Transfer pricing gyalcmandan 110R5pR 16, 2011 g pagcs 6 January 2011 International Tax Alert News and views from Transfer Pricing Mumbai Tribunal upholds TP adjustment that substituted taxpayer’s ransactional Net Margin Method with Comparable Uncontrolled Price Method Executive summary The Mumbai Income-tax Appellate Tribunal (Tribunal), in a ruling in the case of Serdia Pharmaceuticals (India) Private Limited (Taxpayer), has adjudicated on certain transfer pricing (TP) issues with respect to determining the arm’s length Price (ALP) for the import of generic dru b the tax a er from its associated
S»ipeto next*ge enterprises (AE). The based on the Transa the arm’s length pric to the Tribunal, the e method implies that org alt xpayers analysis d (TNMM) to test sactions. According ost appropriate method is to be ranked in some order. Accordingly, it is open to the Tax Authority to reject the TNMM and adopt the Comparable Uncontrolled Price (CUP) method on the basis that the latter is most appropriate on the facts of the case. The Tribunal found that the CUP method is the most appropriate method to determine the arm’s length Price in the case of generic drug manufacturers so long as comparables re available.
As the products imported are generic drugs and not patent protected, the CUP method 1 ITA Nos: 2469,’Mum/06, 3032/Mum/07 and 2531/Mum/08. could be used. The Tribunal also observed that while innovators of drugs are allow allowed monopolistic pricing during the period when patents are in force so as to recoup the research and development (R) costs, once the patent period expires, the higher pricing of the drug vls-à-vis prices of generic drugs manufactured by competitors [Yffgl Z] gf I x] _jgmft g»‘ heavy R&D costs. arithmetic mean of the operating margins of the comparable companies.
Accordingly, the international transactions are at arm’s length. During the audit proceedings, the Tax Authority, based on the inputs from the Taxpayer, collected information on the prices at which the APIS are purchased by other manufacturers of competing FDFs. The Tax Authority observed that the APIS purchased by the Taxpayer from its AES are not unique items since other manufacturers are also purchasing the seme APIS, though from different vendors. The Tax Authority thus rejected the TNMM applied by the Taxpayer and proceeded to compute the ALP on the basis of the CUP method.
With respect o the CUP of one of the APIS, the Tax Authority held that the Price paid to the AE was more than four times the ALP. For a CUP of another of the APIS, the Tax Authority held the Price paid to the AE to be more than 2. 5 times the ALP after allowing an adjustment for differences in quality norms and purity standards. Being aggrieved by the Tax Authority’s order, the Taxpayer YfYhhlYd Yl Õjkl% d]nld YhhlddYl] Yml’ gjalq& L • ] ójkl appellate authority decided the matter in favor of the Revenue Authority.
L ‘ ] LYphYqlj Yf Yhh]Yd Z]Agj] the Tribunal, the second-level appellate authority, against the gj] Yf Yhh]Yd Z]Agj] the Tribunal, the second-level appellate authority, against the gn l’] Õjkl%d]n]d Yhh]ddYI] authority. Contentions of the Taxpayer The Indian TP rules do not prescribe a hierarchy of methods for ascertaining the ALP- The right to choose the most appropriate method to determine the ALP rests with the taxpayer and unless the Tax Authority can demonstrate that the ALP so computed is not in accordance with the rules, the Tax Authority cannot reject the method chosen by the taxpayer.
Developing a new drug entails huge costs and efforts and that is the reason why riginal inventors need to charge higher prices for their products. It is thus submitted that the Price at which a drug is sold by the enterprise that has invented the Said drug cannot be compared with the Price at which other enterprises manufacture and sell the same drug. The Indian TP rules prescribe strict comparability requirements for the use of CUP. The API manufactured bythe AE, which is the inventor of the drug, cannot be compared with the API manufactured by other enterprises.
The taxpayer also relied on the decision of the Mumbai Tribunal in the case of UCB India Pvt Ltd v ACIT (118 TTJ 865). The products manufactured WIth the APIS supplied by the Taxpayers AES are guaranteed for quality and the AES also provide product liability coverage with respect to the FDFs manufactured out of such APIS. In View of these differences, the comparables proposed by the ax Authority cannot be considered to be comparables. Background and facts of the case The Taxpayer, an Indian company and part 31_1f8 to be comparables.
The Taxpayer, an Indan company and part ofthe French pharmaceutical group, Les Laboratories Servier France, is engaged in manufacturing and eyjc]laf_ gn af Ófak dosage forms (FDFs). The Taxpayer imports, from its associated enterprises (AES), certain active pharmaceutical ingredients (APIs), which are necessary for the manufacture and sale of drugs as FDFs. Thus, the PDF is produced and marketed by the Taxpayer, while the API, which is the key element containing medicinal properties, is imported from its AES. gmjl g’N Appeal, except to the extent that the matter was sent back to the Tax Court to determine the impact of the license agreement, which enabled the buyer of the API to sell the FDF under the brand name owned by Glaxo- The Tribunal also stated that similar to the taxpayer’s case there is no aterial on record to suggest that the higher prices for the APIS were warranted due to commercial compulsions arising from a license agreement. The Federal Court’s ruling does not dilute the conclusions reached by the Tax Court.
Based on the above, the Tribunal concluded that the CUP method Will be the most appropriate TPM with respect to the purchase of generic drugs, even when such a generic drug is manufactured by the original patent holder_ Customs valuation and transfer pricing L ALD Y mechanism for computation of the ALP, and it is only when determination ofthe ALP is made in accordance with the scheme f the ITL that the onus of the taxpayer is discharged. Merely because another arm with the scheme of the ITC that the onus of the taxpayer is discharged.
Merely because another arm of the government considers this Price an arm’s length Price, even though for the purposes of customs duty, the taxpayer cannot be relieved of the burden of establishing that it is an arm’s length Price, for purposes of TP requirements. Comments The ruling provides guidance on certain TP issues that are currently faced by taxpayers in India. The jmdaf_ [gfôjek I • YI k]d] [lagf gn Y TPM is not a mechanical exercise and that the taxpayer hould evaluate all relevant factors befare selecting the most appropriate method.
This ruling, consistent with other recent rulings, continues the practice of relying on the OECD Transfer pricing Guidelines as well as foreign country case law while addressing issues under the Indian TP rules. Hence, it becomes important for taxpayers to give due consideration to international TP developments while dealing with Indian TP issues. For additional information with respect to this Alert, please contact the following: Ernst & Young Private Limited, Bangalore Rajendra Nayak +91 80 4027 5454 rajendra. ayak@in. ey. om 4 International Tax Alert Transfer Pricing Transfer Pricing C] C] Global Transfer Pricing, Germany Thomas Borstell, +49 21 1 9352 10601 Americas, United States Bob Ackerman, +1 202 327 5944 purvez captan 713 750 8341 EMEIA, Germany Thomas Borstell, +49 211 9352 10601 Asia Pacific, Shanghai Luis coronado, +86 21 2228 3366 Argentina Albania Australia ium Brazil Bulgaria Canada Sl_1f8 Chile China Colombia Cost Albania Australia Austria Belgium arazil Bulgaria Canada Chile China Colombia Costa Rica Croatia Czech Republic Denmark Ecuador Egypt Estonia Finland France Germany Greece Hong
Kong Hungary India Indonesla Ireland Israel Italy Japan Kazakhstan Korea Latvia Lithuania Luxembourg Malaysia Mexico Netherlands New Zealand Norvuay peru Phillipines Poland Portugal Romania Russia Singapore Slovak Republic Slovenia South Africa Spain Sweden Switzerland Taiwan Thailand Turkey United Kingdom United States Venezuela Vietnam Carlos Casanovas Alexandros Karakitis Paul galkus Andreas Stefaner Hervu•ig Joosten Gil Mendes Laszlo Szaka Sean Kruger Osiel Gonzales Luis Coronado Gustavo Pardo Rafael Sayagues Denes Szabo Libor Fryzek Thomas Bjerre Javier Salazar Sherlf El Kilany Ranno Tlngas Kennet pettersson
Franck Berger Oliver Wehnert Aggelos Benos Patrick Cheung Zoltan Liptak Vijay lyer Carlo Navarro Dan McSwiney Lior Harary- Nitzan Davide Bergami Kai Hielscher Roman Yurtayev Rap Chai llana Butane Leonas Lingis Paul Leyder Janice Wong Jorge Castellon Danny Oosterhoff Mark Loveday Marius Leivestad Marcial Garcia Romulo Danao Aneta Blazejewska-Gaczynska Paulo Mendonca Alexander Milcev Henrik Hansen Jesper Solgaard Gunter Oszwald Denes Szabo Karen Miller Ramón Palacín Mikael Hall Edvard Rinck George Chau Anthony Loh Feridun Gungor Tim Steel Bob Ackerman Purvez Captain Katherine Pinzon Nitin Jain 54 11 4318 1619 +355 424 19 574 +612 9248 4952 +43 1 211 70 1041 02 774 9349 11 2112 5466 +359 2 8177 141 +1 416 941 1761 +56 26 761 141 +86 21 2228 3366 +1571 651 2210 +1 212 7734761 +36 1 451 8209 + 212 773 4761 +36 1 451 8209 +420 225 335 310 +45 3 587 2901 +1 593 2 255 5553 +20 23 336 6627 +372 611 4578 +358 40 556 1 181 +33 4 78 63 17 10 +49 21 1 9352 10627 +30 210 288 6 024 4852 2846 9905 +36 1 451 8638 +91 98 1049 5203 +62 21 5289 5000 +353 1 221 2094 +972 3 623 2749 +39 02 851 4409 +49 89 14331 16711 +87 727 258 5960 +82 2 3770 1001 +371 704 3836 +370 5 274 2279 +352 42 124 7240 +6 03 7495 8223 +52 1 81521829 +31 88 40 71007 +64 g 300 7085 +47 24 OO 23 86 +151 1 411 4424 +63 2 894 8392 +48 22 557 8996 +351 21 791 2045 +402 1402 4000 +7 495 648 9608 +65 6309 8038 +421 2 333 39610 +36 1 451 8209 +27 21 443 0200 +34 915 727 485 +46 8 520 592 35 41 58 285 4250 +86 21 2228 8888 +662 264 0777 +90 212 368 5204 20 7951 1149 +1 202 327 5944 +1 713 750 8341 +58 212 953 5222 +84 8 832 45252 C] CICI Japan, Tokyo Kai Hielscher, +49 89 14331 16711 Global Markets, United Kingdom John H0bster, +44 207 951 6438 TESCM, Amsterdam Victor Bartels, +31 88 4071 378 Ernst & Young Assurance Tax I Transactions Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141 ,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, cur clients and cur wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity.
Ernst & Young Global Limited, a UK company limited by guara Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please VISit www. ey. com. CICI About Transfer Pricing/TESCM We bring you a global perspective on transfer pricing and tax effective supply chain management (TESCM), based on Our long-standing experience ofwhat really Works. We help you configure Your supply chain effectively and design and implement sustainable transfer pricing policies. Our multi-skilled teams support you in implementing proactive, pragmatic and integrated strategies that address tax risks and help your business achieve its potential.
It’s how Ernst & Young makes a difference. www. ey. com 2011 EYGM Limited. Ali Rights Reserved. EYG no. CM2211 This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. International Tax Alert Transfer pricing 81_1f8