Purchase price of generic unpatented APIs from associated enterprises can be benchmarked against the price of same APIs

Purchase price of generic unpatented APIs from associated enterprises can be benchmarked against the price of same APIs sold by other independent producers despite difference in quality

The Mumbai bench of the Income Tax Appellate Tribunal (Tribunal) recently pronounced its ruling in the case of Serdia Pharmaceuticals India Private Limited (Taxpayer), on transfer pricing issues arising from the import of Active Pharmaceutical Ingredients (API) from its Associated enterprises (AEs) for production of drugs in finished dosage forms (FDFs). The Tribunal upheld the order of the Commissioner of Income-tax (Appeal) stating that the arm?s length price of generic APIs can be computed using the Controlled Uncontrolled Price Method (CUP) as long as comparables for application of CUP are available.

Facts

Serdia Pharmaceuticals India Private Limited, a wholly owned subsidiary of Servier International BV, Netherlands and Serdia (Mauritius) Limited, Mauritius is engaged in the manufacture and marketing of pharmaceutical drugs mainly in the field of anti-hypertension and metabolism. They manufacture and market pharmaceutical drugs in Finished Dosage Forms (FDFs) for use by the end consumers. The FDFs may be in the form of tablet, liquid or gel.

The Taxpayer imported APIs from its AEs (Servier France and Servier Egypt) in the process of manufacturing the FDFs in Assessment Years (AY) 2002-03, 2003-04 and 2004-05. An API contains all the medicinal properties and is a key element and ingredient in a pharmaceutical drug. An API may be patented or generic in nature. A patented API allows the patent holder to sell the API at a premium price, allowing the company to recoup the cost involved in the course of research and development of the drug. Once the patent on an API expires in a particular geographic location, any other pharmaceutical manufacturing company can manufacture and market that API. The API then becomes generic in nature thereby ending the monopoly of the patent holder.

Please become a Premium member. If you are already a Premium member, login here to access the full content.