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

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.

Briefly stated, the assessee company is a manufacturer and trader of pharmaceutical products including veterinary pharmaceutical products operating both at the domestic level and internationally. As regards domestic business, the assessee company employed marketing field force and incurred all marketing and sales promotion expenses. It also appointed C&S agents across the country to carry out selling and distribution functions on behalf of the assessee company. As regards international business, the assessee company exported goods to various foreign countries either directly or through its Overseas Associate Enterprise. The details of international transaction in terms of Section 92B of the Act between the assessee and its associate enterprise were given in Form 3ECB and the aggregate value of the international transactions mentioned therein was Rs.21,54,00,08,465/-. A reference u/s.92CA(1) of the Act was sent by the AO to the TPO to determine the Arm’s Length Price of the international transactions undertaken by the assessee company during the impugned year. The TPO passed an order u/s.92CA(3)

The AO further disallowed excess claim of deduction of R & D expenses, claimed u/s.35(2AB) of the Act, amounting to Rs.1,08,36,02,274/-. A draft order incorporating the Transfer Pricing adjustments made and the disallowance of excess claim of deduction u/s.35(2AB) of the Act was passed by the AO. The assessee filed objections to the same to the DRP who, in turn, gave directions in its order passed u/s.144C of the Act following which the AO passed order making addition u/s 92CA(3) of the Act to Rs.92,57,65,000/- and u/s 35(2AB) of the Act to Rs.108,36,02,274/-.

Aggrieved by the same, the assessee has come up in appeal before us.

Ground No.2 relates to transfer pricing adjustment made to the international transaction of corporate guarantee commission earned by the assessee amounting to Rs.8,54,24,075/-.

At the outset, Ld. Counsel for the assessee stated that this was a legacy issue which had arisen in the case of the assessee in the earlier years also and had repeatedly been decided in favour of the assessee by the ITAT. He contended that the adjustment on account of the impugned international transaction was made by the TPO based on his findings in the preceding years in the case of the assessee and the ITAT in all the preceding years had deleted the adjustment made by the TPO.

Drawing our attention to the facts of the case, Ld. Counsel for the assessee drew our attention to Page No.4 of the TPO’s order pointing out the corporate guarantees issued by the assessee to its AEs listed thereon. He pointed out that in the TP study report, the assessee had benchmarked corporate guarantee, charged @1%, by taking “Such Other Method “as the Most Appropriate Method (MAM). The TPO, however, noted that in the TP orders of the assessee for A.Ys. 2013-14, 2014-15, 2015-16 & 2016-17 the impugned transaction had been benchmarked @2.52%. Noting Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 7 – 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:

The DRP, it was pointed out, directed the restriction of the ALP of corporate guarantee commission to 1.5%, following the decision of the Hon’ble Bombay High court in the case of Everest Kanto and the case of Glenmark Pharmaceuticals Ltd.in dated 13-11-2013 as affirmed by the Hon’ble High court.

Ld. Counsel for the assessee, thereafter, pointed out that the ITAT in the case of the assessee for A.Y.2015-16 had dealt with an identical issue and noting that identical adjustment made in the case of the assessee in A.Y. 2014-15 had been deleted by the ITAT, the adjustment made in A.Y. 2015-16 was also deleted. He drew our attention to para 4 to 11 of the order of the ITAT placed before us in paper book page nos. 111 to 117, more particularly, our attention was drawn to the fact that the ITAT had taken note of its own case in the case of the assessee in A.Y. 2014-15 deleting identical adjustment made in the case of the assessee. He contended, therefore, that since the TPO in the present case had 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.

Ld. DR was unable to controvert the factual contention made by the Ld. Counsel for the assessee as above. He was also unable to point out any distinguishable facts in the case of the assesee for A.Y. 2014-15 & 2015-16. More particularly, he was unable to controvert the fact that the TPO had followed his order for A.Y. 2014-15 while making the impugned adjustment, which adjustment in A.Y. 2014-15 already stood deleted by the ITAT’s order.

Ground of appeal No.2 of the assessee is accordingly allowed.

Ground of appeal no.3 relates to the adjustment made to the international transaction of interest earned on convertible loans given by the assessee to its associate enterprise i.e. Zydus Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 10 – International Pvt. Ltd. and Zydus Worldwide amounting to Rs. 2,65,51,520/-.

Ld. Counsel for the assessee contended that this adjustment had also been made following the orders passed by the TPO in the preceding years in the case of the assessee i.e. right from A.Ys. 2012-13 to A.Y. 2016-17 and he again pointed out that in all the said years the matter had travelled to the ITAT and the adjustment stood deleted. Therefore, he stated that the issue should covered in favour of the assessee.

Drawing our attention to the facts of the case, Ld. Counsel for the assessee pointed out from page 15 of the TPO’s order that the assessee was noted to have advanced optionally converted loans to Zydus International Pvt. Ltd. and Zydus Worldwide amounting to Rs.1,66,47,50,000/- and Rs.7,81,62,53,202/-; respectively. In the transfer pricing study report, the assessee was noted to have benchmarked the interest on the said loans by following “Other Method” as the Most Appropriate Method (MAM). The assessee had claimed these transactions to have not given rise to any taxable income and that they had been identified as international transaction as a matter of abundant caution. Accordingly, the transactions had been claimed as to be at Arm’s Length. The TPO however noted that in the orders passed in the case of the assessee from A.Ys. 2012-13 to 2016-17 onwards, the transaction was benchmarked at contractual rate applicable to the 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.

Ld. Counsel for the assessee, thereafter, drew our attention to the order of the ITAT in A.Y. 2015-16 placed at paper book page nos. 111 to 117, drawing our attention, more particularly, to para 12 to 17 of the order pointing out that the ITAT had deleted the decision following its order in the case of the assessee from A.Ys. 2008-09, 2010-11, 2012-13, 2013-14 & also 2014-15.

Drawing our attention to the facts of the case, Ld.Counsel for the assessee pointed out that the assessee had reported certain transaction of reimbursement of expenses to its AEs in Form No.3CEB which are reproduced at page 44 of the TPO's order. The Assessee had claimed these expenses to have been incurred by the AEs on behalf of the assessee, being in the nature of insurance Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 13 – 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:

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.

With respect to Zydus, France, the assessee had contended reimbursement of the product submissions and regulatory fees as also reimbursement of reprinting charges, while with respect to Zydus Pharmaceuticals, Mexico, the assessee had contended reimbursement of clinical research and product registration expenses. The assesee’s contention was that the reimbursement had been made for products wherein the assessee was intellectual owner and played role of entrepreneur whereas the associate entity was only a distributor. The TPO and the DRP took a view that there was a contradiction in FAR analysis in the TP report and submissions made by the assessee, while justifying the ALP expenses reimbursed. It was noted that the FAR analysis in the TP report, the assessee had been classified as contract manufacturer, and accordingly, both the TP and DRP held that in such circumstances, the AE cannot be said to have incurred expenses on behalf of the assessee-company. The case of theTPO/DRP was that no contract manufacturer in similar uncontrolled transactions, would reimburse expenses of another third-party, since contract manufacturing is a limited risk activity with no rewards and does not require any other expenses of such nature to be incurred.

We have gone through the order of the ITAT for Asst.Year 2014- 15, wherein the issue has been dealt with at para 11 to 14 of its order. The relevant findings of the TPO are as under: “11. The brief facts in relation to this ground of appeal are that during the year under consideration, the assessee had reimbursed expenses to three associated Enterprises: Zydus pharmaceuticals Mexico, Zydus France and Zydus Japan. The assessee's contention is that all these expenses were made by way of reimbursement on cost of cost basis to these overseas associated enterprises. With respect to reimbursements made to Zydus Mexico, the assessee's contention is that Zydus Mexico had incurred certain expenses related to clinical research and product registration for assessee's products. The assessee's contention is that the reimbursements have been made by the assessee for the products wherein the assessee is the IP owner and plays the role of entrepreneur whereas Zydus Mexico is only a distributor entity. With respect to reimbursement of expenses to Zydus France, the assessee submission was that the expenses have been reimbursed to Zydus France only for those matters where the assessee is acting as an entrepreneur (while the assessee admitted that for some products, he also acted as a contract manufacturer, but the assessee submitted that no reimbursements were made by the assessee to Zydus France in respect of the same). During the year, Zydus France had incurred certain expenses related to product submission and regulatory fees, control and testing fees, leaflet replacement cost and production sample cost for assessee's products. These costs have been reimbursed by the assessee to Zydus France on cost to cost basis without any markup. Thirdly, the assessee also made reimbursements to Zydus Japan on Cadila Healthcare Ltd. vs. DCIT cost to cost basis by way of Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 15 – 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.

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 Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 17 –

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.”

Ld.DR was unable to draw our attention to any distinguishing facts from the preceding year and he fairly agreed that the TPO while making the impugned adjustment had followed his orders in the preceding years in the case of the assessee, which stood deleted by the ITAT.

In view of the same, we see no reason to confirm the addition made to the income of the assessee on account of adjustment/ upward adjustment made to the international transaction of reimbursement of expenses to the tune of Rs.7,61,41,741/-. We, accordingly, direct deletion of the same.

The facts relating to the issue are that the assessee while benchmarking its transaction of sale of goods to its AE ,Zydus USA, had treated its AE as the tested party and benchmarked the transaction by conducting an independent search on Compustat North America, database of North American companies. The assessee selected six comparable companies, the details of which are given at page 56 and 57 of the TPO's order as under:

The assessee's AE was shown to have retained an operating margin of 4.37% on sales and the remaining profits had come back to India in the form of true up. The broadly comparable independent companies were shown to have earned a segmental margin ranging from 1.81% to 6.01% with a median of 3.91%. Further, the assessee had provided entity level margins of comparable companies during the proceedings which led to an updated range of 2.19% to 6.96% with a median of 4.57%. The TPO however retained and accepted only three comparable companies shown to be having a mean of 1.82% at entity level and 1.60% at the segment level and worked out the amount of adjustment to be made to the international transaction to the tune of Rs.72,78,05,930/-. His adjustment in this regard is contained at page 76 and 77 of the TPO's order as under:

In Ground No. 5 raised before us, Ld. Counsel for the assessee contended, that the adjustment made has been challenged on the ground that it is within the benefit of plus minus 3% as provided in Rule 10CA of the Income Tax Rules, 1962. The contention of the Ld. Counsel for the assessee was that the TPO had worked out the weighted average of the operating margins of the comparables at 1.82% and applying the same while computing the arm's length price of the international transaction in the present case the adjustment made would fall within the accepted variation of 3%. In this regard, he drew our attention to the working submitted by the assessee to the TPO during proceedings before him reproduced at page 74 of the TPO's order as under:

At this juncture, the department was asked to seek a report from the TPO on the contention of the assessee. Subsequently, a report was submitted to us vide letter dated 20th February, 2025, wherein the TPO pointed out that the weighted operating margin of the comparables was 1.60% and not 1.82% as contended by the assessee. In the submissions, it was stated that this was categorically pointed out to the assessee in the show cause notice 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.

Accordingly, Ground No. 5 raised by the assessee is dismissed finding the contention raised of the adjustment made to the international transaction of sale to ZYDUS USA being within the safe harbour 3% range as per rule 10CA, to be admittedly factually incorrect.

In Ground No. 6, Ld. counsel for the assessee contended that his arguments were against the rejection by the TPO of three comparables selected by the assessee company, i.e SCHEIN (HENRY) INC, ACETO CORP, and PATTERSON COMPANIES INC. His arguments, in brief, were to the effect that the reasons for rejection by the TPO were all incorrect and they had been rightly selected as comparable by the assessee company. He contended that all the three companies were rejected by the TPO 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.

With respect to SCHEIN (HENRY) INC, Ld.Counsel for the assessee pointed out that it was noted to be engaged by the TPO in two segments healthcare distribution and technology and value added services and having operations all over the world. With respect to Aceto Corp also the company was found to be dealing in different and diversified product categories in the field of performance chemicals, such as, antioxidants, photo initiators, catalyst as well as in photo tooling of printed circuit boards and to have its operations in United States Europe and Asia territory. With respect to Patterson and company, it was found that the said company was engaged in the distribution of dental veterinary and rehabilitation supplies. The tested company selected for determination of ALP, was however noted to be dealing only in pharmaceutical products within the territorial jurisdiction of USA and, therefore, all the three entities were found to be functionally not comparable and also having an expanded territorial jurisdiction and for this reason the TPO rejected all the three for comparison.

The rebuttal or the counter of the assessee to the same was that with respect to all the three entities segmental information had been furnished and it had also been pointed out that majority of the operations of all the three entities was in USA. It was 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.

Learned DR, however, relied on the findings of the authorities below contending that the three comparables had been rightly rejected by the TPO finding them to be not functionally comparable and also finding them to be operating in an expanded jurisdiction. He further contended that the assessee's contention with respect to the said entities having been accepted in the preceding years and the AE i.e. Zydus USA consistently returning 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.

We have heard the rival contentions and we find merit in the argument of the Learned Counsel for the assessee. The Learned Counsel for the assessee has agitated the rejection of three comparables selected by it while benchmarking its international transaction of sale made to its Associate Enterprise Zydus USA. The three entities rejected by the TPO are SCHEIN Henry Inc, ACETO Corp and Patterson Companies Inc.

Undoubtedly, these three entities have been found to be functionally not comparable, since, they have been noted by the TPO to have been dealing in products other than that in which the tested entity of the assessee company, ZYDUS USA, dealt with i.e. pharmaceutical products and they were also found to be operating in a wider territorial jurisdiction while the tested entity operated only in the jurisdiction of USA. The Learned Counsel for the assessee has pointed out that it had submitted segmental results of the pharmaceutical division of all the three entities to the TPO. This fact has not been controverted by the Learned DR. Learned Counsel for the assessee has demonstrated the same from relevant pages of the paper book reflecting the segmental results of these three entities, which was furnished to the TP. Further, Ld. 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.

In the light of the same, we find merit in the contention of the Learned Counsel for the assessee that the authorities below had erred in rejecting these three entities as comparables, since, the basis for rejecting the same by the TPO does not survive i.e. the entities not being functionally comparable and operating in a wider jurisdiction, since, the assessee has furnished segmental data of the pharmaceutical division with respect to the three entities and has also demonstrated the three entities to be operating majorly in the jurisdiction of USA. Besides, Learned Counsel for the assessee has pointed out that the three entities have been accepted as comparable in the past years also, right from A.Y. 2011-12 onwards. And the fact that the tested party, that is the AE, has consistently been returning profits in the past of 4.5%, which have not been visited with any adjustment in the hands of the assessee in the past, add strength to the argument of the Learned Counsel for the assessee in support of the arm's length price of the transaction entered into by the assessee with its AE. In view of the above, we hold that the AO / TPO was not justified in rejecting the three comparables selected by the assessee for determining the arm's length price of its international transaction 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.

Ground of Appeal No. 6 raised by the assessee is, accordingly, allowed.

We have heard both the parties. Undoubtedly, the adjustment to the International Transaction of sale of finished goods to Zydus France has been made by rejecting in all 8 comparables selected by the assessee in its benchmarking exercise. The facts on record show that that the assessee had benchmarked its transaction selecting 23 comparables companies, out of which four were 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.

One of the arguments of the Ld. Counsel for the assessee before us was that it was pointed that as per Rule 10CA of Income Tax Rules, 3 years data of each comparable company was to be taken for the Bench marking exercise, however he contended that as per Rule 10CA itself the mere non availability of data for one year could not be the reason for rejection of comparables. In this regard he contended that as per illustration 2 provided in Rule 10CA the absence or the non-availability of data for one of the assessee could not be the reason for rejection of comparable. Our attention was drawn to the relevant illustration of the Act provided in Rule 10CA which is placed at page no.380 of the paper book.

We have gone through the said illustration 2 provided under Rule 10CA and we are not in agreement with the contention of the Ld. Counsel for the assessee that the non-availability of one year data of a comparable can be ignored for the purposes of determination of arm’s length price of an International transaction. What the illustration 2 provides is that in case, at the time of benchmarking transaction by the assessee the data of that comparable is not available, however it is available during the assessment proceedings then that data is to be considered for the purposes of benchmarking of transaction and if during the assessment any new comparable also arises then that is also to be considered for determining of arm’s length price of the transaction. This does not mean that and in no way implies that if the data of the particular year relating to the comparable is not 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.

We are not in agreement with the contention of the Ld. Counsel for the assessee. The dis-similarity in the function of the comparables rejected by the DRP with the tested parties has vide ramifications. Even if agreeing that the tested party was operating both in the wholesale and retail segments, the comparables rejected by the DRP were noted to be operating only in the retail segment. There is no doubt that the functions, risks and margins of the retail segment and wholesale segment are markedly different. In the light of the same the functional dissimilarity noted between the comparables rejected by the DRP and the tested party cannot be ignored, even taking a broader view as contended by the Ld. Counsel for the assessee. Therefore, the rejection of four comparables by the DRP is confirmed by us.

The argument for the Ld. Counsel for the assessee before us was that even in earlier years the same data base i.e DIANE had been used for undertaking benchmarking exercise which was accepted by the TPO in the preceding years .That as per Rule of consistency the benchmarking exercise carried out by the assessee using DIANE data base needed to be accepted.

We do not find any merit in the contention of the Ld. Counsel for the assessee since we have noted from the order of the DRP that using the DIANE database to identify the independent companies in distribution of pharmaceuticals goods in France office, the assessee had run search for calendar year 2012 to 2014 only. The DRP has stated that it is evident from the same the assessee had failed to substantiate that the search process had been carried out independently and in an independent fashion resulting 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.

In view of the above grounds nos. 7 and 8 raised by the assessee relating to the issue of adjustment made to the international transaction of sale of finished goods to Zydus France is partly allowed for statistical purposes.

Ground Nos. 9 & 10 raised by the assessee relate to the issue of weighted deduction claimed by the assessee of Research & Development expenditure incurred by it in terms of the provisions of Section 35(2AB) of the Act. The assessee had claimed weighted deduction on account of capital expenditure incurred amounting to Rs.13,12,58,435/-. and revenue expenditure incurred on R&D amounting to Rs.3,79,28,52,702/-. Reducing R&D income 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.

The assessee objected to the same before the DRP who, in turn, though found merit in the findings of the AO that of the weighted deduction to be allowed only to the extent approved by the DSIR, however, at the same time, the DRP directed the AO to allow assesses alternative claim to such expenditure not considered for the purposes of section 35(2AB) of the Act, u/s 35(1)(i) and 35(1)(iv) of the Act, if found eligible. The AO however disallowed claim of deduction u/s 35(2AB) of the Act to the tune of Rs.108,36,02,274/- noting that the DRP had rejected the objections of the assessee.

During the course of arguments made by both the sides before us, it emerged that Section 35(2AB) of the Act read with the relevant Rule, i.e Rule 6 of the Income Tax Rules, 1962, underwent an amendment relevant for the impugned assessment 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:

Having noted so, the argument of the Ld. Counsel for the assessee before us was that DSIR had been empowered to approve quantum of expense eligible for deduction by virtue of amendment made to Rules and there was no change in the provision of law with regard to claim of deduction u/s.35(2AB) of the Act. He contended that any provision made under Rules could not circumvent or transgress the legislative intent of the relevant provisions under the Act. He submitted his submissions in writing in this regard before us.

Ld. DR, however, contended that the proposition of law applicable to the impugned year had been interpreted by judicial authorities against the assessee and, therefore, the issue stood covered against the assessee. That, the assessee was entitled to claim weighted deduction on the capital and revenue expenditure 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.

We have heard the contentions of both the parties. Admittedly, in the facts of the present case, the assessee’s claim of deduction u/s.35(2AB) of the Act has been restricted to the extent approved by the competent authority i.e. DSIR in Form No. 3CL. The case of the assessee is that the competent authority was not empowered to approve the quantum of deduction. It is not disputed that by virtue of amendment made to the Rules applicable to the impugned year the DSIR was empowered to quantify and approve the quantum of revenue and capital expenditure incurred on R&D eligible to deduction u/s.35(2AB) of the Act. The Ld. Counsel for the assessee does not dispute this position and the same emanates from the Rules itself, which are reproduced hereunder:

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.

The argument in effect of the Ld.Counsel for the assessee is with respect to the vires of the Rules. Determining the validity of Rules we may respectfully state, is beyond the scope of the powers of the ITAT.

Be that so we find no merit in the contention of the Ld.Counsel for the assessee that the amendment to the Rules was not in consonance with the scope of the amended provision of section 35(2AB) of the Act. In terms of sections 35(2AB) of the Act, weighted deduction of R&D expenditure is allowed to eligible entities. The reading of the entire section reveals that this entitlement of weighted deduction is subject to approval by a designated authority which is the Department of Scientific and Industrial Research, DSIR which is a government authority technically competent to approve R&D activities. The intent of the legislation is to give incentive to research and development 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.

In the light of the same, we reject the argument of ld. counsel of the assessee. The order of the authorities below restricting assessee’s claim of weighted deduction u/s 35(2AB) of Lifesciences Ltd. vs. DCIT] A.Y. 2017-18 - 42 – the Act to the extent approved by the DSIR in Form 3CL is therefore upheld.

Another argument of the Ld.Counsel for the assessee was that the AO had not followed the directions of the DRP to allow assesses claim of deduction to the expenses not considered eligible for weighted deduction u/s 35(2AB) of the Act, u/s 35(1)(i) & 35(1)(iv) of the Act if found eligible.

Ld.DR fairly agreed that the AO had followed the directions of the DRP as above.

In view of the same the AO is directed to consider the claim of the assessee to deduction u/s 35(1)(i) & 35(1)(iv) of the Act as directed by the DRP.

The Ld.Counsel for the assessee has also raised a contention that weighted deduction be allowed on Clinical Trials and Bio- equivalence study amounting to Rs.3,73,40,000/-. His contention is that the jurisdictional High court has held such expenses to be eligible to weighted deduction in the case of the assessee in preceding years.

Since, we have held that the assessee is entitled to weighted deduction only to the extent approved by DSIR in Form 3CL, as per law, this argument of the assessee merits no consideration.

Ground No.9 & 10 raised by the assessee are therefore partly allowed for statistical purposes.

In the result, appeal filed by the assessee is partly allowed for statistical purposes.