In a transfer pricing appeal, the Hyderabad Bench of the Income Tax Appellate Tribunal (ITAT) has ordered the removal of Aurigene Discovery Technologies from the final set of comparables for benchmarking R&D services, accepted LIBOR plus 200 basis points as the arm’s length rate for delayed trade receivables, and restored LIBOR plus 3% as the benchmark for interest on External Commercial Borrowings.
The ITAT clarified that where the TPO himself adopts a specific filter or threshold for selecting comparables, that filter must be applied uniformly and consistently to all companies under consideration, and a comparable that fails the self-imposed filter cannot be retained in the final set merely because it was initially included.
Further, where the assessee has benchmarked the interest on ECBs at LIBOR plus 3% and such rate is within the ceiling prescribed by the RBI Master Circular on ECB and trade credits, the same is to be treated as at arm’s length, since RBI’s approval of the rate of interest is a relevant factor in determining the ALP of that rate, added the Tribunal.
On the issue of the R&D services adjustment, the Division Bench comprising Ravish Sood (Judicial Member) and Madhusudan Sawdia (Accountant Member) observed that the TPO himself had adopted a filter whereby companies having income from R&D services of less than 75% of their total operating revenue were to be excluded from the set of comparables. The Tribunal noted from the segmental information in the audited financial statements of Aurigene Discovery Technologies Limited, that Aurigene’s revenue from research services and discovery and collaboration was Rs. 19,443 lakhs as against its total revenue of Rs. 28,005 lakhs, which constituted only approximately 69.43% of its total revenue.
The Tribunal held that once the TPO had adopted the 75% R&D service-income filter for selection of comparables, the said filter had to be applied uniformly to all the companies under consideration, and a company which did not satisfy the filter adopted by the TPO himself could not be retained in the final set of comparables.
On the issue of interest on delayed trade receivables, the Tribunal observed that the issue was squarely covered by its earlier order in the assessee’s own case for AY 2018-19 in ITA No. 389/Hyd/2022, wherein it had directed the AO/TPO to compute interest by applying LIBOR plus 200 basis points after allowing a credit period of 30 days, on an invoice-to-invoice basis. On the issue of interest on ECBs, the Tribunal observed that the identical issue was covered by its earlier order in the assessee’s own case for AY 2018-19, wherein it had held that the interest paid on ECBs at LIBOR plus 3% was at arm’s length, being within the ceiling prescribed by the RBI Master Circular on ECB and trade credits.
Briefly, Curia India Private Limited, a company engaged in manufacturing and contract research activities in the field of medicinal chemistry, filed its return declaring total income at Rs. Nil. Since the assessee had entered into international transactions with its Associated Enterprises (AEs), the matter was referred to the Transfer Pricing Officer (TPO), who proposed transfer pricing adjustments aggregating to Rs. 5.99 crores, comprising Rs. 3.39 crores on account of provision of R&D services, Rs. 2.27 crores on account of interest on delayed trade receivables, and Rs. 32.98 crores on account of interest on External Commercial Borrowings (ECBs).
Pursuant thereto, the Assessing Officer (AO) passed a draft assessment order under section 144C(1) proposing total income at Rs. 6.39 crores. Pursuant to DRP’s directions, the TPO passed an order giving effect, determining the total transfer pricing adjustment at Rs. 5.87 crores, and the AO thereafter passed the final assessment order determining the total income at Rs. 6.15 crores.
Aggrieved, the assessee approached the Tribunal pressing four issues, namely (i) transfer pricing adjustment of Rs. 3.25 crores on R&D services, (ii) transfer pricing adjustment of Rs. 2.27 crores on interest on delayed trade receivables, (iii) transfer pricing adjustment of Rs. 32.98 lakhs on interest on ECBs, and (iv) adjustment of Rs. 28.06 lakhs made by the CPC under section 143(1) on account of disallowance towards payment of bonus under section 43B and non-adjustment of brought forward business losses.
