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TMI Blog2020 (12) TMI 585X X X X Extracts X X X X X X X X Extracts X X X X ..... dication and are decided vide this common order. The appeal for assessment year 2012-13 is taken as lead case, hence, the facts are narrated from the said appeal. ITA. NO 2263/MUM/2017 - A.Y. 2012-13. FACTS OF THE CASE: 2. The brief facts of the case as emanating from records are that the assessee is a subsidiary of Novartis Holding-AG, Switzerland. The assessee is engaged in the business of manufacturing and trading of Active Pharmaceutical Ingredients (APIs) and Finished Drugs Formulation (FDFs). The assessee is also engaged in provision of contract development support services and related recoveries. 2.1. In the impugned assessment year the assessee imported 17 APIs from its Associated Enterprises (AEs). The assessee adopted Transactional Net Margin Method (TNMM) as most appropriate method to benchmark its international transactions of import of APIs. Out of 17 APIs, the Transfer Pricing Officer (TPO) could obtain comparable price in respect of only four APIs u/s 133(6) of the Act. The TPO accepted the price adopted by assessee in respect of two APIs i.e. Hydroxypropyl Cellulose and Macrogol, as the assessee's import price of the said APIs was lower than the comparable price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of the above said two main grounds. 3.1. The ld. Authorized Representative of the assessee submitted that in the impugned assessment year, the assessee imported 17 APIs from its AEs to be used in manufacturing of FDFs. The assessee exported final product (FDFs) to its AEs. The import of AIPs from AEs and export of FDFs to AEs is a composite transaction under an agreement. The TPO has erred in treating import of APIs and export of FDFs as two separate transactions. The ld. Authorized Representative for the assessee submitted that the business model of the assessee is akin to that of a 'contract manufacturer'. The assessee manufactures the products as per specifications of its AEs based on confirmed order from the AEs. The inputs are imported from AEs and the final product is exported to AEs. The assessee has to maintain defined standard of quality and has to use standardised raw material for manufacturing of FDFs. Owing to contract manufacturing arrangement between assessee and its AEs, the assessee receives remuneration on cost plus bases. The compensation payable to the assessee as per Manufacturing Agreement (at page 376 of the paper book) depends on the price at which APIs h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rry picking when all the APIs are part of closely linked transactions. The TPO accepted TNMM in respect of other 15 APIs out of 17. The ld. AR placed reliance on the decision of Tribunal in the case of Amphenol Interconnect India Pvt. Ltd vs. DCIT in ITA No. 1548/PUN/2011 for AY 2007-08 decided on 30/05/2014 to contend that where substantial part of benchmarking of international transaction has been accepted by the TPO, the TPO cannot change the method of benchmarking remaining minuscule part of the same international transaction. 3.4. The ld. AR contended that the TPO gathered information regarding two APIs under section 133(6) of the Act to benchmark the transaction. The said information is not available in public domain. The ld. AR submitted that the adjustment made by TPO is without proper appreciation of facts and judicial precedents. The assessee is entitled to full reimbursement of the cost of APIs, hence, there is no transfer of profits. The TPO and the DRP have erred in observing that there is no mention of recovery of cost of APIs in the Manufacturing Agreement. The ld. AR pointed that at the end of agreement there is a table of 'Cost elements to be reimbursed under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p on recoveries. The ld. AR prayed for deleting the entire adjustment as the assessee is recovering external cost without any mark-up. The ld. Authorized Representative of the assessee made an alternative prayer without prejudice to his initial submissions to delete the entire adjustment. The ld. AR submitted that if, the cost of APIs and bio-equivalence studies are considered as integral part of contract development support services segment i.e. the average cost is included in segment revenue and segment cost, the revised margin (OP/OC) after considering cost of APIs and bio-equivalence studies would be 18.03%. The said margin would meet arm's length test if compared to average margin of the comparable companies i.e. 13.08%. The ld. Authorized Representative for the assessee furnished a table giving the calculations: Particulars As per transfer pricing study Revised margin after considering cost of APIs and bio-equivalence studies. Operating Revenue (A) 1,03,83,00,256 1,74,15,78,243 Operating cost (B) 77,22,59,534 1,47,55,37,522 Operating Profit (C=A-B) 26,60,40,722 26,60,40,722 OP/OC(D=C/B) 34.45% 18.03% Margin of comparable companies as per Transfer Pricing Stud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds of appeal No.23 to 27. SUBMISSION OF DEPARTMENT REPRESENTATIVE: 7. Per contra, Sh. Anand Mohan, representing the Department vehemently defended the impugned assessment order and the directions of the DRP. The ld. Departmental Representative submitted that the TPO could gather comparable prices of only four APIs out of 17 imported by the assessee during the period relevant to the assessment year under appeal. Therefore, in the absence of comparable data in respect of 13 APIs, the TPO accepted the data furnished by the assessee. Out of four APIs for which comparable prices were available, the TPO accepted the price in respect of two APIs as the comparable prices were higher. It was only in the case of 2 APIs that the TPO found that prices charged to the assessee were higher. Hence, the adjustment was made by the TPO while determining arm's length price. The ld. Departmental Representative defended the action of TPO in applying CUP as most appropriate method to determine ALP. In support of his contention the ld. Departmental Representative placed reliance on the decision of Tribunal rendered in the case of Serdia Pharmaceuticals India Pvt. Ltd. Vs. ACIT reported as 44 SOT 39 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated the entire transaction of import and export as one composite transaction. During the course of submissions, the ld.Authorized Representative of the assessee has referred to Manufacture Agreement dated 01/01/2009 between Sandoz GmbH (in short 'Sandoz') and the assessee (at page 376 of the Paper Book). It would be essential to refer to the relevant clause of the said agreement to appreciate the scope of agreement, obligations of the assesse and manner of remuneration. The extract of the relevant clauses of the agreement are reproduced herein below:- "Article 2 - Scope of the Agreement 2.1 This Agreement lays down the general conditions applicable to the Production and Supply of Agreement Products by Manufacturer for Sandoz under a manufacturing arrangement, which may be amended separately from time to time upon mutually written agreement of the Parties. It is understood that this Agreement shall not apply to the extent the Parties, in individual cases, explicitly and in writing depart from its terms after the Effective Date. 2.2 Individual manufacturing will be deemed completed upon the release to Sandoz of the relevant Quality Assurance statement of compliance, unless ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. However, the 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. 9. As we have observed earlier that al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... far lower. The TPO rejected TNMM and applied CUP as the most appropriate method to benchmark the arm's length price of APIs and made adjustment. The CIT(A) upheld the adjustment. The Tribunal after examining the facts in the said case confirmed the order of CIT(A) in upholding determining arm's length price of APIs by adopting CUP as the most appropriate method. The Tribunal while upholding selection of CUP for benchmarking transaction of import of APIs observed: "76. In view of the above discussion, in our considered view, as long as appropriate comparables can be found, CUP method will indeed be the most appropriate method in respect of generic drug, even when such a generic drug is manufactured by its original patent holder." Similar view has been expressed by the Tribunal in the case of Fulford (India) Ltd. (supra). 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,43,950/- on recoveries of cost of APIs and cost of Bioequivalence studies under Contract Development Service agreement. The grounds of appeal on the issue are as under: "Adjustment of Rs.24,89,43,950 of international transactions with AEs with respect to recovery of cost of APIs & cost of bioequivalence studies in contract development services segment 13. erred in making a transfer pricing adjustment of Rs. 24,89,43,950 of international transactions with AEs with respect to recovery of cost of APIs & cost of bioequivalence studies in contract development services segment; 14. erred in not appreciating that the international transaction of contract development support service provided to AEs should exclude the recovery of cost of APIs and bioequivalence studies which are pass through costs and entire cost on these expenses are recovered from AEs on a cost to cost basis which meets the arm's length test; 15. erred in applying a mark-up earned by the Appellant itself in its contract development support services segment i.e. 34.45% on recovery transaction of cost of APIs and cost of bio-equivalence studies which is arising out of a controlled transaction and is contrary t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Assessing Officer has made disallowance by placing reliance on MCI Regulations and CBDT Circular (supra). The contentions of the assessee is that the expenditure has been incurred for conducting seminars and not on gifts and personal travelling expenses of Doctors. 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. For the sake of completeness relevant extract of the decision rendered in the case of M/s Solvay Pharma India Ltd. is reproduced herein below:- "21. CBDT Circular no. 5 of 2012 seeks to disallow expenditure incurred by pharmaceutical companies inter-alia in providing 'freebies' to doctors in violation of the MCI Regulations. The term "freebies' has neither been defined in the Income-tax Act nor in the MCI Regulations'. However, the expenditure so incurred by assessee does not amount to provision of 'freebies' to medical practitioners. The expenditure incurred by it is in the normal course of its business for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw which is applicable to different class of persons or particular category of assessee, same cannot be made applicable to all. The regulation of 2002 issued by the Medical Council of India (supra), provides limitation/curb/prohibition for medical practitioners only and not for pharmaceutical companies. Here the maxim of 'Expressio Unius Est Exclusio Alterius' is clearly applicable, that is, if a particular expression in the statute is expressly stated for particular class of assessee then by implication what has not been stated or expressed in the statute has to be excluded for other class of assessee. If the Medical Council regulation is applicable to medical practitioners then it cannot be made applicable to Pharma or allied health care companies. If section 37(1) is applicable to an assessee claiming the expense then by implication, any impairment caused by Explanation 1 will apply to that assessee only. Any impairment or prohibition by any law/regulation on a different class of person/assessee will not impinge upon the assessee claiming the expenditure under this section. 24. We observe that the CBDT Circular dated 1-8-2012 (supra) in its clarification has enlarged t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal field and therapeutic areas, etc. Every day there are new developments taking place around the world in the area of medicine and therapeutic, hence in order to provide correct diagnosis and treatment of the patients, it is imperative that the doctors should keep themselves updated with the latest developments in the medicine and the main object of such conferences and seminars is to update the doctors of the latest developments, which is beneficial to the doctors in treating the patients as well as the pharmaceutical companies. 25. In view of the above discussion, we do not find any merit in the order passed u/s.263. 26. In the result, appeal of the assessee is allowed." Thus, we find merit in the grounds No. 18 to 22 raised by the assessee. However, we observe that the 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. The grounds No.18 to 22 are allowed for statistical purpose, in the above terms. 18. The ld.Authorized Representative of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.54%. Particulars As per transfer pricing study Revised margin after considering cost of APIs and bio-equivalence studies. Operating Revenue (A) 75,24,19,812 1,56,18,54, 198 Operating cost (B) 53,27,18,828 1,34,21,53,215 Operating Profit (C=A-B) 21,97,00,984 21,97,00,984 OP/OC(D=C/B) 41.24% 16.37% Margin of comparable companies as per Transfer Pricing Study 13.54% Since the margins of the assessee are within tolerance limits, the findings given by use while adjudicating this issue in assessment year 2012-13, would mutatis mutandis apply to the present appeal. Accordingly, ground No.18 is allowed and grounds No.15 to 17 and 19 are dismissed. 23. In ground No.20, the assessee has assailed initiation of penalty proceedings under section 271(1)(c) of the Act. The challenge to penalty proceedings at this stage is premature. This ground of the appeal is dismissed, as such. 24. The ground of appeal No.1 and 2 are general in nature, hence, require no adjudication. 25. In ground 3 and 4 of the appeal, the assessee has raised legal ground challenging the jurisdiction of TPO. The ld. Authorized Representative of the assessee stated at the Bar that grounds No.3 & 4 are no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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