The Aurobindo Pharma SEZ Case: What It Means for Transfer Pricing

Introduction: A High-Stakes Battle in Transfer Pricing

Transfer pricing rules and Special Economic Zone (SEZ) benefits have never sat easily together, and firms walk a fine line between compliance and planning. Aurobindo Pharma Ltd. v. ACIT (Hyderabad ITAT, 2025) puts that problem in focus, and shows how unit-to-unit sales, pricing methods and tax scrutiny meet.

The dispute turns on raw materials. Aurobindo moved Active Pharmaceutical Ingredients (APIs) and other inputs from its non-SEZ units to its SEZ units. The tax office rejected the firm's transfer pricing (TP) study and added a large sum to its income. Aurobindo pushed back, saying the tax office read the economics wrong and ignored other methods Indian tax law allows.

The case is about more than a number. Every SEZ unit faces the same tension: it wants the tax break, and it must still price group sales at arm's length. The ruling matters for drugmakers, factories and export-led firms that work the same way.

The Core Dispute: Transfer Pricing Adjustments in SEZ Transactions

The Context

Aurobindo Pharma runs several plants, some inside an SEZ and some outside it. The firm moved raw materials from the non-SEZ plants to the SEZ plants, and priced those sales on the Cost Plus Method (CPM). That method compares an internal sale with the price paid by outside buyers.

The Transfer Pricing Officer (TPO) rejected that approach. In the TPO's view, the study was flawed because it left out a large share of the goods when it set the median price. The TPO then picked six product families out of 11, all of them cheap, and that choice produced a large transfer pricing adjustment.

The key issues in the case:

• Selective benchmarking: the TPO picked only some products and ignored the price of the rest of the range.

• Rejection of the firm's TP study: the firm used a method the industry accepts, yet its study was set aside.

• Alternative methods ignored: the TPO would not read a second study on the Transactional Net Margin Method (TNMM), though later years accepted that method.

That pick left Aurobindo with a large tax demand, so the firm went first to the Dispute Resolution Panel (DRP) and then to the Income Tax Appellate Tribunal (ITAT).

The ITAT’s Analysis and Ruling: A Lesson in Economic Rationality

1. The Problem with Cherry-Picking Transactions

The ITAT found that both sides had gone too far. Aurobindo's study left out 70% of its product families, which skewed the result. The TPO went the other way, looking only at the cheap lines and ignoring the dear ones that would have pulled the price back into line.

The ITAT held that a group of goods sold as a “basket” must be tested as a whole, and that a firm may not pick out the lines that give the tax office its case. The point matters for drugmakers, FMCG groups and any firm with a wide range.

2. Acceptance of TNMM as an Alternative Benchmarking Method

Aurobindo had also filed a second TP study on TNMM, which put the sales inside the Arm's Length Price (ALP) range. The DRP did not deal with it.

The ITAT called that unfair. The same tax office had accepted TNMM for the next year, 2020-21, and if TNMM was good for that year, it should have been read for the year in dispute.

3. Remanding the Case for Reassessment

The ITAT found fault on both sides, so it sent the case back and told the tax office to:

• Look at the whole product basket, not just the cheap lines.

• Take TNMM as the best method, since later years accepted it.

• Reassess the ALP with outside comparables, so the test is fairer.

Implications for Businesses: Lessons from the Aurobindo Pharma Case

1. The Growing Scrutiny of SEZ Transactions

The tax office is looking harder at sales between SEZ and non-SEZ units, and the eye is sharpest where the Section 10AA deduction is claimed. A firm in an SEZ must:

• Keep its transfer pricing file strong and easy to defend.

• Test more than one pricing method, to head off a challenge.

• Stay with one method across the years, to avoid claims that reach back.

2. The Danger of Arbitrary Adjustments by Tax Authorities

The case shows the risk of selective benchmarking by tax officers, so a firm must be ready to challenge:

• A pick of trades that bends the real price trend.

• Rejection of a sound study with no reason given.

• A different view each year, which makes tax hard to plan.

3. The Importance of Alternative Benchmarking Approaches

Companies facing TP disputes should:

• Run a second TP study, such as TNMM, before a dispute starts.

• Use outside comparables to test the price, which cuts the risk of a made-up addition.

• Talk to the tax office early, before a point grows into a case.

Beyond Transfer Pricing: The Case’s Wider Impact

Apart from transfer pricing, the case also dealt with two deductions:

1. Weighted deduction under Section 35(2AB) for R&D. The tax office denied the weighted deduction on some clinical trial costs, and the ITAT ruled for Aurobindo: trials run outside the firm's own R&D unit still qualify.

2. Additional depreciation. The tax office denied extra depreciation on plant and machinery used for research. The ITAT held the denial was wrong, and pointed to settled cases.

Conclusion: A Call for Rational Transfer Pricing Practices

The Aurobindo Pharma Ltd. v. ACIT ruling shows how hard transfer pricing is inside an SEZ. Three points stand out:

• The risk that the tax office picks the trades it wants.

• One method should hold across the years.

• A firm must be ready to defend its own prices.

India is tightening its transfer pricing rules and looking harder at SEZ tax breaks, so firms need a file they can defend.

The case goes well beyond one drugmaker. It shows what any group selling between units in a zone with a tax break must prove, and how the ITAT will read its study.