TMI Blog2024 (2) TMI 864X X X X Extracts X X X X X X X X Extracts X X X X ..... ame, except for source of procurement of APIs. Taking into consideration the facts, we are unable to accept the plea of assessee to re-characterize assessee Value Added Distributor . We find no infirmity in the findings of TPO/DRP on the issue, hence, the first plea of assessee is rejected. Comparable selection - since TPO has selected comparables from TIPS data base, where information regarding comparables is not completely available i.e. deficit with respect to quality, etc. the comparable so selected would not be ideal for applying CUP method - We are of the considered view that the objection raised by the assessee with regard to use of TIPS data base for selection of comparables is unfounded. However, while using TIPS data base reasonable adjustment qua quality, etc. can be allowed. In the instant case, the assessee has vehemently argued that the APIs procured by the assessee are higher in price because of superior quality. Neither before the TPO nor before the DRP any comparative analysis of the quality of the APIs imported by the assessee and the comparable selected by the TPO was available. Hence, we are of the considered view that reasonable adjustment with regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... segregation of the two segments, we deem it appropriate to restore this issue to AO/TPO for fresh examination of Distribution segment after segregation. The ground no. 2 of appeal is thus allowed pro tanto for statistical purpose. - SHRI VIKAS AWASTHY, JUDICIAL MEMBER SHRI GAGAN GOYAL, ACCOUNTANT MEMBER For the Appellant : Shri P.J. Pardiwala, Sr. Advocate with Shri Madhur Agrawal, Advocate For the Respondent : Dr. Yogesh Kamat, CIT-DR Shri Ujjwal Kumar Chavan, Sr.AR ORDER PER VIKAS AWASTHY, JM: This appeal by the assessee is directed against the assessment order dated 13/12/2013 passed u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 [in short the Act ], for the Assessment Year 2009-10. 2. The facts of the case in brief are: The assessee/appellant is engaged in the business of manufacturing and distribution of Pharmaceutical Products in India. The assessee is a subsidiary of Schering-Plough Corporation, USA. During the period relevant to the Assessment Year under appeal, the assessee entered into various international transactions with its Associated Enterprise(AE). During the course of assessment proceedings the Transfer Pricing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that in so far as segment (ii) and (iii) are concerned there is no dispute. The dispute is with respect to determination of arm s length pricing (ALP) in segment (i) and (iv). IMPORT OF APIs FROM AEs: 5. The ld. Counsel for the assessee submits that in transfer pricing study the assessee has characterized its activities of tolling as Licensed Manufacturer , exposed to less than normal risk as compared to full fledged manufacture. During the proceedings before the TPO the assessee re-characterized its status from Licensed Manufacturer to Value Added Distributor (VAD). The assessee to benchmark its transaction applied Transactional Net Margin Method (TNMM) as the most appropriate method for determining ALP of the international transaction for purchase of APIs from its AEs. The APIs is the active ingredient or the main ingredient of the formulations. The cost of conversion of APIs to formulations is miniscule and work of conversion of API to formulation is performed by an independent third party. The assessee has entered into an agreement with Gland Pharma for the process of conversion of API to formulations, for which Gland Pharma is remunerated at arm s length. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion provided by the Revenue, lacks vital details viz: (i) The transaction between related/unrelated party; (ii) Terms of contract, payment terms, other relevant circumstances with respect to the contract rate. FAR of the alleged unrelated transactions cannot be compared with the FAR of the assessee. The assessee vide its detailed submissions had brought these facts before the TPO and the DRP, but, they failed to appreciate the submissions of the assessee. 6.1 . The ld.Counsel for the assessee placed reliance on the following decisions to contend that TIPS data base cannot be relied upon to apply CUP in the absence of relevant supporting information: (i) Tilda Riceland Pvt. Ltd. vs. ACIT, 42 taxmann.com 400 (Del-Trib) (ii) ACIT vs. Billion Wealth Minerals Pvt. Ltd, 90 taxmann.com 170(Mum.) (iii) DCIT vs. UCB India Ltd., 70 taxmann.com 164 (Mum-Trib). 6.2 He further submitted that merely for the reason that the name of the product is same, i.e. Mometasone, it cannot be said that the products are comparable without actual comparability analysis of the products purchased by the assessee and products purchased by alleged independent third parties. The TPO while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal after having held the CUP as the most appropriate method remanded the matter back to the TPO for giving the information to the assessee to make submissions with respect to comparability of comparable product and FAR of the comparable transactions. TNMM was never under consideration as the most appropriate method before the Tribunal 9. Per contra, Dr. Yogesh Kamat representing the Department vehemently supported the order of TPO and the directions of the DRP. The ld. Departmental Representative submits that the assessee has changed its stand in the proceedings before the TPO to re-characterize its transactions as Licensed Manufacturer to VAD without there being any cogent reason. He pointed that the assessee has tried to re-characterize its role as VAD in order to avoid application of CUP as the most appropriate method. The TPO in the order has pointed that conversion of APIs into Finished Drug Formulations(FDF) is not a simple value addition but is highly technical process. The running cost of conversion may be low, the basic profile and activity of the assessee is that of manufacturer. In value addition, features or services to an existing product are added and then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d decision by the Tribunal has been upheld by Hon'ble Delhi High Court in the case of CIT vs. Cargill Foods (India) Ltd. in ITA 157/2016 decided on 19/02/2016. With regard to objection of assessee that TIPS data base does not have the names of the parties to the transaction, ld. Departmental Representative pointed that the TPO has used TIPS data base to determine ALP in respect of import of API-Mometasone and Dexchlorpheniramine Maleate. One of the parties in TIPS data base for import of Mometasone is Sun Pharmaceuticals Ltd. For comparison of Netilmicine Sulphate, the TPO has collected information from Cipla Ltd. Both the aforesaid companies are leading Pharma Companies. As regards assessee s objection on adjustment if any required, he submitted that the issue can be restored to the Assessing Officer to make necessary adjustments. 11. On application of CUP as most appropriate method the Ld. Departmental Representative submitted that in Assessment Year 2003-04 in assessee's own case the Tribunal held CUP as the most appropriate method to benchmark the transactions relating to import of APIs. The Tribunal restored the matter to the file of Assessing Officer to re-examine, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Serdia Pharmaceuticals (India) Ltd. (supra) has been distinguished by the Tribunal in the case of Gulbrandsen Chemicals Vs. DCIT, ITA Nos.760 874(Ahd) of 2012 and DCIT Vs. Dishman Pharmaceuticals Chemicals Ltd., ITA Nos.1388 1511 (Ahd) of 2016. 13.2 Without prejudice to the primary submissions the ld.Counsel for the assessee submitted that if, CUP is held as the most appropriate method to benchmark the transaction then the matter may be remitted back to the TPO to determine comparability of the products. 14. We have heard the submissions made by rivals sides, examined the orders of authorities below and have considered the documents judgements on which reliance has been placed by the respective sides. The first contention of the assessee is that the assessee be treated as VAD instead of Licensed Manufacturer as has been classified by the assessee in TP study report. The assessee for the first time in submissions before the TPO seeks to reclassify it self as VAD. The assessee purchased following APIs from its overseas AEs: (i) Netilmicin Sulphate (ii) Dexchlorpheniramine Maleate (iii) Mometasone After processing of the same converts it into FDF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts of this case, are inputs with regard to the information publicly available with the customs department at the different ports. These inputs are not the independent 'quotes', as referred to by the TPO, but only compilation of the data available in public domain. In our considered view, the Transfer Pricing Officer was clearly in error in rejecting these inputs on the ground that such information is not covered by Rule 10D(3) for the simple reason that Rule 10D(3) is only illustrative in nature and it merely describes the information, required to be maintained by the assessee under section 92D, shall be supported by authentic documents, which .may include the following (i.e. documents specified therein) . The logic employed by the Transfer Pricing Officer is that since databases compiled by private entities is not included in rule 10 D(3), such' databases cannot be relied upon by the assessee. This logic is clearly fallacious inasmuch as an item not being included in illustrative list of required documents does not take outside the ambit of 'acceptable document' for the required purposes. In any event, all that Tips Software does is to collect the data, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the comparable selected by the TPO was available. Hence, we are of the considered view that reasonable adjustment with regard to quality of the comparables can be allowed to the assessee. 17. The next grievance of the assessee in respect of TP adjustment under Licensed manufacturing segment is that the assessee has applied TNMM as the most appropriate method to benchmark its transaction of import of APIs from the AEs. The TPO rejected the same and applied CUP as the most appropriate method to determine the ALP of APIs from the AEs. The primary objection of the assessee in application of CUP is selection of comparable by the TPO from TIPS data base. The contention of the assessee is that TIPS data base does not have relevant information for applying CUP method. CUP is direct method to bench mark international transaction. The essential conditions for adopting CUP as most appropriate method are:- (i) Availability of comparable uncontrolled transaction where none of the differences between such uncontrolled comparable and the controlled transactions under testing affect the price in the open market. (ii) Reasonable accurate adjustment to eliminate material differences, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puts them in a delivery mechanism by combining them with excipients, and thus produce the FDF, i.e. finished dosage form, for consumption by the end user. The Tribunal dismissed the appeal of the assessee and confirmed the validity of CUP method followed by TPO for benchmarking the APIs imported by the assessee. In the above case, the Tribunal observed as under: The TPO noted that while Indapamide was imported by assessee s competitor from Italy at the price of Rs 40,375 per kg , the assessee had imported by the same, from its AE, at the price of Rs 1,89,456 per kg. The TPO further noted that while the assessee had imported Trimetazidine from its Servier Egypt at the price of Rs 52,546 per kg, the same drug was sold by other vendors at much lower rates of Rs 8,150 per kg (Nivedita Chemicals Pvt Ltd), Rs 8,625 per kg (Sharon Pharmachem Limited), Rs 10,558 per kg (Orion) and Rs 11,000 per kg (Trichem). As visualized from the above, the rates of the drugs imported by Serdia(India) from its AEs were 5-6 times more than that purchased by the third parties. In Merck Ltd. (supra), the assessee imported API from its AE for manufacture of medicine. The method adopted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partly allowed for statistical purposes The Co-ordinate Bench while adjudicating the issue has taken into consideration the decisions rendered in the case of Serdia Pharmaceuticals (P) Ltd. (supra) as well as in the case of Merck Ltd.(supra). We see no reason to take a different view in accepting CUP as the most appropriate method for benchmarking the transaction in the impugned assessment year. Following the decision of Co-ordinate Bench in assessee's own case in Assessment Year 2003- 04, ground No.1 of appeal is partly allowed in similar terms. 19. In the result, ground No.1 of the appeal is partly allowed. DISTRIBUTION IMPORT OF FORMULATIONS (FDF): 20. The ld.Counsel for the assessee submits that the second segment in which the TPO has made adjustment relates to the distribution of FDF.. He submitted that in transfer pricing study inadvertently the assessee has combined two segments i.e. Contract Manufacturing and Distribution of formulations imported from AE. The assessee applied TNMM as the most appropriate method to determine the ALP of the international transactions for purchase of formulations from AE. The assessee compared itself with other distr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufacturer at the direction and supervision of assessee. 21. On the other hand the learned Departmental Representative vehemently supporting the order of TPO submitted that assessee in Transfer Pricing study report had itself clubbed the segment of distribution of sale of FDFs procured from AE and formulations manufactured by Zyg Pharma and Encore Pharma. The assessee in proceedings before the TPO for the first time raised an argument for segregating Distribution segment and Manufacturing segment. He further submits that the points of difference as highlighted by the assessee are merely for name sake. On going through FAR it can be seen that in both segments function, assets and risk are almost the same. The only difference assessee between the two sub segments is that the assessee is following Market Back approach in purchase of FDF from AE and to Zyg Pharma it is giving cost plus. However, the assessee could not give any basis of Market Back theory. In both these sub segments the Assessee is purchasing finished goods and selling them in the market through its common network. He further argued that the other difference assessee could point was type of products, therapeutic area ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Encore. The agreement dated 21/12/2007 with Zyg Pharma effective from 01/1/2008 is at page 379 of the paper book. After examining the terms and conditions of the agreement, the salient points of agreement are culled out as under: - Zyg (seller) shall manufacture the product as required by the assessee (buyer) in accordance with manufacturing and quality assurance procedures specifications given by the assessee; - Zyg assures that the products manufactured conforms to quality standards and specifications of the assessee; - Zyg to keep secrete and confidential the standards and specifications shared by the assessee; - Zyg to manufacture products under trademarks/brand specified by the assessee; - Zyg not to use trademark/brand of the assessee or infringe/impair, right title or interest in the said mark of assessee; - In case the assessee subsequently finds that the products do not conform to the standard and specifications or statutory requirements pertaining to the manufacturing of the products, Zyg was liable to reimburse the cost of the product paid by the assessee; - Zyg on delivery of products was required to provide assessee, protocols assay and other m ..... 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