WATSON PHARMA PRIVATE LIMTIED ,MUMBAI vs. DCIT, CIRCLE 13(3)(2), MUMBAI

आदेश / ORDER PER BEENA PILLAI, JUDICIAL MEMBER: Present appeal arises out of the final assessment order under section 143(3) r.w. 144C(13) r.w. section 144B of the Act, passed by the assessment unit vide order dated 11/11/2025 on following grounds of appeal:

“Based on the facts and circumstances of the case, Watson Pharma Private Limited (hereinafter referred to as the ‘Appellant’) craves leave to prefer an appeal against the order passed by the Assessment Unit, Income Tax Department [hereinafter referred to as the ‘learned AO’] under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’), in pursuance of the directions issued by the Hon’ble Dispute Resolution Panel (hereinafter referred to as the ‘Hon’ble DRP’). On the facts and in the circumstances of the case and in law, the learned AO/ Joint Commissioner of Income-tax – Transfer Pricing – 4(3),Mumbai (hereinafter referred to as the ‘learned TPO’) / Hon’ble DRP has: General: 1. erred in assessing the total income at Rs.1,29,80,71,771 as against the returned income of Rs.1,22,01,01,380 disclosed in the return of income filed; Final assessment order bad in law and liable to be quashed: Final assessment order passed beyond the period of limitation: 2. erred in passing the order under section 143(3) read with section 144C(13) of the Act dated 11 November 2025 beyond the time limit prescribed under section 153 of the Act which is the outer time limit to issue assessment orders and thereby, making the impugned order bad in law and liable to be quashed; Notice issued under Section 143(2) not being as per the format prescribed by CBDT Instruction (F.No. 225/157/2017/ITA.II) dated 23 June 2017 is invalid erred in issuing notice u/s 143(2) of the Act dated 02 June 2023 without complying with the CBDT Instruction F.NO.225/157/2017/ITA-II dated 23-06-2017, therefore the notice issued u/s 143(2) is invalid thereby leading to consequent assessment proceedings and consequent final assessment order being bad in law and liable to be quashed;

Procedural irregularity in issuing demand notice prior to passing of the assessment order u/s 143(3) of the Act: 3. erred in issuing the notice of demand prior to the passing of the final assessment order, resulting in a demand being computed without an underlying final assessment order and therefore, the assessment order was not followed by demand computation, thereby rendering the assessment order issued u/s 143(3) of the Act as null and void; Transfer Pricing Adjustment: Reference to the TPO 4. erred in making a reference of the Appellant’s case (by technical unit) to the Ld. TPO without complying to the provision of Section 92CA of the Act and thereby making a transfer pricing adjustment of Rs.7,79,70,391 on account of provision of Contract manufacturing and Contract R&D services; Rejection of transfer pricing documentation maintained by the Appellant with respect to Provision of Contract Manufacturing Segment and Contract R&D support services 5. erred in not accepting the economic analysis conducted by the Appellant in accordance with the provisions of the Act read with the Rules and modifying the economic analysis for the determination of the ALP in connection with the transactions undertaken by it and holding that the international transaction(s) are not at arm’s length; Transfer Pricing Adjustment in respect of Contract Manufacturing Segment and Contract R & D Segment : Rs. 7,79,70,391 6. erred in taking the arm’s length margins agreed by Appellant in the Advance Pricing Agreement (‘APA’) signed on 31st May 2016 for FY 2013- 14 to FY 2017-18 while determining the arm’s length margins for the international transactions of provision of contract manufacturing services and provision of contract R&D services during the year under consideration; 7. erred in not taking the arm’s length margin agreed by other Teva group entity in the APA signed on 21st May 2019 for FY 2016-17 to FY 2020-21 for the international transactions of provision of contract manufacturing services and provision of contract R&D services during the year under consideration; Levy of interest under Section 234B of the Act:

The assessee company-Watson Pharma Private Limited (WPPL) is the wholly owned subsidiary of Watson Laboratories Inc., USA. The principal activity of the company is to manufacture Finished Drug Formulation (FDF). The company is also engaged in providing research and development services to the group companies. The Ld. TPO has passed order u/s. 92CA(3) of the Income Tax Act, 1961, wherein the arm's length price various eligible transactions have been determined with a proposed adjustment of Rs. 7,79,70,391/- Accordingly, the Ld. A.O. undertook certain variations to the income of the applicant and passed Draft Assessment Order.

2.1. The assesse filed its return of income for the year under consideration declaring total income at Rs. 1,22,01,01,380/-. The case was selected for scrutiny under CASS and notices under section 143(2) and 142 (1) of the Act was issued in response to which the representatives of the assesse appeared filed requisite details as called for.

2.2. From the details filed by the assesse, the Ld.AO noted that the assesse had entered into international transaction with its associated enterprises(AE) and therefore a reference was made to the Ld.TPO for determining the ALP of such international transactions. 4

2.3. On receipt of the reference, the Ld.TPO issued notice under section 92CA(2) to the assesse calling for the economic details of the international transactions between the assesse and its AE:-

Value of Sr. International Total Value International Method No. Transaction (amount in Rs.) Amount (in Rs.) Sale of Contract formulations/active Manufacturing 1 5,24,08,40,313 TNMM pharmaceutical Segment ingredients 5,56,20,69,195 Purchase of raw material 2 15,39,51,554 and packing material 3 Purchase of consumables 55,57,191 Sale of raw and packing 4 53,82,156 material Income from 5 manufacturing site 4,09,74,357 transfer activities Interest on delayed 6 5,93,92,791 payment of receivables Reimbursement of 7 5,59,70,883 expenses Contract R&D Income from Product 8 1,92,00,09,964 Segment TNMM Development activities 1,92,87,40,428 Interest of delayed 9 87,30,464 payment of receivables 10 Provision of IT support 2,10,90,902 2,10,90,902 TNMM services

The assessee is engaged in the business of manufacture and sale of pharmaceutical products to its Associated Enterprises (AEs)

on a contract manufacturing basis. During the year under consideration, the assessee undertook contract manufacturing activities for its AEs involving functions such as sourcing of raw materials, logistics and inventory management, production and manufacturing operations, quality control, and pricing/marketing support in relation to the drugs supplied to end customers. In consideration of the services/products supplied to its AEs, the assessee received an amount of Rs. 5,56,20,69,195/-.

3.1. As per the Transfer Pricing Study Report (TPSR), the assessee aggregated and benchmarked the international transactions relating to its manufacturing segment as a closely linked set of transactions. The transactions so clubbed comprised sale of formulations and active pharmaceutical ingredients (APIs), purchase of raw materials and packing materials, purchase of consumables, sale of raw and packing materials, income from manufacturing site transfer activities, interest on delayed realization of receivables, and reimbursement of expenses. The assessee treated the aforesaid transactions as being intrinsically connected with its overall manufacturing operations and benchmarked the same on a combined basis under the transfer pricing provisions of the Act.

3.2. The assessee adopted TNMM as most appropriate method for benchmarking this transaction by choosing itself to be the tested party. The assesse used OP/OC as PLI to compute its margin at 14.01%. The assessee considered following 30 companies as comparable companies with median of 8.26%:-

Weighted average of Sr. No. Name of the company operating profits on operating cost Shine Pharmaceuticals 1 -0.25% Ltd. Green signal Bio Pharma 2 1.17% Pvt. Ltd. 3 Medico Remedies Ltd. 2.34% 4 Aglowmed Ltd. 22.53% Welex Laboratories Pvt. 5 3.15% Ltd. 6 Zenith Health Care Ltd. 3.25% Brussels Laboratories 7 4.22% Pvt. Ltd. 8 Bajaj Healthcare Ltd. 5.14% Enicar Pharmaceuticals 9 5.62% Private Limited 10 Kilitch Drugs (India) Ltd. 5.73% East India 11 Pharmaceutical Works 5.97% Ltd. Bafna Pharmaceuticals 12 6.91% Ltd. 13 Adora Products Pvt. Ltd. 7.28% Akriti Pharmaceuticals 14 7.58% Pvt. Ltd. Vivek PharmaChem 15 8.03% (India) Ltd. 16 Medreich Ltd. 8.50% Kwality Pharmaceuticals 17 10.27% Ltd. ANG Lifesciences India 18 10.33% Ltd. 19 Dey S Medical (U P) 10.49% 7 Weighted average of Sr. No. Name of the company operating profits on operating cost Private Limited Deys Medical Stores 20 10.56% Manufacturing Ltd. 21 Windlas Biotech Ltd. 11.19% 22 Agog Pharma Ltd. 13.04% Synokem 23 13.90% Pharmaceuticals Ltd. 24 Coral Laboratories Ltd. 14.51% 25 BDH Industries Limited 15.11% Medibios Laboratories 26 15.41% Ltd. Medicamen Biotech 27 16.96% Limited DWD Pharmaceuticals 28 18.28% Ltd. Milan Laboratories India 29 27.62% Pvt. Ltd. Elysium Pharmaceuticals 30 27.62% Ltd. Data place considered as per M Arm’s Length Range OP/OC Y rule 35th Percentile 5.97% Median 8.26% 65th Percentile 10.56%

3.3. The assesse thus treated margin earned by the assesse under this segment to be at arms length.

During the year under consideration, the assessee was also engaged in rendering contract research and development services to its AEs. The said services were classified under the head “income from product development activities.” In respect of such services rendered to its AEs, the assessee received consideration amounting to Rs. 1,92,00,09,964/-.

4.1. The assessee adopted TNMM as most appropriate method for benchmarking this transaction by chosing itself to be the tested party. The assesse used OP/OC as PLI to compute its margine at 18.02%. The assessee considered following 14 companies as comparable companies with median of 19.19%:

Weighted average of operating Sr. No. Name of the company profits on operating cost 1 Finoso Pharma Pvt. Ltd. -3.97% Synchron Research Services Private 2 1.31% Limited 3 Choksi Laboratories Ltd. 2.74% 4 Vimta Labs Ltd. 5.41% 5 Raptim Research Ltd. 11.02% 6 Veeda Clinical Research Pvt. Ltd. 16.14% 7 Vivo Bio Tech Ltd. 18.56% 8 Panexcell Clinical Lab Pvt. Ltd. 19.74% 9 Azidus Laboratories Ltd. 19.94% 10 Jeevan Scientific Technology Ltd. 20.17% 11 Vanta Bioscience Ltd. 20.90% Eurofins Advinus Limited (Formerly 12 26.74% Advinus Therapeutics Limited) 13 Jubilant Biosys Limited 32.88% 14 QPS Bioserve India Pvt. Ltd. 54.42% Data Range OP/OC 9 Weighted average of operating Sr. No. Name of the company profits on operating cost place 5 35th Percentile 11.02% Median 19.19% 10 65th Percentile 20.17%

4.2. During the course of transfer pricing proceedings, the Ld. TPO observed that the assessee had entered into an Advance Pricing Agreement (“APA”) with the Central Board of Direct Taxes (“CBDT”) on 31.05.2016. It was noted that the APA covered a period of five years commencing from Financial Year (“FY”) 2013-14 to FY 2017- 18 and also provided for rollback in respect of four preceding years, i.e., from FY 2009-10 to FY 2012-13.

4.2.1. The Ld. TPO further compared the mark-up agreed under the APA with the mark-up actually earned by the assessee during the year under consideration and observed as under:

Mark-up agreed under Mark-up earned by Nature of services APA Assessee in AY 2021-22 Contract manufacturing 15% 14.02% segment Contract R&D segment 20% 18.02%

4.3. The Ld.TPO compared the FAR (Functions performed, Assets employed and Risks assumed) profile of the international transactions covered under the APA with that of the transactions undertaken during the year under consideration and arrived at the following conclusions: 10 i) There was no change in the functions performed by the assessee company;

ii) There was no change in the assets deployed by the assessee company; and

iii) There was no change in the risks assumed by the assessee company.

4.4. The Ld.TPO observed that the FAR analysis contained in the transfer pricing study report of the assessee for the year under consideration was substantially similar to the FAR analysis furnished by the assessee in the APA proceedings.

4.4.1. Accordingly, vide show cause notice dated 09.12.2024, the assessee was called upon to explain as to why the mark-up rates agreed under the APA, i.e., 15% for the contract manufacturing segment and 20% for the contract research & development segment, should not be adopted for benchmarking the international transactions undertaken during the year under consideration.

4.5. In response to the show cause notice, the assessee submitted that it had undertaken contemporaneous benchmarking to justify that the international transactions were at arm’s length and had complied with all the applicable provisions of the Act and Rules governing transfer pricing. However, the Ld.TPO observed that the assessee failed to satisfactorily explain the decline in operating 11 margins vis-à-vis the years covered under the APA. According to the Ld.TPO, when there was no material change in the FAR profile of the assessee, the operating profit margins ought to have remained broadly consistent. It was observed that the APA had been entered into after detailed FAR analysis and benchmarking of the assessee’s transactions and, therefore, the margins agreed therein constituted a reliable benchmark.

4.6. The assessee further submitted vide reply dated 16.12.2024 that one of its AEs, namely Tevapharm India Private Limited, was engaged in similar business activities of contract manufacturing as well as contract research and development services and possessed a functional profile similar to that of the assessee. It was submitted that the said entity had entered into a Unilateral Advance Pricing Agreement (“UAPA”) dated 21.05.2019, applicable from AY 2017-18 to AY 2021-22, which also covered the period relevant to the year under consideration. Relying upon the said UAPA, the assessee contended that the operating margin of 14.01% earned in its contract manufacturing segment and the operating margin of 18.02% earned in its contract R&D segment were in line with the margins accepted under the UAPA entered into by the aforesaid AE and, therefore, no further transfer pricing adjustment was warranted.

4.7. The aforesaid contention of the assessee was, however, rejected by the Ld. TPO on the ground that an APA entered into by one entity cannot automatically be applied to another entity. According to the Ld.TPO, the UAPA executed by Tevapharm India Private Limited was entity-specific and could not govern the assessee’s transactions.

4.8. Accordingly, the benchmarking analysis undertaken by the assessee was rejected and the margins agreed under the assessee’s own APA were considered to represent the arm’s length standard for benchmarking the international transactions under consideration. The Ld.TPO thus proposed the difference between the margin earned by the assesse for the year under consideration and the margin computed under the APA for both segments as adjustment as under:

Mark-up agreed Mark-up earned by Assessee Nature of services under APA in AY 2021-22 Contract manufacturing 15% 14.02% segment Contract R&D segment 20% 18.02%

4.8.1. On receipt of the order passed under section 92CA(3), the Ld.AO passed draft assessment order proposing addition in the hands of the assesse. On receipt of the draft assessment order, the assesse filed objection before the DRP. The DRP upheld the action of the Ld.AO/TPO based on its direction for assessment year 2020- 21. On receipt of the DRP direction, the Ld.AO passed the final assessment order making addition of Rs. 7,79,70,391/- Aggrieved by the order passed by the Ld.AO the assesse is in appeal before this Tribunal.

8.1. The Ld. AR further submitted that the mere existence of an APA for earlier years could not automatically justify application of the same margins for the year under consideration, particularly when benchmarking had independently been carried out on the basis of contemporaneous comparables. It was argued that transfer pricing analysis is year-specific and margins may vary from year to year depending upon prevailing economic and business conditions, market circumstances and operational factors. 14

8.2. Referring to the observations of the Ld. TPO regarding consistency in FAR profile, the Ld. AR submitted that although the broad FAR profile remained similar, that by itself could not be a ground to mechanically apply the APA margins without undertaking an independent benchmarking exercise for the relevant assessment year.

8.3. The Ld. AR further submitted that one of the assessee’s AEs, namely Tevapharm India Private Limited, which was engaged in similar contract manufacturing and contract R&D activities and possessed a comparable functional profile, had entered into a Unilateral Advance Pricing Agreement (“UAPA”) dated 21.05.2019 applicable for AYs 2017-18 to 2021-22. It was contended that the operating margins earned by the assessee, i.e., 14.01% in the contract manufacturing segment and 18.02% in the contract R&D segment, were in line with the margins accepted under the said UAPA. Accordingly, it was argued that the international transactions undertaken by the assessee were at arm’s length and no transfer pricing adjustment was called for.

8.4. Per contra, the Ld. DR strongly supported the order of the Ld. TPO/Assessing Officer. It was submitted that the assessee itself had entered into an APA with the CBDT after detailed examination of its FAR profile and benchmarking analysis. The APA prescribed mark- up of 15% for the contract manufacturing segment and 20% for the contract research and development segment.

8.5. The Ld. DR submitted that the Ld. TPO had specifically examined the FAR profile of the assessee for the year under consideration vis-à-vis the FAR profile accepted under the APA and had categorically recorded that there was no change in the functions performed, assets employed or risks assumed by the assessee. In such circumstances, there was no justification for substantial decline in the operating margins earned by the assessee during the year under consideration.

8.6. It was further contended that the APA was executed after detailed negotiations and analysis between the assessee and the CBDT and, therefore, the margins agreed therein constituted a reliable benchmark for determining the arm’s length nature of the transactions. According to the Ld. DR, once the FAR profile remained unchanged, the assessee could not deviate from the margins accepted in the APA without demonstrating cogent reasons for such deviation.

8.7. With regard to the reliance placed by the assessee on the UAPA entered into by Tevapharm India Private Limited, the Ld. DR submitted that an APA is entity-specific and transaction-specific and cannot automatically be extended to another taxpayer. It was argued that the terms and conditions of an APA are based upon facts peculiar to the concerned entity and, therefore, the UAPA entered into by the said AE had no binding or persuasive applicability in the case of the present assessee. Accordingly, the Ld. DR submitted that the benchmarking undertaken by the assessee was rightly rejected by the Ld. TPO and the margins agreed under the assessee’s own APA were correctly adopted for determining the arm’s length price of the international transactions.

We have perused the submissions advanced by both sides in light of records placed before us.

9.1. In our considered view, though the APA may not be strictly binding for a year not specifically covered therein, the terms agreed under the APA nevertheless carry considerable persuasive value, particularly when the Revenue itself accepts that the FAR profile of the assessee continues to remain unchanged. An APA is arrived at after detailed analysis, negotiations and examination of the functional profile, industry conditions and economic circumstances surrounding the international transactions of the assessee. 17 Therefore, in the absence of any material change in facts or business model, the agreed margins under the APA constitute a reliable guiding factor for determining the arm’s length nature of similar transactions in subsequent years as well.

9.2. We further note that the assessee had also undertaken contemporaneous benchmarking analysis in its transfer pricing study report and furnished comparable data in support of the arm’s length nature of the international transactions undertaken during the year under consideration. Except placing reliance upon the margins agreed under the APA, no independent material has been brought on record by the Revenue authorities to demonstrate any defect in the comparability analysis undertaken by the assessee or to establish that the comparables selected by the assessee were functionally inappropriate. No fresh search process or alternate set of comparables has been placed on record by the Ld. TPO for rejecting the assessee’s benchmarking analysis.

9.3. At the same time, it is also necessary to examine whether the margins actually earned by the assessee during the year under consideration materially deviate from the APA margins so as to justify an adjustment. In the present case, the operating margins earned by the assessee in both the contract manufacturing segment as well as the contract R&D segment are broadly aligned with the margins agreed under the APA. Even otherwise, the difference between the margins earned by the assessee and those contemplated under the APA falls within the permissible tolerance band of ±5% provided under the transfer pricing provisions of the Act.

9.4. Accordingly, the international transactions undertaken by the assessee are liable to be regarded as being at arm’s length and no further transfer pricing adjustment is called for. We, therefore, direct deletion of the adjustment made by the Assessing Officer/TPO.

Accordingly Grounds 4-7 raised by the assesse stands allowed.

Ground No.8 -9 is consequential and do not requires adjudication.

In the result the appeal filed by the assesse stands partly allowed.

Order pronounced in the open court on 08/06/2026.

Sd/- Sd/-

BEENA PILLAI BIJAYANANDA PRUSETH ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai Dated: 08/06/2026 SC. Sr. P.S.

Copy to:

WATSON PHARMA PRIVATE LIMITED 8TH FLOOR, C-WING, TIMES SQUARE, ANDHERI 1 KURLA ROAD, MAROL NAKA, OPP MITTAL INDUSTRIAL ESTATE ANDHERI (E) MUMBAI - 400059

2 DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE -13(3)(2), MUMBAI 3 THE PCIT / CIT, 4 THE D.R., ITAT, MUMBAI BENCH 5 GUARD FILE