted that the assessee was the IP owner and all the reimbursements were made with Cadila Healthcare Ltd. vs. DCIT respect to assessee's business interests in these jurisdictions. In respect of Zydus Mexico, the assessee filed submission dated 2ndJune 2022 and drew our attention to relevant extracts of the supply and distribution agreement between the assessee company and Zydus Mexico to demonstrate that in fact, assessee is the IP owner and therefore reimbursements were made in connection with protection of assessee's interest 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

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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 assessee is the IP owner. He further drew our attention to pages 505-592 of the paper book, to the supportings for expenses reimbursed by Zydus France for product submission and regulatory fees, control and testing fees, the leaflet replacement cost of product innovator sample costs. The assessee submitted Cadila Healthcare Ltd. vs. DCIT that all these expenses have been reimbursed in respect of those expenses incurred by Zydus France where the assessee company is acting as the entrepreneur/IP owner and Zydus France is acting as low risk distributor. 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, whereas the latter was acting as the low risk distributor for the assessee. With respect to cost to cost reimbursements made by the assessee to Zydus Japan, the assessee submitted that these were reimbursements made to Zydus Japan for insurance charges and he drew attention to pages 614-15 of the paper book. The assessee's contention is that in all cases, the expenses were reimbursed on cost of cost basis to the overseas entities in respect of those expenses which were incurred by these overseas associated Enterprises on behalf the assessee company wherein the assessee was acting in the capacity of an entrepreneur/IP owner. Accordingly, the AO has erred in facts and in law computing the arm's-length price at "Nil" in respect of these payments. 13. We have heard the rival contentions and perused the material on record. In our considered view, the assessee has been able to demonstrate that these expenses were incurred by way of reimbursement to its associated Enterprises-Zydus Mexico, Zydus France and Zydus Japan in respect of expenses incurred by these overseas Associated Enterprises on behalf of the assessee company, wherein the assessee were acting in the capacity is an entrepreneur/IP owner, on a cost to cost basis. The assessee has given supporting documents in respect of the nature of reimbursements, from which it can be inferred that the expenses were essentially incurred with Cadila Healthcare Ltd. vs. DCIT respect to assessee's business interests in these overseas jurisdictions. The TPO/DRP has not questioned/challenged the assertion of the assessee that these expenses were reimbursed on a cost to 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

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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 enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd. [(2012) 345 ITR 241 (Del)] "Even Rule 10B(l)(a) does not authorize disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same". The very foundation of the action of the TPO is thus devoid of legally sustainable merits. We have also noted that there is no mark up in the reimbursement of expenses, and, as such, there is no question of making any ALP adjustment in respect of these reimbursements of expenses. We have further noted that similar reimbursement of expenses to the US based AEs were made in the period relating to the assessment years 2010-11, 2011-12, 2013-14, 2014-15 and 2015-16, but no such arm's length price adjustments were made in any of these Cadila Healthcare Ltd. vs. DCIT years. Undoubtedly, there is no res judicata in tax proceedings but principles of consistency definitely have a crucial rule to play- particularly in respect of a factual matter which permeates through the different assessment years. Similar transactions have been accepted to have been entered into on arm's length basis in the preceding, as also succeeding, years. There is thus no justification for deviation in this particular assessment year. In any case, so far product liability insurance is concerned, the assessee has justified bearing the same on the ground that US AE is an LRD (limited risk distributor) with a targeted operated margin, and, therefore, under this business model, these costs are to be borne by the assessee company. We see no infirmity in this approach and this explanation. When AE is only doing distribution, it is entirely a commercial call of the assessee as to which type of product related expenses are to be borne by the assessee. These expenses thus clearly pertain to the assessee as the US AE is admittedly, and beyond dispute, only an LRD. The same is the position with respect to the legal expenses. It has been specifically explained by the assessee, and this explanation has not even been called into question, that the US AE was holding

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the ANDAs and patents, as a trustee and in fiduciary capacity, for the assessee company. It would, therefore, be wholly immaterial as to who is holding 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 deduction. In any case, Cadila Healthcare Ltd. vs. DCIT there is not even a whisper of a discussion about the method of ascertaining the ALP employed by the TPO. When a TPO makes an ALP adjustment, he has to justify on the basis of a prescribed method of ascertaining the ALP. Thus, whichever way we look at it, the impugned ALP adjustment cannot be justified. We, therefore, uphold the plea of the assessee on this point as well, and direct the Assessing Officer to delete the impugned ALP adjustment of Rs 21,43,79,368- subject to necessary verifications about the figures. 24. Ground no. 3 is thus allowed." 13.1 Respectfully following the observations of the ITAT in assessee's own case for assessment year 2012-13 and assessment year 2013-14 in ITA number is 954/AHD/17 and 213/AHD/18, referred to above, we are of the considered view that the TPO has erred in fact and law in holding that the arm's-length price in respect of these cost to cost reimbursements should be determined at "Nil". Further, we also observed that the High Courts in various cases have held that the TPO cannot determine the arm's-length price of transaction as "Nil" on ad- hoc basis without employing any of the prescribed methods as the same is against the scheme of the Act. [Johnson & Johnson Ltd (Bombay High Court) (ITA No. 1030 of 2014), Kodak India Private Limited (Bombay High Court) (ITA No. 15 of 2014), Merck Limited (Bombay High Court) (ITA No. 1272 of 2014)]. Further, the High Court's have also held on various occasions that the TPO's jurisdiction is limited to

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determine the arm'slength price of a transaction and does not have the jurisdiction to examine the allowability of expenses as provided in section 37 of the Act. [Luwa India Pvt. Ltd (Karnataka High Court) (I.T. A.No.296 of 2017), Lumax Industries Limited (Delhi High Court) (ITA Nos. 102,103, 104 & 587/2014), Cushman and Wakefield (India) Pvt. Ltd. (Delhi High Cadila Healthcare Ltd. vs. DCIT Court) (ITA No. 475 OF 2012), EKL Appliances Ltd. (Delhi High Court) (ITA No. 1068 & 1070 OF 2011), Hive Communication Private Ltd. (Delhi High Court) (ITA No. 306 OF 2011).] 14. In view of the above observations, ground number 1(c) of the assessee's appeal is allowed.” 22. We have noted from the above that the ITAT took note of the facts of the case, and found that the assessee had reasonably 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.”

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 20 – 26. Ground of appeal No.4 raised by the assessee stands allowed.

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 21 –

Particulars Amount ALP taking Adjustment

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 22 –

1.82% Sales 405.01 405.01 Expenditures Cost of Goods 368.62 379.85 11.23 Sold (Transaction value to be benchmarked Direct Costs 6.88 6.688 Common Costs 11.41 11.41 Depreciation 0.39 0.39 Total Operating 387.3 398.53 Profit Net Operating 17.71 6.48 Profit 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

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ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 24 – issued by the TPO also. The Ld.DR contended that the operating margin of the comparables was inadvertently taken at 1.82% though it was 1.60% and the correct operating margin of 1.60% was specifically mentioned in the show cause notice. When confronted with the same, the Ld. AR was unable to controvert the said fact. He conceded that the operating margins of the comparables was correctly taken by the TPO at 1.60% and taking the same there was no scope of the adjustment made to the international transaction falling within the 3% margin as specified in Rule 10CA. He fairly conceded that there was no merit left in the ground so raised by the assessee.

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 25 – finding them to be not functionally comparable and to be having wider geographical or expanded territorial jurisdiction.

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 26 – contended that with respect to SCHEIN, ACETO and Patterson, the segmental information of their pharmaceutical segment was duly furnished to the TPO and it was pointed out that in all the three cases the revenue generation from the territory of USA was more than 60% being 65.13% in the case of SCHEIN, 72% in the case of ACETO Corp and 84% in the case of Patterson company. It was, therefore, contended that with respect to all the three comparables, it was demonstrated that only segmental information with respect to the pharmaceutical division of these entities was furnished to the TPO for comparison and it was also demonstrated that majority of their operations were in USA. Ld. Counsel for the assessee further contended that these three comparables were all accepted as comparables in the TP assessment of the assessee conducted right from A.Y. 2011-12 to A.Y. 2015-16 and he further pointed out that Zydus USA, the tested party, had consistently shown net operating margin of 4.5% from A.Y. 2012-13 to A.Y. 2015-16 and, therefore, any adjustment made on account of sales made by the assessee to this AE was not justified.

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 27 – huge margins in the preceding years also was not sufficient argument to reject the adjustment made by the TPO in the impugned year, since each year was to be considered separately for Income Tax purposes.

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 28 – Counsel for the assessee has also demonstrated that the majority of the revenue or operations of all the three entities was in the jurisdiction of USA. This fact has also been pointed out from the documents submitted to the TPO placed in the paper book before us and has not been controverted by the Learned DR.

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 29 – of sales to Zydus USA. All the three entities are held to be comparable by us and the transfer pricing adjustment made to the international transaction of sales to Zydus USA amounting to Rs.72,78,05,930/- is accordingly directed to be deleted.

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 30 – 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.

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 31 –

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 32 – available the same can be ignored. On the contrary, the illustration emphasises the consideration of 3 years data of comparables. The orders of the authorities below reveal that the assessee had contended the non-availability of data even at the time of conclusion of the assessment proceedings. However, the DRP proceedings are continuation of the assessment proceedings and assessee has failed to demonstrate whether data relating to said four comparables was available during the pendency of the DRP proceedings. Further, even appellate proceedings are continuation of the assessment proceedings and if the data is available even at this stage it is to be considered for determining arm’s length price of the transaction. It is not the case of the assessee that the Rule 10CA of the Rules does not prescribed 3 years data of comparables to be considered. Therefore, if the prescription as per the Rule to consider 3 years data of comparable, the same has to be adhered to. Since the issue before us 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.

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 33 – 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 broad functional comparison needed to be done.

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 34 – 47. Another argument of the Ld. Counsel for the assessee before us was that the assessee had undertaken its benchmarking exercise taking Zydus France as the tested party and selecting comparable from the DIANE data base. His contention was that the TPO/DRP had rejected this exercise carried out by the assessee since the assessee was unable to demonstrate its benchmarking exercise using this data base, DIANE, both to TPO/DRP. The assessee subsequently, used another data base before the TPO and exhibited its benchmarking exercise to the TPO selecting 23 comparables out of which four were rejected by the TPO and four by the DRP.

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 35 – in selection of proper 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 2017- 18, 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.

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 36 – of Rs.5,45,90,300/- therefrom, weighted deduction @ 200% on the balance of Rs.3,86,95,20,837/- was claimed amounting to Rs7,73,90,41,674/-. The AO restricted the claim of deduction of capital and revenue expenditure to the extent approved by the competent authorities specified in law i.e. DSIR in Form No. 3CL amounting to Rs.3,32,77,19,700/- resulting in restricting the claim of weighted deduction to Rs.6,65,54,39,400/-. As a result, deduction claimed by the assessee u/s 35(2AB) of the Act was disallowed to the tune of Rs.1,08,36,02,274/-. The working of the disallowance is reproduced at page 8 of the assessment order.

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 37 – year before us, A.Y 2017-18. It was pointed out that section 35(2AB) of the Act was amended by Finance Act 2015 and sub Rule (7A) to Rule 6, was amended by the IT (Tenth Amdt) Rules, 2016 we.f. 01-07-2016, effecting the provisions applicable for the impugned year before us, A.Y 2017-18. Both the parties agreed that by virtue of the said amendment, the competent authority, i.e DSIR, was to approve the quantum of eligible expenditure for claiming weighted deduction u/s.35(2AB) of the Act. It was common ground that prior to the amendment to the Section along with the Rules applicable thereto, the section read with the Rules, was judicially interpreted as empowering the 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)

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 38 – 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) 161 Taxmann.com 393 (Kolkatta-Trib)

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 39 –

incurred on R&D only to the extent approved by the DSIR in Form No.3CL, which had been rightly done so by the authorities below and there was no reason for interfering in the orders of the authorities below.

“RULE 6………………… ……………………………. …………………………….. (7A) Approval of expenditure incurred on in-house research and development facility by a company under sub-section (2AB) of section 35 shall be subject to the following conditions, namely :— (a) The facility should not relate purely to market research, sales promotion, quality control, testing, commercial production, style changes, routine data collection or activities of a like nature; 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;

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 40 –

(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.

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 41 – activities by granting weighted deduction to expenditure incurred on account of the same. To make it workable and feasible, Rules have been framed by CBDT stating the approving authority to be DSIR who approves the facility and by virtue of an amendment to the rules even the quantum of expenditure is required to be approved by the competent authority. This amendment to the rules in our view does not in principle defeat the policy objective of the section i.e. the grant of weighted deduction to R&D expenditure. In fact, the amendment to the Rules has made the section workable, granting the power to scrutinize the eligible expenditure to the authority which is technically competent to do so and thus ensuring that only eligible R&D expenses are allowed the benefit of weighted deduction. The arguments of the ld. counsel for the assessee that the rules has effected substantively the parent provision is therefore incorrect. Ld.Counsel for the assessee cited decisions in support of its contention that any provision made in Rules could not circumvent or transgress the legislative intent, but since this principle laid down by the courts is not disputed , and on the contrary however it is found that in the present case the rules have not transgressed the legislative intent, the said decisions do not help the case of the assessee.

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 42 – the Act to the extent approved by the DSIR in Form 3CL is therefore upheld.

ITA No. 392/Ahd/2023 [Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 43 –

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.

This Order pronounced on 29/01/2026

Sd/- Sd/- (SUCHITRA KAMBLE) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 29/01/2026 S. K. SINHA True Copy आदेश क� �ितिल�प अ�े�षत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. ��यथ� / The Respondent. 2. संबंिधत आयकर आयु� / Concerned CIT 3. 4. आयकर आयु�(अपील) / The CIT(A)- �वभागीय �ितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण, अहमदाबाद / ITAT, Ahmedabad