PFIZER PRODUCTS INDIA PRIVATE LIMITED,MUMBAI, MAHARASHTRA V. ASSESSMENT UNIT, INCOME TAX DEPARTMENT AND THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 14(1)(1), MUMBAI

ITA 4391/MUM/2024

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The case involves Pfizer Products India Private Limited appealing against the Transfer Pricing (TP) adjustment of Rs. 11,88,31,332 concerning international transactions for the purchase of finished goods for the Assessment Year 2020-21. The primary grievances included the erroneous computation of the operating margin, incorrect inclusion of companies that did not meet the turnover filter, and the inclusion of companies that failed the related party transactions filter. The Tribunal found that the TPO incorrectly adjusted the purchase price adjustment to sales instead of cost of goods sold, which was against accounting principles. The Tribunal also noted the improper application of the turnover filter and the need for a re-evaluation of related party transactions based on accurate financial data.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 469878 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-02-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: J
• Assessment Year: misc
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PANKAJ KUMAR; DR
• Assessee Lawyers: KETAV VED AW RIDDHI JAIN; ARS
• Keywords: Transfer pricing; International transaction; Related party transaction
• Section: 144

Judgement Text

"| आयकर अपीलीय अिधकरण \fा यपीठ, मुंबई | IN THE INCOME TAX APPELLATE TRIBUNAL “G” BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, HON’BLE VICE PRESIDENT & SHRI NARENDRA KUMAR BILLAIYA, HON’BLE ACCOUNTANT MEMBER I.T.A. No. 4391/Mum/2024 Assessment Year: 2020-21 Pfizer Products India Private Limited 1802/1901, The Capital Plot No. C-70, G Block Bandra Kurla Complex Bandra (East) Mumbai - 400051 [PAN: AADCP8985B] Vs Assessment Unit, Income Tax Department अपीला थ\u0016/ (Appellant) \u0017\u0018 यथ\u0016/ (Respondent) Assessee by : Shri Ketav Ved a/w Ms. Riddhi Jain, A/Rs Revenue by : Shri Pankaj Kumar, CIT D/R सुनवाई की तारीख/Date of Hearing : 05/02/2025 घोषणा की तारीख /Date of Pronouncement: 11/02/2025 आदेश/O R D E R PER NARENDRA KUMAR BILLAIYA, AM: This appeal by the assessee is preferred against the order dated 29/06/2024 framed u/s 144 r.w.s. 144C(13) r.w.s 144B of the Act, pertaining to AY 2020-21. 2. The sum and substance of the grievance of the assessee can be summarized to the Transfer Pricing (TP) adjustment of Rs. 11,88,31,332/- in respect of the international transactions pertaining to purchase of finished goods. 3. The grievance of the assessee relates to the erroneous computation of assessee’s operating margin by considering purchase price adjustment as part of the operating income, erroneous inclusion of companies failing the turnover filter applied by the TPO and erroneous inclusion of companies failing the related party transactions. I.T.A. No. 4381/Mum/2024 2 4. Representatives of both the sides were heard at length. Case records carefully perused and the relevant documentary evidence brought on record, duly considered in the light of Rule 18(6) of the ITAT Rules, 1963. 5. Briefly stated, the facts of the case are that the assessee is a wholly owned subsidiary of Pharmacia & Upjohn LLC, Kalamazoo USA. The ultimate parent company is Pfizer Inc., USA. The assessee is engaged in trading of pharmaceutical products and providing business support services to its group companies. The list of associated enterprises (AEs) with whom the assessee has entered into international transactions, are as under:- SI. No. Name of the AE Nature of Relationship with AE Brief Description of Business of AE 1 Pfizer Innovative Supply Point Int. SPRL Any person or enterprise holds, directly or indirectly, shares carrying not less than twenty- six percent of the voting power in each of such enterprises Manufacturing and Trading in Pharma Products 2 Pfizer Service Co BVBA Any person or enterprise holds, directly or indirectly, shares carrying not less than twenty- six percent of the voting power in each of such enterprises Manufacturing and Trading in Pharma Products 3 Wyeth-Ayerst (Asia) Ltd - Taiwan Branch Any person or enterprise holds, directly or indirectly, shares carrying not less than twenty- six percent of the voting power in each of such enterprises Manufacturing and Trading in Pharma Products 4 Pfizer Worldwide Services Any person or enterprise holds, directly or indirectly, shares carrying not less than twenty- six percent of the voting power in each of such enterprises Business Support Service Provider 5 Pfizer Indonesia Any person or enterprise holds, directly or indirectly, shares carrying not less than twenty- six percent of the voting power in each of such enterprises Manufacturing and Trading in Pharma Products 6 Pfizer Global Trading Any person or enterprise holds, directly or indirectly, shares carrying not less than twenty- six percent of the voting power in each of such enterprises Manufacturing and Trading in Pharma Products 7 Pfizer Enterprises SARL Any person or enterprise holds, directly or indirectly, shares carrying not less than twenty- six percent of the voting power in each of such enterprises Manufacturing and Trading in Pharma Products I.T.A. No. 4381/Mum/2024 3 6. The international transactions entered into during the year under consideration are as under:- 7. The method applied for the determination of ALP is TNMM and there is no dispute insofar Most Appropriate Method (MAM) is concerned. The quarrel revolves around the international transactions of purchase of finished goods for which the margin of the assessee as per the Transfer pricing report (TPSR) is 6.30% whereas the same has been I.T.A. No. 4381/Mum/2024 4 determined by the TPO at 8.59%. The assessee selected the following comparable in its TPSR:- 8. Comparable companies as per the TP Order are as under:- I.T.A. No. 4381/Mum/2024 5 9. And the final set of comparable considered in final assessment order are as under:- I.T.A. No. 4381/Mum/2024 6 10. In light of the above, the TP adjustment made by the TPO is as under:- 11. The first grievance is the erroneous recomputation of assessee’s operating margin by considering purchase price adjustment as part of operating income. While computing its operating profit for the year under consideration, the assessee had reduced the purchase price adjustment from the operating cost since the said amount was received from the AE as an adjustment to the purchase price. The facts show that the assessee had entered into a distribution agreement dated 01/04/2017 with both AEs, namely, Pfizer Service Co. BVBA and Pfizer Innovative Supply Point Int. SPRL. We find that in terms of the above mentioned agreements, the assessee is entitled to the retrospective adjustment in purchase price if the Arm’s length target operating margin at year end is not achieved in case of purchase of products. The relevant clause of the agreement read as under:- \"...On intervals agreed upon by the Parties (but in no event of less frequently than once each Financial Year), the Parties will review the LMC's Operating Margin (with respect to the entire Product Portfolio) to determine whether LMC has erred an Operating Margin within the Arm's Lenth Operating Margin Range. If the Operating Margin earned by LMC at the Product Portfolio level is outside the Arm's Length Operating Margin Range, the Parties will agree to a retroactive increase or I.T.A. No. 4381/Mum/2024 7 decrease of the Effective Price with respect to selected Products, as applicable, in an amount that will cause LMC to have earned an Operating Margin at the Product Portfolio level that is within the Arm's Length Operating Margin Range. Such adjustments to the Effective Price of such selected Products may be performed in any manner permitted under applicable law.\" 12. We further find that the assessee has received an amount of Rs. 21,34,39,034/- as purchase price adjustment from one of its AE, namely, Pfizer Service Co. BVBA and accordingly in its TPSR, the assessee has reduced the purchase price adjustment from the cost of goods sold and worked out its operating cost and the operating margins. Before the TPO, the assessee had explained the treatment given by its to the said purchase price adjustment and the TPO never disputed the calculation of operating margins of the assessee. However, while framing the TP order, the TPO reduced the purchase price adjustment from the sales and re- computed the profit margin at 6.05%. The objections were raised before the DRP but the DRP was of the firm belief that the impugned agreements with the AE are nothing but a colorable device. The DRP presumed that the agreement provides for an alteration to margin/assured margin whereas the agreement simply provides that if the operating margin at the product portfolio level is outside the Arm’s length range then the parties would agree to a retroactive decrease of the price in respect of the products. 13. We are of the considered view that, the observation that the agreement is a colorable device is not acceptable. Thus, solely based on the assumption and surmises and conjectures of the DRP. Moreover, if any adjustment has to be made toward purchase of finished goods then, obviously, the said adjustment will be towards the purchase price as done by the assessee whereas the TPO has done the adjustment to the I.T.A. No. 4381/Mum/2024 8 sales of the assessee which is against the accounting principles. We are of the view that reducing the credit from the cost of goods sold is because the said reduction is clearly a reduction in the purchase price both as per the agreement as well as the credit memo. We find that the assessee forwarded the credit memos raised by the purchase price agreement which evidence the fact that adjustment in price was clearly allocated against the original invoices and underlying product. 14. In our considered view, the reduction for the purchase price adjustment can only be done to the cost of goods sold/operating cost and not to the operating revenue as is done by the TPO/DRP. The aforementioned discussion can be summarized into the following margin computations:- 15. From the above it can be gathered that the Arm’s length margin of the assessee works out to 6.30% which falls within the Arm’s length I.T.A. No. 4381/Mum/2024 9 range of the comparable companies selected by the TPO. We direct the AO/TPO accordingly. 16. The next grievance relates to the inclusion of companies failing turnover filter applied by the TPO. 17. We find that the TPO had applied turnover filter to accept/reject comparable companies having turnover of 1/10 lesser and greater. Since the turnover of the assessee for the relevant segment was Rs. 510.91 Crores hence the turnover files would be between Rs.51.09 Crore (1/10 lower) and Rs.5109.10 Crores (1/10 greater). Having applied this turnover filter, the TPO grossly erred in taking the following companies as comparables which fails the turnover filter applied by the TPO:- Name of the company Turnover Balaxi Pharmaceuticals Ltd. 45.63 Crores German Homeopathic Distributors Pvt. Ltd. 45.86 Crores 18. When the objections were raised before the DRP, the DPR rubbished the objections by stating that the turnover of the above two comparable companies are marginally lower. We do not find any logic in this reasoning. Once the TPO himself has applied a turnover filter, then he should not tweak the filter to justify inclusion of a particular company. We accordingly direct the TPO/AO to exclude the aforementioned two companies failing the turnover filter. 19. The next grievance relates to the erroneous inclusion of the companies failing related party transactions. These companies are Teva Pharmaceuticals & Chemical Inds. India Pvt. Ltd. and Nureca Limited. 20. We find that the assessee had applied a filter of selecting companies having ratio of RPT to total income less than 25% which has been accepted by the TPO also. The aforementioned two companies have RPT I.T.A. No. 4381/Mum/2024 10 as percentage of sales at 93% and 209.28% respectively. Both these companies failed the related party transaction filter. 20.1. However, we find that the TPO has applied the RPT filter by working the figures from the database whereas the same should have been taken from the financials of the aforementioned two companies. Therefore, in the interest of justice and fairplay, we restore this issue to the file of the TPO. The assessee is directed to furnish the financials of the aforementioned two companies and the TPO is directed to decide the RPT in light of the financials of the two companies. Needless to mention that the assessee will be given reasonable and adequate opportunity of being heard. 21. With the above directions, in respect of the third grievance, the appeal of the assessee is allowed. 22. In the result, appeal of the assesse is allowed. Order pronounced in the Court on 11th February, 2025 at Mumbai. Sd/- Sd/- (SAKTIJIT DEY) (NARENDRA KUMAR BILLAIYA) VICE-PRESIDENT ACCOUNTANT MEMBER Mumbai, Dated 11/02/2025 *SC SrPs *SC SrPs *SC SrPs *SC SrPs I.T.A. No. 4381/Mum/2024 11 आदेश की \u0015ितिलिप अ\u001aेिषत /Copy of the Order forwarded to : 1. अपीलाथ\u001c / The Appellant 2. \u0015\u001dथ\u001c / The Respondent 3. संबंिधत आयकर आयु\" / Concerned Pr. CIT 4. आयकर आयु\" ) अपील ( / The CIT(A)- 5. िवभागीय \u0015ितिनिध ,आयकर अपीलीय अिधकरण, मुंबई /DR,ITAT, Mumbai, 6. गाड& फाई/ Guard file. आदेशानुसार/ BY ORDER, TRUE COPY Assistant Registrar आयकर अपीलीय अिधकरण ITAT, Mumbai "