Case Law Details
[Serdia Pharmaceuticals (India) Pvt. Ltd. Vs. ACIT (ITA Nos: 2469/Mum/06, 3032/Mum/07 and 2531/Mum/08) (Mumbai)]
Mumbai Tribunal Ruling- CUP method is the ‘most appropriate method’ to determine the arm’s length price in the cases of generic drug manufacturers so long as comparables are available and while innovators of drugs are allowed monopolistic pricing during the period when patents are in force so as to recoup the R & D costs, once the patent period expires, the higher pricing of the drug vis-à-vis prices of generic drugs manufactured by competitors cannot be justified on the ground of heavy R&D costs.
Facts: Serdia Pharmaceuticals India Private Limited (the assessee) was a company incorporated in India of which 74% of its share capital was held by a Netherlands based company Servier International BV (Servier BV) and the remaining 26% of its share capital was held by a Mauritius based company Serdia (Mauritius) Limited. Servier BV, in turn, was a subsidiary of Les Laboratoires Servier France (Servier France). Servier France had a subsidiary in Egypt in the name of Servier Egypt Industries Ltd Egypt (Servier Egypt). Therefore, Servier France and Servier Egypt were the associated enterprises (AEs) of the assessee under the Indian transfer pricing regulations.
The assessee was engaged in the business of producing drugs mainly in the field of anti-hypertension and metabolism. It produced and marketed drugs in finished dosage forms (FDF). The assessee imported active pharmaceutical ingredient (API) from Servier France and Servier Egypt for manufacturing and marketing FDF.
The FDF is to facilitate consumption by end user. It may be in form of tablet, liquid or gel made of excipients (medicinally inactive constituents). The excipients are vehicles in which one or more API is suspended in. An API may be a patented or generic. A patented API can be produced by the patent holder, and this monopoly allows the pharmaceutical company, which developed the drug, to sell it in a monopoly market and thus, allows the company to recoup the cost of developing that particular drug by selling the drug in monopolistic conditions. Once patent on an API expires or is not valid in a particular geographical location, any pharmaceutical company can manufacture and sell that API. The API then becomes generic in nature, and the expiration, or inapplicability, of the patent, ends the monopoly of the patent holder.
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