TaxTMI 
TaxTMI 
2026 (9) TMI 230
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....of INR 3,86,56,51,850 disclosed in the return of income filed. TRANSFER PRICING ISSUES 2 Erred in proposing an adjustment of INR 3,57,35,40,737 to the total income of the Appellant under Section 92CA(3) of the Act by treating the transaction of sale of identified business to a third-party ie Dr Reckty's Laboratories Limited ('DRL') as a deemed international transaction covered under section 92B(2) of the Act. Without prejudice to the above: 3 Erred in disregarding the valuation reports prepared for benchmarking the arm's length price of the identified business of the Appellant including the intellectual property without understanding the assumptions used and basis therein. 4 Erred in upholding the arbitrary approach adopted by the learned TPO in determining the arm's length price of the transaction of sale of identified business without applying any of the prescribed five methods. 5 Erred in concluding that the marketing intangibles are owned by the Appellant by alleging that significant advertisement, marketing and promotion ('AMP') expenses have been incurred by the Appellant by computing the allege....
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....vidend paid/ distributed to non-resident shareholder namely UCB S.A, Belgium (a tax resident of Belgium), is liable to be taxed under Article 10 of the India -Belgium DTAA (i.e. at the rate of 15%) and not as per section 115-O of the Act at 20.36%. Accordingly, the Hon'ble Tribunal may kindly direct the AO to apply treaty rate instead of DDT rate of 20.36%. Deduction of education cess 14 Learned DRP/ AO failed to adjudicate the additional ground filed during the proceeding before the DRP in respect of deduction of education cess. 15 The appellant prays that ld. Assessing Officer be directed to allow deduction under section 37(1) of the Act in respect of education cess paid during the year on income-tax. Charge of interest under section 234A of the Act 16. Erred in charging interest under section 234A of the Act. Charge of interest under section 234B of the Act 17. Erred in charging interest of INR 1,02,61,28,519 under section 234B of the Act Charge of interest under section 234C of the Act 18. Erred in charging interest of INR 36,86,283 under section 234C of the Act as against nil on the returned income. Penalty pro....
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.... 3.2. Financial summary of the entire transaction which took place and is the subject matter of present appeal is tabulated below: Party Nature of Transaction Consideration (Rs. Crore) % Share UCB India Private Limited Transfer of identified business (slump sale) vide BTA dated 01.04.2015 440.80* 55.10% UCB Global (UCB Farchim SA + UCB Biopharma SPRL) Transfer of intellectual property rights vide TAA dated 16.06.2015 359.20 44.90% Total Consideration (as negotiated with DRL) 800.00 100.00% *Actual amount reported in Form 3CEB: Rs. 434.65 crore. The difference represents adjustments in the final settlement. 3.3. Even though the transaction of UCB India was with an unrelated third party DRL, the assessee, out of abundant precaution, reported the transaction of sale of business to DRL as a "Deemed International Transaction" in Form 3CEB. Independent valuation reports were obtained from an independent valuer for determination of the value of the identified business of UCB India and the IP owned by UCB Global. The summary of the independent valuation versus the actual consideration received is as under: Particulars ....
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..... Ld. TPO accordingly proposed a TP adjustment of Rs. 357,35,40,737/- (Rs. 357.35 crore) over and above the consideration of Rs. 434.64 crore actually received by UCB India, thereby rewriting the terms of the Business Transfer Agreement entered into between UCB India and DRL which was an agreement between two unrelated parties. 4.2. The draft assessment order dated 21.12.2019 was passed by the learned AO u/s 144C(1) r.w.s 143(3) of the Act, proposing to tax the TP adjustment of Rs. 357.35 crore as business income and not as capital gains. Ld. AO also made a further addition on account of disallowance of net working capital while computing the net worth of the transferred undertaking of Rs. 23,52,21,796/-. Assessee filed objections before the ld. Dispute Resolution Panel-2 (the "DRP"), Mumbai. Ld. DRP, vide its directions dated 19.03.2021, disposed of the objections as under: Issue DRP Direction Transfer pricing adjustment on account of sale of identified business Upheld Rs. 357,35,40,737/- Disallowance of net working capital while computing net worth Directed to allow deduction of Rs. 23,52,21,796/- subject to verification Characterisation of TP adjustment (....
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....ted viz. to determine the ALP of an international transaction in terms of Chapter X of the Act. The ad hoc determination of ALP dehors section 92C of the Act cannot be sustained. The relevant extract is reproduced below for ready reference: "7. We note that the Tribunal has recorded the fact that the respondent assessee has launched new products which involved huge advertisement expenditure. The sharing of such expenditure by the respondent assessee is a strategy to develop its business. This results in improving the brand image of the products, resulting in higher profit to the respondent assessee due to higher sales. Further, it must be emphasized that the TPO's jurisdiction was to only determine the ALP of an International Transaction. In the above view, the TPO has to examine whether or not the method adopted to determine the ALP is the most appropriate and also whether the comparables selected are appropriate or not... In fact, as found both by the CIT(A) as well as the Tribunal that neither the method selected as the most appropriate method to determine the ALP is challenged nor the comparables taken by the respondent assessee is challenged by the TPO. Therefore,....
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....es in India. However, AMP expenses are incurred for affecting sales and promoting products in the market, they are not incurred for building the brand. The brand is built and owned by UCB Global through its decades of research, development, regulatory filings and clinical trials. Further, it is a material fact that no TP adjustment was made in respect of AMP expenses in any of the preceding assessment years. The approach of the Revenue of attributing value based on AMP expenses alone is misplaced, particularly in the absence of any AMP adjustment in earlier years, and cannot be used to retrospectively recharacterize value attribution. Analogous examples from other industries confirm that branded products consistently command higher value than generic equivalents, reinforcing the importance of IP and brand equity developed by the IP owner. 5.3. Products do not lose significance on expiry of patent: Ld. TPO attributed virtually the entire IP value to 1% and implicitly concluded that IP "pales into insignificance" after 3-5 years. This approach ignores the long-term nature of pharmaceutical R&D and IP protection, which typically spans 10-20 years. Even after patent expiry, innovato....
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....their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. 19. There is no reason why the OECD guidelines should not be taken as a valid input in the instant case..." 5.5. Contribution analysis, a scientific basis adopted by the assessee: Assessee undertook a detailed contribution analysis to demonstrate the respective contributions of UCB India and UCB Global to the value of the identified business. The analysis was submitted before the ld. DRP vide submissions dated 04.02.2021. The product portfolio sold by UCB India to DRL was categorised into four baskets based on the nature of products and the relative contributions of UCB India and UCB Global which is tabulated below: Part Particulars Description % of Portfolio I Original innovator products Owned and developed by UCB Global; consists of original products 69% II Product extensions/variations Developed by UCB India, leveraged on UCB Global trademark/brands; owned by UCB Global 18% III Generic products Owned by UCB India 6% IV Other arrangements Arrangement with Indian third parties 7% Tot....
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....eration as made by the ld. TPO, contending that: (a) ld. TPO rightly relied on AMP expenses to establish economic ownership of marketing intangibles by UCB India; (b) absence of royalty payment by UCB India to UCB Global for use of IPs demonstrates that the IPs were of negligible value in the Indian market; and (c) the valuation approach adopted by the assessee does not correctly reflect the economic reality of the transaction. Ld. DR submitted that the TP adjustment confirmed by the ld. DRP be upheld. 7. We have heard both the parties and perused the material on record. We have also given our thoughtful consideration to the submissions made as well as the judicial precedents referred before us. We have also gone through the paper books placed on record by the assessee. 7.1. Starting point for us is the analysis of the nature of impugned transaction. UCB India transferred its identified pharmaceutical business to DRL, an unrelated third party, on an arm's length basis through a BTA, dated 01.04.2015. The BTA was negotiated independently between two unrelated parties. The consideration of Rs. 434.65 crore (Rs. 440.80 crore as per the final settle....
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....ying any of the prescribed methods, is contrary to the mandatory requirements of section 92C and cannot be sustained. 7.4. Ld. TPO's reliance on AMP expenses to establish economic ownership of marketing intangibles by UCB India is fundamentally flawed. AMP expenses are incurred for promoting and selling products in the market, for affecting sales and not for building the brand or creating intellectual property. The brand, the trademark, the technical know-how and the manufacturing process have been developed, registered and protected by UCB Global over decades of research, regulatory filings and clinical trials. The legal ownership of IPs vested squarely with UCB Global. The economic ownership of an intangible cannot be presumed merely from the incurrence of marketing expenses by a distributor. Furthermore, there has been no TP adjustment to AMP expenses in any of the preceding years. The ld. TPO cannot now, for the first time, use AMP expenses retrospectively to recharacterize the value attribution between UCB India and UCB Global. 7.5. Ld. TPO's implicit proposition that IPs lose significance with the passage of time and upon patent expiry does not withstand scrutin....
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....ach adopted by the ld. TPO. 7.8. Further, since the ld. TPO has failed to apply any of the prescribed methods under section 92C and has made the TP adjustment on an entirely ad hoc basis, we are in agreement with the contention of the ld. Counsel for the assessee that the matter should not be remanded to the ld. TPO to provide a second opportunity. For this, we find force from the principle enunciated by the Hon'ble jurisdictional High Court of Bombay in Kodak India Pvt. Ltd. and Capgemini India (P.) Ltd. (supra). Ld. DR's request for a remand to the learned TPO is therefore cannot be accepted. 7.9. In view of the foregoing discussion on each of the contentions put forth by the ld. Counsel for the assessee, we hold that the TP adjustment of Rs. 357,35,40,737/- (Rs. 357.35 crores) proposed by the learned TPO u/s 92CA(3) of the Act and confirmed by the ld. DRP is not sustainable. The TP adjustment so made is accordingly deleted. Ground nos. 3, 4, 5, 6, 7 and 8 raised by the assessee are allowed. 8. In view of our finding on Ground nos. 3 to 8 above whereby the TP adjustment of Rs. 357.35 crore has been deleted in its entirety, ground no. 2, which challenges the chara....
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....ing Company Limited. Subsequent to this reference to the larger bench of the Hon'ble High Court, Hon'ble Supreme Court decided to hear the SLP filed by the Revenue in the case of Colorcon Asia (supra). While admitting the SLP of the Revenue, Hon'ble Supreme Court observed that it is an interesting case and thus, posted the matter for hearing on 13.05.2026. In view of the stated subsequent development after the conclusion of hearing before us, we find it appropriate to remit this particular issue raised by the assessee by way of additional grounds, to the file of ld. Assessing Officer so as to give effect to the issue based on the outcome of the above stated matter pending before the Hon'ble Supreme Court. Needless to say, assessee be given reasonable opportunity of being heard in this regard. Accordingly, additional grounds raised by the assessee are allowed for statistical purposes." 9.2. We are confronted with the same factual and legal position in the present case. The controversy regarding the applicability of DTAA rate to DDT levied under section 115-O is pending before the Hon'ble Supreme Court in the matter arising from the Colorcon Asia (supra) case. ....