Arm’s length price should be based on the functional and asset profile of the company

Court  Mumbai Bench of the Income Tax Appellate Tribunal

Citation: ITO Vs. Zydus Altana Healthcare Pvt. Ltd. [2010-TI I-29-ITAT–MUM-TP]

Brief- The Mumbai Bench of the Income Tax Appellate Tribunal (‘the Tribunal’), in the case of ITO Vs. Zydus Altana Healthcare Pvt. Ltd. [2010-TI I-29-ITAT–MUM-TP], while deciding the case in favor of the assessee, ruled that the determination of arm’s length price should be based on the functional and asset profile of a company and profit margins earned by comparable companies should be adjusted for functional differences between the tested party and the comparable. The Tribunal also ruled that in case an assessee’s income is exempt from tax (and taxable in the overseas jurisdiction), this factor should be considered by the revenue authorities while undertaking a tax assessment since in such a situation, there is no benefit to the assessee in charging its associated enterprise a lower mark-up.

Facts– The assessee is a Joint Venture between Cadila Healthcare Ltd., and Byk Gulden Lomberg GmbH Germany (“BGL”). The assessee, a 100% export oriented unit is engaged in the manufacture and export of pharmaceutical intermediates exclusively for BGL. The assessee also provides clinical trial services with respect to molecules developed from the research undertaken by BGL for which it is remunerated on a cost plus 5% basis. In addition, the assessee receives reimbursement from BGL of certain clinical trial expenses.

During the course of transfer pricing (“TP”) assessment proceedings, the Transfer Pricing Officer (“TPO”) accepted the assessee’s export prices of pharmaceutical products to be at arm’s length. The TPO, however, proposed an adjustment to the transfer price for the transaction involving clinical trial services provided by the assessee to its Associated Enterprise (“AE”). For this purpose, the TPO identified a set of companies providing clinical trial services to third parties and determined the arm’s length cost plus mark up at 17.14%.

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