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Income Tax Appellate Tribunal, DELHI BENCH ‘H’: NEW DELHI
Before: SHRI YOGESH KUMAR U.S. & SHRI AVDHESH KUMAR MISHRA
A.Y.2018-19 Jubilant Generics Ltd. Assistant Commissioner of Plot-1a, Sector-16a, Noida Income Tax, Circle-5(1)(1), Gautam Buddha Nagar, Vs. Gautam Buddha Nagar, PAN: AADCJ2401L Uttar Pradesh (Appellant) (Respondent) Appellant by Shri Himanshu Sinha, Advocate, Sh. Prashant Meharchandani, Adv. Ms. Kanika Jain, Advocate Respondent by Sh. Rohit Garg, CIT-DR Date of Hearing 27/06/2025 Date of Pronouncement 24/09/2025 ORDER
PER AVDHESH KUMAR MISHRA, AM
This appeal of the assessee for the Assessment Year (‘AY’) 2018-19 is directed against the order dated 28.06.2022 of the Assistant Commissioner of Income Tax, Circle-5(1)(1), Gautam Buddha Nagar, passed under section 143(3) r.w.s. 144C(13) and 144B of the Income Tax Act, 1961 (‘Act’). Grounds of appeal:
2. The assessee has raised following grounds: “Legal Grounds:
1. On the facts and circumstances of the case and in law, the assessment proceedings are invalid since the reference made by the Ld. Assessing Officer (AO National Faceless Assessment Centre ("NFAC) to Ld. Transfer
On the facts and circumstances of the case and in law, provisions of section 144B of the Act were contravened by Ld. AO/NFAC as the final assessment order u/s Section 143(3) rws 144C(13) dated 28 June 2022 was passed by Jurisdictional Assessing Officer (ACIT, Circle 5(1)(1), GB Nagar instead of NFAC, thereby making the entire assessment proceedings as void-ab-initio and is liable to be quashed
Grounds of appeal with respect to Export of manufactured Pharmaceutical Products:
3. On the facts and in the circumstances of the case and in law, the Ld. TPO/AO/DRP erred in rejecting the use of overseas associated enterprises ("AEs”) of the Appellant as tested parties, which are less complex vis-à-vis the Appellant, citing incorrect and irrelevant reasons.
4. On the facts and in the circumstances of the case and in law, the Ld. AO/TPO/DRP erred in using a flawed methodology consequent to which arm's length price for international transactions was determined in excess of the final price recovered by AES from third parties.
5. On the facts and in the circumstances of the case and in law, the Ld. AO/TPO/DRP erred in treatment of the following items as operating while computing the Appellant's operating profitability from the impugned transactions.
4.1 "Impairment of intangible assets” 4.2 Loss on sale/ disposal of property/ plant and equipment 4.3 Subsidy received on capital assets
The Ld. AO/TPO/DRP erred in rejecting functionally comparable companies for the purpose of determining arm's length price of the impugned transaction
7. On the facts and in the circumstances of the case under law, the CA AO/TPO/DRP erred by treating receivables from AEs as international transaction separate and distinct from the international transaction of export of finished goods to its AEs and by ignoring that the compensation, if any, for outstanding receivables is already subsumed in the working capital adjustment undertaken with respect to primary international transaction
8. On the facts and in the circumstances of the case and in law, the Ld. AO/TPO/DRP exceeded jurisdiction and erred in re-characterization of trade receivables as unsecured loans advanced to AEs, thereby, penalizing the Appellant for not undertaking its business in a particular manner.
9. On the facts and in the circumstances of the case and in law, the Ld. AO/ TΡΟ/DRP erred by considering on an ad-hoc basis, 30 days to be the arm's length credit period that the Appellant should extend to its AEs without giving any consideration to the Appellant's business circumstances, industry practice or commercial exigencies
10. On the facts and in the circumstances of the case and in law, the Ld. AO/TPO/DRP erred in law and in facts by not considering the fact that the Appellant follows a similar credit policy for both associated Enterprises (AEs) and non-AEs
11. On the facts and in the circumstances of the case and in law, the Ld. AO/TPO/DRP erred in law and in facts in not appreciating the fact that the average receivable days of the comparable companies is much higher than the average receivable days of the Appellant.
12. On the facts and in the circumstances of the case and in law, the Ld AO/TPO/DRP erred in not giving set-off for receivables cleared by AEs in less than normal credit period assumed by TPO/AO herself or received in advance.
Jubilant Generics Ltd. On the facts and in the circumstances of the case and in law, the Ld. AO/TPO/DRP erred by adding 400 basis points to the LIBOR on an ad hoc basis for computing the interest adjustment.
Grounds of appeal with respect to Corporate Tax Adjustment
13. On the facts and circumstances of the case and in law, the Ld. AO erred by disallowing an amount of Rs.12,31,686 u/s 143(1)(a) of the Act in ignorance of the fact that the said amount is deductible under Income Computation and Disclosure Standards notified u/s 145(2) of the Act.
14. On the facts and circumstances of the case and in law, the AD erred in initiating penalty proceedings under Section 270A of the Act on arbitrary premise that there is under-reporting of Income done by the Appellant.”
Facts of the case: 3. The relevant facts giving rise to this appeal are that the assessee, engaged in the business of manufacturing pharmaceutical products, including Active Pharmaceutical Ingredients (APIs) and Dosage forms, filed its Income Tax Return (‘ITR’) declaring loss of (-) Rs.50,05,06,264/-. The case was picked up for scrutiny. During the relevant year, the assessee has exported pharmaceutical products and APIs to its Associated Enterprises (AEs) located in the USA and Europe. It has two manufacturing units: one for manufacturing APIs and another for Dosage forms. The business revolves around generic finished dosage formulations including solid dosage forms, anti-inflammatory and anti-allergic medicines, etc. The assessee has two AEs in USA, namely Jubilant Cadista Pharmaceuticals Inc. (‘Jubilant Cadista’) and Jubilant Pharma Trading Inc. (‘JPTI’). These two AEs; Jubilant Cadista and JPTI are distributors of assessee’s manufactured Jubilant Generics Ltd. medicines, APIs, etc. in USA. The AE in Europe; namely, PSI Supply NV (‘PSI Supply’), imports goods from the appellant assessee. As per the appellant assessee, the nature of business of AEs of USA and AE of Europe is different as the AE of Europe acts as an agent, which makes goods available to the dealers in Europe as per their specific demands; whereas the AEs of USA are importer of the manufactured medicines, APIs, etc. from the appellant assessee and selling the same in USA.
The appellant assessee selected Transactional Net Margin Method (‘TNMM’) as the Most Appropriate Method (‘MAM’) for benchmarking the international transactions. As per the TP Study report of the assessee, these AEs perform routine functions and are not engaged in complex activities and do not own any/minimal intangible assets; therefore, these AEs have been taken by the appellant assessee as tested parties for benchmarking purposes. The OP/OR has been take as Profit Level Indicator (‘PLI’). The assessee has also sold raw material to its one of the AEs of USA; namely, Jubilant Cadista, who manufactures medicines from such raw material and sales the finished products in USA. The Ld. Transfer Pricing Officer (‘TPO’) worked out the assessee’s profit margin (OP/OR) @ 1.30% by treating impairment of intangible assets and other expenses such as donation, loss on sale/disposal of PPE as operating in nature, and receivables from foreign exchange gains, subsidy received on capital goods, Scrap sales, etc. as non-operating in nature. The Ld. TPO rejected the Jubilant Generics Ltd. selection of Foreign AE as a tested party on the reasoning that sufficient financial data of these tested parties were not available. Accordingly, the Ld. TPO conducted a fresh search and selected 8 comparables to determine the Arm’s Length Price (‘ALP’) by adopting TNMM as a MAM. The Ld. TPO determined the Arm’s Length price of 8 comparables ranging from 15.04% to 24.50% (with median of 17.73%) and worked out the transfer pricing adjustment of Rs.52.66 Crores (the difference between 17.73% and 1.30%) in this regard. Further, the Ld. TPO also denied adjustment on account of working capital differences and made further adjustment of Rs.1.47 Crores as interest overdue on receivables from AEs by applying 6 months LIBOR+400 bps as the ALP. Consequentially, the adjustment in aggregate proposed by the Ld. TPO was Rs.54,13,35,405/- (Rs.52,66,10,000/- plus Rs.1,47,25,405/-) in his order. Based on which, the draft assessment order was passed by the Ld. Assessing Officer (‘AO’).
Aggrieved with the draft assessment order, the assessee filed its objections before the Ld. Dispute Resolution Panel (‘DRP’), who rejected the assessee’s request to treat its AE as a tested party, but partly accepted some objections in respect of few comparables resulting consequential part relief to the appellant assessee. Further, the Ld. DRP upheld the interest on overdue receivables but, in principle, allowed the adjustment on account of working capital differences. After the DRP’s order, the Transfer Pricing (‘TP’) adjustment was restricted to Rs.35,02,95,405/-. Aggrieved, this appeal Jubilant Generics Ltd. challenging the TP adjustment of Rs.35,02,95,405/- in the final assessment order vide 14 grounds falling in the following 4 sub heads was filed: i. Export of manufactured pharmaceutical products (Gr. No. 3 to 6), ii. Notional interest on receivables from AEs (Gr. No. 7 to 12), iii. Corporate tax adjustment (Gr. No. 13) and iv. Initiation of penalty (Gr. No. 14) Rejection of AE as tested party (Ground No. 3 & 4): 6. At the outset, Mr. Himanshu Sinha, Ld. Counsel appearing on behalf of the assessee did not press the Ground No.
2. Hence, the same is dismissed as not pressed. The Ground No. 1, being general, does not require specific adjudication; hence, it is dismissed.
The Ld. Counsel submitted that the Ld. TPO has wrongly rejected the selection of foreign AE as the tested party on the reasoning that sufficient financial data of the AE were not made available. However, he specifically submitted that the appellant assessee had made all relevant financial data of the AE available to the Ld. TPO during the course of TP proceedings. Hence, the Ld. TPO’s reasoning that the assessee had not made all relevant financial data available was not justified, argued the Ld. Counsel. It was further submitted that the Ld. TPO did not raise the issue of insufficiency of any specific data of the appellant assessee’s AEs being tested party and or comparables not made available by the appellant assessee. Further, the Ld. DRP had also not raised any question on insufficiency of data of the Jubilant Generics Ltd. appellant assessee’s AEs being tested party and or comparables. It was contended that the AEs of the appellant assessee were least complex entities and they passed through all filters applied by the Ld. TPO for selecting comparables. It was contended that the AEs were routine distributors who performed limited functions with limited risks and they did not own any significant intangible assets, whereas the appellant assessee was a full-fledged manufacturer which undertook significant functions with all inherent risks and significant intangible assets. Thus, it was contended that AEs were the least complex comparable. In support of said contention, the Ld. Counsel placed emphasis on the OECD Transfer Pricing Guidelines, 2022. The relevant portion is extracted as below: "3.18 When applying a cost plus, resale price or transactional net margin method as described in Chapter II. it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the transaction. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found, i.e. it will most often be the one that has the less complex functional analysis.
3.19 This can be illustrated as follows. Assume that company A manufactures two types of products. Pl and P2, that it sells to company B, an associated enterprise in another country. Assume that A is found to manufacture Pl products using valuable, unique intangibles that belong to B and following technical specifications set by B. Assume that in this Pl transaction, A only performs simple functions and does not make any valuable, unique contribution in relation to the transaction. The tested party for this P1 transaction would most often be A. Assume now that A is also manufacturing P2 products for which it owns and uses valuable unique intangibles such as valuable patents and trademarks, and for Jubilant Generics Ltd. which B acts as a distributor. Assume that in this P2 transaction, B only performs simple functions and does not make any valuable, unique contribution in relation to the transaction. The tested party for the P2 transaction would most often be B.”
Further, the Ld. Counsel drew our attention to the following para of UN Practical Manual on Transfer Pricing for Developing Countries (refer pg. 2 of CLC) provides as under: “5.3.3.1 The tested party normally should be the less complex party to the controlled transaction and should be the party in respect of which the most reliable data for comparability ix available. Either the local or the foreign party may be the tested party. If a taxpayer wishes to select the foreign associated enterprise as the tested party, it must ensure that the necessary relevant information about it and sufficient data on comparables is available to the tax administration in order for the latter to be able to verify the proper selection of the tested party and the accurate application of the transfer pricing method"
The Ld. Counsel placed reliance on the following decisions as under: (i) Virtusa Consulting Services Pvt. Ltd., [2021] 124 taxmann.com 309 (Mad. HC) (ii) Ranbaxy Laboratories Ltd. [2016] 68 taxmann.com 322 (Delhi-Trib.) (iii) Almatis Alumina Pvt. Ltd., (2022) 445 ITR 632 (Cal H.C.)
The Ld. Counsel further submitted that the quantum of adjustment made by the Ld. TPO was quite more than the revenue earned by the AE from sales to third/independent parties in USA. It was therefore, contended that the AE’s profit margin was quite less and if the TP adjustment was taken into account of the AE against the cost, then there would be no profit in the hands of the AE. In other words, it could be said that the Ld. TPO Jubilant Generics Ltd. had suggested that the assessee should have charged more revenue from its AE than the sale consideration recovered by its AE from sales done out of purchased from the appellant assessee to third party customers in USA. In case, the TP adjustment accepted, there would be loss of (-) 4.85% in JPIT and loss of (-) 5.41% in Jubilian Codista and 3.46% in PSI supply. However, no AE would work on losses. Accordingly, it was contended that the TP adjustment made by the Ld. TPO was unjustified as no prudent businessman would operate on losses. Reliance was placed on the following decisions: (i) Global Vantedge Pvt. Ltd., [2010] 1 ITR(T) 326 (Del. Trib) (ii) HCL Technologies BPO Services Ltd. [2015] 60 taxmann.com 186 (Del. Trib.) (iii) Omniglobe Information Technologies (I) Pvt. Ltd. MANU/ID.0546/2019 (iv) Unilog Content Solutions Pvt. Ltd. [2023] 152 taxmann.com 179 (Bang.-Trib.)
On the other hand, Mr. Rohit Garg, Ld. CIT-DR on behalf of the Revenue, submitted that the appellant assessee, captive manufacture, had maintained its accounts for the Financial Year (‘FY’) commencing from 01.04.2017 to 31.03.2018; whereas its AE, situated in USA, had maintained its account on Calendar year basis. Therefore, adjustment on this account was complex in nature. Further, the Ld. CIT-DR, emphasizing on Rule 10B(2) of the Income Tax Rules and drawing analogy from the said Rule, submitted that the AE could not be considered as tested party Jubilant Generics Ltd. comparable on the simple reasoning that conditions prevailing in the markets in which the AE and the appellant assessee engaged in their business were different including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets were wholesale or retail. It was thus, contended that the OP/OR of the AE would bound to be on the lower side as the operating costs in USA was quite high than those in India. Hence, the Ld. DRP and Ld. TPO were justified in rejecting the AE as a tested party comparable.
We have heard both parties and have perused material available on the record. The coordinate bench, in the case of GKN Driveline (India) Ltd. [TS-297-ITAT-2018(DEL)-TP], prescribes guidelines for treating foreign AE as a ‘tested party’ for TP benchmarking. It has been held in the case of GKN Driveline (India) Ltd. (supra) that an AE cannot be considered a tested party if sufficient details are not made available to ascertain that the AE is a tested party with least complex operations and limited risks.
In this case (in the case of GKN Driveline (India) Ltd.), the Ld. TPO, claiming that sufficient details of the AE (financial statements, etc., etc.) not provided, rejected the selection of the AE as a tested party. In the present case, the Ld. TPO had also contended that sufficient financial data of AE was not made available to do proper TP analysis. The Tribunal, in the case Jubilant Generics Ltd. of GKN Driveline (India) Ltd, has held that as a general rule, tested party is the one to which a TP method can be applied in the most reliable manner and for which the most reliable comparables can be found (most often the one that has the least complex functional analysis). The ITAT highlighted important aspects to be considered for selection of tested party based on Para 3.18 of the OECD guidelines. On the other hand, the assessee’s claim in the case in hand is that it has provided sufficient financial data, etc. and the issue of insufficiency of data was never raised by the Authorities below. The appellant assessee should have provided all requisite corroboratory documents in support of the AE’s Functions, Assets and Risk (FAR) analysis demonstrating that the AE was least complex party to the controlled transactions. We have perused all the material on the record and find merit in the Ld. TPO’s finding that the appellant assessee did not provide sufficient financial data, etc. (i) to arrive the conclusion that the AE was least complex party to the controlled transactions and (ii) to determine the ALP of international transactions.
In similar sets of facts, the Tribunal, in the case of Decathlon Sports India Pvt. Ltd. IT(TP)A No. 1874/Bang/2024 (order dated 26.12.2024) has held as under:
“37. The learned dispute resolution panel in paragraph number 2.1 has rejected the foreign AE as a tested party because when the entity being evaluated for transfer pricing purposes is a foreign entity, sufficient information regarding that entity is necessary to ensure the chosen method can be reliably applied and subsequently reviewed by the tax authorities. 12 Jubilant Generics Ltd. As in the present case, the Indian public domain lacks reliable information concerning the associated Enterprises company and further the taxpayer is obligated to furnish the tax administration with all the relevant information regarding the associated enterprises, including sufficient data on comparable transactions. This information exchange is crucial to enable reciprocal verification of the selection of transfer pricing method and its application to the tested party by the tax authorities. In the present case the assessee did not provide any such data to the Indian tax administration and therefore the contention of the assessee regarding the foreign AE as a tested party was rejected.
The learned TPO has rejected the selection of the tested party because assessee selected the same without giving any substantial reasoning and further reaching at a conclusion that the associated enterprises is engaged in manufacturing and providing the goods to the other associated Enterprises and therefore it is more complex than the assessee. The further reason is that it is easier to gather the information regarding the assessee taxpayer company then the foreign associated Enterprises. It proceeded to hold that the assessee must ensure that the necessary relevant information about the AE and sufficient data on comparable is furnished to the tax administration to verify the selection and application of the transfer pricing method. In this case no doubt the annual accounts of the associated enterprise were not available with the assessee but all other information with respect to the comparables were available with the assessing officer in the form of transfer pricing study report. Further for selection of the method as transactional net margin method was not in dispute between the parties. Therefore, so far as the comparability analysis is concerned the assessee has selected seven comparables from different database and TPO are selected three comparables from Prowess database.
Therefore, as the basic object of selecting a tested party is reliability of application of the method and comparability analysis for determining the arm's-length price of the international transaction, and as assessee as well as TPO both have reached at a conclusion of a different tested party without looking into the & IT(TP)A No. 1874/Bang/2024 balance sheet of the associated enterprise and holding whether the assessee or the foreign AE is least complex. Obviously, there is no bar in selecting a foreign entity as a tested party if the arm's-length price of international transaction by selecting reliable method and reliable comparability analysis can be made. 13 Jubilant Generics Ltd.
Both the parties have placed before us judicial precedent that foreign AE can be taken as a tested party, but all the decisions have held the tested party only could be the party on which the transfer pricing methods can be applied in the most reliable manner and for which most reliable comparables can be found.
Therefore, in view of above discussion, we restore ground numbers 4 - 11 back to the file of the learned transfer pricing officer with a direction to the assessee to substantiate the arm's-length price of the transaction of trading segment by showing with sufficient data about the foreign AE as a tested party. The learned TPO may examine that the tested party selected by the assessee gives a reliable method and computation of arm's-length price or not. Thereafter, after giving assessee an opportunity of hearing, determine the arm's-length price of the international transaction of trading segment.”
We have heard both parties and have perused material available on the record. In view of above discussion, profit derived by the AE from trading segment of finished goods of the appellant assessee, we deem it fit to remit the issue of AE as a tested party emerging from grounds numbered e and 4, back to the file of the Ld. AO/TPO with a direction to the assessee to substantiate the arm's-length price of the transaction of trading segment of finished goods of the appellant assessee with requisite financial data about the foreign AE as a tested party. The Ld. TPO may examine that the tested party selected by the assessee gives a reliable method and computation of ALP or not. Thereafter, after giving assessee an opportunity of being heard, determine the arm's-length price of the international transaction of trading segment of finished goods of the appellant assessee. For trading of raw material and API, similar exercise of determining the ALP should be done separately taking AE as tested party. In case the Ld. TPO Jubilant Generics Ltd. decides otherwise and the appellant assessee does not find favour on this issue from the Ld. TPO; exercise of comparables as done initially subject to finding hereinafter on this issue only in subsequent para will survives. Accordingly, grounds numbered 3 and 4 succeed as above. Impairment of tangible assets & loss on sale/disposal of property, plant & equipment (Ground No. 5):
The next issue is in respect of impairment of intangible assets as operating expenses. The R & D expenses have been capitalized as intangible assets. During the relevant year, the appellant assessee has debited R & D expenses of Rs.67.15 Crores in its Profit & Loss Account. However, the appellant assessee excluded it (R & D expenses of Rs.67.15 Crores) while working out operating cost for determining the ALP, which in turn increased its profit vis-à-vis OP/OR and PLI. But the Ld. TPO included it (R & D expenses of Rs.67.15 Crores) in the operating cost on the reasoning that R & D expenses were integral part of pharmaceutical industries manufacturing medicine/API, etc. The Ld. TPO’s working of operating cost including R & D expenses of Rs.67.15 Crores for determining the ALP was upheld by the Ld. DRP.
Before us, the Ld. Counsel contended that the Ld. TPO had wrongly included ‘impairment of intangible assets’ representing the R & D expenses of Rs.67.15 Crores written off while working out the operating cost. The reasoning for exclusion of R & D expenses of Rs.67.15 Crores from operating expenses given by the Ld. Counsel are that (i) the R & D expenses 15 Jubilant Generics Ltd. written off in the books of accounts have no direct nexus with products sold to AE, (ii) R & D expenses are non-recurring (R & D expenses of Rs.67.15 Crores charged to the P & L Account of relevant year as against Rs.1.54 Crores of preceding year), (iii) R & D expenses of Rs.67.15 Crores charged to the P & L Account of relevant year is based on current carrying cost of the asset its remaining useful life, (iv) R & D expenses of Rs.67.15 Crores have no future economic/real value, (vi) sale of this intangible asset valued at Rs.67.15 Crores would have resulted loss, which is non-operating loss. The Ld. Counsel relied on following decisions: Insofer Manufacturing India Pvt. Ltd. [2020] 121 taxmann.com 209 (Del. ITAT) and DLAB Core Material Pvt. Ltd. (Chenn. ITAT)
On the other hand, the Ld. CIT-DR argued this issue vehemently and supported orders/directions of Authorities below.
We have heard both parties and have perused material available on the record. Research and development (R & D) expenses are direct expenditures relating to a company's efforts to develop, design, and enhance its products, services, technologies, or processes. R & D offers companies a way to improve how they do business and what they offer customers. The industrial, technological, health care, and pharmaceutical sectors typically incur the highest degree of R & D expenses. Generally accepted accounting principles (GAAP) require companies to recognize R & D costs as expenses in the same year the cost was incurred. As per the Jubilant Generics Ltd. facts emerged from the record, the R & D expenses of Rs.67.15 Crores written off during the year has been capitalized in the past as intangible asset. In other words, the same has not been charged to the Profit & Loss Account in preceding years. The assessee is captive manufactures and supplies to its AEs only. Therefore, the R & D expenses of Rs.67.15 Crores has to be charged to the cost of medicines, API, etc. manufactured by the assessee because the research is for core business of the assessee and therefore, it has to be included in the manufacturing cost as the R & D has to be necessarily required to be carried out on regular basis in the pharma sector, the core business of the assessee. Since the R & D expenses of Rs.67.15 Crores has not been charged ever (except this year) in the past and that is why it has been capitalized as intangible asset; therefore, the value of this cost has not been recovered from the AEs by taking it into account of the cost of goods manufactured.
The R & D activities may always not be successful. Even then, such expenses are bound to be incurred and have to be recovered by loading the same to the cost of products manufactured by the assessee. The Ld. Counsel has not brought any material on the record to establish that the R & D expenses capitalized as intangible asset has been amortized regularly during the expected life of this intangible asset generated from R & D expenses. Hence, charging the same in the relevant year. The case laws relied upon by the Ld. Counsel are held factually different as these case Jubilant Generics Ltd. laws are in respect of loss arising from revaluation and accounting treatment of machineries and factory assets. Here, in the present case it is R & D expenses for product development.
An operating expense is an expense that a business incurs through its normal business operations. Operating expenses include rent, equipment, inventory costs, marketing, payroll, insurance, and funds allocated for research and development. The non-operating expense is an expense incurred by a business that is unrelated to the business's core operations. A capital expense is a different type of expense that relates to acquiring, maintaining, or upgrading an asset.
We have given thoughtful consideration to the facts of the case and are of the considered view that there is no infirmity in finding of the Ld. TPO and the Ld. DRP that the R & D expenses of Rs.67.15 Crores debited as impairment of intangible assets is nothing but operating expenses as the same is directly related to the survival, growth and sustenance of the business. This ground, therefore, fails.
The next issue is in respect of inclusion of loss of Rs.1.17 Crores derived from sale/disposal of property, plant & equipment in operating expenses for determining the ALP. The Ld. Counsel, placing reliance on the decisions of the Tribunal in cases of DHL Express (India) Pvt. Ltd. [2011] 12 ITR(T) 457 (Mum) and Thyssenkrup Industries (India) Pvt. Ltd. [2013] 25 Jubilant Generics Ltd. ITR(T) 243 (Mum), contended that this expenditure did not fall under the head ‘operating expenses’. On the other hand, the Ld. CIT-DR supported orders/directions of Authorities below. We have heard both parties and have perused material on the record. We, in view of the above discussion/ observation/finding on R & D Expenses issue, find merit in the arguments of the Ld. Counsel. We therefore, are of the considered view that the inclusion of loss of Rs.1.17 Crores derived from sale/disposal of property, plant & equipment in operating expenses by the Authorities below is not justified. Hence, we direct the Ld. AO/TPO to exclude the loss of Rs.1.17 Crores derived from sale/disposal of property, plant & equipment in operating expenses. This ground, therefore, succeeds accordingly. Inclusion of Flamingo Lifesciences Ltd. and Everest Organics Ltd. as comparables (Ground No. 6):
The next issue is in respect of inclusion of Flamingo Lifesciences Ltd. and Everest Organics Ltd. as comparables. Flamingo Lifesciences Ltd. has been excluded from the final list of comparables by the Ld. TPO on the reasoning that this is functionally dissimilar. Whereas Everest Organics Ltd. has been excluded from the final list of comparables by the Ld. TPO on the reasoning that this comparable does not pass the export filter => 25% of export turnover. Before us, the Ld. Counsel contended that Flamingo Lifesciences Ltd. passed all the filters applied by the Ld. TPO and there was no functional dissimilarity. In the case of Everest Organics Ltd., the Ld. Counsel submitted that it passed the export filter => 25% of export Jubilant Generics Ltd. turnover [25.97% of turnover (export sales of Rs.29.01 Crores and total turnover of Rs.111.71 Crores)]. On the other hand, the Ld. CIT-DR supported orders/directions of Authorities below. We have heard both parties and have perused material on the record. We have taken note of the fact that neither the order of the Ld. TPO nor the directions of the Ld. DRP is well reasoned and demonstrated the functional dissimilarities in the case of Flamingo Lifesciences Ltd. We, therefore, set aside the finding of the AO in this regard and remit the issue of comparable of Flamingo Lifesciences Ltd. back to the AO/TPO to reexamine it afresh and decide that whether this comparable is functionally similar/dissimilar. In case it is found functionally similar then it has to be included in the final set of comparables otherwise not. Thus, in view of the above, the issue of comparable of Flamingo Lifesciences Ltd. is remitted back to the files of the AO/TPO for doing needful to arrive the ALP, in accordance with law, after providing adequate opportunity of being heard to the appellant assessee. Ordered accordingly. The appellant assessee, no doubt, shall cooperate in remitted proceedings. The ground limited to the issue of inclusion of Flamingo Lifesciences Ltd. in the final set of comparables, therefore, succeeds as above.
In the case of Everest Organics Ltd., the Ld. Counsel failed to demonstrate that this comparable passes the export filter of => 25%. The appellant assessee is 100% export turnover. The Ld. TPO has applied Jubilant Generics Ltd. export filter of => 25% of the operating turnover. We are of the considered view that the operating turnover should be from manufacturing and or trading only. Not all revenue taken in turnover in the books of account will form the operating turnover. Excluding non-operating revenue from the turnover has to be considered for comparison. We have given thoughtful consideration to the facts of the case and are of the considered view that there is no infirmity in excluding Everest Organics Ltd. from the final set of comparables by the Ld. TPO and the Ld. DRP on the reasoning that this comparable does not pass the export filter. Ordered accordingly. The ground limited to the issue of inclusion of Everest Organics Ltd. in the final set of comparables, therefore, fails. Interest on overdue receivables (Ground No. 7-12): 26. The next issue is in respect of interest on overdue receivables. The Ld. TPO allowed credit period of 30 days and worked out interest on overdue receivables from AEs @ LIBOR + 400 bps. The Ld. Counsel contended that the appellant assessee had calculated working capital adjustment which subsumes the impact of interest cost; therefore, adjustment on account of interest on overdue receivables was not called for. Reliance was place on the decision of the Hon’ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd. 398 ITR 66. Further, the Ld. Counsel contended that the appellant assessee had a policy of non-charging of interest from its customers; AE and Third Parties. He drew our attention to the average collection period, which was 93.08 days from third parties as Jubilant Generics Ltd. against 66.14 days from AEs. The Ld. Counsel, with the help of tabular details mentioned in the Paper Book, submitted that the appellant assessee’s average collection period of 66.14 days was lesser than the average collection period of 67.53 days of final set of comparables. Hence, he contended that no adjustment on account of overdue receivables was called for. Further, he challenged not only the applicability of 30 days of threshold time period for working out the interest on overdue receivables but also the mark-up of 400 bps on LIBOR. Reliance was placed on the decision of the Hon’ble Delhi High Court in the case of Cotton Naturals [2015] 55 taxmann.com 523 and the Tribunal decision in the case of Concur Technologies (I) Pvt. Ltd. 170 taxmann.com 299 (Bang.). The Ld. Counsel also argued that the interest on overdue receivables was not an international transaction and consequential credit of interest on payments in advance/within 30 days should be also allowed.
On the other hand, the Ld. CIT-DR argued this issue vehemently and supported orders/directions of Authorities below.
We have heard both parties and have perused material on the record. The Hon'ble Delhi High Court, in the case of Kusum Health Care Pvt. Ltd. (supra), has held that the delay in collection of money may be due to different reasons require investigation on a case-to-case basis. What needs to be analysed is the pattern that may emerge from the receivables over a period of time which indicate that the arrangement of parking huge Jubilant Generics Ltd. receivables with the related parties reflects an international transaction with underlying intent to benefit the AE. Here, in the present case, facts highlighted by the Ld. TPO clearly show that the appellant assessee has benefitted its AE by not recovering its trade receivables in stipulated time. In the present case, since the assessee had not factored the impact of receivables on its profitability; therefore, further adjustment for outstanding receivables is held warranted. Thus, the reliance placed by the Ld. Counsel on the decision of the Hon'ble Delhi High Court in the case of Kusum Health Care Pvt. Ltd. (supra) is of no relevance in view of the facts and findings considered in totality. We do not find any merit in the argument of the Ld. Counsel that the interest should not be worked out overdue receivables from AEs as it has not charged any interest on overdue receivables from third parties as the facts of third parties are totally different.
The Hyderabad ITAT, in the case of Corteva Agriscience Services India Pvt. Ltd. [ITA-TP No 78/Hyd./2022], accepted the stand of the Revenue in holding overdue receivables from associated enterprises ('AEs') as an international transaction and computed notional interest at the rate of 6 percent on the amount of such outstanding receivable invoices. In general, the ruling has relied upon the decision of Higher Courts, wherein it has been held that the delay in receipt of receivables beyond a reasonable credit period partakes the character of an advance and therefore results in an
In view of the above and following the reasonings of decisions of the Hon'ble High Court of Bombay in the case of Patni Computer Systems Ltd. 33 Taxmann.com 3 , the Hon'ble High Court of Delhi in the case of Bechtel India Pvt. Ltd. for AY 2010-11 (ITA 379/2016) (P.) and the Hyderabad ITAT in the case of Corteva Agriscience Services India Pvt. Ltd. (supra), we are of the considered view that the Ld. TPO is justified in holding overdue receivables from AE as international transactions and it has to be benchmarked separately for computing notional interest thereon. Accordingly, we order so.
The Chenai ITAT, in the case of Plintron Global Technology Solutions Pvt. Ltd. TS-238-ITAT-2018(CHNY)-TP, has held that the LIBOR is more appropriate for computing interest on outstanding receivables from AEs. In arriving at its decision, the ITAT relied on the ruling of the Mumbai Bench of the ITAT in the case of Tecnimont ICB House ITA No.487/Mum/2014. Here, in the present case, the rate LIBOR + 400 applied by the AO is also under challenge. We have considered the facts and submission of both parties. The Ld. TPO; therefore, is directed to compute interest on outstanding receivable balances from the AE @ LIBOR + markup in accordance with the Rule 10CB of the Income Tax Rules. Accordingly, the ground no. 7-12 are disposed of.
Jubilant Generics Ltd. ICDS adjustment (ground no.13): 32. The next issue is in respect of adjustment made in the processing made under section 143(1) of the Act. The assessee’s challenge of this issue in this appeal was opposed by the Ld. CIT-DR on the reasoning that this would have been challenged after receipt of processing under section 143(1) of the Act as that was an appealable order; hence, this issue, at this stage, could not be raised here. On the other hand, the Ld. Counsel prayed for issuing direction to do needful as the same was prima-facie mistake and could be revised lawfully. We remand this matter back to the file of the Ld. AO to direct the Ld. AO to decide it in accordance with the law and allow it without going into the issue that whether it can be challenged at this stage. Initiation of penalty proceedings under section 270A of the Act (ground no.14): 33. The ground numbered 14, being premature, stands dismissed.
In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in open Court on 24th September, 2025