TMI Blog2009 (2) TMI 237X X X X Extracts X X X X X X X X Extracts X X X X ..... s as may be prescribed and the AO may require such person to furnish any such information or documentation within a particular period of time - non-maintenance or non-furnishing of these individual items pointed out by the Revenue does not negate the claim of the assessee that it had maintained the information and documents statutorily required under r. 10D(1) r/w s. 92D of the Act. In our humble opinion, the Revenue should positively look on the vast data and documentation maintained by the assessee and not only pick up some defects here and there as an excuse to reject the documentation. The sum and substance has to be seen and substantive compliance should be a criteria. Therefore, in our humble opinion, the test should be, as to whether the non-maintenance or deficiency in the maintenance of some records fundamentally effects or distorts the computation of the ALP. If it does not make a material difference to the process, then the defects are not fatal. Thus, this finding of the Revenue authorities that non-furnishing of the abovesaid information is fatal to the TP analysis for determining ALP is not correct. This is a case where the assessee has substantially complied with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch a method. Method applied by the Revenue - HELD THAT:- The Revenue has applied CUP method and determined the ALP, on the ground that API, are comparable products, which are subject to quality regulations and when certain organizations purchase the very same product at a particular rate, for producing the similar 'FPS', they are comparable transactions which are uncontrolled and the price at which these are traded have to be compared with the prices the AE charged to the assessee company in this case - CUP method is the most direct method for determining ALP. Under this method, the price at which controlled transaction is carried out is compared to the price obtained in comparable uncontrolled transaction. An uncontrolled price is the price agreed between unconnected parties for the transfer of goods or services. The CUP can be either (a) internal CUP or (b) external CUP. In this case on hand, we are concerned with external CUP. The Revenue has failed to discharge the onus placed on them that CUP is the most appropriate method and it has found the right comparable. Thus, for all these reasons the additions made by the Revenue on this issue cannot be sustained. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... X VERSUS LAKSHMI MACHINE WORKS [ 2007 (4) TMI 202 - SUPREME COURT] . Respectfully following the same we allow this ground of the assessee. Appeals for both the assessment years are allowed in part. - Member(s) : K. C. SINGHAL., J. SUDHAKAR REDDY. ORDER-BY THE BENCH: Both these appeals are filed by the assessee and are directed against the consolidated order of the CIT(A)-XXIII, Mumbai, dt. 16th Oct., 2006 for the asst. yrs. 2002-03 and 2003-04. As the issues arising in both these appeals are common, for the sake of convenience, they were heard together and are disposed of by way of this common order. 2. Facts in brief: The assessee-company, M/s UCB India (P) Ltd. (hereinafter referred to as 'UCB India' or 'the assessee'), formerly known as UCB India Ltd., is a 100 per cent subsidiary of UCB S.A., Belgium. The assessee is engaged in the business of manufacture and marketing of prescription drugs in the therapeutic areas of allergy and asthma, central nervous system and internal medicine. 3. The assessee filed its return of income for the asst. yr. 2002-03 on 31st Oct., 2002 returning total income of Rs. 12,51,59,397 and for the asst. yr. 2003-04 on 4th Nov., 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LP in respect of appellant's international transaction relating to import of raw materials from its AEs. Accordingly, the learned CIT(A) has erred in confirming the addition of Rs. 2,09,75,500 to the total income of the appellant, by applying the CUP method. Your appellant submits that the invocation of CUP method is solely at instance of the AO and the same is erroneous in the facts of this case and ought to be set aside. Further, your appellant prays that the addition be deleted. Ground 4: The learned CIT(A) has erred in not considering and adjudicating the +/- 5 per cent variation from the ALP permitted to tile appellant under the provisions of s. 92C(2) of the Act. Your appellant prays consideration of the +/- 5 per cent variation from the ALP." 4. In addition to tile above common grounds, the assessee, for the asst. yr. 2003-04 has also raised the following grounds: "Ground 2: The learned CIT(A) has erred in not considering the bank interest amounting to Rs. 7,96,634 as business income and excluding the same while computing the eligible profits for deduction under s. 80HHC of the Act. Ground 3: The learned CIT(A) has erred in upholding the addition of sales-tax of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, only from its parent company and the parent company, it is stated, does not sell these two APIs to any other company in India. 9A Another term for API is "bulk drug substance". API can be original APIs or generic APIs. An import of an original API entitles the Indian company to use the global brand name for its formulation developed from the said API. Now, let us consider the use of the term "generic substance". In brief, when a new chemical entity emerges from pharmaceutical research which seems to have any potential for development, it will usually be patented as a "generic substance" with a generic name. If and when the drug is successfully developed using the new chemical entity as its captive ingredients, the drug (sometimes in the context called the "generic drug") will be sold under one or more brand names by the patent owner or its licencee. When its patent protection runs out it will be possible for anyone to occupy the generic substance and sell it under his generic name or under his own brand name. Production by the copier, whether under the generic name or under his own brand name, will be described as "generic production" or "production of generics". Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which, in its view, are not comparable functionally. Ultimately it had identified thirty-six companies, which according to the assessee-company, fit into the criteria of companies engaged in similar business activity as that of the assessee. The assessee-company found that the operating profit margin of these identified companies is 8.86 per cent and whereas the assessee's operating profit margin is 27.54 per cent and therefore it concluded that the international transactions entered into by the assessee with its AEs are at arm's length. This claim is disputed by Revenue. 12. The TPO, in the TP proceedings sought the following information/clarifications from the assessee: (a) Whether the AE supplied similar APIs to third parties in India or to any other parties in other parts of the world; (b) As to how the price for those products is fixed between the assessee and its AE. (c) The process by which the decision to buy or not to buy a particular item at a particular price is taken by the assessee-company; (d) The end products manufactured out of the 'APIs'; (e) To furnish brand names of other brand FDS which are available in the market in competition to "Nutropil" and " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty transactions, the assessee-company pleaded that the information was not available in the public domain and hence the assessee was not able to provide the same. 16. The TPO drew adverse inference on these replies and her conclusions are at para 8 of the transfer pricing order. She issued notice under s. 133(6) of the Act to three entities, i.e., Micro Labs; Torrent Pharmaceuticals; and Dabur India Ltd., who are competitors to the assessee's products seeking information on the purchase price of APIs, i.e., Piracetam and Mesna. The comparative purchase prices are given at para 10 of the TPO's order which is extracted below for ready reference: ------------------------------------------------------- Sl. Party Qty. Piracetam Mesna No. (Rs.) (Rs.) ------------------------------------------------------- 1. Micro Labs 876 667 - ------------------------------------------------------- 2. Torrent Pharmaceuticals 4,500 3,626 - ------------------------------------------------------- 3. Dabur India Ltd. 20 - 27,075 --------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt price was fixed. Though it is contended again and again that the price was fixed in a manner giving adequate return to the AE for the functions performed by it and the intangibles owned by it, and the functions performed by the assessee, the evidence of such economic analysis was not furnished. The economic analysis relied upon by the assessee consisting of the TNMM and determination of ALP is only in the nature of a post-mortem to test the correctness of the price. However, this analysis is not the basis for the price determined. In the absence of such evidence, the price paid by the assessee is subject to verification and accordingly the exercise was undertaken by this office to obtain the comparable prices. Hence, the argument of the assessee that the import price cannot be disturbed as there is nothing wrong in the TNMM adopted by it, is rejected in the light of the specific comparable prices obtained by this office. (c) The assessee contends that its margins are very good and hence its transfer price at arm's length. This argument fails to consider the effectiveness of CUP method and its superiority over the indirect profit based methods. (d) The assessee has accepted i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clearly shows that there is no significant difference in the raw material. (f) The last contention of the assessee is that the purchase price of the raw material is also to compensate the AE for the R D costs incurred by it for the development of this molecule and to give a reasonable return on the AEs ownership of intangibles, patents and registration for this product. In this connection, a letter dt. 14th Jan., 2005 was issued to the assessee requesting it to submit the particulars as to when the said molecule was patented, the territory where patented, duration of the patent and whether such patent protection continues till date in the overseas territory and India or not. In this connection, the assessee has submitted its reply dt. 24th Jan., 2005 wherein it is stated that the patent for the product Piracetam was filed on 6th Aug., 1964 in Belgium, Germany, Denmark, Finland, France, Israel, Italy, Netherlands, Sweden and the United States. It is further explained that the patent expired on 5th Aug., 1985. Considering these facts, it is clear that the overseas entity cannot expect to be compensated for its R D activity indefinitely even after the patent has expired almost 20 y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first appellate authority rejected the various contentions of the assessee and confirmed the conclusions drawn by the TPO. Further aggrieved, the assessee is in appeal before us. 19. Shri N. Venkataraman, the learned senior advocate, argued on behalf of the assessee. Smt. Malati Sridharan, the learned senior Departmental Representative, argued on behalf of the Revenue. 20. The assessee filed paper books running into 643 pages. Separate compilations and loose papers were filed during the course of hearings along with copies of certain case laws cited. Smt. Malati Sridharan, on the other hand, filed a paper book consisting of pp. 1 to 35. She also filed various other papers including extracts of law relating to drugs and cosmetics. 21. The learned senior advocate, Shri N. Venkataraman appearing for the assessee started his arguments by referring to the facts and thereafter explaining the TP study undertaken by the assessee which was filed in the form of a report before the assessing authority. He took this Bench to the various chapters of the TP study report and explained that this brings on record-(a) the ownership structure; (b) industry overview of the global market as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Torrent Pharmaceuticals Ltd., Microlabs and Dabur which indicated the price at which these entities purchase Piracetam and Mesna. He later dealt with each of the objections raised by the Revenue, the first being that the assessee has not complied with the mandatory requirements of r. 100. He took this Bench through r. 100(1) and argued that except for not furnishing information on item No. (f), which deals with forecasts and budgets or other financial estimates the report cannot be said to be vitiated. He further contended that the Revenue has not placed on record as to how the lack of data relating to forecasts, budgets or other financial estimates would vitiate the report and the methodology arrived at by the assessee. He further referred to r. 100(1) items (k), (l), (m) and (n) and submitted that these are not mandatory columns and the assessee need to furnish the information, only in case the data is available. He specifically laid emphasis on the words "if any" mentioned in rr. 100(1)(k) and 100(1)(l). He vehemently contends that when data is not available on a particular issue, the same cannot be brought on record. Similarly he submits that r. 100(1)(m) is a omnibus clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted party transactions, export turnovers, etc. and therefore need not be excluded. Shri Venkataraman submitted that the TP report was examined in detail by the TPO and neither she nor the AO had at any stage of the proceedings raised such objection and for the first time such objection is being taken before the Tribunal and thus the same need not be entertained. He further submitted that all the data obtained by the assessee were in the public domain and the AO had access to prowess by which the Revenue could have found, read and analysed the data relating to all the 36 entities without any strain or difficulty. It was submitted that the assessee did not want the search to be limited and that it wants it to be all pervasive. He submitted that the assessee proceeded to eliminate extreme cases of high margins as well as low margins to arrive at a fair and sensible operating margin range. He justified the comparison with the help of data of five companies. 27. Shri Venkataraman submitted that the assessee-company has made detailed submissions vide its letters dt. 20th April, 2004, 19th July, 2004 and 24th Jan., 2005 and the submissions therein remained uncontroverted. The assessee-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these molecules, i.e., Piracetam and Mesna and in spite of the expiry of its patent in 1985 the assessee's AE continues to remain the market leader. He claimed that there is sustained R D going on these products and the same is brought on record. Consequently the submissions of the Revenue on patent and its expiry it is argued as misconceived and misdirected. 31. On the efficacy of the two APIs, the learned counsel for the assessee drew the attention of the Bench to the submission of the managing director dt. 2nd July, 2004 to question No. 14 where it specifically stated that the stands of the assessee company are much better than the local companies though the applications are similar. It was claimed that lot of research in terms of efficacy and safety is undertaken by the assessee and that numerous clinical trials are also done on global basis which is usually not done by others. It was further submitted that the reputation enjoyed by the assessee-company internationally for these products and their command in the market demonstrate better efficacy. He contends that though the final products may be acceptable in terms, of chemical standards the same may not necessarily show the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g assets and risks); (g) Business strategy; (h) Geography; and (i) Level of market. 34. Shri Venkataraman pointed out that vide letters dt. 19th July, 2004 and 24th July, 2005 the assessee sought from the Revenue, the entire search process undertaken by it as well as the level and depth of the details available with the Revenue, with a view to bring about various factors determining comparability. He pointed out that no such material was available with the Revenue except information collected from the three entities by invoking powers under s. 133(6). Thus he argues that CUP method cannot be applied as the comparable should be perfect or realistic and if not it should allow reasonable and accurate adjustment. He relied on the proposition laid down by the Special Bench of the Tribunal in the case of Aztec Software Technology Services Ltd. vs. Asstt. CIT and the Delhi Bench of the Tribunal in the case of Mentor Graphics (Noida) (P) Ltd. vs. Dy. CIT (2007) 112 TTJ (Del) 408 : (2007) 109 ITD 101 (Del), on this issue. He also relied on r. 100(3) and argued that only authentic data available in public domain can constitute basis for arriving at the most appropriate method or fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... most appropriate method was rejected by the Revenue. The first reason being that the assessee failed to produce documentation as required by law with respect to import of APIs and second the assessee failed to discharge the onus cast on it to determine the ALP in accordance with the most appropriate method. Mrs. Malati Sridharan submits that the assessee had never disclosed the profit made by it on the API and also demonstrated as to how the comparable cases under TNMM are similar to that of the assessee in terms of functions performed, assets employed and risks assumed (FAR). She emphasized that the assessee had considered the net profit of the whole entity for the purpose of comparison rather than considering the net profit that arise on an international transaction in the TNMM. Thus she submitted that the TPO rightly rejected the determination made by the assessee and proceeded to adopt CUP method. Her case is that the assessee confirmed that three Indian companies, viz., Torrent Pharmaceuticals, Micro Labs and Dabur manufacture finished formulations in competition with assessee's Nutropil and Mistabron. The TPO, she submitted, ascertained the price at which these companies had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's products. 42. She reiterated her contention that these statements of the assessee, were also not backed by any documentary evidence. The managing director has stated that in view of the price of competitive products, the assessee could secure a reduction in price of the API in the subsequent years, i.e., as against an import price of 40 Euros during the relevant previous year, the price of active ingredients was reduced to 30 Euros during the subsequent year and finally to 20 Euros by the next year. In this connection she pointed out to contradictory statement made by the learned counsel for the assessee that the reduction in the price was given by the AE only to compensate for the appreciation of Euros against Indian rupees. She pointed out that no evidence was furnished in support of this contention and on the contrary in the study report it is stated that the foreign exchange fluctuation loss is to be borne by the assessee only. The learned Departmental Representative vehemently contended that it is absolutely clear that the import price should not be more than 20 Euros under the facts and circumstances of the case. 43. Mrs. Malati Sridharan referred to s. 92D r/w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd established comparability between the international transaction and uncontrolled transaction having regard to the FAR analysis. She pointed out that a crude elimination process has been adopted and finally, in respect of short listed cases, the assessee has not shown as to how they are comparable in terms of FAR analysis. Mrs. Malati Sridharan pointed out that for the purpose of identifying comparable cases, the assessee had placed reliance upon a private database called "Prowess". She pointed out that the assessee itself expressed reservations on this database and particularly referred to the reservations expressed by the auditors therein that they have not even examined the published financial results of the comparable set or inquired into the nature, circumstances and their activities. She reiterated the findings of the TPO that (a) there is no information on the database to identify other licensed manufactures though the assessee, classified as a licensed manufacturer with less than normal risk; (b) the assessee concedes that no information is available on the database to ascertain whether the comparable cases are also engaged in marketing patented drugs; (c) that there is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lmost the same and hence this argument has to be brushed aside. 49. On the argument of the assessee that it has been in the market for a long duration and that the competitors arc now entering into the market, Mrs. Malati Sridharan contended that when the assessee is purchasing large quantities of raw material to cater to its higher market share, it should secure a lower price from its AE as compared to its competitors. 50. On the submission of purity standards she pointed out that during the assessment proceedings the assessee categorically stated that chemical standards of the competitors' raw material arc acceptable and there is no difference in terms of efficacy in the finished formulations. Thus she submits that there is no difference in standards between raw material imported by the assessee and the raw material imported by the competitors. She also feels that in terms of efficacy the assessee could not demonstrate any difference. 51. Mrs. Malati Sridharan vehemently contended that the drugs and pharmaceutical products of this country are subjected to stringent Government regulations and in the copy of the guidelines submitted to the Bench, on p. 1. the guidelines for B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submitted that the location of the market cannot be decided on the basis of the supplier and the market in fact is located where the buyers are. Thus she argues that all the buyers being located in India, imports from Belgium or from China cannot be segregated on the basis of geographical differences. She vehemently contended that the price in both the situations is the price at which the API can be purchased in India. 55. On the issue of differences on account of credit terms and transportation and insurance, the learned Departmental Representative agreed that the AO may be directed to carry out necessary adjustments, but at the same time, pointed out that the differences will not be significant though the assessee gets two months credit and the price paid is CIF price. 56. Mrs. Malati Sridharan contended that the conditions contained in s. 92C(3) has been complied with by the AO. She pointed out that the AO can disturb the ALP determined by the assessee, when some material or document or information is in the hands of the AO based on which he can come to a conclusion that the ALP determined by the assessee is incorrect. She argued that the AO has comparable cases. She point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which cautions against providing competitor information. (6) Aztec Software Technology Services Ltd. for the proposition that FAR analysis should be conducted for identifying comparable cases. (7) Eli Lilly Co. Subsidiaries vs. IRC 84 US Tax Court Reports 996 where the facts were narrated as follows: "This is a case decided in United States involving a US parent company purchasing finished formulations from its subsidiary in Puerto Rico. The facts are narrated in detail in the said decision upto p. 1107. The decision of the Court is from p. 1107 onwards. A number of issues are involved in this case but what is relevant in the present context is the approach adopted by the Court in determining the transfer price for finished formulation purchased by the US company. The years involved in this case are 1971, 1972 and 1973. For the years 1971 and 1972 the formulation imported by the US company was protected by patent in US and hence there were no other comparable, uncontrolled sales of similar formulations. Hence profit split method was applied by the Court. This part of the decision is not very relevant. However in 1973 the patents in respect of the formulations expired. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out that these cases pertained to best judgment assessments where assessee has not co-operated. 59. On the reliance placed by the Revenue on the judgment of Satellite Engineering Ltd. he submitted that in that case the information of suppliers was held back from the petitioners whereas in the present case, the identity of the importer is well-known and whereas the identity of the supplier, which is of vital importance for comparison has not been provided. He reiterated his contentions and concluded that-(a) the Revenue has not brought out any tangible evidence to sustain CUP; (b) the submissions of the assessee on rejection of CUP have not been rebutted by the Revenue; (c) all parameters prescribed by law are satisfied by the assessee in adoption of the methodology of TNMM; and (d) the objections of the Revenue have been met. 59A. After the hearing was over, both the parties filed written submissions. Later, the assessee's representative came out with an application stating that the Revenue has not given a copy of its submission to them for a long time and that on receipt of these submissions, they would like to give a rejoinder and that the Bench should post the case for fres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manpower, infrastructure and other facilities. Within this business segment, UCB India has undertaken the international transactions of purchase of APIs to manufacture different FDFs. However, the broad category/class of these transactions remains one, i.e., manufacturing of FDFs. - Given the use of common assets and the fact that same functions are performed and risks are undertaken to manufacture all FDFs entail that significant amount of expenses incurred are common to all FDFs, thus, rendering the manufacture of FDFs 'closely linked'. - The segregation of costs within the same segment may be possible by way of approximate allocation of expenses, which may though be practically implemented to follow the letter of the law, may not give accurate results of costs/profits for each of the FDFs. - UCB India not required to maintain data of costs/profits for each product statutorily. - Data of product-wise net margin of comparables is not available in public domain-Data regarding product-wise costs/profits of Torrent and Micro Labs, the only two Indian manufacturers that purchase the APIs under dispute is not available in public domain. - TNMM does not require product compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion or document in his possession, of the opinion that- (a) the price charged or paid in an international transaction has not been determined in accordance with sub-ss. (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-s. (1) of s. 92D and the rules made in this behalf; or (c) the information or data used in computation of the ALP is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-s. (3) of s. 92D, the AO may proceed to determine the ALP in relation to the said international transaction in accordance with sub-ss. (1) and (2) on the basis of such material or information or document available with him. Provided that an opportunity shall be given by the AO by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the ALP should not be so determined on the basis of material Dr information or document in the possession of the AO." The main thrus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h records have a bearing on the international transaction. In case no such estimate is prepared, in our humble opinion, the same need not be furnished. The maintenance of these records, in our opinion, is procedural and non-maintenance of the same is not such that it would affect the determination of ALP. Similarly cls. (k), (l) and (m) to r. 10D(1) read as follows: "(k) the assumptions, policies and price negotiations, if any, which have critically affected the determination of the ALP. (l) details of the adjustments, if any, made to transfer prices to align them with ALPs determined under these rules and consequent adjustment made to the total income for tax purposes; (m) any other information. data or document, including information or data relating to the AE, which may be relevant for determination of the ALP." 65. The situation that arises in cls. (k) and (l), by the very wording "if any" suggest that, the documents may be furnished if they are in existence. In cases where no such documentation exists, these clauses do not come into play. Coming to cl. (m), it is an omnibus provision and it gives an option to the assessee to furnish any other information or data which, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been maintained, The Revenue, seeks to pin the assessee, against its argument, that being the originator of the drug and its R D profile, the cost factors, the intangibles such as R D costs, result in its products being of higher standard and of higher cost. This has nothing to do with the type of information to be furnished under d. (d). Similarly the allegations that cl. (g), cl. (h) and cl. (j) are not complied with, in our considered opinion, is devoid of merit. The assessee has adopted TNMM. The question of maintaining a record of uncontrolled transactions for analyzing the comparability under the CUP method arises only if the assessee finds comparables for bench marking. Thus, in our considered opinion. the TPO was not justified in invoking cl. (b) to sub-s. (3) of s. 92C as the assessee has kept and maintained the documents specified under s. 92D(1). which, in our opinion. substantially complies with the law. 68. We now consider the second limb of invoking provisions of s. 92C, i.e., the adoption of TNMM by the assessee. The assessee has adopted the TNMM by comparing the overall operating profits of the assessee company with the overall operating profits of certain ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided services because it is on the basis of rate of return on sales or cost or operating assets that transactional margin is computed. These parameters generally available in the case of a party providing services." 69. Under the TP Regulations the following steps are to be taken to determine the TNMM: Step 1: The net profit margin realized by an enterprise from an international transaction entered into with an AE is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. Step 2: The net profit margin realized by the enterprise or by an unrelated enterprise, form a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. Step 3: The net profit margin referred to in Step 1 arising in comparable uncontrolled transactions is adjusted taking into account the differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprise entering into such transactions, which would materially affect the amount of net profit margin in the open market. Step 4: The net profit m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed transactions that cannot be appropriately compared on an aggregate basis with those of an independent enterprise. Similarly, when analyzing the transactions between the independent enterprises to the extent they are needed, profits attributable to transactions that are not similar to the controlled transactions under examination should be excluded from the comparison. Finally, when profit margins of an independent enterprise are used, the profits attributable to the transactions of the independent enterprise must not be distorted by controlled transactions of that enterprise." 71A. The arguments of Shri Rajan Vora that entity level comparison is permitted both by the OECD Commentary as well as by the commentaries by eminent authors like Robert T. Cole, J. Harold McLure and others, in our considered opinion is not correct. In the book "Transfer Pricing Note Book Third Edition by Robert T. Cole at Chapter. XXV what is said is that the regulator should also note that segmentation of transaction does not always lead to more reliable results and that the combined effect of two or more separate transactions may be considered, if such transactions are taken as a whole and are so inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom sharing the data on uncontrolled transactions entered into by it for the very same ingredients. Such a data would have gone a long way in concluding the issue. Only it was at the time of hearing that photocopies of some comparable uncontrolled transactions, as made available by the parent company was sought to be filed. If the parent company does not want to come to the rescue of its subsidiary by furnishing authentic data, then it cannot except (expect) the Revenue authorities to come to conclude in favour of the subsidiary. Shri Vora also argues that there is no statutory requirement to maintain quantitative details so as to arrive at the net margin on a transaction. This is a fallacious argument. The assessee cannot justify its inability to evaluate a transaction or a class of transaction on stand alone basis, on the ground that there is no statutory requirement to maintain segmental data. Irrespective of the fact whether there is a requirement or not, if the assessee wants to adopt a particular method to demonstrate that the international transaction in question is at arm's length, then it is its duty to maintain and furnish the required data. When the burden of proving tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion. on the facts of the case, is not correct. Hence, the AO is right in invoking provisions of s. 92C(3)(a) of the Act and proceeding to determine the ALP in relation to the international transaction. 74. The assessee in its analysis of transfer price arrangement with UCB group has narrowed down on 36 comparable companies which are at pp. 53 and 54 of its report. Further, in the conclusions, it clearly states that UCB India, as a licensed manufacturer is exposed to less than normal risks. It also states that UCB India does not own any intangible property rights or leverages. It is not demonstrated as to how, in all these comparables, that are identified, the criteria of also being (a) licensed manufacturers; and (b) those which do not own any intangible property or rights is met. The company now claims that 80 per cent of its activity is manufacturing. It is to be seen that a similar percentage of activity of manufacturing exists in other companies. 75. In our understanding, the international transaction or an aggregate of similar international transactions, have to be evaluated, on a stand alone basis and then compared with similar analysis undertaken on independent tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dabur. The comparison of the quantities and rates are as below: *** Asst. yr. 2002-03 -------------------------------------------------------------- Product UCB Torrent Micro Labs Dabur -------------------------------------------------------------- Kgs. Rate Kgs. Rate Kgs. Rate Kgs. Rate -------------------------------------------------------------- Piracetam 15,500 1,700 4,500 326 875 667 - - -------------------------------------------------------------- Mesna 100 32,385 - - - - 20 20.075 -------------------------------------------------------------- Asst. yr. 2003-04 -------------------------------------------------------------- Product UCB Torrent Micro Labs Dabur -------------------------------------------------------------- Kgs. Rate Kgs. Rate Kgs. Rate Kgs. Rate -------------------------------------------------------------- Piracetam 24,500 1,549 7,000 306 875 667 - - -------------------------------------------------------------- Mesna 75 31,382 - - - - 20 20,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------- Neurocetam Microlabs Ltd. 63 19.23 -------------------------------------------------------------- Normabrain Torrent Pharmaceuticals Ltd. 25 7.50 -------------------------------------------------------------- Cerecetam Intas 13 4.01 -------------------------------------------------------------- Neurofil Shine 10 2.93 -------------------------------------------------------------- Pirament Ipca Laboratories Ltd. 9 2.64 -------------------------------------------------------------- Normenta Ipca 4 1.22 -------------------------------------------------------------- Sumocctam Talent 3 0.92 -------------------------------------------------------------- Alcetam Alkem 2 0.62 -------------------------------------------------------------- Neurofil- Forte Shine 1 0.40 -------------------------------------------------------------- Pirac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys similar goods in similar quantities and under similar terms from other independent enterprise in a similar market (an external comparable). 80. Under the CUP method the properties of a product and accompanying circumstances and conditions have to be evaluated for comparison. Even a minor change in the properties of the products, circumstances of trade (billing period, amount of credit therein, etc.) may have a significant effect on the price. Product comparability is absolutely key, in particular physical features such as size, weight, appearance along with volume, reliability/storage requirements, regulatory requirements, etc. Pricing of a product is a very subjective exercise and its true value, as received by the receiver, can differ from that received by others in the market place. Thus, CUP method requires a high degree of comparability along the following dimensions: (i) Quality of the product or service; (ii) Contractual terms (example, scope and terms of warranties provided, sale or purchase volumes, credit terms, transportation terms, etc.); (iii) Level of market i.e., wholesale, retail, etc.; (iv) Geographical market in which the transaction takes place; (v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PI imported by the assessee, as even a minor difference could materially affect the price. Just because there is an objective to ensure uniformity in stands of quality, efficacy and safety of pharmaceutical products as the fundamental responsibility of CDSZCO (see guidelines for bioavailability and bioequivalence studies issued by Ministry of Health and Family Welfare, Government of India), if it is fallacious on the part of the Revenue to argue that, there are absolutely no differences in the products. If the quality, efficacy, safety, etc. are uniform and same for all products which fall within the ken of Drugs and Cosmetics Act, 1940, this objective would not have been one that is sought to be implemented. There should be a scientific basis to say that these APIs are identical, with the same purity, potency, and characteristics. APIs are unique compound making, and the effect of usage of a particular FDF using an API would depend on the composition, purity, method of usage, dosage used, side-effects. All such data should be first obtained by the Revenue or the assessee, who wish to compare products and then arrive at the ALP or wish to make adjustments to a price, cost or margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny or the product, cannot be taken as comparables. There is no data on the structure of the organization, functions performed, assets involved or risks assured and also the process, protocols followed are not known, particularly when a slight variation in the purity of the product affects the comparability. From the purchase price identified by revenue, it can be seen that the rate at which Micro Labs has purchased 875 kgs, is Rs. 667 per kg. in the case of Piracetam and whereas Torrent Pharmaceuticals has purchased 4,500 kgs. of the same drug @ Rs. 326 per kg. There is huge variation in the purchase price of the same product by both the parties which are independent entities doing uncontrolled transactions. Time of purchase is not known. Thus, with such variation in prices, it is difficult to accept the Revenue's contention that the product in question is the same and identical in all aspects including quality and efficacy. Under these circumstances in the absence of any data whatsoever on the supplier company/organization, or on the products supplied by it, adoption of that price as a comparable, in our considered opinion, would not be most appropriate. Thus we do not agree with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not even gather any technical literature on the comparable products identified by it. The Revenue has not conducted any such exercise of comparing products nor has it examined the comparability of the companies supplying the same so as to bring out factors which would be helpful in determining comparability. The parameters such as purity standards, quantity of productions and sales, manufacturing practices employed, efficacy of the products, group profiles, R D activity, clinical trials, technical literature on product quality, contractual terms of supply, etc. are not brought out by Revenue so as to enable comparison by adopting CUP method. In the case of Aztec Software Technology Services Ltd. the Special Bench of the Tribunal has specifically observed that a proper analysis of the transactions with respect to functions performed, assets employed and risk assumed (FAR analysis) should be undertaken, as this has a direct bearing on the pricing of a product/services. This has not been done. In fact, no enquiry whatsoever has been done on the similarity between the APIs. General arguments have been made without any reference to specific material, data or evidence. ALP cannot be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to discharge the onus placed on them that CUP is the most appropriate method and it has found the right comparable. Thus, for all these reasons the additions made by the Revenue on this issue cannot be sustained. 87. As we have not approved the method followed by the Revenue or the assessee, though both the parties have desired that we decide the issue of sustaining the addition or not, we deem it fit to set aside the issue to the file of the AO for fresh adjudication in accordance with law, as we do not, have the right information and data to decide the issue. 88. The assessee has sought to file additional documents in the form of warning letter issued to Northeast General Pharmaceutical Factory, No. 37, Zhonggong Bei Street. Tiexi District, Shenyang, Liaoning 1234 China, by United States Food Drug Administration, Rockville, MD 20857, dt. 2nd Oct., 2007 and October, 2007, to demonstrate that the companies, which supplied APIs to the three Indian entities, i.e., Torrent Pharmaceuticals, Micro Labs and Dabur are sub-standard companies which did not meet the required regulations. Similarly the assessee's counsel tried to file photostat copies of invoices evidencing sale by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with law after giving adequate opportunity to the assessee, with the following directions: (a) The assessee shall be allowed to file a fresh TP study report and any other document or evidence, which he may seek to furnish, for the first time, in support of his report and the AO shall take the same on record and examine the same. (b) The assessee is free to adopt any method as prescribed by law, if it considers that method as the most appropriate method. TNMM may also be considered, if the transaction or a class of transactions are properly evaluated in accordance with law. In case external comparables are not available due to lack of data in public domain, the AO may accept internal comparables including segmental data or internal TNMM. 88B. In short, a fresh exercise may be undertaken on this aspect by both the parties, unconstrained by technicalities and with an open mind, so as to arrive at the most appropriate method of evaluating the ALP. 89. We now discuss the other grounds of appeal. A common disallowance is made for the asst. yrs. 2002-03 and 2003-04 which pertains to a disallowance of a percentage out of the total sales promotion expenses claimed by the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he marketing and distribution of the assessee's products. He states that the total list of doctors, who received the gifts are extremely voluminous and hence cannot be attached. A list of representatives was furnished to the CIT(A). He also submits that the CIT(A) was wrong in stating that there is no procedure or system in place to monitor, control, supervise, guide or even to veto the distribution of samples. The assessee submits that it is an internal procedure of approval and a copy, of the same is attached as Annex. II. Thus submissions of the assessee on facts are not controverted by the Revenue. There is an internal control procedure in place. On this factual matrix we are of the considered opinion that the ad hoc disallowance is not based on firm legal ground. There is no dispute that the expenditure incurred on gifts was for the purpose of business. The gifts display the logo of the assessee-company. To assume that 20 per cent or 10 per cent of these gifts might have not been used for the purpose of business, in our considered opinion, is based on mere surmises and presumptions. It is well-settled that no addition can be made merely on the basis of such presumptions and as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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