API vs Formulation: HSN 2941 / 3003 / 3004 Reconciliation Guide

A backward-integrated Indian pharma group closes its books on 30 September with an API manufacturing unit in Hyderabad dispatching approximately 42 tonnes of bulk antibiotic — Amoxicillin trihydrate, Cefixime, Azithromycin base — across the September month to a sister formulation plant twelve kilometres away that converts the same molecule to finished tablets, capsules, and dry syrup in retail SKUs. Two GSTINs, two Rule 89(5) refund cycles, one inter-unit invoice stream at arm’s length under the Section 92BA specified-domestic-transaction discipline, and one material-flow register that must carry the HSN transition from Chapter 29 (2941) at the API dispatch stage, through Chapter 30 (3003) at the formulation feedstock stage, to Chapter 30 (3004) at the finished-dosage-form dispatch stage — this is API vs formulation HSN 2941 3003 3004 reconciliation at the operating scale that a Tier-1 Indian pharma group runs across its own backward-integrated supply chain. The 56th GST Council decisions effective 22 September 2025 rationalised the pharmaceutical schedule to a flat 5 percent output rate on both HSN 2941 (bulk antibiotic APIs) and HSN 3004 (formulations), but the deepened inversion on the API side against 18 percent solvent, catalyst, and intermediate inputs — combined with the Chapter-27 solvent exclusion under Notification 09/2022-Central Tax (Rate) that sterilises the solvent leg of the API unit’s refund envelope — is the tax cycle that separates a well-instrumented group from one that spends the following financial year litigating a Section 74 short-payment demand at one GSTIN and a Section 92BA transfer-pricing adjustment at the group’s income-tax assessment.

Quick reference

The reconciliation in one paragraph

A backward-integrated pharma group runs a three-stage material flow across the API and formulation legs: API synthesis at the manufacturing plant (dispatched under HSN 2941 as an antibiotic of Chapter 29 organic chemicals), bulk mixture at the formulation feedstock stage (received under HSN 3003 as a medicament of two or more constituents mixed together but not put up in measured doses), and finished dosage form at the formulation output stage (dispatched under HSN 3004 as a medicament put up in measured doses for retail sale). Each transition is a distinct HSN classification event that must be captured on the invoice, on the material-flow register keyed on the API batch number, and on the GSTR-1 supply line at the relevant GSTIN. The 56th GST Council decisions effective 22 September 2025 flattened the output rate to 5 percent on all three HSN codes, deepening the inverted duty structure on the API side against 18 percent input GST on solvents, catalysts, and intermediates. Notification 09/2022-Central Tax (Rate) dated 13 July 2022 bars the Rule 89(5) inverted-duty refund on the solvent leg (HSN Chapter 27), which forces the API unit’s refund workbook to segregate solvent ITC from other input ITC and file GST RFD-01 monthly on the refund-eligible base only. The formulation plant runs a separate refund workbook at its own GSTIN. The inter-unit invoice stream sits at arm’s length under Section 92BA read with Rule 10D where the two units are separate legal entities, and Section 194Q applies to the buyer-side formulation plant’s payment to the seller-side API unit where the cross-plant procurement crosses Rs 50 lakh per counterparty. Where the two units are two GSTIN registrations of the same corporate legal entity (same PAN), neither Section 92BA nor Section 194Q applies because the buyer and seller are the same person.

What the scenario looks like in India

Backward integration on the antibiotic API to finished formulation axis is a defining operating pattern of the Indian pharma industry. A group that runs its own API manufacturing capacity for the molecules that dominate its formulation portfolio holds a structural cost and supply-security advantage over one that imports the same API from a third-party Chinese or European supplier — but it inherits the reconciliation complexity of two distinct tax positions on two distinct HSN legs of the same molecule.

Illustrative Tier-1 Indian pharma groups running backward-integrated API to formulation supply chains at the scale relevant to this reconciliation include Sun Pharmaceutical Industries (with its own API footprint across Ahmednagar, Halol, and other sites), Dr Reddy’s Laboratories (Bachupally and Bollaram sites in Hyderabad for API, Baddi and Vishakhapatnam for formulations), Cipla (Kurkumbh in Maharashtra for API, Verna in Goa and Baddi for formulations), Aurobindo Pharma (a large Hyderabad API cluster feeding formulation plants in the same catchment), Lupin (Ankleshwar and Tarapur for API, Aurangabad and Goa for formulations), Zydus Lifesciences (with backward integration across Gujarat and Sikkim sites), Torrent Pharmaceuticals, Alkem Laboratories, Glenmark Pharmaceuticals, and Cadila Pharmaceuticals. Illustrative Tier-2 API specialists that supply the same integrated groups on a merchant-API basis include Divi’s Laboratories, Neuland Laboratories, Suven Pharmaceuticals, Laurus Labs, Granules India, and Ipca Laboratories. The persona for the worked example in this article is a group whose Unit-I API manufacturing site in Hyderabad ships bulk antibiotic API — Amoxicillin trihydrate, Cefixime, and Azithromycin base — to Unit-IV formulations in the same Hyderabad catchment where the API is converted to tablets, capsules, and reconstituted-syrup finished dosage forms for the domestic and export markets.

The two-plant, two-GSTIN structure is the reconciliation base case. Some groups run the API and formulation legs under a single corporate legal entity with two GSTIN registrations (one per plant) at the same PAN. Others run them under separate group companies — a subsidiary API-manufacturing company and a parent formulation-plus-marketing company, or an intermediate holding structure — where each entity has its own PAN. The two structures produce the same GST reconciliation surface (two GSTINs, two refund cycles, one material-flow register across the two) but very different income-tax positions on the inter-unit invoice: same-PAN structures escape Section 92BA and Section 194Q because buyer and seller are the same person, while separate-entity structures trigger both. The group’s tax function must decide the corporate structure question upstream — this article walks the separate-entity worked example because it exposes the fuller reconciliation surface; the same-PAN case is a strict subset.

The regulatory overlay — 56th GST Council, Rule 89(5), Notification 09/2022, Section 92BA, Section 194Q

Five regulatory anchors govern the API to formulation reconciliation, and each maps to a specific surface on the material-flow register or the inter-unit invoice.

The 56th GST Council on 3 September 2025, with rates effective 22 September 2025, moved the entire pharmaceutical schedule to a single 5 percent output rate. Antibiotic APIs under HSN 2941 dispatched from the API manufacturing unit attract 5 percent IGST on inter-state supply (or CGST plus SGST on intra-state supply); bulk drug feedstock under HSN 3003 attracts 5 percent; finished formulations in measured doses under HSN 3004 attract 5 percent. A specified schedule of life-saving drugs — cancer, HIV, TB, and notified rare-disease molecules — moved to nil rate. GST Council FAQ Q10, Q25, and Q51 explicitly acknowledge the deepened inversion for the API tier and reaffirm expedited Section 54(3) refund treatment. The pharma inventory GST rate switch reconciliation walkthrough covers the inventory-side straddle mechanics for stock held on 21 September at the pre-cutover rate that shipped on 22 September at the post-cutover rate; the pre-post-22-September straddle-invoice reconciliation covers the invoice-side straddle for orders released before the cutover and delivered after.

Section 54(3) of the CGST Act 2017 permits a registered person to claim a refund of unutilised input tax credit where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies. The Supreme Court in Union of India v. VKC Footsteps India Pvt Ltd (2021) 10 SCC 674 confirmed the statutory framework and clarified that the refund is confined to unutilised credit on inputs; input services and capital goods are excluded. Rule 89(5) of the CGST Rules 2017, as amended by Notification 14/2022-Central Tax dated 5 July 2022, gives the operational formula. Maximum Refund Amount = (Turnover of inverted-rated supply of goods and services × Net ITC / Adjusted Total Turnover) minus (Tax payable on such inverted-rated supply × Net ITC / ITC availed on inputs and input services). Net ITC excludes input services and capital goods. The inverted-duty refund guide for pharma formulations walks the formula on the formulation-plant side; this article deals specifically with the API-side application and the Chapter-27 solvent exclusion that governs it.

Notification 09/2022-Central Tax (Rate) dated 13 July 2022, effective 18 July 2022, invokes clause (ii) of the first proviso to Section 54(3) to bar refund of unutilised ITC on account of the inverted duty structure for supplies of goods falling under HSN Chapter 15 (edible fats and oils) and HSN Chapter 27 (mineral fuels, mineral oils, and products of their distillation). Solvents used at the API synthesis stage — hexane, isopropyl alcohol, methanol, toluene, methyl-ethyl-ketone, and ethyl acetate — are HSN Chapter 27 goods. The ITC on the solvent purchases sits in the API unit’s electronic credit ledger like any other input credit and can be used to discharge the API unit’s output tax liability, but it cannot be included in the Net ITC numerator of the Rule 89(5) refund formula. The mechanic is identical to the Chapter-15 blockage that governs Indian edible oil refiners under the same notification — see the edible oil Chapter-15 IDR refund blockage walkthrough for the parallel and the dairy inverted-duty refund under Rule 89(5) walkthrough for the unblocked Rule 89(5) mechanic without the exclusion overlay.

Section 92BA of the Income-tax Act 1961 (retained in the Income-tax Act 2025 codification) covers Specified Domestic Transactions. Where the API manufacturing unit and the formulation plant are two separate legal entities within the group (each with its own PAN), the inter-unit API transfer is a Section 40A(2)(b) related-party transaction, and where the aggregate crosses the Section 92BA monetary threshold in the previous year, the transaction is a Specified Domestic Transaction subject to arm’s-length pricing discipline. Rule 10D prescribes the documentation set — description of the group entities, functional analysis of each, arm’s-length pricing method (typically Cost Plus for a manufactured API where a marked-up cost is the natural benchmark, or Comparable Uncontrolled Price where the same API is also sold to third-party formulators at market price), Form 3CEB certification by an Accountant at year-end, and retention of the documentation for the statutory period. Where both units are two GSTINs of the same PAN, Section 92BA does not apply because there is no counterparty relationship.

Section 194Q, Income-tax Act 1961 (successor payment code 1031 under Section 393 Sl. 8 of the Income-tax Act 2025), requires a buyer whose aggregate turnover in the immediately preceding financial year exceeds Rs 10 crore to deduct TDS at 0.1 percent on payment for purchase of goods from a resident seller where the aggregate value crosses Rs 50 lakh in a previous year. Where the API unit and the formulation plant are separate legal entities, the formulation plant (as buyer) deducts TDS at 0.1 percent on the incremental cross-plant procurement above Rs 50 lakh per counterparty. Where both units are two GSTINs of the same PAN, Section 194Q does not apply because the buyer and seller are the same person. The TDS payment code 1031 Section 393 Sl. 8 purchase of goods walkthrough covers the buyer-side reconciliation surface for the 194Q code across supply chains.

A worked example — Unit-I Hyderabad API to Unit-IV Hyderabad Formulations at monthly close

Illustrative — the following figures represent the operating pattern of a Tier-1 backward-integrated pharma group of the scale that runs its own Hyderabad API cluster feeding a proximate formulation plant. Public disclosures do not reveal per-batch inter-unit transfer detail; cross-verify against your group’s own material-flow extract and Rule 10D benchmark file before action.

An illustrative pharma group runs Unit-I API Manufacturing in Hyderabad and Unit-IV Formulations in the same Hyderabad catchment, structured as two separate legal entities of the group (Unit-I is a subsidiary API-manufacturing company; Unit-IV is the parent formulation-plus-marketing entity). For the September 2026 month, Unit-I dispatches 18 tonnes of Amoxicillin trihydrate USP, 14 tonnes of Cefixime USP, and 10 tonnes of Azithromycin base to Unit-IV — total 42 tonnes.

The inter-unit invoice from Unit-I to Unit-IV carries HSN 2941 at 5 percent IGST (the movement is intra-state Hyderabad, so 2.5 percent CGST plus 2.5 percent SGST — expressed here as 5 percent aggregate for simplicity). The arm’s-length benchmark under Section 92BA is set at Cost Plus 12 percent on Unit-I’s manufacturing cost, cross-validated against the price Unit-I charges third-party formulator customers for the same API on a merchant-API basis. The Rule 10D functional analysis records Unit-I as the manufacturer bearing manufacturing risk, Unit-IV as the formulator bearing market risk, and the Cost Plus method as the most-appropriate arm’s-length method for a fungible bulk API where market comparables exist.

Aggregate inter-unit invoice for the month: Rs 92 crore at arm’s length. IGST at 5 percent: Rs 4.6 crore, output-side at Unit-I, input-side at Unit-IV.

Unit-I’s September input GST position:

Unit-I’s September output GST position: Rs 92 crore at HSN 2941 at 5 percent = Rs 4.6 crore output tax.

Refund-eligible ITC pool at Unit-I: Rs 3.348 + Rs 0.504 + Rs 0.288 = Rs 4.14 crore (Chapter 29 to 38 chemicals plus refund-eligible packaging, excluding solvents, services, and capital goods).

Applying the amended Rule 89(5) formula on the refund-eligible base with the Chapter-27 solvent ITC excluded from the Net ITC numerator, Unit-I files GST RFD-01 for the September tax period against the accumulated inverted-duty credit on the eligible pool. The refund draft is filed at Unit-I’s GSTIN, and the ITC-04 (job-work) provisions are not triggered because the inter-unit transfer is a supply on an invoice at arm’s length, not a job-work send-out.

Unit-IV’s September position on the same 42-tonne API receipt:

At Unit-IV, the input GST accumulates on the API input (5 percent), the excipients (18 percent), and the retail packaging (18 percent). The output GST on finished formulation is 5 percent under HSN 3004. Unit-IV also runs a Rule 89(5) inverted-duty refund cycle against the accumulated ITC — but Chapter-27 solvent exposure is minimal at the formulation stage (solvents are largely spent at the API stage), so the refund envelope at Unit-IV is dominated by excipients (Chapter 17/29/33 depending on the excipient — all refund-eligible) and packaging (Chapter 39/48 — also refund-eligible). Unit-IV files GST RFD-01 monthly at its own GSTIN independently of Unit-I’s refund cycle.

Section 194Q liability at Unit-IV: 0.1 percent on the September aggregate above the Rs 50 lakh threshold (which was crossed in the first quarter of the financial year) — approximately Rs 9.15 lakh for the month, remitted against Unit-I’s PAN. Because Section 194Q takes precedence over Section 206C(1H) where both apply, Unit-I does not collect TCS on the same transaction. At year-end, the Form 3CEB Accountant’s certification records the inter-unit transfer at Rs 92 crore for September (and the year’s aggregate) as a Specified Domestic Transaction with the Cost Plus 12 percent arm’s-length benchmark and the Rule 10D documentation file.

Common reconciliation breakages

Five breakages recur across Indian backward-integrated pharma groups running the API to formulation reconciliation, and each maps to a specific control failure.

• HSN transition tag lost on the material-flow register. The API batch enters at HSN 2941 (Chapter 29 antibiotic), transitions to HSN 3003 as bulk feedstock inside the formulation plant, and exits as HSN 3004 finished dosage form. Groups that carry only one HSN tag on the material-flow register (typically the final 3004 tag) lose the audit trail on the inter-unit transfer and the API-side dispatch — the GSTR-1 supply line at Unit-I’s GSTIN reports HSN 2941 but the material-flow register no longer supports it, creating a Section 61 scrutiny exposure at Unit-I’s assessment.

• Solvent ITC mixed into the API unit’s refund workbook. Chapter 27 solvent ITC is refund-blocked under Notification 09/2022 but sits in the same electronic credit ledger as the refund-eligible Chapter 29 to 38 chemical ITC. Groups that draw the Net ITC numerator from the full ledger overstate the refund claim, expose the API unit to a Section 74 short-payment demand plus penalty, and — after audit — face a claw-back of the excess refund with interest. Reconciliation discipline requires the solvent ITC and the other input ITC to be maintained in separate sub-pools at source, keyed on the HSN chapter of the input.

• Inter-unit invoice priced off arm’s length. Where the two units are separate legal entities, the Section 92BA arm’s-length discipline requires the inter-unit invoice to reflect either a Cost Plus benchmark (with the mark-up justified against comparables) or a Comparable Uncontrolled Price benchmark (where merchant-API sale prices for the same molecule are available). Groups that price the inter-unit transfer at a convenient round-number rate — or at Unit-I’s cost with no mark-up — under-report Unit-I’s income to the extent of the missing arm’s-length margin, invite a Section 92BA transfer-pricing adjustment at the assessment stage, and undermine the Form 3CEB Accountant’s certification.

• Section 194Q not deducted on the buyer-side formulation plant’s payment to the API unit. Where the two units are separate legal entities and the cross-plant procurement crosses Rs 50 lakh per counterparty in the previous year, the formulation plant (as buyer) must deduct TDS at 0.1 percent under Section 194Q on the incremental value. Groups that treat the inter-unit transfer as an intra-group settlement outside the 194Q net under-deduct TDS by the full 0.1 percent and expose the formulation plant to a Section 201 short-deduction demand with interest. The mis-classification typically surfaces at the buyer’s TDS audit, and the corresponding under-credit on the API unit’s Form 26AS surfaces at the API unit’s tax return processing.

• Same-PAN two-GSTIN case over-taxed under Section 194Q or Section 92BA. The mirror-image error. Where the two units are two GSTIN registrations of the same corporate legal entity (same PAN), neither Section 194Q nor Section 92BA applies because the buyer and seller are the same person for income-tax purposes. Groups that mechanically apply the separate-entity treatment to the same-PAN case over-deduct TDS on the inter-unit invoice (paying it in as a self-tax with no offsetting credit) and over-document the inter-unit transfer as an SDT under Rule 10D. The over-documentation is cosmetic; the over-deduction under 194Q is a real cash cost until the TDS is claimed back at the return-filing stage.

How a reconciliation platform handles this

A purpose-built pharma reconciliation platform ingests the material-flow register from the API manufacturing plant and the formulation plant, keys every batch on the three-stage HSN transition (2941 to 3003 to 3004), reconciles the API dispatch invoice against the formulation plant’s inward register on a two-way match, and generates two separate Rule 89(5) refund workbooks — one at each GSTIN — with the Chapter-27 solvent exclusion pre-applied at the API side per Notification 09/2022. It maintains the inter-unit invoice register at arm’s length with the Section 92BA benchmark source (Cost Plus or Comparable Uncontrolled Price) tagged per invoice, generates the Form 3CEB feed at year-end for the Accountant’s certification, and computes Section 194Q buyer-side TDS on cross-plant procurement above the Rs 50 lakh threshold only where the two units are separate legal entities. Match rate improvement of 51 to 88 percent on the cross-plant material-flow reconciliation chain, combined with an ISO 27001:2022 posture and DPDP Act 2023 aligned data handling, is what makes the platform an infrastructure investment for a Tier-1 backward-integrated Indian pharma group rather than a spreadsheet substitute for the tax function’s monthly close.

The reconciliation methodology in this article is a specific application of Terra Insight’s own reconciliation failure-mode analysis framework on the API-to-formulation supply chain, and the operating cadence sits inside the broader monthly-close reconciliation playbook that governs the finance function’s period-end discipline.

Cross-cluster bridges and where to read next

The HSN classification discipline in this article sets up the pharma cluster’s foundation. For the inventory-side straddle mechanics on the 22 September 2025 GST rate cutover, read the pharma inventory GST rate switch reconciliation walkthrough. For the medical-device rate change from 18 percent to 5 percent under the same 56th GST Council decisions, read the medical device HSN 9018-9022 18 to 5 percent rate change walkthrough. For the specified schedule of life-saving drugs moved to nil rate, read the life-saving drugs nil-rate GST cancer HIV TB rare-disease walkthrough. For the Rule 89(5) refund mechanics on the formulation-plant side without the Chapter-27 exclusion overlay, read the GST refund inverted duty pharma Rule 89(5) India walkthrough. For the parallel Chapter-15 refund blockage that governs Indian edible oil refiners under the same Notification 09/2022, read the edible oil Chapter-15 IDR refund blocked walkthrough. For the R&D-side weighted-deduction cycle that runs at the same pharma group’s DSIR-approved facility, read the pharma R&D tax incentive Section 35(2AB) walkthrough. The commercial pillar for the entire pharma sub-cluster is Pharma reconciliation software India; the broader authority is reconciliation software India.

The five FAQs below address the classification, refund, and inter-unit transfer questions Indian pharma group tax teams ask most often when implementing structured API to formulation HSN reconciliation across a backward-integrated supply chain.

Terra Insight Editorial Team Reconciliation Infrastructure

Content authored by practitioners with experience at Amazon India, Intuit QuickBooks, and the Tata Group. Meet the team →

Published 13 July 2026

Domain expertise

TDS Reconciliation GST Input Credit Platform Settlements NACH Batch Matching Bank Reconciliation Form 26AS Matching ERP Integrations Enterprise Finance Ops

Reviewed by

NK

Navin Krishnan

Managing Director & Founder — Terra Insight

Ex Amazon India · Intuit QuickBooks · Tata nexarc

ISO 27001:2022 Patent Pending Incorporated 2024