TMI Blog2019 (11) TMI 1547X X X X Extracts X X X X X X X X Extracts X X X X ..... k Ltd.[ 2016 (3) TMI 1105 - ITAT MUMBAI] we hold that CUP is the most appropriate method in the instant case. Adjustments under CUP method need to be examined by the AO/TPO for the reason that under the CUP method adjustments can be made for differences such as differences in the terms of contract, quantity sold or purchased, nature of market (retail or wholesale), credit period allowed, delivery terms, foreign currency risks etc. which might affect the price in the open market. We hold that the TPO/AO has rightly adopted the CUP as the most appropriate method in the instant case with regard to Netilmicin by the appellant vis- -vis Cipla Ltd and Mometasone Furoate by the appellant vis- -vis Ranbaxy Laboratories Ltd. However, as observed above by us adjustments under the CUP method need to be reexamined by the AO. Therefore, we restore the matter to the file of the AO to re-examine that under the CUP method adjustments can be made for differences such as differences in the terms of contract, quantity sold or purchased, nature of market (retail or wholesale), credit period allowed, delivery terms, foreign currency risks etc. which might affect the price in the open market. - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... APIs by the appellant from its AEs and the generic raw material imported by third parties; vii. Confirming AO / TPO's order which has not provided sufficient information to the appellant to adequately examine the comparability analysis and to put forth appropriate counter arguments; viii. Confirming the AO / TPO's order even though the TPO failed to respond appropriately to the inquiry u/s 250(4) of the Act made by the Ld CIT(A), who had directed the TPO to examine the efficacy of adoption of CUP as the most appropriate method in light of the standards / guidelines laid down by the Mumbai Tribunal in the case of UCB India Private Limited where the facts are identical with this case . ix. Without prejudice to above, the Ld. CIT(A) erred in confirming the AO/TPO's order which includes an adjustment to the arms length price of the said international transaction without giving effect to the proviso to Section 92C(2) of the Act. The appellant without prejudice to the above, prays that effect be given to the proviso to Section 92C(2) and accordingly the arm's length price be re-computed. c) That it be held that the aforesaid international transaction was at a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The gross profit mark-up to direct and indirect cost of production of the AE manufacturing segment (manufacturing segment having international transaction) as the profit level indicator ( PLI ) has been benchmarked against the gross profit mark-up to direct and indirect cost of production of the non-AE segment (manufacturing segment having international transaction). The PLI of the appellant is 56.45% in the AE segment vis- -vis 27.54% in the non-AE segment and hence, the assessee has concluded that its transactions are at arm s length. During the course of proceedings, the TPO issued notice u/s 133(6) to a number of cases to find out the rates at which these products are imported by other comparable companies. Details of import of two materials viz Netilmicin Sulphate and Mometasone Furoate were obtained. The value of import in respect of these two items along with quantity and amount as recorded by the TPO are as under : Sl No. Active Ingredient Unrelated companies FIL Name of the Case Quantity (Kg) Price per Kg. (USD) Quantity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... USD 10,440 per Kg. Similarly in respect of Mometasone Furorate, it has made payment to its AEs in excess of USD 34,000 per Kg. Therefore, the TPO made a total adjustment of ₹ 2,29,09,780/- to the total income shown by the appellant. The AO followed the above order of the TPO and made similar addition of ₹ 2,29,09,780/- u/s 92CA in the order dated 29.03.2006 passed u/s 143(3) of the Act. 4. Aggrieved by the order of the AO, the appellant filed an appeal before the CIT(A). During the course of appellate proceedings, considering the appellant s submissions, the CIT(A) directed the TPO to make an inquiry u/s 250(4) of the Act and send a remand report. The direction so given are at para 8 of the order dated 10.06.2011 passed by the CIT(A). It contains inter-alia the argument of the appellant on the purchase prices of generic APIs obtained from third parties by issuing notice u/s 133(6) of the Act. In response to it, the TPO submitted an interim report and a final report. In the said report, the TPO stated that the information called for u/s 133(6) has been duly confronted to the appellant and sufficient time was given to rebut the same. A copy of the interim report d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transactions in comparable circumstances. The CUP method requires a high degree of comparability in the products sold or services provided in the controlled and uncontrolled transactions. This standard of comparability is ordinarily extremely difficult to meet. Further, it is explained that the arm s length per unit prices to uncontrolled enterprises is substantially dependent upon factors such as volume, contractual terms, locational differences etc. and it may not be possible to estimate with reasonable reliability and accuracy, the combined effect of such factors on per unit prices and further, abstract factors such as use of intangibles, makes it difficult to use CUP method for benchmarking purposes. Referring to the distinction between internal comparable and external comparable the Ld. counsels explain that generally specific details regarding the product or service, contractual terms, geographic market, and other factors involved in internal comparables are more readily available to the parties engaged in the controlled transaction than det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplain their above contentions. 5.1 Also the Ld. counsels relied on the decision in UCB India (P.) Ltd. v. ACIT (2009) 121 ITD 131 (Mumbai-Trib); DCIT v. Fresenius Kabi Oncology Ltd. (ITA No. 575/Del/2014) for AY 2005-06 by ITAT Delhi; Amphenon Inter-connect India (P.) Ltd. v. Addl. CIT (2015) 58 taxmann.com 168 (Pune-Trib); Sony India (P.) Ltd. v. CBDT (2006) 157 Taxman 125 (Del); Fulford India Ltd. v. DCIT (ITA No. 6733/Mum/2013) for AY 2002-03 by ITAT, Mumbai; Firmenich Aromatics Productions (India) Pvt. Ltd. v. ITO (ITA No. 7145/Mum/2017) for AY 2013-14 by ITAT, Mumbai; Dishman Pharmaceuticals Chemicals Ltd. v. DCIT (ITA No. 955/Ahd/2012) for AY 2007-08 by ITAT Ahmadabad; Serdia Pharmaceuticals (India) P. Ltd. v. ACIT (2011) 136 TTJ (Mumbai) 129; Commissioner of Central Excise v. Universal Glass Ltd. (CA No. 894 of 2000) decided by Supreme Court of India; DCIT v. UCB India Ltd. (2016) 70 taxmnn.com 164 (Mumbai-Trib); DCIT v. Dishman Pharmaceuticals Chemicals Ltd. (2019) 103 taxmann.com 271 (Ahmadabad-Trib); Gulbrandsen Chemicals (P.) Ltd. v. DCIT (2019) 104 taxmann.com 253 (Ahmadabad-Trib); GS Caltex India (P.) Ltd. v. DCIT (2018) 96 taxmann.com 614 (Mumbai-Trib) and Wel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of operating expenses between AE and non-AE manufacturing segment as Form 3CEB neither recognizes any segmental result nor makes such artificial bifurcation. When the manufacturing centre (Gland Pharma Ltd.) is the same such an attempt will be just an estimation of operating cost among different products. The Ld. DRs further submit that since APIs imported from AE are off patented and the generic products are easily available in the foreign market as imported by Cipla and Ranbaxy, it is not difficulty for any manufacturer of the formulation to ascertain the rate of such off patented APIs/generic products, since customs data is always available in the public domain. Referring to the issue, it is explained by them that generics contain same active ingredients as the original formulations and similar in terms of purity, efficacy, dosages form, route of administration, quality and performance characteristics. Same APIs/generics imported by different companies lead to similar generic drugs with different brand names. On the issue of APIs being imported and appellant being the tested party, it is contended by the Ld. DRs that market conditions and regulations in the territory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. 7.1 At this moment, we discuss the case laws relied on by the Ld. counsels. In UCB India (P.) Ltd (supra), the assessee an Indian company was a 100% subsidiary of UCB Belgium (UCB). It was engaged in the business of manufacture and distribution of pharmaceutical products in three main therpatic segment of : allergy and asthama, central nervous system and internal medicines. The assessee manufactured intermediates, bulk drugs and formulations, both in the tablet and capsule form at its own factory. The liquid and injectible form of the products were manufactured on toll basis by third parties. The assessee manufactured some of the active ingredients required for manufacturing of formulations and certain other ingredients were imported by it from its parent company, or were procured locally from third parties. The assessee also imported certain finished formulations from its parent company. Such imports constituted a small portion of the turnover of the assessee. The assessee marketed its formulations in the domestic market as well as in overseas markets such as Sri Lanka, Bangladesh and Nepal. It had entered into international transactions of purchase of raw material; wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CUP method requires strict compliance and the same was not done by the TPO, affirmed the order of the Ld. CIT(A). In Amphenol Interconnect India (P.) Ltd. (supra), the assessee, a wholly own subsidiary, was engaged in the manufacturing of broad range of inter-connected products and assemblies for voice, video and data communication systems. In appeal, the Tribunal held that where prices vary on account of various issues i.e. timing of transaction, volume of order and geographical location, then CUP method cannot be applied and it is most appropriate to apply TNMM method. In Sony India (P.) Ltd. (supra), the assessee-company challenged constitutional validity of Instruction No. 3 dated 20.05.2003 issued by CBDT mainly on the ground that by issuance of said Circular, the Assessing Officer s ultimate decision on computation of ALP is sought to be supplanted by decision of TPO for transactions of value ₹ 5 crores and TPO is not bound to follow steps outlined in section 92C which are otherwise mandatory for the AO to follow. The Hon ble High Court held that the Instruction in question is consistent with statutory objective underlying section 92CA(1) and acts as a guidance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be exercised on the touchstone of principles governing selection of most appropriate method set out in section 92C(1); where the AO finds that the selection of most appropriate method is not correct, he has the powers as well as corresponding duty to select the most appropriate method and compute the ALP by applying that method. Also it held that as long as appropriate comparables can be found, CUP method will indeed be the most appropriate method in respect of purchase of generic drug, even when such a generic drug is manufactured by its original patent holder; assessee having imported two active pharmaceutical ingredients (API) from its AEs, CUP method was the most appropriate method for determining the ALP, and the selling prices of related APIs in Indian market constitute good comparables for applying the said method. In Universal Glass Ltd. (supra), the issue before the Supreme Court was whether M/s Universal Glass Ltd. (assessee herein) was right in valuing the bottles manufactured and supplied by them to M/s Jagatjit Industries Ltd. by relying upon the prices charged by the assessee to companies like Dabur, Hamdard, Maaza, Kissan etc. under Rule 6(b)(i) of the Centra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its AEs located in USA, UK. In transfer pricing proceedings, the TPO noticed that the assessee deviated from stand taken in the earlier years in which internal CUP method was adopted for benchmarking the sale to the AEs and instead computed the ALP of those transactions on the basis of TNMM. However, the TPO was not convinced with the method adopted by the assessee and was of the view that the internal CUP was the most appropriate method. The Tribunal held that no addition could be made to the assessee s ALP on the basis of internal CUP method where intra AE transactions were fundamentally different in character and same could not be compared with independent transaction. In CS Caltex India (P.) Ltd. (supra), the assessee was engaged in business of procuring/importing lubricants in bulk from its parent company. The Tribunal held that CUP method requires high degree of comparison of product/services, geographies and other attributes such as scale of operations, type of market and TNMM will compare operating margins of assessee s business with that of operating margins of companies operating in similar business. In Welspun Zucchi Textiles Ltd. (supra), the assessee was enga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect and traditional method is preferable over an indirect method like TNMM. However, the TPO adopted TNMM on the entity level. The Tribunal upheld the CUP method in principle but restored the issue to the file of the AO for determination of ALP as per observations made therein. In Clear Plus India (P.) Ltd (supra), the assessee manufactured all seasons wipers and snow wipers which were exported to AEs. It adopted CUP method for determining sale price of automobile wipers. However, the TPO adopted TNMM for determining the ALP. The Tribunal held that on facts CUP method was most suitable method for determining ALP. In Serdia Pharmaceuticals (India) (P.) Ltd. (supra), The taxpayer, i.e. Serdia Pharmaceuticals India Private Limited (Serdia, in short), is a company incorporated in India and 74% of its share capital is held by Servier International BV (Servier BV, in short), a company incorporated in the Netherlands, and the remaining 26% of its share capital is held by a Mauritius based company by the name of Serdia (Mauritius) Limited. Servier BV, in turn, is a subsidiary of Les Laboratoires Servier France (Servier France, in short), a well-known pharmaceutical company which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . During the relevant financial period, the assessee imported Bisoprolol Fumerate, an active pharmaceutical ingredient (API) used in manufacturing of finished dosage form (FDF) of medicine. These imports were made from an associated enterprise, i.e. Merck CIE KG, Switzerland. The total imports during the financial period was 345 kgs for an aggregate consideration of ₹ 2,30,12,198. The average cost of this API thus comes to ₹ 66,702 per kg. The assessee had claimed these imports to be at arm's length price on the basis of TNMM as OP/OI of the assessee was 12.17% in the pharmaceutical segment, as against the arithmetic mean of 64 comparables which came to 12.30%. However, relying upon the decision of this Tribunal in the case of Serdia Pharmaceuticals India Pvt Ltd vs ACIT [(2011) 44 SOT 391 (Mum) holding that CUP method is the most appropriate method for determining arm's length price in the case of generic APIs and armed with the requisite CUP inputs gathered by him under section 133(6), the Transfer Pricing Officer proceeded to compute the arm's length price under CUP method. As number of comparable uncontrolled prices for small quantities as well, the Tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total imports of the API from the AE. The Tribunal held that (i) where assessee imported API from its AE which was superior in quality in comparison with locally manufactured API, adjustment for quality was justified, (ii) import price of API can be compared only with domestic prices and cannot be compared with export prices, (iii) where weighted arithmetic mean of comparable prices cannot be used to determine ALP only simple arithmetic mean can be used, (iv) where assessee imported API from its AE, use of CUP method to determine ALP was justified. In Fulford (India) Ltd. (supra), for AY 2006-07 and 2007-08, the Tribunal restored the issues to the file of the AO/TPO for fresh adjudication. 7.3 What is an API ? It has been aptly explained at para 5 in Serdia Phamaceuticals (India) (P.) Ltd.(supra) which is reproduced below:- An API may be a patented or generic. A patented API can be produced by the patent holder, and this monopoly allows the pharmaceutical company, which developed the drug, to sell it in a monopoly market and thus allows the company to recoup the cost of developing that particular drug by selling the drug in monopolistic conditions. The patents, however, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduced below : Profit Loss Account Year ended March 31, 2003 Manufacturing Segment AE Non-AE Gross Sales (A) 132,515 105,996 Less : Excise duty on goods sold (B) 18,424 14,686 Net Sales 114,091 91,310 Less : Cost of goods sold (C) 66,543 71,265 Gross Profit (D) 47,812 22,886 Operating Expenses (E) 45,907 34,996 Operating Profit (D-E) 1,905 (12,110) Add : Other Income Less : Inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction which could materially affect such profit mark-up in the open market; iv. the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); v. the sum so arrived at is taken to be an arm s length price in relation to the supply of the property or provision of services by the enterprise. In the instant case, the appellant s therapeutic segment are distinct i.e. systematic anti-infectives, dermatologicals, oral steroids, antihistamine having distinct process, patent, formulations and regulatory requirements. Thus CPM is not the appropriate method in the instant case. Accordingly, their manufacturing into final product cannot be clubbed together to compare gross profits with gross profits of manufacturing of products related to distinct generic or APIs procured from non-AEs. In the case of Knorr-Bremse India (P.) Ltd. (supra), it is held by the Hon ble Punjab Haryana High Court that several transactions between two or more AEs can form a single composite transaction, if such transactions are closely linked. It is not so in the case of segmented financial information (manufacturing segment) of the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me drug was sold by other vendors at much lower rates of ₹ 8,150 per kg (Nivedita Chemicals Pvt Ltd), ₹ 8,625 per kg (Sharon Pharmachem Limited), ₹ 10,558 per kg (Orion) and ₹ 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 the TPO is CUP method. DRP directed to make appropriate adjustment for quality difference between imported goods and comparable goods. On facts, product imported by assessee was superior to locally manufactured API. The TPO had himself allowed a quality adjustment @ 10% in subsequent year. The Tribunal confirmed CUP method and held that it was appropriate to adopt quality adjustment @ 10% in the that assessment year as well. Facts being nearly identical, respectfully following the orders of the Co-ordinate Bench in Serdia Pharmaceuticals (India) (P.) Ltd. (supra) and Merck Ltd. (supra), we hold that CUP is the most appropriate method in the instant case. However, adjustments under CUP me ..... X X X X Extracts X X X X X X X X Extracts X X X X
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