UCB INDIA P.LTD,MUMBAI vs. ADDL CIT RG 7(3), MUMBAI

These appeals are filed by the assessee against respective orders of Assessing Officer passed pursuant to direction of Ld. Dispute Resolution Panel, u/s. 144C(5) of the Act, for the concerned assessment years.

One common issues raised in these appeals relate to Transfer Pricing adjustment on account of finished dosage form („FDFs‟) to overseas associated enterprises. Since facts are similar we are referring to facts and figures from assessment year 2010-11.

In assessment year 2010-11, the assessee raised a ground that AO erred in passing the final assessment order without providing sufficient opportunity of being heard. 4. At the outset Ld. Counsel of the assessee submitted that be shall not be pressing to the ground. Hence this ground raised

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:

Upon assessee objection Ld. DRP noted that After rejecting the TNMM analysis undertaken in the transfer pricing study report, the AO noted that the Active Pharmaceutical ingredients (APIs) used in the FDFs exported to its AEs was the same as used for the FDFs manufactured by the assessee and sold locally to third parties in India. Accordingly, the TPO was of the-view that the price of both the FDFs exported and the FDFs sold to third parties in India could be compared under the CUP method. The sale price per unit of the FDFs Ucerax (10mg), Ucerax (25 mg) and Zyrtec sold to the AE was compared by the TPO to the sale price of FDFs having an identical pharmaceutical composition sold to the local parties in India and the total difference between the two amounting to Rs. 5,08,38,010 was computed by the TPO as the transfer pricing adjustment required on this international transaction.

Thereafter, Ld. DRP noted the objections of the assessee to the TPO‟s action and found that T.P.O has cogently rebutted the difference in FAR pointed out by the assessee. But DRP accepted the objection for adjustment for employment 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 5 I.T (TP).A No.1785/Mum/2016 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 directed to give appropriate discount for the additional marketing expenses incurred by the assessee in its beat sales. The ALP computed by the TPO in his order would be required to be reduced by the per unit salary cost of the employees engaged in the marketing functions. Subject to such modifications of the computation, the CUP method adopted by the assessee is hereby upheld. With these directions the grounds of appeal 1 to 5 with reference to the transfer pricing adjustment on export of FDFs by the assessee to the AE stand disposed.

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 (Rs 5 cr) with the OP/OC of the total export of Rs. 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 associated enterprise and non-associate enterprise. Further more in the audited annual accounts the segmental results for export and local sales is also not available. Further the transfer pricing officer found that assessee has benchmarked the transaction of import of API and export of finished drugs with the same set of comparable. The transfer pricing officer has rightly observed that activity of import of API cannot be compared with that of export of finished products. In these circumstances the transfer pricing officer has rejected the TNMM 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. 16. As rightly noted by the transfer pricing officer there is readily available internal CUP in the form of local sales of the same products. The export sales with the associated enterprise of fixed doses form (FDF) viz. UCEREX 10mg, UCEREX 25mg & 2YRTEC were also sold in local market with identical pharmaceutical contents CUP. The assessee has objected that there are differences in function assets risk (FAR) analysis in this regard. The assessing objection in this regard 8 I.T (TP).A No.1785/Mum/2016 has been cogently dealt with by the transfer pricing officer and has been noted by the dispute resolution panel as under:- 5. Grounds of objection three and four are against the adoption of the CUP method by the TPO to benchmark the international transactions of export of FDFs. The assessee has contended that the functions performed in the export of FDFs to the AE and the sales of similar FDFs to the local third parties in India are different. Among the differences highlighted by the assessee are that in respect of local sales, the assessee is required to estimate the demand for FDFs in the market for the purposes of manufacture whereas while dealing with the 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 doctors, hospitals and retailers. Thus substantial marketing functions were undertaken by the stockists appointed and not the assessee. 5.1 In the same context of differences between the export of FDFs to the AE and their sale in the local market, the assessee had contended that when dealing with the AEs, the credit risk borne by the assessee was negligible whereas in the local sales, as there is a possibility of bad debts arising, it is the assessee that bears the credit risk. Here again, the TPO has noted that the delivery to the local stockists is against post dated cheques issued by them to the assessee and to that extent the credit risk of the assessee on local sales is also negligible. In any case, I.T (TP).A No.1785/Mum/2016 there was a specific clause for payment of interest @18% if the stockists delayed the payments, whereas the invoices of, the AE permitted a credit period of 60 days. The assessee has also contended that without considering the manufacture for the export transactions, the production capacity utilization by the assessee was only 58% and the export was against such idle capacity and, therefore, the cost parameters of the two transactions could not be compared. Such correspondence between the idle capacity and the production for exports, claimed by the assessee, is arbitrary and without any basis. From the aforesaid facts, the DRP is of the view that the element of FAR analysis discussed above do not demonstrate any significant economic differences that would affect the price in the open market between the transaction of sale of FDFs to the AEs and the sale of identical FDFs to the local parties. 5.2 In its objections filed before the DRP on the issue of inappropriateness of the CUP method to its transactions, the assessee has pointed out the differences on the geographical markets wherein the two sets of transactions were undertaken. The TPO has analysed this objection and has observed that the product quality of the FDFs exported appears to be marginally superior and the regulatory regime being more stringent in the geographical location of the AE, the price charged to the AE should have been higher to that extent. However, in the CUP analysis, the price actually charged to the AE is found to be lower than that charged in the local sales made by the assessee. The DRP on such facts finds itself in agreement with the TPO that no discount would be available 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.

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.

We find that the difference in FAR as submitted assessee has been cogently rebutted by assessee below. Hence we find no infirmity in the direction of the dispute admission panel in this regard. 19. We find that the learned counsel of the 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 not find any cogency in the same for taking this international transaction out of the ambit of ALP determination. As a matter of fact it is in fact an admission on the part of the assessee that prices charged from the associated enterprise are comparatively lower, which in turn further fortifies the action of the transfer pricing officer. We note that it is the contention of the learned counsel of the assessee that the assessing officer has not given effect to the direction of the DRP regarding adjustment in ALP computed by T.P.O. we direct the assessing officer to follow the direction of the dispute admissions panel. It will not be out of place here to reiterate that T.P.O. from examination of assessee‟s personnel has found that finished products exported to AE are superior quality they comply with strict U.S FDA regulation. 20. Our order as above shall apply mutatis mutandis for assessment year 2011-12 & AY 2012-13. 21. Other ground raised is with respect to connectivity charges being treated as capital expenditure and the deprecation the on. We find that these have been dealt with by the dispute resolution panel as under:-

The sixth ground of objection is with reference to the treatment of e-connectivity charges as capital in nature and accordingly the disallowance by the AO of the expenses claimed on that account. The relevant facts are that the assessee has been annually paying e-connectivity charges to its parent company. These involve SAP services, data security, e-mail capacity, web browsing capacity, worldwide information technology support etc. The payments made during the period under consideration was Rs.3,66,95,941. The AO following the treatment given to these expenses right from A.Y. 2004-05 onwards treated these expenses as yielding an enduring benefit to the assessee and, therefore, capital in nature. Depreciation allowance @60% was granted in the draft assessment order on such expenses 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.

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 forward written down value of e-connectivity assets of Rs.2,07,69,309. In accordance with the consistent treatment given to these payments by the Department in the earlier years, depreciation allowance on the opening written down value for the period presently under consideration ought to have been granted to the assessee in the draft assessment order. The AO is hereby directed to do so after verification of the relevant facts.