9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2020 (12) TMI 585 - AT - Income TaxTP Adjustment - addition made in respect of international transactions of import of APIs - Selection of MAM - assessee is importing inputs for manufacturing of FDFs from its AEs and exporting final product to its AEs only, the assessee has treated the entire transaction of import and export as one composite transaction - HELD THAT - A perusal of the chart shows that the assessee would be entitled for reimbursement of material cost including APIs, Bulk product and partially packed Drug Products without mark-up. The assessee shall be remunerated with mark-up of 15% on processing cost and transportation, warehousing and customer services cost. The Revenue has not disputed the fact that the assessee has imported inputs (APIs) for manufacturing of FDFs from its AEs and has exported the final products to its AEs, albeit to AEs other than the suppliers of APIs. The only objection raised by the TPO is that the import of raw material and the export of finished goods are to different entities. TPO has failed to appreciate the fact that the international transactions of importing APIs and export of FDFs are within group companies. The manufacturing agreement in an unambiguous manner has restricted the assessee to manufacture for Sandoz and its affiliates. Since the import and export transactions are within the group concerns and manufacturing is carried out in accordance with the orders received from AEs, we have no hesitation in holding that there is live link of the import and export transactions. In the instant case the distinguishable facts are The assessee has imported APIs from its AEs for manufacturing FDFs and has exported FDFs to its AEs under manufacturing arrangement. Thus, the entire international transactions of import and export is within the closed loop of AEs. The assessee has imported 17 APIs. The TPO accepted TNMM adopted by the assessee in respect of 15 APIs and applied CUP in respect of only two APIs. The TPO failed to find appropriate comparables for closely linked transactions. Hence, in the peculiar facts of the present case CUP cannot be adopted to benchmark the international transaction of import of APIs. Although in all the years the nature of international transactions and the product imported from AEs were same. In AY 2013-14 the objections of the assessee against the adjustment were accepted by the DRP and the adjustment was deleted. The Revenue accepted the same as no appeal against the findings of the DRP has been filed by the Department. These facts have not been refuted by the Revenue. No material has been brought on record to distinguish the facts in the impugned assessment year. Once the TPO has accepted the cost of inputs determined by the assessee by applying TNMM as the most appropriate method in substantial part of international transaction, the TPO has no discretion of cherry picking two APIs and apply CUP to benchmark transaction. Whatever be the cost of inputs (APIs), the assessee would be getting reimbursement of the cost (without margin) after processing of the same into FDF. The international transactions of import of APIs and export of FDFs are within the close loop of group concerns and hence, interlinked. The findings of the TPO and the directions of the DRP are reversed and the adjustment made on the import cost of APIs is deleted. The assessee succeeds. Adjustment on recoveries of cost of APIs and cost of Bioequivalence studies under Contract Development Service agreement - HELD THAT - As per Article-3 of the agreement, the assessee (service provider) shall invoice on monthly basis the service charges for services rendered and the assessee shall be entitled to mark-up of 10% on internal services cost only. Assessee has fairly admitted that in assessment year 2013-14, the DRP has held that the cost of APIs and cost of Bio-equivalence studies are integral part of Contract Development Services support activity. However, the DRP deleted the addition on the ground that the revised margin of the assessee after including the recovery cost of API and bio-equivalence studies are at arm s length - assessee stated at the Bar that the issue can be disposed of in the similar manner. The assessee has filed a chart giving the revised margin after including cost of APIs and Bio-equivalence studies. The revised margin of the assessee is 18.03% as against margin of comparable companies at 13.08%. Since the margin is within tolerance limit, therefore, no adjustment is required. Disallowance of expenditure incurred by the assessee on health care professionals(Doctors) - AO has made disallowance by placing reliance on MCI Regulations and CBDT Circular - contentions of the assessee is that the expenditure has been incurred for conducting seminars and not on gifts and personal travelling expenses of Doctors - HELD THAT - We find that this issue has been considered by the Tribunal in catena of appeals and has held that MCI Regulations does not apply on pharmaceutical companies. Thus, any expenditure incurred by pharmaceutical company on medical professionals is outside the scope of MCI guidelines - AO while dealing with this issue has out-rightly disallowed the amount claimed by the assessee. We deem it appropriate to restore this issue to the Assessing Officer for the limited purpose of verification of the expenditure and allow the same in accordance with our above finding.
Issues Involved:
1. Transfer Pricing Adjustments on import of APIs. 2. Recovery of cost of APIs and Bioequivalence studies under Contract Development Services. 3. Disallowance under section 37(1) of the Income Tax Act for payments to Doctors. 4. Jurisdiction of Transfer Pricing Officer (TPO). 5. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustments on import of APIs: The assessee, a subsidiary of Novartis Holding-AG, Switzerland, engaged in manufacturing and trading of Active Pharmaceutical Ingredients (APIs) and Finished Drugs Formulation (FDFs), imported 17 APIs from its Associated Enterprises (AEs). The Transactional Net Margin Method (TNMM) was used to benchmark these transactions. The TPO accepted the prices for 15 APIs but applied the Comparable Uncontrolled Price (CUP) method for two APIs, resulting in an adjustment of ?17,97,82,202/-. The assessee argued that import and export transactions were inter-linked and should not be treated separately. The Tribunal found that the international transactions of importing APIs and exporting FDFs were within group companies and interlinked, thus rejecting the TPO's method of cherry-picking two APIs for CUP application. The adjustment made on the import cost of APIs was deleted. 2. Recovery of cost of APIs and Bioequivalence studies under Contract Development Services: The TPO made an adjustment of ?24,89,43,950/- by applying a mark-up of 34.45% on recoveries of costs of APIs and bioequivalence studies, treating them as part of Contract Development Services. The assessee contended that these were pass-through costs recovered on an actual basis without any mark-up. The Tribunal accepted the alternative plea that if these costs were included in the segment revenue and cost, the revised margin of 18.03% would still meet the arm's length test compared to the average margin of comparable companies at 13.08%. Consequently, the adjustment was deleted. 3. Disallowance under section 37(1) of the Income Tax Act for payments to Doctors: The Assessing Officer disallowed ?1,30,04,803/- under section 37(1) for payments purportedly made to Doctors, referring to the Indian Medical Council (Professional Conduct Etiquette and Ethics) Regulations 2002 and CBDT Circular 5/2012. The assessee argued that the expenses were incurred for conducting seminars and were not in violation of MCI guidelines, which apply to medical practitioners and not pharmaceutical companies. The Tribunal, relying on various judicial precedents, held that MCI regulations do not apply to pharmaceutical companies, and restored the issue to the Assessing Officer for verification of the expenditure. 4. Jurisdiction of Transfer Pricing Officer (TPO): The assessee raised legal grounds challenging the jurisdiction of the TPO. However, these grounds were not pressed by the assessee and were dismissed accordingly. 5. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act: The assessee challenged the initiation of penalty proceedings under section 271(1)(c). The Tribunal found the challenge premature at this stage and dismissed this ground. Summary of Judgments: The Tribunal partly allowed the appeals for the assessment years 2012-13, 2008-09, and 2013-14. The key adjustments on transfer pricing and disallowances under section 37(1) were deleted or sent back for verification, while the jurisdictional and penalty-related grounds were dismissed.
|
