Fulford India Ltd. imported active pharmaceutical ingredients (APIs) from related Group companies and sold them in India. The cost plus method had been used by Fulford to determine the arm’s length price of the controlled transactions.
Following an audit for the financial year 2003-04, the tax authorities determined that the CUP method was the most appropriate method and issued an assessment of additional taxable income.
An appeal was made to the Income Tax Appellate Tribunal.
Judgment
The Tribunal dismissed Fulford’s appeal and upheld the decision of the tax authorities to apply the CUP method.
Excerpts
“In the instant case, the appellant’s therapeutic segment are distinct i.e. systematic anti-infectives, dermatologicals, oral steroids, anti histamine having distinct process, patent, formulations and regulatory requirements. Thus CPM is not the appropriate method in the instant case. Accordingly, their manufacturing into final product cannot be clubbed together to compare gross profits with gross profits of manufacturing of products related to distinct generic or APIs procured from non-AEs.
…
Facts being nearly identical, respectfully following the orders of the Co-ordinate Bench in Serdia Pharmaceuticals (India) (P.) Ltd. (supra) and
Merck Ltd. (supra), we hold that CUP is the most appropriate method in the instant case.
However, adjustments under CUP method need to be examined by the AO/TPO for the reason that under the CUP method adjustments can be made for differences such as differences in the terms of contract, quantity sold or purchased, nature of market (retail or wholesale), credit period allowed, delivery terms, foreign currency risks etc. which might affect the price in the open market.
7.6 Accordingly, we hold that the TPO/AO has rightly adopted the CUP as the most appropriate method in the instant case…”