2025 (5) TMI 739 - AT - Income Tax

Transfer pricing adjustments partially deleted after tribunal finds intra-group service charges at arm's length

M/s TDK India Pvt. Ltd. (formerly known as EPCOS India Pvt. Ltd.) Versus DCIT, Circle-11 (1), Kolkata

The ITAT Kolkata ruled partly in favor of the assessee regarding transfer pricing adjustments. The tribunal directed deletion of additions for intra-group ... Addition in respect of intra group services rendered by the associated enterprises to the assessee - HELD THAT:- Respectfully following the above decision of Co-ordinate Bench in assessee own case [2023 (8) TMI 1638 - ITAT KOLKATA] we direct the AO/TPO to delete the addition and accept the charges paid by the assessee to AE for IGS are held to be at arm’s length. Our direction is inconsonance with the decision of Radhasoami Satsang [1991 (11) TMI 2 - SUPREME COURT] wherein held that even though the principle of res-judicata does not apply to income tax proceedings, but where fundamental aspect permeating through the different assessment years has been found as the fact one way or the other and the parties have allowed the position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in subsequent year. Therefore, following the said decision, we hold that the department cannot be allowed to take a different view in the subsequent years. Similar view has been laid down in the case of Britannia Industries Ltd. [2001 (9) TMI 20 - CALCUTTA HIGH COURT], Excel Industries Ltd. [2013 (10) TMI 324 - SUPREME COURT]. Accordingly, ground no. 6 to 11 are allowed. TP adjustment made in relation to sales margin - HELD THAT:- We find that the DRP has directed the TPO to verify the data submitted by the assessee during the assessment proceedings and determine the ALP of the transactions. However, the TPO disregarded the direction given by the DRP and upheld the adjustment with respect to international transactions of payment of sales margin on the ground that CUP analysis has been submitted on sample basis whereas the same has been accepted in AY 2017-18. We observe from the statement filed before us during the course of hearing from AY 2014-15 to 2021-22 that the TPO has accepted the assessee’s CUP analysis on sample basis in other assessment years. Therefore, as a matter of consistency also the TPO cannot be allowed to take a different view in AY 2016-17 as has been held in the case of Radhasoami Satsang [1991 (11) TMI 2 - SUPREME COURT]. Accordingly, we direct the AO to delete the adjustment. Incorrect income being considered for computation of total income for the final assessment order - assessee filed rectification petition before the AO, however, the AO has not passed any order till date - HELD THAT:- We find that the issue is required to be examined at the level of AO. Accordingly, we restore this issue to the file of AO with the direction to rectify the same after examining the facts on record and after affording a reasonable opportunity of hearing to the assessee. Ground allowed for statistical purposes. Disallowance of foreign exchange loss - assessee debited forex fluctuation loss to the profit and loss account which represented the realized forex loss on settlement of External Commercial Borrowings (ECB) and corresponding principal only swap and forward exchange contract by way of conversion into equity shares - HELD THAT:- We find that the issue requires re-examination at the end of AO . Therefore, we restore the issue to the file of AO to decide the same considering the facts on record and in accordance with law after verification of the same. Disallowance of actual payment of leave encashment - HELD THAT:- AO did not follow the direction of DRP and has not verified the details nor provided any opportunity to the assessee to substantiate its claim before passing the final assessment order and upheld the adjustment. After hearing the rival contentions and perusing the material on record, we find that issue needs to be examined at the level of AO. Appeal of the assessee are partly allowed for statistical purposes. The core legal questions considered in the appeals involve: (1) the validity of transfer pricing adjustments relating to intra-group services (IGS) rendered by associated enterprises (AEs) to the assessee, including the nature and arm's length pricing (ALP) of such services; (2) the correctness of transfer pricing adjustment relating to sales margin payments made to associated enterprises; (3) the treatment of foreign exchange loss and its disallowance; (4) the disallowance of leave encashment payments; and (5) the correctness of income considered for computation of total income in the final assessment order.Regarding the intra-group services (IGS) adjustment, the principal legal framework comprises the provisions of the Income Tax Act, 1961 (the Act), specifically sections 92C and 92CA dealing with transfer pricing and determination of arm's length price. The Tribunal relied heavily on precedents from coordinate benches and High Courts, emphasizing that the Transfer Pricing Officer (TPO) must apply one of the six prescribed methods under section 92C(3) for determining ALP. The TPO's determination of ALP at nil without applying any prescribed method was held to be without jurisdiction and contrary to the principles of Indian transfer pricing regulations.The Tribunal examined detailed evidence submitted by the assessee regarding the nature, need, and benefits derived from intra-group services such as IT support services (ITSS), export support services (ESS), and management support services (MSS). The assessee demonstrated that these services were integral to its business operations, with ITSS involving centralized IT infrastructure management and third-party vendor coordination by the AE, ESS involving export market development and product marketing support, and MSS encompassing consulting, financial advisory, and other strategic support. The Tribunal found the TPO's characterization of these services as 'stewardship activities' to be factually and legally incorrect.In addressing the stewardship activity argument, the Tribunal distinguished the facts from the Supreme Court's ruling in the Morgan Stanley case, which concerned permanent establishment issues and involved admitted stewardship services. Here, the dispute was factual and related to the nature of services received. The Tribunal relied on its own precedents, including Akzo Nobel India Ltd., which rejected the stewardship classification in similar circumstances.The Tribunal further noted that the TPO and Dispute Resolution Panel (DRP) failed to consider the documentary evidence and cost allocation certificates provided by the assessee, which were not disputed. The Tribunal underscored the principle that the businessman is best placed to judge the reasonableness and benefit of business expenditures, a principle supported by decisions such as N L C Nalco India Private Limited. The Tribunal held that the charges paid to the AE for intra-group services were at arm's length and directed deletion of the transfer pricing additions relating to IGS.On the sales margin adjustment, the Tribunal analyzed the facts that the assessee sold goods to distributors and associated enterprises (AEs) at third-party prices, paying sales margin on turnover. The TPO rejected the assessee's internal Comparable Uncontrolled Price (CUP) analysis on the ground that it was submitted on a sample basis and was incomplete. However, the DRP directed the TPO to verify and accept the internal CUP analysis, consistent with directions given in prior assessment years.The Tribunal observed that the TPO's rejection of the CUP analysis in the instant year contradicted its acceptance in other years, including AY 2017-18, and that such inconsistency violated principles of consistency and fairness as enshrined in the Supreme Court's Radhasoami Satsang decision. The Tribunal relied on this precedent to hold that the TPO could not take a divergent view for the same issue without justification and directed deletion of the sales margin adjustment.Concerning the foreign exchange loss disallowance, the assessee claimed a loss on settlement of External Commercial Borrowings (ECB) partly related to capital goods purchased domestically. The AO disallowed the claim citing inconsistency between the tax audit report and return of income. The DRP erroneously treated the issue as a transfer pricing matter and gave directions related to operating versus capital nature of forex gains/losses, which the Tribunal found misplaced.The Tribunal restored the issue to the AO for fresh examination, directing that the assessee be afforded reasonable opportunity to substantiate the claim and that the AO decide the matter in accordance with law and facts. This approach recognized the issue as one of corporate tax treatment rather than transfer pricing.Regarding the leave encashment disallowance, the assessee had created a provision and made payments during the year but inadvertently misreported the payment amount in its return. The DRP directed the AO to verify and grant relief accordingly. However, the AO failed to comply or provide opportunity to the assessee. The Tribunal restored this issue to the AO for adjudication after affording the assessee a reasonable opportunity to substantiate the claim.Lastly, the issue of incorrect income considered for computation of total income was also restored to the AO for rectification after examination of facts and hearing the assessee, as the AO had considered a higher income figure than declared by the assessee without explanation.The Tribunal's significant holdings include the following:'The TPO, in the instant case, determined the arm's length price of the international transaction at Nil without applying any of the methods prescribed under sub-sections (1) and (2) of section 92C of the I.T. Act. We find that the principle enunciated by the Hon'ble High Court of Bombay in the aforesaid case is squarely applicable on the facts of the present case. Hence, we find that the aforesaid action of the TPO (that is, the determination of the ALP of the international transaction under consideration at nil) is without jurisdiction and it goes against the basic tenet of the Indian Transfer Pricing Regulation.''The essence is that a businessman himself is the best judge in determining the reasonableness / usefulness / benefit of an expenditure which is wholly and exclusively laid out for the purpose of business. The Revenue has no role to play in determining the reasonableness / usefulness / benefit of a business expenditure.''Following the decision of the Hon'ble Apex Court in the case of Radhasoami Satsang vs. CIT wherein the Hon'ble Apex Court held that even though the principle of res-judicata does not apply to income tax proceedings, but where fundamental aspect permeating through the different assessment years has been found as the fact one way or the other and the parties have allowed the position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in subsequent year.''The ruling in the aforesaid decision [Morgan Stanley]... has no application to the facts of the present case... the factual dispute is as to whether the IT services received by the assessee under the aforesaid agreement was in the nature of stewardship services or not.'In conclusion, the Tribunal allowed the appeals in part by directing the deletion of transfer pricing additions relating to intra-group services and sales margin payments, restoring issues relating to foreign exchange loss, leave encashment, and income computation to the AO for fresh adjudication with appropriate opportunity to the assessee. The Tribunal emphasized adherence to prescribed transfer pricing methodologies, the need for consistent treatment across assessment years, and the primacy of evidence regarding the nature and benefit of intra-group services. The Tribunal rejected the characterization of intra-group services as stewardship activities without factual basis and upheld the principle that the assessee's documented evidence of service receipt and benefit must be given due weight in transfer pricing disputes.