TaxTMI 
TaxTMI 
TaxTMI 
2009 (2) TMI 237
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....r. 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 disallowances, adjustments on account of ....
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....mputing 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 the active ingredients required for manufacturing of formulations and certain other ingredients are imported by ....
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....oduction 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 respect of these international transactions. The total value of raw material purchased by the assessee from its AEs is R....
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.... (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 possession of more details and being a 100 per cent subsidiary, it would not be possible for it to obtain the said information from its parent company. A further submission was made statin....
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....onting 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: (a) The first contention of the assessee is that it has complied with the onus placed on it by determining the ALP by using TNMM. This contention of the assessee is not acceptable as the TNMM is not a direct method. It only evaluates the effect of the internati....
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....49 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 guarantees the ultimate purpose and riot the others. In this connection, a letter dt. 27th Jan., 2005 was issued to the assessee requesting them to substantiate this contention by producing necessary evidence. In this connection, the assessee has clarified in its letter dt. 31st Jan., 2005 that they did....
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....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 Rate of purchase Rs./Kg.) Comparables Price per kg. Difference Adjustments Piracetam 15,500 Kgs. 1,700 381* 1,139 2,04,44,500 Mesna 100 Kgs 32,385 27,075 5,310 5,31,000 Total 2,09,75,500 *This is the WL average rate of Piracetam Value of international tra....
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.... 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 explained with the help of the parameters adopted in eliminating certain companies. He vehemently contends that through this objective process, which is in line with the methodology approved by OECD, the assessee has arrived at the arithmetic mean of the margins of 36 comparables, which disclose an operating margin of 8.86 per cent with the inter-quartile range between 8.28 per cent to....
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....man 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 objections of the Revenue to the filing of these documents, he submits that the managing director, in his original statement has confirmed that the purchase price from the AE by the assessee is at the lowest and these documents just support the same. On the argument that these documents pertained to different geographical territory, he submits that there are no third party sales in India and if the ....
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....ent 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 data with any third party, the assessee's counsel submits that since the data was very much available with the Revenue, it could have conducted comparability of technical specifications between all the comparables on its own. 30. On the issue of patents, he submitted that in the case of Piracetam, the same was obtained on 6th Aug., 1964 and it expired on 5th Aug., 1985. The product was patented....
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.... 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's FDF. He reiterated the contention that the product itself is known by the brand name given by the assessee-company, just like in the case of vegetable oil being marketed as "Dalda" and argued that it is universally agreed that the product manufactured by the assessee-company is unique as compared to others. 33, Thus, on facts the learned counsel for the assessee contends that the assessee's APIs a....
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....s 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 information from the public domain and filtering the same in the most scientific manner and submitting a TP study report. He relied on the decision of the Special Bench of the Tribunal in the case of Aztec Software & Technology Services Ltd. and submitted that once the assessee has discharged his liability the burden shifts to the Revenue if it has to reject the methodology adopted by the assessee and wants to impose its own methodology. He vehemently contended that the burden....
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....n 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 to the managing director was that the local companies or their suppliers did not undertake research whereas, its AE undertook research; (c) That with regard to the pricing of the raw material, the managing director stated, that they undertook an evaluation of price against quality from time to time and whenever there are any changes in circumstances. Further based on an evaluation done a year earlier, the assessee was able to negotiate a reduction in the price of API from its AE; (d) That the o....
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....nternational 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 she submits that this clearly states that where a taxpayer does not provide adequate documentation, there is a shifting of burden of proof, in the manner of a rebuttable presumption, in favour of the adjustment proposed by the tax authorities. 46. The learned Departmental Representative repeated her contention that the transactional net margin analysis of the assessee is not in accordance with rr. 10B and 10C for the reason that there is no comparison transaction-wise. She pointed out that the assessee has neither maintained nor pro....
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.... 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 Commentary to bring out the weaknesses in the TNMM. Thus she submitted that the AO was right in adopting the CUP method. 48. Mrs. Malati Sridharan strongly contended that the TPO as well as the AO were right in adopting the CUP method. On the points raised by the assessee against the adoption of the CUP method, she argued that-(a) the assessee did not produce any document to show how much weightage is to be given to factors such as quality, efficiency, intangibles, R&D recovery, etc. No evidence of valuation undertaken on competitors' p....
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....andards 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 there is no disclosure. this argument is not correct. She further pointed out that Piracetam was discovered in 1960 and was patented in many other countries, except India and that the patent expired in 1985 and it cannot be claimed that there would be fresh recovery of costs. Thus she concluded that no component of cost of intangibles, is embedded in the price. Similar contentions were raised on other intangibles such as patents, clinical trials. manufacturing technology know-how, etc. She pointed out that there is neither technology transfer nor tran....
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.... 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. Krishnamachari & Co. (1997) 140 CTR (Mad) 185 : (1997) 223 ITR 224 (Mad) for the proposition that CUP method may be accepted as a reliable basis for determination of profits in case of an addition under s. 40A(2). (3) Seth Gurmukh Singh vs. CIT (1944) 12 ITR 393 (Lahore)(FB) for the proposition that the AO is entitled to make enquiries and collect the information and though it is the duty of the AO to disclose the information upon which he proposes to rely and give a fair opportunity to the assessee to rebut the same, there is no requirement to disclose the source fr....
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.... 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 it was a case under s. 40A(2) which is a non obstante clause. He pointed out that there is a fundamental difference between s. 40A(2) and the TP provisions in respect of the methodology and application of the provisions. Under s. 40A(2), the burden of proof is on the assessee and he argued that in respect of the TP provisions the burden of proof shifts to the Revenue once the assessee has discharged its onus of demonstrating ALP. He relied on the decision in the case of Aztec Software & Technology Services Ltd., at para 127, for the proposition that the responsibility of determining the ALP shifts to the Revenue authoritie....
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....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 transaction in certain cases, as otherwise application of TNMM would be an impossibility in most of the cases, which is not the intention of law. They also filed written submissions on these issues, the sum and substance of which is that the transactions need not be evaluated on stand alone basis especially when the statute does not require maintenance of such records and that various authors as well as OECD Commentaries permit aggregation of similar transactions and such aggregation permits entity level comparison. Specific reliance is placed at para 1.20 of "TP Guidelines for Multinational Enterprises and Tax Administrations". Reliance is als....
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....ointed 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 that the assessee has not given any information as to whether the comparable cases were of licensed manufacturer, whether they marketed patented products, whether they were engaged in related party transactions, whether they undertook less than normal risk, whether they leverage invaluable intangibles, etc. 60. Both. Mrs. Malati Sridharan, the learned senior Departmental Representative as well as Shri Venkataraman, the learned senior advocate specifically submitted that no useful purpose would be achieved by restoring the matter back to the file of the AO for fresh adjudication and for considering the additional evidences that are sought to be filed before the Bench. Both the parties wanted a d....
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....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 part of this order. 63. Rule 10D specifies the information on documentation to be kept and maintained under s. 92D. It is mandatory for every person, who has entered into an international transaction to keep and maintain such information and documents as may be prescribed and the AO may require such person to furnish any such information or documentation within a particular period of time. 64. We now consider each of the specified documentation which the Revenue alleges that the assessee has not maintained. 64.1 We first consider r. 10D(1)(f), which reads as follows: "(f) a record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the assessee for the business as a whole and for each division or product separately, ....
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....umble 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 TP analysis for determining ALP is not correct. This is a case where the assessee has substantially complied with the law of maintenance of records. 66. The next issue is that the assessee has not furnished the documentation or particulars of negotiations between the AE and the assessee. A close look at r. 10D(1)(a) reveals that price negotiations, if any, which have critically affected the determination of ALP has to be maintained as an information and document under the rule, if at all such documents are available. As we have interpreted the term "if any", the assessee would not be required to furnish the said information if the same is not within its possession or if such price negotiations did not exist. The managing director has indicated to some discussion on the, issue with the AE in his statement bu....
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....ntities. 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 margin derived by an AE on similar operations. Under this method, the net profit margin realized by an AE from an international transaction is computed in relation to a particular factor such as costs incurred, sales, assets utilized, etc. The net profit margin realized by an AE is compared with net profit margin of the uncontrolled transactions to arrive at the ALP. The TNMM is similar to RPM and CPM to the extent that it involves comparison of margin earned in a controlled situation with margins earned from comparable uncontrolled situation. The only difference is that, in the RPM and CPM methods, comparison is of margins of gross profits and whereas in TNMM the comparison is on margins of net profit. TNMM requires comparison between net margins derived from the operations of the uncontrolled parties and net margins d....
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....delines 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 under the principles of Chapter I). Thus, a TNMM operates in a manner similar to the cost plus and resale price methods. This similarity means that in order to be applied reliably, the TNMM must be applied in a manner consistent with the manner in which the resale price or cost plus method is applied. This means in particular that the net margin of the taxpayer from the controlled transaction (or transactions that are appropriate to aggregate under the principles of Chapter I) should ideally be established by reference to the net margin that the same taxpayer earns in comparable uncontrolled transactions. Where this is not possible, the net margin that would have been earned in comparable transactions by an independent enterprise may serve as a guide. A functional analysis of the AE and, in the latter case, the independent enterprise is required to determine whether the transac....
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....e 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 be adopted for arriving at the ALP. The learned counsel for the assessee cannot restrict para 1.20 to the method of transactional net margin. Thus, this argument cannot be accepted. Coming to the decision relied upon by the assessee in the case of Philips Software Centre (P) Ltd. vs. Asstt. CIT (2008) 119 TTJ (Bang) 721 : (2008) 15 DTR (Bang)(Trib) 505 : (2008) 26 SOT 226 (Bang), the Bangalore Bench of the Tribunal was considering a case wherein the assessee's business was only software development. So the comparable of another assessee also only in software development was considered sufficient. This was a case of aggregation of similar transactions and where the assessee had no other transactions. In our case, 50 per cent of the assessee's production is from APIs imported from the AE and whereas the balance is production from APIs which are not imported from AE. There is also tr....
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....nd 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, and the enterprise does not have any other transaction which is not similar, in such a situation, the operating margins of the enterprise would be the TNMM of a class of transaction. 73. In the case on hand, the net profit margin of the international transaction or transactions of the same class which could have been aggregated, has not been arrived at by the assessee. The assessee manufactures many other drugs than the two i.e., Piracetam and Nutropil. It has also trading activity. In the comparables that have been narrowed down in its TP report, the assessee has taken the aggregate net operating profit margins of multiple activities of an organization as a whole. Net profit margins reflect manufacturing of different types of drugs, patented, licensed, etc. as well as trading activity in the case of the assessee. In the case of the comparables narrowed down and arrived at by the assessee th....
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....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 adjustments. In other words, what the assessee has tried to do is to compare the overall operating profit of one entity, with the overall operating margins of the assessee and as the operating margin of the assessee is higher, it asserts that all its international transactions done with its AE are at ALP. This cannot be accepted. Thus, as already stated we agree with the Revenue that provisions of s. 92C(3) are attracted in the instant case on this ground. As we have decided this issue in favour of the Revenue on this ground, we do not feel it necessary to go into other arguments of the Revenue. Once the method adopted by the assessee is rejected, the Revenue is duty bound to compute the ALP by adopting a most appropriate method and it has also to substantiate and justify the use of such a method. 75A. Now we consider the method applied by the Revenue. The first argument of Revenue is that CUP method is ....
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....p; Mistraon UCB India Private Ltd. 5 97.00 Mesna Dabur India Ltd. 0.2 3.00 This Table shows that in the case of Piracetam, UCB India has 60 per cent share and the rest of the industry has almost 40 per cent share. In the case of Mistabron, UCB India has almost a monopoly with 97 per cent. 78. The Revenue has applied CUP method and determined the ALP, on the ground that API, are comparable products, which are subject to quality regulations and when certain organizations purchase the very same product at a particular rate, for producing the similar 'FPS', they are comparable transactions which are uncontrolled and the price at which these are traded have to be compared with the prices the AE charged to the assessee company in this case. 79. We now examine the CUP method, CUP method is the most direct method for determining ALP. Under this method, the price at which controlled transaction is carried out is compared to the price obtained in comparable uncontrolled transaction. An uncontrolled price is the price agreed between unconnected parties for the transfer of goods or services. The CUP can be either (a) internal CUP or (b) external CUP. In this ....
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....e, a minor difference in the property transferred in the controlled and uncontrolled transactions could materially affect the price even though the nature of the business activities undertaken may be sufficiently similar to generate the same overall profit margin. When this is the case, some adjustments will be appropriate. As discussed below in para 2.9, the extent and reliability of such adjustments will affect the relative reliability of the analysis under the CUP method. 2.9 In considering whether controlled and uncontrolled transactions are comparable, regard should be had to the effect on price of broader business functions other than just product comparability (i.e., factors relevant to determining comparability under Chapter I). Where differences exist between the controlled and uncontrolled transactions or between the enterprises undertaking those transactions, it may be difficult to determine reasonably accurate adjustments to eliminate the effect on price. The difficulties that arise in attempting to make reasonably accurate adjustments should not routinely preclude the possible application of the CUP method. Practical considerations dictate a more flexible approach to....
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....own. The Revenue does not disclose the names and addresses of the supplier companies. The credentials, capabilities, research budgets, manpower, quality and quantity, size, standing, etc. of these supplier companies are not known. Reasonable inference drawn by both the parties is that the suppliers are some Chinese companies, the details of which the Revenue is not disclosing to the assessee, Though the argument of the Revenue that the law relating to drugs and cosmetics ensures uniformity in stands of quality, efficacy and safety of pharmaceutical products, the fact remains that the APIs produced and supplied by the originator, which is like a branded company product, cannot be taken as identical or similar in all aspects, with the product supplied by a duplicator unknown Chinese company. No information is available in the public domain. It is common knowledge that Chinese goods are flooding international markets with a very low pricing. It is also true that the quality of these products is not rated by independent bodies to enable comparison in some cases. The assessee's repeated queries on the standards, processes, purity, barrels, etc. followed by those Chinese companies an....
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....ations connected with cure of respiratory disorders and central nervous system disorders. Such highly specialized drugs have been developed and patented by the assessee. It is another issue that the period of patent has expired. The assessee had furnished information regarding R&D, product and drug development cycle, the time and efforts spent along with the expenditure generally incurred by the assessee. It further submitted that 15 per cent of the annual turnover is spent on R&D activities by the group. The group employs 9,000 people who include highly qualified scientists, etc. These claims have not been disputed by the Revenue. The assessee also provided technical information on the products. The Revenue has not found fault with the assessee for not submitting these details. When the product specifications, quality, efficacy, etc. are furnished by the assessee as far as these products are concerned, as rightly claimed by Shri Venkataraman, the Revenue itself could have conducted a comparability test of these parameters with the products identified by it, particularly when it does not want to share the product specifications of the competitor companies with the assessee. We are ....
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....in the case of Mentor Graphics (Noida) (P) Ltd. has specifically stated that Indian TP Regulations have force of law and the tax authority cannot refuse to consider specific characteristics of transactions, functions performed and assets employed. When no such effort is made by the TPO, we have no other alternative but to hold that CUP is not the most appropriate method under the facts and circumstances of this case. 85. In the case of Aztec Software & Technology Services Ltd., at para 127 it has been stated that the burden to establish that international transaction was carried out at ALP is on the taxpayer. Once the authorities are not satisfied with the assessee's determination of ALP, the responsibility for determination are shifted to the Revenue authorities. Thus, in such situation, it is for the Revenue authorities to demonstrate that the ALP arrived at by them is in accordance with the statutory regulations. At para 132, the Special Bench held as follows: "132. A dispassionate study of provisions of various countries on burden of proof, would show, the following fundamental features; (i) That the burden to establish that the international transaction is carried at ....
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....al evidences sought to be filed before the Bench, may be filed by the assessee before the AO. In view of the peculiar situation, the assessee is permitted to file fresh TP study report and also file fresh documents, and to adopt any method to arrive at ALP, as a fresh exercise is to be done. In all fairness, the assessee should not be pinned down to his submissions in the first round of TP proceedings. It should be appreciated that TP Regulations are relatively new provisions and the case does require special consideration. The assessee is free to support his case in any manner it deems fit by filing any additional evidence or document before the AO. Further information may be gathered from the parent company, if possible. Fresh methods may be adopted to prove ALP. Our intention is that, the assessee should not be shut out in the second round of proceedings, on the ground that, certain documents were not filed in the first round or certain method was not adopted originally. Similar facility is also given to the Revenue. Instead of adopting a technical view, the issue may be adjudicated freshly on substantive basis on merits. The entire exercise may be done de novo by both the asses....
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....tors. The AO described the expenses as that which is incurred towards purchase of various gift items such as, ball pens, towels and tissue foils, household appliances and watches. On a query the assessee explained that the company distributed its product through various medical representatives, who got in touch with large number of doctors, etc. for marketing and distributing the company products. It was submitted that the gift items are distributed through these medical representatives and the sales promotion expenses incurred were for the purpose of business to promote sales and has to be allowed. The undisputed fact was that all the gift articles bore the logo of the company and were useful for brand regulating. Samples of these gift articles were produced before the AO. The AO directed the assessee to submit details of recipients of gift articles. On the ground that non-business utilization of the same cannot be ruled out, 20 per cent of Rs. 44,48,975 was disallowed for the asst. yr. 2002-03 and 10 per cent of Rs. 1,04,71,947 was disallowed for the asst. yr. 2003-04 by the AO. Aggrieved, the assessee carried the matter in appeal without success. Further aggrieved, the assessee ....