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22.The basis of adopting TNMM as the most appropriate method was that SPG BVI and subsequently SPG FZE are the technology owners and are getting medicines manufactured by the assessee company. The AE was in possession of certain product technologies and wanted to sell products in the regulated markets of USA, Europe etc. Hence, it approached SPIL to . A.Y. 2009-10 work on a Contract Research & Manufacturing Services (CRAMS) basis. The assessee in its Transfer Pricing Study report claimed that on the sale transactions with SPG, the net profit margin earned is 14.84%. To substantiate its claim, external TNMM was shown at 13.96%. The TPO rubbished the claim of most appropriate method as TNMM and adopted Profits Split Method (PSM) because he was of the strong belief that PSM is applied mainly to international transactions involving transfer of unique intangibles. The TPO as of the belief that the technology to manufacture Pantoprazole Sodium was originally developed by the assessee and was subsequently transferred to SPG indirectly. Therefore, the relevant international transactions involve transfer of unique intangibles. The TPO was of the opinion that a transactional profit split method may be the most appropriate method in cases where both parties to a transaction make unique and valuable contribution to the transaction, because in such a case independent parties might wish to share the profits in proportion to their respective contributions and a two-sided method might be more appropriate than a one sided method.

83. Having established that the ownership of IPR/ANDA rights of Pantoprazole Sodium was with SPG BVI, now let us examine the applicability of the most appropriate method for determining the arm's length price.

84. OFCD guidelines for profits spilt method (PSM) states as under:-

C. Transactional profit split method C.1 In general . A.Y. 2009-10 2.108 The transactional profit split method seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transaction (or in controlled transactions that are appropriate to aggregate under the principles of paragraphs 3.9-3.12) by determining the division of profits that independent enterprises would have expected to realise from engaging in the transaction or transactions. The transactional profit split method first identifies the profits to be split for the associated enterprises from the controlled transactions in which the associated enterprises are engaged (the "combined profits"). References to "profits" should be taken as applying equally to losses. See paragraphs 2.124- 2.131 for a discussion of how to measure the profits to be split. It then splits those combined profits between the associated enterprises on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm's length. See paragraphs 2.132 -2.145 for a discussion/6f how to split the combined profits. C.2 Strengths and weaknesses 2.109 The main strength of the transactional profit split method is that it can offer a solution for highly integrated operations for which a one-sided method would not be appropriate. For example, see the discussion of the appropriateness and application of profit split methods to the global trading of financial instruments between associated enterprises in Part III, Section C of the Report on the Attribution of Profits to Permanent Establishments.2 A transactional profit split method may also be found to be the most appropriate method in cases where both parties to a transaction make unique and valuable contributions (e.g. contribute unique intangibles) to the transaction, because in such a case independent parties might wish to share the profits of the transaction in proportion to their respective contributions and a two-sided method might be more appropriate in these circumstances than a one-sided method. In addition, in the presence of unique and valuable contributions, reliable comparables information might be insufficient to apply another method. On the other hand, a transactional profit split method would ordinarily not be used in cases where one party to the transaction performs only simple functions and does not make any significant unique contribution (e.g. contract manufacturing or contract service activities in relevant circumstances), as in such cases a transactional profit split method typically would not be appropriate In view of the functional analysis of that party. See paragraphs 3.38-3.39 for a discussion of limitations in available comparables.

85. United Nations practical manual on transfer pricing states as under:-

.                                             A.Y. 2009-10
    6.3.13. Profit Split Method

6.3.13.1. The Profit Split Method is typically applied when both sides of the controlled transaction contribute significant intangible property. The profit is to be divided such as is expected in a joint venture relationship.

6.3.13.2. The Profit Split Method seeks to eliminate the effect on profits of special conditions made or imposed in a controlled transaction (or in controlled transactions that it is appropriate to aggregate) by determining the division of profits that independent enterprises would have expected to realize from engaging in the transaction or transactions.

10 Adoption of profit split method for benchmarking: During the year, the assessee has sold Alendronale, Amifostine and Venlafaxine to Sun BVI and Alendronale, leuprolide and Gemcitabine to Sun FZE. Venlafaxine appears to have been withdrawn subsequently as evident from the P&L account submitted by the assessee. Since the function-asset-risk profile renders TNMM as an unsuitable method for benchmarking. The benchmarking study conducted by the assessee in respect of this transaction is found to be unreliable and hence is rejected u/s 92C(3). The assessee was issued a show cause notice on the issue of rejection of TNMM study conducted by the assessee and adoption of another method for conducting the benchmarking study. The profit split method is found to be more suitable to the nature of these transactions. Accordingly, the method employed by the assessee company is rejected and profit split method is followed for benchmarking the transactions. Following points are noted with respect to export sale of these drugs.