Delhi HC upholds ITAT transfer pricing decision accepting TNMM over CUP method for pharmaceutical transactions under Rule 10B(2)

The Delhi HC upheld ITAT's decision on transfer pricing adjustments for pharmaceutical transactions. For Paclitaxel and Disodium Pamidronate sales, the court accepted TNMM over CUP method, noting TPO failed to consider Rule 10B(2) factors and relied on different market prices. Net margins from these sales were higher at 14.10% versus 10.90% for other sales. For Methylene Chloride Soluble purchase from associated enterprise, despite TPO's Rs. 32 per kg determination using CUP method, the assessee's cost certificate showing Rs. 4648 per kg was accepted by CIT(A). The appellant failed to challenge the cost certificate's veracity before ITAT. HC found no substantial question of law arose from these factual determinations.

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Issues:
1. Correctness of judgment by Income Tax Appellate Tribunal
2. Most appropriate method for determining Arm's Length Price
3. Transfer pricing adjustment for Methylene Chloride Soluble extract

Analysis:
1. The Department challenged the judgment of the Income Tax Appellate Tribunal (ITAT) regarding the Transfer Pricing Officer's (TPO) orders on international transactions. The main issue was whether the TNMM or CUP method should be used to determine the Arm's Length Price (ALP) under Section 92C of the Income Tax Act, 1961.

2. The ITAT considered the TPO's rejection of the proposed pricing based on TNMM for Paclitaxel and Disodium Pamidronate. The ITAT observed that the TPO relied on market prices without considering Rule 10B(2) of the Income Tax Rules, 1962. The CIT(A) found that the TPO did not adequately justify the use of CUP method due to various factors like customer profile, pricing terms, geographic impact, and product quality. The appellant demonstrated through net margin analysis that TNMM was more appropriate, leading to the deletion of the transfer pricing adjustment.

3. The CIT(A) also noted higher net margins from the sale of Paclitaxel and Disodium Pamidronate compared to other sales. The ITAT upheld the CIT(A)'s decision as the appellant provided sufficient evidence supporting the TNMM method. Therefore, no interference with the CIT(A)'s order was warranted.

4. Regarding the transfer pricing adjustment for Methylene Chloride Soluble extract, the TPO rejected TNMM in favor of CUP method. The TPO determined the cost price per kg at Rs. 32, while the appellant claimed Rs. 4648 per kg. The CIT(A) considered additional evidence but found no material to doubt the claimed cost. The appellant did not challenge the veracity of the cost certificate before the ITAT, leading to factual findings that did not warrant interference.

5. Ultimately, no substantial question of law arose, and the High Court dismissed the appeal, upholding the ITAT's decision.

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