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2019 (11) TMI 1547
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....ction of import of APIs from the Associated Enterprises ('AEs') at Rs. 1,06,27,853/- instead of Rs. 3,35,37,633/- as determined by the appellant b) He further erred in: - i. disregarding the transfer pricing analysis carried out by the appellant; ii. confirming AO/ TPO's order which has not taken cognizance of the transfer pricing regulations as well as the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations issued by Organization for Economic Cooperation and Development ('OECD TP Guidelines'); iii. disregarding the economic characterization of the appellant without giving due regard to the functional analysis carried out by the appellant. iv. confirming the rejection of the Cost Plus Method ('CPM') as the most appropriate method adopted by the appellant and selection of Comparable Uncontrolled Method ('CUP') as the most appropriate method adopted by the AO/TPO, which requires stringent comparability; v. Confirming the AO/ TPO's order, which was framed based on the data obtained under section 133(6) of the Act and thereby comparing the purchase prices of the origi....
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....transaction Total value of transactions (Rs.) Method selected Purchase of raw materials 3,35,37,633 CPM Purchase of finished goods 21,21,01,670 RPM Reimbursement (Receipts) 29,46,483 CUP A reference was made by the AO u/s 92CA(1) in the case of the appellant to the Transfer Pricing Officer (TPO) for computation of arm's length price (ALP) in relation to the international transaction detailed in the audit report in Form No. 3CEB. It is found that the TPO has made an adjustment of Rs. 2,29,09,780/- only in respect of purchase of raw materials. He held the purchase of finished goods and reimbursement to be at ALP. 3.1 It is found by the TPO that the appellant manufactures and sells finished formulations in India. It carries out secondary manufacturing of finished formulations using basic raw materials (called actives) or molecules discovered and developed by SP as well as locally purchased actives. During FY 2002-03, the appellant entered into international transaction i.e. purchase of raw material with its AEs for manufacturing finished formulations to be sold in India. The appellant has considered cost-plus-method (CPM) as the most approp....
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....The products made from these raw materials are also different. * The market share of each product will be different. * Each product will be catering to some specific disease and hence, may command different margins. * It is well known fact that each product made by any company will give different margins. The companies make healthy margin in some products in which it is well established whereas it may make a thin margin or may sell at loss also, sometimes, to get a foothold in the market so that it can reap the benefits on a later stage. However, the TPO was not convinced with the above explanation of the appellant for the reason that in the instant case the raw material imported by the appellant has been imported by other comparable companies at significantly lower price and therefore a direct comparison of the rates is available and in that context CUP is the most appropriate method. In respect of Netilmicin Sulphate the appellant has made payment to its AEs in excess of USD 10,440 per Kg. Similarly in respect of Mometasone Furorate, it has made payment to its AEs in excess of USD 34,000 per Kg. Therefore, the TPO made a total adjustment of Rs. 2,29,....
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....s imported by the appellant were not unique items and that such business models being adopted by pharmaceutical companies leave ample scope for them to manipulate API prices so as to regulate profitability of their controlled entities in the end use jurisdiction, (v) the facts that another arm of the government (Customs) considered the price paid by the appellant to be ALP does not mean that the appellant is relived of the burden of establishing that it is an ALP for transfer pricing purposes, (vi) in respect of the issues regarding reliable accurate adjustments to be made as per Rule 10B(3) of the Rules, the appellant has not given as to what could be the reliable adjustment in this case and further how such an adjustment, if at all existing, are justifiable in the facts of the case. Accordingly, the Ld. CIT(A) confirmed the adjustment of Rs. 2,29,09,780/- made by the AO. 5. Before us, the Ld. counsels for the appellant submit that CUP method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transactions in comparable circumstances. The CUP m....
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....f production, which is a good measure of the compensation for the performance of the functions and risks assumed by the appellant, CP method has been selected as a preferred method for determining the arm's length results of the manufacturing segment of the appellant, (iii) based on the analysis of the appellant's overall manufacturing operations, it is understood that the appellant is operating under economic and commercial factors that may be unique to the company. Thus it is stated by the ld. counsels that the return on direct and indirect cost of production for the AE segment is 56.45% which is higher than the arm's length return of 27.54% earned in the non-AE segment and at the operating profit level also, the AE segment has performed better than the non-AE segment (operating margin of 1.44% in AE segment versus (-) 11.42% in non-AE segment). The Ld. counsels referred to page, 37,40, 50, 52, 57, 58, 59, 60, 61, 86 of the Paper Book (P/B) filed before the Tribunal as well as before the lower authorities to explain their above contentions. 5.1 Also the Ld. counsels relied on the decision in UCB India (P.) Ltd. v. ACIT (2009) 121 ITD 131 (Mumbai-Trib); DCIT v....
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....ermatological, oral steroid and anti-histamine medicines having distinct process, patent, formulations and regulatory requirements. Relying on the decision in the case of Knorr Bremse India (P.) Ltd. (2015) 63 taxmann.com 186 (P&H), the Ld. DRs submit that several transactions can form a single composite transaction only if such transactions are inter-linked and inter-oven. Thus it is explained by them that in the instant case CPM is impossible to apply as import of Mometosone, Netlimycin and Dexchlorpheniramine Maleate are distinct international transaction being distinct APIs, governed by distinct product specifications and pricing regulations of exporting as well as importing countries and entirely distinct process through which the end products are manufactured. Hence, their manufacturing into final products cannot be clubbed together to compare gross profits with gross profit of manufacturing of products related to distinct generic or APIs procured from non-AEs. It is further argued by the Ld. DRs that there is no basis of allocation of operating expenses between AE and non-AE manufacturing segment as Form 3CEB neither recognizes any segmental result nor makes such ar....
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....70 taxmann.com 200 (Delhi- Trib); Cargill Foods India Ltd. (2015) 57 taxmann.com 330 (Pune-Trib); Tilda Riceland Pvt. Ltd. (ITA no. 6279/Del/2012) dated 21.02.2014; Clear Plus India (P.) Ltd (2011) 10 taxmann.com 249 (Delhi); Serdia Pharmaceuticals (India) (P.) Ltd. (2011) 9 taxmann.com 13 (Mumbai ITAT); Merck Ltd. (2016) 69 taxmann.com 45 (Mumbai); ITAT order in the assessee's case for A.Y. 2006-07 and A.Y. 2007-08. 7. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. Herein we are concerned with CPM vrs CUP. As mentioned earlier, the Ld. CIT(A), during the course of appellate proceedings, had asked the AO to make further inquiry and submit a remand report u/s 250(4) of the Act. After receipt of the said remand report, he provided a copy of it to the appellant for its comment/reply. Then after receipt of the said reply from the appellant he has passed the order dated 10.06.2011. Therefore, the ground regarding not being given reasonable opportunity of being heard does not arise. 7.1 At this moment, we discuss the case laws relied on by the Ld. counsels. In UCB India (P.) Ltd (supra....
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....idence, which it could seek to furnish, for the first time, in support of its report and the Assessing Office shall take the same on record and examine the same. b. The assessee would be free to adopt any method as prescribed by law, if it considered that method as the most appropriate method. TNMM might also be considered, if the transaction or a class of transactions were properly evaluated in accordance with law. In case external comparables were not available due to lack of data in public domain, the Assessing Officer might accept internal comparables including segmental data or internal TNMM. In Fresenius Kabi Oncology Ltd. (supra), the assessee had entered into international transactions with two AEs namely Dabur Oncology PLC and Dabur Neparl Pvt. Ltd. The assessee had adopted TNMM with operating profit earned on sales as the PLI. However, the TPO was not convinced with the above method of the assessee and in turn adopted the CUP method. In appeal, the Ld. CIT(A) deleted the transfer pricing adjustment made by the TPO on this account. The Tribunal, observing that CUP method requires strict compliance and the same was not done by the TPO, affirmed the order of the ....
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.... the most appropriate method for determining ALP of its international transactions with PLI of OP/OC. The TPO applied CUP for 30% of its transactions and TNMM for the rest of the transactions, which eventually led to application of two methods for the same transaction. The Tribunal upheld the stand of the assessee that TNMM is the most appropriate method to arrive at the ALP. In Dishman Pharmaceuticals & Chemicals Ltd. (supra), the assessee adopted TNMM as the most appropriate method. The TPO did not accept TNMM adopted by the assessee for benchmarking of its transactions with its AE. Instead, the TPO changed the method from TNMM to CUP and thereafter, recommended adjustment. The Tribunal, observing that there is no disparity on facts from earlier years affirmed the order of the CIT(A) by holding that the benchmarking on sale price of various products to AEs is to be tested following TNMM. In Serdia Pharmaceuticals (India) P. Ltd. (supra), the Tribunal held that the choice of method of determination of ALP is not an unfettered choice on the part of the taxpayer and this choice has to be exercised on the touchstone of principles governing selection of most appropri....
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....ng bulk drugs and fine chemicals. During the relevant year, the assessee sold some of those drugs to its AEs abroad. In order to benchmark said transactions, assessee adopted TNMM as the most appropriate method. However, TPO took a view that since assessee had sold identical products to non-AEs i.e. independent parties, prices at which such sales to independent parties had taken place provided valid inputs for application of CUP method ; thus he applied CUP method and made certain addition to the assessee's ALP. The Tribunal held that "while determining ALP, nature of trade relationship in sense of its impact on functions, asset and risk assumed by AEs have crucial bearing on prices and unless these vital factors are taken into account, application of CUP has no usefulness and since TPO while applying CUP method did not take into consideration aforesaid aspects of case, impugned order passed by him deserved to be set aside." In Gulbrandsen Chemicals (P.) Ltd. (supra), the assessee was engaged in the manufacturing of chemicals for its divergent industrial customers and it sold those products to its AEs located in USA, UK. In transfer pricing proceedings, the TPO noticed that the ....
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.... the Tribunal held that actuals have to be taken to arrive at correct cost since 'cost plus' method does not contemplate estimation of cost. In Noble Resources & Trading India (P.) Ltd. (supra), the Tribunal held that in case of assessee-company engaged in international transactions of import and export of various agro commodities with AE, CUP was to be applied as the most appropriate method for determining ALP. In Cargill Foods India Ltd. (supra), the Tribunal held that (i) in a case where comparable uncontrolled transaction is possible to identify and locate, CUP method would be most reliable measure of ALP in relation to tested international transaction, (ii) where product i.e. Oil, being transacted is commodity recognized for trading in commodity exchange, price quotation of such exchanges would be relevant material for purposes of carrying out comparability analysis in course of a application of CUP method. In Tilda Riceland Pvt. Ltd. (supra), the assessee is an exporter of brown basmati rice and milled basmati rice to its AEs. It was the contention of the assessee that CUP, being a direct and traditional method is preferable over an indirect method ....
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....dispute extends to FDF Diamicron and Diamacron MR, which has Gliclazide as API. 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. The TPO, by adopting CUP method recommended TP adjustment of Rs. 1.95 crores which was accepted by the AO. On appeal, the CIT(A) confirmed the order of the AO. The Tribunal held that as long as appropriate comparables can be found, CUP method is the most appropriate method in respect of purchases of generic drug, even when such a generic drug is manufactured by its original patent holder. It further held that since the APIs in instant case, were generic drugs at relevant point of time and not patent protected, TPO was justified in determining ALP of APIs on basis of CUP method and selling price of related APIs in Indian market constituted good comparable by applying the said method. Thus it confirmed the determination of ALP by the TPO as sustained by the CIT(A). In Merck Ltd. (supra), the assessee-company is a subsidiary of Merck KgaA, Germany. During the relevant financial period, the assessee im....
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....he Assessing Officer, in response to these directions, computed a relief of Rs. 35,35,560 since the ALP based on the simple arithmetic mean was Rs. 47,079, as against the ALP based on weighted arithmetic mean which was Rs. 36,831, and this difference of Rs. 10,248 per kg, for 345 kgs. of imports worked out to Rs. 35,35,560. The balance ALP adjustment, i.e. Rs. 1,03,05,503 minus Rs. 35,35,560, of Rs. 67,69,943 was thus confirmed for the assessment year 2010-11. As regards the assessment year 2009-10, the ALP adjustment on the same line and in respect of the same API, of Rs. 69,76,105 was computed on the basis of simple arithmetic mean of Rs. 44,401. The assessee was not satisfied and filed appeal before the Tribunal. The Assessing Officer also filed appeal, so far as the assessment year 2010-11 is concerned, on the short point that the TPO should have computed weighted average rather than simple average. The Assessing Officer also filed appeal on the DRP's directing that the ALP adjustment being restricted to actual consumption of the API from the AE rather than the total imports of the API from the AE. The Tribunal held that (i) where assessee imported API from its AE which was sup....
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.... AntiandrogenOncology 14. Others Plarium Anti-Inflamatory Then the segmental financial information of the appellant for the year ended 31.03.2003 (at page 86 of P/B) as reported by the appellant (amount in Rupees '000) are produced below : Profit & Loss Account Year ended March 31, 2003 Manufacturing Segment AE Non-AE Gross Sales (A) 132,515 105,996 Less : Excise duty on goods sold (B) 18,424 14,686 Net Sales 114,091 91,310 Less : Cost of goods sold (C) 66,543 71,265 Gross Profit (D) 47,812 22,886 Operating Expenses (E) 45,907 34,996 Operating Profit (D-E) 1,905 (12,110) Add : Other Income Less : Interest Less : Exceptional Items Profit Before Tax (PBT) Gross Profit/Direct and indirect costs of production 56.45% 27.54% The application of Cost Plus Method (CPM) provides for (i) ascertaining the direct and indirect c....
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....tic anti-infectives, dermatologicals, oral steroids, antihistamine having distinct process, patent, formulations and regulatory requirements. Thus CPM is not the appropriate method in the instant case. Accordingly, their manufacturing into final product cannot be clubbed together to compare gross profits with gross profits of manufacturing of products related to distinct generic or APIs procured from non-AEs. In the case of Knorr-Bremse India (P.) Ltd. (supra), it is held by the Hon'ble Punjab & Haryana High Court that several transactions between 'two or more' AEs can form a single composite transaction, if such transactions are closely linked. It is not so in the case of segmented financial information (manufacturing segment) of the appellant for the year ended 31.03.2003. Thus the segmented financial information (manufacturing segment) of the appellant for the year ended 31.03.2003 suffers from the above infirmities and therefore does not give a true and fair view. The above ground of appeal can be seen through the lens of deductive inference, in which it is asserted that the conclusion is guaranteed to be true if the premises are true. Here the inference drawn....
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....for manufacture of medicine. The method adopted by the TPO is CUP method. DRP directed to make appropriate adjustment for quality difference between imported goods and comparable goods. On facts, product imported by assessee was superior to locally manufactured API. The TPO had himself allowed a quality adjustment @ 10% in subsequent year. The Tribunal confirmed CUP method and held that it was appropriate to adopt quality adjustment @ 10% in the that assessment year as well. Facts being nearly identical, respectfully following the orders of the Co-ordinate Bench in Serdia Pharmaceuticals (India) (P.) Ltd. (supra) and Merck Ltd. (supra), we hold that CUP is the most appropriate method in the instant case. However, adjustments under CUP method need to be examined by the AO/TPO for the reason that under the CUP method adjustments can be made for differences such as differences in the terms of contract, quantity sold or purchased, nature of market (retail or wholesale), credit period allowed, delivery terms, foreign currency risks etc. which might affect the price in the open market. 7.6 Accordingly, we hold that the TPO/AO has rightly adopted the CUP as the most appropriate m....