TaxTMI 
TaxTMI 
2010 (12) TMI 60
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.... 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 is said to have its presence in more than 140 countries worldwide, including in Egypt by way of a subsidiary in the name of Servier Egypt Industries Ltd Egypt (Servier Egypt, in short). 3. Serdia is enagegd in the business of producing drugs mainly in the field of anti-hypertension and metabolism. It produces and markets drugs in finished dosage forms (FDFs), which is what a drug is called when it is ready for end use by the consumer, and in the process of producing these FDFs, the assessee imports active pharmaceutical ingredient (API) from Servier France and Servier Egypt. 4. Pharmaceutical products are manufactured in two basic stages, referred to as primary manufacturing and secondary manufacturing. Primar....
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....PI). In the next two years, i.e. assessment years 2003-04 and 2004-05, the dispute extends to FDF Diamicron and Diamacron MR, which has Gliclazide as API. 7. The issue in dispute is the arm's length price of the above three APIs, i.e. Trimetazidine, Indapamide and Gliclazide, that Serdia is importing from its AEs - namely Servier France and Servier Egypt. 8. During the course of related assessment proceedings, the Assessing Officer made references to the Transfer Pricing Officer (TPO, in short) under section 92CA(2) for determination of arm's- length price for the transactions that Serdia entered into with its AEs. As far as assessment year 2002-03 is concerned, the TPO received the reference on 20th January 2004. The TPO noted that the Serdia has determined the ALP by adopting TNMM, with operating margin as a percentage of net sales, as most appropriate method. The comparable companies, as selected by Serdia, showed operating margins ranging between (-) 13.29% to 19.07%, and the arithmetic mean of margin of comparable companies was found to be 6.67%. The claim of the assessee was that since its operating profit at 8.76% on net sales was higher than 6.67%, its international t....
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....le the assessee did not seem to have much to say so far as Indapamide is concerned, beyond pointing out that the assessee is market leader, with 68.9% market share, in respect of the FDF made of Indapamide, the assessee did seriously challenge the quality of Trimetazidine. The assessee also contended that both the products of the assessee are patented in Europe and USA, that these products are market leaders even as the products are sold at higher prices and that all these factors put together show that the APIs used by the assessee are better than that used by its competitors. The assessee made elaborate submissions to demonstrate that the quality of Trimetazidine manufactured in India, is not at all comparable with the quality of Trimetazidine imported by the assessee from its AE Servier Egypt. It was contended that purity levels of Trimetazidine manufactured in India are much lower than purity level of Trimetazidine imported by the assessee, the shelf life of assessee's API is much longer, the effect of assessee's API last longer than the effect of the same API manufactured in India, that the efficacy of assessee's API is proven since it is launched after clinical trials as agai....
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....es in prices in British Pharmacopoeia quality standards vis-à-vis Japanese Pharmacopoeia quality standards, and a further Rs 5,000 per kg for any variations in purity standards. The adjusted CUP was thus computed at Rs 20,850 (i.e. Rs 11,000 + Rs 4,850 + Rs 5,000), as against price of Rs 52,546 per kg paid by the assessee to its AE for imports of Trimetazidine. The price paid to the AE was thus more than 2.5 times the ALP, even after making all these adjustments, of the Indapamide. 14. The adjustments in respect of the above two APIs, i.e. Trimetazidine and Indapamide, were also made in the subsequent two years as well. There are variations in the figures but in principle, as learned representatives agree, the adjustments were of the same nature and for the same reasons. There is no variations in material facts, and, therefore, for the sake of brevity, we need not set out details for those two years. As learned representatives have agreed, whatever is decided in the first year, i.e. assessment year 2002-03, will also follow in the two subsequent years before us, i.e. 2003-04 and 2004-05. 15. In the assessment year 2003-04 and 2004-05, however, the ALP adjustments were ....
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....en by the TPO at the assessment and the remand stage, did not impress the Assessing Officer. While rejecting the submissions made by the assessee for the assessment year 2002-03, which has been followed in the subsequent years as well, learned CIT(A) has, inter alia, observed as follows:- The appellant has not given any cogent reasons as to why the TNM method is applicable to its case. In fact on page 16 of the E and Y report on Transfer Pricing, it has been stated that the TNM approach has been followed, based on the hypothesis that the since operating margins earned from the appellant's manufacturing and marketing are on an arm's length basis, then it must be assumed that the underlying payments to the AEs for imports of APIs too are on an arm's length basis. This assumption is wholly irrational and otiose. Just because the sales are at an arm's length basis, it cannot be said that the purchase too must therefore be at an arm's length basis. Such an assumption obliterates the very need for transfer pricing regulation. Further the contention of the appellant in the said report that the above hypothesis of arm's length transaction is supported by the fact that the cost of the im....
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....ant's FDFs are compared with others too are not established by an independent and authoritative data. c. The appellant has been unable to give contractual data in respect of the said APIs supplied by its AEs to third parties on comparable terms and circumstances, so as to establish that its own international transactions with its AEs in this regard were on an arm's length basis. d. The appellant's additional advantages, derived from its AEs in terms of manufacturing and marketing assistance by importing the products are not related to product imports in ordinary circumstances, but are actually technical and managerial services received for which normally royalty and fees is paid by a party. Perhaps the cost of such services which should have been added to the cost of the product, so as to keep the profits thereunder away from the domain of Indian taxation. The law related to transfer pricing in India is of recent vintage and the Indian scene is bereft of any authoritative judgements. It is evident here to refer to a judgement of the US court (Bausch and Lomb Inc., Reference No.89-4156 dated 14.5.92), where it was held that uncontrolled sales are considered comparable to co....
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....w:- 1. The learned CIT(A) has erred in upholding the addition of Rs.19,533,408 made by the ACIT pursuant to the order of the learned ACIT (Transfer pricing) to the total income of the appellant on account of computing the arm's length price relating to the international transaction pertaining to import of active pharmaceutical ingredients (ATP) namely, Trimetazidine and Indapamide, from associated enterprises. 2. The learned CIT(A) has erred in upholding the non-acceptance of Transactional Net Margin Method (TNMM) adopted by the appellant for determination of its arm's length price in connection with its international transaction relating to import of raw materials (Trimetazidine and Indpamide) from its associated enterprises. Your appellant submits that TNMM has been considered as the most appropriate method as per Rule 10C of the Income tax Rules 1962 and is a recognised method in accordance with law and accordingly ought to have been accepted in the facts of the case. 3. Your appellant submits that as provided under paragraph 55.11 of CBDT circular number 14 of 2001, it has discharged the primary onus to determine the arm's length price by applying TNMM as the most appr....
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....ition is required in your appellant's case and prays that the addition be deleted. 10. The learned CIT (A) has erred in not considering the order passed by Dy. Commissioner of Custom, GAT valuation cell, Mumbai accepting the import prices of the APIs imported by Serdia from its associated enterprises, including, inter alia, Trimetazidine and Indapamide, to be at arm's length. Your appellant submits that the above further proves that the transaction undertaken by the appellant with its associated enterprises is at arm's length and hence prays that the addition be deleted. 11. The learned CIT (A) has erred in not considering the results of the tests conducted by independent third parties on the quality of the APIs imported by the appellant and the APIs available in the local markets. Your appellant submits that the above further proves that the transaction undertaken by the appellant with its associated enterprises is at arm's length and hence prays that the addition be deleted. 12. The learned CIT (A) has erred in not considering the difference that the additional assistance obtained by the appellant by importing the products are not received by the local suppliers of the A....
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....goes on to give example of a generic drug by the name of 'fluoxtine' launched by Dr. Reddy's Laboratories which is generic version of Eli Lilly's Prozac, with norfluoxteine as the common API. Learned counsel submits that principal reason of lower price of generic drugs is that there is more competition as there is a larger number of producers of the same drug, that generic drug manufacturers donot incur the cost of drug discovery , that generic drug manufacturers donot bear the burden of proving the safety and efficacy of drugs through clinical trials, and that generic drug manufacturers may also enjoy the benefits of previous marketing efforts of the brand name. Learned counsel then takes us through details of various stages of drug discovery, product development, pre clinical research and clinic trials. Highlighting the importance of active pharmaceutical ingredients, it is submitted that an API is substance in the pharmaceutical drug which is biologically active, that a dosage form of a drug is composed on an API, which is drug itself, and excipients, which is the substance of the tablet, and that drugs are chosen primarily for their APIs. In his last few slides, learned counsel....
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....ounsel then refers to the CBDT circular no. 14 of 2001 which, inter alia, states that where the taxpayer has discharged the primary onus of determining the ALP as per the rules and substantiating the same with prescribed documentation, there can be no intervention in the ALP by the Assessing Officer. A reference is then also made to a coordinate bench's decision in the case Development Consultants Pvt Ltd vs DCIT (115 TTJ 577) and Philips Software Centre Ltd vs ACIT (26 SOT 226) in support of the proposition that taxpayer's documentation should be accepted, unless the Assessing Officer is able to controvert the same. Learned counsel then points out that the Assessing Officer did not have good and legally sustainable reasons to reject the transactional net margin method as adopted by the assessee, and takes us through the brief reasons, for doing so, recorded by the assessee. It is submitted that the Transfer Pricing Officer has not appropriately and fully dealt with the prescription of Rule 10C which deals with the criterion on which most appropriate method is selected, and, as such, justification for adopting CUP method for ALP determination is not sound. A reference is also made ....
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....various factors". Learned counsel then invites our attention to Hon'ble Supreme Court's judgment in the case of CCE vs Universal Glass Limited (182 ELT 3) wherein it is observed that simply because two goods are known by the same known or the same group, it does not mean that they are comparable goods and that even if they are assumed to be comparable, the relevant differences, all relevant differences, as far as possible, should be recognized. According to the learned counsel, these observations show that comparables proposed by the TPO cannot be considered to be comparable only because they are known by the same name. 23. Learned counsel then submits that, as observed by a co ordinate bench of this Tribunal in the case of Sony India Pvt. Ltd. vs DCIT (118 TTJ 685) sales of ethical pharmaceuticals by a research-based multinational group would not be comparable with sales of generic pharmaceutical substances by a multinational group not engaged in research for, and the development of, innovatory products. A reference is also made to the decision of another coordinate bench in the case of Mentor Graphic Pvt Ltd vs. DCIT (112 TTJ 408) in support of the proposition that if differen....
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....tted that there is no contradiction in the stand of the assessee before the custom authorities vis-à-vis stand before the transfer pricing authorities. It was submitted that the assessee's stand before the custom authorities to the effect that the price of API has been renegotiated with the AEs, due to fall in the selling prices of the FDFs, only demonstrates that the AEs are unrelated parties and the appellant negotiated and brought about the reduction in prices. It is submitted that even if it is assumed that FDFs manufactured by the assessee and those manufactured with locally produced APIs constitute the same market, there is a wide gap between the quality and characteristics of the same product. It is also submitted that since custom department has accepted the said valuation for custom purposes, it cannot be open to another wing of the Government to disregard the same. Reliance is placed on the decision of a coordinate bench of this Tribunal in the case of Kinetic Honda Motors Ltd vs. JCIT (77 ITD 393) in support of the proposition that "when payments are approved by one wing of the Government, there is no question of such payment being treated as excessive or unreason....
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.... that these decisions are extended by the judicial forums in other countries, have no binding precedent value. He also points out that the transfer pricing legislation in India is not in pari materia , including on the core question of hierarchy of methods of determining arm's length price. It is submitted that, as evident from paragraph 34 of the Federal Court decision, there is a hierarchy of methods implicit in Canadian transfer pricing legislation. The relevant observation in paragraph 34 of the said decision is that "(t)here was no dispute between the parties that the Cost-Plus and Resale Price methods were secondary methods to be used when the CUP method was not appropriate and that the Transactional Net Margin method was another alternative to be used when the Cost-Plus and Resale Price methods were not appropriate". It is submitted that as against this hierarchy of methods to determine the ALP, the choice of method of determining ALP rests with the assessee in India, and, unless the Assessing Officer demonstrates that ALP so computed is contrary to the provisions of transfer pricing legislation in India, the choice of method cannot be disturbed. Learned counsel then submits....
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....djustments made by the Transfer Pricing Officer and uphold the grievance of the assessee. 33. In response to bench's query whether the assessee is in a position to give any further inputs on application of the CUP method for determining the ALP, beyond what has been filed at the assessment and appellate stage, or whether the assessee considers any of the same API being sold in India a comparable, learned counsel expressed regret for not being able to do so. 34. On the strength of all these arguments, as also on several other arguments on peripheral procedural issues and written submissions filed before us, learned counsel urged us to delete the impugned ALP adjustments. 35. Learned Departmental Representative submits that it is an undisputed position that the APIs in question are no longer patented drugs and the related patents have since expired. It is submitted that all these scholarly submissions by the learned counsel on patented drugs versus generic drugs are wholly irrelevant. 36. It is pointed out that, as submitted by the learned counsel himself in his presentation, it is because of the high costs of developing and launching a new drug that the patents are enfor....
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....e sold in the market, and, therefore comparable uncontrolled prices are easily available. As for the variations in quality, every producer makes a claim that his product is better than other similar products and that is more of a marketing gimmick than real differentiation. On the facts of this case, and particularly as API is a standard product for which transaction prices between unrelated parties are available and as it is a direct method with minimum distortions by irrelevant factors, it is a fit case for use of CUP method for determining the ALP. According to the learned Departmental Representative, the Transfer Pricing Officer has given liberal adjustments in respect of the quality differences claimed by the assessee. It is submitted that the Transfer Pricing Officer has given cogent, though perhaps brief, reasons for rejecting the TNMM for ascertaining the ALP. Learned Departmental Representative takes us through these reasons and justifies the same. It is also submitted that the powers of the Tribunal, in restoring the matter to the file of the Assessing Officer, are unfettered and of wide amplitude. Just because it is inconvenient to the assessee to go through the process ....
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.... out that the hearing of Canadian Tax Court was spread over forty days and in coming to their conclusions, the judges was not only guided by illuminating legal arguments by tax experts but also by industry insight provided by several expert witnesses. It is more like a research paper, according to the learned Departmental Representative, which deserves utmost respect and which succinctly explains the functioning of the pharmaceutical industry and demystifies their working. It is pointed out that, as rightly held by the Canadian Tax Court, to ascertain arm's length price of APIs manufactured even by the original patent holder, prices of the same API produced by a generic drug producer must be taken into account. We are urged to follow the same approach. As regards Federal Court of Appeal decision, it is pointed out that FCA decision does not disapprove the principle but adds that the arm's length price must also take into account the licence terms for FDF sale. That is not even the claim of the assessee before us. We are thus urged to reject the contentions of the assessee and approve the ALP adjustments made in the impugned assessments. 43. It is then submitted that in order to ....
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.... law. 47. We have duly considered the rival submissions, perused the material on record and duly considered the rival submissions as also the applicable legal position. 48. The first issue that we need to adjudicate on is whether, in the absence of a hierarchy of methods of determining the arm's length price, it is permissible for the Transfer Pricing Officer to reject the transactional net margin method to determine the arm's length price of the transactions with AEs, on the ground that the comparable uncontrolled price method to determine the ALP will be more appropriate and even as the Transfer Pricing Officer has not pointed out any defects in the method adopted by the assessee. 49. Let us deal with some fundamentals first. Section 92C of the Act, which deals with determination of arm's length price in relation to international transactions between the associated enterprises, provides as follows:- 92C. Computation of arm's length price:- (1) The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or ....
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....of material or information or document in the possession of the Assessing Officer. (4) Where an arm's length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute the total income of the assessee having regard to the arm's length price so determined:- Provided that no deduction under section 10A 27 [or section 10AA] or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section:- Provided further that where the total income of an associated enterprise is computed under this sub-section on determination of the arm's length price paid to another associated enterprise from which tax has been deducted or was deductible under the provisions of Chapter XVIIB, the income of the other associated enterprise shall not be recomputed by reason of such determination of arm's length price in the case of the first mentioned enterprise. 50. In terms of the provisions of Section 92 C(1), as evident from a plain reading of the said provision, the arm's length price in relation to an international transaction is ....
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.... Officer has to give an opportunity of hearing to the taxpayer, on as to why he should not do so, by serving a show cause notice. The twin conditions of compliance with the provisions under section 92C (1) and 92C (2) have to be fully complied with by the taxpayer, and it is only when this onus is properly discharged by the taxpayer that the Assessing Officer is restrained from resorting to determination of arm's length price by him in terms of Section 92 C (3)(a). of course, there are other situations, as se out in clauses (b), (c) and (d) of Section 92 C (3), in which the Assessing Officer can proceed to determine the arm's length price under section 92 C(1) and (2), but, in the context of the situation that we are in seisin of, it is not really necessary to deal with the same. 51. In view of the above discussions, in our considered view, it is clear that the selection of method of determining the arm's length price is not on the unfettered discretion of the taxpayer. The duty of the taxpayer is to select such method of determining the arm's length price as is most appropriate method having regard to all the relevant factors, such as,- (i) nature of transaction, (ii) cla....
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....under the method that, under the facts and circumstances, provide the most reliable measure of an arm's length result". 53. In a situation in which the Assessing Officer finds that the selection of most appropriate method is not appropriate to the all the relevant factors, he has the powers, as indeed the corresponding duty, to select the most appropriate method and compute the arm's length price by applying that method. It is not at all necessary, as has been contended by the assessee, that unless the Assessing Officer can demonstrate that arm's length price computed by the assessee is not computed in the manner as prescribed in the regulations, he cannot reject the method chosen by the taxpayer. The selection of most appropriate method of computing the arm's length price is a significant component of the process of determining the arm's length price and the assessee has to justify the same on sound reasoning. In our considered view, the onus is on the assessee to demonstrate that the method of ascertaining the arm's length price is chosen by the assessee is the most appropriate method of determining the arm's length price - as is the clear mandate of Section 92C (1), as much a....
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....ise of selecting most appropriate method essentially implies that appropriateness of method is to be ranked in some order, and that one cannot put all the methods, even as all the methods may be appropriate to the facts of a case, at par in this respect. Undoubtedly, the transfer pricing legislation in India does not prescribe a particular order of preference about methods of determining the arm's length price, but the selection of most appropriate method of determining arm's length price, under Section 92 C(1) read with Rule 10 C, essentially requires the methods of determining the arm's length price to be ranked, on a sound and rationale basis, in an order of preference vis-à-vis the facts of every case. Compared with a situation in which transfer pricing legislation itself provides for order of preference in selection of method for determining arm's length price, the only difference absence of this 'order of preference' perhaps makes it is that while in the former case this order of preference cannot be challenged before the assessment and appellate authorities irrespective of peculiarities of the fact situation, in the latter, the order of preference adopted in ranking o....
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....m's length price, is contrary to the transfer pricing legislation. As far as this aspect of the matter is concerned, in our considered view, the proposition advanced by the assessee has to be rejected by relying upon the observations made by Special Bench in Aztec's case. 57. As far as learned counsel's reliance on decision of the coordinate bench in the case of Philips Software (supra) is concerned, we find that the coordinate bench was in seisin of a situation in which none of the conditions set out in 92 C(3) (a) to (d) were satisfied, and yet the arm's length price as determined by the assessee was rejected. As a matter of fact, the coordinate bench, having taken note of the scope of Section 92 C (3), which have reproduced above, observed that "the above-mentioned section clearly provides that before the arm's length price is determined, the Assessing Officer has to prove that at least one of the four conditions laid down in sub-section (3) above have been satisfied" and that "however, in the instant case, the Assessing Officer did not prove to the assessee that the above conditions were satisfied, either before initiating the transfer pricing assessment or during the course....
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....ect the most appropriate method adopted by the assessee. In our considered view, the Transfer Pricing Officer was well within his powers to go into the question as to whether the method of determining the arm's length price adopted by the assessee was indeed most appropriate method of determining the arm's length price on the facts of assessee's case, and, on being satisfied that it was not the most appropriate method of determining the arm's length price, the Transfer Pricing Officer was also justified in determining the arm's length price on the basis of, what he found to be, the most appropriate method on the facts of the case. 59. That takes us to the question as to whether, on the facts of this case, the CUP method is indeed preferable over the TNM method for determining the arm's length price. 60. The thrust of learned counsel's arguments is that since transfer pricing legislation does not provide for any order of preference in selection of the most appropriate method, no such order of preference - direct or implied, can be exercised by us either. 61. This issue is no longer res integra. In the case of ACIT vs MSS India Pvt Ltd (32 SOT 132), a coordinate bench of thi....
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....l, however, be stretching the things too far to suggest that in the 2010 version of OECD Guidelines, all the methods of determining the arm's length price have been placed at par with each other. The change in the OECD Guidelines, as we see it, is in respect of the order in which suitability of the methods is to be considered and in recognition of the fact that there can be situations in which transactional profit methods can have an edge over traditional transactional methods. However, wherever transactional profit methods as also traditional transactional methods can be applied in equally reliable manner, the OECD Guidelines still consider the traditional transactional methods to be preferable, as is evident from following observations in paragraph 2.3 of the OECD Guidelines 2010:- 2.3 Traditional transaction methods are regarded as the most direct means of establishing whether conditions in the commercial and financial relations between associated enterprises are at arm's length. This is because any difference in the price of a controlled transaction from the price of a comparable uncontrolled transaction can normally be traced directly to the commercial and financial relatio....
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.... which the transactions have been entered into by such AEs. 65. While traditional methods seek to compute the prices at which international transactions would normally be entered into by the associated enterprise, but for their interdependence and relationship, transactional profit methods seek to compute the profits that the tested party would normally earn on such transactions with unrelated parties. It is only axiomatic that the profits earned by an enterprise is dependent on several factors, and not only on the prices at which transactions have been entered into with the associated enterprises. The profit based results thus admit possibility of vitiation of results by a number of factors which are not relevant to the determination of prices at which international transactions are entered into by the associated enterprises. These methods, which are a step removed from the methods of computing the prices at which independent transactions would normally take place in respect of the product or service, must therefore be put to service when the traditional methods, which seek to compute prices in independent situations, fail or are incapable of being implemented, as there are lar....
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.... generic drug manufactured by the original patent holder). Dr. J. Gregory Ballentine testified for the appellant. Dr. Jack Mintz testified for the respondent. Both experts agreed that the CUP method is the preferred method for determining transfer prices. [65] Only in the absence of useful evidence of an uncontrolled transaction will it be necessary to use another method. For example, because no comparable transaction exists or because there are differences in the transactions that cannot be taken into account. The other methods are also useful in that they can be used as a check on each other. (Emphasis by underlining supplied by us) 70. Closer home, in the second case, the same question fell for consideration before a coordinate bench of this Tribunal, in the case of UCB India Pvt Ltd vs ACIT (supra). This was a case in which comparables cited by the Transfer Pricing Officer were inferred to have been produced by unknown duplicator Chinese companies and about which no data was available. It was in this background that the CUP method was held to be inapplicable for want of comparables. While holding so, the coordinate bench, inter alia, observed as follows:- Reasonable in....
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....or permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete 'law' declared by this Court". We must not, therefore, proceed on the basis that since CUP method was rejected in the case of a generic drug being manufactured by innovator of that generic drug, the CUP method must also be rejected in all cases where generic drugs are manufactured by the innovators of that generic drug; essentially, a lot depends on the quality of CUP inputs as well. 72. While dealing with UCB's case, we may also add that it was a case in which the Tribunal did not give any finding about as to which method of determining the arm's length price was the most appropriate method, having regards to the facts of that case, and the matter was remitted to the file of the Assessing Officer for fresh adjudication on that question. UCB decision holds that transactional net margin method applied in that case as long as comparison is made for net profit margins realized by an enterprises from a transaction or aggregate of transactions, but not at an entity level, but then it is nobody's case before us t....
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....ric drugs are purchased by the assessee from its associated enterprises are admittedly not driven by the market forces but on considerations which have no role to play in a typical arm's length transaction. In the order dated 6th May 2003 passed by the Deputy Commissioner of Customs, following stand of the assessee has been noted:- They (Serdia India) have stated that increased market competition in India has resulted in overall reduction in prices of selling price of their formulations manufactured by them in India. In order to retain their market share in India, their suppliers (Servier Group) have agreed to renegotiate the to sell the bulk drug to them at reduced price by affecting necessary changes to the price list applicable for India. 75. On the one hand, the assessee claims that he is a market leader and his FDFs sell at higher prices because of the premium its API commands, which justifies the higher price paid for the API, and, on the other hand, the evidence on record demonstrates that he must paid lower price for the API because his FDF was selling at a lower price. In a typical arm's length transaction, one does not reduce the price of the API because the buye....
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.... guaranteed for quality and these AEs also provide product liability cover in respect of FDFs manufactured out of such APIs. 79. The question whether an API can be considered to be unique product on such ground that GMP (Good Manufacturing Practices) and HSE (Health, Safety and Environment) standards were followed in its production process whereas such high standards were not maintained by other generic drug manufacturers, was also one of the issues which came up for adjudication before Tax Court of Canada in the case of Glaxo Smithkline (supra). 80. Briefly stated, the relevant material facts of Glaxo's case were like this. Ranitidine is the active pharmaceutical ingredient ("API"), used in a drug marketed by the assessee in Canada under the brand name Zantac. Ranitidine was discovered by the assessee's parent company in 1976 and was approved for sale in Canada in 1981. Zantac was launched by the taxpayer in 1982. During the period under appeal other pharmaceutical companies (generic companies) were selling generic versions of Zantac in Canada. These companies purchased ranitidine for much less than the price at which assessee purchased it from Adechsa, an AE based in Switze....
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....eutical producers is an appropriate CUP. The Court indicated that the highest price paid by the generic pharmaceutical producers represents a reasonable price that the taxpayer could have paid Adechsa. The judge did allow an additional C $ 25 per kilogram of ranitidine in acknowledgement that the ranitidine purchased from the related party manufacturer in Singapore was granulated. 81. This matter was heard at great length and in fine detail for over forty days, as noted in the order itself, and the Court was not only assisted by illuminating arguments by the learned counsel but also by expert witnesses, in a way, demystifying the pharmaceutical industry and sharing their insights on the manufacturing process of the APIs, as evident from the following observations in the said decision:- [93] A point in dispute is the impact of Glaxo's GMP. The appellant submits that the Glaxo ranitidine and that purchased by generic companies are not comparable because of the differences in GMP and HSE standards. The respondent agrees that there may be differences in GMP and HSE but states that those differences are of no significance to either safety or efficacy and therefore should have no b....
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...., and (3) granulated to Glaxo World standards. The suppliers to the generic companies did not manufacture ranitidine according to Glaxo standards. [98] When Mr. Ment was asked "[t]o what extent can test methods be developed to detect adventitious contamination, cross-contamination or all and any kind of chemical that may be found in a batch?" he replied, "[i]t would be extremely difficult, if not impossible, to do that with a battery of tests that companies typically run for batch release testing. They are not designed to detect and to identify adventitious contamination, except to a very limited extent." [99] A similar sentiment was expressed by Dr. Ian Keith Winterborn, the appellant's science nominee at discovery who also testified at the trial of these appeals. He said "[i]t is impossible to design - well, it is not impossible, but it would be onerous to try to design analytical tests which could detect and quantify any and all potential contaminants that might occur during manufacture, if the conditions under which the material is manufactured are not known and not understood." [100] Mr. Ment said laboratory testing was aimed at detecting the most likely contami....
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.... that lacked GMP. [103] The Therapeutic Products Directorate of the Health Products and Food Branch of Health Canada is the Canadian authority that regulates pharmaceuticals and medical devices for human use. The respondent's witness, Mr. Sultan Ghani, became the director of the Bureau of Pharmaceutical Sciences of the TPD in 2002. He was qualified as an expert in good manufacturing practices of the pharmaceutical industry in general, the drug approval process, quality assurance and GMP in the pharmaceutical industry in Canada. [104] Mr. Ghani explained that, during the years in issue and right up to the time of his testimony, Canadian regulations placed the responsibility for the quality of the active pharmaceutical ingredient on the dosage form (or secondary) manufacturer, and that this was where Health Canada considered the responsibility to rest as well. However, this practice will soon change due to international efforts to bring GMP standards to API manufacturers. [105] Mr. Ghani also said the number of GMP problems associated with API manufacturing was very, very small compared with the number of GMP problems associated with dosage form or secondary manufacturing an....
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....ric companies in Canada are an appropriate comparator using the CUP method. The appellant acquired granulated ranitidine from Adechsa at an amount in excess of the fair market value of ranitidine, and pursuant to subsection 69(2) of the Act the appellant is deemed to acquire it at a reasonable amount. The price that would have been reasonable in the circumstances for Glaxo Canada to pay Adechsa for a kilogram of ranitidine is the highest price the generic companies paid for a kilogram of ranitidine. However, to this amount I would add $25 per kilogram as this was the approximate cost to Singapore for granulation. The ranitidine purchased by the generic companies was not granulated. The GMP performed by a Singapore may have increased the value of its ranitidine but only to the extent that, as stated earlier in these reasons, it gave some degree of comfort to the appellant that the product would probably have less impurities and contaminants than that of its generic competition. No submissions were made as to what this extra consideration should be. There is no evidence before me to consider what increase I might add to the generic price per kilogram of ranitidine on account of GMP. ....
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....deral Court of Appeals concluded as follows:- [74] ......it is my view that the Judge was bound to consider those circumstances which an arm's length purchaser would necessarily have had to consider. In other words, the test mandated by subsection 69(2) does not operate regardless of the real business world in which the parties to a transaction participate. [75] This is not what the Judge did. Rather, he determined the "fair market value" of ranitidine, which he found to be the price paid by Apotex and Novopharm, and then found that anything paid by the appellant over that amount, save for a $25 per kilo upward adjustment, was in excess of "the reasonable amount". [76] Clearly, in the circumstances of this case, the Judge's approach was mistaken. In a real business world, presumably an arm's length purchaser could always buy ranitidine at market prices from a willing seller. However, the question is whether that arm's length purchaser would be able to sell his ranitidine under the Zantac trademark. In my view, as a result of the approach which he took, the Judge failed to consider the business reality which an arm's length purchaser was bound to consider if he intended to ....
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....s do not arise from the non-arm's length relationship between the appellant and Adechsa or between the appellant and Glaxo Group. To the contrary, these circumstances, and I quote the appellant, "arose from the market power attaching to Glaxo Group's ownership of the intellectual property associated with ranitidine, the Zantac trademark and the other products covered by its License Agreement with Glaxo Canada". As the Administrative Appeals Tribunal of Australia stated in Roche Product Pty Limited and Commissioner of Taxation, [2008] AATA 639 (July 22, 2008) at paragraph 153:- It is the intellectual property which is really the product, not the pill or capsule by which it is dispensed. The intellectual property included patent rights. The intellectual property came from very substantial expenditure on research and development, much of which would have produced no result. The profits from the exploitation of the intellectual property rights was something to which [the parent company which invented the product] had a special claim even though the profit would be collected for Australian sales by the Australian subsidiary. [81] I now return to subsection to 69(2) of the ITA and ....
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....of the Tax Court of Canada was overturned by the Federal Court of Appeal have nothing to do with claimed superiority of the product, as is the case before us, but on the basis of compulsions of the licence agreement, because of which the assessee was said under an obligation to purchase the API at a higher price. 89. In the case before us, the plea of the assessee is of superiority of APIs manufactured by its associated enterprises that the APIs purchased by the assessee command a higher price, and not that it was on account of the compulsions of license agreement that the assessee had to buy it at a higher price. In any event, the assessee has not even filed copies of any agreements, including the license agreement, before us. As we make these observations, we make it clear our observations should not be construed an expression of opinion on things not before us. That is a plea which will have to be dealt with, on merits, when it is made. That apart, there are many other peripheral aspects which will have to be examined when such a claim is made by the assessee, such as, when assessee of claims that the higher price, independent of consideration paid in terms of the licence agr....
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....alty or other income is made to the foreign AE in the garb of payment for such goods or services. Once it is held that a part of payment made to the foreign AE is wrongly characterized as payment of goods or services, it is only a natural corollary of this finding that the payment so made in excess of arm's length price must have some other character. While a lower deduction, on account of ALP adjustment, neutralizes the erosion of domestic tax base caused by reporting artificially lower profits, a simplictor ALP adjustment does not neutralize the non-taxability, in source country, of the payment of dividend, royalty or other incomes to the foreign AEs, in the garb of payment for goods or services. Many countries, including Canada - by way of Section 247(2) of Canadian Income Tax Act , neutralize this ill effect of a payment in excess of arm's length price by providing for re-characterizing the amount paid in excess of ALP. In India, re characterization provisions in respect of payments made in excess of ALP have not yet been legislated, but that does not mean that judicial precedents from the countries where recharacterization of payment in excess of ALP payment is permissible, ce....
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....length price, and it is only when determination of arm's length price is made in accordance with the scheme of the Act that the onus of the assessee is discharged. Merely because another arm of the Government considers this price at an arm's length price, even though for the purposes of customs duty, the assessee can not be relieved of the burden of establishing that it is an arm's length, for the purposes of transfer pricing requirements, in terms of the provisions of the Income tax Act. 96. In view of the above discussions, and bearing in mind entirety of the case, we are of the considered view that CUP method of determining the arm's length price is most appropriate method for determining arm's length price, on the facts of this case, and the selling price of related APIs in Indian market constitute good comparables for applying the said method. 97. As regards Indapamide, based on the information about competitor drugs submitted by the assessee himself, the Transfer Pricing Officer ascertained the purchase price of Indapamide from Torrent Pharmaceuticals was producing Lorvas and Lorvas SR, in competition with Natrilix and Natrilix SR being produced by the assessee, which w....
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....12,000 per kg, the Transfer Pricing Office allowed Rs 4,850 per kg for higher quality standard as also an additional allowance of Rs 5,000 towards impurities. The assessee has not made out a case for higher adjustments to be allowed in respect of the same, and it is not, therefore, the case that an adjustment for higher quality of product has been declined to the assessee. Even as we confirm the orders of the authorities below on this issue, we make it clear that the assessee is not prevented from making any such claim for adjustments in value, as he may deem appropriate and can justify, in future, and, to this extent, the issue is left open. Subject to these observations, in our considered view and on the given facts, these adjustments reasonably cover the variations in quality of API manufactured by Nivedita Chemicals vis-à-vis API manufactured by Servier Egypt which was purchased by the assessee for Rs 52,546 per kg. 103. As regards the internal CUPs furnished by the assessee, we find that these inputs are, strictly speaking, not internal CUP in the sense that while the assessee has imported Trimetazidine from Servier Egypt, the sale instances to unrelated parties are ....
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....ssment beyond the time limit prescribed vide a CBDT instruction, the assessment order so passed was liable to be quashed as it suffered lack of jurisdiction. A reference was then also made to Hon'ble Andhra Pradesh High Court's judgment in the case of CIT vs Nayana P Dedhia (270 ITR 572) which holds that selection of a case for scrutiny assessment in violation of directions of the Central Board of Direct Taxes was legally unsustainable, and the assessment framed on the basis of such assessment was liable to be set aside. On the basis of these arguments, learned counsel submits that the reference made to the TPO was void ab initio as it was made after the time limit stipulated by the CBDT. We are urged to set aside the order passed by the Transfer Pricing Officer for this short reason alone. Learned Commissioner (Departmental Representative), on the other hand, vehemently opposes the submissions made by the learned counsel for the assesse. He submits that the directions contained in the circular dated 20th May 2003, are merely recommendations and not directions. He submits that these directions do not prohibit the Assessing Officer from making references to the Transfer Pricing Offi....
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....ssment year 2002-03 should be completed by June 30, 2003". A plain reading of this instruction does not suggest that there was any bar on making of references to the TPO after 30th June 2003 or that all these references will have to be necessarily completed before that date, as, for example was the position, in the context of CBDT instruction dealt by the Bilaspur bench of this Tribunal in the case of Sunita Finlease (supra), and by Hon'ble Andhra Pradesh High Court in the case of Nayana P. Dedhia (supra). In the case of Sunita Finlease (supra), the coordinate bench was dealing with a situation in which the CBDT had specifically directed that "(f)or returns filed during the current financial year 2004- 05, the selection of cases for scrutiny will have to be completed within 3 months of the date of filing of the return" (emphasis supplied by us). Similarly, in the case of Nayana P Dedhia (supra), Their Lordships were dealing with a situation in which there was a specific bar from selecting a case in scrutiny assessment in which income offered to tax in the relevant assessment year was 30% more than the income offered to tax in the immediately preceding assessment year as the CBDT ha....