Tribunal directs re-examination of transfer pricing adjustments & disallowance of interest, partially allowing appeal.

The Tribunal partially allowed the appeal regarding transfer pricing adjustments, directing the Assessing Officer to re-examine the adjustments under the Comparable Uncontrolled Price method. In the case of disallowance of interest, the Tribunal instructed the AO to verify confirmations and make a decision accordingly. The appeal was partly allowed for statistical purposes on 25/11/2019.

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Issues Involved:
1. Transfer Pricing Adjustment
2. Disallowance of Interest

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment

Ground of Appeal:
The appellant contested the CIT(A)'s decision to uphold the AO/TPO's adjustment of the arm's length price (ALP) for the international transaction of importing APIs from Associated Enterprises (AEs), resulting in an adjustment of Rs. 2,29,09,780/-.

Facts:
- The appellant, an indirect subsidiary of Schering-Plough Corporation, USA, engaged in manufacturing and marketing pharmaceutical products in India, filed a return for AY 2003-04.
- The appellant used the Cost Plus Method (CPM) to determine the ALP for the import of raw materials from AEs, showing a gross profit mark-up of 56.45% in the AE segment compared to 27.54% in the non-AE segment.
- The TPO rejected CPM and adopted the Comparable Uncontrolled Price (CUP) method, comparing prices of APIs with those imported by unrelated companies (Cipla Ltd. and Ranbaxy Laboratories Ltd.), leading to a significant adjustment.

Tribunal's Findings:
- The Tribunal noted that the CUP method requires a high degree of comparability, which was not met by the TPO.
- The Tribunal found that the appellant's use of CPM was flawed due to the distinct nature of therapeutic segments and manufacturing processes.
- The Tribunal upheld the TPO's adoption of the CUP method but directed the AO to re-examine adjustments for differences in terms of contract, quantity, market nature, credit period, delivery terms, and foreign currency risks.
- The Tribunal referred to similar cases (Serdia Pharmaceuticals and Merck Ltd.) where CUP was deemed the most appropriate method.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the AO to re-examine the adjustments under the CUP method.

2. Disallowance of Interest

Ground of Appeal:
The appellant challenged the disallowance of Rs. 18,22,861/- in interest paid on deposits received from prospective distributors.

Facts:
- The CIT(A) upheld the disallowance due to the appellant's failure to file confirmations from the parties.
- The appellant contended that all confirmations had been filed before the AO.

Tribunal's Findings:
- The Tribunal restored the matter to the AO to verify the confirmations and pass an order per the provisions of the Act after giving the appellant a reasonable opportunity to be heard.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to verify the confirmations and make a decision accordingly.

Order Pronounced:
The appeal was partly allowed for statistical purposes on 25/11/2019.

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