TaxTMI 
TaxTMI 
2009 (2) TMI 237
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....iled its return of income for the asst. yr. 2002-03 on 31st Oct., 2002 returning total income of Rs. 12,51,59,397 and for the asst. yr. 2003-04 on 4th Nov., 2003 returning total income of Rs. 13,49,62,484. Along with the return of income, the assessee filed accountant's report in Form 3CEB in accordance with s. 92E of the IT Act, 1961 reporting inter alia particulars of its international transactions with its AEs. The case was selected for scrutiny and notice under s. 143(2) issued. The AO referred the case under s. 92A(1) of the IT Act to the Addl. CIT, Transfer Pricing-3, Mumbai on 18th Nov., 2004 after obtaining approval from the CIT, Mumbai City-VII, Mumbai, for the purpose of determination of ALP with reference to all the transactions reported by the assessee in Form 3CEB filed by it. The TPO, vide her order dt. 31st Jan., 2005 proposed adjustments of Rs. 2,09,75,500 for the asst. yr. 2002-03 and an amount of Rs. 3,00,18,803 as adjustments for the asst. yr. 2003-04. The AO, in addition to making additions on account of adjustments given by the TPO, disallowed sales promotion expenses, employees' contribution to PF in both the assessment years. There were certain other ....
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....ring the bank interest amounting to Rs. 7,96,634 as business income and excluding the same while computing the eligible profits for deduction under s. 80HHC of the Act. Ground 3: The learned CIT(A) has erred in upholding the addition of sales-tax of Rs. 1,86,94,762 and excise duty of Rs. 7,14,45,433 to the total turnover of the appellant for the purpose of calculation of the eligible deduction under s. 80HHC of the Act." 5. We first take up the common ground Nos. 2, 3 and 4 relating to the determination of ALP. 6. Before we consider the arguments of both the parties, for the sake of clarity, the brief facts relating to these international transactions with AE are narrated below: 7. As already stated, UCB India (P) Ltd. is engaged in the business of manufacture and distribution of pharmaceutical products in three main therapeutic segments of, allergy and asthma, central nervous system and internal medicine. The assessee manufactures intermediates, bulk drugs and formulations, both in the tablet and capsule form at its own factory. The liquid and injectible form of the products are manufactured on toll basis by three third parties. The assessee manufactures some of ....
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....possible for anyone to occupy the generic substance and sell it under his generic name or under his own brand name. Production by the copier, whether under the generic name or under his own brand name, will be described as "generic production" or "production of generics". The companies that are engaged in the manufacture and sale of generics, arc able to sell the substance at a comparatively low price, because they do not bear the cost or risk of R&D which is borne by the companies in the business of producing new and innovatory substances. They often do not have to bear the heavy cost involved in getting regulatory approval for the new product. cost in bringing the new product into the market, etc. They need not continuously monitor the effect. of drugs which are in the market. The profile, functions, assets employed, risks, the standards, etc. of the companies which indulge in production of copier, or generics, have to be carefully considered. 10. In the above backdrop, the issue in these grounds is whether the purchases in question of these two APIs, i.e., Piracetam and Mesna from the AE were at ALP or not. The assessee claims to have applied the TNMM to determine the ALP in ....
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..... (c) The process by which the decision to buy or not to buy a particular item at a particular price is taken by the assessee-company; (d) The end products manufactured out of the 'APIs'; (e) To furnish brand names of other brand FDS which are available in the market in competition to "Nutropil" and "Mistabron". (f) To file a copy of the economic analysis forecasts or any other estimates undertaken by the assessee or its AE, based on which the transfer price of the imports effected by the assessee are determined. (g) To prove that comparables cited by the assessee, i.e., 36 identified companies are also licensed manufacturers having similar business as that of the assessee. 13. The TPO further requested the assessee to submit material studied by it in filtering various companies in the same category on account of mismatch and explain the same. 14. In reply, the assessee submitted that- (a) The AE supplies the two APIs to other group entities as well as to third parties in different countries but it expressed its difficulty in furnishing the information on price charged, etc. on the ground that it is not in the poss....
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....- 3. Dabur India Ltd. 20 - 27,075 4. Assessee - 1,700 32,385 17. The TPO later summoned the managing director of the assessee-company and its marketing manager under s. 131 of the Act and examined them on oath after confronting the information obtained from Micro Labs. Torrent Pharmaceuticals and Dabur India Ltd. Later, the TPO furnished copies of the information obtained by her from three third parties on the above issue and the assessee replied to the same. After considering the contentions of the assessee, the TPO rejected them and came to a conclusion that the CUP method is a direct method and it should be examined as to whether the same can be applied in the given case and that TNMM is not a direct method. As per the TPO, only when CUP method fails, the other method could be brought into service. The reasons given for the same is that the profits are affected by so many other factors besides the price and these factors may dilute the impact of the price on profits and hence correct results may not be available. The finding of the TPO at para 14 reads as follows: "14. The various contentions of the assessee are considered as follows: ....
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.... (d) The assessee has accepted in the course of the statement recorded under s. 131 that after an evaluation of the market situation, the import prices were revised downwards. This is evident from the table at para 13(c) which shows that the import price has fallen down from Rs. 1,749 during the relevant year to Rs. 1,080 in one and half years, on the basis of market evaluation. This clearly shows that the prices originally fixed were not realistic at all and did not reflect the fair market price. The so-called reason given by the assessee for the reduction in prices to be due to appreciation of Euros against rupees is totally baseless as is evident from the same Table. From the said Table, it can be seen that the price of Piracetam has almost reduced to half as against a much greater appreciation of Euros against rupees. (e) As regards any differences between the material purchased by the assessee and that purchased by the competitors, it is contended that the material purchased by the competitors may be of same chemical standards but the product does not have the same efficacy as that of the assessee. It is contended that only the originator's molecule guarante....
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.... R&D activity indefinitely even after the patent has expired almost 20 years ago. In any case, patent is a specific legal protection granted by law and such protection is not available to the assessee in India. Hence, effectively even if there had been a current patent as on date, there is no question of being compensated for the same as such patent is not recognized in India. In the circumstances, the fact that the assessee does not pay any royalty does not have any significance. Further, even in the case of royalty, the same has to be benchmarked and justified and is subject to the restrictions imposed by RBI. Also royalty is subject to TDS before remittance. Therefore the transaction of import cannot be compared to the royalty situation. In view of all the above facts, the ALP for the import of active ingredients 'Piracetam' and 'Mesna' is determined applying the CUP method in the following manner as provided in r. 10B(1)(a). The prices obtained from third parties as explained at para 10 is the price of these materials in the open market in India. Hence, no adjustments are required to the prices ascertained: Active ingredient Quantity purchased Rat....
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..... Shri Venkataraman argued that the TP report satisfies the requirements of r. 100(1) of the IT Rules, 1962. He further submitted that after examining and analysing each of the available methods under the TP Regulations, the assessee had come to a conclusion that the most appropriate method for computing the ALP is TNMM, under the facts and circumstances of the case. Shri Venkataraman drew the specific attention of this Bench to pp. 389 to 415 of the TP report and submitted that it was clearly brought out that due to the factors such as contractual terms, locational differences and other abstract factors such as use of intangibles, quality, level of market, transaction details and alternative commercial arrangements are not available in public domain and absence of the same would result in rejection of application of the CUP method in this case. Thereafter he justified TNMM and also demonstrated as to how from a total list of 8,067 companies picked up as uncontrolled comparables through electronic databases, selection of time period of the cut-off month in "Prowess", etc., the assessee has narrowed down to just a list of 36 companies. The details of filters that were applied were e....
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....his statement clearly indicates that the information sought, regarding similar sales by the AE to third parties, could not be furnished as they are private and confidential and the AE would not part with it. For the proposition that the tax authority cannot insist on the taxpayer to furnish information that he does not possess or is not required to maintain under the rules. Shri Venkataraman placed reliance on the decision of the Special Bench of the Tribunal in the case of Aztec Software & Technology Services Ltd. vs. Asstt. CIT (2007) 109 TTJ (Bang)(SB) 892 : (2007) 107 ITD 141 (Bang)(SB). He further relied on OECD Transfer Pricing Guidelines wherein it is stated that the tax administration further should not require taxpayers to produce documents that are not in the actual possession of control of the taxpayer or otherwise reasonably available. 24. Shri Venkataraman wanted to file certain additional evidences before the Tribunal in the form of letter dt. 27th Aug., 2008 addressed by the AE, along with sample invoice, copies of sale issued by the AE to third parties located in Indonesia and USA and tried to justify his contention that the same was at ALP. 25. On the objecti....
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....e term "Dalda" which is the brand name of a refined oil. is identified as the pioneer product, "Nutropil" has such a standing. He pointed out that the AE spent 15 per cent of its turnover on R&D activities. He pointed out that the TP report discloses that UCB group employs as many as 9,000 people and the pharmaceutical sector employs 4,700 people which included highly qualified scientists, competent manufacturing, marketing as well as trained medical representatives, etc. His case is that the product of the AE cannot be compared with the product of unknown entities. 28. He referred to the technical specifications and standards maintained by the AE and submitted that the assessee vide its letter dt. 9th July, 2004 brought on record product-wise specifications of the same and submitted that this is not, at any point of time, disputed by the Revenue. 29. Shri Venkataraman specifically pointed out that, at no point of time the Revenue brought any material on record, to demonstrate that the specification of the alleged comparables are one and the same with the standards of the assessee's products. On the contention of the Revenue that the assessee had asked it not to share its....
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....ems imported from China is much higher. He submitted that these submissions have not been disputed by the Revenue. He further argued that the assessee's market share is higher though its pricing of the "drugs" in the market is also higher. He pointed out that in the case of "Piracetam" the market share is 62.25 per cent as against 9.39 per cent of Torrent and 22.82 per cent in the case of Micro Labs. In case of "Mesna" he pointed out that the assessee enjoys 96 per cent of the market share whereas Dabur enjoys the rest 4 per cent. He submitted that higher price of products of the assessee company having a higher market share, demonstrates that the products of the assessee company have higher quality, efficacy and proven standards and therefore they are unique and different. 32. He referred to various technical literature and articles and reports by authors of international repute which are at pp. 293 to 295 of the assessee's paper book and submitted that in this original research articles on the clinical efficacy of Piracetam, its effects. the clinical trials, in terms of dosage effect etc. Piracetam is referred to as "Nutropil" which is the brand name of the assessee....
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....he assessee. He submitted that three pieces of paper are the only evidence available with the Revenue and these three papers are not in the public domain and therefore cannot be relied or acted upon. 35. During the course of hearing the assessee sought to place on record copies of letters dt. 2nd Oct., 2001 and 31st Oct., 2007 addressed by US Food and Drug Administration to North East General Pharmaceutical Factory, China setting out therein very clearly, that the devices resorted to by manufacturers, which would show that the basic or rudimentary requirement of manufacturing processes arc not being followed but in fact has been violated. The admission of this additional evidence has been objected to by the Revenue. 36. After reiterating his contentions that the TNNM is the most appropriate method in this case rather than CUP method and once again taking this Bench to s. 92C(1), r. 10C(1), r. 10C(2) and r. 10B(2) he argued that the CUP method applied by the Revenue is to be held as not the correct method. 37. Coming to the legal arguments, the learned counsel submitted that the assessee has discharged the burden of proof cast on him by doing a proper TP study and obtaining....
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....ts contained in s. 92C(3) and r. 10B have been complied with in determination of ALP made by the AO. 40. Mrs. Malati Sridharan reiterated the findings of the TPO that there was no proper maintenance of documentation by the assessee. She emphasized that the assessee was unable to produce any correspondence to explain the methodology in which the transfer pricing was arrived at between the assessee and its AE. A vague reply without any material was given, i.e., the price fixed was in such a manner as to give a return to the assessee and its AE which is proportionate to the functions performed. She pointed out that these assertions or submissions are not backed by any document or evidence. 41. Mrs. Malati Sridharan specifically relied upon the statement of the managing director of the company and poiI1ted out the following from the facts and statements made by the managing director: (a) That the product and the generic versions available in the market are same as far as the application is concerned; (b) That in terms of chemical standards, the raw material used by the assessee and that of the competitors in the market are the same. The only difference according....
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....(g), (h), (j), (k) and (m) are concerned. She pointed out that r. 10D(3)(f) is also not complied with. 44. On the argument of the learned counsel for the assessee by placing reliance on the study report submitted in the course of the proceedings, she argued that the auditor's study report merely provides justification for the certificate issued by them under s. 92E and that this document can neither take place nor be confused with the documentation that is required to be maintained by the assessee in respect of the specific international transaction. The only reference made in the study report, as per Mrs. Malati Sridharan, is regarding the compliance with the documentation rules which is placed at p. 458 of the paper book. She pointed out that in the entire study report there is neither any detailed analysis in respect of international transaction nor reference to the documentation maintained as required by the statute. 45. The learned Departmental Representative relied upon the OECD Commentary specifically to paras 5.2, 5.3, 5.17 and 5.27 and argued that these explain and clarify the importance of maintaining proper documentation. Referring to para 5.2 of the commentary....
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....ons. Though the assessee was requested to provide all the data relied by it to ascertain the comparability of the cases considered by it, it had provided the particulars only in respect of 5 cases. She argued that the cases are not comparable functionally and that the other details given in Annex. I are sketchy. Thus she concludes that the Revenue authorities were right in holding that the data used by the assessee is not reliable and thus the TNMM cannot be the most appropriate method. She relied on the decision of the Delhi Bench of the Tribunal in the case of Mentor Graphics (Noida) (P) Ltd. and pointed out that the Bench explained the importance of FAR analysis. The Bench, she submitted, particularly cautioned against placing reliance on para 2.37 of the OECD Commentary. She further relied on the decision of the Calcutta Bench of the Tribunal in the case of Development Consultants (P) Ltd. vs. Dy. CIT (2008) 115 TTJ (Kol) 577 : (2008) 6 DTR (Kol)(Trib) 74 : (2008) 23 SOT 455 (Kol) and submitted that ALP should be determined on transaction to transaction basis and not by aggregation of all the transactions at the entity level. Mrs. Malati Sridharan further relied on the OECD Com....
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....s explained that they are issued for ensuring uniformity in standards of quality. efficacy and safety of pharmaceutical products. Thus she submits that the law on drugs and pharmaceuticals ensures that the competitors' products are comparable transaction and the products sold by the assessee and other organizations have to be clinically equivalent. She further pointed out from p. 14 of the compilation which is the second schedule to the Drugs and Cosmetics Act, 1940 and submitted that the law requires that imported drugs should comply with standards of purity and strength specified therein. She produced samples of the assessee's formulations as well as the formulations of the competitors and pointed out that British Pharmacopoeia establishes that there is no difference between the assessee's raw material and finished goods and that of the competitors. 52. On the argument of the assessee that the AE performed additional functions of R&D the benefit of which can be reaped by the assessee, Mrs. Malati Sridharan argued that cost recovery of R&D is an independent transaction and as it is international transaction, a disclosure should have been made by the assessee. As the....
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....C is that the ALP has not been determined in accordance with the most appropriate method as per ss. 92C(l) and 92C(2) r/w r. 10C. She pointed out that the Revenue has already brought out as to how TNMM is not the most appropriate method in this case in the given facts and circumstances of the case. Secondly she submitted that the assessee has failed to maintain proper documentation and thus s. 92C is attracted. Thirdly the information and data used for calculation of ALP by the assessee, are not reliable and hence the third condition for invoking s. 92(3), as per Mrs. Malati Sridharan, stands satisfied. She pointed out that if at least one condition is satisfied, the AO was right in invoking s. 92C(3). She reiterated that all conditions provided in r. 10B have been complied with in the determination made by the AO under the CUP method. She relied on the following case laws: (1) CIT vs. Shatrunjay Diamonds (2003) 183 CTR (Bom) 86 : (2003) 261 ITR 258 (Bom) for the proposition that the intricacies of the transactions are required to be explained by the assessee and the onus is on the assessee to explain the differences while leading proper evidence. (2) CIT vs. T.T.....
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....ired. Immediately, at least 24 pharmaceutical companies manufactured and sold similar formulations in the US and hence CUP method was considered to be the must appropriate method both by the taxpayer and the Court." 57. Thus, for the year 1973, unlike the two previous years, they appear to be comparable uncontrolled sales. In the Tax Court both Lilly and the Commr. agreed that CUP method be applied but the point that arose before the Court was the comparability between controlled and uncontrolled sales, as adjustments could not be made because of the difference that arose on account of (a) credit terms; (b) supply of raw material; (c) packaging; (d) product quality; and (e) patents. However, at the end, the tax Court rejected the CUP method because of the fact that the difference between controlled and uncontrolled transactions could not be accounted for by a reasonable number of adjustments. Mrs. Malati Sridharan prayed that the order of the Revenue authorities be upheld. 58. Joining the issue, Shri Venkataraman, the learned senior advocate, distinguished the decisions relied upon by the learned Departmental Representative and argued that in the ease of Shatrunjay Diamonds i....
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.... case for fresh hearing to consider these issues. As per this request, the case was refixed for fresh hearing. Shri Rajan Vora, appeared on behalf of the assessee and Smt. Malati Sridharan represented the Revenue. 59B. Shri Rajan Vora recapitulated all the arguments made by Shri Venkataraman, the learned counsel for the assessee on the earlier dates of hearing. However, he specifically submitted that it is practically not possible to look at the margins at the transaction level in the case of the assessee for the following reasons: (a) Segmental data of comparables is not available in public domain in most cases and hence margins of comparables have to be compared only at the entity level; (b) Segmental data may not be available with the taxpayer. That there is no statutory requirement to maintain segmental data or the cost relating to different products which was integrated with segregation of cost, is not practical. Thus, he pleads that the law regarding comparison of net margins need to be given a rational interpretation, to mean that segregation of same/similar linter-related transactions should be allowed by computing net margins from an international t....
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....er dispute is not available in public domain. TNMM does not require product comparability. Comparability of transaction/segment/enterprise, which is necessary for application of TNMM has been undertaken by UCB India in selecting the 36 comparables, the net margin of which has been used for benchmarking." 59C. Smt. Malati Sridharan, on the other hand, strongly controverted the submissions of the assessee and argued that the transaction has to be evaluated on a stand alone basis and in case of aggregation of similar transaction, it would be restricted to a class of international transactions that are closely linked or comparable uncontroned transactions that are closely linked. She pointed out that only 50 per cent of the total turnover of the assessee arises out of formulations in which the imported APIs are used where AE imports are involved. Thus, she argues that the balance 50 per cent on which no AE imports are involved, could have been a good comparable and an ideal internal TNMM analysis. On the statutory requirement of maintenance of records he submits that there is a specific mandate to maintain records both under r. 10B(1)(e)(i). She reiterated her contention th....
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....in the notice, why the ALP should not be so determined on the basis of material Dr information or document in the possession of the AO." The main thrust of the Revenue's argument is that- (a) The assessee has failed to maintain and produce the documents as required by law; (b) The assessee failed to discharge the onus cast upon it to determine the ALP in accordance with the most appropriate method. 62. In that context, first we examine as to whether the Revenue authorities were right in holding that the assessee has failed to maintain proper documentation in accordance with law. In the order dt. 9th Jan., 2006, the TPO held that the assessee failed to maintain and furnish information as required by s. 92D r/w rr. 10D(1)(f), 10D(1)(i), 10D(1)(k), 10D(1)(l) and 10D(1)(m) and also on the ground that the assessee has not furnished documentation, on the methodology under which the AE and the assessee have arrived at the purchase price of the APIs in question. During the course of arguments, the learned Departmental Representative improved on these findings of the AO and sought to raise some more issues of documentation, which we will be deciding in the later ....
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....ases where no such documentation exists, these clauses do not come into play. Coming to cl. (m), it is an omnibus provision and it gives an option to the assessee to furnish any other information or data which, would be relevant for determining the ALP. Thus, non-maintenance or non-furnishing of these individual items pointed out by the Revenue does not negate the claim of the assessee that it had maintained the information and documents statutorily required under r. 10D(1) r/w s. 92D of the Act. In our humble opinion, the Revenue should positively look on the vast data and documentation maintained by the assessee and not only pick up some defects here and there as an excuse to reject the documentation. The sum and substance has to be seen and substantive compliance should be a criteria. Therefore, in our humble opinion, the test should be, as to whether the non-maintenance or deficiency in the maintenance of some records fundamentally effects or distorts the computation of the ALP. If it does not make a material difference to the process, then the defects are not fatal. Thus, this finding of the Revenue authorities that non-furnishing of the abovesaid information is fatal to the T....
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....ovisions of s. 92C, i.e., the adoption of TNMM by the assessee. The assessee has adopted the TNMM by comparing the overall operating profits of the assessee company with the overall operating profits of certain other organizations or companies which were the comparable companies selected by it. from out of data available in the public domain, by using the software 'Prowess' and adopting various filters for elimination of uncomparables as listed out by it. The assessee classifies itself as a licensed manufacturer and thus having lesser risks. While so the learned senior Departmental Representative is right in pointing out that the com parables selected by the assessee are not of licensed manufacturers of the similar commodity. The TNMM compares net margins of uncontrolled transactions between independent entities. with those achieved in controlled transactions between related parties. The Tribunal in the case of Aztec Software & Technology Services Ltd. on p. 238 observed as follows: "The TNMM requires establishing comparability at a broad functional level. It requires comparison between net margins derived from the operation of the uncontrolled parties and net marg....
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....ferences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprise entering into such transactions, which would materially affect the amount of net profit margin in the open market. Step 4: The net profit margin realized by the enterprise and referred to in Step 1 is established to be the same as the net profit margin referred in Step 3. Step 5: The net profit margin thus established is then taken into account to arrive at an ALP in relation to the international transaction. 70. Sec. 92C(1) refers to ALP in relation to an international transaction. Rule 10B(1)(e) r/w s. 92C deals with TNMM, and it refers to only net profit margin realized by an enterprise from an international transaction or a class of such transaction, but not operational margins of enterprises as a whole. Para 3.26 of TP Guidelines for Multinational Enterprises and Tax Administrations issued by OECD reads as follows: "3.26 The TNMM examines the net profit margin relative to an appropriate base (e.g., costs, sales, assets) that a taxpayer realizes from a controlled transaction (or transactions that are appropriate to aggregate....
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.... T. Cole at Chapter. XXV what is said is that the regulator should also note that segmentation of transaction does not always lead to more reliable results and that the combined effect of two or more separate transactions may be considered, if such transactions are taken as a whole and are so inter-related with consideration of multiple transactions, is the most reliable means of determining the arm's length consideration of the transactions. At para 25.4 the learned author states that OECD Guidelines may also require some segmentation of the inter-company transactions. The issue whether further dis-aggregation is required, depends on practical issues. Such comments cannot be interpreted as permitting entity level comparison. Similarly, Taxman's book on "Law of Transfer Pricing" by D.P. Mittal, Second Edition para 7.9 has been cited and the book "US Transfer Price" by Robert T. Cole para 2.06 was relied upon by Shri Rajan Vora. On a perusal of all these material we find that none of them suggests entity level comparison. Reliance was also placed on para 1.20 of "TP Guidelines" of OECD. From a perusal of this para it is clear that they are applicable to all methods, that may....
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....maintain segmental data. Irrespective of the fact whether there is a requirement or not, if the assessee wants to adopt a particular method to demonstrate that the international transaction in question is at arm's length, then it is its duty to maintain and furnish the required data. When the burden of proving that a particular method is the most appropriate method is initially on the assessee, it is for the assessee to demonstrate the same by furnishing adequate records and data, irrespective of the fact whether they are statutorly required or not. Thus, we are unable to accept the contentions of the assessee. 72. From the above, it is clear that the net margins on the transaction is the basis of comparison. Only in cases where profits of an enterprise are attributable to similar transactions and when an enterprise does not have any other transaction or activity which is not similar, and which distorts the profits, then probably the net margin derived by an enterprise may also be the net margin of a transaction. In other words, when in an enterprise, only similar transactions are undertaken, i.e., all the transactions are of the same type, same class and of similar variety,....
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.... to be seen that a similar percentage of activity of manufacturing exists in other companies. 75. In our understanding, the international transaction or an aggregate of similar international transactions, have to be evaluated, on a stand alone basis and then compared with similar analysis undertaken on independent transactions. Comparison of the operating profits of the assessee-company as a whole, with the overall operating profits of certain other companies, without any adjustments, in our considered opinion, would not satisfy the requirements of evaluating an international transaction under TNMM, for the purpose of arriving at the ALP. In this case, the assessee has taken all the activities of the company as one unit and on an analysis of its P&L a/c, arrived at an overall operating profit margin of 27 per cent. This is compared with the chart of overall operating profit margins of identified comparable companies, which is summarized in Table 5 of the report. No adjustments or segregations have been made between turnovers involving licensed manufacturing, patented drugs, trading and other revenues. No exercise has been done to iron out the variations by making suitable adjust....
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....5,653.36) (14,518.55) Gross profit 24,577.27 30,205.85 Less: operating expenses (21,919.74) (23,103.66) Operating profit 4,657.53 7,102.19 Add: other income (net of expenses) 346.05 60.76 Less: interest expense (463.16) 153.18 Profit for the year 6,540.42 7,316.13 OP/Sales % 15.05% 15.88% From the above it can be seen that other income is also considered while arriving at the operational profits. Trading margins are not segregated. 77. The details of the market share of the products as compiled by the assessee is as follows: Product Supplier's name Value in Rs. (millions) Market share Piracetam 327 100.00 Nootropil UCB India Pvt. Ltd. 197 60.09 Neurocetam Microlabs Ltd. 63 19.23 Normabrain Torrent Pharmaceuticals Ltd. 25 7.50 Cerecetam Intas 13 4.01 Neurofit Shine 10 2.93 Pirament Ipca Laboratories Ltd. 9 2.64 Normenta Ipca 4 1.22 Sumocetam Talent 3 0.92 Alcetam Alkem 2 0.62 Neurofit-Forte Shine 1 0.40 Pirac Mano 1 0.34 Nicetam Reliance 0....
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....therein, etc.) may have a significant effect on the price. Product comparability is absolutely key, in particular physical features such as size, weight, appearance along with volume, reliability/storage requirements, regulatory requirements, etc. Pricing of a product is a very subjective exercise and its true value, as received by the receiver, can differ from that received by others in the market place. Thus, CUP method requires a high degree of comparability along the following dimensions: (i) Quality of the product or service; (ii) Contractual terms (example, scope and terms of warranties provided, sale or purchase volumes, credit terms, transportation terms, etc.); (iii) Level of market i.e., wholesale, retail, etc.; (iv) Geographical market in which the transaction takes place; (v) Date of transaction; (vi) Intangible property associated with the sale; (vii) Foreign currency receipt; (viii) Alternatives realistically available with the buyer and the seller. 81. In OECD Transfer Pricing Guidelines at II-3 paras 2.8 and 2.9 it is stated as follows: "2.8 It may be difficult to find a transaction ....
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....s issued by Ministry of Health and Family Welfare, Government of India), if it is fallacious on the part of the Revenue to argue that, there are absolutely no differences in the products. If the quality, efficacy, safety, etc. are uniform and same for all products which fall within the ken of Drugs and Cosmetics Act, 1940, this objective would not have been one that is sought to be implemented. There should be a scientific basis to say that these APIs are identical, with the same purity, potency, and characteristics. APIs are unique compound making, and the effect of usage of a particular FDF using an API would depend on the composition, purity, method of usage, dosage used, side-effects. All such data should be first obtained by the Revenue or the assessee, who wish to compare products and then arrive at the ALP or wish to make adjustments to a price, cost or margin. 83. In the case on hand, the assessee, on the one hand, is the subsidiary of a highly reputed company, which is the pioneer and inventor of many, drugs including Nutropil and Mistabron. These drugs, were the result of exclusive research and they also enjoyed patent protection in certain countries for a certain peri....
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....e purchase price identified by revenue, it can be seen that the rate at which Micro Labs has purchased 875 kgs, is Rs. 667 per kg. in the case of Piracetam and whereas Torrent Pharmaceuticals has purchased 4,500 kgs. of the same drug @ Rs. 326 per kg. There is huge variation in the purchase price of the same product by both the parties which are independent entities doing uncontrolled transactions. Time of purchase is not known. Thus, with such variation in prices, it is difficult to accept the Revenue's contention that the product in question is the same and identical in all aspects including quality and efficacy. Under these circumstances in the absence of any data whatsoever on the supplier company/organization, or on the products supplied by it, adoption of that price as a comparable, in our considered opinion, would not be most appropriate. Thus we do not agree with the Revenue's contention that the comparables identified by it should be taken for the purpose of determination of ALP. 84. The undisputed fact is that the AE a global leader, which dominates the world market in these drugs relating to central nervous system disorders and respiratory system related disor....
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....y. The parameters such as purity standards, quantity of productions and sales, manufacturing practices employed, efficacy of the products, group profiles, R&D activity, clinical trials, technical literature on product quality, contractual terms of supply, etc. are not brought out by Revenue so as to enable comparison by adopting CUP method. In the case of Aztec Software & Technology Services Ltd. the Special Bench of the Tribunal has specifically observed that a proper analysis of the transactions with respect to functions performed, assets employed and risk assumed (FAR analysis) should be undertaken, as this has a direct bearing on the pricing of a product/services. This has not been done. In fact, no enquiry whatsoever has been done on the similarity between the APIs. General arguments have been made without any reference to specific material, data or evidence. ALP cannot be determined on preponderance of probabilities or based on objectives sought to be achieved in an enactment or in a policy guideline of the Government. Documentation and data has to be made available and comparability demonstrated before an addition is made. The TPO should have taken the differences into accou....
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....he Revenue or the assessee, though both the parties have desired that we decide the issue of sustaining the addition or not, we deem it fit to set aside the issue to the file of the AO for fresh adjudication in accordance with law, as we do not, have the right information and data to decide the issue. 88. The assessee has sought to file additional documents in the form of warning letter issued to Northeast General Pharmaceutical Factory, No. 37, Zhonggong Bei Street. Tiexi District, Shenyang, Liaoning 1234 China, by United States Food & Drug Administration, Rockville, MD 20857, dt. 2nd Oct., 2007 and October, 2007, to demonstrate that the companies, which supplied APIs to the three Indian entities, i.e., Torrent Pharmaceuticals, Micro Labs and Dabur are sub-standard companies which did not meet the required regulations. Similarly the assessee's counsel tried to file photostat copies of invoices evidencing sale by the parent, company to an Indonesian entity at Jakarta i.e., PT Darya Varia Laboratoria, Invoice No. 2710001883. These documents are not admitted as they were not filed before any of the authorities below nor was there any separate application made before us for adm....
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....r the first time, in support of his report and the AO shall take the same on record and examine the same. (b) The assessee is free to adopt any method as prescribed by law, if it considers that method as the most appropriate method. TNMM may also be considered, if the transaction or a class of transactions are properly evaluated in accordance with law. In case external comparables are not available due to lack of data in public domain, the AO may accept internal comparables including segmental data or internal TNMM. 88B. In short, a fresh exercise may be undertaken on this aspect by both the parties, unconstrained by technicalities and with an open mind, so as to arrive at the most appropriate method of evaluating the ALP. 89. We now discuss the other grounds of appeal. A common disallowance is made for the asst. yrs. 2002-03 and 2003-04 which pertains to a disallowance of a percentage out of the total sales promotion expenses claimed by the assessee. During the asst. yr. 2002-03 the assessee claimed a sum of Rs. 3,93,15,069 as expenses in connection with sales promotion activity. Out of this, an amount of Rs. 44,48,975 pertained to purchase of various gift items for....
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....hed to the CIT(A). He also submits that the CIT(A) was wrong in stating that there is no procedure or system in place to monitor, control, supervise, guide or even to veto the distribution of samples. The assessee submits that it is an internal procedure of approval and a copy, of the same is attached as Annex. II. Thus submissions of the assessee on facts are not controverted by the Revenue. There is an internal control procedure in place. On this factual matrix we are of the considered opinion that the ad hoc disallowance is not based on firm legal ground. There is no dispute that the expenditure incurred on gifts was for the purpose of business. The gifts display the logo of the assessee-company. To assume that 20 per cent or 10 per cent of these gifts might have not been used for the purpose of business, in our considered opinion, is based on mere surmises and presumptions. It is well-settled that no addition can be made merely on the basis of such presumptions and assumptions. Thus, the ad hoc disallowance is hereby deleted for both the assessments. 91. The next ground is on the issue whether on the bank interest in question, on the facts and circumstances of the case, is a....