2019 (11) TMI 1547 - AT - Income Tax

TP Adjustment - selection of MAM - CPM or CUP - HELD THAT - In the instant case, the appellant s therapeutic segment are distinct i.e. systematic anti-infectives, dermatologicals, oral steroids, antihistamine having distinct process, patent, formulations and regulatory requirements. Thus CPM is not the appropriate method in the instant case. Accordingly, their manufacturing into final product cannot be clubbed together to compare gross profits with gross profits of manufacturing of products related to distinct generic or APIs procured from non-AEs. The CUP method compares the price charged for goods, property or services transferred between related parties (controlled transaction) to the price charged for similar goods, property or services transferred between independent third parties (comparable controlled transaction) in comparable circumstances and conditions. Facts being nearly identical, respectfully following the orders of the Co-ordinate Bench in Serdia Pharmaceuticals (India) (P.) Ltd. 2010 (12) TMI 60 - ITAT, MUMBAI and Merck Ltd. 2016 (3) TMI 1105 - ITAT MUMBAI we hold that CUP is the most appropriate method in the instant case. Adjustments under CUP method need to be examined by the AO/TPO for the reason that under the CUP method adjustments can be made for differences such as differences in the terms of contract, quantity sold or purchased, nature of market (retail or wholesale), credit period allowed, delivery terms, foreign currency risks etc. which might affect the price in the open market. We hold that the TPO/AO has rightly adopted the CUP as the most appropriate method in the instant case with regard to Netilmicin by the appellant vis- -vis Cipla Ltd and Mometasone Furoate by the appellant vis- -vis Ranbaxy Laboratories Ltd. However, as observed above by us adjustments under the CUP method need to be reexamined by the AO. Therefore, we restore the matter to the file of the AO to re-examine that under the CUP method adjustments can be made for differences such as differences in the terms of contract, quantity sold or purchased, nature of market (retail or wholesale), credit period allowed, delivery terms, foreign currency risks etc. which might affect the price in the open market.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Disallowance of Interest

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment

Ground of Appeal:
The appellant contested the CIT(A)'s decision to uphold the AO/TPO's adjustment of the arm's length price (ALP) for the international transaction of importing APIs from Associated Enterprises (AEs), resulting in an adjustment of ?2,29,09,780/-.

Facts:
- The appellant, an indirect subsidiary of Schering-Plough Corporation, USA, engaged in manufacturing and marketing pharmaceutical products in India, filed a return for AY 2003-04.
- The appellant used the Cost Plus Method (CPM) to determine the ALP for the import of raw materials from AEs, showing a gross profit mark-up of 56.45% in the AE segment compared to 27.54% in the non-AE segment.
- The TPO rejected CPM and adopted the Comparable Uncontrolled Price (CUP) method, comparing prices of APIs with those imported by unrelated companies (Cipla Ltd. and Ranbaxy Laboratories Ltd.), leading to a significant adjustment.

Tribunal's Findings:
- The Tribunal noted that the CUP method requires a high degree of comparability, which was not met by the TPO.
- The Tribunal found that the appellant's use of CPM was flawed due to the distinct nature of therapeutic segments and manufacturing processes.
- The Tribunal upheld the TPO's adoption of the CUP method but directed the AO to re-examine adjustments for differences in terms of contract, quantity, market nature, credit period, delivery terms, and foreign currency risks.
- The Tribunal referred to similar cases (Serdia Pharmaceuticals and Merck Ltd.) where CUP was deemed the most appropriate method.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the AO to re-examine the adjustments under the CUP method.

2. Disallowance of Interest

Ground of Appeal:
The appellant challenged the disallowance of ?18,22,861/- in interest paid on deposits received from prospective distributors.

Facts:
- The CIT(A) upheld the disallowance due to the appellant's failure to file confirmations from the parties.
- The appellant contended that all confirmations had been filed before the AO.

Tribunal's Findings:
- The Tribunal restored the matter to the AO to verify the confirmations and pass an order per the provisions of the Act after giving the appellant a reasonable opportunity to be heard.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to verify the confirmations and make a decision accordingly.

Order Pronounced:
The appeal was partly allowed for statistical purposes on 25/11/2019.