Tevapharm India Pvt. Ltd., New Delhi V. Addl. CIT, New Delhi

ITA 6707/DEL/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6534 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-03-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 02-03-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 30-12-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Assessee Lawyers: HIMANSHU S SINHA; VRINDA TU LSHAN
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-2 : NEW DELHI BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.6707/DEL/2016 ASSESSMENT YEAR : 2012-13 TEVAPHARM INDIA PVT. LTD., M-34, SAKET, NEW DELHI. PAN: AABCR7561F VS. ADDL. CIT, SPECIAL RANGE-9, NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI HIMANSHU S. SINHA, ADVOCATE & MS VRINDA TULSHAN, ADVOCATE DEPARTMENT BY : SHRI PEEYUSH JAIN, CIT, DR DATE OF HEARING : 02.03.2017 DATE OF PRONOUNCEMENT : 06.03.2017 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E FINAL ASSESSMENT ORDER DATED 30.11.2016 PASSED BY THE ASSESSING OFFI CER (AO) U/S 143(3) READ WITH SECTION 144C(13) OF THE INCOME-TAX ACT, 1 961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEA R 2012-13. 2 ITA NO. 6707/DEL/2016 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THA T THE ASSESSEE, AN INDIAN SUBSIDIARY OF MERCKLE GROUP/MERCKLE GMBH, GERMANY, WHICH, IN TURN, IS A GLOBAL GENERIC PHARMACEUTICAL LEADER AND ONE O F THE TOP 15 PHARMACEUTICAL COMPANIES IN THE WORLD. THE TEVA GRO UP SPECIALIZES IN DEVELOPMENT, PRODUCTION AND MARKETING OF A WIDE RAN GE OF GENERIC/BRANDED PRODUCTS AS WELL AS ACTIVE PHARMACE UTICAL INGREDIENTS. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDIN G CONTRACT RESEARCH, BUSINESS DEVELOPMENT PHARMA AND TECHNICAL SERVICES, CONTRACT TESTING AND RELATED SUPPORT SERVICES, APART FROM BEING A CO NTRACT MANUFACTURER FOR ITS AES. A RETURN DECLARING TOTAL INCOME OF RS .33,90,95,876/- WAS FILED REPORTING 13 INTERNATIONAL TRANSACTIONS IN FO RM NO. 3CEB AS UNDER:- TABLE 1 SR.NO. NATURE OF TRANSACTION AMOUNT (RS.) METHOD 1. CONTRACT OF MANUFACTURING 1733908249 TNMM 2. SALE OF FIXED ASSET 25676089 OTHER METHOD 3. PURCHASE OF FIXED ASSET 414908 OTHER METHOD 4. BUSINESS DEVELOPMENT AND PROCUREMENT SUPPORT SERVICES 48099708 TNMM 5. QUALITY ASSURANCE SUPPORT SERVICES 5624152 TNMM 6. REGULATORY SUPPORT SERVICES 23523381 TNMM 7. LABORATORY INFORMATION MANAGEMENT SYSTEMS SUPPORT SERVICES 3240788 TNMM 8. CONTRACT MANUFACTURING SUPPORT SERVICES 22724125 TNMM 9. BUSINESS DEVELOPMENT AND PROCUREMENT SUPPORT SERVICES 4608399 TNMM 10. CONTRACT RESEARCH AND TESTING SERVICES 32091816 6 TNMM 11. ECB LOAN 11674648 CUP 12 REIMBURSEMENT OF EXPENSES 13650244 CUP 13. WOUND CASE SERVICES 3401065 3 ITA NO. 6707/DEL/2016 3. THE ASSESSING OFFICER (AO) REFERRED THE DETERMIN ATION OF ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTION S TO THE TRANSFER PRICING OFFICER (TPO). ALTHOUGH THE ACCOUNTS WERE MAINTAINED ON A CONSOLIDATED BASIS, YET, THE ASSESSEE FILED SEGMENT AL FINANCIAL INFORMATION FOR THE PURPOSES OF TRANSFER PRICING AN ALYSIS. CORRECTNESS OF THE SEGMENTAL INFORMATION HAS NOT BEEN DISPUTED BY THE TPO. SUCH INFORMATION, REPRODUCED FROM THE TPOS ORDER, IS G IVEN AS UNDER : - TABLE - 2 PARTICULARS CONTRACT MANUFACTURING (RS.) CONTRACT RESEARCH & TESTING SERVICES (RS.) BUSINESS DEVELOPMENT & PROCUREMENT SERVICES (RS.) SUPPORT SERVICES BUSINESS SUPPORT SERVICES 1 2 3 4 5 6 SALES/OPERATING INCOME 1733908247 320918167 20324785 28473251 26485595 TOTAL OPERATING EXPENSES 1517543142 276985386 17494525 23372406 24584843 OPERATING PROFIT 216365105 43932781 2830260 5100845 1900752 OP/OC 14.26% 15.86% 16.18% 21.82% 7.73% 4. THE TPO PROPOSED TRANSFER PRICING ADJUSTMENTS TO TALING RS.56,07,13,323 UNDER FOUR HEADS CONSISTING OF RS.2 2,78,671 IN THE INTERNATIONAL TRANSACTION OF `CONTRACT MANUFACTURIN G SUPPORT SERVICES AND BUSINESS DEVELOPMENT AND PROCUREMENT SUPPORT SE RVICES 4 ITA NO. 6707/DEL/2016 [COMPRISING OF INTERNATIONAL TRANSACTIONS AT SERIAL NOS. 5 AND 8 IN THE ABOVE TABLE-1, VIZ., `QUALITY ASSISTANCE SUPPORT S ERVICES AND `CONTRACT MANUFACTURING SUPPORT SERVICES]; RS.55,6 0,75,740 IN THE INTERNATIONAL TRANSACTION OF `CONTRACT MANUFACTURIN G SERVICES [BEING INTERNATIONAL TRANSACTION NO.1 IN TABLE-1 VIZ., `CO NTRACT MANUFACTURING]; RS.18,72,637 IN THE INTERNATIONAL TRANSACTION OF `R EIMBURSEMENT FOR THE REGISTRATION OF PRODUCT; AND RS.4,86,275 IN THE I NTERNATIONAL TRANSACTION OF `REIMBURSEMENT RECEIVABLE FOR WOUND CARE SERVICE S[BEING LAST INTERNATIONAL TRANSACTION IN THE ABOVE TABLE-1, NAM ELY, WOUND CASE SERVICES]. THE AO MADE TRANSFER PRICING ADDITION IN RESPECT OF ALL THESE FOUR INTERNATIONAL TRANSACTIONS IN THE DRAFT ORDER. THE ASSESSEE REMAINED UNSUCCESSFUL BEFORE THE DISPUTE RESOLUTION PANEL (D RP). THAT IS HOW, THE ABOVE ADDITIONS CAME TO BE MADE IN THE FINAL AS SESSMENT ORDER. THE ASSESSEE IS AGGRIEVED AGAINST EACH OF THE ABOVE TRA NSFER PRICING ADDITIONS, WHICH WE WILL TAKE UP, ONE BY ONE, FOR C ONSIDERATION AND DECISION. 5 ITA NO. 6707/DEL/2016 I. CONTRACT MANUFACTURNG SUPPORT SERVICES AND BUSINESS DEVELOPMENT AND PROCUREMENT SUPPORT SERVICES 5. THE TPO TOOK UP INTERNATIONAL TRANSACTIONS AT SERIAL NOS. 5 AND 8 FROM THE ABOVE TABLE-1, VIZ., `QUALITY ASSISTANCE S UPPORT SERVICES AND `CONTRACT MANUFACTURING SUPPORT SERVICES, WHICH WE RE BENCHMARKED BY THE ASSESSEE UNDER THE TRANSACTIONAL NET MARGIN MET HOD (TNMM). THESE SERVICES INCLUDE THIRD PARTY AUDIT AND THIRD PARTY INSPECTION, WHICH THE ASSESSEE DOES FOR ITS AE. AUDIT AND INSPECTION PERTAINS TO CONTRACT MANUFACTURING WHICH IS DONE BY THIRD PARTIES FOR TH E ASSESSEES AE. THE ASSESSEE CHOSE FOUR COMPANIES AS COMPARABLE WITH TH EIR AVERAGE OP/TC AT 12.21%. THE ASSESSEES OWN PROFIT MARGIN WAS 7. 73%. THE TPO REJECTED ALL THE COMPARABLES GIVEN BY THE ASSESSEE FOR THE REASONS GIVEN IN THE ORDER, AGAINST WHICH THE ASSESSEE IS NOT AGG RIEVED. THE TPO CAME TO HOLD THAT THE TNMM WAS NOT THE BEST METHOD FOR T HESE TWO TRANSACTIONS PROCESSED IN A COMBINED MANNER. IT WA S OBSERVED THAT THESE SERVICES WERE ALMOST SIMILAR TO BUSINESS DEVELOPME NT AND PROCUREMENT 6 ITA NO. 6707/DEL/2016 SERVICES [COL. 4 OF TABLE-2] AND SUPPORT SERVICE S [COL. 5 OF TABLE-2], IN RESPECT OF WHICH THE ASSESSEE DECLARED OP/OC AT 16.18% AND 21.82%. AS AGAINST THE ASSESSEES OP/TC AT 7.73% FROM THE I NSTANT COMBINED INTERNATIONAL TRANSACTIONS [COL.6 OF TABLE-2], THE TPO AVERAGED THE ASSESSEES PROFIT MARGIN FROM THE `BUSINESS DEVELOP MENT AND PROCUREMENT SERVICES AND `SUPPORT SERVICES AT 17% , WHICH WAS CONSIDERED AS BENCHMARK FOR THIS INTERNATIONAL TRAN SACTION. BY APPLYING THIS PROFIT RATE AS THE ARMS LENGTH PROFIT, THE TP O WORKED OUT TRANSFER PRICING ADJUSTMENT OF RS.22,78,671/-. THE AO MADE T HE SAID ADDITION, WHICH HAS BEEN ASSAILED BEFORE US. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE LD. AR DID NOT DISPUTE THE ACTION OF THE TPO IN REJECTING ITS COMPARABLES; AVERAGING THE PROFIT MAR GINS EARNED BY THE ASSESSEE ITSELF FROM ITS SEGMENTS OF `BUSINESS DEVE LOPMENT AND PROCUREMENT SERVICES AND `SUPPORT SERVICES TO BE TREATED AS A BENCHMARK; THE FIGURES OF REVENUE AND OPERATING EXP ENSES OF THE INSTANT SEGMENT TAKEN BY THE TPO WITH THE HELP OF WHICH ITS OP/TC WAS TAKEN 7 ITA NO. 6707/DEL/2016 AT 7.73%. IT WAS PUT FORTH THAT THE ASSESSEE VOLUN TARILY MADE TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.10,22,453/- UNDE R THIS SEGMENT, WHICH WAS ADDED IN THE COMPUTATION OF TOTAL INCOME. THE LD. AR ARGUED THAT THIS VOLUNTARY TRANSFER PRICING ADJUSTM ENT WAS NOT CONSIDERED BY THE TPO IN CALCULATING THE ASSESSEES OP/TC AT 7 .73% AND THE SAME BE ALSO TAKEN INTO CONSIDERATION. 7. IT CAN BE SEEN FROM THE COMPUTATION OF TOTAL INCOME THAT THE ASSESSEE DID OFFER ADJUSTMENT OF RS.10,22,453/- AND ADDED THIS AMOUNT TO ITS TOTAL INCOME. ONCE A PARTICULAR TRANSFER PRICI NG ADJUSTMENT HAS BEEN VOLUNTARILY MADE BY THE ASSESSEE, IT REQUIRES TO BE TAKEN INTO CONSIDERATION IN DETERMINING THE ALP OF THE INTERNA TIONAL TRANSACTION. IT CAN BE SEEN THAT THE TPO TOOK OPERATING PROFIT FROM THIS INTERNATIONAL TRANSACTION AT RS.19.00 LAC WITHOUT INCLUDING THE A MOUNT OF SUO MOTU TRANSFER PRICING ADJUSTMENT OFFERED BY THE ASSESSEE UNDER THIS SEGMENT AT RS.10,22,453/-. WE, THEREFORE, SET ASIDE THE IMPUG NED ORDER ON THIS SCORE AND REMIT THE MATTER TO THE FILE OF AO/TPO FO R RE-DETERMINING THE ALP OF THE EXTANT INTERNATIONAL TRANSACTION BY TAKI NG OPERATING PROFIT OF 8 ITA NO. 6707/DEL/2016 THE ASSESSEE FROM THIS SEGMENT AT RS.29,23,205/- (R S.19,00,752/- + RS.10,22,453/-). THE OTHER CALCULATION OF BENCHMARK PROFIT AT 17% MADE BY THE TPO WILL REMAIN UNCHANGED. II. CONTRACT MANUFACTURING 8. THE ASSESSEE DECLARED RS.173,39,08,249/- AS THE VALUE OF THE INTERNATIONAL TRANSACTION OF `CONTRACT MANUFACTURIN G. TNMM WAS APPLIED FOR DEMONSTRATING THAT THIS INTERNATIONAL T RANSACTION WAS AT ALP. THE ASSESSEE COMPUTED ITS OWN PLI (OP/OC) AT 14.26% . FOUR COMPANIES WERE CHOSEN AS COMPARABLE, WHICH HAVE BEE N TABULATED ON PAGE 3 OF THE TPOS ORDER, GIVING AVERAGE OP/OC AT 13.04%. IN VIEW OF THE ASSESSEES HIGHER PLI THAN THE AVERAGE OF COMPA RABLES, IT WAS CLAIMED THAT THIS INTERNATIONAL TRANSACTION WAS AT ALP. THE TPO DOUBTED THE ASSESSEES CONTENTION ABOUT IT BEING A `CONTRACT MANUFACTURER INASMUCH AS IT HAD DISCLOSED SALES IN ITS ACCOUNTS RATHER THAN JOB CHARGES. ON BEING CALLED UPON TO EXPLAIN ITS STAND, THE ASSESSEE SUBMITTED THAT IT MANUFACTURES GENERIC DRUGS FOR IT S AES ON PRINCIPAL TO 9 ITA NO. 6707/DEL/2016 PRINCIPAL BASIS. RAW MATERIAL IS PROCURED BY IT; MA NUFACTURING IS DONE AS PER THE SPECIFICATIONS OF THE AE; AND THE FINAL PRO DUCT IS SOLD TO THE AE. THE ASSESSEE DISTINGUISHED ITSELF, BEING, A CONTRAC T MANUFACTURER FROM A `LOAN AND LICENCE MANUFACTURER IN WHOSE CASE INPUT S ARE PROVIDED BY THE PRINCIPAL AND ONLY THE MANUFACTURING PART IS DO NE BY THE OTHER PARTY. IT WAS CONTENDED THAT THE ASSESSEE MANUFACTURED THE PRODUCTS AT ITS OWN THOUGH AT THE INSTANCE OF ITS AE AND THAT IS THE RE ASON FOR WHICH AMOUNT REALIZED FROM THE AES WAS SHOWN AS SALES. THE TPO NOTICED THAT THE ASSESSEE ALSO DID CONTRACT RESEARCH AND TESTING FOR SALES AND IT HAS THE ENTIRE MANUFACTURING SET UP WHICH IS SUBJECTED TO I NSPECTIONS BY FOREIGN REGULATORS. HE CAME TO HOLD THAT THE ASSESSEE SHOU LD HAVE APPLIED COMPARABLE UNCONTROLLED PRICE (CUP) METHOD FOR BENC HMARKING THIS INTERNATIONAL TRANSACTION. THE ASSESSEES CONTENTIO N THAT NO COMPARABLE INSTANCES WERE AVAILABLE, WAS REJECTED. THE TPO OB SERVED THAT THE ASSESSEE MANUFACTURES GENERIC DRUGS AND SEVERAL SUC H DRUGS MANUFACTURERS ARE AVAILABLE IN THE MARKET FOR COMPA RISON. CONSIDERING CIMS DATABASE AVAILABLE IN THE PUBLIC DOMAIN, THE T PO NOTICED THAT 10 ITA NO. 6707/DEL/2016 SUCH DATABASE PROVIDES DATA OF RETAIL PRICES OF THE DRUGS BY DIFFERENT MANUFACTURERS. HE, THEREFORE, HELD THAT SUCH RETAIL SALE PRICES SHOULD BE COMPARED WITH THE PRICES CHARGED BY THE ASSESSEE FR OM ITS AE WITH REASONABLE ADJUSTMENT. AS THE PRICES UNDER CIMS DAT ABASE ARE AVAILABLE FOR RETAILING, AND THAT TOO IN THE INDIAN MARKET, T HE TPO OPINED THAT SUCH RETAIL PRICES SHOULD BE ADJUSTED TO ARRIVE AT THE E X-FACTORY PRICE, WHICH IS THE POINT OF SALE BY THE ASSESSEE. FOR CONVERTIN G THE RETAIL PRICE FROM CIMS DATABASE TO THE EX-FACTORY PRICE, THE TPO SOUG HT HELP AND GUIDANCE FROM THE PRICING GIVEN BY NATIONAL PHARMA PRICING AUTHORITY. AS PER THE PRICING POLICY PRESCRIBED, THE DIFFERENC E BETWEEN THE RETAIL PRICE AND EX-FACTORY PRICE STOOD AT 39.6% ON ACCOUN T OF RETAIL MARGINS, WHOLESALE MARGIN AND TAXES ETC. HE, THEREFORE, TOO K SOME OF THE PRODUCTS SOLD BY THE ASSESSEE TO ITS AE WITH PARTI CULAR POTENCY, QUALITY AND VALUE AND FOUND THE UNIT PRICE CHARGED. THEN, H E TOOK THE PRICES OF SUBSTITUTED DRUGS FROM CIMS CLASSIFICATION. RETAIL PRICE CHARGED BY INDEPENDENT MANUFACTURERS WAS ADJUSTED TO THE EX-FA CTORY PRICE BY 11 ITA NO. 6707/DEL/2016 REDUCING THE SAME WITH 39.6% AND, THEREAFTER, THE A DJUSTMENT AMOUNTING TO RS.55,60,75,740 WAS WORKED OUT AS UNDER :- TABLE-3 9. THE ASSESSEE COULD NOT CONVINCE THE DRP ON ITS P OINT OF VIEW. AS A CONSEQUENCE, THE AO MADE ADDITION OF RS.55.60 CRO RE, AGAINST WHICH THE ASSESSEE IS BEFORE US. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT THE ASSESSE E APPLIED TNMM TO 12 ITA NO. 6707/DEL/2016 DEMONSTRATE THAT THIS INTERNATIONAL TRANSACTION WAS AT ALP. THE TPO APPLIED THE CUP METHOD AND PROPOSED THE ABOVE AMOUN T OF TRANSFER PRICING ADJUSTMENT. FIRST OF ALL, LET US EXAMINE I F THE EXERCISE UNDERTAKEN BY THE TPO IS IN ACCORDANCE WITH LAW? 11. THE TPO IN THE TABLE-3 ABOVE HAS STARTED WIT H THE PRODUCT SOLD AS `ALLOPURINOL WITH POTENCY OF 300, WHICH THE ASSESS EE SOLD TO MERCKLE GMBH WITH PER UNIT PRICE AT RE.0.85. THE TPO TOOK SUBSTITUTED DRUG OF ALRIK FROM CIMS CLASSIFICATION WITH MARKET PRICE AT RS.3.94 PER UNIT. SUCH PRICE WAS ADJUSTED TO RS.2.38 PER UNIT BY REDU CING 39.6% FOR BRINGING THE AVAILABLE RETAIL PRICE IN CIMS DATABAS E TO EX-FACTORY PRICE, AS IS THE POINT OF SALE MADE BY THE ASSESSEE. IT IS IN THIS WAY, THAT TRANSFER PRICING ADJUSTMENT WAS PROPOSED AT RS.2,71,20,813/- FOR THIS PRODUCT. GOING IN THE SAME MANNER FOR SOME OTHER PRODUCTS SO LD BY THE ASSESSEE TO ITS AE, THE TPO COMPUTED TOTAL TRANSFER PRICING ADJUSTMENT FROM THIS INTERNATIONAL TRANSACTION AT RS.55.60 CRORE. 13 ITA NO. 6707/DEL/2016 12. IT CAN BE SEEN THAT FOR THE PURPOSE OF COMPA RISON OF `ALLOPURINOL SOLD BY THE ASSESSEE, THE TPO HAS TAKEN `ALRIK A S A SUBSTITUTED DRUG WITH SIMILAR POTENCY, WHOSE RETAIL PRICE AS PER TH E DATABASE CHARGED BY CIPLA IS RS.3.94 PER UNIT. THE LD. AR ARGUED THAT THE CIMS DATABASE GIVES ONLY THE CURRENT RETAIL PRICES CHARGED BY SEV ERAL MANUFACTURERS OF THE SAME GENERIC DRUGS WITH THEIR OWN BRAND NAMES A ND, AS SUCH, THE RETAIL PRICES FOR THE EARLIER PERIOD ARE NOT AVAILA BLE. THIS CONTENTION HAS REMAINED UNCONTROVERTED ON BEHALF OF THE REVENUE. T HE LD. AR PLACED ON RECORD CIMS DATA FOR OTHER MANUFACTURERS OF THE SAME PRODUCT, WHICH SHOWS SIGNIFICANT VARIATIONS IN THE RETAIL PRICE. FOR EXAMPLE, A MANUFACTURER `KAMRON IS SELLING ALLOPURINOL WITH T HE TRADE NAME OF ALLGORIC AT THE RETAIL PRICE OF RS.1.20 PER UNIT. S IMILARLY, THE RETAIL PRICE CHARGED BY A MANUFACTURER `UNKIND FOR THE SAME FOR MULATION BUT WITH ITS OWN TRADE NAME IS RS.5.20 PER UNIT. THE RETAIL PRICE CHARGED BY ANOTHER MANUFACTURER, NAMELY, `SANITI WITH SAME FO RMULATION IS RS.4.99 PER UNIT. SIMILARLY, ANOTHER MANUFACTURER `SHINTO B IOTECH IS CHARGING RETAIL PRICE OF RS.12.00 PER UNIT OF THE SAME MEDIC INE. ANOTHER 14 ITA NO. 6707/DEL/2016 MANUFACTURER, NAMELY, `ALNO BIO IS CHARGING FOR S AME PRODUCT AND SAME POTENCY AT RS.5.20 PER UNIT. THE RETAIL PRICE CHARGED BY STILL ANOTHER MANUFACTURER `BIO PLASMA FOR SAME GENERIC PRODUCT WITH SAME POTENCY IS RS.7.00. THE ABOVE DISCUSSION SHOWS THA T THERE IS A WIDE FLUCTUATION IN THE RETAIL PRICE CHARGED BY DIFFEREN T MANUFACTURERS OF THE SAME PRODUCT BUT UNDER THEIR RESPECTIVE BRAND NAMES . THE TPO HAS CONVENIENTLY PICKED UP ONLY ONE PRICE OF RS.3.94 PE R UNIT, CHARGED BY CIPLA, BY IGNORING THAT THE SAME PRODUCT IS BEING S OLD BY OTHER MANUFACTURERS AT VARYING PRICES. HE DID NOT CONSIDE R IT EXPEDIENT TO TAKE INTO CONSIDERATION THE OTHER PRICES OF THE SAME PRO DUCT ALSO AVAILABLE FROM THE SAME DATABASE. SIMILAR IS THE POSITION QUA ALL THE PRODUCTS TAKEN NOTE OF BY THE TPO IN TABLE-3. 13. IT WAS SUBMITTED BY THE LD. AR THAT ALL THE PRICES AVAILABLE IN THE CIMS DATABASE ARE OF FULL-FLEDGED MANUFACTURERS AS AGAINST THE ASSESSEE BEING ONLY A CONTRACT MANUFACTURER. HE VEHEMENTLY A RGUED, AND RIGHTLY SO, THAT A FULL-FLEDGED MANUFACTURER CANNOT BE COMP ARED WITH A CONTRACT MANUFACTURER. WE AGREE THAT WHEREAS A CONTRACT MANU FACTURER WORKS ON 15 ITA NO. 6707/DEL/2016 THE STRENGTH OF A SURE PRE-ORDERS AND ORDINARILY GE TS REMUNERATION AT COST PLUS, AS IS THE CASE HERE, A FULL-FLEDGED MANUFACTU RER HAS TO UNDERTAKE SEVERAL RISKS AND THERE REMAINS UNCERTAINTY ABOUT P ROFIT. ALL THESE FACTORS NECESSARILY PLACE A CONTRACT MANUFACTURER IN A COMP ARTMENT DIFFERENT FROM A FULL-FLEDGED MANUFACTURER. ONE IS NO MATCH T O THE OTHER. 14. COMING BACK TO THE TABLE-3 OF THE TPO, WE FIN D THAT THE FIRST COLUMN IN HORIZONTAL WAY CONTAINS THE NAME OF THE R ESPECTIVE AE TO WHOM THE ASSESSEE SOLD THE PRODUCTS. VERTICALLY THE RE ARE EIGHT BROAD COLUMNS BELOW IT. THOUGH THE TPO HAS COMPUTED TRANS FER PRICING ADJUSTMENT IN RESPECT OF ALL THE EIGHT VERTICAL COL UMNS WITH FURTHER SUB- COLUMNS, BUT ONLY FOUR COLUMNS CONTAIN THE NAME OF THE AE, VIZ., MERCKLE GMBH; RATIOPHARM INC.; TEVA OPERATIONS, POL AND; AND TEVA PHARMACEUTICALS WORKS PVT. LTD. COMPANY. THERE IS N O MENTION OF THE NAME OF THE AE AGAINST THE REMAINING FOUR COLUMNS. THUS IT IS NOT DISCERNIBLE AS TO WHICH ARE THE OTHER INTERNATIONAL TRANSACTIONS IN THESE FOUR COLUMNS, WHICH HAVE BEEN BENCHMARKED. 16 ITA NO. 6707/DEL/2016 15. FURTHER, THE SECOND HORIZONTAL COLUMN IS `PR ODUCTS SOLD TO AE. AGAINST THE NAME OF MERCKLE GMBH, THERE ARE SIX COL UMNS, BUT NAME OF ONLY TWO PRODUCTS HAVE BEEN MENTIONED, THAT IS, ALL OUPURINOL AND SILDENAFIL. THERE IS NO MENTION OF THE PRODUCT IN R EMAINING FOUR COLUMNS, THOUGH TRANSFER PRICING ADJUSTMENT HAS BEE N WORKED FOR ALL THE SIX COLUMNS. THUS, THERE IS COMPLETE DARK ABOUT THE NAME OF THE PRODUCT SOLD BY THE ASSESSEE TO ITS AE. WITH NO INFORMATION ABOUT THE PRODUCT SOLD BY THE ASSESSEE, THE CORRESPONDING COLUMNS OF SUBSTITUTED DRUG ARE ALSO BLANK, ALBEIT TRANSFER PRICING ADJUSTMENT HAS BEEN PROPOSED BY GIVING CERTAIN PRICES FOR COMPARISON. WHERE FROM T HESE MARKET PRICES HAVE EMERGED IS A MYSTERY. ONCE THE PRODUCT SOLD AN D THE CORRESPONDING COMPARABLE PRODUCT ARE NOT ASCERTAINABLE, WE FAIL T O COMPREHEND AS TO HOW ANY COMPARISON CAN POSSIBLY BE MADE FOR MAKING A TRANSFER PRICING ADJUSTMENT UNDER THE CUP METHOD. SIMILAR POSITION PREVAILS IN RESPECT OF TRANSACTIONS IN THE REMAINING SEVEN COLUMNS. 16. THERE IS ONE MORE ASPECT OF THE MATTER. IT HAS BEEN NOTED ABOVE AS AN UNCONTROVERTED POSITION THAT THE CIMS DATA HAS O NLY CURRENT RETAIL 17 ITA NO. 6707/DEL/2016 PRICES OF THE PRODUCTS. IT DOES NOT CONTAIN PRICES OF EARLIER DATES. AS THE TPOS ORDER IS DATED 14.01.2016, IT IS, BUT, NATURA L THAT THE CIMS DATA TAKEN BY HIM WILL ALSO BE FOR THE SAME PERIOD. THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2012-13, WITH THE YEAR ENDIN G 31.03.2012. THUS, IT BECOMES MANIFEST THAT THE TPO COMPARED THE PRICE S CHARGED IN THE SO CALLED COMPARABLE UNCONTROLLED SITUATIONS PREVALENT DURING THE FINANCIAL YEAR 2015-16 WITH THE PRICES CHARGED BY THE ASSESSE E FROM ITS AES DURING THE FINANCIAL YEAR 2011-12. SUCH A TIME GAP FRUSTRATES THE COMPARABILITY, AS THE PRICES OFTEN FLUCTUATE WITH T HE PASSAGE OF TIME. THE ADJUSTMENT MADE BY COMPARING PRICES OF ALTOGETHER D IFFERENT YEARS PATENTLY LACKS CREDIBILITY. 17. THERE IS STILL ANOTHER SIGNIFICANT ASPECT OF TH E MATTER. THE TPO SCALED DOWN THE RETAIL PRICE CHARGED BY COMPARABLES TO EX-FACTORY PRICE BY DEDUCTING 39.6%. THIS 39.6% HAS BEEN ADOPTED B Y TAKING ASSISTANCE FROM THE PRICING POLICY OF ORGANIZATION OF PHARMACE UTICAL PRODUCERS OF INDIA, WHICH IS ANNEXURE-1 TO THE TPOS ORDER. WE HAVE GONE THROUGH THIS DOCUMENT. PARA 8 OF THE SAME DEALS WITH `PRIC ING. IT STATES THAT: 18 ITA NO. 6707/DEL/2016 PRICE CONTROLS ARE EXERCISED ON CERTAIN DRUGS BY VIRTUE OF THE DRUGS (PRICES CONTROL) ORDER 1995 (DPCO), IN THE FRAMEWOR K OF THE ESSENTIAL COMMODITIES ACT. IT HAS FURTHER BEEN STATED IN PAR A 8 THAT THE NPPA MONITORS THE DRUG PRICES BY FIXING AND REVISING THE M. `UNDER THE DPCO-1995, THERE ARE 74 BULK DRUGS AND THEIR FORMUL ATIONS UNDER PRICE CONTROL (KNOWN AS SCHEDULED DRUGS) COVERING SIGNIFI CANT PERCENTAGE OF THE TOTAL PHARMACEUTICAL MARKET IN INDIA. IT FURT HER PROVIDES THAT: ONLY A FEW OTC ACTIVES, E.G., ACETYLSALICYLIC ACID AND E PHEDRINE AND ITS SALTS, FALL UNDER THE CURRENT DPCO CONTROL. IT HAS FURTH ER BEEN ENUMERATED THAT: THE PRICES OF NON-SCHEDULED DRUGS ARE FIXED BY THE MANUFACTURER SUBJECT TO A MAXIMUM INCREASE OF 10% ON THE PREVAIL ING PRICE OF A 12- MONTH PERIOD. ON GOING THROUGH THE CONTENTS OF PAR A 8, IT CLEARLY EMERGES THAT PRICE CONTROLS ARE EXERCISED ON CERTAIN DRUGS AND NOT ALL THE DRUGS. FURTHER, THE PRICE CONTROL MECHANISM UNDER T HIS ORDER APPLIES ONLY WITHIN THE FRAMEWORK OF ESSENTIAL COMMODITIES ACT, WHICH REGULATES THE PRICES CHARGED FROM CUSTOMERS IN INDI A. IN CONTRAST, THE ASSESSEE HAS ONLY EXPORTED ITS COMPLETE RANGE OF PR ODUCTS TO THE AES AND 19 ITA NO. 6707/DEL/2016 THERE IS NO DOMESTIC SALE UNDER THIS INTERNATIONAL TRANSACTION. SINCE THE EXPORT PRICES ARE NOT REGULATED BY THE DPCO, IT CAN HAVE NO BEARING ON THE ARMS LENGTH PRICE OF EXPORTS. IN VIEW OF THIS POSITION, IT BECOMES APPARENT THAT THE COMPARABLE UNCONTROLLED PRICE COM PUTED BY THE TPO BY REDUCING MARGIN OF 39.6% FROM THE RETAIL PRICE C HARGED BY INDIAN MANUFACTURERS, CANNOT BE JUSTIFIED. 18. AT THIS STAGE, IT WOULD BE APT TO NOTE THE MAND ATE OF RULE 10B (1)(A), WHICH CONTAINS THE MODUS OPERANDI FOR DETERMINING ALP UNDER THE CUP METHOD, AS UNDER :- `(I) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFE RRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRAN SACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED ; (II) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFEREN CES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISE S ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFE CT THE PRICE IN THE OPEN MARKET ; (III) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUS E (II) IS TAKEN TO BE AN ARMS LENGTH PRICE IN RESPECT OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN THE INTERNATION AL TRANSACTION ; 20 ITA NO. 6707/DEL/2016 19. SUB-CLAUSE (I) OF RULE 10B(1)(A) PROVIDES FOR IDENTIFYING THE PRICE, INTER ALIA, PAID FOR PROPERTY SOLD. SUB-CLAUSE (II) TALKS OF M AKING ADJUSTMENTS TO SUCH PRICE ON ACCOUNT OF DIFFERENCES , IF ANY, BETWEEN INTERNATIONAL TRANSACTION AND COMPARABLE UNCONTROLL ED TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET. SUB-CLAUSE (III) PROVIDES THAT THE ADJUSTED PRICE ARRIVED AT U NDER SUB-CLAUSE (II) IS CONSIDERED AS ALP IN RESPECT OF THE PROPERTY SOLD. 20. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE CALCULATION OF THE ALP MADE BY THE TPO UNDER THIS M ETHOD IS NOT PASSING THE PRESCRIPTION OF RULE 10B(1)(A). SUB-CLA USE (I) TALKS OF IDENTIFYING THE PRICE CHARGED FOR THE PROPERTY TRAN SFERRED. WE HAVE NOTED ABOVE THAT EVEN THE DESCRIPTION OF PROPERTY TRANSFE RRED I.E. THE DRUGS SOLD IS NOT ASCERTAINABLE IN MOST OF THE CASES. SUB-CLA USE (II) FIRSTLY, REQUIRES DETERMINING THE PRICE CHARGED IN COMPARABLE UNCONTR OLLED SITUATION. HERE AGAIN, SIMILAR POSITION PREVAILS. NOT ONLY THE RE ARE VARYING PRICES CHARGED BY DIFFERENT MANUFACTURERS AS AGAINST THE T PO TAKING ONLY ONE PRICE IN AN AD HOC MANNER, EVEN THE REDUCTION OF MARGIN OF 39.6% FROM 21 ITA NO. 6707/DEL/2016 SUCH RETAIL PRICE FOR GETTING THE EX-FACTORY PRICE, IS NOT SACROSANCT. APART FROM THAT, NO ADJUSTMENT HAS BEEN CARRIED OUT AS PE R SUB-CLAUSE (II) ON ACCOUNT OF EXPORTS MADE BY THE ASSESSEE VIS--VIS THE COMPARABLE PRICES RELATING TO DOMESTIC SALES. THUS, IT IS CLEAR FROM THE ABOVE DISCUSSION THAT THE EXERCISE DONE BY THE TPO IN DETERMINING TH E ALP OF THE INTERNATIONAL TRANSACTION OF `CONTRACT MANUFACTURIN G UNDER THE CUP METHOD DOES NOT MERIT ACCEPTANCE. 21. NOW, WE TURN TO THE TNMM APPLIED BY THE ASSESSE E AS THE MOST APPROPRIATE METHOD. 22. THE LD. AR CONTENDED THAT THE ASSESSEE, AS A `C ONTRACT MANUFACTURER, IS COMPENSATED BY ITS AES WITH COST PLUS ARMS LENGTH PROFIT MARK-UP. AS AGAINST THE GOODS SOLD TO SEVERA L AES, THE LD. AR COULD PRODUCE AGREEMENTS WITH ONLY TWO AES. WHEN W E CONSIDER ANNEXURE-19 AT PAGE 216 OF THE PAPER BOOK, BEING TH E DETAILS OF INTERNATIONAL TRANSACTIONS, THE EXPLANATION SO GIVE N DOES NOT PRIMA FACIE APPEAR TO BE CORRECT. THIS PAGE, INTER ALIA, CONTAINS A LIST OF DRUGS 22 ITA NO. 6707/DEL/2016 SOLD/CONTRACT MANUFACTURED BY THE ASSESSEE TO ITS A ES. NORMALLY, PER UNIT COST OF PRODUCTION, WHICH CONTAINS THE EFFECT OF THE FIXED, SEMI-FIXED AND VARIABLE COSTS, REMAINS THE SAME. IF ARMS LENG TH MARK-UP IS EARNED ON SUCH COSTS AS IS CLAIMED IN THIS CASE, THEN IT W ILL BE SOME REASONABLE PERCENTAGE ON SUCH COSTS. ONCE COSTS INCURRED ARE S AME FOR THE SIMILAR GOODS PRODUCED AND SOLD TO ALL THE AES AND MARK-UP HAS ALSO BEEN SETTLED AS ARMS LENGTH, THEN BY AND LARGE THE SALE PRICE SHOULD REMAIN CONSISTENT OR IN CLOSE RANGE TO EACH OTHER FOR DIFF ERENT AES. TURNING TO THE TABLE ON PAGE 216 OF THE PAPER BOOK, WE FIND TH AT THERE IS ONE PRODUCT, DONEPEZIL WITH POTENCY OF 10 MG., SOLD BY THE ASSESSEE TO ITS DIFFERENT AES. PER UNIT PRICE CHARGED FOR THIS PR ODUCT FROM MERCKLE GMBH, GERMANY IS RS.13.22. THE SAME ANNEXURE SHOWS THE PER UNIT PRICE CHARGED FOR THE SIMILAR PRODUCT AT RS.9.64 FR OM RATIOPHARM INTERNATIONAL GMBH, GERMANY AND RS.2.67 PER UNIT F ROM RATIOPHARM INC. CANADA. WE FAIL TO APPRECIATE AS TO HOW THE AS SESSEE CAN JUSTIFY AS BEING COMPENSATED BY ITS AES WITH COST PLUS ARMS L ENGTH MARK-UP IN THE FACE OF SUCH A WIDE VARIATION IN THE PRICE CHA RGED FOR THE SAME DRUG 23 ITA NO. 6707/DEL/2016 FROM DIFFERENT AES. IN THE ABSENCE OF ALL THE AGREE MENTS PRODUCED BEFORE US, WE ARE UNABLE TO VERIFY THIS CONTENTION. 23. THERE IS ONE MORE INTEREST ASPECT OF THE MAT TER. IT HAS BEEN NOTICED ABOVE THAT THE ASSESSEE, UNDER THIS INTERNATIONAL T RANSACTION, CHOSE FOUR COMPANIES AS COMPARABLE, NAMELY, BROOKS LABORATORIE S LTD. (OP/OC AT 21.56%), SHARON BIO-MEDICINE LTD. (OP/OC AT 12.37%) , SMRUTHI ORGANICS LTD. (OP/OC AT 10.80%) AND NATURAL CAPSULE S LTD. (OP/OC AT 7.43%). WE HAVE NOTED SUPRA WITH APPROVAL THE ARGUMENT OF THE LD. AR THAT A FULL-FLEDGED MANUFACTURER CANNOT BE COMPARED WITH A CONTRACT MANUFACTURER. NOW, LET US EXAMINE THE NATURE OF BUS INESS CARRIED OUT BY THESE COMPANIES CHOSEN BY THE ASSESSEE AS COMPARAB LE IN JUSTIFYING THE DETERMINATION OF ALP OF THIS INTERNATIONAL TRANSACT ION UNDER THE TNMM. ON REQUISITION, THE LD. AR PLACED ON RECORD THE ANN UAL REPORTS OF THESE FOUR COMPANIES. THE FIRST COMPANY IS BROOKS LABORAT ORIES LTD., WHO IS ADMITTEDLY NOT A CONTRACT MANUFACTURER, BUT, A FULL -FLEDGED MANUFACTURER. SIMILAR IS THE POSITION REGARDING SECOND COMPANY, NAMELY, SHARON BIO MEDICINE LTD. THE ANNUAL REPORT OF THIRD COMPANY, NAMELY, SMRUTHI 24 ITA NO. 6707/DEL/2016 ORGANICS LTD., HAS ALSO BEEN PLACED ON RECORD. PAGE 14 OF THIS REPORT INDICATES THAT THIS COMPANY IS ALSO A CONTRACT MANU FACTURER, IN ADDITION TO DOING NON-CONTRACT MANUFACTURING. IT TRANSPIRES FROM ITS ANNUAL REPORT, AS HAS ALSO BEEN CANDIDLY ADMITTED BY THE LD. AR AS WELL, THAT THERE IS NO SEGMENTAL INFORMATION AVAILABLE IN RESPECT OF `CONT RACT MANUFACTURING. AS SUCH, THIS COMPANY ALSO CEASES TO BE COMPARABLE FOR BENCHMARKING. SIMILAR IS THE POSITION REGARDING LAST COMPANY, NAM ELY, NATURAL CAPSULES LTD., WHICH AGAIN HAS NO SEPARATE SEGMENTAL INFORMA TION ABOUT THE CONTRACT MANUFACTURING SEGMENT. THIS DIVULGES THAT GOING BY THE YARDSTICK OF THE ARGUMENT OF THE LD. AR, WHILE OPPO SING THE ACTION OF THE TPO, FOR NOT TREATING FULL-FLEDGED MANUFACTURERS A S COMPARABLE WITH CONTRACT MANUFACTURER, NONE OF THESE FOUR COMPANIES CHOSEN BY IT CAN BE CATEGORIZED AS COMPARABLE. THE FURTHER ARGUMENT THA T COMPARABILITY CAN BE COMPROMISED UNDER THE TNMM, IN OUR CONSIDERED OP INION, DOES NOT HOLD WATER, IN VIEW OF THE DIRECT JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN RAMPGREEN SOLUTIONS PVT. LTD VS. CIT (2015) 377 I TR 533 (DEL) , IN WHICH IT HAS BEEN HELD THAT SELECTION OF COMP ARABLES DOES 25 ITA NO. 6707/DEL/2016 NOT DIFFER WITH THE METHOD ADOPTED AND COMPARABLES HAVE TO BE SELECTED ON THE BASIS OF SIMILARITY, EVEN UNDER THE TNMM. BY FINDING ALL THE FOUR COMPANIES AS INCOMPARABLE, THERE DOES NOT REMA IN EVEN A SINGLE COMPARABLE CASE, WHOSE OPERATING PROFIT MARGIN COUL D BE CONSIDERED FOR BENCHMARKING. ERGO, IT IS VIVID FROM THE ABOVE DISC USSION THAT THE ASSESSEES DETERMINATION OF ALP OF THE INTERNATIONA L TRANSACTION OF `CONTRACT MANUFACTURING IS CREPT WITH SEVERAL FLAW S, WHICH RENDERS IT UNACCEPTABLE. 24. WE ARE BACK TO SQUARE ONE. THE POSITION IS T HAT NEITHER THE TPOS DETERMINATION OF ALP UNDER THE CUP METHOD NOR THE A SSESSEES DETERMINATION OF ALP UNDER THE TNMM, CAN BE ACCEPTE D FOR THE REASONS DISCUSSED ABOVE. THUS, WE ARE LEFT WITH NO ALTERNA TIVE BUT TO SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR REDOING THE EXERCISE AFRESH. IN SUCH EXERCISE, THE FIRST QUESTION BEFORE THE TPO WILL BE TO APPLY WHICH METHOD AS THE MOST A PPROPRIATE METHOD FOR DETERMINING THE ALP OF THIS INTERNATIONAL TRANS ACTION? 26 ITA NO. 6707/DEL/2016 25. USUALLY CUP IS A METHOD OF FIRST CHOICE BEC AUSE IT SEEKS TO DIRECTLY COMPARE THE PRICE CHARGED/PAID FOR GOODS W ITH THE PRICE CHARGED/PAID IN A COMPARABLE UNCONTROLLED TRANSACTI ON. COMPARISON OF PRICE PAID FOR GOODS PURCHASED IN CONTRADISTINCTION TO THE PROFIT RATE IN OTHER METHODS - GROSS OR OPERATING - OFFERS BEST CO MPARISON AS SOME TIMES PROFIT MAY BE INFLUENCED BY CERTAIN EXTRANEOU S FACTORS THEREBY REDUCING THE RELIABILITY OF COMPARABILITY. HOWEVER , IN ORDER TO SUCCESSFULLY APPLY THIS METHOD, IT IS SINE QUA NON THAT THE PRODUCTS UNDER COMPARABLE UNCONTROLLED TRANSACTION AND THE OTHER A TTENDING FACTS AND CIRCUMSTANCES, MUST BE SIMILAR. IF THESE FACTORS IN A COMPARABLE UNCONTROLLED TRANSACTION ARE NOT SIMILAR OR NO ADJU STMENT CAN BE CARRIED OUT DUE TO DISTINGUISHING FACTORS, THEN, THE CUP CE ASES TO BE MOST APPROPRIATE METHOD. WE HAVE SUPRA TAKEN NOTE OF THE REASONS WHICH HAVE MARRED THE APPLICATION OF THE CUP METHOD BY TH E TPO IN THE GIVEN CIRCUMSTANCES. BUT THE FACT THAT THIS METHOD HAS BE EN APPLIED IN AN INCORRECT MANNER, DOES NOT IPSO FACTO REDUCE ITS RELEVANCE. 27 ITA NO. 6707/DEL/2016 26. WHILE DEALING WITH THE EARLIER INTERNATIONAL TR ANSACTION OF `BUSINESS SUPPORT SERVICES, WE HAVE NOTICED THAT T HE ASSESSEE CARRIED OUT AUDIT AND INSPECTION PERTAINING TO CONTRACT MAN UFACTURING DONE BY THIRD PARTIES IN INDIA FOR ITS AE. THIS PRIMA FACIE SHOWS THAT THERE ARE CERTAIN OTHER THIRD PARTIES IN INDIA DOING CONTRACT MANUFACTURING FOR THE ASSESSEES AE. THE TPO HAS NOT TAKEN COGNIZANCE OF THESE TRANSACTIONS FOR ASCERTAINING IF THEY ARE COMPARABLE. AS THEY AR E ALSO CONTRACT MANUFACTURERS ENGAGED IN MANUFACTURING DRUGS FOR TH E ASSESSEES AE IN INDIA, THERE MAY BE A POSSIBILITY OF FINDING COMPAR ABLE UNCONTROLLED TRANSACTIONS IN SUCH PARTIES, WHICH SKIPPED THE ATT ENTION OF THE TPO. IF OTHER THINGS ARE SIMILAR, THEN, THE PRICE CHARGED B Y SUCH THIRD PARTIES FROM THE CONTRACT MANUFACTURING DONE BY THEM FOR TH E ASSESSEES AE, CAN CONSTITUTE A GOOD COMPARABLE UNCONTROLLED TRANS ACTION. HOWEVER, THIS REQUIRES INVESTIGATION AT THE END OF THE AO/TP O BEFORE JUMPING TO ANY CONCLUSION AS TO THE COMPARABILITY OR OTHERWISE OF SUCH CONTRACT MANUFACTURERS WITH THE ASSESSEE. WE, THEREFORE, HOL D THAT IN THE FRESH EXERCISE TO BE UNDERTAKEN BY THE AO/TPO, HE SHOULD FIRSTLY CONSIDER IF 28 ITA NO. 6707/DEL/2016 THE CUP METHOD CAN BE APPLIED W.R.T. THE CONTRACT MANUFACTURING DONE BY THE THIRD PARTIES IN INDIA FOR THE ASSESSEES AE . 27. IF EITHER THE RELEVANT CUP DATA OF SUCH CON TRACT MANUFACTURERS IS NOT AVAILABLE OR THEIR TRANSACTIONS TURN OUT TO BE INCOMPARABLE, THEN, THE AO/TPO SHOULD APPLY THE TNMM FOR DETERMINING THE AL P OF THIS INTERNATIONAL TRANSACTION. WE HAVE FOUND ABOVE THAT ALL THE FOUR COMPANIES CHOSEN BY THE ASSESSEE DO NOT QUALIFY TO BE CONSIDERED AS COMPARABLE. THE TPO, IN A SITUATION WARRANTING THE APPLICATION OF THE TNMM, SHOULD SELECT FRESH COMPANIES, ENGAGED IN CON TRACT MANUFACTURING, WHICH ARE REALLY COMPARABLE AND ARE NOT FULL-FLEDGED MANUFACTURERS. NEEDLESS TO SAY, THE ASSESSEE WILL B E ALLOWED A REASONABLE OPPORTUNITY OF BEING HEARD IN SUCH FRESH DETERMINATION. III. REIMBURSEMNT FOR REGISTRATION OF PRODUCTS 28. THE NEXT INTERNATIONAL TRANSACTION UNDER DISPUT E IS `REIMBURSEMENT FOR THE REGISTRATION OF PRODUCT. THE TPO OBSERVED ON PAGE 12 OF HIS ORDER THAT THE PRODUCTS WHICH ARE MANUFACTURED AS P ER AES 29 ITA NO. 6707/DEL/2016 SPECIFICATIONS ARE REGISTERED BY THE ASSESSEE AND O NLY THEN ITS OWNERSHIP IS PASSED ON TO THE AE. HE NOTICED THAT A SUM OF R S.1,31,32,100/- WAS RECOVERED UNDER THIS TRANSACTION FROM THE AES WITHO UT ANY MARK UP. CONSIDERING THE PROFIT MARGIN FROM THE CONTRACT MAN UFACTURING SEGMENT AT 14.26% AS A BENCHMARK, THE TPO PROPOSED TRANSFER PRICING ADJUSTMENT OF RS.18,72,637/- FROM THIS INTERNATION AL TRANSACTION, WHICH WAS EVENTUALLY MADE BY THE AO IN HIS FINAL ORDER. 29. HAVING GONE THROUGH THE RELEVANT MATERIAL ON RE CORD, WE FIND THAT ANNEXURE-7 ON PAGE 227 OF THE PAPER BOOK CONTAINS D ETAILS OF `REIMBURSEMENT OF EXPENSES (RECEIVED). THERE IS A N ENTRY DATED 27.4.2011 FOR A SUM OF RS.1,31,32,100/- WITH THE NA RRATION REIMBURSEMENT OF REGISTRATION FEES PAID FOR THE PR ODUCT. THE TPO HAS PROPOSED TRANSFER PRICING ADJUSTMENT ONLY FOR THIS ENTRY. APART FROM THIS ENTRY, THERE ARE CERTAIN OTHER RELATED COSTS INCURR ED BY THE ASSESSEE, ON WHICH THE ASSESSEE CLAIMS TO HAVE EARNED MARK-UP. S UCH A CONTENTION HAS NOT BEEN DISPUTED BY THE TPO. THE ONLY AMOUNT C ONSIDERED BY THE TPO IS THE `REGISTRATION FEES PAID FOR THE PRODUCT S AT RS.1,31,32,100/-. 30 ITA NO. 6707/DEL/2016 AS THIS IS A COST INCURRED BY THE ASSESSEE FOR AND ON BEHALF OF ITS AE AND THE SAME WAS RECOVERED WITHOUT RENDERING ANY SERVIC E QUA THE PAYMENT OF REGISTRATION FEES, IN OUR CONSIDERED OPINION THI S AMOUNT WAS RIGHTLY CLAIMED AS `REIMBURSEMENT OF EXPENSES ON WHICH NO MARK-UP COULD HAVE BEEN EARNED. WE, THEREFORE, HOLD THAT THE ADD ITION OF RS.18,72,637/- WAS WRONGLY MADE. THE SAME IS DIREC TED TO BE DELETED. IV. REIMBURSEMENT FOR WOUND CARE SERVICES 30. THE LAST TRANSFER PRICING ADDITION IS OF RS.4,8 6,275/- ON THE INTERNATIONAL TRANSACTION OF `REIMBURSEMENT RECEIVA BLE FOR WOUND CARE SERVICES. THE TPO NOTED ON THE LAST PAGE OF HIS O RDER THAT THE ASSESSEE INCURRED A SUM OF RS.34,10,065/- IN THE FORM OF SEL LING EXPENSES, WHICH WERE CATEGORIZED UNDER THE HEAD WOUND CARE. APPLY ING THE SAME MARGIN OF 14.26%, THE TPO COMPUTED TRANSFER PRICING ADJUSTMENT OF RS.4,86,275/-, BEING THE EXCESS OF ALP OVER ZERO MA RK-UP CHARGED. 31. HAVING HEARD BOTH THE SIDES AND PERUSED THE REL EVANT MATERIAL ON RECORD, WE FIND THAT THE NATURE OF SUCH REIMBURSEME NT OF EXPENSES IS NOT 31 ITA NO. 6707/DEL/2016 PROPERLY COMING OUT FROM THE ORDER OF THE TPO. THE RIVAL PARTIES ALSO COULD NOT THROW PROPER LIGHT ON THE EXACT NATURE OF THE AMOUNT OF RS.34.10 LAC. UNDER THESE CIRCUMSTANCES, IT CANNOT BE PROPERLY ASCERTAINED AS TO WHETHER THE AMOUNT OF RS.34.10 LA C IS A COST INCURRED BY THE ASSESSEE WITHOUT RENDERING ANY SERVICES TO I TS AE OR ITS INVOLVEMENT WAS THERE IN INCURRING SUCH EXPENSES. IF THE ASSESSEES INVOLVEMENT WAS THERE APART FROM MERE INCURRING, AN D THERE IS NO COMPENSATION FOR IT, THEN, NATURALLY, SOME MARK-UP IS REQUIRED AND VICE VERSA . IN THE ABSENCE OF THIS VITAL INFORMATION, WE SET ASIDE THE IMPUGNED ORDER ON THIS SCORE AND REMIT THE MATTER T O THE FILE OF AO/TPO FOR RE-DOING IT AFRESH. 32. TO SUM UP, WE SET ASIDE THE IMPUGNED ORDER ON T HE ISSUE OF ADDITION TOWARDS TRANSFER PRICING ADJUSTMENT ON THR EE INTERNATIONAL TRANSACTIONS OF `CONTRACT MANUFACTURING SUPPORT SER VICES AND BUSINESS DEVELOPMENT AND PROCUREMENT SUPPORT SERVICES; `CON TRACT MANUFACTURING SERVICES; AND `REIMBURSEMENT RECEIVA BLE FOR WOUND CARE SERVICES AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR FRESH 32 ITA NO. 6707/DEL/2016 DETERMINATION OF THEIR ALP IN CONSONANCE WITH OUR A BOVE DIRECTIONS. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REA SONABLE OPPORTUNITY OF BEING HEARD IN SUCH FRESH PROCEEDINGS. 33. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON 06.03.201 7. SD/- SD/- [KULDIP SINGH] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 06 TH MARCH, 2017. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.