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TMI Blog2019 (4) TMI 1830X X X X Extracts X X X X X X X X Extracts X X X X ..... method of benchmarking adopted by the assessee. In our considered opinion the reasons given by the transfer pricing officer for rejecting the TNMM method adopted by the assessee is quite cogent. The above clearly show that if on the same facts in earlier period TNMM method was adopted it was an error. It is settled law that there is no use of perpetuating an error. The case here is not that the transfer pricing officer is changing the method to that of CUP by claiming that this method is a superior method to TNMM. Hence the objection of the learned counsel of the assessee by placing reliance upon case laws in this regard is liable to be rejected and the same is rejected as such. Appropriate discount for the additional marketing expense incurred by the assessee in its local sales - Asdirected that the ALP computed by T.P.O. would be reduced by per unit salary cost of employees engaged in marketing field - Assessee has made a proposition before us that assessee has only used its surplus/spare capacity to make exports to the associated enterprise and it has actually made a profit out of the same. We find that this line of argument was never before the authorities below. We do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be pressing to the ground. Hence this ground raised is dismissed at not pressed. 5. Brief facts in this regard are being dealt with reference to facts of figures for AY 2010-11 as issue is, common. The assessee new UCB India is wholly owned subsidiary of UCB, SA, Belgium. The assessee is engaged in the business of manufacturer and sale of prescription drugs. 6. During the relevant period, the assessee inter-alia entered into the international transaction of export of the FDFs Ucerax and Zyrtec to its AE. The assessee in its transfer pricing study report had benchmarked this international transaction using the TNMM at the segmental level as the most appropriate method using the Profit Level Indicator (PLI) of operating profits on operating cost. 23 comparables had been selected by the assessee and the arithmetic mean of the PLI was computed at 10.59% whereas the assessee's own PLI was 49.60%. Its PLI being higher than those of the comparables, the concerned international transaction of export of FDFs to its AE were claimed to be at arm's length. 7. However, the Transfer Pricing Officer was not satisfied with the above he rejected the benchmarking done by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparables is not acceptable. 8. The Transfer Pricing Officer, proceeded to compare margin earned by the UCB India from sale of these products in India. He rejected the assessee‟s submission that gross margin earned by the assessee from export to AE‟s is higher than gross margin earned from local sale. He proceeded to hold as under: The assessec's submission has been considered. It has already been mentioned above that the Finished Products Exported to AEs are of Superior Quality, they comply US FDA regulations. It is tact that the US PDA regulations are the toughest in the industry. So any drug which qualifies the US PDA has to be of extra ordinary quality. It has been submitted by employee of the assessee that Special Excipients are added to the Drugs which are exported. Thus, though the Quality of the Drugs Exported is very high as compared to drugs sold in India, the Price charged to AE is less than the Price at which it was sold to distributor in India. Therefore, the CUP is applied, taking the price at which the drugs are sold in India as ALP. Therefore, the transaction is not at Arm's Length. The difference in the price is as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployment of additional marketing personal. Thereafter the DRP concluded as under :- 5.4 To sum up, as regards the most appropriate method for benchmarking the international transaction of export of FDFs to the AE, the DRP notes that the jurisdictional Mumbai Bench of the (TAT in the case of Serdia Pharmaceuticats (136 TTJ 129) has observed that as long as appropriate comparable can be found, the CUP method would indeed be the most appropriate method in transactions involving pharmaceutical products. The CUP method as a direct method is found by the DRP to be preferable for the benchmarking of the present transactions as compared to the TNMM using external comparables as done in the transfer pricing study report or even the internal TNMM benchmarking exercise done by the assessee on a without prejudice basis. The TNMM attempts to benchmark the profits earned by the concerned assessee against suitable comparables whereas the CUP method carries out the benchmarking exercise keeping in view the prices of the specific individual international transactions as against comparable uncontrolled prices of similar products. However, while using the CUP method the AO/TPO are hereby dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying to camouflage the OP/OC of the small Export to AE using OP/OC of the Total Export. Therefore/ this method of Benchmarking is not acceptable as it is not giving a true picture. On perusal of the TPSR it was observed that the assessee had benchmarked the Transaction of Import of API and Export of Finished Drugs using the same set of comparables. This method of benchmarking two different activities using the same set of comparables itself is incorrect. How can one compare the activity of import of API with that of Export of Finished Products. The two activities are altogether different. In the TPSR the difference between the two activities is clearly mentioned in the TPSR. Therefore, assessee's this act of benchmarking the Export of FDF using the same set of comparables is not it acceptable. 14. From the above it is clear that transfer pricing officer's observation that assessee is trying to camouflage the OP/OC of small export associated enterprises (₹ 5 cr) with the OP/OC of the total export of ₹ 33 crore is cogent. Further in the annual accounts there are no segmental accounts. The annual audited accounts does contain the breakup of export to associa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AEs, it manufactures and supplies the FDFs in accordance with confirmed orders placed by the AEs and as per their specifications. The TPO in his order as well as in the course of the remand proceedings found such claim of the assessee to be without adequate basis. The AE placed the orders for purchase three months in advance and no fixed quantum of purchase was assured in the facts of this case by the concerned AEs. The Indian stockists, in a similar manner, also have to place order as per the fixed formula of twice the quantum of sales minus the closing stock with them. Thus the Indian stockists of the FDFs for whom supplies were made by the assessee also placed confirmed orders well in advance. The assessee further contented that while exporting FDFs to the AEs, the functions with respect to sales and marketing were performed by the AEs whereas in the case of sales made to the local third parties, the said sales and marketing functions had to be undertaken by the assessee itself. Here also, the TPO on an analysis of the clauses in the relevant stockist's agreement observed that the stockists had undertaken to promote ethical business practice arid to secure orders from the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lable to the assessee on account of differences in geographical location of the export price of FDFs sold to its AE. 5.3 Among the differences between the sale of FDFs to the AE and the sate of identical FDFs in the local market pointed out by the assessee is the difference in the level of marketing. It is a fact of this case that as against the singular AE to whom export of FDFs were made, the stockists to whom supplies are made by the assessee are more than 1500 in number. In order to co-ordinate and to manage its local sales, the assessee has employed marketing staff of around 200 employees. The DRP recognises the additional expenditure on account of marketing expenses that are an additional factor of cost in the local sales made by the assessee as compared to the sales made to the AEs. 17. Thereafter the dispute resolution panel had directed for appropriate discount for the additional marketing expense incurred by the assessee in its local sales. It directed that the ALP computed by T.P.O. would be reduced by per unit salary cost of employees engaged in marketing field. 18. We find that the difference in FAR as submitted assessee has been cogently rebutted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowed as capital expenditure. The assessee before the DRP has contended that the concerned expenses facilitated efficient and smooth conduct of the business activities of the assessee and that the assessee through such payment of e-connectivity charges did not get any ownership rights in the software, server, processes etc. The expenses were periodic annual charges and not a one time cost and, therefore, these expenses should not be treated as capital in nature. The specific nature of the software licences, server, processes, connections etc. that were acquired through these expenses have not been provided by the assessee. The DRP on the facts available does not see any compelling reason to change the consistent treatment given in the assessment orders for e-connectivity charges in the last several years. This ground of objection is accordingly, rejected. 7. The seventh ground of objection is on account of non granting of the consequential depreciation on written down value of the e-connectivity charges brought forward from the earlier years. The assessee, consequent to the treatment of the e-connectivity charges of earlier years as capital in nature would have a brought ..... X X X X Extracts X X X X X X X X Extracts X X X X
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