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15.14 Accordingly, the TPO applied the residual profit split method in respect of pantoprazole drug to determine the profit of the assessee and its associated enterprise. The relevant extract of the order of the TPO is extracted below:

"8.10 Since it was found fit to use residual profit split method, the global profits on account of the transaction was required to be computed. The assessee was directed to separately produce the details of sale made by SPIL to SPG FZE and the subsequent sale of these drugs to final destinations. The details have been submitted by the assessee company. The relative accounts of SPIL with reference to sales made by these two entities is reproduced below:

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 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.

ITA Nos.922 & 1234/Ahd/2017 (By Revenue) and ITA Nos.929 & 1237/Ahd/2017 (By Assessee) DCIT vs. Sun Pharmaceuticals Inds.Ltd.vs. DCIT Asst.Years - 2010-11 & 2012-13

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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:-

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.