ITAT upholds CUP method for API transfer pricing, rejects Value Added Distributor characterization claim

The ITAT Mumbai rejected the assessee's plea to be re-characterized as a Value Added Distributor instead of Licensed Manufacturer for API imports from associated enterprises. The Tribunal upheld CUP as the most appropriate method for benchmarking API transactions, following precedent from Assessment Year 2003-04 involving similar transactions. While rejecting objections to TIPS database usage for comparable selection, the Tribunal allowed reasonable quality adjustments. The case was partially remanded to AO/TPO for fresh examination of the distribution segment after proper segregation from contract manufacturing activities, as the TPO had not examined transactions post-segregation.

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Issues Involved:
1. Re-computation of Arm's Length Price (ALP) for import of Active Pharmaceutical Ingredients (APIs).
2. Re-computation of ALP for import of Finished Drug Formulations (FDF).

Summary:

Issue 1: Re-computation of ALP for import of APIs:
The assessee, a subsidiary of Schering-Plough Corporation, USA, engaged in the manufacturing and distribution of pharmaceutical products, contested the adjustments made by the Transfer Pricing Officer (TPO) concerning the import of APIs. The TPO had applied the Comparable Uncontrolled Price (CUP) method instead of the Transactional Net Margin Method (TNMM) used by the assessee. The TPO collected data from the Customs Data Base (TIPS) and selected Cipla Ltd. as a comparable. The assessee argued that the TIPS data lacked relevant information for applying CUP and that the APIs purchased from its AE were of superior quality, meeting European FDA standards, unlike the comparables. The Tribunal upheld the TPO's application of CUP as the most appropriate method, citing a previous decision in the assessee's own case for AY 2003-04, but allowed for reasonable adjustments concerning quality differences.

Issue 2: Re-computation of ALP for import of FDF:
The assessee had combined the segments of contract manufacturing and distribution of formulations in its transfer pricing study but later sought to segregate them. The TPO had made adjustments based on the combined segment, applying TNMM. The Tribunal found that the two segments had distinct functional profiles and accepted the assessee's request for segregation. It restored the issue to the AO/TPO for fresh examination of the distribution segment after segregation.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal affirming the use of CUP for APIs with adjustments for quality and remanding the issue of FDF distribution for fresh examination post-segregation.

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