AI Drafter 
TaxTMI 
TaxTMI 
2017 (7) TMI 208
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....ess of providing contract research, business development pharma and technical services, contract testing and related support services, apart from being a contract manufacturer for its AEs. A return declaring total income of Rs. 33,90,95,876/- was filed reporting 13 international transactions in Form no. 3CEB as under:- Table - 1 Sr.No. Nature of transaction Amount (Rs.) Method 1. Contract of Manufacturing 1733908249 TNMM 2. Sale of fixed asset 25676089 Other Method 3. Purchase of fixed asset 414908 Other Method 4. Business Development and procurement support services 48099708 TNMM 5. Quality Assurance Support services 5624152 TNMM 6. Regulatory Support services 23523381 TNMM 7. Laboratory information Management systems support services 3240788 TNMM 8. Contract Manufacturing support services 22724125 TNMM 9. Business development and Procurement support services 4608399 TNMM 10. Contract Research and Testing services 320918166 TNMM 11. ECB Loan 1 1674648 CUP 12 Reimbursement of expenses 13650244 CUP 13. Wound case s....
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....RNG SUPPORT SERVICES AND BUSINESS DEVELOPMENT AND PROCUREMENT SUPPORT SERVICES 5. The TPO took up international transactions at serial nos. 5 and 8 from the above Table-1, viz., 'Quality Assistance Support Services' and 'Contract Manufacturing support services', which were benchmarked by the assessee under the Transactional Net Margin Method (TNMM). These services include third party audit and third party inspection, which the assessee does for its AE. Audit and inspection pertains to contract manufacturing which is done by third parties for the assessee's AE. The assessee chose four companies as comparable with their average OP/TC at 12.21%. The assessee's own profit margin was 7.73%. The TPO rejected all the comparables given by the assessee for the reasons given in the order, against which the assessee is not aggrieved. The TPO came to hold that the TNMM was not the best method for these two transactions processed in a combined manner. It was observed that these services were almost similar to 'Business development and procurement services' [Col. 4 of Table-2] and 'Support services' [Col. 5 of Table-2], in respect of which the assessee declared OP/OC at 16.18% and 21.82%. As ....
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....value of the international transaction of 'Contract Manufacturing'. TNMM was applied for demonstrating that this international transaction was at ALP. The assessee computed its own PLI (OP/OC) at 14.26%. Four companies were chosen as comparable, which have been tabulated on page 3 of the TPO's order, giving average OP/OC at13.04%. In view of the assessee's higher PLI than the average of comparables, it was claimed that this international transaction was at ALP. The TPO doubted the assessee's contention about it being a 'Contract manufacturer' inasmuch as it had disclosed 'Sales' in its accounts rather than job charges. On being called upon to explain its stand, the assessee submitted that it manufactures generic drugs for its AEs on principal to principal basis. Raw material is procured by it; manufacturing is done as per the specifications of the AE; and the final product is sold to the AE. The assessee distinguished itself, being, a contract manufacturer from a 'Loan and licence manufacturer' in whose case inputs are provided by the principal and only the manufacturing part is done by the other party. It was contended that the assessee manufactured the products at its own though ....
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....proposed the above amount of transfer pricing adjustment. First of all, let us examine if the exercise undertaken by the TPO is in accordance with law? 11. The TPO in the Table-3 above has started with the Product sold as 'Allopurinol' with potency of 300, which the assessee sold to Merckle GmbH with per unit price at Re.0.85. The TPO took Substituted drug of Alrik from CIMS classification with market price at Rs. 3.94 per unit. Such price was adjusted to Rs. 2.38 per unit by reducing 39.6% for bringing the available retail price in CIMS database to ex-factory price, as is the point of sale made by the assessee. It is in this way, that transfer pricing adjustment was proposed at Rs. 2,71,20,813/- for this product. Going in the same manner for some other products sold by the assessee to its AE, the TPO computed total transfer pricing adjustment from this international transaction at Rs. 55.60 crore. 12. It can be seen that for the purpose of comparison of 'Allopurinol' sold by the assessee, the TPO has taken 'Alrik' as a substituted drug with similar potency, whose retail price as per the database charged by Cipla is Rs. 3.94 per unit. The ld. AR argued that the CIMS database ....
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.... is no match to the other. 14. Coming back to the Table-3 of the TPO, we find that the first column in horizontal way contains the name of the respective AE to whom the assessee sold the products. Vertically there are eight broad columns below it. Though the TPO has computed transfer pricing adjustment in respect of all the eight vertical columns with further subcolumns, but only four columns contain the name of the AE, viz., Merckle GmbH; ratiopharm Inc.; Teva Operations, Poland; and Teva Pharmaceuticals Works Pvt. Ltd. Company. There is no mention of the name of the AE against the remaining four columns. Thus it is not discernible as to which are the other international transactions in these four columns, which have been benchmarked. 15. Further, the second horizontal column is 'Products sold to AE'. Against the name of Merckle GmbH, there are six columns, but name of only two products have been mentioned, that is, Alloupurinol and Sildenafil. There is no mention of the product in remaining four columns, though transfer pricing adjustment has been worked for all the six columns. Thus, there is complete dark about the name of the product sold by the assessee to its AE. With ....
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....acid and ephedrine and its salts, fall under the current DPCO control." It has further been enumerated that: "the prices of non-scheduled drugs are fixed by the manufacturer subject to a maximum increase of 10% on the prevailing price of a 12- month period." On going through the contents of para 8, it clearly emerges that price controls are exercised on certain drugs and not all the drugs. Further, the price control mechanism under this Order applies only within the framework of Essential Commodities Act, which regulates the prices charged from customers in India. In contrast, the assessee has only exported its complete range of products to the AEs and there is no domestic sale under this international transaction. Since the export prices are not regulated by the DPCO, it can have no bearing on the arm's length price of exports. In view of this position, it becomes apparent that the comparable uncontrolled price computed by the TPO by reducing margin of 39.6% from the retail price charged by Indian manufacturers, cannot be justified. 18. At this stage, it would be apt to note the mandate of Rule 10B (1)(a), which contains the modus operandi for determining ALP under the CUP meth....
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....The ld. AR contended that the assessee, as a 'Contract manufacturer', is compensated by its AEs with cost plus arm's length profit mark-up. As against the goods sold to several AEs, the ld. AR could produce Agreements with only two AEs. When we consider Annexure-19 at page 216 of the paper book, being the details of international transactions, the explanation so given does not prima facie appear to be correct. This page, inter alia, contains a list of Drugs sold/contract manufactured by the assessee to its AEs. Normally, per unit cost of production, which contains the effect of the fixed, semi-fixed and variable costs, remains the same. If arm's length mark-up is earned on such costs as is claimed in this case, then it will be some reasonable percentage on such costs. Once costs incurred are same for the similar goods produced and sold to all the AEs and mark-up has also been settled as arm's length, then by and large the sale price should remain consistent or in close range to each other for different AEs. Turning to the Table on page 216 of the paper book, we find that there is one product, Donepezil with potency of 10 mg., sold by the assessee to its different AEs. Per unit pric....
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....tract manufacturer, none of these four companies chosen by it can be categorized as comparable. The further argument that comparability can be compromised under the TNMM, in our considered opinion, does not hold water, in view of the direct judgment of the Hon'ble jurisdictional High Court in Rampgreen Solutions Pvt. Ltd vs. CIT (2015) 377 ITR 533 (Del), in which it has been held that selection of comparables does not differ with the method adopted and comparables have to be selected on the basis of similarity, even under the TNMM. By finding all the four companies as incomparable, there does not remain even a single comparable case, whose operating profit margin could be considered for benchmarking. Ergo, it is vivid from the above discussion that the assessee's determination of ALP of the international transaction of 'Contract manufacturing' is crept with several flaws, which renders it unacceptable. 24. We are back to square one. The position is that neither the TPO's determination of ALP under the CUP method nor the assessee's determination of ALP under the TNMM, can be accepted for the reasons discussed above. Thus, we are left with no alternative but to set aside the impug....
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....manufacturers with the assessee. We, therefore, hold that in the fresh exercise to be undertaken by the AO/TPO, he should firstly consider if the CUP method can be applied w.r.t. the contract manufacturing done by the third parties in India for the assessee's AE. 27. If either the relevant CUP data of such contract manufacturers is not available or their transactions turn out to be incomparable, then, the AO/TPO should apply the TNMM for determining the ALP of this international transaction. We have found above that all the four companies chosen by the assessee do not qualify to be considered as comparable. The TPO, in a situation warranting the application of the TNMM, should select fresh companies, engaged in contract manufacturing, which are really comparable and are not full-fledged manufacturers. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh determination. III. REIMBURSEMNT FOR REGISTRATION OF PRODUCTS 28. The next international transaction under dispute is 'Reimbursement for the registration of product'. The TPO observed on page 12 of his order that the products which are manufactured as per AEs specifications are....
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....annot be properly ascertained as to whether the amount of Rs. 34.10 lac is a cost incurred by the assessee without rendering any services to its AE or its involvement was there in incurring such expenses. If the assessee's involvement was there apart from mere incurring, and there is no compensation for it, then, naturally, some mark-up is required and vice versa. In the absence of this vital information, we set aside the impugned order on this score and remit the matter to the file of AO/TPO for re-doing it afresh. 32. To sum up, we set aside the impugned order on the issue of addition towards transfer pricing adjustment on three international transactions of 'Contract Manufacturing support services and Business development and Procurement support services'; 'Contract manufacturing services'; and 'Reimbursement Receivable for Wound care services' and remit the matter to the file of AO/TPO for fresh determination of their ALP in consonance with our above directions. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. 33. In the result, the appeal is partly allowed. The order pronounced in the open court on 06.03.....