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2015 (9) TMI 326 - ITAT BANGALORE

2015 (9) TMI 326 - ITAT BANGALORE - TMI - Transfer pricing adjustment - Whether transaction by which incipient (raw material for manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials) is supplied by Novo Nordisk A/S to TPL and the transaction by which the Assessee engages the services of TPL to convert the incipient into Human Mono component and Highly Purified insulin in 40 IU Vials and ultimately sells the same in Indian market on behalf of Novo Nordisk A/S. can be con .....

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d there is no necessity in our view to look to the provisions of Sec.92B(2) or Sec.92A(2) of the Act, though the reasons given by the DRP in its order on this aspect also, in our view is acceptable. The transaction between TPL and the Assessee for manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials, in our view, cannot fall within the ambit of the provisions of sec.92(1) of the Act. The reason for the above conclusion is that tax base erosion in India can happen only a .....

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ndia from the transaction of manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials by Assessee through TPL. - Decided in favour of assessee.

Determination of ALP - Whether the transaction of supply of raw material excepient/insulin crystal by Novo Nordisk A/S to the Assessee can be benchmarked for the purpose of determining ALP together with the international transaction of import of products directly from Novo Nordisk A/S and selling the same in India ( which .....

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transactions. We find that the TPO characterized both the transactions as “Manufacturing” and adopted a combined approach in determining ALP. The DRP has also fallen into the same error. The DRP carved out the consideration in so far as it relates to supply of raw material by Novo Nordisk A/S is concerned but applied “Profit Split Method” (PSM) and determined a sum of ₹ 3.14 crores as addition to be made on account of adjustment to ALP. In our view the entire approach by the TPO and DRP i .....

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be adopted in this regard. As to what is the Most Appropriate Method (MAM) to be adopted will depend on the stand taken by the Assessee in its TP study and the opinion of the TPO on the approach adopted by the TPO. The application of Profit Split Method (PSM) as the MAM in our view requires reconsideration, as the Assessee’s request for a personal hearing before applying PSM as MAM has not been considered by the DRP. The subvention fee is claimed to be paid by Novo Nordisk A/S just to help the .....

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order of the AO making disallowance u/s.40(a)(ia) of the Act which was sustained by the AO/DRP is set aside and the issue of disallowance u/.s.40(a)(ia) of the Act is directed to be decided afresh by the AO in the light of the certificate in form No.26-A filed by the Assessee and in the light of the decision referred to by the learned counsel for the Assessee. The correctness of the sale value as claimed by the Assessee will also be verified by the AO. The AO will afford opportunity of being he .....

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pany by M/s. Accentia Technologies Limited during the relevant year, and the said company, therefore, cannot be considered as comparable due to this extraordinary event which occurred in the relevant year as rightly held by the Tribunal inter alia in the case of Excellence Data Research P. Ltd. (2014 (9) TMI 126 - ITAT HYDERABAD ).

Infosys BPO be excluded from the list of comparables as the said company cannot be taken as comparable because of its uncomparable size of operations. See .....

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e that clinical research was in fact carried out by a third party pursuant to agreement with the AE and not with the Assessee and that the Assessee only carried out coordination activity for which it received payment from AE. Mere assertion before TPO/DRP and description of functional profile in the TP study will not be sufficient. We therefore direct the TPO to consider the issue afresh. The Assessee has to substantiate the real activities with supporting evidence and show that it did not carry .....

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Sciences Ltd., sought to be filed before us should be permitted to be filed in the set aside proceedings. - Decided in favour of assessee by way of remand. - IT(TP)A No.146/Bang/2015 - Dated:- 30-7-2015 - SHRI N.V. VASUDEVAN AND SHRI ABRAHAM P.GEORGE,JJ. For The Appellant : Shri Nageshwar Rao, Advocate For The Respondent : Shri R. Ravichandran, CIT-III (DR) ORDER Per N.V. Vasudevan, Judicial Member IT(TP)A No.146/Bang/15 is an appeal by the Assessee against the order dated 9.01.2015 of DCIT, 5(1 .....

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e Companies Act, 1956 in April, 1994. It is a subsidiary of Novo Investments Pte. Ltd., Singapore and Novo Nordisk region International Operations A/S Denmark . Novo Nordisk A/S. Denmark, hereinafter referred to as Novo Nordisk A/S is holding company of the holding companies of the Assessee. Therefore the Assessee and Novo Nordisk A/S are Associated Enterprises (AE) as defined in Sec.92A of the Act. The business of the Assessee is trading in high purity Insulin formulation, Insulin delivery syst .....

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s.92E of the Act in Form No. 3CEB:- Sl. No. Description Amount Paid Rs. Amount Received Rs. 1 Purchase of excipients 148,90,87,821 2 Purchase of finished goods 236,26,75,713 3 Quality Testing Fee 28,76,448 4 Receipt for Admin Services 22,11,19,930 5 Receipt for ITES 14,06,28,263 6 Subvention Fee 70,00,00,000 7 Reimbursement of Expenses 35,38,586 6,22,65,806 8 Payment of Software License fee. 1,72,68,647 9 Payment towards cross charge of employee compensation. 41,43,087 10 Payment of EDP Charges .....

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ssee and TPL. Subvention fee was received by the Assessee from Novo Nordisk A/S. Testing fee was paid by the Assessee to Novo Nordisk. There is no dispute that the Assessee and Novo Nordisk A/S are Associated Enterprises within the meaning of the said term as defined in Sec.92A of the Act. 6. The Assessee submitted a Transfer Pricing Study (TP Study) along with the report required to be filed in terms of Sec.92E of the Act in Form No. 3CEB. In the TP Study the Assessee took the stand that the tr .....

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applied to each of the transactions separately or to all such transactions a single group of transactions. According to the Assessee in its case, given the range of transactions involved it would not be appropriate to apply the arm s length method on a transaction-by-transaction basis. Hence international transactions were aggregated for benchmarking. According to the Assessee, the Rules [Rule 10A(d) of the Rules] provides that closely linked transactions can be benchmarked on an aggregated basi .....

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rchased locally: (2) Direct import and sale pf products from Novo Nordisk A/S and Novo Nordisk HealthCare AG. 8. The two categories as explained by the Assessee in its TP Study for AY 2009-10 was as follows:- 4.3.26 Sale of products purchased locally: Novo Nordisk India sells Human Monocomponent and Purified Insulin in 40 IU Vials purchased from Torrent Pharmaceuticals Limited, a company formed and registered under the laws of India. These insulin products have been manufactured by Torrent from .....

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tension agreement, granted Novo Nordisk India the right and license to use and or sub-license the use of its Know-how to manufacture the products at Novo Nordisk India s facilities or those of the sub-licensee where the said know-how is used for the manufacture of the said products. Similarly, Novo Nordisk A/S has, vide the trade mark master license agreement and extensions thereafter, granted to Novo Nordisk India the master license to use and or sub-license the use of the trade marks. These tr .....

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ystals and excepients bulk supply agreement, Torrent shall purchase the agreed quantity of insulin crystals and excepients only from Novo Nordisk A/S. Further the crystals and excepients shall be used solely for the manufacture of human monocomponent and highly purified insulin in 40 IU vials with the know-how and trade mark sub-licensed by Novo Nordisk India. Additionally, the insulin shall be sold only to Novo Nordisk India. 4.3.29 In the light of the above, Novo Nordisk India has entered into .....

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98 with Novo Nordisk A/S. 4.3.30 Novo Nordisk A/S has its own set of standard operating procedures and measures to control quality. Representatives of Novo Nordisk India and Novo Nordisk A/S, jointly or severally undertake quality checks on the manufacturing process by Torrent. These checks are undertaken almost quarterly. Quality audits are undertaken once in two years. The drugs need to be maintained at prescribed conditions of temperature (cold storage). Novo Nordisk India undertakes quality .....

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are AG. Some of these products are covered under the DPCO. For this purpose, Novo Nordisk India and Novo Nordisk A/S and Novo Nordisk HealthCare AG have entered into a product supply agreement dated October 4, 1999 and August 17, 2004 respectively. The term of these distribution agreements shall continue until terminated with mutual consent. In order to sell the above mentioned products in India, Novo Nordisk India has entered into distribution agreements with Abbott and Med India. Novo Nordisk .....

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. Novo Nordisk India also commissions various agencies to undertake market research to assess the potential business development opportunities and competitors. Target market segments are identified for further sales promotion. Product promotions include providing value added services like technical updates, continuous medical educational programs, global sponsorship programs for doctors etc. 4.3.33 The marketing executives are trained and scientifically equipped with regard to the product and di .....

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effects on the patients. Necessary corrective actions are taken especially if such complaints are related to quality control reasons and ample monitoring is done both by Novo Nordisk India and Novo Nordisk A/S. The customer complaints are sent to a central database in Denmark where an international product safety section analysis the nature of such complaints. (emphasis supplied) 9. The Assessee s operating profit to sales in the distribution segment was arrived at by the Assessee at 2% after t .....

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nterprise of the Assessee. Torrent Pharmaceuticals Limited gets insulin in crystal form which is raw material required for manufacture of Human Mono Component and highly purified insulin in 40 IU Vials, which is imported from Novo Nordisk A/S. The Assessee in its TP study accepts the fact that there is an arrangement between the Assessee, Novo Nordisk A/S and Torrent Pharmaceuticals Limited (TPL) whereby insulin in crystal form will be supplied by Novo Nordisk A/S to TPL. Novo Nordisk A/S will a .....

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on Net Margin Method (TNMM) was chosen as the Most Appropriate Method for determining the Arm s Length Price (ALP). The Assessee therefore claimed that its margin of 2% operating profit to sales was better and therefore the international transaction in the distribution segment was at arm s length. 12. The Transfer Pricing Officer (TPO), to whom the question of determination of ALP was referred to by the AO u/s.92CA of the Act, examined the transactions claimed by the Assessee to be of the nature .....

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d TPL on the one hand and the Agreements between TPL and Novo Nordisk A/S and agreement between the Assessee and Novo Nordisk A/S are as follows: 1. Know-how license Agreement dated 28.2.1994: Novo Nordisk A/S owns the know how i.e., formulae, processes, recipes, product specifications, technical and manufacturing data, information, equipment, specification, specifications of raw materials and utilities and all other technical information and data, whether patented or not, accumulated techniques .....

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ght and license to use or sub-license the use of the Novo Nordisk know-how to manufacture Novo Nordisk Products at the Plant. Plant means the manufacturing facilities of the Assessee or those of its sub-licensee and or contractor manufacturer(s) as the case may be where Novo Nordisk A/S know how is used for production of any of Novo Nordisk Products. 2. Trade Mark Master License Agrement-1 dated 28.2.1994: Novo Nordisk A/S owns Trade Marks Actrapid, Lentard, Monotard, Insulatard, Mixtard, NovoPe .....

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o Nordisk Products. 4. Facility Establishment Agreement dated 6.8.2005: Whereby the Assessee and TPL agree about the facility to be created by TPL exclusively for insulin production in terms of agreement of Assessee and TPL for insulin formulation supply. 5. Agreement for quality control testing dated 1-4-1997: This agreement is between Novo Nordisk A/S and the Assessee. Novo Nordisk A/S under this agreement undertakes to do quality control testing for 40 iu insulin manufactured by TPL pursuant .....

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no specific services to be rendered by the Assessee for the payment of subvention fee. 7. INSULIN CRYSTALS AND EXCIPIENTS BULK SUPPLY AGREEMENT DATED 15-2-1994: This agreement is between Novo Nordisk A/S and TPL. This Agreement in its preamble refers to the fact that TPL wants to enter into a long term purchase agreement with Novo Nordisk for purchase of Human Mono component and Highly Purified Porcine Insulin Crystals and Excepients, which are used as raw material in manufacture of 40 iu insul .....

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reement dated 15.2.1994. The agreement provides for several restrictions with regard to maintenance of inventory by TPL of the raw material imported. Clause 5.3 of the Agreement is very material for the present case and it reads thus: 5.3. The Purchaser shall use the Insulin Crystals and Excepients only for the purpose of manufacturing Human Mono component and Highly purified Insulin in 40 IU vials ( formulations ) more particularly specified in Appendix4m with the know-how to be supplied by the .....

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Highly purified Insulin in 40 IU vials through TPL and distribution of products directly imported from Novo Nordisk A/S as distribution function, was of the view that the arrangements between the Assessee, Novo Nordisk A/S and Torrent was in fact a manufacturing activity and cannot be characterized as distribution operations. The TPO in his TP order conducted a fresh comparability analysis based on the application of TNMM and arrived at a set of 15 purported comparable companies with a mean oper .....

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The TPO also applied Profit Split Method(PSM) of determining ALP as against TNMM applied by the Assessee in respect of the arrangement with the Torrent for purchase of Insulin. The TPO additionally analyzed purchase of insulin from Torrent separately by applying residual PSM based on the FAR analysis following the approach of the TPO and the learned Panel in the previous year s assessment proceedings/Panels proceedings. The TPO applied residual PSM in the ratio of 50:50 between Novo Nordisk A/S .....

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he overall transaction, arrived at an operating margin of 15.5% (50% of 31%) to be earned by the Assessee based on application of PSM, thereby enhanced the overall adjustment in distribution segment by INR 58,831,508. 16. The DRP confirmed the order of the AO. Hence grounds No. 39 to 47 by the Assessee before the Tribunal. 17. At the time of hearing it was agreed by the parties before us that the facts and circumstances and the basis on which the addition was made in the present assessment year .....

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which the Assessee engages the services of TPL to convert the incipient into Human Mono component and Highly Purified insulin in 40 IU Vials and ultimately sells the same in Indian market on behalf of Novo Nordisk A/S. can be considered as an International Transaction between two Associated Enterprises attracting the provisions of Sec.92(1) of the Act? 2. If the answer to the above question is in the affirmative, whether the said transaction can be benchmarked for the purpose of determining ALP .....

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correct? 18. The Tribunal decided the aforesaid issues as follows: Issue No.1: Whether transaction by which incipient (raw material for manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials) is supplied by Novo Nordisk A/S to TPL and the transaction by which the Assessee engages the services of TPL to convert the incipient into Human Mono component and Highly Purified insulin in 40 IU Vials and ultimately sells the same in Indian market on behalf of Novo Nordisk A/S. ca .....

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f the Act will apply only when income arises from an International Transaction . He drew our attention to the provisions of Sec.92B of the Act, which lays down the meaning of International Transaction . He brought to our notice that two conditions are required to be satisfied before a transaction can be said to be International Transaction viz., (i) there should be a transaction between two or more associated enterprises and (ii) either or both of them should be non-residents. He pointed out tha .....

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of manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials is between TPL and the Assessee, the learned counsel submitted that both the Assessee and TPL are residents and therefore the condition that either or both the parties to a transaction should be non-resident is not satisfied and therefore the said transaction cannot also be regarded as International Transaction . 50. He then drew our attention to the provisions of Sec.92B(2) of the Act which provides a transaction .....

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Associated Enterprise as used in Sec.92B(1) of the Act and it does not dispense with the condition that either or both the parties to a transaction should be non-resident for a transaction to be termed as International Transaction . In other words according to him Sec.92B(2) controls only the definition of Associated Enterprises as laid down in Sec.92A of the Act. 51, The learned counsel for the Assessee drew our attention to the decision of the ITAT Hyderabad Bench in the case of Swarnandra IJ .....

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abad ITAT held: 28.4. Section 92B(2) embodies a legal fiction. It deems a transaction to have been entered into between two associated enterprises. Though section 92B(2) is a part of section 92B with the heading "Definition of international transaction", it is to be read as an extension of section 92A(2) and not as an extension of section 92B(1). This is for the following reasons: (a) Both section 92A(2) and 92B(2) deal with situations under which two or more persons constitute associa .....

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39; and not as 'international transaction between two enterprises'. 28.5 There is a difference between associated enterprises defined under section 92A and transaction deemed to be between associated enterprises under section 92B(2}. Under section 92A, two or more enterprises once determined to be associated enterprises remain so for the entire financial year. Their relationship will not change for different transactions between them. They will remain associated enterprises even if they .....

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wo associated enterprises intend to have an international transaction but want to avoid transfer pricing provisions by interposing a third party as an intermediary. In such cases, the third party intermediary will generally not be the ultimate consumer of the services or goods. The intermediary would facilitate the transfer of services or goods from one enterprise to its associate enterprise with no value addition or insignificant value addition. The intermediary is used to break a transaction i .....

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ining whether such transaction constitutes an 'international transaction' under section 92B(1). In case section 92B(1) is not attracted, the fiction under section 92B(2) ceases to operate. In our opinion, the impugned transaction between the assessee and IJMII does not fall under section 92B(2). This is for the following reasons. (a) Both the assessee and IJMII are residents of India for tax purposes. They pay their taxes in India. To fall under 92B(1), the international transaction has .....

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as an intermediary. The transaction in question involved direct rendering of services by IJMII to the assessee. (c) The APHB came into existence under the A.P. Housing Board Act, 1956. It performs governmental functions. Its policies are directly controlled by the Andhra Pradesh Government. In view of the active participation of the Government of AP in the functioning of the assessee, it cannot be said that IJM Group would influence the assessee either in entering into contract with IJMII or in .....

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sactions between two domestic related parties by virtue of the amendment through Finance Act, 2012. In case, the existing provisions were applicable to domestic transactions then there was no need to bring about the for the above amendment. 28.8 The primary condition for attracting transfer pricing provisions is that there should be a transaction between two or more AEs in terms of section 92A(1) and 92A(2) of the Act. In our opinion, the transactions between the assessee and IJMII do not fall u .....

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we refrain from going into the other grounds raised by the assessee on the issue of transfer pricing. The addition made towards transfer pricing transactions is deleted in its entirety. 52. It was further pointed out by him that Sec.92B(2) has been amended by the Finance Act, 2014 to read as below:- (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be [deemed to be a transaction] entered into between two .....

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4-2015. Prior to the said amendment, if either or both the parties to a transaction are not non-residents, than the provisions of Sec.92B(2) of the Act were not attracted and therefore the transaction was outside the purview of Sec.92(1) of the Act. He also placed reliance on the decision of the ITAT Mumbai in the case of Kodak India Pvt. Ltd. Vs. ACIT ITA No.7349/Mum/2012 order dated 30.4.2013 wherein a view similar to the view expressed by the ITAT Hyderabad Bench in the case of Swarnandhra IJ .....

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on which the DR laid emphasis are the following:- 1. As per the Agreement for bulk supply of excepient between Novo Nordisk A/S and TPL, which the raw material for manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials by TPL, in its preamble, there is a reference to the Agreement for long term insulin formulations supply agreement between TPL and the Assessee i.e., the Human Mono component and Highly Purified insulin in 40 IU Vials. Clause 7.1 of the agreement provides .....

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TPL and the Assessee in clause 2.01 specifically provides that the agreement by which use of knowhow and use of trade mark by TPL was sub-licensed to TPL for manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials, specifically provides that the Assessee will disclose the source of the Assessee s right to grant sub-license of know-how and trade mark as from Novo Nordisk A/S and further provides that such original license agreement will be deemed to be incorporated in the s .....

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y the testing of quality of the product manufactured by TPL is undertaken by Novo Nordisk A/S. 55. According to him all the terms of all the agreements have to be read together and if so read it becomes clear that the arrangement between the parties was that the Assessee will carry out manufacture and sale of Human Mono component and Highly Purified insulin in 40 IU Vials through TPL. According to him both the TPO and the DRP have rightly drawn conclusion that the transaction of manufacture and .....

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ransfer Pricing Study carried out by the Assessee in support of ALP of the international transactions entered into by it with its AE. In Para 4.3.26 of its T.P. Study at page-26, the Assessee has specifically mentioned that the transaction of sale of products purchased locally (from TPL) was a distribution function which the Assessee performs for Novo Nordisk A/S and was an international transaction. The only change that the TPO adopted was to characterise the function performed by the Assessee .....

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isk A/S. Novo Nordisk India and Torrent, as associated enterprises and since one of the parties (i.e. Novo Nordisk A/S.) is a non-resident, it would amount to an international transaction that needs to comply with the Indian Transfer Pricing Regulations. 57. According to the learned DR this contradictory stand taken by the Assessee in the course of proceedings before TPO/DRP and now before the Tribunal, that there is no deemed international transaction of Manufacture according him has to be reje .....

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levant to computation of arm s length price, etc. 92F. In sections 92, 92A, 92B, 92C, 92D and 92E, unless the context otherwise requires,- ………… ………… (v) transaction includes an arrangement, understanding or action in concert,- (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding. 59. He laid emph .....

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after the Assessee sells the finished product in Indian market. 60. It was also submitted by the learned DR that the amendment to the provisions of Sec.92B(2) of the Act by the Finance Act, 2014 w.e.f. 1-4-2015 is clarificatory in nature, clarifying the law as always out to be. It may in that sense be held to be retrospective. 61. In his rejoinder, the learned counsel for the Assessee submitted that Sec.92F specifically provides that Unless the context otherwise requires and thereafter gives def .....

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acilitation Agreement in the order of the DRP is perverse as the said agreements do not relate to the period relevant to AY 09-10 and was operative only for period after AY 09-10. 62. We have given a very careful consideration to the rival submissions. The Assessee and Novo Nordisk A/S. are Associated Enterprises . During the previous year relevant to 09-10 there were several international transactions between the Assessee and Novo Nordisk A/S. The Assessee submitted a Transfer Pricing Study (TP .....

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k A/S. Novo Nordisk India and Torrent, as associated enterprises and since one of the parties (i.e. Novo Nordisk A/S.) is a non-resident, it would amount to an international transaction that needs to comply with the Indian Transfer Pricing Regulations. The Assessee in its TP study characterized the transaction of supply of raw material by Novo Nordisk as akin to the distribution of products imported from Novo Nordisk A/S. The Assessee further took the stand that the transaction of purchase of ex .....

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ct. 63. The main thrust of the argument on behalf of the Assessee was that u/s.92B(1) two conditions are required to be satisfied before a transaction can be said to be International Transaction viz., (i) there should be a transaction between two or more associated enterprises and (ii) either or both of them should be non-residents. According to the Assessee at least one party to a transaction should be a non-resident. According to the Assessee the transaction for supply of incipient was between .....

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the Assessee and TPL are residents and therefore the condition that either or both the parties to a transaction should be non-resident is not satisfied and therefore the said transaction cannot also be regarded as International Transaction . The above argument on behalf of the Assessee overlooks the overall arrangement between the Assessee and Novo Nordisk A/S as evidenced by the various agreements entered into between the parties. 64. The Agreement between the Assessee and TPL on the one hand a .....

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and utilities and all other technical information and data, whether patented or not, accumulated techniques, experience and skill owned or possessed or acquired (referred to as Novo Nordisk know-how) to produce Novo Nordisk products i.e., products listed in appendix-1 to the agreement, which includes Human Monocomponenet Insulin Formulations (40 iu/ml in 10ml vials) and Highly Purified Porcine Insulin Formulations (40iu/ml in 10ml vials) (referred to as Novo Nordisk Products). Under clause 2.01 .....

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dated 28.2.1994: Novo Nordisk A/S owns Trade Marks Actrapid, Lentard, Monotard, Insulatard, Mixtard, NovoPen, NovoFine, Glucagon Novo. By the agreement dated 28.2.1994, the Assessee is given the Master License to exclusively use and or sub-license the use of the Trade Marks of the aforesaid products which are listed in Appendix-1 to the agreement. Know-how License Agreement and Trade mark License Agreement between TPL and the Assessee in clause 2.01 specifically provides that the agreement by w .....

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re and supply 40iu insulin to the Assessee. There is also an arrangement whereby TPL is given sub-license to use Novo Nordisk A/S Know how to manufacture Novo Nordisk Products. Insulin formulations supply agreement between the Assessee and TPL in clause 14.2 specifically provides that the agreement is co-terminus with the bulk supply agreement shall be coterminus with the Insulin Crystals and Excepients Supply agreement between Novo Nordisk A/S and TPL and the know-how and trade mark sub-license .....

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ured by TPL pursuant to Formulations supply Agreement dated 1-3-1994. 6. Subvention Agreement dated 1-1-2003: This agreement is between Novo Nordisk A/S and the Assessee. This agreement explains in its preamble that the Assessee is primarily a distributor and marketer of insulin and pharmaceutical products in India. Novo Nordisk A/S wants to support the operations of the Assessee as its holding company and hence the payment of subvention fee is being made by them to the Assessee. The agreement p .....

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facture of 40 iu insulin vials. The agreement also refers to the know-how license and trade mark license between the Assessee and Novo Nordisk A/S and further refers to insulation formulations supply agreement between TPL and the Assessee. These are the agreements set out in sl.No.1 to 3 of the various agreements. These are referred to in appendix 5 to this agreement. Clause 2.5 of the agreement provides that appendices to the agreement form part of this agreement, i.e., Insulin Crystals and Exc .....

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to be supplied by the Seller under a separate technology and know-how agreement to be entered into between the Purchaser and Novo Nordisk (India) Pvt. Ltd., a company incorporated in accordance with the laws of India, hereto, and the finished formulations shall be supplied exclusively to Novo Nordisk (India) Pvt. Ltd. under another separate product supply agreement. As per the this Agreement for bulk supply of excepient between Novo Nordisk A/S and TPL, which the raw material for manufacture of .....

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of the Agreement specifically provides that the bulk supply agreement shall be co-terminus with the Insulin Formulations Supply agreement between TPL and the Assessee and the know-how and trade mark sub-license agreement between the Assessee and TPL. 65. It is clear from the aforesaid agreements that the sum and substance of all the agreements is the supply of raw material by Novo Nordisk A/S to Assessee to enable it to manufacture Mono component and Highly Purified Insulin in 40 IU Vials and se .....

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als. All the agreements between Novo Nordisk A/S and TPL and between TPL and the Assessee refer to each other and specifically incorporate the terms of one agreement into the other. Thus the parties to the arrangement are Novo Nordisk A/S, Assessee and TPL. Since one of the parties to the transaction is a non-resident the conditions specified in Sec.92B(1) of the Act are satisfied. 66. The decision of the ITAT Hyderabad in the case of M/S. Swarnandhra IJMII Integrated Township Development Co. Pv .....

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e was transfer of raw material (excepient insulin crystals) by the non-resident AE to the Assessee, which clearly attracted the provisions of Sec.92(1) and 92B(1) of the Act. In the decision rendered by the ITAT Mumbai in the case of Kodak India Pvt. Ltd. (supra) in para 52 of the order, the Tribunal has clearly brought out that the global agreement did not have any role effect on the transactions of the two domestic companies and therefore deeming provisions of Sec.92B(2) of the Act is not appl .....

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ociated enterprises or nonresidents, one cannot claim that the Transfer Pricing regulations were not applicable, if in reality and in substance transactions were with related parties one or both of whom might be nonresidents. For example in the present case if the cost of excepient/insulin crystal which is the raw material for manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials, is not subjected to the test of ALP, it could result in erosion of tax base in India. The t .....

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the provisions of Sec.92B(2) or Sec.92A(2) of the Act, though the reasons given by the DRP in its order on this aspect also, in our view is acceptable. The transaction between TPL and the Assessee for manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials, in our view, cannot fall within the ambit of the provisions of sec.92(1) of the Act. The reason for the above conclusion is that tax base erosion in India can happen only at the point of time of supply of insulin crysta .....

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an Mono component and Highly Purified insulin in 40 IU Vials by Assessee through TPL. Issue No.1 is decided accordingly. Issue No.2, 3 & 4 2. Whether the transaction of supply of raw material excepient/insulin crystal by Novo Nordisk A/S to the Assessee can be benchmarked for the purpose of determining ALP together with the international transaction of import of products directly from Novo Nordisk A/S and selling the same in India ( which is purely distribution function performed by the Asse .....

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Vials with the pure distribution function of sale of products directly imported from Novo Nordisk A/S. was not in accordance with Rule 10A(d) of the Rules. In this regard he pointed out that transactions include a group of transactions closely linked. Purchase of raw material and manufacture and sale of them are closely linked transaction. The distribution of products imported from Novo Nordisk A/S was not a closely linked transaction with the sale of manufactured products and therefore both hav .....

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ly linked or continuous that they cannot be evaluated adequately on an individual basis, is advocated by the OECD Guidelines on Transfer Pricing. In such a situation, rather than assessing the ALP of the transactions individually, the transactions could be evaluated together using the most appropriate method. 69. In the present case, can it be said that the transaction of supply of raw material and the transaction of sale of imported products directly from Novo Nordisk A/S said to be interlinked .....

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same error. The DRP carved out the consideration in so far as it relates to supply of raw material by Novo Nordisk A/S is concerned but applied Profit Split Method (PSM) and determined a sum of ₹ 3.14 crores as addition to be made on account of adjustment to ALP. In our view the entire approach by the TPO and DRP in this regard is erroneous. In our view it would be just and appropriate to set aside the order of the TPO /DRP in this regard and direct that the determination of ALP of the int .....

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to give his Transfer Pricing Analysis on the above lines for each of the transaction separately. As to what is the Most Appropriate Method (MAM) to be adopted will depend on the stand taken by the Assessee in its TP study and the opinion of the TPO on the approach adopted by the TPO. The application of Profit Split Method (PSM) as the MAM in our view requires reconsideration, as the Assessee s request for a personal hearing before applying PSM as MAM has not been considered by the DRP. The subve .....

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. 70. Thus grounds No. 32 to 40 and the additional ground of appeal are partly allowed. 19. The parties agreed before us that similar findings and directions can be followed in the present assessment year also. Accordingly, we hold that the issues raised in Grounds No. 39 to 47 in the present assessment year are decided according to the decision rendered in AY 09-10 referred to above. The AO is directed to give effect to the directions as are contained in AY 09-10 in the present assessment year .....

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equired for manufacture of Human Mono Component and highly purified insulin in 40 IU Vials, which is imported from Novo Nordisk A/S. TPL after completing the process of manufacture of purified insulin in 40IU Vials sold it to the Assessee at a sum of ₹ 192,89,16,836 as stated in the orders of the revenue authorities. According to the Assessee the correct sale value was only ₹ 184,95,91,300/-. According to the AO, TPL was only a contract manufacturer and the payment made by the Assess .....

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n case in ITA No.1262/2006 dated 5.1.2012 wherein the Hon ble Karnataka High Court took the view that the payment made by the Assessee to TPL for insulin vials was in the nature of contract for work which requires tax deduction at source u/s.194C of the Act. According to the Assessee the issue has not attained finality and an appeal by way of SLP is pending against the said decision before the Hon ble Supreme Court. 21. It is not necessary for us to decide the controversy as to whether the payme .....

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t with a view to liberalize provisions of Section 40(a)(ia) of the Act Finance Act 2012 brought amendment w.e.f 01.04.2013 as under. The following second proviso was inserted in sub-clause (ia) of clause (a) of Section 40 by the Finance Act, 2012, w.e.f. 1-4-2013 :- Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to su .....

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he principal officer of a company - (a) who is required to deduct any sum in accordance with the provisions of this Act; or (b) referred to in sub-section (1A) of Section 192, being an employer, does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax: Provided that .....

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ax due on the income declared by him in such return of income, and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed: 23. The Tribunal considered the Memorandum explaining the provisions while introducing Finance Bill, 2012 provides the justification of the amendment to section 40(a)(ia) in the following words:- In order to rationalise the provisions of disallowance on account of non-deduction of tax from the payments made to a resident payee, .....

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. The Tribunal thereafter observed that the provisions of Sec.40(a)(ia) of the Act are meant to ensure that the Assessee s perform their obligation to deduct tax at source in accordance with the provisions of the Act. Such compliance will ensure revenue collection without much hassle. When the object sought to be achieved by those provisions are found to be achieved, it would be unjust to disallowance legitimate business expenses of an Assessee. Despite due collection of taxes due, if disallowan .....

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section will be allowed only if the - (i) payee has furnished his return of income under section 139; (ii) payee has taken into account such sum for computing income in such return of income; and (iii) payee has paid the tax due on the income declared by him in such return of income, and the payer furnishes a certificate to this effect from an accountant in such form as may be prescribed. 25. The Tribunal thereafter considered the question as to whether the amendment made as above is prospective .....

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that a certificate in Form No.26A of the Rules had already been filed before the AO and DRP. The said Certificate in Form No.26A of a Chartered Accountant is a certificate certifying that TPL has paid tax on the sum of ₹ 184,95,91,300/- received from the Assessee. It was therefore contended by him that in view of the amended provisions of law referred to above which have been held to have retrospective operation and in view of the fact that the Assessee has satisfied the Revenue that taxe .....

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f the decisions relied upon by him deserve to be accepted. Accordingly, the order of the AO making disallowance u/s.40(a)(ia) of the Act which was sustained by the AO/DRP is set aside and the issue of disallowance u/.s.40(a)(ia) of the Act is directed to be decided afresh by the AO in the light of the certificate in form No.26-A filed by the Assessee and in the light of the decision referred to by the learned counsel for the Assessee. The correctness of the sale value as claimed by the Assessee .....

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in so far as it is prejudicial to the Assessee. These grounds need no specific adjudication. 28. Ground No.25 to 32 raised by the Assessee are with regard to addition of ₹ 83,95,951/- made to the total income consequent to determination of ALP in respect of an international transaction of rendering IT enabled Services(ITES) by the Assessee to its AE. The Assessee received a sum of ₹ 6,48,93,316/- for rendering ITES to its AE. The Assessee operating profit to total cost was 13%. The .....

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. The TPO ultimately made an addition of ₹ 67,83,95,931 which was subsequently reduced to ₹ 83,95,931. The addition was sustained by the DRP. Hence, the aforesaid grounds of appeal by the Assessee before the Tribunal. 30. Before us the learned counsel for the Assessee prays for exclusion of 2 comparable companies out of the 9 comparable companies finally chosen by the TPO for the purpose of comparison. A chart was filed before us showing how the 2 comparable companies which the Asses .....

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sessee. 31. We deal with the comparable companies which the Assessee seeks exclusion. 1. Accentia Technology Ltd., 2. Infosys BPO Ltd. The comparability of these company with a ITES company was considered by this Tribunal in the case of Paraxel International (India) Pvt. Ltd. (supra) and the Tribunal held as follows on the comparability of the aforesaid companies with a company providing ITES in the following manner:- 10. In grounds No.4 to 6, the assessee has challenged the comparables selected .....

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s as comparables and also perused the relevant material on record including the various decisions of the coordinate benches of the Tribunal cited by the learned counsel for the assessee. Accentia Technologies Limited 12. As regards the selection of Accentia Technologies Limited as comparable, the learned counsel for the assessee has relied on the decisions of this Tribunal in the cases of Capital IQ Information Systems (India) Pvt. Ltd. V/s. Addl./Dy. Commissioner of Income-tax, Circle 1(2), Hyd .....

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also found to be functionally different. The relevant observations of the Tribunal as recorded in para 19.2 of the order passed in the case of Excellence Data Research Pvt. Ltd., Hyderabad (supra), being relevant in this case, are reproduced below- 19.2 We have considered the rival contentions and noticed that this company operates in a different business strategy of acquiring companies for inorganic growth as its strategy. In earlier years on the reason of acquisition of various companies, bei .....

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the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected. 13. As pointed out by the learned counsel for the assessee, there was acquisition of a company by M/s. Accentia Technologies Limited during the relevant year, and the said company, therefore, cannot be considered as comparable due to this extraordinary event which occurred in the relevant year as rightly held by the Tribunal inter .....

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this Tribunal in the case of Excellence Data Research Services Pvt. Ltd. (supra) and direct the AO/TPO to exclude the Accentia Technologies Limited from the list of comparables. …….. Infosys BPO 20. As regards selection of Infosys BPO as a comparable company, the learned counsel for the assessee has contended that the said company cannot be taken as comparable because of its uncomparable size of operations. He has contended that the turnover of the said company was many times highe .....

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ed as comparables with smaller companies like the assessee in the present case. Respectfully following the decision of the Hon ble Delhi High Court in the case of Agnity Technologies P. Ltd. (supra), we direct the Assessing Officer/TPO to exclude Infosys BPO from the list of comparables. 32. As far as Accentia Technology Ltd., is concerned, even during the previous year relevant to AY 2010-11, there was amalgamation of Ascent Infoserve Private Limited with Accentia Technology Ltd., and consequen .....

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from the list of comparable companies for the purpose of computing arithmetic mean for comparability purpose. The TPO is directed to give effect accordingly. 33. The last issue that arises for consideration in this appeal is Ground Nos. 33 to 38 of the grounds of appeal raised by the Assessee are with regard to an addition of ₹ 1,17,46,336 to the total income of the Assessee on account of adjustment in the arm s length price with respect to co-ordination/monitoring services relating to cl .....

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as also been urged by the Assessee that TPO/AO/DRP have erred, in law and in facts, by not accepting the functional and economic analysis undertaken by the Assessee in accordance with the provisions of the Act read with the Rules, which was duly accepted by the learned AO/ TPO under identical facts and circumstances in the Assessee s own case for the earlier assessment year without assigning any cogent or valid reasons. 34. The taxpayer disclosed receipt of ₹ 22,11,19,930/- as internationa .....

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st of ₹ 6,19,54,270/- on account of activities outsourced. While it has received compensation of cost with mark up of 13% relating to former, it received latter amount on cost-to-cost basis and claimed it as reimbursements. 36. The TPO however was of the view that the Assessee was in fact rendering clinical trial services to it s AE and chose comparable companies engaged in clinical trial services and arrived at a arithmetic mean of those companies at 18.37% operating cost to Total cost in .....

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or, coordination and supervision of clinical trial activity of Novo Nordisk A/S. These services provided by the Assessee include the following: • Conclude clinical study contracts with the independent investigators capable to carry out the trials according to the required standards and procedures; • Control and monitor the clinical study process; • Provide the investigators (and support personal) with necessary information and training with respect to procedures and scope of resea .....

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research, ordering translation of the necessary documents and supplying the investigators with study medication to be used exclusively within the trials. Further, the Assessee basically acts as the first line local liaison and is responsible for complying with all the local regulatory requirements including filing price information with the price control authorities. The costs of local registration trials and phase IV (Post Marketing Studies) trials are met by the Assessee as part of its distri .....

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w product then the clearance from the Indian drug control authorities is obtained by providing factual proof of trials (all phases) including the approvals if any received in other countries. Further, on an ongoing basis, so long as the drug is marketed in India, Nova Nordisk India updates the authorities on safety information. The Assessee undertakes support and coordination services with respect to phase II and phase III of the multi-centric trials for products of Novo Nordisk A/S, which are u .....

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structure was only in the form of furniture and fixtures, office equipment, data processing machines, motor vehicles and lease hold improvements, which were used for general administration and it was not sufficient for carrying out the whole clinical research activity. The main function of the Assessee is to collate the data and transmit the same to Novo Nordisk A/S for which it is substantially reimbursed by Novo Nordisk A/S by mark-up of 13% on cost. The above activities are akin to provision .....

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facilitating only contract support services to Novo Nordisk A/S, as referred to above. The Assessee submitted that it transfers the cost of clinical trial activities undertaken by independent investigators without any mark-up. The Assessee emphasized that the actual services performed as stated earlier, is limited to mere support and coordination services for the clinical trial activity of Novo Nordisk A/S, and does not perform any services/functions of a clinical research or organization as all .....

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ons raised by the Assessee but computed the ALP as follows: 5.7 ALP COMPUTATION: In the light of the above discussions, the arm s length price of receipt of compensation in clinical Trial Segment, is computed as under. Arm s Length Mean Margin 18.37% Clinical Trial cost + Reimbursement relating to clinical trial (Rs.68,03,275 + ₹ 6,19,54,270) Rs.6,87,57,545 Arms Length Price (ALP) @ 118.37% of Clinical trial operating cost Rs.8,13,88,306 Price received + Reimbursement relating to clinical .....

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ssue of clinical trial segment as follows: 15.3. Based on the above arguments, the assessee holds that the comparables selected by the TPO are functionally different from its own activities. However, the TPO on a consideration of the argument proceeded to determine the Transfer Pricing adjustment found that the functions discharged by the tax payer, assets deployed, risks assumed need not be separated out in order to distinguish its own cost and the comparable cost if done through third parties, .....

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self. The FAR analysis made by the TPO does not indicate the superficial level of involvement which could characterize the activities of a mere supporter or coordinator. 15.5. From the assessee s submissions, it is also noted that the role of the principal is limited to deciding upon the particular clinical trial to be conducted and identification of countries/geographical areas for the purpose. It is the assessee which applies for all local approvals and conducts all aspects of the clinical tri .....

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clinical trial activities are fully justified. For determination of the ALP, therefore, the AO has correctly adopted certain comparables which are however not acceptable to the assessee. The argument of the assessee seeks to lighten the depth of its involvement in clinical trials which we do not find acceptable. It performs as a full fledged clinical services provider to its AE and ought to be compensated as such. Accordingly, this objection is not acceded to. 40. Before us the learned counsel .....

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