TaxTMI 
TaxTMI 
2024 (2) TMI 864
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.... following international transactions: Sl. No. Description of international transaction Adjustment made by TPO (Amount in Rs. ) 1. Import of Active Pharmaceutical Ingredients (APIs) 4,81,96,325 2 Import of Finished Drug Formulations (FDF) 15,75,53,000 Total 20,57,49,325 The assessee filed objections before the Dispute Resolution Panel(DRP) assailing the adjustments but the same were rejected. Hence, the present appeal by the assessee. 3. The assessee in appeal has raised following two primary grounds assailing adjustments made in the impugned order. (i) Re-computation of Arm's Length Price (ALP) of the international transactions in relation to import of Active Pharmaceutical Ingredients (APIs) - Adjustment of Rs. 4,81,96,325/-. (ii) Re-computation of ALP in relation to import of formulations - Adjustment Rs. 15,75,53,000/-. 4. Shri P.J. Pardiwala appearing on behalf of the assessee submitted that the assessee is engaged in the business of manufacturing and distribution of pharmaceutical products in India. The assessee does not have its own manufacturing facility, thus, the assessee engages third party for manufacturing of pharmaceutical products. The busin....
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....ed as VAD and compared to other distributors while applying TNMM. 5.1 Without prejudice, even if, the assessee is treated as manufacturer still TNMM is the most appropriate method for determination of the ALP. The ld. Counsel for the assessee submitted that in the process of tolling, the APIs risk is that of the AE and the assessee had minimal risk. In the process of manufacturing/conversion of APIs into formulation the quality control is maintained by the AE. 6. Assailing the findings of the TPO, the ld. Counsel for the assessee submitted that the TPO rejected TNMM as the most appropriate method for determination of ALP adopted by the assessee and instead, applied CUP as the most appropriate method. For applying CUP the TPO collected data from the Customs Data Base(TIPS) in respect of APIs: (i) Dexchlorpheniramine Maleate (ii) Mometasone The TPO in exercise of his powers u/s. 133(6) of the Act selected Cipla Ltd. as comparable for Netilmicin. The TPO compared the rate in TIPS data based in respect of other two APIs which certain parties were also importing allegedly from outside India with the rates at which the assessee was purchasing the APIs from its AEs. The TPO also di....
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....of the products to determine ALP. In support of his submissions he placed reliance on the decision in the case of Merck Ltd. vs. DCIT, 148 ITD 513(Mum). 7. The ld.Counsel for the assessee submits that the observation of the TPO that the product purchased by third party as well as the assessee fulfils the quality standard provided by Indian Food and Drug Administration (FDA), therefore, the products are comparable is erroneous and incorrect. The APIs purchased by the assessee from AE not only meets the Indian FDA requirements but also qualifies stringent requirement of European FDA. Whereas, in respect of third party no data is available to show that the purchased products fulfils European FDA requirements. The ld. Counsel for the assessee submits that even though the higher and stringent requirement may not be necessary for selling the drugs in India, the products procured by the assessee from AE are much superior in quality, hence, cannot be compared with the APIs that fail to qualify stringent tests by European FDA. There is no material available on record as to whether the drugs purchased by the third party fulfils Indian FDA requirements or the purchaser after purchasing the d....
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....ntered. Further excise duty paid during manufacturing of the FDF indicates that the assessee is not VAD. The Ld. Departmental Representative pointed that the intent of the assessee to re- characterize its role as VAD is to wriggle out of transfer pricing adjustment. It is an after though. If , the assessee is held to be VAD the price of the APIs would then be determined by using Market Back approach. The assessee by claiming itself to be distributor wants that it resells the products purchased from the AEs, meaning thereby that the AE is the manufacturer and the assessee is simply a distributor of the FDFs. Whereas, the assessee in the present case is not merely a distributor but is also engaged in manufacturing activities of conversion of APIs into FDF. 10. The Ld. Departmental Representative further submits that adjustment while applying CUP is an accepted norm. To support this argument he placed reliance on the decision in the case of Serdia Pharmaceuticals (India) Ltd. vs. CIT, 147 ITD 156(Mum) and Merck Ltd. vs. DCIT, 148 ITD 513. As regards argument of the ld.Counsel for the assessee in respect of generic vs. patent APIs, the Ld. Departmental Representative submits that qual....
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....decision in the case of Serdia Pharmaceuticals vs. ACIT, 147 ITD 156 to contend that the Tribunal applied CUP over TNMM to benchmark international transactions relating to import of APIs. 12. The Ld. Departmental Representative pointed that the high price charged by the AE on APIs is on account of AMP expenses and not the quality. He 2further submits that cheaper in rate does not mean lower in quality. He reiterated the findings of TPO to support CUP as the most appropriate method. 13. Rebutting the submissions made by Ld. Departmental Representative, the ld.Counsel for the assessee submits that TPO while applying CUP as the most appropriate method to benchmark the transaction has failed to consider the fact that APIs purchased by the assessee not only qualify parameters fixed by the Indian Drug Authority but has qualified higher parameters fixed by the European countries, therefore, the APIs purchased by the assessee cannot be treated as comparable to those purchased by the independent third party. The ld.Counsel for the assessee reiterated that merely because both the products fulfill minimum standards, the products cannot be comparable when one product is of higher standard. W....
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....from procurement of APIs till manufacturing of FDF. The assessee uses manufacturing facility i.e. machines and manpower of the Toll manufacturer (i.e. Gland Pharma) to process APIs into FDF as the assessee does not have its own manufacturing unit. As is emanating from the impugned orders, the assessee has entered into an agreement with Gland Pharma for Toll manufacturing, APIs procurement by the assessee from AEs as well as non-AEs. The assessee in proceedings before the TPO has only sought to re-characterize its status as 'Licensed Manufacturer' to VAD qua the APIs procured from AEs. The assessee is not seeking re-characterization in respect of second segment i.e. procurement of APIs from non-AEs and manufacturing of FDFs through Toll manufacturer, though the manner of operation in both the segments is same, except for source of procurement of APIs. Taking into consideration the facts, we are unable to accept the plea of assessee to re-characterize assessee 'Value Added Distributor'. We find no infirmity in the findings of TPO/DRP on the issue, hence, the first plea of assessee is rejected. 15. The next objection of the assessee is that since TPO has selected comparables from TIP....
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....or further information from this database supplier and examine authenticity of the data so furnished. Yet, instead of doing so, he summarily rejected the data as unreliable on a technical ground which, as we have seen above, is not tenable in law." Hence, the aforesaid decision in fact supports the case of Revenue and is contrary to the arguments raised by the assessee. The assessee has also placed reliance on the decision in the case of Billion Wealth Minerals Pvt. Ltd.(supra). We find that the Tribunal in the said case has distinguished the decision in Tilda Raceland Pvt. Ltd.(supra), as the facts in the case of Billion Wealth Minerals Pvt. Ltd.(supra) were at peculiar and at variance. Hence, the findings of the Tribunal in the said case were specific to the facts of that particular case. The Tribunal again in the case of Dow Chemical International (P) Ltd. vs. ITO, 141 taxmann.com 68 (Mumbai) held that TIPS data can be used to determine ALP under CUP method. Thus, we are of the considered view that the objection raised by the assessee with regard to use of TIPS data base for selection of comparables is unfounded. However, while using TIPS data base reasonable adjustment qua qu....
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....on for purchase of Netilmicine by the assessee vis-à-vis the APIs procured by Cipla Ltd and Mometasone Furoate by the appellant vis-à-vis Ranbaxy Laboratories Ltd. We find that the same very APIs are subject matter of TP adjustment in the impugned assessment year. The assessee had tried to distinguish the aforesaid decision on the ground that in Assessment Year 2003-04 assessee had benchmarked the transaction by applying cost plus method. The Tribunal was considering CUP vis-à-vis cost plus method as the most appropriate method. TNMM was not under consideration before the Tribunal. In the instant Assessment Year the assessee has applied TNMM as the most appropriate method. The provisions of section 92C of the Act requires to compute ALP by following the most appropriate method. Once the Tribunal holds that CUP is the most appropriate method to benchmark a particular transaction without there being any change in the facts and nature of transaction, now it cannot be argued that CUP is not the most appropriate method. The assessee has not brought before us any material to show difference in the nature of transaction or variation in the terms and conditions for imp....
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....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 method in the instant case with regard to Netilmicin by the appellant vis-à-vis Cipla Ltd and Mometasone Furoate by the appellant vis-à-vis Ranbaxy Laboratories Ltd. However, as observed above by us adjustments under the CUP method need to be reexamined by the AO. Therefore, we restore the matter to the file of the AO to re-examine that under the CUP method adjust....
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.... and contract manufacturing segment as single activity it would not mean the error cannot be rectified, subsequently. Explaining the activities in the two segments he submitted that, in distribution segment the AE purchases finished formulations from its AE, which are manufactured by the AE under its own brand. The said formulations are purchased by the assessee for sale in India. Whereas, in Contract manufacturing segment, the assessee entered into a Contract Manufacturing Agreement with Zyg Pharma and Encore Healthcare, collectively known as 3PManufactuers for which the assessee has the license to manufacture the formulations using SP trademarks. Under the arrangement APIs are purchased by 3P manufacturers from third party (non- AE) suppliers and converts into FDFs based on the technology specifications and trademark provided by the assessee. The finished formulations are then sold by the 3P manufacturers to the assessee. The assessee is acting as manufacturer and not distributor. The payment is made to 3P manufacturer which is aggregate of cost of raw material, packing material, cost of conversion from API to FDF plus 10% margin on the total cost. The ld. Counsel for the assess....
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.... The learned departmental representative further submitted that the TPO after examining the new agreements between the assessee and Zyg/Encore came to the conclusion that except for change in the nomenclature of the parties from 'distributor' to 'buyer' and from 'manufacturer' to 'seller' no substantial change in the terms and conditions of the old agreements and the new agreements is visible. One change in the agreements is, that the price which was to be agreed between the parties has been now ex-factory price plus 110%, which is the premium to be paid as per DPCO norms. There is hardly any substantive difference in FAR analysis because of the new agreement, except that in earlier agreement there was clear mention that the assessee is a 'distributor' which has now been changed to 'Purchaser'. The learned departmental representative vehemently supporting the impugned order prayed for dismissing ground number 2 of appeal. 22. We have heard the submissions made by rival sides in respect of ground number 2. It is an undisputed fact that. The Assessee in Transfer Pricing Study report has clubbed both the segments i.e. distribution segment and contract manufacturing segment. The ass....