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14. The TPO after analyzing the aforesaid agreements and the claim of the Assessee for characterization of the activities in relation to manufacture of Highly purified Insulin in 40 IU vials through TPL and distribution of products directly imported from Novo Nordisk A/S as distribution function, was of the view that the arrangements between the Assessee, Novo Nordisk A/S and Torrent was in fact a manufacturing activity and cannot be characterized as distribution operations. The TPO in his TP order conducted a fresh comparability analysis based on the application of TNMM and arrived at a set of 15 purported comparable companies with a IT(TP)A No.146/Bang/2015 mean operating margin of 8.26%. Accordingly, the TPO, considered the whole distribution segment of the Assessee for the purpose of computing the Arm's Length Price (ALP) adjustment, without considering the fact that the entire sales are of purchased products (more than 61% of the total purchases being products imported from Group companies) and made an adjustment of INR 352,638,074 [including additional adjustment computed on account of application of Profit Split Method ('PSM') as discussed below].

15. The TPO also applied Profit Split Method(PSM) of determining ALP as against TNMM applied by the Assessee in respect of the arrangement with the Torrent for purchase of Insulin. The TPO additionally analyzed purchase of insulin from Torrent separately by applying residual PSM based on the FAR analysis following the approach of the TPO and the learned Panel in the previous year's assessment proceedings/Panels proceedings. The TPO applied residual PSM in the ratio of 50:50 between Novo Nordisk A/S and Novo Nordisk India after reducing the margins of Torrent of 9.85% from the value of insulin products. The TPO computed the total margin in the entire transaction to be 31% alleging that on an overall basis Novo Nordisk AS earns a margin of 29% and Novo Nordisk India's margin for FY 2009-10 is 2% in the transaction relating to purchase of insulin products from Torrent and sold by Novo Nordisk India.

69. In the present case, can it be said that the transaction of supply of raw material and the transaction of sale of imported products directly from Novo Nordisk A/S said to be interlinked or closely linked? In our view the two transactions have no connection whatsoever and can be evaluated individually. While the sale of imported products is a trading activity, the purchase of raw material would be part of manufacturing activity and different parameters would need consideration for determining IT(TP)A No.146/Bang/2015 ALP of the two transactions. We find that the TPO characterized both the transactions as "Manufacturing" and adopted a combined approach in determining ALP. The DRP has also fallen into the same error. The DRP carved out the consideration in so far as it relates to supply of raw material by Novo Nordisk A/S is concerned but applied "Profit Split Method" (PSM) and determined a sum of Rs.3.14 crores as addition to be made on account of adjustment to ALP. In our view the entire approach by the TPO and DRP in this regard is erroneous. In our view it would be just and appropriate to set aside the order of the TPO /DRP in this regard and direct that the determination of ALP of the international transaction of (i) supply of raw material by Novo Nordisk A/S to the Assessee and (ii) import of product directly from Novo Nordisk A/S and sale of such products, which is in the nature of trading, separately. The segmental results as given by the Assessee in the chart given as ANNEXURE- 1 to this order should be adopted in this regard. As far as Quality Testing Fee is concerned, the ALP of the said transaction is to be tested again independently. The Assessee is accordingly directed to give his Transfer Pricing Analysis on the above lines for each of the transaction separately. As to what is the Most Appropriate Method (MAM) to be adopted will depend on the stand taken by the Assessee in its TP study and the opinion of the TPO on the approach adopted by the TPO. The application of Profit Split Method (PSM) as the MAM in our view requires reconsideration, as the Assessee's request for a personal hearing before applying PSM as MAM has not been considered by the DRP. The subvention fee is claimed to be paid by Novo Nordisk A/S just to help the Assessee to help survive and that there is no specific services rendered by the Assessee. The subvention fee will therefore need to be set off against any transfer pricing adjustment that might ultimately be made. Thus the subvention fee will not be subjected to any ALP test and will only go to reduce the addition on account of determination of ALP, if any, that might ultimately survive. Issues No.2 to 4 are decided accordingly.