Introduction: When the cost of drugs and transfer pricing rules meet

Pricing in the world of global business, especially in the pharmaceutical industry, isn't just about supply and demand; it's also about strategy, compliance, and paperwork. The Income Tax Appellate Tribunal (ITAT) in Hyderabad made a decision on June 6, 2025, in the case of Mylan Laboratories Ltd. vs. ACIT that directly addresses this crossroads of business sense and strict rules. This case wasn't just about numbers; it was also about how multinational companies make sure that their internal transactions follow fair market rules, especially when those rules are complicated, changing, and open to a lot of interpretation.

Mylan Laboratories, a big name in India's pharmaceutical industry, came under scrutiny for its transfer pricing policies that affected its international business dealings with its associated enterprises (AEs). This case is interesting not only because of its technical depth, but also because of the real-world problems it raises, such as segmental benchmarking vs. entity-level aggregation, how to handle goodwill amortization, and what interest rates should be used for intercompany loans.

This article breaks down the complicated but important lessons that this ruling teaches, especially for multinational companies doing business in India and other countries.

Setting the Scene: Mylan's Business and the Fight Over Transfer Pricing

Mylan Laboratories Ltd., which is part of the Viatris group, makes Active Pharmaceutical Ingredients (APIs), Finished Dosage Forms (FDFs), injectables, and product development services (PDS). It makes sense that it does a lot of business with related foreign companies because it has a large portfolio and a global supply chain.

Mylan used a mix of methods to compare its transactions for the fiscal year 2016–17. It was used:

• Using the Cost Plus Method (CPM) for API transactions,

• FDFs use the Transactional Net Margin Method (TNMM),

• Comparable Uncontrolled Price (CUP) or other method for injectables.

A cost accountant checked this hybrid strategy based on segmental analysis. The Transfer Pricing Officer (TPO), on the other hand, did not agree with this method and instead decided to use TNMM at the entity level, combining all international transactions except those that were covered by APAs. The TPO said that Mylan's operations were very interconnected, dependent on each other, and couldn't be separated, so it wasn't right to look at them by segment.

This was the main point of the legal battle.

The Tribunal's View: Integration Justifies Aggregation, But Only to a Point

The Tribunal mostly agreed with what the TPO said. It acknowledged that Mylan's business activities, which include research, API development, FDF manufacturing, and marketing, are all connected in some way. So, using TNMM at the entity level was not only okay, but it was also better in this case. The Tribunal was right to say that OECD guidelines prefer a transaction-by-transaction approach, but this isn't always possible, especially when internal cost allocations aren't clear or don't match the real economic substance.

There was, however, a very important caveat.

The TPO had left out whole groups, like FDF and injectables, just because some of their transactions were covered by an Advance Pricing Agreement (APA). The Tribunal said that this didn't make sense. Not the whole segment, but only those specific transactions that are covered by the APA should be left out.

This difference is very important. It says that APAs shouldn't be used as a blanket exclusion tool and should only be used in very specific situations. It also subtly strengthens the taxpayer's rights against arbitrary government overreach.

Is amortization of goodwill a cost?

Another important question was whether the goodwill that Mylan got from buying the Women's Healthcare Business should be considered an operating cost when calculating the Profit Level Indicator (PLI) under TNMM.

The TPO and Commissioner (Appeals) said that Mylan couldn't later say that amortization should be considered non-operating because it had already treated goodwill as an intangible asset and claimed depreciation. The Tribunal agreed.

But the Tribunal also saw a practical problem: companies that are similar might not have the same way of amortizing their intangible assets. In these situations, either:

• You need to make a change to make the margins normal, or

• To get rid of distortion, you should use a Cash-PLI approach.

This is a fair point of view: tax authorities shouldn't blindly follow accounting rules or ignore the facts of the economy.

Are cash flow hedge revenues operating or not?

Mylan made a lot of money from exports in US dollars, which they protected with forward contracts. It said that the money it made from these cash flow hedges was part of its operating income because they were directly related to business activities.

The TPO and the Tribunal did not agree.

Why? These gains weren't part of the company's main business income. According to Safe Harbour Rules, losses from foreign exchange are not included in operating costs. Therefore, gains should be treated the same way. The decision makes it very clear: revenue that is related to operations does not count as operating income unless it comes directly from day-to-day core activities.

This finding supports the idea that TP principles should be consistent and makes it less likely that taxpayers will choose to classify things.

Consistency Is Key for CCD Interest Benchmarking

Mylan had given its AEs Compulsory Convertible Debentures (CCDs) that paid 9.5% interest. The TPO, going against what had been done in the past, only used 50% of the coupon rate (4.75%) because they said that CCDs offer both interest and equity.

The Tribunal did not agree at all.

It said that the interest rate of 9.5% was:

• In line with what has been done before,

• Below the Prime Lending Rate (PLR) that was in effect when CCDs were issued in 2013,

• Fair and reasonable, since CCDs aren't as safe as government bonds.

This part of the ruling supports the idea of consistency: unless the facts or law change significantly, treatments from previous years cannot be changed for no reason.

RBI Guidelines as a Benchmark for ECB Interest Rates

Mylan borrowed External Commercial Borrowings (ECBs) from its AEs at a rate of USD LIBOR + 500 basis points. The TPO changed the rules and lowered the allowed spread to 200 bps.

The Tribunal once more sided with Mylan.

It pointed to RBI Circular No. 26, which made it clear that

• LIBOR plus 300 basis points for loans with terms of 3 to 5 years

• For loans that last more than five years, LIBOR plus 500 bps.

This shows that TPs need to make sure their policies are in line with regulatory thresholds, and that TPOs shouldn't pick benchmarks that don't take into account real-world regulatory norms.

Interest on Late Payments: Accuracy Is Key

Lastly, the problem of AE receivables that were late was dealt with. The TPO saw all delays longer than 60 days as separate international transactions and charged interest based on SBI deposit rates.

The Tribunal got involved in two ways:

• Credit Period: Mylan's APAs allowed for 90-day credit, so that rule must be followed.

• Interest Rate: LIBOR + 200 bps (which is accepted around the world) was better than the deposit rate at an Indian bank.

The Tribunal said that interest should only be calculated for the time that the payment was late, not for the whole financial year.

This makes it very clear that interest benchmarking needs to be based on real business behavior, not on what people think it should be.

In conclusion, this case teaches us a lot about transfer pricing in India.

The Mylan Laboratories decision is a turning point in Indian law about transfer pricing. It deals with almost every big problem that businesses around the world face:

• Grouping vs. splitting up,

• APA limits,

• Consistent interest rate benchmarking,

• Understanding the reality of the economy over form,

• Fair treatment of intangible assets.

The Tribunal was both technically sound and wise in real life. It knew that businesses don't work in neat silos and that TP methods need to show how things really are in the economy. But it also told tax officials not to make broad assumptions and to use nuance and evidence when making decisions.

The message is clear for multinational companies: strong documentation, consistent methods, and compliance with regulatory standards are all things that cannot be changed. Tax authorities should remember not to be too strict and to think about the business context.

As India works to become a global business center, decisions like this will affect not only tax compliance but also the overall business confidence of foreign investors.

Something to think about:

When intangible assets, intercompany loans, and IP licensing are the most important things in cross-border trade, can traditional transfer pricing models keep up with how business is done? Or do we need a new system that strikes a balance between legal certainty and economic sense?

The Mylan case doesn't give us a clear answer, but it does help us get closer to asking the right questions.