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2015 (9) TMI 326 - AT - Income TaxTransfer pricing adjustment - Whether transaction by which incipient (raw material for manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials) is supplied by Novo Nordisk A/S to TPL and the transaction by which the Assessee engages the services of TPL to convert the incipient into Human Mono component and Highly Purified insulin in 40 IU Vials and ultimately sells the same in Indian market on behalf of Novo Nordisk A/S. can be considered as an International Transaction between two Associated Enterprises attracting the provisions of Sec.92(1) of the Act? - Held that - The transaction by which supply of excepients was made by Novo Nordisk A/S to TPL was in effect an international transaction between the Assessee and Novo Nordisk A/S. The income from such transaction had to be computed having regard to Arm s Length Price as laid down in Sec.92(1) of the Act. The conditions laid down in Sec.92B(1) of the Act are satisfied and there is no necessity in our view to look to the provisions of Sec.92B(2) or Sec.92A(2) of the Act, though the reasons given by the DRP in its order on this aspect also, in our view is acceptable. The transaction between TPL and the Assessee for manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials, in our view, cannot fall within the ambit of the provisions of sec.92(1) of the Act. The reason for the above conclusion is that tax base erosion in India can happen only at the point of time of supply of insulin crystals by Novo Nordisk A/S. Thereafter it is the Assessee who gets the crystals converted into manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials and sells it in the Indian market. This transaction cannot result in erosion of tax base in India. The income of TPL from manufacture is subjected to tax in India. The sale of finished products by Assessee is subjected to tax in India. Therefore there can be no tax base erosion in India from the transaction of manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials by Assessee through TPL. - Decided in favour of assessee. Determination of ALP - Whether the transaction of supply of raw material excepient/insulin crystal by Novo Nordisk A/S to the Assessee can be benchmarked for the purpose of determining ALP together with the international transaction of import of products directly from Novo Nordisk A/S and selling the same in India ( which is purely distribution function performed by the Assessee on behalf of Novo Nordisk A/S) on the plea that both the transactions are interlinked and therefore have to be benchmarked together? - Held that - The two transactions have no connection whatsoever and can be evaluated individually. While the sale of imported products is a trading activity, the purchase of raw material would be part of manufacturing activity and different parameters would need consideration for determining ALP of the two transactions. We find that the TPO characterized both the transactions as Manufacturing and adopted a combined approach in determining ALP. The DRP has also fallen into the same error. The DRP carved out the consideration in so far as it relates to supply of raw material by Novo Nordisk A/S is concerned but applied Profit Split Method (PSM) and determined a sum of ₹ 3.14 crores as addition to be made on account of adjustment to ALP. In our view the entire approach by the TPO and DRP in this regard is erroneous. In our view it would be just and appropriate to set aside the order of the TPO /DRP in this regard and direct that the determination of ALP of the international transaction of (i) supply of raw material by Novo Nordisk A/S to the Assessee and (ii) import of product directly from Novo Nordisk A/S and sale of such products, which is in the nature of trading, separately. The segmental results as given by the Assessee in the chart given as ANNEXURE- 1 to this order should be adopted in this regard. As to what is the Most Appropriate Method (MAM) to be adopted will depend on the stand taken by the Assessee in its TP study and the opinion of the TPO on the approach adopted by the TPO. The application of Profit Split Method (PSM) as the MAM in our view requires reconsideration, as the Assessee s request for a personal hearing before applying PSM as MAM has not been considered by the DRP. The subvention fee is claimed to be paid by Novo Nordisk A/S just to help the Assessee to help survive and that there is no specific services rendered by the Assessee. The subvention fee will therefore need to be set off against any transfer pricing adjustment that might ultimately be made. Thus the subvention fee will not be subjected to any ALP test and will only go to reduce the addition on account of determination of ALP, if any, that might ultimately survive - Decided in favour of assessee by way of remand. Disallowance made u/s.40(a)(ia) - Held that - The order of the AO making disallowance u/s.40(a)(ia) of the Act which was sustained by the AO/DRP is set aside and the issue of disallowance u/.s.40(a)(ia) of the Act is directed to be decided afresh by the AO in the light of the certificate in form No.26-A filed by the Assessee and in the light of the decision referred to by the learned counsel for the Assessee. The correctness of the sale value as claimed by the Assessee will also be verified by the AO. The AO will afford opportunity of being heard to the Assessee before deciding the issue with liberty to furnish additional evidence to substantiate the claim of the Assessee. - Decided in favour of assessee by way of remand. Determination of ALP in respect of an international transaction of rendering IT enabled Services(ITES) by the Assessee to its AE - issue of inclusion/exclusion of companies as comparables - Held that - Accentia Technologies Limited be excluded from the list of comparables as there was acquisition of a company by M/s. Accentia Technologies Limited during the relevant year, and the said company, therefore, cannot be considered as comparable due to this extraordinary event which occurred in the relevant year as rightly held by the Tribunal inter alia in the case of Excellence Data Research P. Ltd. (2014 (9) TMI 126 - ITAT HYDERABAD ). Infosys BPO be excluded from the list of comparables as the said company cannot be taken as comparable because of its uncomparable size of operations. See CIT Versus Agnity India Technologies Pvt. Ltd. 2013 (7) TMI 696 - DELHI HIGH COURT Adjustment in the arm s length price with respect to co-ordination/monitoring services relating to clinical trial activities undertaken in India provided by the Assessee to its associated enterprises - Held that - Facts with regard to the activities carried out by it on behalf of the AE for which the Assessee received administrative support service fee are within its knowledge. It has to substantiate that clinical research was in fact carried out by a third party pursuant to agreement with the AE and not with the Assessee and that the Assessee only carried out coordination activity for which it received payment from AE. Mere assertion before TPO/DRP and description of functional profile in the TP study will not be sufficient. We therefore direct the TPO to consider the issue afresh. The Assessee has to substantiate the real activities with supporting evidence and show that it did not carry out any clinical trial and that it acted only as co-ordinator between the AE and independent clinical trial service providers or hospitals. In the event of the Assessee s activities held to be clinical trial than the AO/TPO shall afford the Assessee opportunity to object to the comparability of the comparables that has been chosen or might be chosen by the TPO and in particular the additional evidence in the form of annual reports of Choksi Laboratories Ltd., NG Indusrtries Ltd. And Suven Life Sciences Ltd., sought to be filed before us should be permitted to be filed in the set aside proceedings. - Decided in favour of assessee by way of remand.
Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions. 2. Characterization of transactions between the Assessee and Torrent Pharmaceuticals Ltd. (TPL). 3. Disallowance under Section 40(a)(ia) of the Income Tax Act, 1961. 4. Inclusion/exclusion of comparable companies for Transfer Pricing analysis. 5. Recharacterization of services provided by the Assessee as Clinical Trial Services. Detailed Analysis: 1. Determination of Arm's Length Price (ALP) for International Transactions: The Assessee, a subsidiary of Novo Nordisk A/S, Denmark, engaged in trading high purity insulin formulations and other pharmaceutical products, reported several international transactions with its Associated Enterprises (AE). The Assessee adopted the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determining the ALP of combined transactions termed as the "Distribution Segment." The Transfer Pricing Officer (TPO) recharacterized the transactions as manufacturing activities and applied the Profit Split Method (PSM), resulting in an ALP adjustment of INR 352,638,074, which was further enhanced by INR 58,831,508. The Tribunal, following its decision in AY 09-10, directed that the determination of ALP for supply of raw materials and import of products should be done separately, and the subvention fee received should be set off against any transfer pricing adjustment. 2. Characterization of Transactions Between the Assessee and TPL: The Tribunal examined the agreements between the Assessee, TPL, and Novo Nordisk A/S, concluding that the arrangement was a concerted action for manufacturing and selling insulin products in India. The Tribunal held that the transaction of supply of excepients by Novo Nordisk A/S to TPL was an international transaction between the Assessee and Novo Nordisk A/S, attracting the provisions of Section 92(1) and 92B(1) of the Act. However, the transaction between TPL and the Assessee for manufacturing insulin vials did not fall within the ambit of Section 92(1) as it did not result in tax base erosion in India. 3. Disallowance Under Section 40(a)(ia): The AO disallowed the Assessee's claim for deduction of INR 192,89,16,836 paid to TPL for insulin vials, invoking Section 40(a)(ia) for non-deduction of tax at source. The Tribunal, considering the amendment to Section 40(a)(ia) by the Finance Act, 2012, which is retrospective, directed the AO to verify if TPL had included the receipts in its return of income and paid taxes thereon. If verified, the disallowance should be deleted. 4. Inclusion/Exclusion of Comparable Companies: The Assessee contested the inclusion of Accentia Technology Limited and Infosys BPO Ltd. as comparables for its ITES segment. The Tribunal, following its earlier decisions, directed the exclusion of these companies from the list of comparables, as they were not functionally similar to the Assessee's ITES activities. 5. Recharacterization of Services Provided by the Assessee as Clinical Trial Services: The TPO recharacterized the Assessee's administrative support services as clinical trial services, leading to an ALP adjustment of INR 1,17,46,336. The Assessee argued that it only provided coordination services for clinical trials conducted by independent investigators. The Tribunal remanded the issue for fresh consideration, directing the Assessee to substantiate its claim with supporting evidence and allowing the AO/TPO to reconsider the comparables chosen. Conclusion: The Tribunal provided detailed directions for the determination of ALP, characterization of transactions, and reconsideration of comparables, ensuring that the Assessee's contentions were adequately addressed and verified by the AO/TPO. The appeal was partly allowed, with specific issues remanded for fresh consideration.
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