PAR FORMULATIONS PRIVATE LIMITED,CHENNAI vs. DCIT, CHENNAI

The assessee is a private limited company earlier known as Edict Pharmaceuticals Pvt. Ltd. was an independent developer of solid oral dosage form of generic pharmaceuticals. The assessee also held a manufacturing facility for solid oral dosages in Chennai with a manufacturing capacity of one million units per day. The assessee had also undertaken research and development contract work. The assessee has entered into a product supply and development agreement with PAR, USA on 22.12.2010 to develop products, get approval of ANDA in the name of Edict and retain the right to manufacture the products. PAR, USA was given the right to market the products. PAR, USA would provide funds to the assessee to develop pharmaceutical products getting the approval of the ANDA from US FDA. The assessee had also entered into marketing and distribution agreement with PAR, USA whereby PAR, USA was given exclusive license to market the collaborative products and the profit arising from the sale of these products were shared between the assessee and PAR, USA.

Subsequently PAR, USA acquired the assessee (earlier known as Edict pharmaceuticals Pvt. Ltd.(Edict)) by entering into a share purchase agreement (SPA) on 17.05.2011 through which PAR, USA agreed to acquire the equity shares of Edict for a total consideration of USD 32.5 Million (Rs.174.9 Cr.). The said consideration was based on the enterprise valuation computed on the basis of discounted cash flow of income. Post the date of acquisition, the assessee who became the subsidiary of PAR, USA, was renamed as PAR Formulation Pvt. Ltd. (present assessee) and commenced its operations as a capital entity rendering contract R&D and contract manufacturing services exclusively to PAR, USA. The assessee in order to align itself as a limited risk entity entered into a memorandum of understanding with PAR, USA, where it was agreed that all the intangibles inter-alia in rights, resources and capabilities held as on the date of acquisition was transferred by the assessee to PAR, USA. It was also agreed as per the MoU that the assessee would operate on a capital basis. The consideration agreed for transfer of intangibles was USD 14.43 Million (Rs.97.3 Cr.). The assessee determined the consideration for transfer of intangibles through an independent valuation report where the total consideration paid towards acquisition of shares is considered as a base and after applying certain adjustments such as present value of future returns from contract manufacturing, contract R&D services etc., and arrived at the value of intangibles. In the transfer pricing study report (TPSR), the assessee applied internal CUP i.e., the consideration agreed under the share purchase agreement as the uncontrolled transaction stating that at the time of entering into SPA, the assessee (earlier known as Edict pharmaceuticals Pvt. Ltd.) and PAR, USA were independent parties without having any relationship. Accordingly, the assessee in the TPSR has stated that the consideration of Rs. 97.2 Cr. is within the Arms Length.

During the course of assessment, the A.O made a reference to the TPO for the purpose of determining the Arms Length Price of the various international transactions entered into by the assessee with its AE (PAR, USA). The TPO held that the consideration received by the assessee towards sale of intangibles is not adequate and rejected the method in which the said price was considered by the assessee as at arms length. The determination of the ALP towards sale of intangible assets by the assessee is tabulated below: Steps Particulars Value in INR Crores Step 1 Enterprise value as on Febrrary 17, 2012 (As per SPA 174.9 Agreement in page 384 of paper book & as per the table in page no 617 of paper book) Step 2 Less: Present value of routine contract R&D activities 45.4 Step 3 Less: Value of non-compete fee included and IP not 28.4 transferred to Par US Step 4 Total value of IP rights, resources & capabilities 97.2 transferred to Par US as of February 17, 2012

The TPO made an upward adjustment of Rs.49.29 towards the consideration by holding that the adjustments made by the assessee were not acceptable. The details of the upward adjustment as arrived at by the TPO are given below: S. No. Description Amount (in Rs. Crores) 1. Enterprise value for contract manufacturing 28.40 2. Non compete fee 3.90 3. Increment book value in IPRs from 01.04.2011 to 12.46 31.03.2012 4. Add: 20% thereof being the admitted rate of return 2.49 from contract R&D to PAR USA, post acquisition and claimed to be at arm’s length with reference to external comparables 5. Unallocated expenses incurred by way of contract 2.04 R&D to be recouped with a markup of 20% 6. Upward adjustment 49.29 7. Add; Transaction value reported in Form 3CEB 97.20 8. Arm’s length price 146.49

The assessee filed its objections before the DRP against the draft assessment order passed by the A.O incorporating the TP adjustments. The DRP rejected the objections of the assessee and confirmed the TP adjustment. The assessee is in appeal before the Tribunal against the final order of the assessment passed by the A.O.

The Ld. Authorized Representative (AR) of the assessee submitted that the assessee has rightly adopted the internal CUP as the most appropriate method and the valuation of intangibles is based on valuation report. The Ld. AR further submitted that the observations of the TPO (para 7.1 of TPO's order) that the assessee has not shared independent valuation is factually incorrect since the assessee has submitted all the relevant documents. The Ld. AR took the bench through the TPSR to submit that the assessee has done a proper benchmarking to determine the ALP of the consideration towards of intangibles. The Ld. AR also took the bench through list of intangibles which have been transferred to PAR, USA against which the assessee has received the consideration (Page 9 & 10 of DRP order). The Ld. AR argued that the TPO has made the adjustments without any benchmarking and has simply added the amounts which the assessee has considered as adjustments from the consideration received as per SPA. Accordingly, the ld. AR submitted that the determination of the TP adjustment is without any basis.

The Ld. Departmental Representative (DR), on other hand, relied on the order of the TPO and submitted that the assessee has not properly substantiated the basis on which the consideration towards sale of intangibles have been arrived at.

We have heard the parties, and perused the material available on record. The assessee before acquisition of shares by PAR, USA has been carrying out product supply and development services to PAR, USA. As per agreement entered into on 17.05.2011, the assessee's shares were acquired by PAR, USA for a consideration of Rs. 174.9 Cr. The assessee has subsequently transferred the intangibles to PAR, USA for a consideration of Rs.97.2 post which the assessee started rendering contract manufacturing services as a captive entity exclusively to PAR, USA. We notice that in the TPSR, the assessee has bench marked the transfer of intangible separately using CUP as the most appropriate method. We further notice that for the purpose of bench marking the SPA and the consideration received there-under has been taken as uncontrolled transaction stating that at the time of entering into SPA the assessee (earlier known as Edict pharmaceuticals Pvt. Ltd.) and PAR, USA, where independent parties without any relationship. We also notice that the assessee for the purpose of ALP has made certain adjustments to the consideration received under SPA to conclude that the consideration received for transfer of intangibles is with arms length (refer the working which is extracted in the earlier part of this order). The TPO has rejected the TP study and held that the adjustments made are not acceptable and the TPO added certain amounts to make upward adjustment of Rs. 49.29 Cr. From the perusal of the order of the TPO, we notice that the TP adjustment is made by the TPO by recording certain adverse findings with regard to each of the adjustments made by the assessee in the TPR against the uncontrolled transaction of consideration received under SPA. We further notice that the TPO while making the TP adjustment has not carried out any independent benchmarking but has arrived at the upward TP adjustment by considering the same amount as taken by the assessee for bench marking and has made the adjustment by

In result, the appeal of the assessee is allowed for statistical purposes. Order pronounced on 23rd day of January, 2026 at Chennai.