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2024 (2) TMI 864 - AT - Income TaxTP Adjustment - Import of APIs from AEs - contention of the assessee is that the assessee be treated as VAD instead of Licensed Manufacturer as has been classified by the assessee in TP study report - HELD THAT - The assessee uses manufacturing facility i.e. machines and manpower of the Toll manufacturer (i.e. Gland Pharma) to process APIs into FDF as the assessee does not have its own manufacturing unit. As is emanating from the impugned orders, the assessee has entered into an agreement with Gland Pharma for Toll manufacturing, APIs procurement by the assessee from AEs as well as non-AEs. The assessee in proceedings before the TPO has only sought to re-characterize its status as Licensed Manufacturer to VAD qua the APIs procured from AEs. The assessee is not seeking re-characterization in respect of second segment i.e. procurement of APIs from non-AEs and manufacturing of FDFs through Toll manufacturer, though the manner of operation in both the segments is same, except for source of procurement of APIs. Taking into consideration the facts, we are unable to accept the plea of assessee to re-characterize assessee Value Added Distributor . We find no infirmity in the findings of TPO/DRP on the issue, hence, the first plea of assessee is rejected. Comparable selection - since TPO has selected comparables from TIPS data base, where information regarding comparables is not completely available i.e. deficit with respect to quality, etc. the comparable so selected would not be ideal for applying CUP method - We are of the considered view that the objection raised by the assessee with regard to use of TIPS data base for selection of comparables is unfounded. However, while using TIPS data base reasonable adjustment qua quality, etc. can be allowed. In the instant case, the assessee has vehemently argued that the APIs procured by the assessee are higher in price because of superior quality. Neither before the TPO nor before the DRP any comparative analysis of the quality of the APIs imported by the assessee and the comparable selected by the TPO was available. Hence, we are of the considered view that reasonable adjustment with regard to quality of the comparables can be allowed to the assessee. TP adjustment under Licensed manufacturing segment - MAM selection - assessee has applied TNMM as the most appropriate method to benchmark its transaction of import of APIs from the AEs - TPO rejected the same and applied CUP as the most appropriate method to determine the ALP of APIs from the AEs - primary objection of the assessee in application of CUP is selection of comparable by the TPO from TIPS data base - HELD THAT - We find that in Assessment Year 2003-04 the Tribunal in ITA No.6154/Mum/2011 has considered the issue of most appropriate method applicable to the similar transaction, the Co-ordinate Bench after examining the issue threadbare came to the conclusion that CUP is the most appropriate method for benchmarking the transaction for purchase of Netilmicine by the assessee vis- -vis the APIs procured by Cipla Ltd and Mometasone Furoate by the appellant vis- -vis Ranbaxy Laboratories Ltd. We find that the same very APIs are subject matter of TP adjustment in the impugned assessment year. In the instant Assessment Year the assessee has applied TNMM as the most appropriate method. The provisions of section 92C of the Act requires to compute ALP by following the most appropriate method. Once the Tribunal holds that CUP is the most appropriate method to benchmark a particular transaction without there being any change in the facts and nature of transaction, now it cannot be argued that CUP is not the most appropriate method. The assessee has not brought before us any material to show difference in the nature of transaction or variation in the terms and conditions for import of APIs from the AEs in the impugned assessment year. We see no reason to take a different view in accepting CUP as the most appropriate method for benchmarking the transaction in the impugned assessment year. TP Adjustment - distribution of FDF(Import of formulation) - HELD THAT - Taking into consideration the facts and terms and conditions of the Agreement we are of considered view that segregation of Contract Manufacturing activity and Distribution is fair and reasonable. Merely for the reason that the assessee committed error in TP study to merge the two distinct segments under one head would not mean that the error cannot be rectified, subsequently. Since, the TPO has not examined the transaction after segregation of the two segments, we deem it appropriate to restore this issue to AO/TPO for fresh examination of Distribution segment after segregation. The ground no. 2 of appeal is thus allowed pro tanto for statistical purpose.
Issues Involved:
1. Re-computation of Arm's Length Price (ALP) for import of Active Pharmaceutical Ingredients (APIs). 2. Re-computation of ALP for import of Finished Drug Formulations (FDF). Summary: Issue 1: Re-computation of ALP for import of APIs: The assessee, a subsidiary of Schering-Plough Corporation, USA, engaged in the manufacturing and distribution of pharmaceutical products, contested the adjustments made by the Transfer Pricing Officer (TPO) concerning the import of APIs. The TPO had applied the Comparable Uncontrolled Price (CUP) method instead of the Transactional Net Margin Method (TNMM) used by the assessee. The TPO collected data from the Customs Data Base (TIPS) and selected Cipla Ltd. as a comparable. The assessee argued that the TIPS data lacked relevant information for applying CUP and that the APIs purchased from its AE were of superior quality, meeting European FDA standards, unlike the comparables. The Tribunal upheld the TPO's application of CUP as the most appropriate method, citing a previous decision in the assessee's own case for AY 2003-04, but allowed for reasonable adjustments concerning quality differences. Issue 2: Re-computation of ALP for import of FDF: The assessee had combined the segments of contract manufacturing and distribution of formulations in its transfer pricing study but later sought to segregate them. The TPO had made adjustments based on the combined segment, applying TNMM. The Tribunal found that the two segments had distinct functional profiles and accepted the assessee's request for segregation. It restored the issue to the AO/TPO for fresh examination of the distribution segment after segregation. Conclusion: The appeal was partly allowed for statistical purposes, with the Tribunal affirming the use of CUP for APIs with adjustments for quality and remanding the issue of FDF distribution for fresh examination post-segregation.
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