TMI Blog2017 (7) TMI 208X X X X Extracts X X X X X X X X Extracts X X X X ..... assing the prescription of rule 10B(1)(a). Sub-clause (i) talks of identifying the price charged for the property transferred. Even the description of property transferred i.e. the drugs sold is not ascertainable in most of the cases. Sub-clause (ii) firstly, requires determining the price charged in comparable uncontrolled situation. Here again, similar position prevails. Not only there are varying prices charged by different manufacturers as against the TPO taking only one price in an ad hoc manner, even the reduction of margin of 39.6% from such retail price for getting the ex-factory price, is not sacrosanct. Apart from that, no adjustment has been carried out as per sub-clause (ii) on account of exports made by the assessee vis-à-vis the comparable prices relating to domestic sales. Thus, it is clear from the above discussion that the exercise done by the TPO in determining the ALP of the international transaction of ‘Contract manufacturing’ under the CUP method does not merit acceptance. TNMM for determining the ALP - Held that:- While dealing with the earlier international transaction of ‘Business support services’, we have noticed that the assessee carried out audit and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurring, and there is no compensation for it, then, naturally, some mark-up is required and vice versa. In the absence of this vital information, we set aside the impugned order on this score and remit the matter to the file of AO/TPO for re-doing it afresh. - ITA No.6707/Del/2016 - - - Dated:- 6-3-2017 - SHRI R.S. SYAL, ACCOUNTANT MEMBER, AND SHRI KULDIP SINGH, JUDICIAL MEMBER For The Assessee : Shri Himanshu S. Sinha, Advocate Ms Vrinda Tulshan, Advocate For The Department : Shri Peeyush Jain, CIT, DR ORDER PER R.S. SYAL, AM: This appeal by the assessee is directed against the final assessment order dated 30.11.2016 passed by the Assessing Officer (AO) u/s 143(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter also called the Act ) in relation to the assessment year 2012-13. 2. Briefly stated, the facts of the case are that the assessee, an Indian subsidiary of Merckle Group/Merckle GmbH, Germany, which, in turn, is a global generic pharmaceutical leader and one of the top 15 pharmaceutical companies in the world. The Teva Group specializes in development, production and marketing of a wide range of generic/branded products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of transfer pricing analysis. Correctness of the segmental information has not been disputed by the TPO. Such information, reproduced from the TPO s order, is given as under : - Table - 2 Particulars Contract Manufacturing (Rs.) Contract research testing services (Rs.) Business development Procurement services (Rs.) Support Services Business Support Services 1 2 3 4 5 6 Sales/Operating Income 1733908247 320918167 20324785 28473251 26485595 Total Operating expenses 1517543142 276985386 17494525 23372406 24584843 Operating Profit 216365105 43932781 2830260 5100845 1900752 OP/OC 14.26% 15.86% 16.18% 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... almost similar to Business development and procurement services [Col. 4 of Table-2] and Support services [Col. 5 of Table-2], in respect of which the assessee declared OP/OC at 16.18% and 21.82%. As against the assessee s OP/TC at 7.73% from the instant combined international transactions [Col.6 of Table-2], the TPO averaged the assessee s profit margin from the Business development and procurement services and Support services at 17%, which was considered as benchmark for this international transaction. By applying this profit rate as the arm s length profit, the TPO worked out transfer pricing adjustment of ₹ 22,78,671/-. The AO made the said addition, which has been assailed before us. 6. We have heard the rival submissions and perused the relevant material on record. The ld. AR did not dispute the action of the TPO in rejecting its comparables; averaging the profit margins earned by the assessee itself from its segments of Business development and procurement services and Support services to be treated as a benchmark; the figures of revenue and operating expenses of the instant segment taken by the TPO with the help of which its OP/TC was taken at 7.73%. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acturer from a Loan and licence manufacturer in whose case inputs are provided by the principal and only the manufacturing part is done by the other party. It was contended that the assessee manufactured the products at its own though at the instance of its AE and that is the reason for which amount realized from the AEs was shown as Sales. The TPO noticed that the assessee also did Contract research and testing for sales and it has the entire manufacturing set up which is subjected to inspections by foreign regulators. He came to hold that the assessee should have applied Comparable Uncontrolled Price (CUP) method for benchmarking this international transaction. The assessee s contention that no comparable instances were available, was rejected. The TPO observed that the assessee manufactures generic drugs and several such drugs manufacturers are available in the market for comparison. Considering CIMS database available in the public domain, the TPO noticed that such database provides data of retail prices of the drugs by different manufacturers. He, therefore, held that such retail sale prices should be compared with the prices charged by the assessee from its AE with reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e seen that for the purpose of comparison of Allopurinol sold by the assessee, the TPO has taken Alrik as a substituted drug with similar potency, whose retail price as per the database charged by Cipla is ₹ 3.94 per unit. The ld. AR argued that the CIMS database gives only the current retail prices charged by several manufacturers of the same generic drugs with their own brand names and, as such, the retail prices for the earlier period are not available. This contention has remained uncontroverted on behalf of the Revenue. The ld. AR placed on record CIMS data for other manufacturers of the same product, which shows significant variations in the retail price. For example, a manufacturer Kamron is selling Allopurinol with the trade name of Allgoric at the retail price of ₹ 1.20 per unit. Similarly, the retail price charged by a manufacturer Unkind for the same formulation but with its own trade name is ₹ 5.20 per unit. The retail price charged by another manufacturer, namely, Saniti with same formulation is ₹ 4.99 per unit. Similarly, another manufacturer Shinto Biotech is charging retail price of ₹ 12.00 per unit of the same medicine. Ano ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o products have been mentioned, that is, Alloupurinol and Sildenafil. There is no mention of the product in remaining four columns, though transfer pricing adjustment has been worked for all the six columns. Thus, there is complete dark about the name of the product sold by the assessee to its AE. With no information about the product sold by the assessee, the corresponding columns of substituted drug are also blank, albeit transfer pricing adjustment has been proposed by giving certain prices for comparison. Where from these market prices have emerged is a mystery. Once the product sold and the corresponding comparable product are not ascertainable, we fail to comprehend as to how any comparison can possibly be made for making a transfer pricing adjustment under the CUP method. Similar position prevails in respect of transactions in the remaining seven columns. 16. There is one more aspect of the matter. It has been noted above as an uncontroverted position that the CIMS data has only current retail prices of the products. It does not contain prices of earlier dates. As the TPO s order is dated 14.01.2016, it is, but, natural that the CIMS data taken by him will also be for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the comparable uncontrolled price computed by the TPO by reducing margin of 39.6% from the retail price charged by Indian manufacturers, cannot be justified. 18. At this stage, it would be apt to note the mandate of Rule 10B (1)(a), which contains the modus operandi for determining ALP under the CUP method, as under :- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified ; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market ; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm s length price in respect of the property transferred or services provided in the international transaction ; 19. Sub-clause (i) of Rule 10B(1)(a) provides for identifying the price, inter alia, paid for property sold. Sub-clause (ii) talks of making adjustments to such price on account of differences, if any, between international transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n settled as arm s length, then by and large the sale price should remain consistent or in close range to each other for different AEs. Turning to the Table on page 216 of the paper book, we find that there is one product, Donepezil with potency of 10 mg., sold by the assessee to its different AEs. Per unit price charged for this product from Merckle GmbH, Germany is ₹ 13.22. The same Annexure shows the per unit price charged for the similar product at ₹ 9.64 from ratiopharm International GmbH, Germany and ₹ 2.67 per unit from ratiopharm Inc. Canada. We fail to appreciate as to how the assessee can justify as being compensated by its AEs with cost plus arm s length mark-up in the face of such a wide variation in the price charged for the same drug from different AEs. In the absence of all the Agreements produced before us, we are unable to verify this contention. 23. There is one more interest aspect of the matter. It has been noticed above that the assessee, under this international transaction, chose four companies as comparable, namely, Brooks Laboratories Ltd. (OP/OC at 21.56%), Sharon Bio-Medicine Ltd. (OP/OC at 12.37%), Smruthi Organics Ltd. (OP/OC at 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... everal flaws, which renders it unacceptable. 24. We are back to square one. The position is that neither the TPO s determination of ALP under the CUP method nor the assessee s determination of ALP under the TNMM, can be accepted for the reasons discussed above. Thus, we are left with no alternative but to set aside the impugned order and remit the matter to the file of AO/TPO for redoing the exercise afresh. In such exercise, the first question before the TPO will be to apply which method as the most appropriate method for determining the ALP of this international transaction? 25. Usually CUP is a method of first choice because it seeks to directly compare the price charged/paid for goods with the price charged/paid in a comparable uncontrolled transaction. Comparison of price paid for goods purchased in contradistinction to the profit rate in other methods - gross or operating - offers best comparison as some times profit may be influenced by certain extraneous factors thereby reducing the reliability of comparability. However, in order to successfully apply this method, it is sine qua non that the products under comparable uncontrolled transaction and the other attending ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasonable opportunity of being heard in such fresh determination. III. REIMBURSEMNT FOR REGISTRATION OF PRODUCTS 28. The next international transaction under dispute is Reimbursement for the registration of product . The TPO observed on page 12 of his order that the products which are manufactured as per AEs specifications are registered by the assessee and only then its ownership is passed on to the AE. He noticed that a sum of ₹ 1,31,32,100/- was recovered under this transaction from the AEs without any mark up. Considering the profit margin from the contract manufacturing segment at 14.26% as a benchmark, the TPO proposed transfer pricing adjustment of ₹ 18,72,637/- from this international transaction, which was eventually made by the AO in his final order. 29. Having gone through the relevant material on record, we find that Annexure-7 on page 227 of the paper book contains details of Reimbursement of expenses (received) . There is an entry dated 27.4.2011 for a sum of ₹ 1,31,32,100/- with the narration Reimbursement of registration fees paid for the product . The TPO has proposed transfer pricing adjustment only for this entry. Apart from this e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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