Meyer Organics Private Limited

Meyer Organics Private Limited
Transfer Pricing Study Report
Assessment Year 2013-14
Table of Contents
Sr. No. Particulars Page No. 1 Abbreviations and Acronyms 2 Executive Summary 3 Corporate Background 4 Industry Overview 5 Specified Domestic Transactions 6 Functions, Assets and Risks Analysis 7 Economic Analysis 8 Findings 9 Disclaimer 10 Relevant Transfer Pricing Regulations 11 Index of Principal Documents 1.
Abbreviations and Acronyms
The following abbreviations and acronyms have been defined for use throughout this study report.
Abbreviations and Acronyms Full Name AE Associated Enterprise CUPM Comparable Uncontrolled Price Method CPM Cost Plus Method FAR analysis Functions, Assets and Risks analysis FY 2012-13 Financial year ended March 31, 2013 Guidance Note Guidance Note on report on international transactions under section 92E of the Income Tax Act, 1961 issued by the Institute of Chartered Accountants of India Meyer Meyer Organics Private Limited OECD Guidelines Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations published by the Organisation for Economic Cooperation and Development NPM Net Profit Margin PLI Profit level indicator PSM Profit Split Method RPM Resale Price Method TNMM Transactional Net Margin Method The Act Income-tax Act, 1961 The Firm Sukhbir & Associates The Study Report The Transfer Pricing Study Report The Rules Income-tax Rules, 1962 VB (UK) Vitabiotics Limited, London

2. Executive Summary

2.1. Meyer has engaged the services of the Firm to prepare the Study Report documenting the review of the arm’s length nature of its international transactions with its AEs during FY 2012-13, from an Indian transfer pricing perspective.

2.2. Meyer Organics is one of the leading pharmaceutical manufacturers in India, founded in 1982 in technical collaboration with Omega – Meyer Ltd., Jersey (Br. Isles). Meyer has manufactured innovative health care products for over three decades. It is headquartered in Mumbai, India with global presence in more than 30 countries. Through shared marketing know-how and promotional support, Meyer Organics’ strategy is to provide professional and comprehensive support for its international partners.

2.3. We present below the list of the Associated Enterprises and the corresponding countries:

Sr. No. Associated Enterprise Country Nature of Relationship 1 Vitabiotics Ltd – VB (UK) London 2 Adler Products Ltd Nigeria 3 Vitabiotics (Nigeria) Ltd Nigeria 4 Farmex Meyer Ltd Nigeria 5 Vita Aria Co Iran 6 Omega Meyer Ghana Ltd Ghana 7 Vitabiotics Tehran Co Tehran 8 PT Vitabiotics Healthcare Indonesia
2.4. VB (UK) is a limited liability company having its registered office in UK. It is in the business of manufacturing and marketing pharmaceutical preparation including nutraceuticals in UK and also has invested huge sums to develop other markets in the world.

2.5. Adler Products Ltd. is a limited liability company having its registered office in Nigeria. The company’s main business is manufacturing and trading in pharmaceutical formulations and other items viz: packing material for pharma goods, plastics, allied machinery and spares, which are supplied in Nigeria.

2.6. Vitabiotics (Nigeria) Ltd. is a limited liability company having its registered office in Lagos, Nigeria. The company’s has its own manufacturing facilities to produce pharmaceutical formulations.

2.7. Farmex Meyer Ltd. is a limited liability company having its registered office in Lagos, Nigeria. The company’s main operation of business is manufacturing and trading of pharmaceutical formulations.

2.8. Vita Aria is a limited liability company having its registered office at Tehran, Iran. The company’s main operation of business is manufacturing pharmaceutical formulations.

2.9. Omega Meyer Ghana Ltd is a trading company with the registered office at Accra, Ghana. The company is in the business of

2.10. Vitabiotics Tehran Co has its registered office in Tehran, Iran. This company is engaged in trading in Pharma products in Iran.

2.11. PT Vitabiotics Healthcare is a manufacturing Company with its registered office in Jakarta Timur, Indonesia with the factory at Bandung. This company is engaged in manufacturing in Pharma products in Indonesia.

2.12. The Firm prepared the study report in accordance with the Indian transfer pricing provisions contained in Sections 92 and 92A to 92F of the Act, read with Rules 10A to 10E of the Rules. In reviewing the international transactions useful inferences have been made from the ‘Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations’ published by the OECD Guidelines and Guidance Note.

2.13. Section 92 of the Act requires that the international transaction shall be computed having regard to the arm’s length price. To prepare the study report, the firm interviewed Meyer’s personnel and reviewed various documents and financial data provided by Meyer.

2.14. We present below, the a summary of the international transactions undertaken between Meyer and its AEs and the transfer pricing method identified as the most appropriate method.

Sr. No. Nature of Transaction Amount
(Rs.) Most Appropriate Method 1 Contract Manufacturing Activity TNMM 2 Export of Manufactured Goods CPM 3 Trading Activity CPM Total
2.15. Contract Manufacturing Activity
During FY 2012-13, Meyer has manufactured products for VB (UK) of Rs. /-. These transactions are in the nature of contract manufacturing.
Based on the FAR analysis and the availability of reliable information, Meyer has been selected as the tested party. We have selected TNMM method, using NPM as PLI to be the most appropriate transfer pricing method for determining arm’s length price.
For the purpose of applying TNMM, we have compared the NPM earned by Meyer from its contract manufacturing activity vis-à-vis NPM earned by independent comparable companies. For FY 2012-13, the NPM earned by Meyer from contract manufacturing activity is 4.48 percent, and adjusted NPM earned by independent comparable companies is 3.08 percent.
Further, we have compared the margins stated in the DPCO norms to the margins earned by Meyer. From this too, we can state that Meyer earns a margin higher than what is specified by those norms.
Based on the aforesaid analysis, it is reasonable to conclude that Meyer’s international transactions with its AE in respect of the contract manufacturing activity are consistent with the arm’s length standard from an Indian transfer pricing perspective.

2.16. Export of Manufactured Goods
During FY 2012-13, Meyer has manufactured and exported to AEs, products amounting to Rs. /-.
Based on the FAR analysis and the availability of reliable information, Meyer has been selected as the tested party. We selected CPM to be the most appropriate transfer pricing method for determining arm’s length price.
For the purpose of applying CPM, we compared the gross margin earned by Meyer from its export to AEs vis-à-vis gross margins earned by its domestic manufacturing activity / export to unrelated parties / independent comparable companies. For FY 2012-13, the margin earned by Meyer from export to AEs is 4.48 percent, and margin of its domestic manufacturing activity / export to unrelated parties / independent comparable companies is 3.08 percent.
Based on the aforesaid analysis, it is reasonable to conclude that Meyer’s international transactions with its AE in respect of the export of manufactured goods are consistent with the arm’s length standard from an Indian transfer pricing perspective.

2.17. Trading Activity
During FY 2012-13, Meyer has trading activity with its AEs amounting to Rs. /-.
Based on the FAR analysis and the availability of reliable information, Meyer has been selected as the tested party. We selected CPM to be the most appropriate transfer pricing method for determining arm’s length price.
For the purpose of applying CPM, we compared the gross margin earned by Meyer from its trading activity vis-à-vis gross margin earned by its domestic manufacturing activity. For FY 2012-13, the gross margin earned by Meyer from trading activity is 4.48 percent, and adjusted gross margin of its domestic manufacturing activity is 3.08 percent.
Based on the aforesaid analysis, it is reasonable to conclude that Meyer’s international transactions with its AE in respect of the contract manufacturing activity are consistent with the arm’s length standard from an Indian transfer pricing perspective.

2.18. Based on this study report and having regard to economic and commercial factors, the transactions undertaken between the company and its AEs appear to be at arm’s length from the Indian transfer pricing principles.
3. Corporate Background

3.1. Meyer is an ISO 9001 Certified Organization. Meyer is currently involved in establishing and growing existing markets in many countries worldwide. Through shared marketing know-how and promotional support, Meyer’s strategy is to provide professional and comprehensive support for its international partners.

3.2. During the early years, Meyer majorly exported products. They slowly enlarged their presence in India. Initially Meyer was mainly dependent on exports to VB (UK) for its survival before it was able to penetrate the Indian market. This relationship has continued which is evident from the fact that exports to VB (UK) accounts for 69% of the company’s export turnover.

3.3. The primary business of Meyer is manufacturing of Pharmaceuticals Products, especially nutrition supplements like Calcimax Forte Tab, Calcimax 500 Tab, Jointace Tab, Immunace Tab etc. The total revenue during the FY 2012-13 is Rs. 368.34 crores (net of excise duty), which consists of Rs. 245.37 crore sales of manufactured goods and Rs. 119.32 crore sale of traded goods.

3.4. The organizational structure of the company has been tabulated below:
Sr. No. Name & Country of shareholder March 31, 2013 1 Dr. K.T.Lalvani – UK 5.02% 2 Mrs. Rohini K. Lalvani – UK 6.00% 3 Mr. Ajit Lalvani – UK 31.67% 4 Mr. Tej Lalvani – UK 31.67% 5 M/s Omega Meyer Ltd – UK 24.44% 6 Mrs. Pushpa Kalsi – India 1.20% TOTAL 100.00%

4. Industry Overview

4.1. The Indian Pharmaceutical Industry currently tops the chart amongst India’s science-based industries with wide ranging capabilities in the complex field of drug manufacture and technology. The Indian Pharmaceutical Industry ranks very high amongst all developing countries, in terms of technology, quality and the vast range of medicines that are manufactured.

4.2. The country now ranks 3rd in terms of volume of production (10 per cent of global share) and 14th largest by value (1.5 per cent of global share). One reason for lower value share is the lowest cost of drugs in India ranging from 5 per cent to 50 per cent less as compared to developed countries. Indian pharmaceutical industry growth has been fuelled by exports and its products are exported to a large number of countries with a sizeable share in the advanced regulated markets of the US and Western Europe.

4.3. Many global pharmaceutical majors are outsourcing manufacturing to Indian companies, which enjoy much lower costs (both capital and recurring) than their western counterparts. Indian companies are proving to be better at developing Active Pharmaceutical Ingredients (APIs) than their competitors from target markets and that too with non-infringing processes. Indian companies are entering in to contract manufacturing agreements for supplying complex under-patent molecules. India gained its foothold on the global scene with its innovative engineered generic drugs and active pharmaceutical ingredients, and it is now seeking to become a major player in outsourced clinical research as well as contract manufacturing and research.

4.4. Pharmaceutical exports from the country during 2012-13 stood at US$14.6 billion, up from US$13.2 billion the previous year. The Indian pharmaceutical industry would continue to experience strong growth as structural growth drivers continue to remain impervious. The industry is expected to achieve a growth of 10-12 percent in 2013-14, according to a study by ICRA.

4.5. The pharmaceutical markets are likely to witness a CAGR of 3-6% over 2012-16, to reach a market value of US $1.2 trillion. The key growth drivers for future include an increasing shift to the use of generics medicines, accompanied by patent expiries and volume-driven growth in pharmerging markets.
Market 2012-2016 CARG(%) Market Value by 2016(US $ in billion) Global 3 – 6 1175 – 1205 Developed 1 – 4 660 – 690 EU5 (-1) – 2 135 – 165 Pharmerging 12 – 15 345 – 375 RoW* 2 – 5 140 – 170 RoW* – Rest of the World

4.6. The pharmaceutical contribution of developed markets is likely to decline from 73% in 2006 to 57% by 2016 due to expiring patents, decreasing spending on branded products, and higher cost containment measures by payers.

4.7. Global share of spending on medicines by EU5 is likely to fall from 19% in 2006 to 13% by 2016, due to a slowdown in economic growth and aggressive cost containment measures

4.8. Pharmaceutical spending from the emerging markets** is estimated to jump from 14% in 2006 and contribute 30% to the global pharmaceutical spending by 2016. This growth will be facilitated by rising population, rising per-capita income, improving medical infrastructure and economic growth.
(**China, Brazil, India, Venezuela, Poland, Argentina, Turkey, Mexico, Vietnam, South Africa, Thailand, Indonesia, Romania, Egypt, Pakistan, Ukraine and Russia.)
5. International Transactions

5.1. List of related party international transactions covered:
Sr. No. Name & Country of AE Nature of transaction AY 2013-14
Amount Method Used 1 Vitabiotics Ltd – London Export of Manufactured Goods 657,808,637 TNMM Sales of Trading Goods 223,040,771 CPM Sales of Consumables & Other Supplies 25,562,726 CPM Purchase of Raw Material & consumables 6,796,643 CUP 2 Adler Products Ltd – Nigeria Export of Manufactured Goods 89,220,910 TNMM Sales of Trading Goods 9,689,772 CPM Sales of Consumables & Other Supplies 2,656,504 CPM 3 Vitabiotics (Nigeria) Ltd – Nigeria Sales of Consumables & Other Supplies 43,275,219 CPM 4 Farmex Meyer Ltd – Nigeria Sales of Consumables & Other Supplies 9,776,104 CPM 5 Vita Aria Co – Iran Sales of Consumables & Other Supplies 12,130,671 CPM Sales of Trading Goods 18,086,055 CPM 6 Omega Meyer Ghana Ltd (Ghana) Sales of Consumables & Other Supplies 2,237 CPM Export of Manufactured Goods 25,301,478 TNMM Sales of Trading Goods 9,058,974 CPM 7 Vitabiotics Tehran Co (Tehran) Export of Manufactured Goods 39,537,805 CPM 8 PT Vitabiotics Healthcare
(Indonesia) Sales of Consumables & Other Supplies 2,089,408 CPM TOTAL 1,174,033,913
5.2. It is pertinent to note that the manufacturing for Vitabiotics UK is in the nature of Contract Manufacturing Arrangement, whereby Meyer manufactures products for them on the basis of long term manufacturing contract. Manufacture is fully according to Good Manufacturing Practice (GMP) under conditions approved by relevant authorities such as the MCA, FDA. Presently Meyer has a total export turnover of Rs 132.22 crores which is mainly attributable to Vitabiotics Ltd – UK.
6. Functions, Assets and Risks Analysis

6.1. Section 92D of the Act and the prescribed rules there under requires every person who has entered into an international transaction to keep and maintain inter alia, a description of the functions performed, risks assumed and assets employed or to be employed by the taxpayer and by the AEs involved in the international transaction or specified domestic transaction.

6.2. FAR analysis reviews the functions performed, assets utilized and risks assumed by the taxpayer and its AEs for the specific international transaction or specified domestic transaction under review. By providing a description of the functions and assets and their location within a corporate group, the FAR analysis provides the first step in evaluating the relative contribution to profit of various related entities.

6.3. FAR analysis enables mapping of the economically relevant facts and characteristics of transactions between AEs with regard to their functions, assets and risks and provides the factual foundation for establishing a transfer pricing methodology consistent with the arm’s length standard set forth in the relevant transfer pricing regulations contained in the Act and the Rules.

6.4. The functions to be performed by Meyer and its AEs in relation to the transactions under review are based on information obtained in the course of discussions with the respective personnel of Meyer and are presented below.

6.5. Functions performed

6.5.1. Contract Manufacturing Activity

6.5.1.1. Research and Development
VB (UK) originates the product idea and asks Meyer to do further research and development. Based on the product idea, Meyer researches and develops new products with technical support of VB (UK). Meyer sends a sample of the new products to VB (UK) who must approve it. After approval, VB (UK) places orders for the product and Meyer commences production.

6.5.1.2. Raw Material Procurement
Meyer is responsible for procurement of raw material and all related quality testing etc. Meyer must ensure that the raw material meets the standards prescribed by VB (UK). Meyer sources suppliers, negotiates prices and stores raw material at its factories.

6.5.1.3. Manufacturing
Meyer manufactures the products through its manufacturing facilities at Thane and Bangalore to meet the needs of VB (UK). Regular orders are received from VB (UK); hence continuous manufacturing is carried out. Usually products are manufactured in batches and production is planned so as to minimize inventory.

6.5.1.4. Inventory Management
Meyer manufactures the products at its factories in India only based on orders received from VB (UK). Proper production planning is done so that the production process is completed just before the export date. Hence, Meyer keeps minimal stock. Once the products are despatched out of India, inventory management becomes the responsibility of VB (UK).

6.5.1.5. Marketing
VB (UK) undertakes the all marketing activity related to the products and is responsible for development and implementation of suitable marketing strategies. Meyer only acts as a contract manufacturer and therefore does not incur any marketing expenses. For marketing of products, Meyer provides some of the relevant marketing material which VB (UK) uses while marketing the products.

6.5.1.6. Quality Control
Quality control, or QC for short, is a process by which entities review the quality of all factors involved in production. Controls include product inspection, where every product is examined visually before the product is sold into the external market.
Meyer is responsible for maintaining the quality of products it supplies to VB (UK). It has a quality control department for this purpose. VB (UK) may reject and return any products due to deficiency in quality.

6.5.1.7. Packaging
Packaging is the technology of enclosing or protecting products for distribution, storage, sale, and use.
Meyer packs the products in large sealed aluminum bags containing 1000-6000 untis and ships them to VB (UK). VB (UK) then repackages the products into smaller strips before selling it further.

6.5.1.8. A summary of the functions performed by each company is tabulated below:
Function Meyer VB (UK) Research & Development ? ? Procurement of Raw Materials ? ? Manufacturing ? ? Inventory Management ? ? Marketing ? ? Quality Control ? ? Packaging ? ?
6.5.2. Export of Manufactured Goods

6.5.2.1. Research and Development
(put explanation from Bard report)
Meyer has an in-house department dedicated to research and development.

6.5.2.2. Manufacturing and Quality Control
Meyer manufactures the products through its manufacturing facilities at Thane and Bangalore to meet the needs of its global customers. It has its own quality team to support and maintain its manufacturing operations; thereby monitors and ensures the production process to achieve the desired output with the defined quality level.

6.5.2.3. Inventory Management
Meyer manufactures goods for AEs only on the basis on orders received from them while in case of non-AEs, Meyer estimates demand based on past experience. Meyer keeps minimal inventory of products at its warehouses.

6.5.2.4. Marketing of goods
Meyer usually does not undertake any marketing activity and business is received only from continuing customers. Most new customers come through referrals from existing customers. Meyer also sells business promotion material to its AEs and non AEs with which they market the products. Further, for certain non-AEs, Meyer may even depute personnel to train them on marketing techniques, etc.

6.5.2.5. Packaging
All packaging is done by Meyer which sells the products in final packed forms.

6.5.2.6. Invoicing and collection
Meyer is responsible for billing & collection i.e., follow-up with the customers for the realization of the sale proceed.

6.5.2.7. A summary of the functions performed by each company is tabulated below:
Function Meyer AEs Research & Development ? ? Procurement of Raw Materials ? ? Manufacturing ? ? Inventory Management ? ? Marketing ? ? Quality Control ? ? Packaging ? ?

6.5.3. Trading Activity

6.5.3.1. Order Procurement
AEs who require goods from India contact Meyer for procurement of such goods. Meyer engages in trading only on such specific orders from AEs.

6.5.3.2. Logistics
Meyer provides logistic support for the goods to be sent to its AEs. All functions like vendor sourcing, transport arrangement, etc are performed by Meyer.

6.5.3.3. Marketing
There is almost no marketing activity involved in these transactions since it is only an incidental activity. If any AE requires a certain product, they contact Meyer. Meyer does not actively market the products.
6.6. Assets employed

6.6.1. Any business requires assets (tangible or intangible) without which it cannot carry out its activities. An understanding of the assets employed and owned by Prosales and its AE provides an insight into the resources deployed by them and their contribution to the business processes/economic activities.

6.6.2. In the case of all products manufactured for VB (UK), VB (UK) owns the intangibles like trademark, brand names, etc. of the products. VB (UK) has given Meyer permission to use certain brand names to manufacture and sell in the domestic market but does not charge any royalty for such use.

6.6.3. For all other manufactured products, Meyer owns the brand names.

6.6.4. Meyer owns two factories, one at Thane, Maharashtra and one at Bangalore, Karnataka, from where it manufactures the products. It ensures that the factories comply with all the relevant laws and regulations.

6.7. Risks assumed

6.7.1. Contract Manufacturing Activity

6.7.1.1. Market Risk
Market risk arises when a firm faces adverse sales conditions resulting from either increased competition in the marketplace, declines in demand within the market, or the inability to market or position products for targeted customers.
Both Meyer and VB (UK) bear this risk as adverse market conditions will cause sales of VB (UK) to decline. This will in turn result in value of orders from VB (UK) declining. This may result in a significant impact on Meyer as sales to VB (UK) form a large part of the turnover.

6.7.1.2. Credit Risk
A firm faces customer credit risk when it supplies services to a customer and the customer fails to make payment or the payment is deferred.
Meyer sells the products only to VB (UK), who makes prompt payments, usually within 30 days. Any defaults by customers of VB (UK) are borne by VB (UK). Hence, Meyer does not bear any credit risk.

6.7.1.3. Inventory Risk
Inventory risks arise from various factors such as rapid technological change, theft, damage, obsolescence, spoilage or reduced demand.
All significant inventory risks are borne by VB (UK). Once the products are sold to VB (UK), they cannot be returned for any reason other than defects.

6.7.1.4. Return Risk
Meyer is responsible for maintaining the quality standard of products specified by VB (UK). VB (UK) has the right to return any products not meeting the standard.

6.7.1.5. Foreign Exchange Fluctuation Risk
This risk relates to the potential impact on profits that may arise because of changes in foreign exchange currency rates over a period of time.
Meyer invoices VB (UK) in US Dollars. Hence, both parties bear some foreign exchange fluctuation risk.

6.7.1.6. A summary of the risks assumed by each company is tabulated below:
Risk Meyer VB (UK) Market Risk ? ? Credit Risk ? ? Inventory Risk ? ? Return Risk ? ? Foreign Exchange Fluctuation Risk ? ?
6.7.2. Export of Manufactured Goods

6.7.2.1. Market Risk
Both ASDPL and Prosales bear this risk. Even though most of the employees who do the marketing are on the payroll of ASPDL, the cost is shared between them in proportion to revenues. Hence, if revenue of either company declines, the cost shared by that company will automatically reduce.

6.7.2.2. Credit Risk
ASDPL and Prosales are in the business of direct marketing where their clients are banks and NBFCs. The revenue is booked based on contracts with them which are usually continuous in nature. Hence, the occurrence of bad debts is rare.

6.7.2.3. Inventory Risk
Meyer bears the inventory risk as any unsold goods

6.7.2.4. Warranty Risk
6.7.2.5. Foreign Exchange Fluctuation Risk
6.7.2.6. A summary of the risks assumed by each company is tabulated below:
Risk ASDPL Prosales Market Risk ? ? Credit Risk ? ?
6.7.3. Trading Activity

Trading is purely an incidental activity for Meyer. Meyer only provides logistic support for AEs who wish to procure certain items from India. Thus Meyer bears no significant risk.
7. Economic Analysis

7.1. Selection of the Most Appropriate Method

7.1.1. As per the Indian transfer pricing provisions, the income arising from an international transaction with an associated enterprise must be computed having regard to the arm’s length price. The calculation of the arm’s length price has to be done by using the most appropriate method. The most appropriate method must be selected from the following methods:
* Comparable Uncontrolled Price (“CUP”) Method;
* Resale Price Method (“RPM”);
* Cost Plus Method (“CPLM”);
* Profit Split Method (“PSM”); or
* Transactional Net Margin Method (“TNMM”).

7.1.2. Rule 10C (2) of the Income Tax Rules lists the factors that should be taken into account in selecting the most appropriate method. Some of the factors are:
• The availability, coverage and reliability of data necessary for the application of the method;
• The extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction or specified domestic transaction and the comparable uncontrolled transaction or between the enterprises entering into such transaction; and
• The nature, extent and reliability of assumptions required to be made in application of a method.

7.1.3. Comparable Uncontrolled Price Method (CUPM)
The CUPM should be applied where AEs buy or sell similar goods or services in comparable transactions with unrelated enterprises or when unrelated enterprises buy or sell similar goods or services, as is being done between the AEs.
Internal CUP involves comparison of prices paid / charged between one of the parties to the controlled transaction and an unrelated third party in uncontrolled conditions, whereas an external CUP involves comparison of prices paid/charged between two unrelated third parties in uncontrolled conditions.

Contract Manufacturing Activity

Export of Manufactured Goods

Trading Activity
7.1.4. Resale Price Method (RPM)
The RPM evaluates the arm’s length nature of a controlled transaction by reference to the gross profit margin realized in a comparable uncontrolled transaction. The RPM measures the value of functions performed and is ordinarily appropriate in cases involving the purchase and resale of tangible goods/services in which the buyer/reseller does not add substantial value to the goods by physically altering them or by using marketing intangibles.
The method may become less reliable when there are differences in the functions performed or risks assumed between the controlled and uncontrolled transactions. It is pertinent to note that when the resale price margin used is that of an independent enterprise in a comparable transaction, the reliability of the resale price method may be affected if there are material differences in the way the AEs and independent enterprises carry out their businesses.

Contract Manufacturing Activity

Export of Manufactured Goods

Trading Activity
7.1.5. Transactional Net Margin Method (TNMM)
Under the TNMM, the standards of comparability are less stringent relative to the other methods with only broad similarity of functions required. This method compares the normal net profit margin, computed in relation to costs incurred or sales effected or assets employed or having regard to any other relevant base, realized by AEs, to the net profit margin realized by unrelated enterprises from comparable uncontrolled transactions. The TNMM has the following practical advantages:
• In the case of TNMM, the net margins (e.g. return on assets, operating income to sales, and possibly other measures of net profit) are less affected by transactional differences than is the case with price, as used in the CUP;
• The net margins may also be more tolerant to some functional differences between the controlled and uncontrolled transactions than gross profit margins;
• The differences in functions performed between enterprises are often reflected in variations in operating expenses. Consequently, enterprises may have a wide range of gross profit margins but still earn broadly similar levels of profits;

Contract Manufacturing Activity

Export of Manufactured Goods

Trading Activity

7.1.6. Profit Split Method (PSM)
The PSM is normally used in situations involving transfer of unique intangibles or in multiple international transactions or specified domestic transactions, which are so closely interrelated that they cannot be evaluated separately for determining the arm’s length price.
In the instant case, the profitability of Prosales can be tested more reliably and easily through other methods without making arbitrary assumptions. Moreover, the transactions do not involve the use of unique intangibles.
Contract Manufacturing Activity

Export of Manufactured Goods

Trading Activity
7.1.7. Cost Plus Method (CPM)
The CPM can be employed in cases involving manufacture, assembly or production of tangible products or provision of services that are sold / provided to related parties. It compares the normal gross profit mark-up on costs (both direct and indirect) earned by a manufacturer / service provider to the gross profit mark-up earned by uncontrolled manufacturers / service providers. Gross profit margin needs to be adjusted to take into account functional and other differences between the international transaction or specified domestic transaction and the comparable uncontrolled transaction, or between the enterprises entering into such transaction, which could materially affect the mark-up in the open market. A close degree of comparability with the products / services provided by uncontrolled manufacturers / service providers and with the functions performed and risks assumed by the uncontrolled manufacturers / service providers will produce a more reliable result under the CPM.

Contract Manufacturing Activity

Export of Manufactured Goods

Trading Activity
7.2. Findings:
As discussed above, the direct methods (CUPM and RPM) cannot be applied to establish arm’s length value of Prosales’ international transaction. Further TNMM and PSM also cannot be applied for the reasons discussed above. Thus for the international transaction under review, CPM appears to be the most appropriate method for benchmarking.
8. Findings

7.
8.
8.8.
8.9.
8.1. Contract Manufacturing Activity:

The company has transactions in the nature of contract manufacturing with VB (UK). This activity forms a major part of the export turnover of Meyer. VB (UK) sends regular purchase orders to Meyer. Meyer sells products to VB (UK) in bulk packages. VB (UK), then repacks and labels the products before selling them.

8.2. Export of Manufactured Goods
Transactions with Nigeria and Dubai cannot be compared as:
8.1.1. They are different geographical markets
Nigeria is a developing country located in the continent of Africa while Dubai is a developed city in the United Arab Emirates. Thus the market is significantly different in terms of type of customers and their requirements.

8.1.2. Volume of transactions is different
8.1.3. Continuity of business
8.2. Trading Activity
During the year, Prosales had reimbursed certain expenses to its AE at actual cost and there is no element of any provision of services.
A detailed working of the expenses reimbursed is contained in Annexure I. A final working based on the audited figures of ASDPL & Prosales has been made and is contained in Annexure II. The difference between the expenses to be transferred as per the final working and the expenses already transferred works out to Rs. 9,53,146/- or 0.58% of expenses transferred. This is lower than the materiality threshold of 2% as per the cost sharing agreement and thus no adjustment is required.

9. Conclusion
10. Index of Principal Documents

This study report contains certain information/documents that are required under the Rule 10D of the Rules. A complete list of the required principal documents and, if applicable, their location in this study report follows. Other principal documents are maintained by the taxpayer, in addition to background documents.
S.No. Primary Documentation Requirements Location 1 Description of the ownership structure of the assessee enterprise with details of shares or other ownership interest held therein by other enterprises {Rule 10D(1)(a)}; Paragraph 3 and
Other relevant documents, if any, are maintained by the Company 2 Profile of the group of which the assessee enterprise is a part along with the name, address, legal status and country of tax residence of each of the enterprises comprised in the group with whom international transaction or specified domestic transactions have been entered into by the assessee, and ownership linkages among them {Rule 10D(1)(b)}; Paragraph 3 and
Other relevant documents, if any, are maintained by the Company
3 Broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted {Rule 10D(1)(c)}; Paragraph 3 & 4 and
Other relevant documents, if any, are maintained by the Company
4 The nature and terms (including prices) of international transaction or specified domestic transactions entered into with each associated enterprise, details of property transferred or services provided and the quantum and the value of each such transaction or class of such transaction {Rule 10D(1)(d)}; Paragraph 4 5 Description of the functions performed, risks assumed and assets employed or to be employed by the assessee and by the associated enterprises involved in the international transaction or specified domestic transaction {Rule 10D(1)(e)}; Paragraph 5 6 Record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the assessee for the business as a whole and for each division or product separately, which may have a bearing on the international transaction or specified domestic transactions entered into by the assessee {Rule 10D(1)(f)}; Not applicable 7 Record of uncontrolled transactions taken into account for analyzing their comparability with the international transaction or specified domestic transactions entered into, including a record of the nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the international transaction or specified domestic transactions {Rule 10D(1)(g)}; Relevant documents, if any, are maintained by the Company 8 Record of the review performed to evaluate comparability of uncontrolled transactions with the relevant international transaction or specified domestic transaction {Rule 10D(1)(h)}; Relevant documents, if any, are maintained by the Company 9 Description of the methods considered for determining the arm’s length price in relation to each international transaction or specified domestic transaction or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case {Rule 10D(1)(i)}; Paragraph 6 10 Record of the actual working carried out for determining the arm’s length price, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments, if any, which were made to account for differences between the international transaction or specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions {Rule 10D(1)(j)}; Paragraph 7 & Annexure I to the study report 11 The assumptions, policies and price negotiations, if any, which have critically affected the determination of the arm’s length price {Rule 10D(1)(k)}; Not applicable 12 Details of the adjustments, if any, made to transfer prices to align them with arm’s length prices determined under these rules and consequent adjustment made to the total income for tax purposes {Rule 10D(1)(l)}; Not applicable 13 Any other information, data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the arm’s length price {Rule 10D(1)(m)}. Relevant documents, if any, are maintained by the Company 11. Disclaimer

11.1. Our views contained in this study report are based on the completeness and accuracy of the information provided by personnel of Prosales and/or any assumptions made by Prosales that were relied upon for the purpose of this study report. We disclaim any liability for advice based on incorrect or inaccurate information provided to us relating to the operations and the international transactions of Prosales with its AE. If any of the information and assumptions provided by Prosales is not complete or accurate, it is imperative that we be informed accordingly, as the inaccuracy or incompleteness thereof could have a material effect on our findings.

11.2. The analysis and findings outlined in this study report are specifically in response to a request for advice by Prosales. This study report is confidential and has been prepared solely for the use by Prosales. It should not be copied or disclosed to any third party, in whole or in part, without our prior written consent. However, this study report may be presented (either in full or part) by Prosales to the tax authorities should there be an inquiry into its transfer pricing arrangements. Neither the Firm nor any of its members or employees undertake responsibility in any way whatsoever to any person or company other than Prosales, for any error or omission in the advice given, however caused. Our views are not binding on any authority or Court and hence, no assurance is given that a position contrary to our views/opinions expressed herein will not be asserted by any authority and/or sustained by an appellate authority or a Court of law. The responsibility for any taxes/ penalties arising from the course of assessments would not rest on the Firm.

11.3. In the preparation of this study report, we have relied on the provisions of the Act, the Rules, and judicial and administrative interpretations thereof, which are subject to change or modification by subsequent legislation or regulatory changes or administrative pronouncements or judicial decisions. Any such change, which could be prospective, retrospective or retroactive, could affect the validity of the analysis herein. Unless specifically requested otherwise, we shall not update this study report for subsequent changes or modifications to the law, to the rules/ regulations, or to the judicial and administrative interpretations thereof.
Meyer Organics Private Limited
Assessment Year 2013-14

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