M/S. SERDIA PHARMACEUTICALS (INDIA) PVT. LTD, MUMBAI v. THE ACIT 7(2), MUMBAI

ITA 3032/MUM/2007 | 2003-2004
Pronouncement Date: 31-12-2010 | Result: Dismissed

Appeal Details

RSA Number 303219914 RSA 2007
Assessee PAN RULES1962A
Bench Mumbai
Appeal Number ITA 3032/MUM/2007
Duration Of Justice 3 year(s) 8 month(s) 11 day(s)
Appellant M/S. SERDIA PHARMACEUTICALS (INDIA) PVT. LTD, MUMBAI
Respondent THE ACIT 7(2), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 31-12-2010
Appeal Filed By Assessee
Order Result Dismissed
Bench Allotted L
Tribunal Order Date 31-12-2010
Date Of Final Hearing 12-10-2010
Next Hearing Date 12-10-2010
Assessment Year 2003-2004
Appeal Filed On 19-04-2007
Judgment Text
ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 1 OF 71 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI L BENCH MUMBAI [CORAM : N V VASUDEVAN JM AND PRAMOD KUMAR AM ] ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEARS: 2002-03 2003-04 AND 2004-05 SERDIA PHARMACEUTICALS (INDIA) PRIVATE LIMITED .. APPELLANT VS. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 7(2) MUMBAI 400020 ... RESPONDEN T APPEARANCES MUKESH BUTANI SRIRAM SESHADRI AND NISHTHA DHAWAN FOR THE APPELLANT NARENDRA SINGH FOR THE RESPONDENT O R D E R PER PRAMOD KUMAR: 1. IN THIS BUNCH OF APPEALS THE TAXPAYER HAS CHALL ENGED CORRECTNESS OF COMMISSIONER (APPEALS)S UPHOLDING FOLLOWING ARMS LENGTH PRICE (ALP) ADJUSTMENTS IN THE VALUE OF IMPORTS OF ACTIVE PHAR MACEUTICAL INGREDIENTS (APIS) BY THE TAXPAYER: API ASSESSMENT YEAR ALP ADJUSTMENT TRIMETAZIDINE 2002-03 1 46 43 552 INDAPAMIDE 2002-03 48 89 85 6 TRIMETAZIDINE 2003-04 2 74 85 204 INDAPAMIDE 2003-04 47 06 566 GLICAZIDE 2003-04 1 55 31 833 TRIMETAZIDINE 2004-05 3 60 21 884 INDAPAMIDE 2004-05 53 25 367 GLICAZIDE 2004-05 2 12 49 394 AGGREGATE OF IMPUGNED ALP ADJUSTMENTS 12 98 53 656 ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 2 OF 71 2. THE TAXPAYER I.E. SERDIA PHARMACEUTICALS IND IA PRIVATE LIMITED ( SERDIA IN SHORT) IS A COMPANY INCORPORATED IN INDIA AND 74% OF ITS SHARE CAPITAL IS HELD BY SERVIER INTERNATIONAL BV ( SERVIER BV IN SHORT) A COMPANY INCORPORATED IN THE NETHERLANDS AND THE R EMAINING 26% OF ITS SHARE CAPITAL IS HELD BY A MAURITIUS BASED COMPANY BY THE NAME OF SERDIA (MAURITIUS) LIMITED. SERVIER BV IN TURN IS A SUBS IDIARY OF LES LABORATOIRES SERVIER FRANCE ( SERVIER FRANCE IN SHORT) A WELL-KNOWN PHARMACEUTICAL COMPANY WHICH IS SAID TO HAVE ITS PR ESENCE IN MORE THAN 140 COUNTRIES WORLDWIDE INCLUDING IN EGYPT BY WAY OF A SUBSIDIARY IN THE NAME OF SERVIER EGYPT INDUSTRIES LTD EGYPT ( SERVIER EGYPT IN SHORT). 3. SERDIA IS ENAGEGD IN THE BUSINESS OF PRODUCING D RUGS MAINLY IN THE FIELD OF ANTI-HYPERTENSION AND METABOLISM. IT PRODU CES AND MARKETS DRUGS IN FINISHED DOSAGE FORMS (FDFS) WHICH IS WHAT A DR UG IS CALLED WHEN IT IS READY FOR END USE BY THE CONSUMER AND IN THE PROCE SS OF PRODUCING THESE FDFS THE ASSESSEE IMPORTS ACTIVE PHARMACEUTICAL IN GREDIENT (API) FROM SERVIER FRANCE AND SERVIER EGYPT. 4. PHARMACEUTICAL PRODUCTS ARE MANUFACTURED IN TWO BASIC STAGES REFERRED TO AS PRIMARY MANUFACTURING AND SECONDARY MANUFACTURING. PRIMARY MANUFACTURING IS MAKING THE ACTIVE PHARMACE UTICAL INGREDIENT FOR A PHARMACEUTICAL PRODUCT. SECONDARY MANUFACTURI NG INCLUDES THE PROCESS OF PUTTING THE ACTIVE INGREDIENT INTO A DEL IVERY MECHANISM OR PACKAGING SUCH AS A TABLET LIQUID OR GEL. AN ACT IVE PHARMACEUTICAL INGREDIENT (API) IS THUS KEY ELEMENT AND SUBSTANCE IN A PHARMACEUTICAL DRUG AND IT IS THIS API WHICH CONTAINS MEDICINAL P ROPERTIES. A FINISHED DOSAGE FORM OF A DRUG IS TRADITIONALLY COMPOSED OF TWO THINGS- THE API WHICH IS THE DRUG ITSELF; AND AN EXCIPIENT WHICH I S THE SUBSTANCE OF THE TABLET OR THE LIQUID THE API IS SUSPENDED IN OR O THER MATERIAL THAT IS PHARMACEUTICALLY INACTIVE OR INERT. THE EXCIPIENTS ARE THUS KIND OF A VEHICLE FOR AN API WHICH ARE PHARMACEUTICALLY INER T AND REPRESENT ALL THE ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 3 OF 71 CONSTITUENTS OF AN FDF WHICH LACK MEDICINAL PROPERT IES. IT IS THUS NOTHING MORE THAN UNAVOIDABLE EXCESS BAGGAGE WITH THE API BUT ESSENTIAL IN THE SENSE THAT IT IS A VEHICLE FOR THE API. A DRUG AS FDF MAY CONTAIN ONE OR MORE APIS AND THE DRUGS ARE CHOSEN PRIMARILY FOR T HEIR ACTIVE INGREDIENTS. 5. AN API MAY BE A PATENTED OR GENERIC. A PATENTED API CAN BE PRODUCED BY THE PATENT HOLDER AND THIS MONOPOLY AL LOWS THE PHARMACEUTICAL COMPANY WHICH DEVELOPED THE DRUG T O SELL IT IN A MONOPOLY MARKET AND THUS ALLOWS THE COMPANY TO RECO UP THE COST OF DEVELOPING THAT PARTICULAR DRUG BY SELLING THE DRUG IN MONOPOLISTIC CONDITIONS. THE PATENTS HOWEVER DO NOT LAST FOR E VER AND THE PATENTS HAVE GEOGRAPHICAL LIMITATIONS TOO. ONCE PATENT ON A N API EXPIRES OR IS NOT VALID IN A PARTICULAR GEOGRAPHICAL LOCATION ANY PH ARMACEUTICAL COMPANY CAN MANUFACTURE AND SELL THAT API. THE API THEN BEC OMES GENERIC IN NATURE AND THE EXPIRATION OR INAPPLICABILITY OF THE PATENT ENDS THE MONOPOLY OF THE PATENT HOLDER. 6. SERDIA IS ENGAGED IN SECONDARY MANUFACTURING PRO CESS IN THE SENSE IT DOES IMPORT THE ACTIVE PHARMACEUTICAL INGREDIENT S PUTS THEM IN A DELIVERY MECHANISM BY COMBINING THEM WITH EXCIPIENT S AND THUS PRODUCE THE FDF I.E. FINISHED DOSAGE FORM FOR CON SUMPTION BY THE END USER. THE FDF IS PRODUCED AND MARKETED BY SERDIA W HILE THE API IS IMPORTED FROM ITS AES. SO FAR AS THE DISPUTE IN TH E FIRST YEAR I.E. ASSESSMENT YEAR 2002-03 IS CONCERNED THE FDFS PR ODUCED BY SERDIA ARE FLAVEDON 20 FLAVEDON MR (IN WHICH TRIMETAZIDINE I S USED AS API) AND NATRILIX AND NATRILIX SR (IN WHICH INDAPAMIDE IS US ED AS API). IN THE NEXT TWO YEARS I.E. ASSESSMENT YEARS 2003-04 AND 2004-0 5 THE DISPUTE EXTENDS TO FDF DIAMICRON AND DIAMACRON MR WHICH HA S GLICLAZIDE AS API. ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 4 OF 71 7. THE ISSUE IN DISPUTE IS THE ARMS LENGTH PR ICE OF THE ABOVE THREE APIS I.E. TRIMETAZIDINE INDAPAMIDE AND GLICLAZI DE THAT SERDIA IS IMPORTING FROM ITS AES NAMELY SERVIER FRANCE AND SERVIER EGYPT. 8. DURING THE COURSE OF RELATED ASSESSMENT PROCEED INGS THE ASSESSING OFFICER MADE REFERENCES TO THE TRANSFER P RICING OFFICER (TPO IN SHORT) UNDER SECTION 92CA(2) FOR DETERMINATION OF A RMS- LENGTH PRICE FOR THE TRANSACTIONS THAT SERDIA ENTERED INTO WITH ITS AES. AS FAR AS ASSESSMENT YEAR 2002-03 IS CONCERNED THE TPO RECEI VED THE REFERENCE ON 20 TH JANUARY 2004. THE TPO NOTED THAT THE SERDIA HAS D ETERMINED THE ALP BY ADOPTING TNMM WITH OPERATING MARGIN AS A P ERCENTAGE OF NET SALES AS MOST APPROPRIATE METHOD. THE COMPARABLE C OMPANIES AS SELECTED BY SERDIA SHOWED OPERATING MARGINS RANGIN G BETWEEN (-) 13.29% TO 19.07% AND THE ARITHMETIC MEAN OF MARGIN OF COMPARABLE COMPANIES WAS FOUND TO BE 6.67%. THE CLAIM OF THE A SSESSEE WAS THAT SINCE ITS OPERATING PROFIT AT 8.76% ON NET SALES WA S HIGHER THAN 6.67% ITS INTERNATIONAL TRANSACTIONS ARE AT ARMS-LENGTH PRIC E. THE TPO NOTED THAT THE ASSESSEE HAD PURCHASED FROM ITS AES INDAPAM IDE AT RS 1 89 456 PER KG AND TRIMETAZIDINE AT RS 52 546 PER KG. IN TH E COURSE OF PROCEEDINGS BEFORE THE TPO IT WAS SUBMITTED BY THE TAXPAYER THAT THE IMPORT PRICE OF APIS IS DETERMINED BASED ON THE PRICE PROPOSED BY THE OVERSEAS ENTITY AND THE ASSESSEES JUDGMENT AS REGA RDS ITS ABILITY TO MANUFACTURE AND MARKET THE FINISHED FORMULATIONS IN INDIA USING THE IMPORTED RAW MATERIAL TO GENERATE REVENUES AND REAS ONABLE PROFITS THAT THE AES DO NOT SELL THESE APIS TO ANY INDEPENDENT E NTERPRISES IN INDIA AND THAT THE ASSESSEE IS NOT AWARE OF THE PRICES AT WHICH THESE APIS ARE SOLD BY THE RELATED AES TO INDEPENDENT ENTERPRISES ABROAD. THE ASSESSEE HOWEVER FURNISHED DETAILS OF PRICES AT WHICH THESE AES HAD SENT TO OTHER AES IN SPAIN POLAND MOROCCO AND PAKISTAN WHICH SH OWED PRICES RANGING BETWEEN (EUROS) 12 487 PER KG TO 16 007 PER KG SO FAR AS INDAPAMIDE IS CONCERNED AND PRICES RANGING BETWEEN 1 485 PER KG TO 2 693 PER KG SO FAR AS TRIMETAZIDINE IS CONCERNED. THE TPO FURT HER NOTED THAT AS PER ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 5 OF 71 THE INFORMATION FURNISHED BY THE ASSESSEE FOLLOWIN G PRODUCTS COMPETE WITH THE ASSESSEE S PRODUCTS : SL NO BRAND NAME OF ASSESSEES FORMULATIONS NAME OF API DOSAGE BRAND NAME OF COMPETITORS FDF 1. FLAVEDON 20/ FLAVEDON MR TRIMETAZIDINE 20 MG/ 35 MG TRIVEDON 20 CIPLA CRYTOGUARD NICHOLAS CARVIDON MICROLABS CARDIMAX USV METAGAURD - IPCA 2 NATRILIX NATRILIX SR INDAPAMIDE 2.5 MG/ 1.5 MG LORVAS TORRENT 9. ON THE BASIS OF THESE INPUTS FROM THE ASSESSEE THE TPO COLLECTED INFORMATION ON THE PRICES AT WHICH THESE APIS ARE P URCHASED BY OTHER PRODUCERS OF THE COMPETING FDFS. THE TPO NOTED TH AT WHILE INDAPAMIDE WAS IMPORTED BY ASSESSEES COMPETITOR FROM ITALY AT THE PRICE OF RS 40 375 PER KG THE ASSESSEE HAD IMPORTED BY THE S AME FROM ITS AE AT THE PRICE OF RS 1 89 456 PER KG. THE TPO FURTHER N OTED THAT WHILE THE ASSESSEE HAD IMPORTED TRIMETAZIDINE FROM ITS SERVIE R EGYPT AT THE PRICE OF RS 52 546 PER KG THE SAME DRUG WAS SOLD BY OTHE R VENDORS AT MUCH LOWER RATES OF RS 8 150 PER KG (NIVEDITA CHEMICALS PVT LTD) RS 8 625 PER KG (SHARON PHARMACHEM LIMITED) RS 10 558 PER KG (O RION) AND RS 11 000 PER KG (TRICHEM). 10. AS FOR THE COMPARABILITY OF THESE PRICES OF THE API WHILE THE ASSESSEE DID NOT SEEM TO HAVE MUCH TO SAY SO FAR AS INDAPAMIDE IS CONCERNED BEYOND POINTING OUT THAT THE ASSESSEE IS MARKET LEADER WITH 68.9% MARKET SHARE IN RESPECT OF THE FDF MADE OF I NDAPAMIDE THE ASSESSEE DID SERIOUSLY CHALLENGE THE QUALITY OF TRI METAZIDINE. THE ASSESSEE ALSO CONTENDED THAT BOTH THE PRODUCTS OF T HE ASSESSEE ARE PATENTED IN EUROPE AND USA THAT THESE PRODUCTS ARE MARKET LEADERS EVEN ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 6 OF 71 AS THE PRODUCTS ARE SOLD AT HIGHER PRICES AND THAT ALL THESE FACTORS PUT TOGETHER SHOW THAT THE APIS USED BY THE ASSESSEE AR E BETTER THAN THAT USED BY ITS COMPETITORS. THE ASSESSEE MADE ELABORAT E SUBMISSIONS TO DEMONSTRATE THAT THE QUALITY OF TRIMETAZIDINE MANUF ACTURED IN INDIA IS NOT AT ALL COMPARABLE WITH THE QUALITY OF TRIMETAZI DINE IMPORTED BY THE ASSESSEE FROM ITS AE SERVIER EGYPT. IT WAS CONTEND ED THAT PURITY LEVELS OF TRIMETAZIDINE MANUFACTURED IN INDIA ARE MUCH LOWER THAN PURITY LEVEL OF TRIMETAZIDINE IMPORTED BY THE ASSESSEE THE SHELF L IFE OF ASSESSEES API IS MUCH LONGER THE EFFECT OF ASSESSEES API LAST LONG ER THAN THE EFFECT OF THE SAME API MANUFACTURED IN INDIA THAT THE EFFICACY O F ASSESSEES API IS PROVEN SINCE IT IS LAUNCHED AFTER CLINICAL TRIALS A S AGAINST TRIMETAZIDINE MANUFACTURED IN INDIA IN RESPECT OF WHICH NO CLINIC AL TRIALS ARE HELD AND AS SUCH ITS SAFETY AND EFFICACY IS YET TO BE ESTABL ISHED AND THAT THE ASSESSEE ALSO RECEIVES TECHNICAL ASSISTANCE IN MARK ETING ITS PRODUCTS WHEN IT BUYS API FROM ITS AE. FOR ALL THESE REASONS HIGHER PRICE PAID BY THE ASSESSEE WAS SOUGHT TO BE JUSTIFIED. IT WAS FUR THER MENTIONED THAT THE ASSESSEE IS MARKET LEADER IN FLAVEDON I.E. FDF WIT H TRIMETAZIDINE AS API AND ITS MARKET SHARE IS 35.44% AS AGAINST 21.51 % M ARKET SHARE HELD BY TRIVEDON MARKETED BY CIPLA. 11. THE TPO WAS OF THE VIEW THAT GIVEN THE FACT TH AT THE APIS PURCHASED BY THE ASSESSEE FROM ITS AES ABROAD ARE NOT A UNIQUE ITEMS IN THE SENSE OTHER PHARMACEUTICAL COMPANIES ARE ALSO P URCHASING THE SAME APIS THOUGH FROM DIFFERENT VENDORS AND HAVING REG ARD TO THE NATURE OF GOODS COMPARABLE UNCONTROLLED PRICE (CUP) METHOD I S THE MOST APPROPRIATE METHOD TO DETERMINE ALP ON THE FACTS OF THIS CASE AND THAT THE CUP METHOD IS MOST DIRECT AND RELIABLE METHOD TO DETERMINE THE ALP. AS REGARDS TRANSACTIONAL NET MARGIN METHOD (T NMM) APPLIED BY THE ASSESSEE THE TPO WAS OF THE CONSIDERED VIEW TH AT TNMM APPLIED BY THE ASSESSEE IS ONLY A METHOD OF LAST RESORT USED W HEN IT IS NOT POSSIBLE TO APPLY ANY OF THE OTHER METHODS AS THIS METHOD IS NOT RELIABLE BECAUSE PROFITS ARE AFFECTED BY SO MANY OTHER ASPECTS BESID ES THE PRODUCT PRICES. ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 7 OF 71 ON THE BASIS OF THIS REASONING THE TPO REJECTED TH E TNMM APPLIED BY THE ASSESSEE AND PROCEEDED TO COMPUTE THE ALP ON THE BA SIS OF CUP METHOD. 12. AS REGARDS CUP OF INDAPAMIDE THE TPO NOTED TH E CUP OF RS 40 375 PER KG AND THE FACT THAT THE ASSESSEE HAS NO T CHALLENGED THE SAID QUALITY OF THE API BEYOND IN GENERAL AND VAGUE MANN ER. ACCORDINGLY RATE OF RS 40 375 PER KG WAS ADOPTED AS AGAINST THE RATE OF RS 1 89 456 WHICH WAS PAID BY THE ASSESSEE TO SERVIER FRANCE. THE PR ICE PAID TO THE AE WAS THUS MORE THAN 4.5 TIMES THE ALP OF THE INDAPAMIDE. 13. AS REGARDS CUP OF TRIMETAZIDINE THE TPO NOT ED THAT THE HIGHEST CUP AS PER INFORMATION GATHERED BY THE ASS ESSEE WHICH WAS DULY CONFRONTED TO THE ASSESSEE WAS RS 11 000 I.E. OF TRIMETAZIDINE SUPPLIED BY NIVEDITA CHEMICALS PVT LTD. SINCE THE ASSESSEE HAD CHALLENGED THE PURITY STANDARDS OF THE TRIMETAZIDIN E MANUFACTURED BY NIVEDITA THE TPO MADE TWO ADJUSTMENTS RS 4 850 P ER KG FOR DIFFERENCES IN QUALITY NORMS BASED ON THE DIFFERENCES IN PRICE S IN BRITISH PHARMACOPOEIA QUALITY STANDARDS VIS--VIS JAPANESE PHARMACOPOEIA QUALITY STANDARDS AND A FURTHER RS 5 000 PER KG FO R ANY VARIATIONS IN PURITY STANDARDS. THE ADJUSTED CUP WAS THUS COMPUT ED AT RS 20 850 ( I.E. RS 11 000 + RS 4 850 + RS 5 000) AS AGAINST PRICE OF RS 52 546 PER KG PAID BY THE ASSESSEE TO ITS AE FOR IMPORTS OF TRIME TAZIDINE. THE PRICE PAID TO THE AE WAS THUS MORE THAN 2.5 TIMES THE AL P EVEN AFTER MAKING ALL THESE ADJUSTMENTS OF THE INDAPAMIDE. 14. THE ADJUSTMENTS IN RESPECT OF THE ABOVE TWO AP IS I.E. TRIMETAZIDINE AND INDAPAMIDE WERE ALSO MADE IN THE SUBSEQUENT TWO YEARS AS WELL. THERE ARE VARIATIONS IN THE FIGURES BUT IN PRINCIPLE AS LEARNED REPRESENTATIVES AGREE THE ADJUSTMENTS WERE OF THE SAME NATURE AND FOR THE SAME REASONS. THERE IS NO VARIATIONS IN MATERIAL FACTS AND THEREFORE FOR THE SAKE OF BREVITY WE NEED NOT SET OUT DETAILS FOR THOSE TWO YEARS. AS LEARNED REPRESENTATIVES HAVE AGREED WHATEVER IS DECIDED ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 8 OF 71 IN THE FIRST YEAR I.E. ASSESSMENT YEAR 2002-03 WI LL ALSO FOLLOW IN THE TWO SUBSEQUENT YEARS BEFORE US I.E. 2003-04 AND 2004-0 5. 15. IN THE ASSESSMENT YEAR 2003-04 AND 2004-05 HO WEVER THE ALP ADJUSTMENTS WERE ALSO MADE IN RESPECT OF ONE MORE A PI I.E. GLICAZIDE IMPORTED BY THE ASSESSEE. ALP ADJUSTMENTS WERE MADE IN RESPECT OF IMPORTS OF GLICAZIDE AS WELL. 16. AGGRIEVED ASSESSEE CARRIED THE MATTER IN APPE AL BEFORE THE CIT(A) BUT WITHOUT ANY SUCCESS. IN THE APPELLATE P ROCEEDINGS LEARNED CIT(A) CALLED FOR ASSESSING OFFICERS REMAND REPORT ON SUBMISSIONS MADE BY THE ASSESSEE. AS FOR THE INTERNAL CUP INPUTS BY WAY OF SALE INSTANCES BY SERVIER FRANCE TO UNRELATED PARTIES IN OTHER COU NTRIES THE ASSESSING OFFICER OPPOSED THE SAME STATED THAT THESE EVIDENC ES WERE NOT EVEN REFERRED TO IN THE TRANSFER PRICING STUDY OR BEFORE THE AUDITORS URGED THE CIT(A) TO TREAT THE SAME AS INADMISSIBLE ADDITIONA L EVIDENCES AND ARGUED THAT AN ENTIRELY NEW CASE IS BEING MADE OUT AT THE APPELLATE STAGE. ON MERITS OF THESE INPUTS IT WAS CONTENDED THAT I N ANY EVENT THESE INTERNAL CUP INPUTS ARE WITH RESPECT OF DIFFERENT M ARKETS WHERE COMPETITION LEVEL AND PURCHASING POWER LEVELS ARE D IFFERENT AND IN RESPECT OF WHICH THE ASSESSEE HAS NOT FURNISHED SUF FICIENT DETAILS. AS REGARDS THE SUBMISSIONS ON VARIATIONS IN QUALITY ST ANDARDS BETWEEN THE APIS IMPORTED BY THE ASSESSEE VIS--VIS APIS MANUFA CTURED BY THE GENERIC DRUG MANUFACTURERS THE ASSESSING OFFICER REJECTED THE ALLEGED VARIATIONS AND OBSERVED THAT EVEN IF COMPARABLE PRODUCTS ARE N OT EXACTLY THE SAME THE VARIATIONS HAVE BEEN ADEQUATELY ADJUSTED FOR. T HE ASSESSING OFFICER ALSO NOTED THAT AS EVIDENT FROM THE CORRESPONDENCE EXCHANGED BY THE ASSESSEE WITH DEPUTY COMMISSIONER OF CUSTOMS GATT VALUATION CELL MUMBAI THE ASSESSEE HAS HIMSELF ACCEPTED THAT INC REASED MARKET COMPETITION IN INDIA HAS RESULTED IN OVERALL REDUCT ION IN PRICES OF THEIR SELLING PRICE OF FORMULATION MANUFACTURED BY THEM I N INDIA AND THAT IN ORDER TO THE MARKET SHARE IN INDIA THEIR SUPPLIERS ( I.E. AES SUPPLYING THE ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 9 OF 71 APIS) HAVE AGREED TO RE NEGOTIATE TO SELL THE BULK DRUG AT REDUCED PRICE BY AFFECTING NECESSARY CHANGES TO THE PRICE LIST APPLI CABLE FOR INDIA. THESE STATEMENTS ACCORDING TO THE ASSESSING OFFICER CLE ARLY ESTABLISH THAT THE PRICES AT WHICH THE TRANSACTIONS HAVE TAKEN PLACE W ITH THE AES ARE ACTUALLY GOVERNED BY THE SELLING PRICES OF THE FDFS AND NOT THE MARKET FORCES REGARDING THE API ITSELF. THE REMAND REPORT THUS REINFORCED THE STAND TAKEN AT THE ASSESSMENT STAGE. THE ELABORATE SUBMISSIONS MADE BY THE ASSESSEE AGAINST THE STAND TAKEN BY THE TPO AT THE ASSESSMENT AND THE REMAND STAGE DID NOT IMPRESS THE ASSESSING OFF ICER. WHILE REJECTING THE SUBMISSIONS MADE BY THE ASSESSEE FOR THE ASSESS MENT YEAR 2002-03 WHICH HAS BEEN FOLLOWED IN THE SUBSEQUENT YEARS AS WELL LEARNED CIT(A) HAS INTER ALIA OBSERVED AS FOLLOWS: THE APPELLANT HAS NOT GIVEN ANY COGENT REASONS AS T O WHY THE TNM METHOD IS APPLICABLE TO ITS CASE. IN FACT ON PAGE 16 OF THE E&Y REPORT ON TRANSFER PRICING IT HAS BEEN STATED THAT THE TN M APPROACH HAS BEEN FOLLOWED BASED ON THE HYPOTHESIS THAT THE SIN CE OPERATING MARGINS EARNED FROM THE APPELLANTS MANUFACTURING A ND MARKETING ARE ON AN ARMS LENGTH BASIS THEN IT MUST BE ASSUM ED THAT THE UNDERLYING PAYMENTS TO THE AES FOR IMPORTS OF APIS TOO ARE ON AN ARMS LENGTH BASIS. THIS ASSUMPTION IS WHOLLY IRRAT IONAL AND OTIOSE. JUST BECAUSE THE SALES ARE AT AN ARMS LENGTH BASIS IT CANNOT BE SAID THAT THE PURCHASE TOO MUST THEREFORE BE AT AN ARMS LENGTH BASIS. SUCH AN ASSUMPTION OBLITERATES THE VERY NEED FOR TR ANSFER PRICING REGULATION. FURTHER THE CONTENTION OF THE APPELLANT IN THE SAID REPORT THAT THE ABOVE HYPOTHESIS OF ARMS LENGTH TRANSACTI ON IS SUPPORTED BY THE FACT THAT THE COST OF THE IMPORTED APIS FORMS A SIGNIFICANT COMPONENT OF THE TOTAL COST OF MANUFACTURE OF FDFS BY THE APPELLANT IS ALSO WHOLLY IRRELEVANT AND DOES NOT IN ANY MANNE R SUPPORT THE APPLICATION OF THE TNM METHOD HERE. IT HAS ALSO NOT BEEN ESTABLISHED BY THE APPELLANT AS TO HOW ITS NET MARGINS REALIZED BY IT FROM THE INTERNATIONAL TRANSACTIONS ENTERED INTO WITH AES AR E TO BE COMPUTED IN RELATION TO COSTS INCURRED OR SALES AFFECTED. I THEREFORE UPHOLD THE STAND OF THE ACIT-TP IN REJECTING THE APPLICATION O F THE TNM METHOD IN RESPECT OF THE IMPORT OF TRIMETAZIDINE AND INDAP AMIDE FROM ITS AES. ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 10 OF 71 THE TRANSACTIONS BETWEEN THE APPELLANT AND ITS AES FOR THE IMPORT OF THE APIS WERE CONTROLLED TRANSACTIONS WHICH NEED T O BE COMPARED WITH UNCONTROLLED TRANSACTIONS TO DETERMINE THE ARM S LENGTH PRICE. THE ARMS LENGTH PRICE IS DETERMINED BY COMPARING T HE RESULTS OF UNCONTROLLED COMPARABLE CIRCUMSTANCES. THE CUP METH OD FOCUSES MORE ON THE MARKET PRICE OF THE PRODUCT WHEN COMPAR ED TO THE OTHER METHODS WHICH FOCUS ON THE FUNCTIONS PERFORMED BY EACH PARTY. AN UNCONTROLLED TRANSACTION SHALL BE CONSIDERED TO BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF- A. NONE OF THE DIFFERENCES (IF ANY) BETWEEN THE TRANSE CTIONS BEING COMPARED OR BETWEEN THE ENTERPRISES ENTERING INTO S UCH TRANSACTION ARE LIKELY TO MATERIALLY AFFECT THE PRI CE OR COST CHARGED OR PAID IN OR THE PROFIT ARISING FROM SUCH TRANSACTIONS IN THE OPEN MARKET; OR B. REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIM INATE THE MATERIAL EFFECTS OF SUCH DIFFERENCE. THEN OECD GUI DELINES AT PARA 1.19 CITE A NUMBER OF FEATURES THAT MAY BE RELEVANT IN COMPARING TWO PRODUCTS CHARACTERISTICS THAT MAY BE IMPORTANT TO CONSIDER INCLUDE THE FOLLOWING IN CASE OF TRANSFER OF TANGIBLE PROPERTY THE PHYSICAL FEATURES OF THE PROPERTY ITS QUALITY AND RELIABILI TY AND THE AVAILABILITY AND VOLUME OF SUPPLY. THE INSTANCES CITED BY THE ACIT-TP IN RESPECT OF TR IMETAZIDINE AND INDAPAMIDE IMPORTED BY CERTAIN OTHER COMPANIES ARE FOUND TO BE COMPARABLE FOR THE FOLLOWING REASONS:- A. EXCEPT FOR SOME INTERNAL STUDIES WHICH ARE NOT OF ANY INDEPENDENT OR STATUTORY AUTHORITY THE APPELLANT H AS NOT GIVEN ANY AUTHORITATIVE AND UNCHALLENGEABLE DATA OR DOCUM ENT TO ESTABLISH THE SUPERIORITY OR PURITY BETTER QUALITY OF THE APIS IMPORTED BY IT AS COMPARED TO THE INSTANCES CITED BY THE ACIT-TP. B. THE DIFFERENCES IN EFFICACY OF THE APPELLANTS FDFS ARE COMPARED WITH OTHERS TOO ARE NOT ESTABLISHED BY AN INDEPENDE NT AND AUTHORITATIVE DATA. C. THE APPELLANT HAS BEEN UNABLE TO GIVE CONTRACTUAL D ATA IN RESPECT OF THE SAID APIS SUPPLIED BY ITS AES TO THIRD PARTI ES ON COMPARABLE TERMS AND CIRCUMSTANCES SO AS TO ESTABLISH THAT IT S OWN ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 11 OF 71 INTERNATIONAL TRANSACTIONS WITH ITS AES IN THIS REG ARD WERE ON AN ARMS LENGTH BASIS. D. THE APPELLANTS ADDITIONAL ADVANTAGES DERIVED FROM ITS AES IN TERMS OF MANUFACTURING AND MARKETING ASSISTANCE BY IMPORTING THE PRODUCTS ARE NOT RELATED TO PRODUCT IMPORTS IN ORDINARY CIRCUMSTANCES BUT ARE ACTUALLY TECHNICAL AND MANAG ERIAL SERVICES RECEIVED FOR WHICH NORMALLY ROYALTY AND FEES IS PAI D BY A PARTY. PERHAPS THE COST OF SUCH SERVICES WHICH SHOULD HAVE BEEN ADDED TO THE COST OF THE PRODUCT SO AS TO KEEP THE PROFITS THEREUNDER AWAY FROM THE DOMAIN OF INDIAN TAXATION. THE LAW RELATED TO TRANSFER PRICING IN INDIA IS OF RECENT VINTAGE AND THE INDIAN SCENE IS BEREFT OF ANY AUTHORITATIVE JUD GEMENTS. IT IS EVIDENT HERE TO REFER TO A JUDGEMENT OF THE US COUR T (BAUSCH & LOMB INC. REFERENCE NO.89-4156 DATED 14.5.92) WHERE IT WAS HELD THAT UNCONTROLLED SALES ARE CONSIDERED COMPARABLE TO CON TROLLED SALES IF THE PHYSICAL PROPERTY AND CIRCUMSTANCES INVOLVED IN THE UNCONTROLLED SALES ARE IDENTICAL TO THE PHYSICAL PROPERTY AND CI RCUMSTANCES INVOLVED IN THE CONTROLLED SALES OR IF SUCH PROPER TIES AND CIRCUMSTANCES ARE SO NEARLY IDENTICAL THAT ANY DIFF ERENCES EITHER HAVE NO EFFECT ON PRICE OR SUCH DIFFERENCES CAN BE REFLECTED BY A REASONABLE NUMBER OF ADJUSTMENTS TO THE PRICE OF UN CONTROLLED SALES. IN A RECENT JUDGEMENT OF THE KOREAN SUPREME COURT REPORTED BY K.R. SEKAR IN HIS BOOK TRANSFER PRICING-LAW AND PRACTIC E IT WAS HELD THAT JUST ONE COMPARABLE INSTANCE IS SUFFICIENT FOR APPLYING THE CUP METHOD. FOR REASONS STATED ABOVE I THEREFORE UPHO LD THE APPLICATION OF THE CUP METHOD FOR DETERMINING THE TRANSFER PRICING ADJUSTMENT FOR THE IMPORT OF TRIMETAZIDINE AND IND APAMIDE BY THE APPELLANT FROM ITS AES. THE ACIT-TP IN THE CASE OF IMPORT OF TRIMETAZIDINE HAS ALLOWED AN ADHOC ADDITION OF RS .4850 PER KG FOR DIFFERENCES IN PHARMACOPOEIAS STANDARDS TO THE BASE PRICE OF RS.11000 PER KG UNDER THE CUP METHOD. SHE HAS ALSO ALLOWED AN ADJUSTMENT OF RS.5000 PER KG ON ACCOUNT OF THE APPE LLANTS CONTENTION N FOR SUPERIOR QUALITY OF TRIMETAZIDINE IMPORTED BY THE APPELLANT THE ASSESSING OFFICER HAS STATED THAT THE APPELLANT HAS FAILED TO ESTABLISH THE SUPERIORITY OF THE PURITY OF TRIMETAZ IDINE PURCHASED BY THE APPELLANT FROM ITS AES EXCEPT REFERRING TO SO ME INTERNAL STUDIES OF THE APPELLANT WHICH CANNOT BE RELIED UPON THE A LLOW ACE OF RS.5000 PER KILOGRAM BY THE ACIT-TP TOWARDS PURITY/ SUPERIORITY DIFFERENCE IS THUS NOT SUPPORTED BY EVIDENCE. IN T HE INTEREST OF ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 12 OF 71 REASONABLENESS AND JUSTICE I DO NOT WISH TO REJECT THE ADJUSTMENT OF RS.5000 PER KG AS ABOVE AND UPHOLD THE COMPUTATION OF TRANSFER PRICING ADJUSTMENT OF RS.19533402 MADE BY THE ASSES SING OFFICER BASED ON THE ORDER OF THE ACIT-TP. 17. AGGRIEVED BY THE STAND SO TAKEN BY THE LEARNED COMMISSIONER (APPEALS) THE ASSESSEE IS NOT SATISFIED AND IS IN APPEAL BEFORE US. THE ASSESSEE HAS RAISED SEVERAL GROUNDS OF APPEAL WHICH ARE NO MORE THAN ARGUMENTS IN SUPPORT OF ITS SHORT MAIN GRIEVANCE TH AT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE CIT(A) ERRED IN UPHOLDING THE ARMS LENGTH PRICE ADJUSTMENTS MADE IN THE PRICE OF APIS PURCHASED BY THE ASSESSEE FROM ITS ASSOCIATED ENTERPRISES. FOR READY REFERENCE HOWEVER RELATED GROUNDS OF APPEAL FOR THE ASSESSMENT YEAR 2 002-03 ARE REPRODUCED BELOW: 1. THE LEARNED CIT(A) HAS ERRED IN UPHOLDING THE ADDIT ION OF RS.19 533 408 MADE BY THE ACIT PURSUANT TO THE ORD ER OF THE LEARNED ACIT(TRANSFER PRICING) TO THE TOTAL INCOME OF THE APPELLANT ON ACCOUNT OF COMPUTING THE ARMS LENGTH PRICE RELATING TO THE INTERNATIONAL TRANSACTION PERTAININ G TO IMPORT OF ACTIVE PHARMACEUTICAL INGREDIENTS(ATP) NAMELY TRIM ETAZIDINE AND INDAPAMIDE FROM ASSOCIATED ENTERPRISES. 2. THE LEARNED CIT(A) HAS ERRED IN UPHOLDING THE NON- ACCEPTANCE OF TRANSACTIONAL NET MARGIN METHOD(TNMM) ADOPTED B Y THE APPELLANT FOR DETERMINATION OF ITS ARMS LENGTH PRI CE IN CONNECTION WITH ITS INTERNATIONAL TRANSACTION RELAT ING TO IMPORT OF RAW MATERIALS (TRIMETAZIDINE AND INDPAMIDE) FROM ITS ASSOCIATED ENTERPRISES. YOUR APPELLANT SUBMITS THA T TNMM HAS BEEN CONSIDERED AS THE MOST APPROPRIATE METHOD AS P ER RULE 10C OF THE INCOME TAX RULES 1962 AND IS A RECOGNISE D METHOD IN ACCORDANCE WITH LAW AND ACCORDINGLY OUGHT TO HAVE B EEN ACCEPTED IN THE FACTS OF THE CASE. 3. YOUR APPELLANT SUBMITS THAT AS PROVIDED UNDER PARAG RAPH 55.11 OF CBDT CIRCULAR NUMBER 14 OF 2001 IT HAS DISCHARG ED THE PRIMARY ONUS TO DETERMINE THE ARMS LENGTH PRICE BY APPLYING TNMM AS THE MOST APPROPRIATE METHOD. ACCORDINGLY YOUR APPELLANT SUBMITS THAT THE LEARNED CIT (A) HAS ERRE D IN ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 13 OF 71 UPHOLDING NON-ACCEPTANCE OF THE TNMM ADOPTED BY THE APPELLANT. 4. THE LEARNED CIT (A) HAS ERRED IN STATING THAT THE A PPELLANT HAS NOT GIVEN ANY COGENT REASONS AS TO WHY TNMM SHOULD BE APPLICABLE TO ITS CASE. THE FINDINGS OF THE LEARNE D CIT (A) ARE ERRONEOUS AND OUGHT TO BE SET ASIDE. 5. THE LEARNED CIT(A) HAS ERRED IN UPHOLDING THE ADOPT ION OF COMPARABLE UNCONTROLLED PRICE (CUP) METHOD BY CONSI DERING THE PRICES OF NON-SIMILAR APIS AVAILABLE LOCALLY FOR DE TERMINING THE ARMS LENGTH PRICE IN RESPECT OF APPELLANTS INTER NATIONAL TRANSACTION RELATING TO IMPORT OF TRIMETAZIDINE AND INDAPAMIDE. YOUR APPELLANT SUBMITS THAT THE INVOCATION OF CUP METHOD IS SOLELY AT INSTANCE OF THE AO AND THE SAME IS ERRONE OUS IN THE FACTS OF THIS CASE AND OUGHT TO BE SET ASIDE. 6. THE LEARNED CIT(A) HAS ERRED IN UPHOLDING THE APPLI CABILITY OF THE CUP METHOD BASED ON THE INFORMATION NOT AVAILAB LE TO THE APPELLANT AT THE TIME OF UNDERTAKING ITS TRANSFER P RICING OBLIGATIONS IN LAW AND HAS ALSO FURTHER ERRED IN RE LYING ON TRANSACTIONS NOT UNDERTAKEN DURING ASSESSMENT YEAR 2002-03. YOUR APPELLANT SUBMITS THAT THE ABOVE RENDERS THE A PPLICATION OF CUP METHOD CONTRARY TO LAW ERRONEOUS AND OUGHT TO BE SET ASIDE. 7. THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ADDI TION OF RS.19 533 408 BY RELYING ON TRANSACTIONS GATHERED B Y THE INCOME TAX DEPARTMENT WITHOUT FURNISHING TO THE APP ELLANT FULL DETAILS/INFORMATION REGARDING THE TRANSACTIONS IN O RDER TO ENABLE THE APPELLANT SUITABLE OPPORTUNITY TO THE IN COME TAX RULES 1962 BASED ON INACCURATE PARTICULARS GRANTI NG INADEQUATE OPPORTUNITY FOR REBUTTAL AND OUGHT NOT T O BE RELIED UPON. 8. THE LEARNED CIT(A) HAS ERRED IN RELYING UPON DATA O BTAINED FROM OTHER COMPANIES WITHOUT PRODUCING THE CONCERNE D OFFICERS IN THE OTHER COMPANIES FOR CROSS-EXAMINATION IN ORD ER TO DETERMINE THAT THE TRANSACTIONS ARE COMPARABLE. YO UR APPELLANT THEREFORE PRAYS THAT THE ADDITION BE DELE TED ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 14 OF 71 9. THE LEARNED CIT(A) HAS ERRED IN DISREGARDING PRICES AT WHICH HE APPELLANTS ASSOCIATED ENTERPRISE HAS SOLD THE TWO APIS VIZ TRIMETAZIDINE AND INDAPAMIDE TO UNRELATED PARTIES WHICH ARE IDENTICAL TO THE TWO APIS SOLD BY THE APPELLANTS A SSOCIATED ENTERPRISE TO THE APPELLANT. YOUR APPELLANT SUBMIT S THAT EVEN IF THE CUP METHOD IS TO BE APPLIED THE ABOVE DATA SHO WS THAT NO ADDITION IS REQUIRED IN YOUR APPELLANTS CASE AND P RAYS THAT THE ADDITION BE DELETED. 10. THE LEARNED CIT (A) HAS ERRED IN NOT CONSIDERING TH E ORDER PASSED BY DY. COMMISSIONER OF CUSTOM GAT VALUATION CELL MUMBAI ACCEPTING THE IMPORT PRICES OF THE APIS IMPO RTED BY SERDIA FROM ITS ASSOCIATED ENTERPRISES INCLUDING INTER ALIA TRIMETAZIDINE AND INDAPAMIDE TO BE AT ARMS LENGTH . YOUR APPELLANT SUBMITS THAT THE ABOVE FURTHER PROVES THA T THE TRANSACTION UNDERTAKEN BY THE APPELLANT WITH ITS AS SOCIATED ENTERPRISES IS AT ARMS LENGTH AND HENCE PRAYS THAT THE ADDITION BE DELETED. 11. THE LEARNED CIT (A) HAS ERRED IN NOT CONSIDERING TH E RESULTS OF THE TESTS CONDUCTED BY INDEPENDENT THIRD PARTIES ON THE QUALITY OF THE APIS IMPORTED BY THE APPELLANT AND THE APIS AVAILABLE IN THE LOCAL MARKETS. YOUR APPELLANT SUBMITS THAT THE ABOVE FURTHER PROVES THAT THE TRANSACTION UNDERTAKEN BY T HE APPELLANT WITH ITS ASSOCIATED ENTERPRISES IS AT ARMS LENGTH AND HENCE PRAYS THAT THE ADDITION BE DELETED. 12. THE LEARNED CIT (A) HAS ERRED IN NOT CONSIDERING TH E DIFFERENCE THAT THE ADDITIONAL ASSISTANCE OBTAINED BY THE APPE LLANT BY IMPORTING THE PRODUCTS ARE NOT RECEIVED BY THE LOCA L SUPPLIERS OF THE APIS AND HENCE THE APIS USED FOR APPLICATION OF THE CUP METHOD BY THE LEARNED ACIT-TP ARE NOT COMPARABLE AT ALL TO THE APIS IMPORTED BY THE APPELLANT. YOUR APPELLANT SUB MITS THAT THE ABOVE FURTHER PROVES THAT THE TRANSACTION UNDERTAKE N BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISES IS AT ARM S LENGTH AND HENCE PRAYS THAT THE ADDITION BE DELETED. 18. WE WILL TAKE UP ALL ABOVE GROUNDS OF APPEAL T OGETHER. THE QUESTION THAT WE ARE REALLY REQUIRED TO ADJUDICATE UPON IS WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE IMP UGNED ALP ADJUSTMENTS ARE INDEED SUSTAINABLE IN LAW AND IF YES TO WHAT EXTENT. AS A FIRST STEP ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 15 OF 71 IN THIS DIRECTION WE HAVE TO DECIDE WHETHER THE CI T(A) WAS JUSTIFIED IN UPHOLDING APPLICATION OF COMPARABLE UNCONTROLLED PR ICE (CUP) METHOD FOR DETERMINING ARMS LENGTH PRICE (ALP) ON THE FA CTS OF THIS CASE. 19. LEARNED COUNSEL FOR THE ASSESSEE BEGINS BY MAK ING A PRESENTATION ON THE BRIEF BACKGROUND ON PHARMACEUTI CAL INDUSTRY. HE SUBMITS THAT PHARMACEUTICAL INDUSTRY DEVELOPS PROD UCES AND MARKETS DRUGS LICENSED FOR USE AS MEDICATIONS AND DEAL IN GENERIC AND AND BRANDED MEDICATIONS. HE GIVES AN EXAMPLE OF METAFOR MIN WHICH IS A GENERIC VERSION OF GLUCOPHAGE XR IS USED TO TREAT DIABETES AND IS MANUFACTURED BY SEVERAL PHARMACEUTICAL COMPANIES AL L OVER THE GLOBE. THIS INDUSTRY ACCORDING TO THE LEARNED COUNSEL CE NTERED AROUND INNOVATION AND THEREFORE PATENTS PLAY A VERY CRUC IAL ROLE AS TO USE HIS WORDS PATENT PROTECTION ENABLES THE OWNER TO RECO VER RESEARCH AND DEVELOPMENT COSTS AND INVEST IN FUTURE DEVELOPMENTS . IT IS POINTED OUT THAT A PATENT DRUG ENTAILS SIGNIFICANT COSTS OF INN OVATION AS DRUG DISCOVERY AND DEVELOPMENT IS AN EXPENSIVE PROPOSITION AND TH AT OF ALL THE COMPOUNDS INVESTIGATED FOR USE AND HUMANS ONLY A S MALL NUMBER OF THESE COMPOUNDS ARE APPROVED BY THE REGULATORS. AS AN EXA MPLE ACCORDING TO THE LEARNED COUNSEL ONLY 5 OUT OF 5 000 COMPOUNDS THAT ENTER PHARMACEUTICAL TESTING MAKE IT TO HUMAN TESTING AND OUT OF 5 COMPOUNDS WHICH ARE TESTED ON HUMANS ONLY 1 DRUG IS APPROVED . AS AGAINST THESES PATENTED DRUGS A GENERIC DRUG IS PRODUCED AND DIST RIBUTED WITHOUT ANY PATENT PROTECTION. EVEN A GENERIC DRUG MAY HAVE A P ATENT ON THE FORMULATION IN THE SENSE THAT A GENERAL DRUG MANUFA CTURER CAN DUPLICATE THE ACTIVE PHARMACEUTICAL INGREDIENT BUT NOT THE CO LOURS FAVOURS AND OTHER INACTIVE INGREDIENTS. LEARNED COUNSEL GOES ON TO GIVE EXAMPLE OF A GENERIC DRUG BY THE NAME OF FLUOXTINE LAUNCHED BY DR. REDDYS LABORATORIES WHICH IS GENERIC VERSION OF ELI LILLY S PROZAC WITH NORFLUOXTEINE AS THE COMMON API. LEARNED COUNSEL S UBMITS THAT PRINCIPAL REASON OF LOWER PRICE OF GENERIC DRUGS IS THAT THER E IS MORE COMPETITION AS THERE IS A LARGER NUMBER OF PRODUCERS OF THE SAME D RUG THAT GENERIC DRUG ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 16 OF 71 MANUFACTURERS DONOT INCUR THE COST OF DRUG DISCOVER Y THAT GENERIC DRUG MANUFACTURERS DONOT BEAR THE BURDEN OF PROVING THE SAFETY AND EFFICACY OF DRUGS THROUGH CLINICAL TRIALS AND THAT GENERIC DR UG MANUFACTURERS MAY ALSO ENJOY THE BENEFITS OF PREVIOUS MARKETING EFFOR TS OF THE BRAND NAME. LEARNED COUNSEL THEN TAKES US THROUGH DETAILS OF VA RIOUS STAGES OF DRUG DISCOVERY PRODUCT DEVELOPMENT PRE CLINICAL RESEAR CH AND CLINIC TRIALS. HIGHLIGHTING THE IMPORTANCE OF ACTIVE PHARMACEUTICA L INGREDIENTS IT IS SUBMITTED THAT AN API IS SUBSTANCE IN THE PHARMACEU TICAL DRUG WHICH IS BIOLOGICALLY ACTIVE THAT A DOSAGE FORM OF A DRUG I S COMPOSED ON AN API WHICH IS DRUG ITSELF AND EXCIPIENTS WHICH IS THE SUBSTANCE OF THE TABLET AND THAT DRUGS ARE CHOSEN PRIMARILY FOR THEIR APIS. IN HIS LAST FEW SLIDES LEARNED COUNSEL GIVES A BRIEF BACKGROUND OF SERDIA GROUP AND ACTIVITIES. LEARNED COUNSEL SUBMITS THAT SERDIA INDIA IS PRINCI PALLY ENGAGED IN THE MANUFACTURING AND MARKETING OF FDFS BASED ON APIS IMPORTED FROM ITS AES IN FRANCE AD EGYPT AND THAT IN ADOPTING PRICE S OF GENERIC APIS FOR CUP ANALYSIS SIGNIFICANT DIFFERENCES BETWEEN THE APIS IMPORTED BY SERDIA INDIA AND THE GENERIC PRODUCTS IN TERMS IF EFFICACY WERE IGNORED. 20. LEARNED COUNSEL THEN TAKES US THROUGH AN ARTIC LE DEATH OF A DREAM WITH SUB TITLE AS IN SPITE OF 16 YEARS O F ARDUOUS RESEARCH NO NEW DRUG HAS MADE IT OUT OF THE INDIAN LABS HERE IS W HY PUBLISHED IN FEBRUARY 2010 ISSUE OF THE MAGAZINE BUSINESSWORLD. LEARNED COUNSEL USES THIS ARTICLE TO REINFORCE THE ARGUMENT THAT DE VELOPING A NEW DRUG IS AN ENTAILS HUGE COSTS AND EFFORTS AND THAT IS THE REASON WHY ORIGINAL INVENTORS NEED TO CHARGE HIGHER PRICES FOR THEIR PR ODUCTS. IT IS THUS SUBMITTED THAT THE PRICE AT WHICH A DRUG IS SOLD BY THE ENTERPRISES WHICH HAS INVENTED THE SAID DRUG CAN NOT BE COMPARED WITH THE PRICE AT WHICH OTHER ENTERPRISES MANUFACTURE AND SELL THE SAME DRU G. 21. LEARNED COUNSEL THEN CONTENDS THAT THE AUTHOR ITIES BELOW ERRED IN REJECTING THE TRANSACTIONAL NET MARGIN METHOD (T NMM) ADOPTED BY THE ASSESSEE FOR JUSTIFYING ARMS LENGTH PRICE OF ITS I NTERNATIONAL TRANSACTIONS ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 17 OF 71 WITH THE AES AND IN THRUSTING UPON THE ASSESSEE CO MPARABLE UNCONTROLLED PRICES (CUP) METHOD. IT IS SUBMITTED THAT IT IS F ALLACIOUS TO PROCEED ON THE BASIS THAT CUP METHOD MUST BE PREFERRED OVER TN MM METHOD FOR ASCERTAINING THE ARMS LENGTH PRICE FOR THE ALLEGE D REASON THAT CUP METHOD IS MOST DIRECT AND RELIABLE METHOD FOR ASC ERTAINING THE ALP AND FOR THE REASON THAT TNMM IS A METHOD OF LAST RESOR T FOR ASCERTAINING ALP. LEARNED COUNSEL SUBMITS THAT UNDER THE SCHEME OF T HE INDIAN INCOME TAX ACT THERE IS NO HIERARCHY OF METHODS OF ASCERTAINI NG THE ARMS LENGTH PRICE AND IT IS THUS WHOLLY INAPPROPRIATE TO PROCE ED ON THE BASIS THAT ANY ONE METHOD OF ASCERTAINING THE ALP SHOULD HAVE PRIO RITY OVER OTHER METHODS. IT IS SUBMITTED THAT THE RIGHT TO CHOOSE T HE MOST APPROPRIATE METHOD FOR DETERMINING THE ARMS LENGTH PRICE RES TS WITH THE TAXPAYER AND UNLESS THE ASSESSING OFFICER CAN DEMONSTRATE TH AT ARMS LENGTH PRICE SO COMPUTED IS NOT COMPUTED IN THE MANNER AS PRESC RIBED IN THE REGULATIONS HE CANNOT REJECT THE METHOD CHOSEN BY THE TAXPAYER. LEARNED COUNSEL THEN REFERS TO THE CBDT CIRCULAR NO. 14 OF 2001 WHICH INTER ALIA STATES THAT WHERE THE TAXPAYER HAS DISCHARGED THE P RIMARY ONUS OF DETERMINING THE ALP AS PER THE RULES AND SUBSTANTIA TING THE SAME WITH PRESCRIBED DOCUMENTATION THERE CAN BE NO INTERVENT ION IN THE ALP BY THE ASSESSING OFFICER. A REFERENCE IS THEN ALSO MADE TO A COORDINATE BENCHS DECISION IN THE CASE DEVELOPMENT CONSULTANTS PVT LT D VS DCIT (115 TTJ 577) AND PHILIPS SOFTWARE CENTRE LTD VS ACIT (26 SO T 226) IN SUPPORT OF THE PROPOSITION THAT TAXPAYERS DOCUMENTATION SHOUL D BE ACCEPTED UNLESS THE ASSESSING OFFICER IS ABLE TO CONTROVERT THE SAM E. LEARNED COUNSEL THEN POINTS OUT THAT THE ASSESSING OFFICER DID NOT HAVE GOOD AND LEGALLY SUSTAINABLE REASONS TO REJECT THE TRANSACTIONAL NET MARGIN METHOD AS ADOPTED BY THE ASSESSEE AND TAKES US THROUGH THE B RIEF REASONS FOR DOING SO RECORDED BY THE ASSESSEE. IT IS SUBMITTED THAT THE TRANSFER PRICING OFFICER HAS NOT APPROPRIATELY AND FULLY DEALT WITH THE PRESCRIPTION OF RULE 10C WHICH DEALS WITH THE CRITERION ON WHICH MOST AP PROPRIATE METHOD IS SELECTED AND AS SUCH JUSTIFICATION FOR ADOPTING CUP METHOD FOR ALP DETERMINATION IS NOT SOUND. A REFERENCE IS ALSO MA DE TO SPECIAL BENCH ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 18 OF 71 DECISION IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LIMITED VS. ACIT (15 SOT 49) IN SUPPORT OF THE PROPOSITION THAT THE LAW REQUIRES TPO TO FIRST COMPREHENSIVELY PROVE WHY THE METHODOLOGY ADOPTED BY THE TAXPAYER CANNOT BE REGARDED AS THE MOST APPROPRIATE METHODOLOGY AND IT IS ONLY AFTER PROVING SO THAT THE TPO HAS THE RIGHT TO USE ANOTHER TRANSFER PRICING METHODOLOGY. NO SUCH EXERCISE ACCORDING TO THE LEARNED COUNSEL HAS BEEN CONDUCTED IN THIS CASE. 22. LEARNED COUNSEL FURTHER SUBMITTED THAT THE API MANUFACTURED BY THE ASSESSEE WHICH IS INVENTOR OF THE DRUG CA N NOT BE COMPARED WITH THE SAME API MANUFACTURED BY OTHER ENTERPRISES. SIN CE THERE IS NO COMPARABLE API AVAILABLE FOR CUP ANALYSIS ACCORDIN G TO THE LEARNED COUNSEL IT IS NOT A FIT CASES FOR APPLYING THE CUP METHOD OF ASCERTAINING THE ALP. IT IS SUBMITTED THAT IN TERMS OF THE P ROVISIONS OF RULE 10 B (1)(A) OF THE INCOME TAX RULES THE CUP METHOD HAS STRICT COMPARABILITY REQUIREMENTS AND THAT IN ORDER TO APPLY THE CUP M ETHOD IT IS NECESSARY THAT THERE SHOULD BE A COMPARABLE UNCONTROLLED TRAN SACTION AND THE PRICE AT WHICH SUCH UNCONTROLLED TRANSACTION HAS TAKEN PL ACE SHOULD BE ADJUSTED FOR DIFFERENCES BETWEEN THE CONTROLLED AND UNCONTRO LLED TRANSACTION. A REFERENCE IS THEN MADE TO RULE 10 B(3) TO HIGHLIGHT AS TO WHAT IT IS EMPHASIZED THAT ONLY WHEN REASONABLY ACCURATE ADJU STMENTS CAN BE MADE FOR DIFFERENCES BETWEEN THE CONTROLLED AND UNC ONTROLLED TRANSACTION THAT CUP METHOD OF ASCERTAINING ALP CAN BE APPLIED. A REFERENCES IS ALSO MADE TO THE OECD GUIDELINES WHICH INTER ALIA STAT E THAT THE CUP METHOD IS A PARTICULARLY RELIABLE METHOD WHERE THE INDEPEN DENT ENTERPRISES SELLS THE SAME PRODUCT AS IS SOLD BETWEEN TWO ASSOCIATED ENTERPRISES AND THAT SINCE PRODUCT PURCHASED BY THE TAXPAYER FROM ITS AE S IS NOT THE SAME THOUGH MAY BE SIMILAR TO AS THE GENERIC DRUGS CUP METHOD IS NOT APPROPRIATE TO THE FACTS OF THIS CASE. IN THIS CON TEXT OUR ATTENTION IS INVITED TO AN OBSERVATION MADE BY SPECIAL BENCH DEC ISION IN THE CASE OF AZTEC SOFTWARE (SUPRA) TO THE EFFECT THAT EVEN MI NOR DIFFERENCES IN CONTRACTUAL TERMS OR ECONOMIC CONDITIONS GEOGRAPHI CAL AREAS RISKS ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 19 OF 71 ASSUMED FUNCTIONS PERFORMED ETC COULD MATERIALLY A FFECT THE AMOUNT CHARGED IN AN UNCONTROLLED TRANSACTION AND THAT C OMPARABILITY UNDER THIS METHOD (I.E. CUP) DEPENDS ON CLOSE SIMILARITIES WIT H RESPECT TO VARIOUS FACTORS. LEARNED COUNSEL THEN INVITES OUR ATTENTI ON TO HONBLE SUPREME COURTS JUDGMENT IN THE CASE OF CCE VS UNIVERSAL G LASS LIMITED (182 ELT 3) WHEREIN IT IS OBSERVED THAT SIMPLY BECAUSE TWO GOODS ARE KNOWN BY THE SAME KNOWN OR THE SAME GROUP IT DOES NOT MEAN THAT THEY ARE COMPARABLE GOODS AND THAT EVEN IF THEY ARE ASSUMED TO BE COMPARABLE THE RELEVANT DIFFERENCES ALL RELEVANT DIFFERENCES AS FAR AS POSSIBLE SHOULD BE RECOGNIZED. ACCORDING TO THE LEARNED COUNSEL THESE OBSERVATIONS SHOW THAT COMPARABLES PROPOSED BY THE TPO CANNOT BE CONS IDERED TO BE COMPARABLE ONLY BECAUSE THEY ARE KNOWN BY THE SAME NAME. 23. LEARNED COUNSEL THEN SUBMITS THAT AS OBSERVED BY A CO ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF SONY INDIA PV T LTD VS DCIT ( 118 TTJ 685) SALES OF ETHICAL PHARMACEUTICALS BY A RESEARC H-BASED MULTINATIONAL GROUP WOULD NOT BE COMPARABLE WITH SALES OF GENERIC PHARMACEUTICAL SUBSTANCES BY A MULTINATIONAL GROUP NOT ENGAGED IN RESEARCH FOR AND THE DEVELOPMENT OF INNOVATORY PRODUCTS. A REFERENCE I S ALSO MADE TO THE DECISION OF ANOTHER COORDINATE BENCH IN THE CASE OF MENTOR GRAPHIC PVT LTD VS. DCIT (112 TTJ 408) IN SUPPORT OF THE PROPOS ITION THAT IF DIFFERENCES BETWEEN THE COMPARABLES ARE SO MATERIA L THAT ADJUSTMENTS CANNOT BE MADE THEN COMPARABLES ARE REQUIRED TO BE REJECTED. 24. LEARNED COUNSEL THEN ELABORATE MADE SUBMISSION S IN SUPPORT OF HIS CORE CONTENTION THAT THE APIS MANUFACTURED BY S ERDIA GROUP ENTERPRISES ARE BETTER AND SUBMITS THAT AS PER ST UDIES CONDUCTED THE PRODUCT EFFICACY OF ASSESSEES FDFS IS BETTER THAT THE PRODUCT PATENT IN RESPECT OF THE FDFS IS REGISTERED IN AND THESE PR ODUCTS ARE MARKETED IN OVER ONE HUNDRED COUNTRIES THAT THE FDFS PREPARED WITH TRIMETAZIDINE ARE BETTER THAN FDFS PREPARED WITH THE SAME API MAN UFACTURED BY OTHER ENTERPRISES THAT THE QUALITY STANDARDS ADOPTED IN THE MANUFACTURING ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 20 OF 71 PROCESS OF TRIMETAZIDINE ARE COMPLIANT WITH WHO G MP (WORLD HEALTH ORGANIZATION GOOD MANUFACTURING PRACTICES) AND T HAT THE ASSESSEE IS A MARKET LEADER IN RESPECTIVE FDF MARKET IN INDIA. I T IS ALSO SUBMITTED THAT THE PRODUCTS MANUFACTURED WITH THE APIS SUPPLIED BY ASSESSEES AES ARE GUARANTEED FOR QUALITY AND THESE AES ALSO PROVIDE PRODUCT LIABILITY COVER IN RESPECT OF FDFS MANUFACTURED OUT OF SUCH APIS. I T IS ALSO SUBMITTED THAT SERVIER GROUP BEING A RESPONSIBLE ORGANIZATIO N IS ACCOUNTABLE TO ALL ITS PARENTS AND MEDICAL FRATERNITY WORLDWIDE TO ENS URE QUALITY AND SAFETY OF ITS ORIGINAL DRUG AND TYPICALLY SUCH SUPPORT IS NOT RECEIVED IN RESPECT OF THE OTHER PLAYERS IN THE INDIAN MARKET. IT IS A LSO SUBMITTED THAT THERE WERE PROCEDURAL DEFICIENCIES IN USING THE PRICES AT WHICH THE LOCALLY PRODUCED API IS SOLD AND THESE DEFICIENCIES WERE H IGHLIGHTED IN DETAIL. 25. LEARNED COUNSEL THEN GIVES DETAILS OF SOME OF THE SALES INSTANCES BY SERVIER FRANCE IN RESPECT OF TRIMETAZIDINE AND INDAPAMIDE TO ENTITIES BASED IN JAPAN PORTUGAL SYRIA KOREA AND TUNISIA. WHILE THE PRICES OF TRIMETAZIDINE RANGE FROM 1 610.26 TO 2 591.6 3 PER KG THE PRICES OF INDAPAMIDE RANGES FROM US $ 12 043.37 TO US $ 26 70 8.64 PER KG. IT IS SUBMITTED THAT THESE PRICES SHOULD BE TREATED AS IN TERNAL CUPS AND SINCE THE PRICES AT WHICH TRIMETAZIDINE AND INDAPAMIDE AR E SUPPLIED BY SERVIER TO THE ASSESSEE AT PRICES LOWER THAN THESE PRICES THE PRICES AT WHICH ASSESSEE HAS BOUGHT THESE APIS SHOULD BE TREATED AS ALPS. ELABORATE SUBMISSIONS ARE ALSO MADE ON AS TO WHY THESE INPUTS ABOUT INTERNAL CUPS SHOULD BE ACCEPTED AND AS TO WHY THESE INPUTS SHOU LD NOT BE TREATED AS ADDITIONAL EVIDENCES. 26. IT IS THEN SUBMITTED THAT THERE IS NO CONTRADI CTION IN THE STAND OF THE ASSESSEE BEFORE THE CUSTOM AUTHORITIES VIS--VI S STAND BEFORE THE TRANSFER PRICING AUTHORITIES. IT WAS SUBMITTED THA T THE ASSESSEES STAND BEFORE THE CUSTOM AUTHORITIES TO THE EFFECT THAT TH E PRICE OF API HAS BEEN RENEGOTIATED WITH THE AES DUE TO FALL IN THE SELLI NG PRICES OF THE FDFS ONLY DEMONSTRATES THAT THE AES ARE UNRELATED PARTIE S AND THE APPELLANT ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 21 OF 71 NEGOTIATED AND BROUGHT ABOUT THE REDUCTION IN PRICE S. IT IS SUBMITTED THAT EVEN IF IT IS ASSUMED THAT FDFS MANUFACTURED BY THE ASSESSEE AND THOSE MANUFACTURED WITH LOCALLY PRODUCED APIS CONSTITUTE THE SAME MARKET THERE IS A WIDE GAP BETWEEN THE QUALITY AND CHARACT ERISTICS OF THE SAME PRODUCT. IT IS ALSO SUBMITTED THAT SINCE CUSTOM DEP ARTMENT HAS ACCEPTED THE SAID VALUATION FOR CUSTOM PURPOSES IT CANNOT B E OPEN TO ANOTHER WING OF THE GOVERNMENT TO DISREGARD THE SAME. RELIANCE I S PLACED ON THE DECISION OF A COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF KINETIC HONDA MOTORS LTD VS. JCIT (77 ITD 393) IN SUPPORT O F THE PROPOSITION THAT WHEN PAYMENTS ARE APPROVED BY ONE WING OF THE GOVE RNMENT THERE IS NO QUESTION OF SUCH PAYMENT BEING TREATED AS EXCESS IVE OR UNREASONABLE HAVING REGARD TO LEGITIMATE BUSINESS NEEDS. 27. LEARNED COUNSEL ALSO RELIED UPON THE DECISION OF THIS TRIBUNAL IN THE CASE OF UCB INDIA PVT LTD VS ACIT (118 TTJ 865) IN SUPPORT OF THE PROPOSITION THAT APIS IMPORTED BY THE ASSESSEE FROM THE ORIGINAL INVENTOR OF THE PRODUCT CANNOT BE COMPARED WITH THE PRODUCT SUPPLIED BY AN UNKNOWN CHINESE COMPANY. IT IS SUBMITTED THAT THE SAID OBSERVATIONS IN THIS CASE WOULD SQUARELY APPLY TO THE CASE OF THE A PPELLANT AS WELL. 28. LEARNED COUNSEL ALSO SUBMITTED THAT IN TERMS OF PROVISO TO SECTION 92C (2) THE TRANSFER PRICING OFFICER WAS R EQUIRED TO ALLOW VARIATION OF 5% IN COMPUTATION OF ARMS LENGTH PRIC E AND THE TPO WAS CLEARLY IN ERROR IN DECLINING THE SAME. LEARNED COU NSEL RELIES UPON THE DECISIONS OF COORDINATE BENCHES IN THE CASES OF DEV ELOPMENT CONSULTANTS (SUPRA) AND SONY INDIA (SUPRA) IN SUPPORT OF THIS PROPOSITION. 29. LEARNED COUNSEL WAS ASKED TO ADDRESS US IN THE LIGHT OF CANADIAN TAX COURTS DECISION IN THE CASE OF GLAXO SMITH KL INE INC VS HER MAJESTY THE QUEEN (2008 TCC 324) AND IN THE LIGHT OF FEDER AL COURT OF APPEAL DECISION IN THE CASE OF GLAXO SMITH KLINE INC VS HE R MAJESTY THE QUEEN (2010 FCA 201). IT WAS POINTED OUT THAT IN GLAXOS CASE CANADIAN TAX ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 22 OF 71 COURT IN A VERY COMPREHENSIVE AND DETAILED ORDER HAS HELD THAT FOR THE PURPOSE OF ASCERTAINING ARMS LENGTH PRICE OF RANIT IDINE AN API MANUFACTURED BY A GLAXO GROUP ENTERPRISES WHICH O RIGINALLY HELD PATENT FOR RANITIDINE THE PRICES AT WHICH THE SAME API S OLD BY OTHER MANUFACTURERS OF RANITIDINE IN CANADA COULD BE TAKE N INTO ACCOUNT. THIS DECISION HAS BEEN CONFIRMED BY THE FEDERAL COURT OF APPEALS EXCEPT TO THE EXTENT THAT THE MATTER WAS SENT BACK TO TAX COURT O F CANADA TO DETERMINE THE IMPACT OF LICENCE AGREEMENT WHICH ENABLED THE BUYER OF API TO SELL THE FDF IN THE BRAND NAME OWNED BY THE GLAXO I.E. ZANTAC. WE ASKED THE PARTIES TO ADDRESS US ON THE QUESTION WHETHER THE P RINCIPLES SO LAID DOWN BY THE CANADIAN COURTS IN GLAXOS CASE WILL ALSO GO VERN THE CASE BEFORE US. THE HEARING WAS ADJOURNED BY A DAY TO ENABLE THE PA RTIES TO PERUSE THESE DECISIONS AND ADDRESS US ON THE SAME. 30. LEARNED COUNSELS PRELIMINARY OBJECTION IS THA T THESE JUDICIAL PRECEDENTS HAVE NO BINDING FORCE OF LAW IN INDIA AN D WE NEED NOT BE INFLUENCED BY THE SAME. HE POINTS OUT THAT THE DEC ISIONS FROM FOREIGN COURTS NO MATTER WHATEVER BE THE DEGREE OF RESPECT THAT THESE DECISIONS ARE EXTENDED BY THE JUDICIAL FORUMS IN OTHER COUNTR IES HAVE NO BINDING PRECEDENT VALUE. HE ALSO POINTS OUT THAT THE TRANSF ER PRICING LEGISLATION IN INDIA IS NOT IN PARI MATERIA INCLUDING ON THE CORE QUESTION OF HIERARCHY OF METHODS OF DETERMINING ARMS LENGTH PRICE. IT IS S UBMITTED THAT AS EVIDENT FROM PARAGRAPH 34 OF THE FEDERAL COURT DECISION TH ERE IS A HIERARCHY OF METHODS IMPLICIT IN CANADIAN TRANSFER PRICING LEGIS LATION. THE RELEVANT OBSERVATION IN PARAGRAPH 34 OF THE SAID DECISION IS THAT (T)HERE WAS NO DISPUTE BETWEEN THE PARTIES THAT THE COST-PLUS AND RESALE PRICE METHODS WERE SECONDARY METHODS TO BE USED WHEN THE CUP MET HOD WAS NOT APPROPRIATE AND THAT THE TRANSACTIONAL NET MARGIN M ETHOD WAS ANOTHER ALTERNATIVE TO BE USED WHEN THE COST-PLUS AND RESAL E PRICE METHODS WERE NOT APPROPRIATE. IT IS SUBMITTED THAT AS AGAINST THIS HIERARCHY OF METHODS TO DETERMINE THE ALP THE CHOICE OF METHOD OF DETER MINING ALP RESTS WITH THE ASSESSEE IN INDIA AND UNLESS THE ASSESSING OF FICER DEMONSTRATES THAT ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 23 OF 71 ALP SO COMPUTED IS CONTRARY TO THE PROVISIONS OF TR ANSFER PRICING LEGISLATION IN INDIA THE CHOICE OF METHOD CANNOT B E DISTURBED. LEARNED COUNSEL THEN SUBMITS THAT AS EVIDENT FROM A PLAIN READING OF SECTION 69(2) OF THE CANADIAN INCOME TAX ACT WHICH IS REPRODUCE D IN THE JUDGMENT BY THE FEDERAL COURT THE POINT IN DISPUTE WAS CLASSIF ICATION ABOUT NATURE OF PAYMENT. IT WAS POINTED OUT THAT AS EVIDENT FROM A READING OF TAX COURT DECISION THE ISSUE BEFORE THE COURT WAS WHETHER TH E AMOUNT PAID FOR PURCHASE OF API ON THE FACTS OF THIS PARTICULAR CA SE WAS TO BE RECLASSIFIED AS DIVIDEND AND TO ADJUDICATE UPON TAX WITHHOLDING REQUIREMENTS FROM THE SAME. THIS ISSUE ACCORDING TO THE LEARNED COUNSEL IS NOT THE ISSUE IN APPEAL BEFORE US AND THEREFORE DECISION RENDERED BY THE TAX COURT HAS NO APPLICATION IN THE CASE BEFORE US. IT IS SUBMITT ED THAT ALL TRANSFER PRICING LEGISLATIONS ARE SOMEWHAT UNIQUE AND THER EFORE IT CANNOT BE OPEN TO US TO IMPORT THE PRINCIPLES LAID DOWN BY TH E FOREIGN COURTS IN THE CONTEXT OF THEIR OWN TRANSFER PRICING LEGISLATION W HICH MAY NOT HAVE MUCH IN COMMON WITH INDIAN TRANSFER PRICING LEGISLATION. 31. WITHOUT PREJUDICE TO THE ARGUMENTS SO ADVANCED ON INAPPLICABILITY OF THE JUDICIAL PRECEDENTS IN GLAXO S CASE (SUPRA) LEARNED COUNSEL SUBMITS THAT IN GLAXOS CASE CANADIAN TAX COURT WAS DEALING WITH A SITUATION IN WHICH THERE WERE NO DIFFERENCES IN T HE API CONCERNED. THAT IS ACCORDING TO THE LEARNED COUNSEL MATERIALLY DI FFERENT VIS--VIS THE SITUATION BEFORE US IN WHICH THE ASSESSEE HAS ESTAB LISHED THE SUPERIORITY OF THE API IMPORTED BY THE ASSESSEE AS AGAINST THE SAME API BEING MANUFACTURED LOCALLY. LEARNED COUNSEL FOR THE ASSE SSE TOOK US THROUGH THESE DECISIONS AND HIGHLIGHTED THE DIFFERENCES BET WEEN THE FACTS OF GLAXOS CASE AND FACTS OF THE CASE BEFORE US. 32. LEARNED COUNSEL VEHEMENTLY OPPOSED OUR SUGGEST ION FOR REMITTING THE MATTER BACK TO THE FILE OF THE ASSESS ING OFFICER. IT WAS POINTED OUT THAT SUBSTANTIAL TIME HAS ELAPSED SINCE THE IMPUGNED ASSESSMENTS WERE FRAMED AND THE MATTER MUST REACH FINALITY NOW. IT WAS ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 24 OF 71 ALSO CONTENDED THAT THE REVENUE AUTHORITIES CANNOT BE ALLOWED SECOND INNINGS TO IMPROVE UPON THEIR CASE. IT IS ONCE AGA IN REITERATED THAT THE ASSESSE HAD APPLIED THE TNMM FOR ASCERTAINING ALP GIVEN FULL DOCUMENTATION IN SUPPORT OF THE SAME AND THE TRANS FER PRICING OFFICER HAS REJECTED WITHOUT PLACING ON RECORD ANY COGENT REASONS THE ALP DETERMINATION METHOD ADOPTED BY THE ASSESSEE. ON TH ESE FACTS ACCORDING TO THE LEARNED COUNSEL WE MUST VACATE THE ADJUSTME NTS MADE BY THE TRANSFER PRICING OFFICER AND UPHOLD THE GRIEVANCE O F THE ASSESSEE. 33. IN RESPONSE TO BENCHS QUERY WHETHER THE ASSES SEE IS IN A POSITION TO GIVE ANY FURTHER INPUTS ON APPLICATION OF THE CUP METHOD FOR DETERMINING THE ALP BEYOND WHAT HAS BEEN FILED AT THE ASSESSMENT AND APPELLATE STAGE OR WHETHER THE ASSESSEE CONSIDERS ANY OF THE SAME API BEING SOLD IN INDIA A COMPARABLE LEARNED COUNSEL EXPRESSED REGRET FOR NOT BEING ABLE TO DO SO. 34. ON THE STRENGTH OF ALL THESE ARGUMENTS AS ALS O ON SEVERAL OTHER ARGUMENTS ON PERIPHERAL PROCEDURAL ISSUES AND WRITT EN SUBMISSIONS FILED BEFORE US LEARNED COUNSEL URGED US TO DELETE THE I MPUGNED ALP ADJUSTMENTS. 35. LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITS TH AT IT IS AN UNDISPUTED POSITION THAT THE APIS IN QUESTION ARE N O LONGER PATENTED DRUGS AND THE RELATED PATENTS HAVE SINCE EXPIRED. I T IS SUBMITTED THAT ALL THESE SCHOLARLY SUBMISSIONS BY THE LEARNED COUNSEL ON PATENTED DRUGS VERSUS GENERIC DRUGS ARE WHOLLY IRRELEVANT. 36. IT IS POINTED OUT THAT AS SUBMITTED BY THE LE ARNED COUNSEL HIMSELF IN HIS PRESENTATION IT IS BECAUSE OF THE H IGH COSTS OF DEVELOPING AND LAUNCHING A NEW DRUG THAT THE PATENTS ARE ENFO RCED AND OTHER ENTERPRISES ARE PROHIBITED FROM MAKING THAT DRUG T HOUGH FOR THE PERIOD LIMITED BY THE PATENTS. THE MONOPOLISTIC CONDITI ONS IN THE PERIOD WHEN ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 25 OF 71 PATENT IS IN FORCE ARE MEANT TO ENABLE THE OWNER TO RECOVER THE HE INITIAL COSTS BUT THAT PERIOD IS NOW OVER SO FAR AS THE AP IS IN QUESTION ARE CONCERNED. ONCE THE PATENT PERIOD EXPIRES IT IS IN EVITABLE THAT EVEN THE COMPANY WHICH HAS DEVELOPED THE API HAS TO COMPLETE WITH GENERIC API PRODUCERS AND IN SUCH A SITUATION A MARKET DRIVEN PRICE ALONE CAN BE AN ARMS LENGTH PRICE. LEARNED DEPARTMENTAL REPRESENTA TIVE POINTS OUT THE WORDS USED BY THE ASSESSEE IN HIS INITIAL PRESENTA TION TO THE EFFECT THAT PATENT PROTECTION ENABLES THE OWNER TO RECOVER RES EARCH AND DEVELOPMENT COSTS AND INVEST IN FUTURE DEVELOPMENTS . IT IS SUBMITTED THAT WHEN ADMITTEDLY OWNER OF A DRUG PATENT USES THE PAT ENT PROTECTED PERIOD TO RECOVER HIS INITIAL COSTS OF DEVELOPMENT THROUG H ARTIFICIAL MONOPOLISTIC CONDITIONS IT CANNOT BE OPEN TO HIM TO AGAIN FACTO R FOR THE COSTS OF DEVELOPING THE DRUG IN COMPUTATION OF ALP IN POST PATENT PROTECTED PERIOD ALSO. 37. LEARNED DEPARTMENTAL REPRESENTATIVE ACCEPTS TH AT THE INDIAN TRANSFER PRICING REGULATIONS DO NOT PRESCRIBE AN HI ERARCHY OF METHODS OF DETERMINING THE ALP BUT THAT IS IMPLICIT IN THE SC HEME OF SELECTION OF MOST APPROPRIATE METHOD BECAUSE AS LONG AS A DIRECT METH OD OF COMPUTING ALP IN AVAILABLE WHICH WILL HAVE LESSER EXTERNAL FACT ORS INFLUENCING THE PRICE THE SAME IS PREFERABLE OVER AN INDIRECT METHOD WHIC H WILL BE INFLUENCED BY IRRELEVANT AND EXTRANEOUS FACTORS. HE SUBMITS TH AT OECD GUIDELINES MAY NOT BE APPLICABLE IN INDIA BUT THE RATIONALE OF TH ESE GUIDELINES WILL ALWAYS BE RELEVANT. 38. IT IS POINTED OUT THAT THERE ARE FACTORS LIKE DEBT FUNDING COMPONENT INVENTORY VALUATION METHOD AND REVENUE R ECOGNITION PRINCIPLES ETC. WHICH ARE WHOLLY IRRELEVANT FOR DE TERMINATION FOR THE ALP OF A PRODUCT WHICH GOVERN TNMM COMPARISON. A METHO D WHICH CAN BE INFLUENCED BY SUCH EXTRANEOUS AND IRRELEVANT FACTOR S CANNOT BE PREFERRED OVER A DIRECT METHOD LIKE CUP METHOD. WE ARE TAKEN THROUGH THE ORDERS OF THE AUTHORITIES BELOW TO SHOW AS TO WHY ON THE FAC TS OF THIS CASE CUP ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 26 OF 71 METHOD IS A MORE APPROPRIATE METHOD. LEARNED DEPART MENTAL REPRESENTATIVE VEHEMENTLY RELIES UPON THE ORDERS OF THE AUTHORITIES IN THIS REGARD. 39. IT IS SUBMITTED THAT THE RELATED APIS ARE PROD UCTS WHICH ARE SOLD IN THE MARKET AND THEREFORE COMPARABLE UNCONTROLL ED PRICES ARE EASILY AVAILABLE. AS FOR THE VARIATIONS IN QUALITY EVERY PRODUCER MAKES A CLAIM THAT HIS PRODUCT IS BETTER THAN OTHER SIMILAR PRODU CTS AND THAT IS MORE OF A MARKETING GIMMICK THAN REAL DIFFERENTIATION. ON THE FACTS OF THIS CASE AND PARTICULARLY AS API IS A STANDARD PRODUCT FOR WHICH TRANSACTION PRICES BETWEEN UNRELATED PARTIES ARE AVAILABLE AND AS IT I S A DIRECT METHOD WITH MINIMUM DISTORTIONS BY IRRELEVANT FACTORS IT IS A FIT CASE FOR USE OF CUP METHOD FOR DETERMINING THE ALP. ACCORDING TO THE LE ARNED DEPARTMENTAL REPRESENTATIVE THE TRANSFER PRICING OFFICER HAS GI VEN LIBERAL ADJUSTMENTS IN RESPECT OF THE QUALITY DIFFERENCES CLAIMED BY TH E ASSESSEE. IT IS SUBMITTED THAT THE TRANSFER PRICING OFFICER HAS GIV EN COGENT THOUGH PERHAPS BRIEF REASONS FOR REJECTING THE TNMM FOR A SCERTAINING THE ALP. LEARNED DEPARTMENTAL REPRESENTATIVE TAKES US THROUG H THESE REASONS AND JUSTIFIES THE SAME. IT IS ALSO SUBMITTED THAT THE P OWERS OF THE TRIBUNAL IN RESTORING THE MATTER TO THE FILE OF THE ASSESSING O FFICER ARE UNFETTERED AND OF WIDE AMPLITUDE. JUST BECAUSE IT IS INCONVENIENT TO THE ASSESSEE TO GO THROUGH THE PROCESS OF AGAIN APPEARING BEFORE THE T RANSFER PRICING OFFICER OR ANY OTHER AUTHORITY BELOW IT CANNOT BE SAID THA T THE TRIBUNAL MUST NOT REMIT THE MATTER TO ANY OF THE AUTHORITIES BELOW. IT IS SUBMITTED THAT TRANSFER PRICING LEGISLATION IS OF RECENT ORIGIN IN INDIA AND WE MUST BEAR THE LIMITED SKILLS AVAILABLE TO THE FIELD OFFICER A T THE INITIAL STAGES OF ITS IMPLEMENTATION. WE MUST NOT THEREFORE REFRAIN FRO M REMITTING THE MATTER TO THE AUTHORITIES BELOW IN DESERVING CASES. 40. IN ANY EVENT ACCORDING TO THE DEPARTMENTAL RE PRESENTATIVE THE TRANSFER PRICING DOCUMENTATION GIVEN BY THE ASSESSE E IS NOT LEGALLY SUSTAINABLE BECAUSE THE TNMM COMPUTATION OF ALP IS BASED ON ENTITY ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 27 OF 71 BASIS COMPARISON WHEREAS AS HELD BY THIS TRIBUNAL IN UCBS CASE (SUPRA) THE COMPARISON HAS TO BE ON THE BASIS OF TRANSACTIO NS RATHER THAN BUSINESS ENTITY ITSELF. 41. LEARNED DEPARTMENTAL REPRESENTATIVE THEN SUBMI TS THAT HIERARCHY OF METHODS OF DETERMINING ALP IS RELEVANT ONLY WHEN TWO METHODS ARE EQUALLY APPROPRIATE AND THOSE TWO METHO DS YIELD VARYING RESULTS. IN THE PRESENT CASE HOWEVER CUP METHOD I S MORE APPROPRIATE ON ITS OWN MERITS AND BEING A DIRECT METHOD AND THER EFORE HIERARCHY OF METHODS IS IRRELEVANT. LEARNED DEPARTMENTAL REPRESE NTATIVE TAKES US THROUGH THE ORDER PASSED BY THE TRANSFER PRICING OF FICER JUSTIFIES AND SUPPORTS THE SAME. HE SUBMITS THAT THE TRANSFER PRI CING OFFICER HAS GIVEN GOOD REASONS FOR REJECTING THE TRANSACTIONAL NET MA RGIN METHOD FOR DETERMINING THE ARMS LENGTH PRICE BECAUSE WHEN TH E SUBJECT MATTER OF SALE IN INTERNATIONAL TRANSACTION BETWEEN THE ASSOC IATED ENTERPRISES IS A PRODUCT WHICH IS SOLD IN THE OPEN MARKET AND A DIR ECT METHOD OF DETERMINING THE ARMS LENGTH PRICE IS AVAILABLE BY WAY OF CUP THERE IS NO OCCASION TO RESORT TO ANY OTHER AND PARTICULARLY I NDIRECT METHOD OF DETERMINING THE ARMS LENGTH PRICE. JUST BECAUSE T HE REASONS GIVEN BY THE TPO ARE BRIEF THOUGH PRECISE IT CANNOT BE CONTEND ED BY THE ASSESSEE THAT THE MATTER HAS NOT BEEN PROPERLY EXAMINED BY THE TP O. 42. LEARNED DEPARTMENTAL REPRESENTATIVE THEN TAKE S US THROUGH THE DECISIONS OF TAX COURT OF CANADA AND FEDERAL COURT OF APPEALS IN CANADA IN THE CASE OF GLAXO SMITHKLINE INC. (SUPRA) . WHILE HE DOES NOT DISPUTE THAT THESE DECISIONS HAVE ANY BINDING PRECEDENCE VA LUE IN INDIA HE SUBMITS THAT THE LOGIC AND RATIONALE OF THESE DECIS IONS BIND EVERY REASONABLE PERSONS. HE POINTS OUT THAT THE HEARING OF CANADIAN TAX COURT WAS SPREAD OVER FORTY DAYS AND IN COMING TO THEIR C ONCLUSIONS THE JUDGES WAS NOT ONLY GUIDED BY ILLUMINATING LEGAL ARGUMENTS BY TAX EXPERTS BUT ALSO BY INDUSTRY INSIGHT PROVIDED BY SEVERAL EXPERT WITN ESSES. IT IS MORE LIKE A RESEARCH PAPER ACCORDING TO THE LEARNED DEPARTMENT AL REPRESENTATIVE ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 28 OF 71 WHICH DESERVES UTMOST RESPECT AND WHICH SUCCINCTLY EXPLAINS THE FUNCTIONING OF THE PHARMACEUTICAL INDUSTRY AND DEMY STIFIES THEIR WORKING. IT IS POINTED OUT THAT AS RIGHTLY HELD BY THE CANA DIAN TAX COURT TO ASCERTAIN ARMS LENGTH PRICE OF APIS MANUFACTURED EVEN BY THE ORIGINAL PATENT HOLDER PRICES OF THE SAME API PRODUCED BY A GENERIC DRUG PRODUCER MUST BE TAKEN INTO ACCOUNT. WE ARE URGED TO FOLLOW THE SAME APPROACH. AS REGARDS FEDERAL COURT OF APPEAL DECISION IT IS POI NTED OUT THAT FCA DECISION DOES NOT DISAPPROVE THE PRINCIPLE BUT ADDS THAT THE ARMS LENGTH PRICE MUST ALSO TAKE INTO ACCOUNT THE LICENCE TERMS FOR FDF SALE. THAT IS NOT EVEN THE CLAIM OF THE ASSESSEE BEFORE US. WE AR E THUS URGED TO REJECT THE CONTENTIONS OF THE ASSESSEE AND APPROVE THE ALP ADJUSTMENTS MADE IN THE IMPUGNED ASSESSMENTS. 43. IT IS THEN SUBMITTED THAT IN ORDER TO FOLLOW T HE PRINCIPLES FROM THESE DECISIONS IT IS NOT REALLY A CONDITION PRECE DENT THAT THE TRANSFER PRICING LEGISLATIONS SHOULD BE THE SAME IN INDIA. W HAT IS MATERIAL IS THAT THE QUESTIONS WHICH HAVE BEEN DECIDED BY THESE COUR TS SHOULD HAVE RELEVANCE TO THE QUESTIONS BEFORE US AND THERE IS NO DISPUTE SO FAR AS THIS ASPECT OF THE MATTER IS CONCERNED. WE ARE THUS URGE D TO FOLLOW THE PRINCIPLES LAID DOWN IN THESE DECISIONS TO THE EXTE NT APPLICABLE ON THE FACT SITUATION BEFORE US. 44. OUR ATTENTION IS THEN DRAWN TO CERTAIN OBSERVA TIONS MADE IN THE ORDERS OF THE AUTHORITIES BELOW AS ALSO IN THE REMA ND REPORT FILED BY THE ASSESSING OFFICER. LEARNED DEPARTMENTAL REPRESENTAT IVE TAKES US THROUGH THE SAME AND VEHEMENTLY RELIES UPON THE SAME. WE AR E URGED TO UPHOLD THE ORDERS OF THE AUTHORITIES BELOW AND DECLINE TO INTERFERE IN THE MATTER. 45. IN HIS BRIEF REJOINDER LEARNED COUNSEL FOR TH E ASSESSEE BROADLY REITERATES HIS SUBMISSIONS AND SUBMITS THAT IT WAS THE POWER BUT THE PROPRIETY OF REMITTING THE MATTER TO THE FILE OF TH E ASSESSING OFFICER IF THAT IS WHAT WE WERE CONTEMPLATING THAT WAS SUBJECT MAT TER OF ASSESSEES ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 29 OF 71 SUBMISSIONS. LEARNED COUNSEL THEN TAKES US THROUGH THE CHRONOLOGY OF EVENTS IN THE TRANSFER PRICING AUDIT AND SUBMITS TH AT THE ASSESSEE HAS COMPLIED WITH ALL REASONABLE REQUISITIONS OF THE TR ANSFER PRICING OFFICER IN WHATEVER WAY IT WAS POSSIBLE FOR THE ASSESSEE T HAT THE ASSESSEE HAS DULY COOPERATED WITH THE TRANSFER PRICING OFFICER AND THAT THE ASSESSEE HAS ADOPTED A METHOD WHICH WAS MOST SUITABLE FOR DE TERMINING THE ALP. 46. LEARNED COUNSEL ALSO SUBMITS THAT THE HIERARCH Y OF METHODS OF COMPUTING ARMS LENGTH PRICE HAS TO EXPLICITLY STAT ED IN THE TRANSFER PRICING REGULATIONS AND SINCE IT IS NOT SO SET OUT NO SUCH HIERARCHY CAN BE INFERRED OR ASSUMED. IN SUPPORT OF THIS PROPOSITION RELIANCE IS PLACED ON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE O F CIT VS TARA AGENCIES ( 292 ITR 444). IT IS REITERATED THAT IN THE ABSENC E OF ANY SUCH HIERARCHY OF METHODS OF DETERMINING THE ALP THE CHOICE OF ME THOD RESTS ONLY WITH THE ASSESSEE AND UNLESS ALP COMPUTED ON THAT BASIS IS FOUND TO BE CONTRARY TO THE PROVISIONS OF TRANSFER PRICING REGU LATIONS THE TRANSFER PRICING OFFICER CANNOT REJECT THE SAME. WE ARE ONCE AGAIN URGED TO SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND HOLD THAT THE IMPUGNED ALP ADJUSTMENTS ARE INDEED UNSUSTAINABLE IN LAW. 47. WE HAVE DULY CONSIDERED THE RIVAL SUBMISSIONS PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED THE RIVAL SU BMISSIONS AS ALSO THE APPLICABLE LEGAL POSITION. 48. THE FIRST ISSUE THAT WE NEED TO ADJUDICATE ON IS WHETHER IN THE ABSENCE OF A HIERARCHY OF METHODS OF DETERMINING TH E ARMS LENGTH PRICE IT IS PERMISSIBLE FOR THE TRANSFER PRICING OFFICER TO REJECT THE TRANSACTIONAL NET MARGIN METHOD TO DETERMINE THE ARMS LENGTH PRI CE OF THE TRANSACTIONS WITH AES ON THE GROUND THAT THE COMPARABLE UNCONTR OLLED PRICE METHOD TO DETERMINE THE ALP WILL BE MORE APPROPRIATE AND EVEN AS THE TRANSFER PRICING OFFICER HAS NOT POINTED OUT ANY DEFECTS IN THE METHOD ADOPTED BY THE ASSESSEE. ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 30 OF 71 49. LET US DEAL WITH SOME FUNDAMENTALS FIRST. SEC TION 92 C OF THE ACT WHICH DEALS WITH DETERMINATION OF ARMS LENGTH PRICE IN RELATION TO INTERNATIONAL TRANSACTIONS BETWEEN THE ASSOCIATED E NTERPRISES PROVIDES AS FOLLOWS: COMPUTATION OF ARMS LENGTH PRICE . 92C. (1) THE ARMS LENGTH PRICE IN RELATION TO AN INTERN ATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLO WING METHODS BEING THE MOST APPROPRIATE METHOD HAVING REGARD TO THE N ATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASS OCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER R ELEVANT FACTORS AS THE BOARD MAY PRESCRIBE NAMELY : (A) COMPARABLE UNCONTROLLED PRICE METHOD; (B) RESALE PRICE METHOD; (C) COST PLUS METHOD; (D) PROFIT SPLIT METHOD; (E) TRANSACTIONAL NET MARGIN METHOD; (F) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. (2) THE MOST APPROPRIATE METHOD REFERRED TO IN SUB- SECTION (1) SHALL BE APPLIED FOR DETERMINATION OF ARMS LENGTH PRICE I N THE MANNER AS MAY BE PRESCRIBED: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES: PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS LENGTH PRIC E SO DETERMINED AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN DOES NOT EXCEED FIVE PER C ENT OF THE LATTER THE PRICE AT WHICH THE INTERNATIONAL TRANSACTION HA S ACTUALLY BEEN UNDERTAKEN SHALL BE DEEMED TO BE THE ARMS LENGTH P RICE.] (3) WHERE DURING THE COURSE OF ANY PROCEEDING FOR T HE ASSESSMENT OF INCOME THE ASSESSING OFFICER IS ON THE BASIS OF M ATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION OF THE OPINION THAT (A) THE PRICE CHARGED OR PAID IN AN INTERNATIONAL TRANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2); OR (B) ANY INFORMATION AND DOCUMENT RELATING TO AN I NTERNATIONAL TRANSACTION HAVE NOT BEEN KEPT AND MAINTAINED BY TH E ASSESSEE IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SUB- SECTION (1) OF SECTION 92D AND THE RULES MADE IN THIS BEHALF; O R (C) THE INFORMATION OR DATA USED IN COMPUTATION O F THE ARMS LENGTH PRICE IS NOT RELIABLE OR CORRECT; OR ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 31 OF 71 (D) THE ASSESSEE HAS FAILED TO FURNISH WITHIN TH E SPECIFIED TIME ANY INFORMATION OR DOCUMENT WHICH HE WAS REQUIRED T O FURNISH BY A NOTICE ISSUED UNDER SUB-SECTION (3) OF SECTION 92D THE ASSESSING OFFICER MAY PROCEED TO DETERMINE THE ARMS LENGTH PRICE IN RELATION TO THE SAID INTERNATIONAL TRANSACTION I N ACCORDANCE WITH SUB-SECTIONS (1) AND (2) ON THE BASIS OF SUCH MATE RIAL OR INFORMATION OR DOCUMENT AVAILABLE WITH HIM: PROVIDED THAT AN OPPORTUNITY SHALL BE GIVEN BY THE ASSESSIN G OFFICER BY SERVING A NOTICE CALLING UPON THE ASSESSEE TO SHOW CAUSE ON A DATE AND TIME TO BE SPECIFIED IN THE NOTICE WHY THE ARMS L ENGTH PRICE SHOULD NOT BE SO DETERMINED ON THE BASIS OF MATERIAL OR INFORM ATION OR DOCUMENT IN THE POSSESSION OF THE ASSESSING OFFICER. (4) WHERE AN ARMS LENGTH PRICE IS DETERMINED BY TH E ASSESSING OFFICER UNDER SUB-SECTION (3) THE ASSESSING OFFICER MAY CO MPUTE THE TOTAL INCOME OF THE ASSESSEE HAVING REGARD TO THE ARMS L ENGTH PRICE SO DETERMINED: PROVIDED THAT NO DEDUCTION UNDER SECTION 10A 27 [OR SECTION 10AA] OR SECTION 10B OR UNDER CHAPTER VI-A SHALL BE ALLOWED IN RESPECT OF THE AMOUNT OF INCOME BY WHICH THE TOTAL INCOME OF THE A SSESSEE IS ENHANCED AFTER COMPUTATION OF INCOME UNDER THIS SUB -SECTION : PROVIDED FURTHER THAT WHERE THE TOTAL INCOME OF AN ASSOCIATED ENTERPRISE IS COMPUTED UNDER THIS SUB-SECTION ON DE TERMINATION OF THE ARMS LENGTH PRICE PAID TO ANOTHER ASSOCIATED ENTER PRISE FROM WHICH TAX HAS BEEN DEDUCTED OR WAS DEDUCTIBLE UNDER THE P ROVISIONS OF CHAPTER XVIIB THE INCOME OF THE OTHER ASSOCIATED E NTERPRISE SHALL NOT BE RECOMPUTED BY REASON OF SUCH DETERMINATION OF AR MS LENGTH PRICE IN THE CASE OF THE FIRST MENTIONED ENTERPRISE. 50. IN TERMS OF THE PROVISIONS OF SECTION 92 C(1) AS EVIDENT FROM A PLAIN READING OF THE SAID PROVISION THE ARMS LENG TH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION IS TO BE DETERMINED BY ON E OF THE PRESCRIBED METHODS WHICH IS MOST APPROPRIATE METHOD HAVING R EGARD TO THE (I) NATURE OF TRANSACTION (II) CLASS OF TRANSACTION ( III) CLASS OF ASSOCIATED PERSONS (IV) FUNCTIONS PERFORMED BY SUCH PERSONS OR (V) SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE. SECTI ON 92 C(2) PROVIDES THAT IT IS ONLY THE MOST APPROPRIATE METHOD AS REF ERRED TO IN SECTION 92 C (1) WHICH CAN BE APPLIED FOR DETERMINATION OF A RMS LENGTH PRICE IN THE PRESCRIBED MANNER. THE CHOICE OF METHOD ON THE BASIS OF WHICH ARMS LENGTH PRICE IS DETERMINED IS THEREFORE NOT AN UN FETTERED CHOICE ON THE PART OF TAXPAYER AND IN OUR CONSIDERED VIEW THIS CHOICE HAS TO BE ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 32 OF 71 EXERCISED ON THE TOUCHSTONE OF PRINCIPLES GOVERNIN G SELECTION OF MOST APPROPRIATE METHOD SET OUT IN SECTION 92 C (1). THE FIRST STEP IN DETERMINATION OF ARMS LENGTH PRICE IS THE SELECTIO N OF THE RIGHT METHOD OF COMPUTING THE ARMS LENGTH PRICE. ONCE THE RIGHT ME THOD IS SELECTED UNDER SECTION 92 C (1) THE NEXT STEP IS APPLICATIO N OF THE METHOD SO SELECTED IN COMPUTATION OF ARMS LENGTH PRICE AS IS SET OUT UNDER SECTION 92 C (2). ON BOTH OF THESE ASPECTS OF EXERCISE OF DETERMINING THE ARMS LENGTH PRICE HOWEVER THE ASSESSING OFFICER HAS TH E OVERRIDING POWERS FOR COURSE CORRECTION. THESE POWERS ARE SET OUT IN SECTION 92 C (3)(A) WHICH PROVIDES THAT WHERE DURING THE COURSE OF ANY PROCEEDING FOR THE ASSESSMENT OF INCOME THE ASSESSING OFFICER IS INTER ALIA OF THE OPINION THAT THE PRICE CHARGED OR PAID IN AN INTERNATIONAL TRANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SECTIONS 92 C(1) AND SECTION 92 C(2) THE ASSESSING OFFICER MAY PROCEED TO DETERMIN E THE ARMS LENGTH PRICE IN RELATION TO THE SAID INTERNATIONAL TRANSAC TION IN ACCORDANCE WITH SECTIONS 92 C(1) AND SECTION 92 C(2) ON THE BASIS OF SUCH MATERIAL OR INFORMATION OR DOCUMENT AVAILABLE WITH HIM. THE AS SESSING OFFICER HAS THE POWERS TO DETERMINE ARMS LENGTH PRICE WHEN THE ARMS LENGTH PRICE COMPUTED BY THE TAXPAYER IS NOT ON THE BASIS OF CO RRECTLY APPLYING THE METHOD OF COMPUTING THE ARMS LENGTH IN TERMS OF T HE PROVISIONS OF SECTION 92 C (2) AS ALSO WHEN THE METHOD OF SELECT ING MOST APPROPRIATE METHOD OF COMPUTING THE ARMS LENGTH PRICE IS NOT D ETERMINED IN ACCORDANCE WITH THE SCHEME OF THINGS ENVISAGED UNDE R SECTION 92 C(1). THIS PROVISION IS HOWEVER SUBJECT TO THE CONDITIO N THAT THE ASSESSING OFFICER HAS TO GIVE AN OPPORTUNITY OF HEARING TO TH E TAXPAYER ON AS TO WHY HE SHOULD NOT DO SO BY SERVING A SHOW CAUSE NOTIC E. THE TWIN CONDITIONS OF COMPLIANCE WITH THE PROVISIONS UNDER SECTION 92 C (1) AND 92 C (2) HAVE TO BE FULLY COMPLIED WITH BY THE TAXPAYER AND IT IS ONLY WHEN THIS ONUS IS PROPERLY DISCHARGED BY THE TAXPAYER THAT TH E ASSESSING OFFICER IS RESTRAINED FROM RESORTING TO DETERMINATION OF ARM S LENGTH PRICE BY HIM IN TERMS OF SECTION 92 C (3)(A). OF COURSE THERE ARE OTHER SITUATIONS AS SE OUT IN CLAUSES (B) (C) AND (D) OF SECTION 92 C (3) IN WHICH THE ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 33 OF 71 ASSESSING OFFICER CAN PROCEED TO DETERMINE THE ARM S LENGTH PRICE UNDER SECTION 92 C(1) AND (2) BUT IN THE CONTEXT OF THE SITUATION THAT WE ARE IN SEISIN OF IT IS NOT REALLY NECESSARY TO DEAL WITH THE SA ME. 51. IN VIEW OF THE ABOVE DISCUSSIONS IN OUR CONSI DERED VIEW IT IS CLEAR THAT THE SELECTION OF METHOD OF DETERMINING THE ARM S LENGTH PRICE IS NOT ON THE UNFETTERED DISCRETION OF THE TAXPAYER. THE DUTY OF THE TAXPAYER IS TO SELECT SUCH METHOD OF DETERMINING THE ARMS LENG TH PRICE AS IS MOST APPROPRIATE METHOD HAVING REGARD TO ALL THE RELEVAN T FACTORS SUCH AS (I) NATURE OF TRANSACTION (II) CLASS OF TRANSACTION ( III) CLASS OF ASSOCIATED PERSONS (IV) FUNCTIONS PERFORMED BY SUCH PERSONS OR (V) SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE. RULE 1 0 C WHICH SETS OUT THE RELEVANT FACTORS PRESCRIBED BY THE BOARD PROVIDES AS FOLLOWS: MOST APPROPRIATE METHOD. 10C. (1) FOR THE PURPOSES OF SUB-SECTION (1) OF SEC TION 92C THE MOST APPROPRIATE METHOD SHALL BE THE METHOD WHICH IS BES T SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTICULAR INTERNAT IONAL TRANSACTION AND WHICH PROVIDES THE MOST RELIABLE MEASURE OF AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. (2) IN SELECTING THE MOST APPROPRIATE METHOD AS SPE CIFIED IN SUB-RULE (1) THE FOLLOWING FACTORS SHALL BE TAKEN INTO ACCO UNT NAMELY: (A) THE NATURE AND CLASS OF THE INTERNATIONAL TRANS ACTION; (B) THE CLASS OR CLASSES OF ASSOCIATED ENTERPRISES ENTERING INTO THE TRANSACTION AND THE FUNCTIONS PERFORMED BY THEM TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND RISKS ASSUMED BY SUCH ENTERPRISES; (C ) THE AVAILABILITY COVERAGE AND RELIABILITY OF DATA NECESSARY FOR APPLICATION OF THE METHOD; (D) THE DEGREE OF COMPARABILITY EXISTING BETWEEN TH E INTERNATIONAL TRANSACTION AND THE UNCONTROLLED TRAN SACTION AND BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRAN SACTIONS; (E) THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJU STMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES IF ANY BET WEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INT O SUCH TRANSACTIONS; (F ) THE NATURE EXTENT AND RELIABILITY OF ASSUMPTI ONS REQUIRED TO BE MADE IN APPLICATION OF A METHOD. ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 34 OF 71 52. IN TERMS OF THE PROVISIONS OF SECTION 92 C(1) O F THE INCOME TAX ACT READ WITH RULE 10C(1) OF THE INCOME-TAX RULES THE MOST APPROPRIATE METHOD OF ASCERTAINING THE ARMS LENGTH PRICE IS TH E METHOD WHICH IS BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTICULAR TRANSACTION AND WHICH PROVIDES THE MOST RELIABLE MEASURE OF AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION THOUGH IN RELATIVELY MORE SPECIFIC TERMS RULE 10C(2) LISTS OUT THE FACTORS T O TAKEN INTO ACCOUNT WHILE SELECTING THE MOST APPROPRIATE METHOD. IT IS SOMEWHAT AKIN TO THE BEST RULE METHOD IN SECTION 482 -1(C)(1) OF US TRAN SFER REGULATIONS WHICH PROVIDES THAT THE ARMS LENGTH RESULT OF A CONT ROLLED TRANSACTION MUST BE DETERMINED UNDER THE METHOD THAT UNDER THE FACT S AND CIRCUMSTANCES PROVIDE THE MOST RELIABLE MEASURE OF AN ARMS LENGT H RESULT. 53. IN A SITUATION IN WHICH THE ASSESSING OFFICER FINDS THAT THE SELECTION OF MOST APPROPRIATE METHOD IS NOT APPROPR IATE TO THE ALL THE RELEVANT FACTORS HE HAS THE POWERS AS INDEED THE CORRESPONDING DUTY TO SELECT THE MOST APPROPRIATE METHOD AND COMPUTE THE ARMS LENGTH PRICE BY APPLYING THAT METHOD. IT IS NOT AT ALL NECESSAR Y AS HAS BEEN CONTENDED BY THE ASSESSEE THAT UNLESS THE ASSESSING OFFICER CAN DEMONSTRATE THAT ARMS LENGTH PRICE COMPUTED BY THE ASSESSEE IS NOT COMPUTED IN THE MANNER AS PRESCRIBED IN THE REGULATIONS HE CANNOT REJECT THE METHOD CHOSEN BY THE TAXPAYER. THE SELECTION OF MOST APPRO PRIATE METHOD OF COMPUTING THE ARMS LENGTH PRICE IS A SIGNIFICANT C OMPONENT OF THE PROCESS OF DETERMINING THE ARMS LENGTH PRICE AND T HE ASSESSEE HAS TO JUSTIFY THE SAME ON SOUND REASONING. IN OUR CONSIDE RED VIEW THE ONUS IS ON THE ASSESSEE TO DEMONSTRATE THAT THE METHOD OF A SCERTAINING THE ARMS LENGTH PRICE IS CHOSEN BY THE ASSESSEE IS THE MOST APPROPRIATE METHOD OF DETERMINING THE ARMS LENGTH PRICE AS IS THE CLEA R MANDATE OF SECTION 92 C (1) AS MUCH AS IS THE ONUS OF THE ASSESSEE THAT THE METHOD CHOSEN BY THE ASSESSEE HAS BEEN CORRECTLY APPLIED IN THE PRES CRIBED MANNER IN TERMS OF PROVISIONS OF SECTION 92 C (2). IT IS ESSE NTIAL TO BEAR IN MIND THE FACT THAT IN TERMS OF THE PROVISIONS OF SECTION 92 C (1) READ WITH RULE 10 ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 35 OF 71 C THE ARMS LENGTH PRICE IS TO BE DETERMINED ON TH E BASIS OF ONE OF THE SPECIFIED METHODS BUT SUCH A SPECIFIED METHOD MUST ALSO BE MOST APPROPRIATE METHOD OF DETERMINING THE ARMS LENGTH PRICE WHICH IS BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTI CULAR INTERNATIONAL TRANSACTION AND WHICH PROVIDES THE MOST RELIABLE M EASURE OF AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANS ACTION. IT IS THEREFORE CLEAR THAT THE ASSESSEE MUST NOT ONLY SELECT A SPEC IFIED METHOD OF DETERMINING THE ARMS LENGTH PRICE BUT SUCH A METHO D MUST ALSO BE BEST SUITED TO THE FACTS OF THE CASE. THE ASSESSEE CANNO T SIMPLY PICK UP ANY OF THE SPECIFIED METHOD WITHOUT DISCHARGING THE ONUS O F DEMONSTRATING THAT THE METHOD SO SELECTED IS INDEED MOST APPROPRIATE T O THE FACTS OF THE CASE. ONCE THE ASSESSEE PLACES ON RECORD REASONS FO R SELECTING A PARTICULAR METHOD OF DETERMINING THE ARMS LENGTH P RICE THAT REASONING CAN BE DECLINED THOUGH FOR COGENT REASONS BY THE TRANSFER PRICING OFFICER AND THAT ASPECT OF THE MATTER CAN BE CHAL LENGED BEFORE THE APPELLATE AUTHORITIES. IT IS THEREFORE NOT REAL LY CORRECT TO CLAIM THAT THE ASSESSEE HAS AN UNFETTERED CHOICE OF CHOOSING THE M ETHOD OF DETERMINING ARMS LENGTH PRICE. THE GRIEVANCE RAISED BY THE ASS ESSEE IS ILL CONCEIVED. 54. THE OTHER ASPECT OF THE MATTER IS THAT EVEN AS THE TRANSFER PRICING LEGISLATION DOES NOT PROVIDE FOR AN ORDER O F PREFERENCE OF METHODS OF DETERMINING ARMS LENGTH PRICE SUCH AN ORDER OF PREFERENCE BEING DRAWN UP IS AN INTEGRAL THOUGH SOMEWHAT SUBLIMINAL PART OF THE PROCESS OF DETERMINING THE ARMS LENGTH PRICE. AS WE HAVE N OTED EARLIER IN THE ORDER IN TERMS OF THE PROVISIONS OF SECTION 92 C ( 1) READ WITH RULE 10 C THE ARMS LENGTH PRICE IS TO BE DETERMINED ON THE B ASIS OF ONE OF THE SPECIFIED METHODS BUT SUCH A SPECIFIED METHOD MUST ALSO BE MOST APPROPRIATE METHOD OF DETERMINING THE ARMS LENGTH PRICE WHICH IS BEST SUITED TO THE FACTS AND CIRCUMSTANCES OF EACH PARTI CULAR INTERNATIONAL TRANSACTION AND WHICH PROVIDES THE MOST RELIABLE M EASURE OF AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANS ACTION. THE EXERCISE OF SELECTING MOST APPROPRIATE METHOD ESSENTIALLY IMPLI ES THAT ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 36 OF 71 APPROPRIATENESS OF METHOD IS TO BE RANKED IN SOME O RDER AND THAT ONE CANNOT PUT ALL THE METHODS EVEN AS ALL THE METHODS MAY BE APPROPRIATE TO THE FACTS OF A CASE AT PAR IN THIS RESPECT. U NDOUBTEDLY THE TRANSFER PRICING LEGISLATION IN INDIA DOES NOT PRESCRIBE A P ARTICULAR ORDER OF PREFERENCE ABOUT METHODS OF DETERMINING THE ARMS L ENGTH PRICE BUT THE SELECTION OF MOST APPROPRIATE METHOD OF DETERMINING ARMS LENGTH PRICE UNDER SECTION 92 C(1) READ WITH RULE 10 C ESSENTIA LLY REQUIRES THE METHODS OF DETERMINING THE ARMS LENGTH PRICE TO BE RANKED ON A SOUND AND RATIONALE BASIS IN AN ORDER OF PREFERENCE VIS- -VIS THE FACTS OF EVERY CASE. COMPARED WITH A SITUATION IN WHICH TRANSFER PRICING LEGISLATION ITSELF PROVIDES FOR ORDER OF PREFERENCE IN SELECTIO N OF METHOD FOR DETERMINING ARMS LENGTH PRICE THE ONLY DIFFERENCE ABSENCE OF THIS ORDER OF PREFERENCE PERHAPS MAKES IT IS THAT WHILE IN TH E FORMER CASE THIS ORDER OF PREFERENCE CANNOT BE CHALLENGED BEFORE THE ASSES SMENT AND APPELLATE AUTHORITIES IRRESPECTIVE OF PECULIARITIES OF THE FA CT SITUATION IN THE LATTER THE ORDER OF PREFERENCE ADOPTED IN RANKING OF METHO DS CAN BE CHALLENGED FOR GOOD AND SUFFICIENT REASON. 55. IN OTHER WORDS THE ORDER OF PREFERENCE ADOPTE D IN SELECTING THE MOST APPROPRIATE METHOD IN THE ABSENCE OF AN ORDER OF PREFERENCE SET OUT IN THE STATUTE ITSELF CANNOT BE UNIVERSAL IN APPRO ACH AND MUST DEPEND ON PECULIARITIES OF THE FACTS OF THE CASE. HOWEVER I T IS NOT OPEN PROCEED ON THE BASIS AS HAS BEEN URGED BY THE LEARNED COUNSEL THAT SINCE THERE IS NO ORDER OF PREFERENCE SET OUT IN THE STATUTE ITSELF A PARTICULAR METHOD OF ASCERTAINING THE ARMS LENGTH PRICE CANNOT BE TREAT ED AS PREFERABLE OVER THE OTHER METHOD OR METHODS OF ASCERTAINING THE A RMS LENGTH PRICE. SUCH A COURSE OF ACTION BEING ADOPTED WILL BE CONTR ARY TO THE SCHEME OF SELECTING MOST APPROPRIATE METHOD OF DETERMINING TH E ARMS LENGTH PRICE. 56. AS REGARDS LEARNED COUNSELS RELIANCE ON OBSER VATIONS MADE BY THIS TRIBUNAL IN THE CASE OF DEVELOPMENT CONSULTANT S PVT LTD VS DCIT (SUPRA) AND AZTEC SOFTWARE TECHNOLOGY (SUPRA) IN SUPPORT OF THE ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 37 OF 71 PROPOSITION TAXPAYERS DOCUMENTATION SHOULD BE ACCE PTED UNLESS THE ASSESSING OFFICER IS ABLE TO CONTROVERT THE SAME WE ARE UNABLE TO SEE ANY MERITS IN THE STAND OF THE ASSESSEE. AS A MATTER OF FACT IN AZTECS CASE (SUPRA) THE SPECIAL BENCH HAS QUITE TO THE CONTRARY SPEC IFICALLY CAUTIONED THAT NONE OF THEIR OBSERVATIONS SHOULD BE CO CONSTRUED AS TO SUGGEST THAT TRANSFER PRICING OFFICER CANNOT DETERM INE ALP ON SOME METHOD OTHER THAN FURNISHED BY THE TAXPAYER AND ON LY RIDER THAT THE SPECIAL BENCH HAS PUT ON SUCH AN EXERCISE ANY CH ANGES IN THE MOST APPROPRIATE METHOD OF COMPUTING THE ARMS LENGTH PR ICE IS TO BE DEALT WITH BY WAY OF A SPEAKING ORDER. IF ANYTHING T HESE OBSERVATIONS SUPPORT THE STAND OF THE AUTHORITIES BELOW. IT IS NOT THE ASSESSEES CASE THAT NO REASONS HAVE BEEN ASSIGNED BY THE TRANSFER PRICING OFFICER FOR REJECTING THE TNMM AS MOST APPROPRIATE METHOD ON TH E FACTS OF THIS CASE BUT THE CASE OF THE ASSESSEE BY HIS OWN ADMISSION IS THAT THE REASONS ARE BRIEF AND INADEQUATE. THAT IS A DIFFERENT ASPECT OF THE MATTER WHICH WE WILL BE DEALING WITH SEPARATELY AS AT PRESENT OU R CONCERN IS ONLY WITH THE BROAD PROPOSITION AS TO WHETHER THE MOST APPROPRIAT E METHOD SELECTED BY THE ASSESSEE CAN BE REJECTED BY THE TRANSFER PRICIN G OFFICER WITHOUT RECORDING A FINDING THAT THE ARMS LENGTH PRICE COM PUTED BY THE ASSESSEE ON THE BASIS OF SUCH A METHOD OF ASCERTAINING ARMS LENGTH PRICE IS CONTRARY TO THE TRANSFER PRICING LEGISLATION. AS FA R AS THIS ASPECT OF THE MATTER IS CONCERNED IN OUR CONSIDERED VIEW THE PR OPOSITION ADVANCED BY THE ASSESSEE HAS TO BE REJECTED BY RELYING UPON THE OBSERVATIONS MADE BY SPECIAL BENCH IN AZTECS CASE. 57. AS FAR AS LEARNED COUNSELS RELIANCE ON DECISI ON OF THE COORDINATE BENCH IN THE CASE OF PHILIPS SOFTWARE (SUPRA) IS CONCERNED WE FIND THAT THE COORDINATE BENCH WAS IN SEISIN OF A SITUATION IN WHICH NONE OF THE CONDITIONS SET OUT IN 92 C(3) (A) TO (D) WERE SATIS FIED AND YET THE ARMS LENGTH PRICE AS DETERMINED BY THE ASSESSEE WAS REJE CTED. AS A MATTER OF FACT THE COORDINATE BENCH HAVING TAKEN NOTE OF TH E SCOPE OF SECTION 92 C (3) WHICH HAVE REPRODUCED ABOVE OBSERVED THAT TH E ABOVE-MENTIONED ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 38 OF 71 SECTION CLEARLY PROVIDES THAT BEFORE THE ARMS LENG TH PRICE IS DETERMINED THE ASSESSING OFFICER HAS TO PROVE THAT AT LEAST ON E OF THE FOUR CONDITIONS LAID DOWN IN SUB-SECTION (3) ABOVE HAVE BEEN SATISF IED AND THAT HOWEVER IN THE INSTANT CASE THE ASSESSING OFFICE R DID NOT PROVE TO THE ASSESSEE THAT THE ABOVE CONDITIONS WERE SATISFIED EITHER BEFORE INITIATING THE TRANSFER PRICING ASSESSMENT OR DURING THE COURS E OF THE PROCEEDINGS. THE COORDINATE BENCH THEN NOTED THE CONTENTION OF T HE ASSESSEE TO THE EFFECT THE ASSESSING OFFICER HAS FAILED TO ESTABLI SH THAT ANY OF THESE FOUR CONDITIONS HAVE BEEN SATISFIED. AND THAT IN PAR TICULAR THERE IS NOTHING IN THE ORDER OF THE ASSESSING OFFICER OR OF THE TPO TO SUGGEST THAT CLAUSE ( C ) OF SECTION 92C(3) IS SATISFIED. IT WAS IN THIS B ACKDROP THAT THE COORDINATE BENCH CONCLUDED THAT IT IS CLEAR THAT THE INTENTION OF SECTION 92C(3) HAS ALWAYS BEEN THAT SCRUTINY OF THE INTERNA TIONAL TRANSACTIONS OF AN ASSESSEE CAN ONLY BE DONE IF THE ASSESSING OFFIC ER CAN PROVE THAT THE CIRCUMSTANCES ENUMERATED IN CLAUSES ( A ) TO ( D ) ARE SATISFIED. BUT SINCE IN THE CASE BEFORE THE COORDINATE BENCH THERE WAS NO FINDING THAT ANY OF THESE CONDITIONS IS SATISFIED THE ARMS LENGTH PRI CE DETERMINED BY THE ASSESSEE COULD NOT BE REJECTED. WHILE WE ARE IN RES PECTFUL AGREEMENT WITH THE VIEWS SO EXPRESSED BY THE COORDINATE BENCH WE DO NOT SEE ANY HELP TO THE ASSESSEES CASE BY THESE VIEWS. IN THE CASE OF THE ASSESSEE AS WE HAVE HELD EARLIER IN THIS ORDER THE PROVISIONS OF SECTION 92C(3)(A) ARE CLEARLY ATTRACTED AS THE ASSESSEE HAS NOT APPLIED THE MOST APPROPRIATE METHOD IN ACCORDANCE WITH THE SCHEME OF THINGS ENVI SAGED UNDER SECTION 92C(1). THE OBSERVATIONS MADE IN THE CASE OF DEVELO PMENT CONSULTANTS (SUPRA) ARE NOT IN THE CONTEXT OF SELECTION OF MOST APPROPR IATE METHOD OF ASCERTAINING THE ARMS LENGTH PRICE AND THEREFORE CANNOT BE OF ANY HELP TO THE ASSESSEE IN THE PRESENT CONTEXT. IN ANY EVE NT PHILIPS SOFTWARE DECISION (SUPRA) AND DEVELOPMENT CONSULTANT DECISION (SUPRA) ARE DIVISION BENCH ORDERS AND EVEN IF THESE DECISIONS ARE SEEMED TO BE IN CONFLICT WITH THE DECISION OF SPECIAL BENCH IN AZTE CS CASE (SUPRA) THEY MUST YIELD TO THE LARGER BENCH ORDER WHICH HAS AS WE HAVE NOTED ABOVE HELD THAT THE TRANSFER PRICING OFFICER CAN DETERMIN E ARMS LENGTH PRICE ON ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 39 OF 71 THE BASIS OF A METHOD OTHER THAN ONE ADOPTED BY THE TAXPAYER AS LONG AS SUCH A CHANGE IN THE MOST APPROPRIATE METHOD OF CO MPUTING THE ARMS LENGTH PRICE IS DEALT WITH BY WAY OF A SPEAKING O RDER. 58. FOR THE REASONS SET OUT ABOVE WE ARE UNABLE T O APPROVE LEARNED COUNSELS PLEA THAT AS THE RESULTS ARRIVED AT BY D ETERMINATION OF ARMS LENGTH PRICE COMPUTED BY THE ASSESSEE WERE NOT CONT RARY TO THE TRANSFER PRICING REGULATIONS IT WAS NOT OPEN TO THE TRANSFE R PRICING OFFICER TO REJECT THE MOST APPROPRIATE METHOD ADOPTED BY THE A SSESSEE. IN OUR CONSIDERED VIEW THE TRANSFER PRICING OFFICER WAS WELL WITHIN HIS POWERS TO GO INTO THE QUESTION AS TO WHETHER THE METHOD OF DETERMINING THE ARMS LENGTH PRICE ADOPTED BY THE ASSESSEE WAS INDEED MOS T APPROPRIATE METHOD OF DETERMINING THE ARMS LENGTH PRICE ON THE FACTS OF ASSESSEES CASE AND ON BEING SATISFIED THAT IT WAS NOT THE MOST APPROPR IATE METHOD OF DETERMINING THE ARMS LENGTH PRICE THE TRANSFER PR ICING OFFICER WAS ALSO JUSTIFIED IN DETERMINING THE ARMS LENGTH PRICE ON THE BASIS OF WHAT HE FOUND TO BE THE MOST APPROPRIATE METHOD ON THE FAC TS OF THE CASE. 59. THAT TAKES US TO THE QUESTION AS TO WHETHER O N THE FACTS OF THIS CASE THE CUP METHOD IS INDEED PREFERABLE OVER THE TNM METHOD FOR DETERMINING THE ARMS LENGTH PRICE. 60. THE THRUST OF LEARNED COUNSELS ARGUMENTS IS T HAT SINCE TRANSFER PRICING LEGISLATION DOES NOT PROVIDE FOR ANY ORDER OF PREFERENCE IN SELECTION OF THE MOST APPROPRIATE METHOD NO SUCH ORDER OF P REFERENCE DIRECT OR IMPLIED CAN BE EXERCISED BY US EITHER. 61. THIS ISSUE IS NO LONGER RES INTEGRA . IN THE CASE OF ACIT VS MSS INDIA PVT LTD (32 SOT 132) A COORDINATE BENCH OF T HIS TRIBUNAL SPEAKING THROUGH ONE OF US (I.E. THE ACCOUNTANT MEMBER) HAD INTER ALIA OBSERVED THAT WHILE THERE IS NO PARTICULAR ORDER OR PRIORI TY OF METHODS WHICH THE ASSESSEE MUST FOLLOW AND NO METHOD CAN INVARIABILI TY BE CONSIDERED TO ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 40 OF 71 BE MORE RELIABLE THAN OTHERS ON A CONCEPTUAL NOTE TRANSACTIONAL PROFIT METHODS (I.E. TRANSACTIONAL NET MARGIN METHOD AND PROFIT SPLIT METHOD) ARE TREATED AS METHODS OF LAST RESORT WHICH ARE PRE SSED INTO SERVICE ONLY WHEN THE STANDARD METHODS WHICH ARE ALSO TERMED AS TRADITIONAL METHODS (I.E. COMPARABLE UNCONTROLLED PRICE METHO D RESALE PRICE METHOD AND COST PLUS METHOD) CANNOT BE REASONABLY A PPLIED. IT WAS NOTED BY THE COORDINATE BENCH THAT THE OECD GUIDELI NES ALSO RECOGNIZE THIS APPROACH AND THE BENCH EXPRESSED ITS CONSIDER ED AGREEMENT WITH THIS APPROACH. WE ARE IN CONSIDERED AGREEMENT WITH THE VIEWS SO EXPRESSED BY THE COORDINATE BENCH. IN OUR CONSIDER ED VIEW THE TRADITIONAL TRANSACTION METHOD HAVE AN INHERENT EDG E OVER THE TRADITIONAL PROFIT METHODS IN MOST OF THE SITUATIONS AND THER EFORE WHEREVER BOTH THE METHODS CAN BE APPLIED IN AN EQUALLY RELIABLE M ANNER TRADITIONAL TRANSACTION METHODS ARE TO BE PREFERRED OVER TRADIT IONAL PROFIT METHODS. 62. WE ARE ALIVE TO THE FACT THAT IN THE 2010 VERS ION OF OECD GUIDELINES OECD HAS DONE AWAY WITH HIERARCHICAL AP PROACH IN SELECTING THE METHOD FOR DETERMINATION OF ARMS LENGTH PRICE. THE OECD HAS ABANDONED ITS EARLIER POSITION THAT TRANSACTIONAL P ROFIT METHODS MAY BE USED TO APPROXIMATE ARMS LENGTH CONDITIONS WHEN T RADITIONAL TRANSACTIONAL METHODS CANNOT BE RELIABLY APPLIED AL ONE OR EXCEPTIONALLY CANNOT BE APPLIED AT ALL. IN SHARP CONTRAST TO THE SAID OBSERVATION 2010 OECD GUIDELINES IN PARAGRAPH 2.4 RECOGNIZE THAT THERE ARE SITUATIONS WHEN TRANSACTIONAL PROFIT METHODS ARE FOUND TO BE M ORE SUITABLE (VIS-- VIS TRADITIONAL TRANSACTIONAL METHODS) SUCH AS IN A SITUATION WHERE EACH OF THE PARTY MAKES A UNIQUE CONTRIBUTION IN RELATIO N TO CONTROLLED TRANSACTION OR WHERE THE PARTIES ENGAGE IN HIGHLY INTEGRATED ACTIVITIES. THIS CHANGE IN OECD APPROACH IS QUITE IN LINE WITH INDIAN TRANSFER PRICING LEGISLATION WHICH REQUIRES SELECTION OF MOST APPROP RIATE METHOD RATHER THAN THE METHOD BEING PICKED UP IN THE ORDER OF PRI ORITY. TO THIS EXTENT THE APPROACH OF OECD AND INDIAN TRANSFER PRICING LE GISLATION IS NOW QUITE IN HARMONY WITH EACH OTHER. ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 41 OF 71 63. IT WILL HOWEVER BE STRETCHING THE THINGS TOO FAR TO SUGGEST THAT IN THE 2010 VERSION OF OECD GUIDELINES ALL THE MET HODS OF DETERMINING THE ARMS LENGTH PRICE HAVE BEEN PLACED AT PAR WITH EACH OTHER. THE CHANGE IN THE OECD GUIDELINES AS WE SEE IT IS IN RESPECT OF THE ORDER IN WHICH SUITABILITY OF THE METHODS IS TO BE CONSIDERE D AND IN RECOGNITION OF THE FACT THAT THERE CAN BE SITUATIONS IN WHICH TRAN SACTIONAL PROFIT METHODS CAN HAVE AN EDGE OVER TRADITIONAL TRANSACTIONAL MET HODS. HOWEVER WHEREVER TRANSACTIONAL PROFIT METHODS AS ALSO TRADI TIONAL TRANSACTIONAL METHODS CAN BE APPLIED IN EQUALLY RELIABLE MANNER THE OECD GUIDELINES STILL CONSIDER THE TRADITIONAL TRANSACTIONAL METHOD S TO BE PREFERABLE AS IS EVIDENT FROM FOLLOWING OBSERVATIONS IN PARAGRAPH 2. 3 OF THE OECD GUIDELINES 2010: 2.3 TRADITIONAL TRANSACTION METHODS ARE REGARDED A S THE MOST DIRECT MEANS OF ESTABLISHING WHETHER CONDITIONS IN THE COMMERCIAL AND FINANCIAL RELATIONS BETWEEN ASSOCIATED ENTERPRISES ARE AT ARMS LENGTH. THIS IS BECAUSE ANY DIFFERENCE IN THE PRICE OF A CO NTROLLED TRANSACTION FROM THE PRICE OF A COMPARABLE UNCONTROLLED TRANSAC TION CAN NORMALLY BE TRACED DIRECTLY TO THE COMMERCIAL AND FINANCIAL RELATIONS MADE OR IMPOSED BETWEEN THE ASSOCIATED ENTERPRISES AND THE ARMS LENGTH CONDITIONS CAN BE ESTABLISHED BY DIRECTLY SUBSTITUT ING THE PRICE IN COMPARABLE UNCONTROLLED TRANSACTION FOR THE PRICE O F THE CONTROLLED TRANSACTION. AS A RESULT WHERE TAKING INTO ACCOU NT THE CRITERIA ESTABLISHED IN PARAGRAPH 2.2 A TRADITIONAL TRANSAC TION METHOD AND A TRADITION PROFIT METHOD CAN BE APPLIED IN A EQUALLY RELIABLE MANNER THE TRADITIONAL TRANSACTION METHOD IS TO BE PREFERR ED OVER TRADITIONAL PROFIT METHOD. MOREOVER WHERE TAKING INTO ACCOUN T THE CRITERIA ESTABLISHED IN PARAGRAPH 2.2 THE COMPARABLE UNCONT ROLLED PRICE METHOD (CUP) AND ANOTHER TRANSFER PRICING METHOD CA N BE APPLIED IN A EQUALLY RELIABLE MANNER THE CUP METHOD IS TO BE P REFERRED.. 64. IN OTHER WORDS THEREFORE EVEN AS THERE MAY N OT BE ANY ORDER OF PREFERENCE IN WHICH METHODS OF DETERMINING THE ARM S LENGTH PRICE MUST BE CONSIDERED THE TRADITIONAL TRANSACTION METHODS AND PARTICULARLY CUP HAVE AN EDGE IN THE SENSE THAT ALL THINGS BEING EQU AL CUP AND TRADITIONAL TRANSACTION METHODS ARE PREFERRED OVER THE TRANSACT ION PROFIT METHOD. WE ARE BROADLY IN AGREEMENT WITH THESE VIEWS. WHETH ER WE PROCEED ON THE BASIS THAT THERE IS AN ORDER OF PREFERENCE IN W HICH TRANSFER PRICING ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 42 OF 71 METHODS ARE TO BE APPLIED OR WHETHER WE PROCEED WI THOUT ANY SUCH PRIORITY ORDER THE FACT REMAINS THAT AS LONG AS CU P METHOD CAN BE REASONABLY APPLIED IN DETERMINING THE ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION IN A PARTICULAR FACT SITU ATION AND UNLESS ANOTHER METHOD IS PROVEN TO BE MORE RELIABLE A METHOD VIS- -VIS THE FACT SITUATION OF THAT PARTICULAR CASE THE CUP METHOD IS TO BE PR EFERRED. THE REASON IS SIMPLE. WHEN ASSOCIATED ENTERPRISES ENTER INTO A TR ANSACTION AT SUCH CONDITIONS IN COMMERCIAL AND FINANCIAL TERMS WHICH ARE DIFFERENT FROM COMMERCIAL AND FINANCIAL TERMS IMPOSED IN COMPARABL E TRANSACTION BETWEEN INDEPENDENT ENTERPRISES THE DIFFERENCES IN THESE TWO SETS OF CONDITIONS IN FINANCIAL AND COMMERCIAL TERMS ARE AT TRIBUTED TO INTER RELATIONSHIP BETWEEN THE ASSOCIATED ENTERPRISES AN D IT IS THIS IMPACT OF INTERRELATIONSHIP BETWEEN THE ASSOCIATED ENTERPRISE S THAT IS SOUGHT TO BE NEUTRALIZED BY THE TRANSFER PRICING REGULATIONS. A S LONG AS CUP METHOD CAN BE RELIABLY APPLIED ON THE FACTS OF A CASE IT DOES OFFER MOST DIRECT METHOD OF NEUTRALIZING THE IMPACT OF INTERRELATIONS HIP BETWEEN AES ON THE PRICE AT WHICH THE TRANSACTIONS HAVE BEEN ENTER ED INTO BY SUCH AES. 65. WHILE TRADITIONAL METHODS SEEK TO COMPUTE THE PRICES AT WHICH INTERNATIONAL TRANSACTIONS WOULD NORMALLY BE ENTERE D INTO BY THE ASSOCIATED ENTERPRISE BUT FOR THEIR INTERDEPENDENC E AND RELATIONSHIP TRANSACTIONAL PROFIT METHODS SEEK TO COMPUTE THE PR OFITS THAT THE TESTED PARTY WOULD NORMALLY EARN ON SUCH TRANSACTIONS WIT H UNRELATED PARTIES. IT IS ONLY AXIOMATIC THAT THE PROFITS EARNED BY AN ENTERPRISE IS DEPENDENT ON SEVERAL FACTORS AND NOT ONLY ON THE PRICES AT W HICH TRANSACTIONS HAVE BEEN ENTERED INTO WITH THE ASSOCIATED ENTERPRISES. THE PROFIT BASED RESULTS THUS ADMIT POSSIBILITY OF VITIATION OF RESU LTS BY A NUMBER OF FACTORS WHICH ARE NOT RELEVANT TO THE DETERMINATION OF PRICES AT WHICH INTERNATIONAL TRANSACTIONS ARE ENTERED INTO BY THE ASSOCIATED ENTERPRISES. THESE METHODS WHICH ARE A STEP REMOVED FROM THE ME THODS OF COMPUTING THE PRICES AT WHICH INDEPENDENT TRANSACTIONS WOULD NORMALLY TAKE PLACE IN RESPECT OF THE PRODUCT OR SERVICE MUST THEREFOR E BE PUT TO SERVICE ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 43 OF 71 WHEN THE TRADITIONAL METHODS WHICH SEEK TO COMPUTE PRICES IN INDEPENDENT SITUATIONS FAIL OR ARE INCAPABLE OF BE ING IMPLEMENTED AS THERE ARE LARGE NUMBER OF SITUATIONS IN WHICH FOR A VARIETY OF REASONS TRADITIONAL METHODS ARE SIMPLY UNWORKABLE. 66. AS WE HAVE SEEN ABOVE AND AS CLEARLY DISCERNA BLE EVEN FROM THE OECD APPROACH DISCUSSED ABOVE AND WITH WHICH WE ARE IN CONSIDERED AGREEMENT WHETHER WE PROCEED ON THE BASIS THAT THERE IS AN ORDER OF PREFERENCE IN WHICH TRANSFER PRICING METHODS ARE TO BE APPLIED OR WHETHER WE PROCEED WITHOUT ANY SUCH PRIORITY ORDER THE TRADITIONAL TRANSACTION METHODS AND PARTICULARLY CUP ARE PREF ERRED METHODS IN THE SENSE THAT ALL OTHER THINGS BEING EQUAL CUP AND TR ADITIONAL TRANSACTION METHODS LEAD TO MORE RELIABLE RESULTS VIS--VIS THE RESULTS OBTAINED BY APPLYING TRANSACTION PROFIT METHOD. AS A RESULT W HEN CUP METHOD CAN BE REASONABLY APPLIED IN DETERMINING THE ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION IN A PARTICULAR FACT SITU ATION AND UNLESS ANOTHER METHOD IS PROVEN TO BE MORE RELIABLE A METHOD VIS- -VIS THE FACT SITUATION OF THAT PARTICULAR CASE THE CUP METHOD IS TO BE PR EFERRED. WE ARE THEREFORE OF THE CONSIDERED VIEW THAT IN CASE CUP METHOD IS FOUND TO BE APPROPRIATE TO DETERMINE THE ARMS LENGTH PRICE IN A PARTICULAR SITUATION THERE ARE GOOD REASONS AS DISCUSSED ABOVE TO PREF ER IT OVER THE OTHER METHODS EVEN IF OF EQUAL EFFICACY- THOUGH OF NOT M ORE EFFICACY OF DETERMINING THE ARMS LENGTH PRICE. 67. THE MOST FUNDAMENTAL ASPECT THEREFORE THAT W E MUST ADDRESS OURSELVES TO IS WHETHER CUP METHOD OF DETERMINING T HE ARMS LENGTH PRICE CAN BE REASONABLY APPLIED IN THE FACT SITUATI ON THAT WE ARE IN SEISIN OF. 68. THERE ARE TWO JUDICIAL PRECEDENTS ON THIS ISS UE WHICH TOUCH UPON THE ISSUE WHETHER CUP METHOD CAN BE USED IN TH E CASES OF GENERIC DRUG MANUFACTURERS. ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 44 OF 71 69. IN THE FIRST CASE WHICH IS A TAX COURT OF C ANADA DECISION IN THE CASE GLAXO SMITHKILINE INC VS HER MAJESTY THE QUEEN ( 2008 TCC 324 ). THIS IS A CASE IN WHICH THE AGREED POSITION BETWEE N THE PARTIES WAS THAT CUP WAS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARMS LENGTH PRICE FOR GENERIC DRUG PRODUCED BY THE ORIGINAL PAT ENT HOLDER OF THE SAID DRUG AS LONG AS APPROPRIATE COMPARATORS COULD BE F OUND. THIS DECISION NOTES THE AGREED POSITION AS FOLLOWS: [64] BOTH PARTIES CALLED AN EXPERT WITNESS TO EXPLA IN TRANSFER PRICING AND TO TESTIFY AS TO THE APPROPRIATE METHOD OF ESTABLISHING THE TRANSFER PRICE BETWEEN THE APPELLANT AND ADECHS A ( I.E. VENDOR OF THE GENERIC DRUG MANUFACTURED BY THE ORIGINAL PA TENT HOLDER). DR. J. GREGORY BALLENTINE TESTIFIED FOR THE APPELLANT. DR. JACK MINTZ TESTIFIED FOR THE RESPONDENT. BOTH EXPERTS AGREED T HAT THE CUP METHOD IS THE PREFERRED METHOD FOR DETERMINING TRAN SFER PRICES . [65] ONLY IN THE ABSENCE OF USEFUL EVIDENCE OF AN U NCONTROLLED TRANSACTION WILL IT BE NECESSARY TO USE ANOTHER MET HOD. FOR EXAMPLE BECAUSE NO COMPARABLE TRANSACTION EXISTS O R BECAUSE THERE ARE DIFFERENCES IN THE TRANSACTIONS THAT CANN OT BE TAKEN INTO ACCOUNT. THE OTHER METHODS ARE ALSO USEFUL IN THAT THEY CAN BE USED AS A CHECK ON EACH OTHER. (EMPHASIS BY UNDERLINING SUPPLIED BY US) 70. CLOSER HOME IN THE SECOND CASE THE SAME QUEST ION FELL FOR CONSIDERATION BEFORE A COORDINATE BENCH OF THIS TRI BUNAL IN THE CASE OF UCB INDIA PVT LTD VS ACIT (SUPRA) . THIS WAS A CASE IN WHICH COMPARABLES CITED BY THE TRANSFER PRICING OFFICER WERE INFERRED TO HAVE BEEN PRODUCED BY UNKNOWN DUPLICATOR CHINESE COMPANIES AND ABOUT W HICH NO DATA WAS AVAILABLE. IT WAS IN THIS BACKGROUND THAT THE CUP METHOD WAS HELD TO BE INAPPLICABLE FOR WANT OF COMPARABLES. WHILE HOLDING SO THE COORDINATE BENCH INTER ALIA OBSERVED AS FOLLOWS: REASONABLE INFERENCE DRAWN BY BOTH THE PARTIES IS T HAT THE SUPPLIERS ARE SOME CHINESE COMPANIES THE DETAILS OF WHICH TH E REVENUE IS NOT DISCLOSING TO THE ASSESSEE. THOUGH THE ARGUMENT OF THE REVENUE THAT ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 45 OF 71 THE LAW RELATING TO DRUGS AND COSMETICS ENSURES UNI FORMITY IN STANDS OF QUALITY EFFICACY AND SAFETY OF PHARMACEUTICAL P RODUCTS THE FACT REMAINS THAT THE APIS PRODUCED AND SUPPLIED BY THE ORIGINATOR WHICH IS LIKE A BRANDED COMPANY PRODUCT CANNOT BE TAKEN AS IDENTICAL OR SIMILAR IN ALL ASPECTS WITH THE PRODU CT SUPPLIED BY A DUPLICATOR UNKNOWN CHINESE COMPANY. NO INFORMATION IS AVAILABLE IN THE PUBLIC DOMAIN. IT IS COMMON KNOWLEDGE THAT CHIN ESE GOODS ARE FLOODING INTERNATIONAL MARKETS WITH A VERY LOW PRIC ING. IT IS ALSO TRUE THAT THE QUALITY OF THESE PRODUCTS IS NOT RATED BY INDEPENDENT BODIES TO ENABLE COMPARISON IN SOME CASES. THE ASSESSEES REPEATED QUERIES ON THE STANDARDS PROCESSES PURITY BARRELS ETC. FOLLOWED BY THOSE CHINESE COMPANIES AND MANY OTHER DETAILS DATA INF ORMATION AND PARAMETERS COULD NOT BE REPLIED TO OR SUPPLIED BY THE REVENUE. 71. IN UCBS CASE AS SUCH CUP METHOD WAS REJECTED NOT BECAUSE IT WAS CONSIDERED TO BE AN INAPPROPRIATE METHOD FOR DETERM INING THE ARMS LENGTH PRICE BUT BECAUSE THE COMPARABLES WERE NOT A VAILABLE. THE COMPARABLES CITED BY THE TRANSFER PRICING OFFICER W ERE APPARENTLY FROM CHINESE MANUFACTURERS OF QUESTIONABLE CREDIBILITY AND THE COORDINATE BENCH DID NOT APPROVE THESE COMPARABLES. IT WAS IN THIS CONTEXT THAT THE COORDINATE BENCH MADE CERTAIN OBSERVATIONS WHICH AR E BEING HEAVILY RELIED UPON BY THE ASSESSEE. WE DONOT THINK THAT T HESE FACTUAL OBSERVATIONS CAN BE CONSTRUED AS OF GENERAL APPLICA TION AND AS OF PRECEDENCE VALUE ON STANDALONE BASIS. WHAT IS OBSER VED BY A COORDINATE BENCH IS ON THE FACTS OF A PARTICULAR CASE AND IN T HE NATURE OF APPRECIATION OF FACTS RATHER THAN LAYING DOWN A LEGAL PRINCIPLE EVEN IF WITH A TONE AND TENOR OF GENERAL OBSERVATION AND IS DEEPLY INFLUEN CED BY THE PECULIAR FACTS OF THE SAID CASE. IN ANY EVENT THESE ARE TH E LEGAL PRINCIPLES LAID DOWN BY THE JUDICIAL FORUMS WHICH CAN BE SUBJECT MA TTER OF PRECEDENCE VALUE AND NOT ON OBSERVATIONS ON FACTUAL MATTERS. AS TO HOW SHOULD WE CONSTRUE THE OBSERVATIONS WE FIND GUIDANCE FROM T HE OFT QUOTED OBSERVATIONS MADE BY HONBLE SUPREME COURT IN THE CASE OF CIT VS SUN ENGINEERING PVT LTD (198 ITR 297) TO THE EFFECT TH AT IT IS NEITHER DESIRABLE NOR PERMISSIBLE TO PICK OUT A WORD OR A S ENTENCE FROM THE JUDGMENT OF THIS COURT DIVORCED FROM THE CONTEXT OF THE QUE STION UNDER CONSIDERATION AND TREAT IT TO BE THE COMPLETE 'LAW' DECLARED BY T HIS COURT. WE MUST NOT ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 46 OF 71 THEREFORE PROCEED ON THE BASIS THAT SINCE CUP METH OD WAS REJECTED IN THE CASE OF A GENERIC DRUG BEING MANUFACTURED BY INNOVA TOR OF THAT GENERIC DRUG THE CUP METHOD MUST ALSO BE REJECTED IN ALL CASES W HERE GENERIC DRUGS ARE MANUFACTURED BY THE INNOVATORS OF THAT GENERIC DRUG ; ESSENTIALLY A LOT DEPENDS ON THE QUALITY OF CUP INPUTS AS WELL. 72. WHILE DEALING WITH UCBS CASE WE MAY ALSO ADD THAT IT WAS A CASE IN WHICH THE TRIBUNAL DID NOT GIVE ANY FINDING ABOU T AS TO WHICH METHOD OF DETERMINING THE ARMS LENGTH PRICE WAS THE MOST APPROPRIATE METHOD HAVING REGARDS TO THE FACTS OF THAT CASE AND THE M ATTER WAS REMITTED TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDIC ATION ON THAT QUESTION. UCB DECISION HOLDS THAT TRANSACTIONAL NET MARGIN ME THOD APPLIED IN THAT CASE AS LONG AS COMPARISON IS MADE FOR NET PROFIT M ARGINS REALIZED BY AN ENTERPRISES FROM A TRANSACTION OR AGGREGATE OF TRAN SACTIONS BUT NOT AT AN ENTITY LEVEL BUT THEN IT IS NOBODYS CASE BEFORE U S THAT THE SAID DATA IS AVAILABLE IN PUBLIC DOMAIN AND ONE OF THE CRUCIAL FACTORS GOVERNING THE SELECTION OF MOST APPROPRIATE METHOD UNDER RULE 10 C (2)(C) IS AVAILABILITY COVERAGE AND RELIABILITY OF DATA NEC ESSARY FOR APPLICATION OF THE METHOD . WHEN DATA FOR APPLICATION OF A METHOD IS NOT AV AILABLE AT ALL SUCH A METHOD CANNOT BE TERMED AS MOST APPROPRIATE METHOD. THEREFORE THE ASSESSEE DOES NOT DERIVE ANY ADVANTA GE FROM UCB DECISION IN THE PRESENT CASE WHERE THE QUESTION WHICH IS BEI NG CONSIDERED BY US IS AS TO WHICH IS THE MOST APPROPRIATE METHOD OF DETER MINING THE ARMS LENGTH PRICE IN THE PRESENT CASE. 73. THE OTHER ASPECT OF THE MATTER IS THAT ON A CON CEPTUAL PLANE WHILE SELECTING THE MOST APPROPRIATE METHOD OF DETERMININ G AN ARMS LENGTH PRICE THERE CANNOT BE A REJECTION OF METHOD IN VAC UUM IT HAS TO BE VIS-- VIS THE OTHER METHODS CONSIDERED IN IN THE COURSE O F THE SAID EXERCISE. IT IS FOR THE REASON THAT THERE CANNOT BE A SITUATION IN WHICH ALL THE PRESCRIBED METHODS ARE REJECTED. EVEN IF ALL THE ME THODS ARE CONSIDERED INAPPROPRIATE FOR ONE REASON OR THE OTHER THE METH OD WHICH IS LESS ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 47 OF 71 INAPPROPRIATE IS TO BE APPLIED THOUGH WITH ADJUSTM ENTS NECESSITATED BY SUCH A PECULIAR SITUATION. IN UCBS CASE THE COOR DINATE BENCH HAS REJECTED CUP METHOD AND APPROVED TRANSACTION NET MA RGIN METHOD ON THE BASIS OF COMPARING NET PROFIT ON TRANSACTIONS OR A GGREGATE OF TRANSACTION RATHER THAN ENTITIES. IT CANNOT BE TREATED AN AUTHO RITY FOR THE PROPOSITION THAT CUP METHOD IS NOT APPLICABLE IN THE CASES OF G ENERIC DRUG MANUFACTURERS. IN OUR CONSIDERED VIEW FOR PRECEDE NCE VALUE RATIO OF THIS DECISION MAINLY IS THAT WHEN ASSESSEE CAN APPL Y TNMM AT TRANSACTION LEVEL RATHER THAN ENTITY LEVEL CUP ME THOD CANNOT BE APPLIED IN THE CASES OF GENERIC DRUG MANUFACTURER FROM WHIC H THE GENERIC DRUG IS PURCHASED IS THE ORIGINAL PATENT HOLDER OF THE PROD UCT. THE ASSESSEE DOES NOT DERIVE ANY ADVANTAGE FROM THIS PROPOSITION FOR THE SHORT REASON THAT TNMM AT TRANSACTION LEVEL IN IMPLIED PREFERENCE TO WHICH CUP METHOD IS REJECTED CANNOT BE APPLIED IN THE PRESENT CASE FOR WANT OF APPROPRIATE DATA INPUTS. UCB DECISION CANNOT THEREFORE BE AN AUTHORITY FOR THE PROPOSITION THAT IN THE CASES OF GENERIC DRUGS IN WHICH DRUG IS MANUFACTURED AND SOLD BY IS THE ORIGINAL PATENT HOL DER CUP METHOD CANNOT BE APPLIED AT ALL. 74. WE ALSO FIND THAT THE PRICES AT WHICH THE GENER IC DRUGS ARE PURCHASED BY THE ASSESSEE FROM ITS ASSOCIATED ENTER PRISES ARE ADMITTEDLY NOT DRIVEN BY THE MARKET FORCES BUT ON CONSIDERATIO NS WHICH HAVE NO ROLE TO PLAY IN A TYPICAL ARMS LENGTH TRANSACTION. IN THE ORDER DATED 6 TH MAY 2003 PASSED BY THE DEPUTY COMMISSIONER OF CUSTOMS FOLLOWING STAND OF THE ASSESSEE HAS BEEN NOTED: THEY (SERDIA INDIA) HAVE STATED THAT INCREASED MARKET COMPETITION IN INDIA HAS RESULTED IN OVERALL REDUCTION IN PRICE S OF SELLING PRICE OF THEIR FORMULATIONS MANUFACTURED BY THEM IN INDIA . IN ORDER TO RETAIN THEIR MARKET SHARE IN INDIA THE IR SUPPLIERS (SERVIER GROUP ) HAVE AGREED TO RENEGOTIATE THE TO SELL THE BULK D RUG TO THEM AT REDUCED PRICE BY AFFECTING NECESSARY CHA NGES TO THE PRICE LIST APPLICABLE FOR INDIA. ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 48 OF 71 75. ON THE ONE HAND THE ASSESSEE CLAIMS THAT HE IS A MARKET LEADER AND HIS FDFS SELL AT HIGHER PRICES BECAUSE OF THE PREMI UM ITS API COMMANDS WHICH JUSTIFIES THE HIGHER PRICE PAID FOR THE API AND ON THE OTHER HAND THE EVIDENCE ON RECORD DEMONSTRATES THAT HE MUST PA ID LOWER PRICE FOR THE API BECAUSE HIS FDF WAS SELLING AT A LOWER PRIC E. IN A TYPICAL ARMS LENGTH TRANSACTION ONE DOES NOT REDUCE THE PRICE O F THE API BECAUSE THE BUYER IS NOT ABLE TO SELL THE FDF AT CORRESPONDING HIGHER PRICES PARTICULARLY WHEN AS ASSESSEE CLAIMS THE PRODUCT BEING SOLD IS A UNIQUE PRODUCT. THE DEMAND OF A UNIQUE PRODUCT CAN HARDLY BE SENSITIVE TO MARGINAL PRICE MOVEMENTS BUT THEN AS ADMITTED BY T HE ASSESSEE THE PRICES WERE MARGINALLY REDUCED BY EFFECTING 25% CU T IN THE RAW MATERIAL PRICE TO CHECK THE FALLING DEMAND. AS AGAINST IM PORTS OF TRIMETAZIDINE AT THE RATE OF 1 372 PER KG TILL 1 ST JANUARY 2002 THE PRICE OF TRIMETAZIDINE WAS REDUCED TO 1 072PER KG WITH EFF ECT FROM 1 ST JANUARY 2002. IN OUR CONSIDERED VIEW THESE PRICE MOVEMENT S AND DEMAND SENSITIVITY TO THE PRICE INDICATE THAT THE APIS IMP ORTED BY THE ASSESSEE ARE NOT UNIQUE ITEMS AS CLAIMED BY THE ASSESSEE AN D THAT SUCH BUSINESS MODELS BEING ADOPTED BY PHARMACEUTICAL COMPANIES LEAVE AMPLE SCOPE FOR THEM TO MANIPULATE API PRICES SO AS TO REGULATE PROFITABILITY OF THEIR CONTROLLED ENTITIES IN THE END USE JURISDICTION. 76. IN VIEW OF THE ABOVE DISCUSSIONS IN OUR CONSID ERED VIEW AS LONG AS APPROPRIATE COMPARABLES CAN BE FOUND CUP METHOD WI LL INDEED BE THE MOST APPROPRIATE METHOD IN RESPECT OF PURCHASES OF GENERIC DRUG EVEN WHEN SUCH A GENERIC DRUG IS MANUFACTURED BY ITS ORI GINAL PATENT HOLDER. 77. IN THE PRESENT CASE THE ASSESSEE HAS PURCHASED ACTIVE PHARMACEUTICAL INGREDIENTS FROM ITS ASSOCIATED ENTE RPRISES. IN THE ASSESSMENT YEAR 2002-03 THE ASSESSEE HAS PURCHASED TWO APIS TRIMETAZIDINE AND INDAPAMIDE. THERE IS NO DISPUTE THAT THESE APIS WERE GENERIC DRUGS AT THE RELEVANT POINT OF TIME AND NO T PATENT PROTECTED. IN THIS VIEW OF THE MATTER ALL THESE ERUDITE SUBMISSI ONS ON THE COSTS AND ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 49 OF 71 PROCESS OF DEVELOPING A NEW DRUG AND THE NEED OF H IGHER PRICE FOR THE PATENTED DRUGS ARE OF NO HELP TO THE ASSESSEES CAU SE BEFORE US. QUITE TO THE CONTRARY THESE ARGUMENTS SEEM TO SUPPORT THE CONTENTION THAT PATENT PROTECTION IS TO ENABLE THE INNOVATOR OF A D RUG TO RECOVER THE HIGH INITIAL COSTS BY ALLOWING HIM A MONOPOLISTIC MARKET IN THE INITIAL STAGES OF MARKETING THE DRUG AND THEREFORE HE MUST COMPET E WITH THE GENERIC DRUG MANUFACTURERS IN POST PATENT PERIOD ON SELLI NG PRICES. 78. THE ASSESSEE CLAIMS THAT THESE ARE UNIQUE ITEMS IN THE SENSE THAT APIS MANUFACTURED ITS AES ARE BETTER OF PROVEN EF FECTIVENESS EMPLOYING MANUFACTURING PROCESS COMPLIANT WITH WHO GMP (WOR LD HEALTH ORGANIZATION GOOD MANUFACTURING PRACTICES) GUARA NTEED FOR QUALITY AND THESE AES ALSO PROVIDE PRODUCT LIABILITY COVER IN RESPECT OF FDFS MANUFACTURED OUT OF SUCH APIS. 79. THE QUESTION WHETHER AN API CAN BE CONSIDERED T O BE UNIQUE PRODUCT ON SUCH GROUND THAT GMP (GOOD MANUFACTURING PRACTICES) AND HSE (HEALTH SAFETY AND ENVIRONMENT) STANDARDS WERE FOLLOWED IN ITS PRODUCTION PROCESS WHEREAS SUCH HIGH STANDARDS WERE NOT MAINTAINED BY OTHER GENERIC DRUG MANUFACTURERS WAS ALSO ONE OF T HE ISSUES WHICH CAME UP FOR ADJUDICATION BEFORE TAX COURT OF CANADA IN T HE CASE OF GLAXO SMITHKLINE (SUPRA). 80. BRIEFLY STATED THE RELEVANT MATERIAL FACTS OF GLAXOS CASE WERE LIKE THIS. RANITIDINE IS THE ACTIVE PHARMACEUTICAL INGRE DIENT ('API') USED IN A DRUG MARKETED BY THE ASSESSEE IN CANADA UNDER THE B RAND NAME ZANTAC. RANITIDINE WAS DISCOVERED BY THE ASSESSEES PARENT COMPANY IN 1976 AND WAS APPROVED FOR SALE IN CANADA IN 1981. ZANTAC WAS LAUNCHED BY THE TAXPAYER IN 1982. DURING THE PERIOD UNDER APPEAL OT HER PHARMACEUTICAL COMPANIES (GENERIC COMPANIES) WERE SELLING GENERIC VERSIONS OF ZANTAC IN CANADA. THESE COMPANIES PURCHASED RANITIDINE FOR MU CH LESS THAN THE PRICE AT WHICH ASSESSEE PURCHASED IT FROM ADECHSA AN AE BASED IN ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 50 OF 71 SWITZERLAND WHICH IN TURN PURCHASED IT FROM ANOTH ER GROUP AE BASED IN SIGANPORE WHICH MANUFACTURED THE SAME. THESE AES W ERE PART OF THE GLAXO GROUP. ACCORDING TO THE TAX AUTHORITIES A RE ASONABLE AMOUNT FOR THE TAXPAYER TO HAVE PAID FOR RANITIDINE WAS THE PR ICE PAID BY THE OTHER GENERIC DRUG MANUFACTURING COMPANIES SELLING RANITI DINE IN CANADA. FOR EXAMPLE WHILE THE ASSESSEE PAID AS MUCH C $ 1 512 FOR EACH KILO GRAM OF RANITIDINE TO ADECHSA THE SAME API WAS SOLD IN C ANADA FOR C $ 292 PER KG. THE GLAXOSMITHKLINE GROUP'S ('GSK GROUP') TRANS FER PRICING ARRANGEMENTS ALLOWED THE SINGAPORE RELATED PARTY MA NUFACTURER TO EARN GROSS PROFITS OF APPROXIMATELY 90% ON THE SALE OF R ANITIDINE TO ADECHSA. ADECHSA WAS REQUIRED TO EARN A MINIMUM 4% PROFIT (B Y AGREEMENT WITH THE SWISS TAX AUTHORITIES) AND THE TAXPAYER EARNED GROSS PROFITS OF APPROXIMATELY 60% ON THE SALE OF ZANTAC. THE TAX AU THORITIES REASSESSED THE TAXPAYER TO DISSALLOW A DEDUCTION INSOFAR AS TH E AMOUNTS PAID TO ADECHSA FOR A KILOGRAM OF RANITIDINE EXCEEDED THE H IGHEST PRICE PAID BY THE GENERIC COMPANIES FOR A KILOGRAM OF RANITIDINE AT THE APPROPRIATE TIME. THE TAX AUTHORITIES ALSO DEEMED THE EXCESS AM OUNT TO BE A DIVIDEND SUBJECT TO WITHHOLDING TAX AT THE REDUCED RATE OF 1 0% UNDER THE CANADA- UK TAX TREATY. THE ASSESSEE ARGUED THAT THE PRICE I T PAID FOR THE RANITIDINE 'CLOSELY MIRRORED THE PRICE PAID BY INDEPENDENT THI RD PARTIES IN COMPARABLE CIRCUMSTANCES' AND THE AMOUNTS PAID BY T HE TAXPAYER WERE 'REASONABLE IN THE CIRCUMSTANCES' WITHIN THE MEANIN G OF SUBSECTION 69(2) OF THE CANADIAN INCOME TAX ACT. THE ASSESSEE ALSO S UBMITTED THAT ITS BUSINESS MODEL AND CIRCUMSTANCES ARE NOT COMPARABLE TO THOSE OF THE GENERIC COMPANIES. THE TAX AUTHORITIES POSITION WA S THAT IT DID NOT PAY A REASONABLE PRICE FOR THE PURCHASE OF RANITIDINE IN ORDER TO MINIMIZE PROFIT IN CANADA AND MOVE THE PROFIT TO A RELATED C ORPORATION IN A LOW TAX JURISDICTION. ON THESE FACTS THE TAX COURT ENDORSE D THE OECD COMMENTARY ON ARTICLE 9(1) WHICH RELIES ON THE ARM 'S LENGTH PRINCIPLE TO DETERMINE THE PRICES THAT MULTINATIONAL ENTERPRISES WOULD CHARGE FOR GOODS AND SERVICES SOLD FROM ONE JURISDICTION TO AN OTHER. THE TAX COURT ALSO ENDORSED THE OECDS HIERARCHY OF TRANSFER PRIC ING METHODS. IT ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 51 OF 71 THEREFORE CONCLUDED THAT THE COMPARABLE UNCONTROLLE D PRICE ('CUP') METHOD IS THE PREFERRED METHOD AND THAT THE PURCHAS E PRICE PAID BY THE GENERIC PHARMACEUTICAL PRODUCERS IS AN APPROPRIATE CUP. THE COURT INDICATED THAT THE HIGHEST PRICE PAID BY THE GENERI C PHARMACEUTICAL PRODUCERS REPRESENTS A REASONABLE PRICE THAT THE TA XPAYER COULD HAVE PAID ADECHSA. THE JUDGE DID ALLOW AN ADDITIONAL C $ 25 PER KILOGRAM OF RANITIDINE IN ACKNOWLEDGEMENT THAT THE RANITIDINE P URCHASED FROM THE RELATED PARTY MANUFACTURER IN SINGAPORE WAS GRANULA TED. 81. THIS MATTER WAS HEARD AT GREAT LENGTH AND IN FINE DETAIL FOR OVER FORTY DAYS AS NOTED IN THE ORDER ITSELF AND THE COURT WAS NOT ONLY ASSISTED BY ILLUMINATING ARGUMENTS BY THE LEARNED COUNSEL BUT ALSO BY EXPERT WITNESSES IN A WAY DEMYSTIFYING THE PHARMA CEUTICAL INDUSTRY AND SHARING THEIR INSIGHTS ON THE MANUFACTURING PROCES S OF THE APIS AS EVIDENT FROM THE FOLLOWING OBSERVATIONS IN THE SAI D DECISION : [93] A POINT IN DISPUTE IS THE IMPACT OF GLAXO'S GM P. THE APPELLANT SUBMITS THAT THE GLAXO RANITIDINE AND THAT PURCHASE D BY GENERIC COMPANIES ARE NOT COMPARABLE BECAUSE OF THE DIFFERE NCES IN GMP AND HSE STANDARDS. THE RESPONDENT AGREES THAT THERE MAY BE DIFFERENCES IN GMP AND HSE BUT STATES THAT THOSE DIFFERENCES AR E OF NO SIGNIFICANCE TO EITHER SAFETY OR EFFICACY AND THERE FORE SHOULD HAVE NO BEARING ON THE PURCHASE PRICE OF RANITIDINE. [94] GMP IS A TERM USED FOR THE CONTROL AND MANAGEM ENT OF MANUFACTURING AND QUALITY CONTROL TESTING OF FOODS AND PHARMACEUTICAL PRODUCTS. THE APPELLANT'S EXPERT MR . WILLIAM MENT A SENIOR REGULATORY COMPLIANCE CONSULTANT WHO WAS A B RANCH DIRECTOR OF THE U.S. FOOD AND DRUG ADMINISTRATION ('FDA') UN TIL 1999 DESCRIBED GMP AS: POLICIES PRACTICES WRITTEN PROCEDURES THAT COMPAN IES ESTABLISH TO ENSURE THAT THE WHOLE PRODUCTION PROCESS WHICH INC LUDES MANUFACTURING TESTING AND RELEASE REDUCES AS MUCH AS POSSIBLE THE RISK TO THAT PRODUCT HAVING BEING ADULTERATED HA VING HARMFUL IMPURITIES ET CETERA IN IT. [95] IN THE VIEW OF CLIVE ROGERS GLAXOCHEM LIMITED 'S PURCHASING ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 52 OF 71 MANAGER BETWEEN 1988 AND 1994 GMP: MEANS THAT YOU ARE RUNNING YOUR SITE EFFICIENTLY W ITH GOOD HOUSEKEEPING. YOU HAVE TRAINED PERSONNEL OPERATING IT. YOU ARE KEEPING FULL AND COMPREHENSIVE RECORDS OF ALL YOUR MANUFACTURE ALL YOUR BATCH RECORDS. YOU ARE DOING PROPER CHEMICAL A NALYSIS ON ALL THE MATERIALS THAT YOU BUY IN THAT YOU USE IN PROCESS. YOU SEGREGATE MATERIALS THAT ARE REJECTED THAT YOU BOUGHT IN AND ONLY USE GOOD ONES AND YOU CAN TRACK A MANUFACTURER RIGHT THE WA Y THROUGH FROM BEGINNING TO END AND YOU KNOW WHO HAS DONE WHAT TO IT AT WHAT TIME AND DID IT COMPLY WITH A MANUFACTURING PROCESS THAT WAS REGISTERED. [96] A TOTAL OF FIVE SCIENCE EXPERTS WERE CALLED A LL OF WHOM ATTEMPTED TO PUT THEIR TESTIMONY IN LAYMAN'S TERMS TO VARYING DEGREES OF SUCCESS. WITH RESPECT TO THESE ISSUES TH E FOLLOWING FACTS ARE CLEAR: (A) DURING THE YEARS IN APPEAL CANADA DID NOT COND UCT INSPECTIONS OF OR HAVE GMP REQUIREMENTS FOR API MANUFACTURERS. THE RESPONSIBILITY FOR ENSURING THE QUALITY OF THE API WAS PLACED ON THE DOSAGE FORM MANUFACTURES. (B) CANADA REQUIRED THE DOSAGE FORM (SECONDARY) MANUFACTURERS TO MANUFACTURE THEIR FINISHED PRODUCT S IN ACCORDANCE WITH GMP; (C) GENERIC RANITIDINE WAS CHEMICALLY EQUIVALENT AN D BIOEQUIVALENT TO GLAXO'S RANITIDINE AND WAS APPROVE D FOR SALE BY HPB; AND (D) GLAXO GROUP HAD GMPS FOR THE PRIMARY MANUFACTUR E OF THE API; THE GENERIC SUPPLIERS DID NOT. [97] THE APPELLANT ARGUED THAT GLAXO'S STANDARDS DI FFERED FROM THOSE OF THE GENERIC API MANUFACTURERS IN THAT GLAXO WORL D REQUIRED THAT ITS RANITIDINE BE (1) MANUFACTURED UNDER GLAXO'S GM P STANDARDS (2) PRODUCED IN ACCORDANCE WITH HSE AND (3) GRANULATED TO GLAXO WORLD STANDARDS. THE SUPPLIERS TO THE GENERIC COMPANIES D ID NOT MANUFACTURE RANITIDINE ACCORDING TO GLAXO STANDARDS . [98] WHEN MR. MENT WAS ASKED '[T]O WHAT EXTENT CAN TEST METHODS BE DEVELOPED TO DETECT ADVENTITIOUS CONTAMINATION CRO SS-CONTAMINATION OR ALL AND ANY KIND OF CHEMICAL THAT MAY BE FOUND I N A BATCH?' HE ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 53 OF 71 REPLIED '[I]T WOULD BE EXTREMELY DIFFICULT IF NOT IMPOSSIBLE TO DO THAT WITH A BATTERY OF TESTS THAT COMPANIES TYPICAL LY RUN FOR BATCH RELEASE TESTING. THEY ARE NOT DESIGNED TO DETECT AN D TO IDENTIFY ADVENTITIOUS CONTAMINATION EXCEPT TO A VERY LIMITE D EXTENT.' [99] A SIMILAR SENTIMENT WAS EXPRESSED BY DR. IAN K EITH WINTERBORN THE APPELLANT'S SCIENCE NOMINEE AT DISCOVERY WHO AL SO TESTIFIED AT THE TRIAL OF THESE APPEALS. HE SAID '[I]T IS IMPOSSIBLE TO DESIGN WELL IT IS NOT IMPOSSIBLE BUT IT WOULD BE ONEROUS TO TRY TO D ESIGN ANALYTICAL TESTS WHICH COULD DETECT AND QUANTIFY ANY AND ALL P OTENTIAL CONTAMINANTS THAT MIGHT OCCUR DURING MANUFACTURE I F THE CONDITIONS UNDER WHICH THE MATERIAL IS MANUFACTURED ARE NOT KN OWN AND NOT UNDERSTOOD.' [100] MR. MENT SAID LABORATORY TESTING WAS AIMED AT DETECTING THE MOST LIKELY CONTAMINANTS (BASED ON THE PROCESS USED ) AND CROSS- CONTAMINANTS (BASED ON THE OTHER CHEMICALS PRESENT IN A MULTI- PRODUCT FACILITY) BUT EVEN WITH SUCH TESTING HE SA ID THAT SOME CONTAMINANTS MIGHT STILL SLIP THROUGH UNDETECTED . [101] APPELLANT'S COUNSEL HAS NOT ARGUED THAT HIS C LIENT'S RANITIDINE WAS SUPERIOR TO THE RANITIDINE USED BY THE GENERIC COMPANIES. HE ARGUED THAT GLAXO GMPS WERE SUPERIOR AND THAT THIS REDUCED THE RISK OF CONTAMINATION DURING MANUFACTURE. THE RESPONDENT 'S EXPERT DR. LESLIE BENET SAW THINGS DIFFERENTLY. DR. BENET A PROFESSOR OF BIOPHARMACEUTICAL SCIENCES AT THE UNIVERSITY OF CAL IFORNIA SAN FRANCISCO WAS QUALIFIED AS AN EXPERT IN PHARMA CEUTICAL SCIENCES PHARMACOLOGY BIOEQUIVALENCY CHEMICAL EQUIVALENCE AND OTHER SCIENTIFIC ASPECTS OF DRUG-RELATED ISSUES. HE EMPHA SIZED THAT THE REAL ISSUE IS NOT CONTAMINATION PER SE (WHICH GOES TO QU ALITY) BUT HARMFUL CONTAMINATION (WHICH GOES TO SAFETY). ACCORDING TO DR. BENET FOR EXAMPLE CROSS-CONTAMINATION WITH ATENOLOL A BETAB LOCKER USED FOR LOWERING BLOOD PRESSURE WOULD NOT BE A CONCERN BEC AUSE IT HAS A VERY WIDE THERAPEUTIC INDEX. CROSS-CONTAMINATION WI TH PENICILLIN ON THE OTHER HAND WOULD BE A CONCERN BECAUSE PEOPLE H AVE ALLERGIC REACTIONS TO PENICILLIN. HE TESTIFIED THAT ANY DIF FERENCES IN GMP AND HSE ARE IRRELEVANT. IN HIS VIEW COMPANIES MAY ESTAB LISH WHATEVER INTERNAL STANDARDS THEY LIKE BUT DRUG PRODUCTS ARE APPROVED BASED ON THE REGULATORY STANDARDS IN EACH COUNTRY. THE ON LY ISSUE ACCORDING TO DR. BENET IS WHETHER THE API MET THE CANADIAN STANDARD. THE APPELLANT HAS ADMITTED THAT THE GENER IC RANITIDINE WAS BIOEQUIVALENT AND CHEMICALLY EQUIVALENT TO GLAXO'S RANITIDINE. THIS IS THE STANDARD USED BY HPB TO DETERMINE WHETHER A NOT ICE OF COMPLIANCE FOR A NEW DRUG SUBMISSION WILL BE GRANTE D. IN DR. BENET'S VIEW THIS IS ENOUGH TO END THE INQUIRY. ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 54 OF 71 [102] THE APPELLANT HAS SUGGESTED THAT BOTH THE ZAN TAC BRAND AND GLAXO'S REPUTATION WOULD BE IMPACTED IF HARMFUL CON TAMINANTS WERE INGESTED BY THE ULTIMATE CONSUMER. THE APPELLANT'S VIEW THEREFORE IS THAT GLAXO WORLD HAS AN INCENTIVE TO DO MORE THAN J UST MEET THE BASIC REGULATORY REQUIREMENTS. TO REDUCE THE RISK O F CONTAMINATION IT WAS NOT UNREASONABLE FOR THE APPELLANT FOR ITS COM FORT AND THAT OF THE GLAXO WORLD TO PURCHASE RANITIDINE PRODUCED UN DER GOOD MANUFACTURING PRACTICES FOR A MARGINALLY HIGHER PRI CE THAN ONE WOULD PAY FOR RANITIDINE THAT LACKED GMP. [103] THE THERAPEUTIC PRODUCTS DIRECTORATE OF THE H EALTH PRODUCTS AND FOOD BRANCH OF HEALTH CANADA IS THE CANADIAN AU THORITY THAT REGULATES PHARMACEUTICALS AND MEDICAL DEVICES FOR H UMAN USE. THE RESPONDENT'S WITNESS MR. SULTAN GHANI BECAME THE DIRECTOR OF THE BUREAU OF PHARMACEUTICAL SCIENCES OF THE TPD IN 200 2. HE WAS QUALIFIED AS AN EXPERT IN GOOD MANUFACTURING PRACTI CES OF THE PHARMACEUTICAL INDUSTRY IN GENERAL THE DRUG APPROV AL PROCESS QUALITY ASSURANCE AND GMP IN THE PHARMACEUTICAL IND USTRY IN CANADA. [104] MR. GHANI EXPLAINED THAT DURING THE YEARS IN ISSUE AND RIGHT UP TO THE TIME OF HIS TESTIMONY CANADIAN REGULATIONS PLACED THE RESPONSIBILITY FOR THE QUALITY OF THE ACTIVE PHARMA CEUTICAL INGREDIENT ON THE DOSAGE FORM (OR SECONDARY) MANUFACTURER AND THAT THIS WAS WHERE HEALTH CANADA CONSIDERED THE RESPONSIBILITY T O REST AS WELL. HOWEVER THIS PRACTICE WILL SOON CHANGE DUE TO INTE RNATIONAL EFFORTS TO BRING GMP STANDARDS TO API MANUFACTURERS. [105] MR. GHANI ALSO SAID THE NUMBER OF GMP PROBLEM S ASSOCIATED WITH API MANUFACTURING WAS VERY VERY SMALL COMPARE D WITH THE NUMBER OF GMP PROBLEMS ASSOCIATED WITH DOSAGE FORM OR SECONDARY MANUFACTURING AND THIS WAS WHY HEALTH CANADA DID NO T CONCERN ITSELF WITH API MANUFACTURERS. HE ALSO ADMITTED THA T CROSSCONTAMINATION IS A CONCERN EVERYWHERE INCLUDI NG THE API MANUFACTURERS IF PROPER CLEANING AND OTHER PRECAUT IONS ARE NOT TAKEN. IN REEXAMINATION MR. GHANI ACKNOWLEDGED THA T THERE ARE LIMITS TO END-PRODUCT TESTING AND THAT GMPS DO REDU CE THE RISK OF CONTAMINATION AS MUCH AS POSSIBLE 82. THE DIFFERENTIATION IN THE PRODUCT I.E. THE API ON THE BASIS OF BETTER MANUFACTURING PRACTICES AND HIGHER STANDARDS FOLLOW ED IN THE ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 55 OF 71 MANUFACTURING PROCESS WAS HOWEVER UNEQUIVOCALLY REJECTED BY THE COURT. SPEAKING THROUGH ASSOCIATE CHIEF JUSTICE GE RALD J RIP AS HE THEN WAS THE COURT OBSERVED AS FOLLOWS : [118] APPELLANT'S COUNSEL ARGUED THAT GLAXO'S ADHER ENCE TO GMPS MEANT THAT ITS RANITIDINE WAS NOT COMPARABLE TO THA T USED BY THE GENERIC COMPANIES. I DO NOT ACCEPT THIS ARGUMENT. G LAXO'S GMP AND HSE STANDARDS DO NOT CHANGE THE NATURE OF THE GOOD. AS MR. WINTERBORN STATED 'RANITIDINE IS RANITIDINE IS RANITIDINE'. BERNARD SHERMAN THE CHAIRMAN OF APOTEX INSISTED T HAT THE GLAXO RANITIDINE MOLECULE AND THE GENERIC RANITIDINE MOLE CULE ARE IDENTICAL. THE APPELLANT HAS ADMITTED THAT THE GENE RIC RANATINDE WAS CHEMICALLY EQUIVALENT AND BIOEQUIVALENT AS REQUIRED BY HPB. THUS WERE IT NOT FOR THE LICENCE AGREEMENT AND GLAXO WOR LD'S SELF- IMPOSED STANDARDS THE APPELLANT COULD HAVE PURCHAS ED RANITIDINE FROM THE GENERIC SUPPLIERS PACKAGED IT AS ZANTAC A ND SOLD IT FOR THE SAME PRICE IT WAS SELLING THE ZANTAC WHICH CONTAINE D GLAXO- MANUFACTURED RANITIDINE. HOWEVER I DO ACCEPT THAT GMPS MAY CONFER A CERTAIN DEGREE OF COMFORT THAT IT HAS MINIMAL IMP URITIES AND IS MANUFACTURED IN A RESPONSIBLE MANNER. GRANTED THIS HAS SOME VALUE BUT IT DOES NOT AFFECT ITS COMPARABILITY WITH THE R ANITIDINE USED BY THE GENERIC COMPANIES. 83. WE ARE IN CONSIDERED AGREEMENT WITH THE VIEWS S O EXPRESSED BY TAX COURT OF CANADA. AS THEY RIGHTLY PUT IT THE H IGH QUALITY STANDARDS EMPLOYED IN MANUFACTURING PROCESS DO CONFER A CERTA IN DEGREE OF COMFORT IN THE SENSE THAT THE API HAS MINIMAL IMPURITIES AN D HAS BEEN MANUFACTURED IN A RESPONSIBLE MANNER BUT THIS DEGR EE OF COMFORT DOES NOT AFFECT ITS COMPARABILITY WITH THE SAME API MANU FACTURED BY GENERIC DRUG COMPANIES. 84. IT WAS IN THIS BACKDROP THAT THE TAX COURT OF C ANADA FINALLY CONCLUDED AS FOLLOWS: [161] CUP IS THE PREFERRED METHOD AND THE GENERIC C OMPANIES IN CANADA ARE AN APPROPRIATE COMPARATOR USING THE CUP METHOD. THE APPELLANT ACQUIRED GRANULATED RANITIDINE FROM ADECH SA AT AN AMOUNT IN EXCESS OF THE FAIR MARKET VALUE OF RANITIDINE A ND PURSUANT TO SUBSECTION 69(2) OF THE ACT THE APPELLANT IS DEEMED TO ACQUIRE IT AT A ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 56 OF 71 REASONABLE AMOUNT. THE PRICE THAT WOULD HAVE BEEN R EASONABLE IN THE CIRCUMSTANCES FOR GLAXO CANADA TO PAY ADECHSA F OR A KILOGRAM OF RANITIDINE IS THE HIGHEST PRICE THE GENERIC COMPANI ES PAID FOR A KILOGRAM OF RANITIDINE. HOWEVER TO THIS AMOUNT I W OULD ADD $25 PER KILOGRAM AS THIS WAS THE APPROXIMATE COST TO SINGAP ORE FOR GRANULATION. THE RANITIDINE PURCHASED BY THE GENERI C COMPANIES WAS NOT GRANULATED. THE GMP PERFORMED BY A SINGAPORE MA Y HAVE INCREASED THE VALUE OF ITS RANITIDINE BUT ONLY TO T HE EXTENT THAT AS STATED EARLIER IN THESE REASONS IT GAVE SOME DEGRE E OF COMFORT TO THE APPELLANT THAT THE PRODUCT WOULD PROBABLY HAVE LESS IMPURITIES AND CONTAMINANTS THAN THAT OF ITS GENERIC COMPETITION. NO SUBMISSIONS WERE MADE AS TO WHAT THIS EXTRA CONSIDERATION SHOUL D BE. THERE IS NO EVIDENCE BEFORE ME TO CONSIDER WHAT INCREASE I MIGH T ADD TO THE GENERIC PRICE PER KILOGRAM OF RANITIDINE ON ACCOUNT OF GMP. IT WOULD APPEAR TO BE MODEST IN ANY EVENT. THE EVIDENCE DOES NOT SUGGEST ANY ADDITION TO THE PRICE OF THE RANITIDINE DUE TO ANY HSE BY SINGAPORE. THE APPELLANT IN COMPUTING ITS INCOME FOR A PARTIC ULAR YEAR MAY NOT DEDUCT THE EXCESS AMOUNT IT PAID TO ADECHSA. 85. CHIEF JUSTICE RIP THEN PROCEEDED TO GIVE AN EXA MPLE FOR WORKING OF THE ABOVE CONCLUSIONS. HE OBSERVED THAT FOR EXAMPL E IF THE APPELLANT PAID TO THE VEDNOR $1 300 PER KILOGRAM FOR RANITIDI NE AND THE HIGHEST PRICE THE GENERIC COMPANIES PAID FOR RANITIDINE WAS $380 PER KILOGRAM THE APPELLANT WOULD BE PERMITTED TO DEDUCT THE AMOU NT OF $380 PER KILOGRAM PLUS $25 PER KILOGRAM FOR GRANULATION A T OTAL OF $405. WHAT WAS THUS FINALLY HELD WAS THAT THE ARMS LENGTH PRICE O F RANITIDINE WAS THE HIGHEST PRICE PAID FOR THE RANITIDINE IN THE GENERI C DRUG MARKET PLUS AN ADDITIONAL ALLOWANCE FOR BETTER QUALITY OF THE PROD UCT. 86. INCIDENTALLY IT WAS BROADLY THE SAME APPROACH WHICH WAS ADOPTED BY THE TRANSFER PRICING OFFICER. 87. COMING BACK TO GLAXO SMITHKLINE DECISION BY TAX COURT OF CANADA WE MAY MENTION THAT THE MATTER DID NOT REST THERE A ND IT TRAVELLED IN FURTHER APPEAL BEFORE THE FEDERAL COURT OF APPEALS. IN ITS JUDGMENT DATED 26 TH JULY 2010 REPORTED AS GLAXOSMITHKLINE INC. VS. HE R MAJESTY THE QUEEN (2010 FCA 201) THE FEDERAL COURT OF APPEAL WHILE AGREEING THAT ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 57 OF 71 THE (CUP) METHOD SHOULD APPLY IN DETERMINING THE AP PROPRIATE PRICE REVERSED THE TAX COURT'S DECISION ON THE BASIS THAT THE TAX COURT USED INCORRECT COMPARABLES INASMUCH AS AN INQUIRY SHOU LD BE MADE INTO THOSE CIRCUMSTANCES THAT AN ARM'S LENGTH PURCHASER STANDING IN THE SHOES OF THE APPELLANT WOULD CONSIDER RELEVANT IN DECIDI NG WHETHER IT SHOULD PAY THE PRICE PAID BY GLAXO TO ADECHSA FOR ITS RANI TIDINE. FEDERAL COURT OF APPEAL WAS OF THE VIEW THAT THE TAX COURT OF CANADA FAILED TO CONSIDER THE BUSINESS REALITY OF THE SITUATION: 'IN THE REAL BUSINESS WORLD PRESUMABLY AN ARM'S LENGTH PURCHASER COULD ALWAYS B UY RANITIDINE AT MARKET PRICES FROM A WILLING SELLER. HOWEVER THE Q UESTION IS WHETHER THAT ARM'S LENGTH PURCHASER WOULD BE ABLE TO SELL HIS RA NITIDINE UNDER THE ZANTAC TRADEMARK.' THEREFORE THE TERMS OF THE LICE NSE AGREEMENT NEED TO BE CONSIDERED IN DETERMINING THE ARM'S LENGTH PR ICE. AS A RESULT THE COURT SENT THE CASE BACK TO THE TAX COURT TO DETERM INE THE ARM'S LENGTH PRICE BASED ON THE TERMS OF THE LICENSE AGREEMENT. THE FEDERAL COURT OF APPEALS CONCLUDED AS FOLLOWS : [74] IT IS MY VIEW THAT THE JUDGE WAS BOUND TO C ONSIDER THOSE CIRCUMSTANCES WHICH AN ARMS LENGTH PURCHASER WOULD NECESSARILY HAVE HAD TO CONSIDER. IN OTHER WORDS THE TEST MAND ATED BY SUBSECTION 69(2) DOES NOT OPERATE REGARDLESS OF THE REAL BUSINESS WORLD IN WHICH THE PARTIES TO A TRANSACTION PARTICI PATE. [75] THIS IS NOT WHAT THE JUDGE DID. RATHER HE DET ERMINED THE FAIR MARKET VALUE OF RANITIDINE WHICH HE FOUND TO BE T HE PRICE PAID BY APOTEX AND NOVOPHARM AND THEN FOUND THAT ANYTHING PAID BY THE APPELLANT OVER THAT AMOUNT SAVE FOR A $25 PER KILO UPWARD ADJUSTMENT WAS IN EXCESS OF THE REASONABLE AMOUNT . [76] CLEARLY IN THE CIRCUMSTANCES OF THIS CASE TH E JUDGES APPROACH WAS MISTAKEN. IN A REAL BUSINESS WORLD PRESUMABLY AN ARMS LENGTH PURCHASER COULD ALWAYS BUY RANITIDINE AT MARKET PRI CES FROM A WILLING SELLER. HOWEVER THE QUESTION IS WHETHER TH AT ARMS LENGTH PURCHASER WOULD BE ABLE TO SELL HIS RANITIDINE UNDE R THE ZANTAC TRADEMARK. IN MY VIEW AS A RESULT OF THE APPROACH WHICH HE TOOK THE JUDGE FAILED TO CONSIDER THE BUSINESS REALITY WHICH AN ARMS LENGTH PURCHASER WAS BOUND TO CONSIDER IF HE INTENDED TO S ELL ZANTAC. ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 58 OF 71 [77] I NOW TURN TO THE CIRCUMSTANCES WHICH IN MY V IEW THE JUDGE SHOULD HAVE CONSIDERED IN DETERMINING WHETHER THE P RICE PAID BY THE APPELLANT FOR ITS RANITIDINE WAS IN EXCESS OF THE REASONABLE AMOUNT. [78] BECAUSE IT WAS CENTRAL TO THE APPELLANTS BUSI NESS REALITY AND WOULD BE SO IF IT WERE DEALING AT ARMS LENGTH WITH ADECHSA THE LICENSE AGREEMENT WITH GLAXO GROUP WAS A CIRCUMSTA NCE WHICH HAD TO BE TAKEN INTO ACCOUNT BY THE JUDGE. IN MY RESPEC TFUL VIEW FAILING TO CONSIDER THAT AGREEMENT MEANT THAT THE JUDGE MAD E HIS DETERMINATION IN A FICTITIOUS BUSINESS WORLD WHERE A PURCHASER IS ABLE TO PURCHASE RANITIDINE AT A PRICE WHICH DOES N OT TAKE INTO ACCOUNT THE CIRCUMSTANCES WHICH MAKE IT POSSIBLE FO R THAT PURCHASER TO OBTAIN THE RIGHTS TO MAKE AND SELL ZANTAC. AS TH E APPELLANT ARGUED AT PARAGRAPH 54 OF ITS MEMORANDUM OF LAW 54. AS A RESULT THE TRIAL JUDGE IGNORED THE KEY BUSINESS CIRCUMSTANCES OF GLAXO CANADAS PURCHASE OF RANITID INE FROM ADECHSA AND ASSUMED A SET OF CIRCUMSTANCES THAT DI D NOT EXIST IN REALITY AND WOULD NOT EXIST IN AN ARMS LENGTH T RANSACTION. [79] IN MY VIEW THERE ARE A NUMBER OF CIRCUMSTANC ES WHICH SATISFY ME THAT THE LICENSE AGREEMENT WAS A CRUCIAL CONSIDE RATION IN DETERMINING THE AMOUNT THAT WOULD HAVE BEEN REASON ABLE IN THE CIRCUMSTANCES IF THE APPELLANT AND ADECHSA HAD BEE N DEALING AT ARMS LENGTH: 1. GLAXO GROUP OWNED THE ZANTAC TRADEMARK AND WOULD OW N IT EVEN IF THE APPELLANT WAS AN ARMS LENGTH LICENS EE. 2. ZANTAC COMMANDED A PREMIUM OVER GENERIC RANITIDINE DRUGS. 3. GLAXO GROUP OWNED THE RANITIDINE PATENT AND WOULD H AVE OWNED IT EVEN IF THE APPELLANT HAD BEEN IN AN ARMS LENGTH RELATIONSHIP. 4. WITHOUT THE LICENSE AGREEMENT THE APPELLANT WOULD NOT HAVE BEEN IN A POSITION TO USE THE RANITIDINE PATENT AND THE ZANTAC TRADEMARK. CONSEQUENTLY IN THOSE CIRCUMSTANCES TH E ONLY POSSIBILITY OPEN TO THE APPELLANT WOULD HAVE BEEN T O ENTER THE GENERIC MARKET WHERE THE COST OF ENTRY INTO THA T MARKET OULD LIKELY HAVE BEEN HIGH CONSIDERING THAT BOTH A POTEX AND NOVOPHARM WERE ALREADY WELL PLACED AND POSITIONED. ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 59 OF 71 5 WITHOUT THE LICENSE AGREEMENT THE APPELLANT WOUL D NOT HAVE HAD ACCESS TO THE PORTFOLIO OF OTHER PATENTED AND T RADEMARKED PRODUCTS TO WHICH IT HAD ACCESS UNDER THE LICENSE A GREEMENT. [80] THE APPELLANT SUBMITS AND I AGREE ENTIRELY WI TH THAT VIEW THAT THESE CIRCUMSTANCES DO NOT ARISE FROM THE NON-ARMS LENGTH RELATIONSHIP BETWEEN THE APPELLANT AND ADECHSA OR B ETWEEN THE APPELLANT AND GLAXO GROUP. TO THE CONTRARY THESE C IRCUMSTANCES AND I QUOTE THE APPELLANT AROSE FROM THE MARKET POWER ATTACHING TO GLAXO GROUPS OWNERSHIP OF THE INTELLECTUAL PROPERT Y ASSOCIATED WITH RANITIDINE THE ZANTAC TRADEMARK AND THE OTHER PROD UCTS COVERED BY ITS LICENSE AGREEMENT WITH GLAXO CANADA. AS THE AD MINISTRATIVE APPEALS TRIBUNAL OF AUSTRALIA STATED IN ROCHE PRODU CT PTY LIMITED AND COMMISSIONER OF TAXATION [2008] AATA 639 (JULY 22 2008) AT PARAGRAPH 153: IT IS THE INTELLECTUAL PROPERTY WHICH IS REALLY THE PRODUCT NOT THE PILL OR CAPSULE BY WHICH IT IS DISPENSED. THE I NTELLECTUAL PROPERTY INCLUDED PATENT RIGHTS. THE INTELLECTUAL P ROPERTY CAME FROM VERY SUBSTANTIAL EXPENDITURE ON RESEARCH AND DEVELOPMENT MUCH OF WHICH WOULD HAVE PRODUCED NO R ESULT. THE PROFITS FROM THE EXPLOITATION OF THE INTELLECTU AL PROPERTY RIGHTS WAS SOMETHING TO WHICH [THE PARENT COMPANY W HICH INVENTED THE PRODUCT] HAD A SPECIAL CLAIM EVEN THOU GH THE PROFIT WOULD BE COLLECTED FOR AUSTRALIAN SALES BY T HE AUSTRALIAN SUBSIDIARY. [81] I NOW RETURN TO SUBSECTION TO 69(2) OF THE ITA AND THE TEST WHICH IT SETS OUT. THAT TEST REQUIRED THE JUDGE TO DETERM INE WHETHER AN ARMS LENGTH CANADIAN DISTRIBUTOR OF ZANTAC WOULD H AVE BEEN WILLING TAKING INTO ACCOUNT THE RELEVANT CIRCUMSTANCES TO PAY THE PRICE PAID BY THE APPELLANT TO ADECHSA. WITH RESPECT THE JUDG E IGNORED ALL OF THOSE CIRCUMSTANCES BECAUSE OF HIS VIEW THAT SINGLE TON SUPRA REQUIRED HIM TO IGNORE THE LICENSE AGREEMENT. I AGA IN WISH TO EMPHASIZE THAT THE ABOVE CIRCUMSTANCES WERE CIRCUMS TANCES THAT WOULD HAVE BEEN PRESENT EVEN IF THE APPELLANT HAD B EEN DEALING AT ARMS LENGTH WITH ADECHSA AND GLAXO GROUP. CONSEQUE NTLY AN ARMS LENGTH APPELLANT WOULD NECESSARILY HAVE HAD TO CONS IDER THOSE CIRCUMSTANCES IN DECIDING WHETHER IT WAS WILLING TO PAY THE PRICE ASKED FOR BY ADECHSA FOR THE SALE OF THE ZANTAC RAN ITIDINE. [82] AS A RESULT I CONCLUDE THAT THE JUDGE ERRED I N LAW IN FAILING TO APPLY THE PROPER TEST IN DETERMINING THE AMOUNT TH AT WOULD HAVE BEEN REASONABLE IN THE CIRCUMSTANCES IF THE APPELL ANT AND ADECHSA HAD BEEN DEALING AT ARMS LENGTH. COUNSEL FOR THE A PPELLANT ARGUED ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 60 OF 71 THAT IN THE EVENT THAT WE AGREED WITH HIM THAT THE JUDGE ERRED IN NOT CONSIDERING THE LICENSE AGREEMENT WE SHOULD THEN D ETERMINE THE REASONABLE AMOUNT. IN MY VIEW THAT DETERMINATION OUGHT TO BE MADE BY THE JUDGE WHO HEARD THE PARTIES FOR WELL O VER FORTY DAYS AND NOT BY THIS COURT. [83] WHETHER THE CONSIDERATION OF THE LICENSE AGREE MENT AS A CIRCUMSTANCE RELEVANT TO THE DETERMINATION OF THE REASONABLE AMOUNT WILL LEAD THE JUDGE TO THE CONCLUSION SOUGH T BY THE APPELLANT IS NOT FOR US TO SAY. FOR EXAMPLE THE JUDGE MAY FI ND THAT THE GENERIC COMPANIES ARE NO LONGER A GOOD COMPARATOR AND THAT ANOTHER GROUP IS MORE APPROPRIATE. ON THE OTHER HAND HE MAY DETE RMINE THAT NO COMPARATOR IS NECESSARY FOR HIM TO MAKE A FINAL DET ERMINATION. CONSEQUENTLY I AM NOT INCLINED TO MAKE THE ULTIMAT E DETERMINATION WHICH THE APPELLANT SEEKS BUT PREFER LEAVING THE M ATTER TO THE JUDGE TO MAKE SUCH A DETERMINATION OR ANY OTHER DETERMINA TION WHICH HE FINDS TO BE WARRANTED IN THE LIGHT OF A FULL RECORD ON THE ISSUE. WHETHER THE PRESENT RECORD IS SUFFICIENT TO ALLOW T HE JUDGE TO PERFORM THAT TASK I CANNOT SAY. THE JUDGE MAY BE S ATISFIED THAT THE RECORD IS SUFFICIENT OR HE MAY REQUEST THE PARTIES TO ADDUCE ADDITIONAL EVIDENCE AND SUBMISSIONS AS A RESULT OF THIS COURTS DECISION. 88. THE GROUNDS ON WHICH THE GLAXO DECISIONS OF THE TAX COURT OF CANADA WAS OVERTURNED BY THE FEDERAL COURT OF APPEA L HAVE NOTHING TO DO WITH CLAIMED SUPERIORITY OF THE PRODUCT AS IS THE CASE BEFORE US BUT ON THE BASIS OF COMPULSIONS OF THE LICENCE AGREEMENT BECAUSE OF WHICH THE ASSESSEE WAS SAID UNDER AN OBLIGATION TO PURCHASE THE API AT A HIGHER PRICE. 89. IN THE CASE BEFORE US THE PLEA OF THE ASSESSEE IS OF SUPERIORITY OF APIS MANUFACTURED BY ITS ASSOCIATED ENTERPRISES THA T THE APIS PURCHASED BY THE ASSESSEE COMMAND A HIGHER PRICE AND NOT THA T IT WAS ON ACCOUNT OF THE COMPULSIONS OF LICENSE AGREEMENT THAT THE ASSES SEE HAD TO BUY IT AT A HIGHER PRICE. IN ANY EVENT THE ASSESSEE HAS NOT EV EN FILED COPIES OF ANY AGREEMENTS INCLUDING THE LICENSE AGREEMENT BEFORE US. AS WE MAKE THESE OBSERVATIONS WE MAKE IT CLEAR OUR OBSERVATIONS SHO ULD NOT BE CONSTRUED AN EXPRESSION OF OPINION ON THINGS NOT BEFORE US. THAT IS A PLEA WHICH ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 61 OF 71 WILL HAVE TO BE DEALT WITH ON MERITS WHEN IT IS M ADE. THAT APART THERE ARE MANY OTHER PERIPHERAL ASPECTS WHICH WILL HAVE T O BE EXAMINED WHEN SUCH A CLAIM IS MADE BY THE ASSESSEE SUCH AS WHEN ASSESSEE OF CLAIMS THAT THE HIGHER PRICE INDEPENDENT OF CONSIDERATION PAID IN TERMS OF THE LICENCE AGREEMENT HAD TO PAID TO THE AE BECAUSE OF THE LICENCE AGREEMENT REQUIREMENT ONE WILL HAVE TO CONSIDER W HETHER THIS EXCESSIVE PAYMENT IS DE FACTO IN THE NATURE OF A ROYALTY PAYMENT IN THE GARB O F PAYMENT FOR API AND WHETHER AND TO WHAT EXTENT N ECESSARY COROLLARIES TO SUCH A RE CHARACTERIZATION WILL FOLLOW. OF COU RSE THIS APPROACH PRESUPPOSES THAT A HIGHER PAYMENT ON THE GROUND OF COMPULSIONS OF AGREEMENT CAN BE RE CHARACTERIZED EVEN IN THE ABS ENCE OF A SPECIFIC LEGAL PROVISION ENABLING SUCH RECHARACTERIZATION-A PROPOS ITION YET TO COME UP FOR JUDICIAL SCRUTINY. BE THAT AS IT MAY SINCE THE RE IS NO MATERIAL ON RECORD TO SUGGEST THAT THE HIGHER PRICES OF API WER E WARRANTED ON ACCOUNT OF COMMERCIAL COMPULSIONS ARISING OUT OF LI CENCE AGREEMENT WE NEED NOT DEAL WITH THIS ASPECT IN ANY MORE DETAILS. SUFFICE TO SAY THAT THIS ASPECT OF THE MATTER IS NOT RELEVANT IN THE PRESENT CASE AS IT HAS NOT BEEN SPECIFICALLY PLEADED BEFORE US. THEREFORE OBSERVAT IONS OF THE COURT OF APPEAL IN CANADA DO NOT IN ANY MANNER DILUTE THE DECISION OF THE TAX COURT OF CANADA TO THE EXTENT IT IS RELEVANT IN AP PEALS BEFORE US. 90. WE ARE IN CONSIDERED AGREEMENT WITH THE VIEWS O F TAX COURT OF CANADA WHICH TO THE EXTENT RELEVANT TO THE CASE B EFORE US HAVE MET THE APPROVAL OF THE FEDERAL COURT OF APPEAL IN CANADA AS WELL. THE DECISION OF TAX COURT OF CANADA IS NOT A BINDING PRECEDENT FOR US BUT IT CERTAINLY DESERVES UTMOST RESPECT AND CONSIDERATION NOT ONLY BECAUSE IT COMES FROM A VERY EMINENT FORUM OF TAX JUDICIARY IN THE WORLD BUT ALSO BECAUSE OF ITS VERY COMPREHENSIVE AND PAINSTAKING ANALYSIS OF ALL THE RELATED ISSUES AND ITS SHEER TECHNICAL EXCELLENCE. THE REASONING ADOPTED IN THE TAX COURT OF CANADAS DECISION APPEALS TO US AS IN DEED IT WOULD APPEAL TO ANY RATIONAL PERSON AND WE RESPECTFULLY ADOPT THE SAME. ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 62 OF 71 91. ONE OF THE CONTENTIONS BY THE LEARNED COUNSEL W AS THAT SINCE THIS CANADIAN DECISION DEALS WITH ISSUES RELATING TO CHA RACTERIZATION OF A PAYMENT AND TAX WITHHOLDING IMPLICATION THEREON I T HAS NO RELEVANCE IN ISSUE IN APPEAL BEFORE US. 92. WE HOWEVER SEE NO SUBSTANCE IN THIS PLEA. WH EN AN EXCESSIVE PAYMENT FOR GOODS OR SERVICES IS MADE TO AN ASSOCIA TED ENTERPRISES IT HAS TWO IMPLICATIONS FIRST THAT DOMESTIC TAX LIABILI TY IS REDUCED IN RESPECT OF INCOME OF THE ENTERPRISES SITUATED IN THAT TAX J URISDICTION AND SECOND A PAYMENT FOR DIVIDEND ROYALTY OR OTHER I NCOME IS MADE TO THE FOREIGN AE IN THE GARB OF PAYMENT FOR SUCH GOODS OR SERVICES. ONCE IT IS HELD THAT A PART OF PAYMENT MADE TO THE FOREIGN AE IS WRONGLY CHARACTERIZED AS PAYMENT OF GOODS OR SERVICES IT I S ONLY A NATURAL COROLLARY OF THIS FINDING THAT THE PAYMENT SO MADE IN EXCESS OF ARMS LENGTH PRICE MUST HAVE SOME OTHER CHARACTER. WHILE A LOWER DEDUCTION ON ACCOUNT OF ALP ADJUSTMENT NEUTRALIZES THE EROSION OF DOMESTIC TAX BASE CAUSED BY REPORTING ARTIFICIALLY LOWER PROFITS A SIMPLICTOR ALP ADJUSTMENT DOES NOT NEUTRALIZE THE NON-TAXABILITY IN SOURCE COUNTRY OF THE PAYMENT OF DIVIDEND ROYALTY OR OTHER INCOMES T O THE FOREIGN AES IN THE GARB OF PAYMENT FOR GOODS OR SERVICES. MANY C OUNTRIES INCLUDING CANADA - BY WAY OF SECTION 247(2) OF CANADIAN INCO ME TAX ACT NEUTRALIZE THIS ILL EFFECT OF A PAYMENT IN EXCESS O F ARMS LENGTH PRICE BY PROVIDING FOR RE-CHARACTERIZING THE AMOUNT PAID IN EXCESS OF ALP. IN INDIA RE CHARACTERIZATION PROVISIONS IN RESPECT O F PAYMENTS MADE IN EXCESS OF ALP HAVE NOT YET BEEN LEGISLATED BUT THA T DOES NOT MEAN THAT JUDICIAL PRECEDENTS FROM THE COUNTRIES WHERE RECHAR ACTERIZATION OF PAYMENT IN EXCESS OF ALP PAYMENT IS PERMISSIBLE C EASE TO BE RELEVANT IN INDIA. THESE DECISIONS THOUGH THEY GO A STEP FURT HER THAN THE PRESENT LEGAL POSITION IN INDIA CONTINUE TO BE AS RELEVANT AND AS USEFUL AS THEY WOULD HAVE BEEN IN THE ABSENCE OF SUCH RE CHARACTER IZATION PROVISIONS IN THE RESPECTIVE COUNTRIES. THE RATIONALE AND LOGIC O F THESE DECISIONS ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 63 OF 71 CONTINUES TO REMAIN UNAFFECTED BY THESE PROVISIONS. THE OBJECTION RAISED BY THE LEARNED COUNSEL IS DEVOID OF LEGALLY SUSTAIN ABLE MERITS. 93. AS REGARDS LEARNED COUNSELS RELIANCE ON HONBL E SUPREME COURTS JUDGMENT IN THE CASE OF UNIVERSAL GLASS LIMITED ( SUPRA ) WHEREIN IT IS OBSERVED THAT SIMPLY BECAUSE TWO GOODS ARE KNOWN B Y THE SAME KNOWN OR THE SAME GROUP IT DOES NOT MEAN THAT THEY ARE C OMPARABLE GOODS ALL WE CAN SAY IS THAT NOT ONLY THE APIS WHETHER MADE BY THE ORIGINAL PATENT HOLDER OF THE DRUG OR BY OTHER GENERIC DRUG MANUFAC TURERS IS NOT ONLY KNOWN BY THE SAME IT IS THE SAME THOUGH MAYBE W ITH SOME VARIATIONS OF QUALITY. 94. AS REGARDS OBSERVATIONS SAID TO HAVE BEEN MAD E BY A COORDINATE BENCH IN THE CASE OF SONY INDIA (SUPRA) TO THE EFFECT THAT SALES OF ETHICAL PHARMACEUTICALS BY A RESEARCH-BASED MULTINATIONAL G ROUP WOULD NOT BE COMPARABLE WITH SALES OF GENERIC PHARMACEUTICAL SUB STANCES BY A MULTINATIONAL GROUP NOT ENGAGED IN RESEARCH FOR AN D THE DEVELOPMENT OF INNOVATORY PRODUCTS WE FIND THAT THESE ARE NOT THE OBSERVATIONS OF THE TRIBUNAL BUT EXTRACTS FROM THE BOOK INTERNATIONAL TRANSFER PRICING IN THE ETHICAL PHARMACEUTICAL INDUSTRY ( IBFD PUBLICATION; AUTHORED BY KARL WUNDISCH) WHICH HAVE BEEN REPRODUCED IN THE ORDER. THESE OBSERVATIONS THUS ARE NO MORE THAN OPINIONS OF THE LEARNED AUTHOR AND AS WE DONOT EVEN KNOW WHAT WAS THE CONTEXT IN WHICH THESE OBSERVATIONS WERE MADE WE DONOT FIND THE SAME TO BE OF ANY HELP TO THE ASSESSEE. WE HAVE IN THE LIGHT OF THE ANALYSIS IN FOREGOING PAR AGRAPHS REJECTED THIS LINE OF REASONING. 95. SIMILARLY THE ASSESSEE DOES NOT DERIVE ANY HEL P FROM COORDINATE BENCH DECISION IN THE CASE OF KINETIC HONDA MOTORS LTD VS. JCIT ( SUPRA ) IN SUPPORT OF THE PROPOSITION THAT WHEN PAYMENTS ARE APPROVED BY ONE WING OF THE GOVERNMENT THERE IS NO QUESTION OF SU CH PAYMENT BEING TREATED AS EXCESSIVE OR UNREASONABLE HAVING REGARD TO LEGITIMATE BUSINESS ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 64 OF 71 NEEDS SINCE UNLIKE IN THE CASE OF SECTION 40A(2 ) WITH WHICH THIS DECISION DEALT THE INCOME TAX ACT PROVIDES A SPECI FIC MECHANISM FOR COMPUTATION ARMS LENGTH PRICE AND IT IS ONLY WH EN DETERMINATION OF ARMS LENGTH PRICE IS MADE IN ACCORDANCE WITH THE S CHEME OF THE ACT THAT THE ONUS OF THE ASSESSEE IS DISCHARGED. MERELY BEC AUSE ANOTHER ARM OF THE GOVERNMENT CONSIDERS THIS PRICE AT AN ARMS LENGTH PRICE EVEN THOUGH FOR THE PURPOSES OF CUSTOMS DUTY THE ASSESSEE CAN NOT BE RELIEVED OF THE BURDEN OF ESTABLISHING THAT IT IS AN ARMS LENGTH FOR THE PURPOSES OF TRANSFER PRICING REQUIREMENTS IN TERMS OF THE PROV ISIONS OF THE INCOME TAX ACT. 96. IN VIEW OF THE ABOVE DISCUSSIONS AND BEARING I N MIND ENTIRETY OF THE CASE WE ARE OF THE CONSIDERED VIEW THAT CUP ME THOD OF DETERMINING THE ARMS LENGTH PRICE IS MOST APPROPRIATE METHOD F OR DETERMINING ARMS LENGTH PRICE ON THE FACTS OF THIS CASE AND THE SE LLING PRICE OF RELATED APIS IN INDIAN MARKET CONSTITUTE GOOD COMPARABLES FOR AP PLYING THE SAID METHOD. 97. AS REGARDS INDAPAMIDE BASED ON THE INFORMATIO N ABOUT COMPETITOR DRUGS SUBMITTED BY THE ASSESSEE HIMSELF THE TRANSF ER PRICING OFFICER ASCERTAINED THE PURCHASE PRICE OF INDAPAMIDE FROM T ORRENT PHARMACEUTICALS WAS PRODUCING LORVAS AND LORVAS SR IN COMPETITION WITH NATRILIX AND NATRILIX SR BEING PRODUCED BY THE ASSESSEE WHICH WAS FOUND TO BE RS 40 375 PER KG. THIS API WAS IMPORTE D FROM ITALY. AS AGAINST THIS PRICE OF RS 40 375 PER KG THE ASSESSE E PAID RS 1 89 456 PER KG FOR IMPORTS FROM SERVIER FRANCE. 98. THE ASSESSEE HAS NOT SERIOUSLY CHALLENGED THE Q UALITY OF INDAPAMIDE USED AS CUP BEYOND MAKING SOME GENERAL AND VAGUE OBSERVATIONS ABOUT INHERENT SUPERIORITY OF SERVIER PRODUCTS. ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 65 OF 71 99. THE INTERNAL COMPARABLE UNCONTROLLED PRICES WH ICH ARE STATED BY THE ASSESSEE ARE IN RESPECT OF SALES MADE TO ENTIT IES BASED IN PORTUGAL JAPAN SYRIA KOREA AND TUNISIA AND THESE PRICES R ANGE BETWEEN US $ 12 043 TO US $ 26 708. THERE IS HOWEVER NOTHING ON RECORD TO EVIDENCE THE AFORESAID TRANSACTIONS AND GIVE ANY FURTHER DET AILS IN RESPECT OF THE SAME. IN ANY EVENT SINCE THESE INTERNAL CUP PERTAI N TO A DIFFERENT GEOGRAPHICAL MARKET AND THE ASSESSEE HAS NOT EVEN D OCUMENTED THE SAME OR MADE ANY EFFORTS TO SHOW COMMERCIAL PARITY IN TH ESE MARKETS THESE INPUTS ARE OF NO ASSISTANCE TO US. 100. IT IS ALSO NOT THE ASSESSEES CASE BEFORE ANY OF THE AUTHORITIES BELOW THAT THE ASSESSEE WAS NOT DULY CONFRONTED WITH THE MATERIAL GATHERED BY THE ASSESSING OFFICER AS IS REQUIRED IN TERMS OF T HE PROVISO TO SECTION 92 C (3) AND AS THE COMPARABLE USED BY THE TRANSFER P RICING OFFICER PERTAINS TO INDIAN MARKET AS RELATED IMPORTS WERE MADE BY A N INDIAN ENTERPRISES FOR AN INDIAN MARKET FROM AN ITALIAN ENTERPRISES WE SEE NO INFIRMITY IN CIT(A)S CONFIRMING THE ACTION OF THE TRANSFER PRIC ING IN THIS REGARD. THE ARMS LENGTH PRICE OF INDAPAMIDE THUS DOES NOT CALL FOR ANY INTERFERENCE. WE CONFIRM THE SAME. 101. AS REGARDS TRIMETAZIDINE THE BASIC GRIEVANCE OF THE ASSESSEE AGAINST THE CUP IN THE DOMESTIC MARKET BEING ADOPTE D IS THAT NOT ONLY INHERENT BUT DEMONSTRATED SUPERIORITY BY WAY OF TE ST REPORTS OF THE TRIMETAZIDINE MANUFACTURED BY THE ASSEESSEES AES V IS--VIS THE TRIMETAZIDINE MANUFACTURED INDIGENOUSLY. 102. THE TECHNICAL SUPERIORITY OF THE APIS IMPORTED BY THE ASSESSEE IS IN TERMS OF PURITY STANDARDS AND IN TERMS OF THE LOWER STANDARDS OF MANUFACTURING FACILITIES OF NIVEDITA CHEMICALS. T HE HIGHEST OF DIFFERENCES BETWEEN PRODUCTS AS PER JAPANESE PHARMO COPIA STANDARDS AS WAS BEING MANUFACTURED BY NIVENDITA CHEMICALS AND T HE SAME PRODUCT AS PER BRITISH PHARMOCOPIA STANDARDS AS WAS THE PRODU CT IMPORTED BY THE ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 66 OF 71 ASSESSEE FROM ITS AE WORKED OUT TO RS 4 850. IN AD DITION TO THE CUP OF RS 12 000 PER KG THE TRANSFER PRICING OFFICE ALLOWED RS 4 850 PER KG FOR HIGHER QUALITY STANDARD AS ALSO AN ADDITIONAL ALLOW ANCE OF RS 5 000 TOWARDS IMPURITIES. THE ASSESSEE HAS NOT MADE OUT A CASE FOR HIGHER ADJUSTMENTS TO BE ALLOWED IN RESPECT OF THE SAME A ND IT IS NOT THEREFORE THE CASE THAT AN ADJUSTMENT FOR HIGHER QUALITY OF P RODUCT HAS BEEN DECLINED TO THE ASSESSEE. EVEN AS WE CONFIRM THE O RDERS OF THE AUTHORITIES BELOW ON THIS ISSUE WE MAKE IT CLEAR T HAT THE ASSESSEE IS NOT PREVENTED FROM MAKING ANY SUCH CLAIM FOR ADJUSTMENT S IN VALUE AS HE MAY DEEM APPROPRIATE AND CAN JUSTIFY IN FUTURE AN D TO THIS EXTENT THE ISSUE IS LEFT OPEN. SUBJECT TO THESE OBSERVATIONS IN OUR CONSIDERED VIEW AND ON THE GIVEN FACTS THESE ADJUSTMENTS REASONABL Y COVER THE VARIATIONS IN QUALITY OF API MANUFACTURED BY NIVEDITA CHEMICAL S VIS--VIS API MANUFACTURED BY SERVIER EGYPT WHICH WAS PURCHASED B Y THE ASSESSEE FOR RS 52 546 PER KG. 103. AS REGARDS THE INTERNAL CUPS FURNISHED BY THE ASSESSEE WE FIND THAT THESE INPUTS ARE STRICTLY SPEAKING NOT INTER NAL CUP IN THE SENSE THAT WHILE THE ASSESSEE HAS IMPORTED TRIMETAZIDINE FROM SERVIER EGYPT THE SALE INSTANCES TO UNRELATED PARTIES ARE BY SERVIER FRANCE. IN ANY EVENT AS IN THE CASE OF INDAPAMIDE THE COMPARABLE UNCONT ROLLED SALE INSTANCES ARE IN RESPECT OF DIFFERENT GEOGRAPHIC MARKETS AND WITHOUT NECESSARY SUPPORTING DOCUMENTATION. FOR ALL THESE REASONS WE REJECT THE INTERNAL CUP INPUTS PROVIDED BY THE ASSESSEE. 104. FOR THE REASONS SET OUT ABOVE WE CONFIRM THE ACTION OF THE CIT(A) IN RESPECT OF ALP ADJUSTMENTS HAVING BEEN SUSTAINED IN RESPECT OF IMPORTS OF TRIMETAZIDINE AS WELL. THERE IS NO NEED FOR OUR INTERFERENCE ON THIS COUNT EITHER. IN THE RESULT ALL THE ALPS SUST AINED IN APPEAL BY THE CIT(A) ARE CONFIRMED BY US AS WELL. ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 67 OF 71 105. BY WAY OF AN ADDITIONAL GROUND OF APPEAL FOR THE ASSESSMENT YEAR 2002-03 HOWEVER THE ASSESSEE HAS TAKEN UP THE GRO UND OF APPEAL TO THE EFFECT THAT THE REFERENCE TO THE TRANSFER PRICING O FFICER HAVING BEEN MADE BEYOND 30 TH JUNE 2003 WAS BAD IN LAW AS IT WAS IN VIOLATION OF CIRCULAR DATED 20 TH MAY 2003. EVEN THOUGH LEARNED DEPARTMENTAL REPRESE NTATIVE VEHEMENTLY OPPOSED ADMISSION OF THIS ADDITIONAL GRO UND OF APPEAL PARTICULARLY AS IT IS A PURE QUESTION OF LAW ON UND ISPUTED MATERIAL FACTS AND IN VIEW OF HONBLE SUPREME COURTS JUDGMENT IN THE CASE OF NATIONAL THERMAL POWER CORPORATION VS CIT (229 ITR 383) W E HAVE ADMITTED THIS GROUND OF APPEAL AND WE PROCEED TO DISPOSE OF THE SAME ON MERITS. 106. LEARNED COUNSEL FOR THE ASSESSEE HAS RAISED THIS OBJECTION FOR THE ASSESSMENT YEAR 2002-03 ON THE GROUND THAT THE REF ERENCE MADE BY THE ASSESSING OFFICER TO THE TRANSFER PRICING OFFICER W AS TIME BARRED INASMUCH AS WHILE THE CENTRAL BOARD OF DIRECT TAXES VIDE CIRCULAR DATED 20 TH MAY 2003 DIRECTED THE FIELD OFFICERS THAT (T)HE WORK RELATING TO SELECTION OF CASES FOR SCRUTINY AND REFERENCE TO TH E TPO IN RESPECT OF PENDING RETURNS FILED FOR THE ASSESSMENT YEAR 2002- 03 SHOULD BE COMPLETED BY JUNE 30 2003 THE ACTUAL REFERENCE T O THE TRANSFER PRICING OFFICER WAS MADE BY THE ASSESSING OFFICER ON 20 TH JANUARY 2004. HE SUBMITS THAT THESE DIRECTIONS OF THE CBDT ARE MANDA TORY AND BINDING ON THE ASSESSING OFFICER AND THE CIT(A) AS WAS NOTED BY A FIVE MEMBER BENCH OF THIS TRIBUNAL IN THE CASE OF AZTEC SOFTWAR E & TECHNOLOGY SERVICES LTD VS ASSISTANT COMMISSIONER OF INCOME TA X ( 294 ITR AT 32) AND THAT AS HELD BY BILASPUR BENCH OF THIS TRIBUNA L IN THE CASE OF SUNITA FINLEASE LIMITED VS DCIT (118 TTJ 263) WHEN AN ASS ESSING OFFICER CARRIED OUT A SCRUTINY ASSESSMENT BEYOND THE TIME L IMIT PRESCRIBED VIDE A CBDT INSTRUCTION THE ASSESSMENT ORDER SO PASSED WA S LIABLE TO BE QUASHED AS IT SUFFERED LACK OF JURISDICTION. A REFE RENCE WAS THEN ALSO MADE TO HONBLE ANDHRA PRADESH HIGH COURTS JUDGMEN T IN THE CASE OF CIT VS NAYANA P DEDHIA (270 ITR 572) WHICH HOLDS THAT S ELECTION OF A CASE FOR SCRUTINY ASSESSMENT IN VIOLATION OF DIRECTIONS OF T HE CENTRAL BOARD OF ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 68 OF 71 DIRECT TAXES WAS LEGALLY UNSUSTAINABLE AND THE ASS ESSMENT FRAMED ON THE BASIS OF SUCH ASSESSMENT WAS LIABLE TO BE SET ASIDE . ON THE BASIS OF THESE ARGUMENTS LEARNED COUNSEL SUBMITS THAT THE REFEREN CE MADE TO THE TPO WAS VOID AB INITIO AS IT WAS MADE AFTER THE TIME LIMIT STIPULATED BY T HE CBDT. WE ARE URGED TO SET ASIDE THE ORDER PASSED BY THE TRANSFER PRICING OFFICER FOR THIS SHORT REASON ALONE. LEARNED COMMIS SIONER (DEPARTMENTAL REPRESENTATIVE) ON THE OTHER HAND VEHEMENTLY OPPO SES THE SUBMISSIONS MADE BY THE LEARNED COUNSEL FOR THE ASSESSE. HE SUB MITS THAT THE DIRECTIONS CONTAINED IN THE CIRCULAR DATED 20 TH MAY 2003 ARE MERELY RECOMMENDATIONS AND NOT DIRECTIONS. HE SUBMITS THA T THESE DIRECTIONS DO NOT PROHIBIT THE ASSESSING OFFICER FROM MAKING REFE RENCES TO THE TRANSFER PRICING OFFICER AFTER 30 TH JUNE 2003 BUT MERELY SUGGEST THAT WITH A VIEW TO ORGANIZE THINGS IN AN ORDERLY FASHION THAT SEL ECTION OF CASES FOR SCRUTINY AND REFERENCES TO THE TRANSFER PRICING OFF ICER SHOULD BE COMPLETED BY 30 TH JUNE 2003. IT IS POINTED OUT THAT AS AGAINST TH IS SUGGESTION THE CBDT WHEREVER IT SO CONSIDERED APP ROPRIATE HAS PROHIBITED THE ASSESSING OFFICER FROM RESORTING TO SELECTION OF SCRUTINY CASES IN CERTAIN SITUATIONS. AS REGARDS ASSESSEE S RELIANCE ON CERTAIN OBSERVATIONS IN AZTECS CASE (SUPRA) LEARNED COUNSEL SUBMITS THAT THESE OBSERVATIONS ARE NOT APPLICABLE AS THESE OBSERVATI ONS ARE MADE IN THE CONTEXT OF THRESHOLD LIMIT FOR REFERENCES TO THE TP O WHICH IS NOT ISSUE BEFORE US. LEARNED DEPARTMENTAL REPRESENTATIVE THU S URGES US TO REJECT THE HYPER TECHNICAL OBJECTION RAISED BY THE ASSESSE E AND PROCEED TO DECIDE THE MATTER ON MERITS. IN HIS BRIEF REJOINDER LEARNED COUNSEL FOR THE ASSESSEE ONCE AGAIN SUBMITS THAT THE INSTRUCTIO NS ISSUED BY THE CBDT ARE BINDING ON THE ASSESSING OFFICER AND AN ACTION OF THE ASSESSING OFFICER WHICH IS IN VIOLATION OF THE CBDT DIRECTIO NS CANNOT CONFER A LEGALLY VALID JURISDICTION TO THE ASSESSING OFFICER . SINCE THE ASSESSING OFFICER HAS MADE THE REFERENCE ON A DATE LATER THAN THE OUTER LIMIT LAID DOWN BY THE CBDT THIS REFERENCE HAS TO BE HELD AS DEVOID OF JURISDICTION. HE REITERATES HIS SUBMISSIONS ONCE AGAIN. ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 69 OF 71 107. HAVING GIVEN OUR CAREFUL CONSIDERATION TO TH E RIVAL CONTENTIONS WE ARE UNABLE TO SUSTAIN THE PRELIMINARY OBJECTION RAISED BY THE ASSESSEE. WE HAVE NOTED THAT THE CENTRAL BOARD OF DIRECT TAXE S HAS VIDE INSTRUCTION NO. 3 (SUPRA) ISSUED THE GUIDELINES IN ORDER TO MAINTAIN UNIFORMITY OF PROCEDURE AND TO ENSURE THAT WORK IN THIS IMPORTANT AREA PROCEEDS SMOOTHLY AND EFFECTIVELY. IN THE GUIDELIN ES SO LAID DOWN IT WAS OBSERVED THAT THE (T)HE CENTRAL BOARD OF DIRECT TA XES THEREFORE HAVE DECIDED THAT WHEREVER THE AGGREGATE VALUE OF INTERN ATIONAL TRANSACTION EXCEEDS RS. 5 CRORES THE CASE SHOULD BE PICKED UP FOR SCRUTINY AND REFERENCE UNDER SECTION 92CA BE MADE TO THE TPO . HAVING SO LAID DOWN THE CRITERION AND HAVING OBSERVED THAT (T)HE THR ESHOLD LIMIT OF RS. 5 CRORES WILL BE REVIEWED DEPENDING UPON THE WORKLOAD OF THE TPOS IT WAS RECOMMENDED THAT (T)HE WORK RELATING TO SELECTION OF CASES FOR SCRUTINY AND REFERENCE TO TPO ON THE ABOVE BASIS IN RESPECT OF PENDING RETURNS FILED FOR THE ASSESSMENT YEAR 2002-03 SHOULD BE COM PLETED BY JUNE 30 2003. A PLAIN READING OF THIS INSTRUCTION DOES NO T SUGGEST THAT THERE WAS ANY BAR ON MAKING OF REFERENCES TO THE TPO AFTER 30 TH JUNE 2003 OR THAT ALL THESE REFERENCES WILL HAVE TO BE NECESSARILY CO MPLETED BEFORE THAT DATE AS FOR EXAMPLE WAS THE POSITION IN THE CONT EXT OF CBDT INSTRUCTION DEALT BY THE BILASPUR BENCH OF THIS TRIBUNAL IN THE CASE OF SUNITA FINLEASE (SUPRA) AND BY HONBLE ANDHRA PRADESH HIGH COURT IN THE C ASE OF NAYANA P DEDHIA (SUPRA) . IN THE CASE OF SUNITA FINLEASE (SUPRA) THE COORDINATE BENCH WAS DEALING WITH A SITUATION IN WHICH THE CBD T HAD SPECIFICALLY DIRECTED THAT (F)OR RETURNS FILED DURING THE CURRE NT FINANCIAL YEAR 2004- 05 THE SELECTION OF CASES FOR SCRUTINY WILL HAVE T O BE COMPLETED WITHIN 3 MONTHS OF THE DATE OF FILING OF THE RETURN (EMPHAS IS SUPPLIED BY US). SIMILARLY IN THE CASE OF NAYANA P DEDHIA ( SUPRA ) THEIR LORDSHIPS WERE DEALING WITH A SITUATION IN WHICH THERE WAS A SPECI FIC BAR FROM SELECTING A CASE IN SCRUTINY ASSESSMENT IN WHICH INCOME OFFERED TO TAX IN THE RELEVANT ASSESSMENT YEAR WAS 30% MORE THAN THE INCOME OFFERE D TO TAX IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AS THE CBDT H AD IN ITS CIRCULAR INTER ALIA STATED THAT (T)HE INCOME-TAX DEPARTMENT HAS DECID ED NOT TO ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 70 OF 71 SELECT RETURNS FOR THE ASSESSMENT YEAR 1996-97 FOR DETAILE D SCRUTINY IF THE TOTAL INCOME DECLARED IS AT LEAST 30% MORE THAN THE TOTAL INCOME DECLARED FOR THE ASSESSMENT YEAR 1995-96 ( EMPHASIS SUPPLIE D BY US). WHEN CASES WERE SELECTED FOR SCRUTINY IN VIOLATION OF TH IS SPECIFIC BAR ON THE ASSESSING OFFICER THE ACTION OF THE ASSESSING OFFI CER WAS HELD TO BE UNSUSTAINABLE IN LAW. THESE SITUATIONS ARE QUITE DI FFERENT FROM THE SITUATION BEFORE US INASMUCH AS THERE IS NOT EVEN A SUGGESTION OF SPECIFIC BAR FROM MAKING A REFERENCE TO THE TPO AFTER 30 TH JUNE 2003 INASMUCH AS THE INSTRUCTIONS ARE SPECIFICALLY TO ENSURE THAT W ORK IN THIS IMPORTANT AREA PROCEEDS SMOOTHLY AND EFFECTIVELY RATHER THAN TO VEST A RIGHT FOR THE ASSESSEE AND INASMUCH AS THE EXPRESSION SHOULD S TANDS FOR IN THE GIVEN CONTEXT THE SUGGESTION THAT THIS REFERENCES TO THE TPO IDEALLY BE COMPLETED BEFORE 30 TH JUNE 2003. IN OUR HUMBLE UNDERSTANDING THIS REFERENCE TO 30 TH JUNE 2003 CANNOT BE CONSTRUED AS OUTER LIMIT FOR M AKING REFERENCES TO THE TRANSFER PRICING OFFICER AND THA T IS IN SHARP CONTRAST WITH AS HIGHLIGHTED ABOVE SITUATIONS THAT HONBLE ANDHRA PRADESH HIGH COURT AND BILASPUR BENCH OF THIS TRIBUNAL HAVE DEAL T WITH IN THE CASES RELIED UPON BY THE LEARNED COUNSEL. LEARNED COUNSEL S RELIANCE ON THESE JUDICIAL PRECEDENTS IS THUS OF NO AVAIL. AS REGAR DS LEARNED COUNSELS RELIANCE ON AZTEC DECISION (SUPRA) WE FIND THAT THE OBSERVATIONS MADE BY THE TRIBUNAL WERE IN THE CONTEXT OF THE THRESHOLD L IMIT AND NOT IN THE CONTEXT OF THE TIME LIMIT FOR MAKING REFERENCES TO THE TRANSFER PRICING OFFICER. IN ANY EVENT AS WE HAVE NOTED ABOVE THE CBDT INSTRUCTION DOES NOT RESTRICT THE POWERS OF THE ASSESSING OFFICER FR OM MAKING REFERENCES TO THE TRANSFER PRICING OFFICER AFTER 30 TH JUNE 2003. 108. IN VIEW OF THESE DISCUSSIONS AND BEARING IN MIND ENTIRETY OF THE MATTER WE REJECT THE TECHNICAL OBJECTION RAISED B Y THE ASSESSEE. THERE IS NO LEGAL INFIRMITY IN THE REFERENCE MADE BY THE ASS ESSING OFFICER TO THE TRANSFER PRICING OFFICER. THE ADDITIONAL GROUND OF APPEAL IS ALSO THEREFORE DISMISSED. ITA NOS: 2469/MUM/06 3032/MUM/07 AND 2531/MUM/08 ASSESSMENT YEAR: 2002-03 2003-04 AND 2004-05 PAGE 71 OF 71 109. IN THE RESULT APPEAL FOR THE ASSESSMEN T YEAR 2002-03 IS DISMISSED. 110. NO INDEPENDENT ARGUMENTS WERE ADVANCED BY EITHER SIDE FOR THE ASSESSMENT YEARS 2003-04 AND 2004-05. LEARNED REPRE SENTATIVES HAVE AGREED THAT WHATEVER IS DECIDED FOR THE ASSESSMENT YEAR 2002-03 WILL APPLY MUTATIS MUTANDIS FOR THESE TWO ASSESSMENT YEARS WELL. AS WE HAVE NOT FOUND ANY MERITS IN THE APPEAL FOR THE ASSESSME NT YEAR 2002-03 THE APPEALS FOR THE ASSESSMENT YEARS 2003-04 AND 2004-0 5 ARE TO BE REJECTED AS WELL. WE DO SO. 111. IN THE RESULT ALL THE THREE APPEALS ARE DISM ISSED. PRONOUNCED IN THE OPEN COURT TODAY ON 31 ST DAY OF DECEMBER 2010. SD/XX SD/XX (N V VASUDEVAN) (PRAMOD KUMAR) JUDICIAL MEMBER ACCOUNTANT M EMBER MUMBAI; 31 ST DAY OF DECEMBER 2010 . COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. DIRECTOR OF INCOME TAX (INTL TAXATION) MUMBA I 4. COMMISSIONER (APPEALS) - MUMBAI 5. DEPARTMENTAL REPRESENTATIVE L BENCH MUMBAI 6. GUARD FILE TRUE COPY BY ORDER ETC. ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES MUMBAI