NOVO NORDISK INDIA PRIVATE LIMITED vs. DCIT, BANGALORE

Per N.V. Vasudevan, Judicial Member

IT(TP)A No.146/Bang/15 is an appeal by the Assessee against the order dated 9.01.2015 of DCIT, 5(1)(2), Bangalore, relating to A.Y. 2008-09 passed u/s.143(3) read with Sec.144C of the Income Tax Act, 1961 (Act).

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holding company of the holding companies of the Assessee. Therefore the Assessee and Novo Nordisk A/S are Associated Enterprises (AE) as defined in Sec.92A of the Act. The business of the Assessee is trading in high purity Insulin formulation, Insulin delivery system and other specified pharmaceutical products.

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Sl. Description Amount Paid Rs. Amount No. Received Rs. 1. Purchase of excipients 148,90,87,821 2. Purchase of finished goods 236,26,75,713 3. Quality Testing Fee 28,76,448 4. Receipt for Admin Services 22,11,19,930 5. Receipt for ITES 14,06,28,263 6. Subvention Fee 70,00,00,000 35,38,586 7. Reimbursement of Expenses 6,22,65,806 8. Payment of Software License 1,72,68,647 fee. 9. Payment towards cross 41,43,087 charge of employee compensation. 10. Payment of EDP Charges 35,52,218

purchase of finished goods of Rs.148,90,87,821, payment of subvention

fee of Rs.70,00,00,000 and quality testing fee of Rs.28,76,448/-. The transaction in respect of purchase of excipients was entered into between

Novo Nordisk A/S. and Torrent Pharmaceuticals Ltd. (TPL). The transaction of purchase of finished goods is between the Assessee and

TPL. Subvention fee was received by the Assessee from Novo Nordisk A/S. Testing fee was paid by the Assessee to Novo Nordisk. There is no

dispute that the Assessee and Novo Nordisk A/S are “Associated

Enterprises” within the meaning of the said term as defined in Sec.92A of the Act.

with the report required to be filed in terms of Sec.92E of the Act in Form

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No. 3CEB. In the TP Study the Assessee took the stand that the transaction of purchase of excipients, purchase of finished goods, payment

for quality testing and receipt of subvention fee between the Assessee and Novo Nordisk A/S are closely linked to the distribution function (purchase of

finished products) and hence was being evaluated by adopting a combined

transaction approach under the nomenclature “Distribution Segment”. According to the Assessee in order to assess, whether international

transactions are at arm’s length, a transfer pricing method may be applied to each of the transactions separately or to all such transactions a single

group of transactions. According to the Assessee in its case, given the range of transactions involved it would not be appropriate to apply the

arm’s length method on a transaction-by-transaction basis. Hence

international transactions were aggregated for benchmarking. According to the Assessee, the Rules [Rule 10A(d) of the Rules] provides that closely

linked transactions can be benchmarked on an aggregated basis. The Assessee had chosen Transaction Net Margin Method (TNMM) as the

Most Appropriate Method (MAM) for determination of Arm’s Length Price

(ALP) in respect of the combined transactions referred to above which was termed as “Distribution segment” by the Assessee.

2009-10. The distribution segment was divided into two categories :- (1) Sale of products purchased locally:

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(2) Direct import and sale pf products from Novo Nordisk A/S and Novo Nordisk HealthCare AG.

“4.3.26 Sale of products purchased locally: Novo Nordisk India sells Human Monocomponent and Purified Insulin in 40 IU Vials purchased from Torrent Pharmaceuticals Limited, a company formed and registered under the laws of India. These insulin products have been manufactured by Torrent from crystals imported from Novo Nordisk A/S. This arrangement makes all the three parties namely Novo Nordisk A/S, Novo Nordisk India and Torrent, as associated enterprises and since one of the parties [i.e. Novo Nordisk A/S] is a non- resident, it would amount to an international transaction that needs to comply with the Indian Transfer Pricing Regulations. 4.3.27 Novo Nordisk A/S has, vide the know-how license agreement dated October 04, 1999 and as amended from time to time and extended vide the extension agreement, granted Novo Nordisk India the right and license to use and or sub-license the use of its Know-how to manufacture the products at Novo Nordisk India’s facilities or those of the sub-licensee where the said know-how is used for the manufacture of the said products. Similarly, Novo Nordisk A/S has, vide the trade mark master license agreement and extensions thereafter, granted to Novo Nordisk India the master license to use and or sub-license the use of the trade marks. These trade marks may be used only to those insulin formulations, which are manufactured from the insulin crystals, and using the know-how supplied by Novo Nordisk A/S. The know-how and trademarks have been licensed by Novo Nordisk A/S to Novo Nordisk India free of charge. 4.3.28 Novo Nordisk A/S has entered into a insulin crystals and excepients bulk supply agreement dated January 04, 2000, which were amended from time to time vide extension agreement with Torrent. As per the above-mentioned insulin crystals and excepients bulk supply agreement, Torrent shall purchase the agreed quantity of insulin crystals and excepients only from Novo

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Nordisk A/S. Further the crystals and excepients shall be used solely for the manufacture of human monocomponent and highly purified insulin in 40 IU vials with the know-how and trade mark sub-licensed by Novo Nordisk India. Additionally, the insulin shall be sold only to Novo Nordisk India.

4.3.29 In the light of the above, Novo Nordisk India has entered into a insulin formulations supply agreement dated January 04, 2000, which were amended from time to time vide extension agreement with Torrent, whereby it agrees to buy the confirmed quantity of insulin, provided the formulations are manufactured strictly in accordance with the know-how and manufacturing standard. In order to ensure that the insulin produced by Torrent meets with the quality standards, Novo Nordisk India has entered into an agreement for quality control testing dated January 01, 1998 with Novo Nordisk A/S.

4.3.30 Novo Nordisk A/S has its own set of standard operating procedures and measures to control quality. Representatives of Novo Nordisk India and Novo Nordisk A/S, jointly or severally undertake quality checks on the manufacturing process by Torrent. These checks are undertaken almost quarterly. Quality audits are undertaken once in two years. The drugs need to be maintained at prescribed conditions of temperature (cold storage). Novo Nordisk India undertakes quality inspections of the distributors, stockists, wholesalers, etc. The above arrangement is illustrated in Figure 3 below.

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4.3.31 Direct Import and Sale of Products (Buy-sell arrangement): Novo Nordisk India sells various insulin formulations, growth hormones, other diabetes therapy products and related devices including Penfills, Pens, Needles, Norditropin®, GlucaGen Hypokit®, Novolet®, Novonorm® and Analogues which are imported directly from Novo Nordisk A/S and Novo Nordisk HealthCare AG. Some of these products are covered under the DPCO. For this purpose, Novo Nordisk India and Novo Nordisk A/S and Novo Nordisk HealthCare AG have entered into a product supply agreement dated October 4, 1999 and August 17, 2004 respectively. The term of these distribution agreements shall continue until terminated with mutual consent. In order to sell the above mentioned products in India, Novo Nordisk India has entered into distribution agreements with Abbott and Med India. Novo Nordisk India also invoices the customers and bears the credit risk. 4.3.32 Novo Nordisk India has a team of medical representatives and other field staff who market the products. Novo Nordisk India undertakes various programs aimed at both customer service and product promotion. These initiatives include relationship programs for doctors and patients, educational mailers specific to suite the customers through a database management program for patients, organising clinic camps, educational programs etc. Novo Nordisk India also

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commissions various agencies to undertake market research to assess the potential business development opportunities and competitors. Target market segments are identified for further sales promotion. Product promotions include providing value added services like technical updates, continuous medical educational programs, global sponsorship programs for doctors etc. 4.3.33 The marketing executives are trained and scientifically equipped with regard to the product and disease through the medical team to enable them to promote the product with doctors and patients. The training includes imparting information about the disease and its control, drug therapy etc. The medical team handles customer complaint and undertakes Market Research so as to collate data and to provide assistance to customers in coping with the disease and administering the drug. This data is used as a database and feedback generated allows to understand the acceptability of the product and its effects on the patients. Necessary corrective actions are taken especially if such complaints are related to quality control reasons and ample monitoring is done both by Novo Nordisk India and Novo Nordisk A/S. The customer complaints are sent to a central database in Denmark where an international product safety section analysis the nature of such complaints. (emphasis supplied)

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Pharmaceuticals Limited a company which is not an Associated Enterprise of the Assessee. Torrent Pharmaceuticals Limited gets insulin in crystal

form which is raw material required for manufacture of Human Mono

Component and highly purified insulin in 40 IU Vials, which is imported from Novo Nordisk A/S. The Assessee in its TP study accepts the fact that there

is an arrangement between the Assessee, Novo Nordisk A/S and Torrent Pharmaceuticals Limited (TPL) whereby insulin in crystal form will be

supplied by Novo Nordisk A/S to TPL. Novo Nordisk A/S will also grant limited license with right to sub-license to TPL, know-how, trade-mark to

manufacture and market with Novo Nordisk A/S’s name to the Assessee to

enable manufacture of purified insulin in 40 IU Vials, for ultimate sale by the Assessee in India.

companies which were in the business of distribution. The arithmetic mean of the operating profit to sales of the 4 comparable companies chosen by

the Assessee was -7.56%. The Transaction Net Margin Method (TNMM) was chosen as the Most Appropriate Method for determining the Arm’s

Length Price (ALP). The Assessee therefore claimed that its margin of 2% operating profit to sales was better and therefore the international

transaction in the distribution segment was at arm’s length.

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manufacturing facilities of the Assessee or those of its sub-licensee and or contractor manufacturer(s) as the case may be where Novo Nordisk A/S know how is used for production of any of Novo Nordisk Products. 2. Trade Mark Master License Agrement-1 dated 28.2.1994: Novo Nordisk A/S owns Trade Marks Actrapid, Lentard, Monotard, Insulatard, Mixtard, NovoPen, NovoFine, Glucagon Novo. By the agreement dated 28.2.1994, the Assessee is given the Master License to exclusively use and or sub-license the use of the Trade Marks of the aforesaid products which are listed in Appendix-1 to the agreement. 3. Insulin Formulation Supply Agreement dated 1-3-1994: By this Agreement TPL undertakes to manufacture and supply 40iu insulin to the Assessee. There is also an arrangement whereby TPL is given sub- license to use Novo Nordisk A/S Know how to manufacture Novo Nordisk Products. 4. Facility Establishment Agreement dated 6.8.2005: Whereby the Assessee and TPL agree about the facility to be created by TPL exclusively for insulin production in terms of agreement of Assessee and TPL for insulin formulation supply. 5. Agreement for quality control testing dated 1-4-1997: This agreement is between Novo Nordisk A/S and the Assessee. Novo Nordisk A/S under this agreement undertakes to do quality control testing for 40 iu insulin manufactured by TPL pursuant to Formulations supply Agreement dated 1-3-1994. 6. Subvention Agreement dated 1-1-2003: This agreement is between Novo Nordisk A/S and the Assessee. This agreement explains in its preamble that the Assessee is primarily a distributor and marketer of insulin and pharmaceutical products in India. Novo Nordisk A/S wants to support the operations of the Assessee as its holding company and hence the payment of subvention fee is being made by them to the Assessee. The agreement provides that there is no specific services to be rendered by the Assessee for the payment of subvention fee. 7. INSULIN CRYSTALS AND EXCIPIENTS BULK SUPPLY AGREEMENT DATED 15-2-1994: This agreement is between Novo Nordisk A/S and TPL. This Agreement in its preamble refers to the fact that TPL wants to enter into a long term purchase agreement with Novo Nordisk for purchase of Human Mono component and Highly Purified Porcine Insulin Crystals and Excepients, which are used as raw

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material in manufacture of 40 iu insulin vials. The agreement also refers to the know-how license and trade mark license between the Assessee and Novo Nordisk A/S and further refers to insulation formulations supply agreement between TPL and the Assessee. These are the agreements set out in sl.No.1 to 3 of the various agreements. These are referred to in appendix 5 to this agreement. Clause 2.5 of the agreement provides that appendices to the agreement form part of this agreement, i.e., Insulin Crystals and Excepients Bulk Supply Agreement dated 15.2.1994. The agreement provides for several restrictions with regard to maintenance of inventory by TPL of the raw material imported. Clause 5.3 of the Agreement is very material for the present case and it reads thus: “5.3. The Purchaser shall use the Insulin Crystals and Excepients only for the purpose of manufacturing Human Mono component and Highly purified Insulin in 40 IU vials (“formulations’) more particularly specified in Appendix4m with the know-how to be supplied by the Seller under a separate technology and know-how agreement to be entered into between the Purchaser and Novo Nordisk (India) Pvt. Ltd., a company incorporated in accordance with the laws of India, hereto, and the finished formulations shall be supplied exclusively to Novo Nordisk (India) Pvt. Ltd. under another separate product supply agreement.”

the Assessee for characterization of the activities in relation to manufacture

of Highly purified Insulin in 40 IU vials through TPL and distribution of

products directly imported from Novo Nordisk A/S as distribution function,

was of the view that the arrangements between the Assessee, Novo

Nordisk A/S and Torrent was in fact a manufacturing activity and cannot be

characterized as distribution operations. The TPO in his TP order

conducted a fresh comparability analysis based on the application of

TNMM and arrived at a set of 15 purported comparable companies with a

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mean operating margin of 8.26%. Accordingly, the TPO, considered the whole distribution segment of the Assessee for the purpose of computing

the Arm’s Length Price (ALP) adjustment, without considering the fact that the entire sales are of purchased products (more than 61% of the total

purchases being products imported from Group companies) and made an

adjustment of INR 352,638,074 [including additional adjustment computed on account of application of Profit Split Method (‘PSM’) as discussed

below].

as against TNMM applied by the Assessee in respect of the arrangement

with the Torrent for purchase of Insulin. The TPO additionally analyzed purchase of insulin from Torrent separately by applying residual PSM

based on the FAR analysis following the approach of the TPO and the learned Panel in the previous year’s assessment proceedings/Panels

proceedings. The TPO applied residual PSM in the ratio of 50:50 between

Novo Nordisk A/S and Novo Nordisk India after reducing the margins of Torrent of 9.85% from the value of insulin products. The TPO computed

the total margin in the entire transaction to be 31% alleging that on an overall basis Novo Nordisk AS earns a margin of 29% and Novo Nordisk

India’s margin for FY 2009-10 is 2% in the transaction relating to purchase of insulin products from Torrent and sold by Novo Nordisk India.

Thereafter, the TPO, held that both Novo Nordisk A/s and the Assessee

have an equal share in the overall transaction, arrived at an operating

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margin of 15.5% (50% of 31%) to be earned by the Assessee based on application of PSM, thereby enhanced the overall adjustment in distribution segment by INR 58,831,508.

“1. Whether transaction by which incipient (raw material for manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials) is supplied by Novo Nordisk A/S to TPL and the transaction by which the Assessee engages the services of TPL to convert the incipient into Human Mono component and Highly Purified insulin in 40 IU Vials and ultimately sells the same in Indian market on behalf of Novo Nordisk A/S. can be considered as an International Transaction between two Associated Enterprises attracting the provisions of Sec.92(1) of the Act? 2. If the answer to the above question is in the affirmative, whether the said transaction can be benchmarked for the purpose of determining ALP together with the international transaction of import of products directly from Novo Nordisk A/S and selling the same in India (which is purely distribution function performed by the Assessee on behalf of Novo Nordisk A/S) on

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the plea that both the transactions are interlinked and therefore have to be benchmarked together? 3. If the answer to the above question is in the negative, How the ALP of the transactions has to be determined? 4. Whether the determination of ALP as directed by the DRP is correct?

“Issue No.1: Whether transaction by which incipient (raw material for manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials) is supplied by Novo Nordisk A/S to TPL and the transaction by which the Assessee engages the services of TPL to convert the incipient into Human Mono component and Highly Purified insulin in 40 IU Vials and ultimately sells the same in Indian market on behalf of Novo Nordisk A/S. can be considered as an International Transaction between two Associated Enterprises attracting the provisions of Sec.92(1) of the Act?” 49. The learned counsel for the Assessee drew our attention to Sec.92(1) of the Act which provides that any income arising from an international transaction shall be computed having regard to the arm’s length price contemplates existence of an international transaction. It was submitted by him that the entire Transfer Pricing Provisions as contained in Chapter X of the Act will apply only when income arises from an “International Transaction”. He drew our attention to the provisions of Sec.92B of the Act, which lays down the meaning of “International Transaction”. He brought to our notice that two conditions are required to be satisfied before a transaction can be said to be “International Transaction” viz., (i) there should be a transaction between two or more associated enterprises and (ii) either or both of them should be non-residents. He pointed out that at least one party to a transaction should be a non-resident. With this background he submitted that the transaction for supply of incipient was between Novo Nordisk A/S and TPL. Though the

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condition that at least one of the parties to a transaction should be a non-resident is satisfied in respect of this transaction, TPL is admittedly not an associated enterprise of Novo Nordisk A/S. and therefore the said transaction cannot be regarded as “International Transaction”. As far as the transaction of manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials is between TPL and the Assessee, the learned counsel submitted that both the Assessee and TPL are residents and therefore the condition that either or both the parties to a transaction should be non-resident is not satisfied and therefore the said transaction cannot also be regarded as “International Transaction”. 50. He then drew our attention to the provisions of Sec.92B(2) of the Act which provides “a transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise” only expands the scope of the expression “Associated Enterprise” as used in Sec.92B(1) of the Act and it does not dispense with the condition that either or both the parties to a transaction should be non-resident for a transaction to be termed as “International Transaction”. In other words according to him Sec.92B(2) controls only the definition of “Associated Enterprises” as laid down in Sec.92A of the Act. 51, The learned counsel for the Assessee drew our attention to the decision of the ITAT Hyderabad Bench in the case of Swarnandra IJMII Integrated Township Development Co. Pvt. Ltd. Vs. DCIT ITA No.2071/Hyd/11 AY 07-08 dated 31.12.2012. In the aforesaid decision the facts were that the Assessee, Swarnandhra IJMII, was a Joint Venture company between APHB and IJM (India). IJM (India) was a subsidiary of a foreign group of companies i.e., IJM (Group). During the previous year the Assessee entered into a transaction with IJM (India). The question was whether the said transaction was a deemed international transaction. The Hyderabad ITAT held: “28.4. Section 92B(2) embodies a legal fiction. It deems a transaction to have been entered into between

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two associated enterprises. Though section 92B(2) is a part of section 92B with the heading "Definition of international transaction", it is to be read as an extension of section 92A(2) and not as an extension of section 92B(1). This is for the following reasons: (a) Both section 92A(2) and 92B(2) deal with situations under which two or more persons constitute associated enterprises. (b) Section 92B(1) does not define the term "associated enterprise". It defines the term "international transaction". This definition provides that there can be an international transaction only between two or more associated enterprises and not otherwise. Therefore recourse to section 92A and section 92B(2} is required before referring to section 92B(1}. (c) Section 92B(2} only deems certain transaction to be 'transaction between associated enterprises' and not as 'international transaction between two enterprises'. 28.5 There is a difference between associated enterprises defined under section 92A and transaction deemed to be between associated enterprises under section 92B(2}. Under section 92A, two or more enterprises once determined to be associated enterprises remain so for the entire financial year. Their relationship will not change for different transactions between them. They will remain associated enterprises even if they do not have any transaction during the previous year. On the other hand, a transaction between an enterprise and another person can be deemed to be transaction between associated under section 92B(2} only in respect of transactions specified therein and not otherwise. This fiction is transaction specific and does not apply to all transactions between the enterprise and person, on the basis that one transaction attracts section 92B(2}. 28.6 Section 92B(2} was enacted to hit at those cases where two associated enterprises intend to have an international transaction but want to avoid transfer pricing provisions by interposing a third party as an intermediary. In such cases, the third party intermediary will generally not be the ultimate

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consumer of the services or goods. The intermediary would facilitate the transfer of services or goods from one enterprise to its associate enterprise with no value addition or insignificant value addition. The intermediary is used to break a transaction into two different parts, which parts when viewed in isolation would not satisfy the requirements of section 92A. The legal form of the transaction in such circumstances is ignored. The substance of the transaction is given effect to, not by disregarding the existence of the intermediary but by deeming the transaction with the intermediary itself to be one with an associated enterprise. 28.7 The legal fiction created in respect of the specified transaction can be used only for the purpose of examining whether such transaction constitutes an 'international transaction' under section 92B(1). In case section 92B(1) is not attracted, the fiction under section 92B(2) ceases to operate. In our opinion, the impugned transaction between the assessee and IJMII does not fall under section 92B(2). This is for the following reasons. (a) Both the assessee and IJMII are residents of India for tax purposes. They pay their taxes in India. To fall under 92B(1), the international transaction has to be between associated enterprises, at least one of whom is a non-resident. As both the parties are residents, the transaction between the assessee and IJMII do not constitute an international transaction. Thus the basic premise for invoking the deeming fiction under section 92B(2) does not arise. (b) The transaction in question did not involve transfer of goods or services from the assessee to IJM Group or to any other non-resident enterprise, either directly or indirectly, or by using IJMII as an intermediary. The transaction in question involved direct rendering of services by IJMII to the assessee. (c) The APHB came into existence under the A.P. Housing Board Act, 1956. It performs governmental

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functions. Its policies are directly controlled by the Andhra Pradesh Government. In view of the active participation of the Government of AP in the functioning of the assessee, it cannot be said that IJM Group would influence the assessee either in entering into contract with IJMII or in determining the terms and conditions thereto. a. The transactions between the assessee and IJMII fall under item 4 above. Consequently, the transaction between the assessee and IJMII does not constitute an international transaction. The transfer pricing provisions of Chapter X are therefore not attracted. b. That transfer pricing provisions are not applicable to transactions between two domestic related parties. The transfer pricing regulations have been specifically been made applicable to transactions between two domestic related parties by virtue of the amendment through Finance Act, 2012. In case, the existing provisions were applicable to domestic transactions then there was no need to bring about the for the above amendment. 28.8 The primary condition for attracting transfer pricing provisions is that there should be a transaction between two or more AEs in terms of section 92A(1) and 92A(2) of the Act. In our opinion, the transactions between the assessee and IJMII do not fall under section 92B(2) of the Act. Being so, as contended by the learned AR in his lengthy arguments, in our opinion, the DRP simply wants to keep the matter alive, though they agreed with the assessee's counsel, and confirmed the order of the TPO (AO). In our opinion, the argument of the Department is devoid of merit. Accordingly, we agree with the contention of the assessee's counsel on legal issue. Since we have decided on legal issue on applicability of transfer pricing on the assessee, we refrain from going into the other grounds raised by the assessee on the issue of transfer pricing. The addition made towards transfer pricing transactions is deleted in its entirety.”

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between TPL and the Assessee i.e., the Human Mono component and Highly Purified insulin in 40 IU Vials. Clause 7.1 of the agreement provides that in the event of discontinuance of production by TPL, the all saleable unexpired stock of Insulin Crystals and excepient should be delivered to Novo Nordisk A/s. Clause-11.2 of the Agreement specifically provides that the bulk supply agreement shall be co-terminus with the Insulin Formulations Supply agreement between TPL and the Assessee and the know-how and trade mark sub-license agreement between the Assessee and TPL. 2. Know-how License Agreement and Trade mark License Agreement between TPL and the Assessee in clause 2.01 specifically provides that the agreement by which use of know- how and use of trade mark by TPL was sub-licensed to TPL for manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials, specifically provides that the Assessee will disclose the source of the Assessee’s right to grant sub-license of know-how and trade mark as from Novo Nordisk A/S and further provides that such original license agreement will be deemed to be incorporated in the sub-license agreement. 3. Insulin formulations supply agreement between the Assessee and TPL in clause 14.2 specifically provides that the agreement is co- terminus with the bulk supply agreement shall be co-terminus with the Insulin Crystals and Excepients Supply agreement between Novo Nordisk A/S and TPL and the know-how and trade mark sub-license agreement between the Assessee and TPL. 4. He also drew our attention to the Quality Testing Agreement between the Assessee and Novo Nordisk A/S whereby the testing of quality of the product manufactured by TPL is undertaken by Novo Nordisk A/S.

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international transaction entered into between the Assessee and Novo Nordisk A/S. Novo Nordisk A/S is admittedly an Associated Enterprise and was a non-resident. Therefore the conditions for applicability of the provisions of Sec.92B(1) of the Act were satisfied and therefore the said transaction was rightly held to be subject to scrutiny u/s.92(1) of the Act. 56. The learned DR next laid emphasis on the Transfer Pricing Study carried out by the Assessee in support of ALP of the international transactions entered into by it with its AE. In Para 4.3.26 of its T.P. Study at page-26, the Assessee has specifically mentioned that the transaction of sale of products purchased locally (from TPL) was a distribution function which the Assessee performs for Novo Nordisk A/S and was an international transaction. The only change that the TPO adopted was to characterise the function performed by the Assessee as “Manufacture and sale”. The following are the contents of Assessee’s own TP study:- “Distribution 4.3.26: Sale of products purchased locally: Novo Nordisk India sells Human Mono-component and Highly Purified Insulin in 40 IU vials purchased from Torrent Pharmaceuticals Limited a company formed and registered under the laws of India. These insulin products have been manufactured by Torrent from Crystals imported from Novo Nordisk A/S. This arrangement makes all the three parties namely Novo Nordisk A/S. Novo Nordisk India and Torrent, as associated enterprises and since one of the parties (i.e. Novo Nordisk A/S.) is a non-resident, it would amount to an international transaction that needs to comply with the Indian Transfer Pricing Regulations.” 57. According to the learned DR this contradictory stand taken by the Assessee in the course of proceedings before TPO/DRP and now before the Tribunal, that there is no deemed international transaction of Manufacture according him has to be rejected. According to him the essential function performed by the Assessee was clearly Manufacturing for and on behalf of Novo Nordisk A/S.

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international transaction within the meaning of Sec.92(1) read with Sec.92A and 92B of the Act. 63. The main thrust of the argument on behalf of the Assessee was that u/s.92B(1) two conditions are required to be satisfied before a transaction can be said to be “International Transaction” viz., (i) there should be a transaction between two or more associated enterprises and (ii) either or both of them should be non-residents. According to the Assessee at least one party to a transaction should be a non-resident. According to the Assessee the transaction for supply of incipient was between Novo Nordisk A/S and TPL. Though the condition that at least one of the parties to a transaction should be a non-resident is satisfied in respect of this transaction, TPL is admittedly not an associated enterprise of Novo Nordisk A/S and therefore the said transaction cannot be regarded as “International Transaction”. As far as the transaction of manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials between TPL and the Assessee, it is the stand of the Assessee that both the Assessee and TPL are residents and therefore the condition that either or both the parties to a transaction should be non-resident is not satisfied and therefore the said transaction cannot also be regarded as “International Transaction”. The above argument on behalf of the Assessee overlooks the overall arrangement between the Assessee and Novo Nordisk A/S as evidenced by the various agreements entered into between the parties. 64. The Agreement between the Assessee and TPL on the one hand and the Agreements between TPL and Novo Nordisk A/S and agreement between the Assessee and Novo Nordisk A/S are all in the year 1994 but the terms as renewed from time to time and as applicable to AY 09-10 in substance is the same. These agreements are:- 1. Know-how license Agreement dated 28.2.1994: Novo Nordisk A/S owns the know how i.e., formulae, processes, recipes, product specifications, technical and manufacturing data, information, equipment, specification, specifications of raw materials and utilities and all other technical information and data, whether patented or not, accumulated techniques, experience and skill owned or possessed or acquired (referred to as Novo Nordisk know-how) to produce Novo Nordisk products i.e., products listed in appendix-1 to the agreement,

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which includes Human Monocomponenet Insulin Formulations (40 iu/ml in 10ml vials) and Highly Purified Porcine Insulin Formulations (40iu/ml in 10ml vials) (referred to as Novo Nordisk Products). Under clause 2.01 of the know-how license agreement dated 28.2.1994, Novo Nordisk A/S grants to the Assessee the exclusive right and license to use or sub-license the use of the Novo Nordisk know-how to manufacture Novo Nordisk Products at the Plant. Plant means the manufacturing facilities of the Assessee or those of its sub-licensee and or contractor manufacturer(s) as the case may be where Novo Nordisk A/S know how is used for production of any of Novo Nordisk Products. 2. Trade Mark Master License Agrement-1 dated 28.2.1994: Novo Nordisk A/S owns Trade Marks Actrapid, Lentard, Monotard, Insulatard, Mixtard, NovoPen, NovoFine, Glucagon Novo. By the agreement dated 28.2.1994, the Assessee is given the Master License to exclusively use and or sub-license the use of the Trade Marks of the aforesaid products which are listed in Appendix-1 to the agreement. Know-how License Agreement and Trade mark License Agreement between TPL and the Assessee in clause 2.01 specifically provides that the agreement by which use of know- how and use of trade mark is sub-licensed for manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials, the Assessee will disclose the source of the Assessee’s right to grant sub-license of know-how and trade mark as from Novo Nordisk A/S and further provides that such original license agreement will be deemed to be incorporated in the sub-license agreement. 3. Insulin Formulation Supply Agreement dated 1-3-1994: By this Agreement TPL undertakes to manufacture and supply 40iu insulin to the Assessee. There is also an arrangement whereby TPL is given sub-license to use Novo Nordisk A/S Know how to manufacture Novo Nordisk Products. Insulin formulations supply agreement between the Assessee and TPL in clause 14.2 specifically provides that the agreement is co-terminus with the bulk supply agreement shall be co- terminus with the Insulin Crystals and Excepients Supply agreement between Novo Nordisk A/S and TPL and the

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know-how and trade mark sub-license agreement between the Assessee and TPL. 4. Facility Establishment Agreement dated 6.8.2005: Whereby the Assessee and TPL agree about the facility to be created by TPL exclusively for insulin production in terms of agreement of Assessee and TPL for insulin formulation supply. 5. Agreement for quality control testing dated 1-4-1997: This agreement is between Novo Nordisk A/S and the Assessee. Novo Nordisk A/S under this agreement undertakes to do quality control testing for 40 iu insulin manufactured by TPL pursuant to Formulations supply Agreement dated 1-3-1994. 6. Subvention Agreement dated 1-1-2003: This agreement is between Novo Nordisk A/S and the Assessee. This agreement explains in its preamble that the Assessee is primarily a distributor and marketer of insulin and pharmaceutical products in India. Novo Nordisk A/S wants to support the operations of the Assessee as its holding company and hence the payment of subvention fee is being made by them to the Assessee. The agreement provides that there are no specific services to be rendered by the Assessee for the payment of subvention fee. 7. INSULIN CRYSTALS AND EXCIPIENTS BULK SUPPLY AGREEMENT DATED 15-2-1994: This agreement is between Novo Nordisk A/S and TPL. This Agreement in its preamble refers to the fact that TPL wants to enter into a long term purchase agreement with Novo Nordisk for purchase of Human Mono component and Highly Purified Porcine Insulin Crystals and Excepients, which are used as raw material in manufacture of 40 iu insulin vials. The agreement also refers to the know-how license and trade mark license between the Assessee and Novo Nordisk A/S and further refers to insulation formulations supply agreement between TPL and the Assessee. These are the agreements set out in sl.No.1 to 3 of the various agreements. These are referred to in appendix 5 to this agreement. Clause 2.5 of the agreement provides that appendices to the agreement form part of this agreement, i.e., Insulin Crystals and Excepients Bulk Supply Agreement dated 15.2.1994. The agreement provides for several restrictions with regard to maintenance of inventory by TPL of the raw

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material imported. Clause 5.3 of the Agreement is very material for the present case and it reads thus: “5.3. The Purchaser shall use the Insulin Crystals and Excepients only for the purpose of manufacturing Human Mono component and Highly purified Insulin in 40 IU vials (“formulations’) more particularly specified in Appendix4m with the know-how to be supplied by the Seller under a separate technology and know-how agreement to be entered into between the Purchaser and Novo Nordisk (India) Pvt. Ltd., a company incorporated in accordance with the laws of India, hereto, and the finished formulations shall be supplied exclusively to Novo Nordisk (India) Pvt. Ltd. under another separate product supply agreement.”

As per the this Agreement for bulk supply of excepient between Novo Nordisk A/S and TPL, which the raw material for manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials by TPL, in its preamble, there is a reference to the Agreement for long term insulin formulations supply agreement between TPL and the Assessee i.e., the Human Mono component and Highly Purified insulin in 40 IU Vials. Clause 7.1 of the agreement provides that in the event of discontinuance of production by TPL, the all saleable unexpired stock of Insulin Crystals and excepient should be delivered to Novo Nordisk A/s. Clause- 11.2 of the Agreement specifically provides that the bulk supply agreement shall be co-terminus with the Insulin Formulations Supply agreement between TPL and the Assessee and the know-how and trade mark sub-license agreement between the Assessee and TPL. 65. It is clear from the aforesaid agreements that the sum and substance of all the agreements is the supply of raw material by Novo Nordisk A/S to Assessee to enable it to manufacture Mono component and Highly Purified Insulin in 40 IU Vials and sell it in India. It is a concerted action or arrangement which is brought out in a form which apparently is intended and framed in such a manner as not to attract the provisions of Sec.92B of the Act but in substance is a transaction of supply of insulin crystal which is raw material for manufacture of Mono component and Highly

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Purified Insulin in 40 IU Vials. If all the agreements are read together an agreement clearly emerges between Novo Nordisk A/S and the Assessee for supply of insulin crystals. All the agreements between Novo Nordisk A/S and TPL and between TPL and the Assessee refer to each other and specifically incorporate the terms of one agreement into the other. Thus the parties to the arrangement are Novo Nordisk A/S, Assessee and TPL. Since one of the parties to the transaction is a non-resident the conditions specified in Sec.92B(1) of the Act are satisfied.

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manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials, is not subjected to the test of ALP, it could result in erosion of tax base in India. The transfer pricing provisions will therefore apply to such transactions. We therefore hold that the transaction by which supply of excepients was made by Novo Nordisk A/S to TPL was in effect an international transaction between the Assessee and Novo Nordisk A/S. The income from such transaction had to be computed having regard to Arm’s Length Price as laid down in Sec.92(1) of the Act. The conditions laid down in Sec.92B(1) of the Act are satisfied and there is no necessity in our view to look to the provisions of Sec.92B(2) or Sec.92A(2) of the Act, though the reasons given by the DRP in its order on this aspect also, in our view is acceptable. The transaction between TPL and the Assessee for manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials, in our view, cannot fall within the ambit of the provisions of sec.92(1) of the Act. The reason for the above conclusion is that tax base erosion in India can happen only at the point of time of supply of insulin crystals by Novo Nordisk A/S. Thereafter it is the Assessee who gets the crystals converted into manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials and sells it in the Indian market. This transaction cannot result in erosion of tax base in India. The income of TPL from manufacture is subjected to tax in India. The sale of finished products by Assessee is subjected to tax in India. Therefore there can be no tax base erosion in India from the transaction of manufacture of Human Mono component and Highly Purified insulin in 40 IU Vials by Assessee through TPL. Issue No.1 is decided accordingly.

Issue No.2, 3 & 4 “2. Whether the transaction of supply of raw material excepient/insulin crystal by Novo Nordisk A/S to the Assessee can be benchmarked for the purpose of determining ALP together with the international transaction of import of products directly from Novo Nordisk A/S and selling the same in India ( which is purely distribution function performed by the Assessee on behalf of Novo Nordisk A/S) on the plea that both the transactions are interlinked and therefore have to be benchmarked together

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ALP of the two transactions. We find that the TPO characterized both the transactions as “Manufacturing” and adopted a combined approach in determining ALP. The DRP has also fallen into the same error. The DRP carved out the consideration in so far as it relates to supply of raw material by Novo Nordisk A/S is concerned but applied “Profit Split Method” (PSM) and determined a sum of Rs.3.14 crores as addition to be made on account of adjustment to ALP. In our view the entire approach by the TPO and DRP in this regard is erroneous. In our view it would be just and appropriate to set aside the order of the TPO /DRP in this regard and direct that the determination of ALP of the international transaction of (i) supply of raw material by Novo Nordisk A/S to the Assessee and (ii) import of product directly from Novo Nordisk A/S and sale of such products, which is in the nature of trading, separately. The segmental results as given by the Assessee in the chart given as ANNEXURE- 1 to this order should be adopted in this regard. As far as Quality Testing Fee is concerned, the ALP of the said transaction is to be tested again independently. The Assessee is accordingly directed to give his Transfer Pricing Analysis on the above lines for each of the transaction separately. As to what is the Most Appropriate Method (MAM) to be adopted will depend on the stand taken by the Assessee in its TP study and the opinion of the TPO on the approach adopted by the TPO. The application of Profit Split Method (PSM) as the MAM in our view requires reconsideration, as the Assessee’s request for a personal hearing before applying PSM as MAM has not been considered by the DRP. The subvention fee is claimed to be paid by Novo Nordisk A/S just to help the Assessee to help survive and that there is no specific services rendered by the Assessee. The subvention fee will therefore need to be set off against any transfer pricing adjustment that might ultimately be made. Thus the subvention fee will not be subjected to any ALP test and will only go to reduce the addition on account of determination of ALP, if any, that might ultimately survive. Issues No.2 to 4 are decided accordingly. 70. Thus grounds No. 32 to 40 and the additional ground of appeal are partly allowed.”

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the issues raised in Grounds No. 39 to 47 in the present assessment year are decided according to the decision rendered in AY 09-10 referred to

above. The AO is directed to give effect to the directions as are contained

in AY 09-10 in the present assessment year also.

by the Assessee which projects the grievance of the Assessee with regard to disallowance made u/s.40(a)(ia) of the Act. As we have already seen

Human Mono component and Highly Purified insulin in 40 IU Vials are

purchased by the Assessee from Torrent Pharmaceuticals Limited a company which is not an Associated Enterprise of the Assessee. Torrent

Pharmaceuticals Limited gets insulin in crystal form which is raw material required for manufacture of Human Mono Component and highly purified

insulin in 40 IU Vials, which is imported from Novo Nordisk A/S. TPL after

completing the process of manufacture of purified insulin in 40IU Vials sold it to the Assessee at a sum of Rs.192,89,16,836 as stated in the orders of

the revenue authorities. According to the Assessee the correct sale value was only Rs.184,95,91,300/-. According to the AO, TPL was only a

contract manufacturer and the payment made by the Assessee was a payment for contract of work and therefore the Assessee ought to have

deducted tax at source on the payments made to TPL. Since the Assessee

did not deduct tax at source, the AO disallowed the claim of the Assessee

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for deduction of a sum of Rs.192,89,16,836 which was the purchase value of the insulin purchased by the Assessee from TPL, invoking the provisions of Sec.40(a)(ia) of the Act. The Revenue’s reliance was on the decision of the Hon’ble Karnataka High Court in Assessee’s own case in ITA

No.1262/2006 dated 5.1.2012 wherein the Hon’ble Karnataka High Court

took the view that the payment made by the Assessee to TPL for insulin vials was in the nature of contract for work which requires tax deduction at source u/s.194C of the Act. According to the Assessee the issue has not attained finality and an appeal by way of SLP is pending against the said decision before the Hon’ble Supreme Court.

10.10.2014. In the aforesaid decision the amendment to Section 40(a)(ia) brought by the Finance Act 2012 was considered. The Tribunal noticed that with a view to liberalize provisions of Section 40(a)(ia) of the Act Finance Act 2012 brought amendment w.e.f 01.04.2013 as under. The following second proviso was inserted in sub-clause (ia) of clause (a) of Section 40 by the Finance Act, 2012, w.e.f. 1-4-2013 :-

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“Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of Section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.”

“Sec.201: (1) Where any person, including the principal officer of a company – (a) who is required to deduct any sum in accordance with the provisions of this Act; or (b) referred to in sub-section (1A) of Section 192, being an employer, does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax: Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident – (i) has furnished his return of income under Section 139; (ii) has taken into account such sum for computing income in such return of income; and

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(iii) has paid the tax due on the income declared by him in such return of income, and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed:

“In order to rationalise the provisions of disallowance on account of non-deduction of tax from the payments made to a resident payee, it is proposed to amend section 40(a)(ia) to provide that where an assessee makes payment of the nature specified in the said section to a resident payee without deduction of tax and is not deemed to be an assessee in default under section 201(1) on account of payment of taxes by the payee, then, for the purpose of allowing deduction of such sum, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee.”

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been introduced. In case of payment to non-resident, the government does not have any other mechanism to recover the due taxes. Hence, no

amendment was made in section 40(a)(i). The legislature has not given blanket deduction under section 40(a)(ia). The deduction as per amended

section will be allowed only if the -

(i) payee has furnished his return of income under section 139; (ii) payee has taken into account such sum for computing income in such return of income; and (iii) payee has paid the tax due on the income declared by him in such return of income, and the payer furnishes a certificate to this effect from an accountant in such form as may be prescribed.

when the provisions of Sec.40(a)(ia) were introduced. Keeping in view the

purpose behind the proviso inserted by the Finance Act, 2012 in section 40(a)(ia) of the Act, it can be said to be declaratory and curative in nature

and therefore, should be given retrospective effect from 1st April, 2005, being the date from which sub-clause (ia) of section 40(a) was inserted by

the Finance (No. 2) Act, 2004.

AO and DRP. The said Certificate in Form No.26A of a Chartered Accountant is a certificate certifying that TPL has paid tax on the sum of

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Rs.184,95,91,300/- received from the Assessee. It was therefore contended by him that in view of the amended provisions of law referred to

above which have been held to have retrospective operation and in view of the fact that the Assessee has satisfied the Revenue that taxes due on

payment made by it to TPL have been declared by TPL in their return of

income, the issue may be restored to the AO to verify the claim of the Assessee and if it is found that TPL has in fact included the receipts from

the Assessee in its returns of income and paid taxes thereon than to that extent the disallowance u/s.40(a)(ia) of the Act be deleted.

Assessee and are of the view that the plea made by him in the light of the decisions relied upon by him deserve to be accepted. Accordingly, the

order of the AO making disallowance u/s.40(a)(ia) of the Act which was sustained by the AO/DRP is set aside and the issue of disallowance

u/.s.40(a)(ia) of the Act is directed to be decided afresh by the AO in the

light of the certificate in form No.26-A filed by the Assessee and in the light of the decision referred to by the learned counsel for the Assessee. The

correctness of the sale value as claimed by the Assessee will also be verified by the AO. The AO will afford opportunity of being heard to the

Assessee before deciding the issue with liberty to furnish additional evidence to substantiate the claim of the Assessee. Accordingly these

grounds are treated as allowed.

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ALP in respect of all international transactions which were referred to TPO and considered by the DRP in so far as it is prejudicial to the Assessee.

These grounds need no specific adjudication.

determination of ALP in respect of an international transaction of rendering IT enabled Services(ITES) by the Assessee to its AE. The Assessee

received a sum of Rs.6,48,93,316/- for rendering ITES to its AE. The

Assessee operating profit to total cost was 13%. The TP study of the Assessee arrived at arithmetic mean of certain comparable companies of

14% and claimed that the price the Assessee charged its AE was at Arm’s Length. The TPO rejected the TP study of the Assessee and arrived at a

set of 9 comparable companies whose arithmetic mean was 25.69%. The

details in this regard are given at para 3.5. at page 8 of the TPO’s order. After allowing working capital adjustment of -1.93%, the arithmetic mean of

comparable was arrived at by the TPO at 27.62%.

subsequently reduced to Rs.83,95,931. The addition was sustained by the

DRP. Hence, the aforesaid grounds of appeal by the Assessee before the Tribunal.

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(India) Private Limited Vs. ACIT ITA No.144/Hyd/2014 AY 09-10 order

dated 30.9.2014 and it was held therein that the aforesaid companies are not comparable with a ITES service providers such as the Assessee.

and the Tribunal held as follows on the comparability of the aforesaid companies with a company providing ITES in the following manner:-

“10. In grounds No.4 to 6, the assessee has challenged the comparables selected by the TPO for the purpose of TP analysis and as submitted by the learned counsel or the assessee, the assessee is objecting to the selection of only the following five comparables, out of the twelve companies selected as comparables-

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Sl. No. Company Name 1. Accentia Technologies Limited 2. Cosmic Global Ltd. 3. Eclerx Services Ltd. 4. Genesys International Ltd. 5. Infosys B P O Ltd.

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the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) P. Ltd. (supra), which indicates that the TPO therein has excluded it at the outset. In view of this, we direct the Assessing Officer/TPO to exclude this comparable, from the list of comparables selected.”

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Respectfully following the decision of the Hon’ble Delhi High Court in the case of Agnity Technologies P. Ltd. (supra), we direct the Assessing Officer/TPO to exclude Infosys BPO from the list of comparables.”

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It is the grievance of the Assessee that the TPO/AO/DRP have erred in re- characterizing the Assessee as a Clinical Research Organization (“CRO”)

as opposed to a mere coordinator of clinical trial activities being carried out in India on behalf of its AE. Without prejudice it has also been prayed that

TPO/AO/DRP erred in accepting certain comparables which do not render

clinical trial services. It has also been urged by the Assessee that TPO/AO/DRP have erred, in law and in facts, by not accepting the

functional and economic analysis undertaken by the Assessee in accordance with the provisions of the Act read with the Rules, which was

duly accepted by the learned AO/ TPO under identical facts and circumstances in the Assessee’s own case for the earlier assessment year

without assigning any cogent or valid reasons.

2010-11. This receipt comprises of two distinct activities : (1) ROFE, which

is in the nature of administrative support services; and (ii) Clinical Trial Activities. The international transactions pertaining to Clinical Trial

Segment was analysed by the TPO as under.

types of expenditure. First, its own cost of Rs. 68,03,275/- and second, cost

of Rs.6,19,54,270/- on account of activities outsourced. While it has received compensation of cost with mark up of 13% relating to former, it

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received latter amount on cost-to-cost basis and claimed it as reimbursements.

• Conclude clinical study contracts with the independent investigators capable to carry out the trials according to the required standards and procedures; • Control and monitor the clinical study process; • Provide the investigators (and support personal) with necessary information and training with respect to procedures and scope of research; • Undertake periodical verification of the progress of clinical trials;

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• Pay visits to hospitals and collect the study medication and additional materials, study documentation; • Conduct preliminary compilation of results; • Assist in final elaboration of the outcome of tests; • Conduct the additional activities necessary to perform the above activities, such as supplying services the investigators with the appropriate forms and questionnaires for each phase of the research, ordering translation of the necessary documents and supplying the investigators with study medication to be used exclusively within the trials. Further, the Assessee basically acts as the first line local liaison and is responsible for complying with all the local regulatory requirements including filing price information with the price control authorities. The costs of local registration trials and phase IV (Post Marketing Studies) trials are met by the Assessee as part of its distribution activities. Phase IV trials have a mainly marketing function to spread knowledge about a new drug and to induce doctors to prescribe it. If a competitive product already exists in the Indian market and Novo Nordisk A/S is introducing a similar but superior product, the medical department provides information about the superiority of Novo Nordisk A/S product to the Indian drug control authorities and obtains the necessary permission to launch the product. However, in case of launching a new product then the clearance from the Indian drug control authorities is obtained by providing factual proof of trials (all phases) including the approvals if any received in other countries. Further, on an ongoing basis, so long as the drug is marketed in India, Nova Nordisk India updates the authorities on safety information. The Assessee undertakes support and coordination services with respect to phase II and phase III of the multi-centric trials for products of Novo Nordisk A/S, which are under development. The Assessee identifies centers for trials, selects the patients and ensures that the trials are run as per Good Clinical Practices (“GCP”) laid out by Novo Nordisk A/S. These tests are administered on patients in India with local permission from the authorities and with the consent of the patients through the investigators. The results of these studies are then collated and

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reported to Novo Nordisk A/S for further analysis and research. The Assessee pointed out that it’s infrastructure was only in the form of furniture and fixtures, office equipment, data processing machines, motor vehicles and lease hold improvements, which were used for general administration and it was not sufficient for carrying out the whole clinical research activity. The main function of the Assessee is to collate the data and transmit the same to Novo Nordisk A/S for which it is substantially reimbursed by Novo Nordisk A/S by mark-up of 13% on cost. The above activities are akin to provision of administrative and co-ordination services. The Assessee acts as a local liaison with Hospitals/Doctors/Investigators/Patients and is responsible for complying with all the local regulatory requirements. The services include initiate, plan and co-ordinate with necessary departments including corporate global development for undertaking of clinical trials support services as directed by Novo Nordisk A/S. The Assessee reiterated that it was not involved in any clinical research activity but was facilitating only contract support services to Novo Nordisk A/S, as referred to above. The Assessee submitted that it transfers the cost of clinical trial activities undertaken by independent investigators without any mark-up. The Assessee emphasized that the actual services performed as stated earlier, is limited to mere support and coordination services for the clinical trial activity of Novo Nordisk A/S, and does not perform any services/functions of a clinical research or organization as alleged by your good(self) during the hearing.

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“5.7 ALP COMPUTATION:

In the light of the above discussions, the arm’s length price of receipt of compensation in clinical Trial Segment, is computed as under. Arm’s Length Mean Margin 18.37% Clinical Trial cost + Reimbursement relating to Rs.6,87,57,545 clinical trial (Rs.68,03,275 + Rs.6,19,54,270) Arms Length Price (ALP) @ 118.37% of Clinical Rs.8,13,88,306 trial operating cost Price received + Reimbursement relating to clinical Rs.6,96,41,970 trial (Rs.76,87,700 + Rs.6,19,54,270) Adjustment u/s. 92CA Rs.1,17,46,336

The above amount of Rs.1,17,46,336/- is treated as transfer pricing adjustment u/s 92CA in respect of Clinical Trial Segment of the taxpayer’s international transaction for the AY 2009-10.”

“15.3. Based on the above arguments, the assessee holds that the comparables selected by the TPO are functionally different from its own activities. However, the TPO on a consideration of the argument proceeded to determine the Transfer Pricing adjustment found that the functions discharged by the tax payer, assets deployed, risks assumed need not be separated out in order to distinguish its own cost and the comparable cost if

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done through third parties, when all the activities led to clinical trials conducted on behalf of the AE, which does not have any physical presence in India. 15.4. We have carefully considered the issue. From a perusal of the activities of the assessee, we find it farfetched to classify the same as mere administrative or coordination services. The conducing of clinical trials is a complicated process involving various statutory and regulatory frameworks and responsibilities, all of which, are shouldered by the assessee itself. The FAR analysis made by the TPO does not indicate the superficial level of involvement which could characterize the activities of a mere supporter or coordinator. 15.5. From the assessee’s submissions, it is also noted that the role of the principal is limited to deciding upon the particular clinical trial to be conducted and identification of countries/geographical areas for the purpose. It is the assessee which applies for all local approvals and conducts all aspects of the clinical trial activities. Apart, from selection of the hospitals/institutions, the clinical trial agreements with these bodies are also entered into by the assessee itself. All quality control and inspection work is performed by the assessee, which is also fully responsible for legal compliances in India. As such it follows that the assessee shoulders substantial local risk in the course of its activities. 15.6. In view of the above, we are of the view that comparables taken by the TPO as bodies engaged in clinical trial activities are fully justified. For determination of the ALP, therefore, the AO has correctly adopted certain comparables which are however not acceptable to the assessee. The argument of the assessee seeks to lighten the depth of its involvement in clinical trials which we do not find acceptable. It performs as a full fledged clinical services provider to its AE and ought to be compensated as such. Accordingly, this objection is not acceded to.”

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decision of the Mumbai ITAT in the case of Zydus Atlanta Healthcare

(P) Ltd. (supra) and find that the issue as to whether the AE was

doing clinical research or administrative service is essentially a factual issue. The Assessee to substantiate its case that it was only co- ordinating in the matter of carrying out clinical research on behalf of the AE has not filed any evidence but has only made assertions. Facts with regard to the activities carried out by it on behalf of the AE for which the Assessee received administrative support service fee are within its knowledge. It has to substantiate that clinical research was in fact carried out by a third party pursuant to agreement with the AE and not with the Assessee and that the Assessee only carried out co- ordination activity for which it received payment from AE. Mere assertion before TPO/DRP and description of functional profile in the TP study will not be sufficient. We therefore direct the TPO to consider the issue afresh. The Assessee has to substantiate the real activities with supporting evidence and show that it did not carry out any clinical trial and that it acted only as co-ordinator between the AE and

IT(TP)A No.146/Bang/2015 Page 51 of 52

independent clinical trial service providers or hospitals. In the event of the Assessee’s activities held to be clinical trial than the AO/TPO shall afford the Assessee opportunity to object to the comparability of the comparables that has been chosen or might be chosen by the TPO and in particular the additional evidence in the form of annual reports of Choksi Laboratories Ltd., NG Indusrtries Ltd. And Suven Life Sciences Ltd., sought to be filed before us should be permitted to be filed in the set aside proceedings. These grounds are accordingly treated as allowed for statistical purposes.

Pronounced in the open court on this 30th day of July, 2015.

Sd/- Sd/-

( ABRAHAM P. GEORGE ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member

Bangalore, Dated, the 30th July, 2015.

/D S/

IT(TP)A No.146/Bang/2015 Page 52 of 52

Copy to:

By order

Assistant Registrar/ Senior Private Secretary ITAT, Bangalore.