M/S TDK INDIA PVT. LTD.(FORMERLY KNOWN AS M/S EPCOS INDIA PVT. LTD.),KOLKATA vs. DCIT, CIR. 11(1), KOLKATA

ORDER / आदेश Per Rajesh Kumar, AM: These are the appeals preferred by the assessee against the separate orders of Ld. Dispute Resolution Panel-2, New Delhi (hereinafter referred to as the “Ld. DRP”] passed u/s 144C(5) of the Income Tax Act, 1961 (hereinafter referred to as the Act) dated 28.12.2020 and 18.02.2022 for the AY 2016-17 & 2017-18,First we shall adjudicate in assessee’s appeal in for AY 2016-17.

4. Issue raised in ground no. 6 to 11 is against the confirmation of addition of Rs. 12,54,93,154/- by the Ld. DRP in respect of intra group services rendered by the associated enterprises to the assessee.

Particulars Adjustment Amount (Rs.)

Intra-Group Services 20,05,67,685/- Sales Margin 24,81,50,256/- Sale of ferrite for consumption 63,11,28,244/- The assessee filed objections before the DRP and DRP after hearing the assessee passed an order u/s 144C(5) of the Act directing the AO/TPO to take 12,54,93,154/- as arms length price for Intra Group Services. Accordingly, the final order was passed by the AO making the said addition.

“15. Now, first we need to examine that what type of services have been provided by the AE to the assessee. Learned Counsel for the assessee has claimed that the assessee company in order to avail an effective network development and high productivity service standards the assessee is in continuous need of said services in the nature of product marketing as well as information technology, management support etc. The Assessee has also filed the written submission before us wherein it has explained in detail the need and consequent receipt as well as benefit derived from availing such services and the same is reproduced below: 1) IT Support Services (‘ITSS’) a) NEED FOR ITSS  In today’s technology driven business environment, it is very important for TDK India to have a systematic IT infrastructure in place, which helps TDK India in conducting its business in an effective manner.  Further, considering the small team of IT personnel (i.e. 3 employees) employed by TDK India, it becomes necessary for TDK India to avail IT support from TDK AG as well to manage the wide network operations and the IT infrastructure. b) RECEIPT & BENEFIT OF ITSS  Within TDK-EPCOS group, TDK AG employs a central IT department that renders IT services to all TDK-EPCOS group subsidiaries including TDK India. The IT systems and resources are used by all TDK-EPCOS group subsidiaries and thus, also facilitate the core business functions and processes of TDK India.  With years of operating in the industry, TDK AG has been able to create an in-house pool of specialized and skilled resources who can provide / coordinate the IT support services to other group entities.  This includes the development and implementation of the IT strategy and architectures, administration, maintenance and controlling of the IT systems and provision of ongoing support with regard to the IT systems.  Moreover, TDK AG also procures IT services (i.e. software, licenses and IT platforms) from the third-party vendors and provides its access to the TDK Group companies. For managing services from third party vendors, TDK AG performs the following functions: - TDK AG also acts a central purchaser of IT resources. The central purchasing function of TDK AG allows TDK-EPCOS group to realize synergies from economies of scale (e.g. better prices) and to provide all subsidiaries with up-to date IT resources. The IT systems and resources centrally purchased by TDK AG comprise of SAP systems (ERP system) and Non- SAP systems (such as, ASSIST (shipping system), EBIS (system for sales controlling &reporting), EDI (system for data transfer between SAP & Non-SAP systems), Microsoft Office applications, etc.

Assessment Year: 2016-17 & 2017-18 M/s TDK India Limited (formerly known as EPCOS India Pvt. Ltd.) - Understanding the IT resource requirement; - Vendor evaluation for sourcing necessary licenses; - Negotiation and finalization of contract with vendors; - Acting as a single point of contact for service related to third party vendors i.e. coordinating with vendor on issue of delivery of software licenses, solving of bugs, license support, renewal of contracts and warranties, following up for updates, ensuring Group’s data security and integrity, etc.; and  Supervise and ensure that right quality services are being provided by the third-parties to all its group companies across the globe.  In view of the above, with respect to third party IT service costs, TDK AG undertakes larger functions and provide value in terms of coordination with the third-party IT service vendors on behalf of all the TDK group entities, ensuring right quality of services, maintain group’s data security etc. Therefore, one cannot conclude that TDK AG is only acting as a pass-through entity for allocating third party costs to other TDK group companies. Hence, TDK AG is required to be remunerated appropriately for such thirdparty costs.  Moreover, the IT department in TDK India comprises of only three people at local level. This only demonstrates the level of coordination and management handled by TDK AG the group level so as to ensure smooth flow of continuous IT support. Such dedicated IT support service in place ensures access to highly specialized talent and resources as and when a company requires. It also helps in maximizing a company’s efficiency, saving business costs in the long run and provides access to latest technology.  The fact that the company is in receipt of various application licenses to undertake its business operations could be verified from the fact that it has been using those licenses in its day to day business operation and without any separate cost being incurred by it.  Further, the IT cost allocated to TDK India include 81.66% of the third-party cost and very minimal cost incurred by TDK AG itself i.e. 18.34%. This clearly suffices that there has been actual receipt of IT support as majority of the support services has been received from third parties. 2) Export Support Services (‘ESS’) a) NEED FOR ESS  During FY 2013-14, approx. 55.54% (i.e. INR 3,840 / 6,914 million) and during FY 2014- 15, approx. 55.18% (i.e. INR 3,546 / 6,426 million) of the total revenue of TDK India is from export activities. Therefore, it is necessary for TDK India to avail export support in the context of furthering its export market and increasing the market reach of its products  Thus, there exists a need for dedicated product marketing team comprising of skillful resources who are constantly involved in analyzing market conditions for TDK India in terms of technology changes, product variation etc. b) RECEIPT & BENEFIT OF ESS Assessment Year: 2016-17 & 2017-18 M/s TDK India Limited (formerly known as EPCOS India Pvt. Ltd.)  To cater to the need of export support, TDK India has received services from TDK AG through well qualified team of resources rendering the desired services in an efficient manner.  The dedicated product marketing team comprising of skilful resources constantly helps TDK India in analyzing market conditions in terms of technology changes, product variation etc. which has benefitted TDK India in increasing export turnover, expanding its business operations in the overseas market, increase the market reach of its products, etc.  Following are list of functions performed by TDK AG personnel at local as well as global level for TDK India to render export support for products manufactured by TDK India: - Analyzing the market conditions in terms of growth rates, technology changes, price developments etc; - Developing product strategies for different market and assisting in implementing the same; - Preparing technical documents for product utility, making visual presentations; - Communicating the details of training and further education of the global product sales staff to TDK India; - Preparing guidelines (advisory nature) for conducting business transactions in different foreign locations; - Maintaining customer relationship, addressing concerns etc; - Negotiating with logistic vendors; and - Preparing guidelines with respect to export controls.  Therefore, there could be no denial from the fact that services have been received and benefits have been derived by TDK India from receipt of services in relation to Export support. 3) Management Support Services (‘MSS’) a) NEED FOR MSS  Differing high value services like consulting, financial advisory, supply chain & logistics, human resource management helps an organization in focusing on core business.  MSS helps in strengthening the competitive position by logical approach to analyze the complex and the strategic management issues. It brings value and measurable performance improvement by saving entity’s valuable time and cost significantly. MSS are specialized for crafting solution to complex financial and strategic challenges of a multilateral enterprise. b) RECEIPT & BENEFIT OF MSS  The regional HQ of each business division (i.e. TDK Malaga for TDK India’s business division) collates details at micro level from each entity and then forwards it to TDK AG at group level, for planning the further plan of action.

 In order to establish oneself as an efficient enterprise, overseeing overall growth of the group becomes pivotal. Accordingly,.  The services availed by TDK India from TDK Malaga under MSS are in the nature of R&D Services, Quality management services, Internal audit services and other support services.  TDK India is able to access best practices and develop efficiency through various types of reporting to regional HQ. Such incidental benefits cannot be directly linked with any tangible outcome  It derives various benefits in the nature of daily check on operational performance of TDK India; alignment of TDK India’s sales strategy with the Group strategy and adoption of global best practices, minimise production costs, etc. Based on the above, it can be concluded that there was a need for availing intra group services and TDK India has derived benefit from such services. The Assessee has adduced documentary evidence supporting the need, rendition of services and benefits derived therefrom. The TPO has, without any basis, held the services to be in the nature of stewardship activity and has, without applying any of the 6 methods specified in section 92C(3) read with section 92CA of the Act, determined the ALP of such services at NIL. The same is not in consonance with law and is bereft of facts of the case. Therefore, it is submitted that the adjustment in this regard needs to be quashed.

16. We observe that the above described type of IT support services which the assessee is availing is majorly from third party service providers and very miniscule form AE. Also the other nature of services rendered by AE to the assessee are not specific but provided on day to day basis whenever needed. The AE has relevant expertise and there are various types of issues and problems attached in such services and the AE being an expertise in the international business – the assessee company is taking regular service through the personnel of AE to get guidelines on various fronts including the product marketing, management support, corporate sales, finance, other connected issues on various courses. In other words, for day to day smooth and effective working of business and for trying to keep an error free working environment, such intra group services have been taken.

17. The learned counsel for the Assessee reiterated submissions made before the DRP/TPO and drew our attention to the evidence in support of the services received by the Assessee from its AE, the rationale/need for services so received vis-à-vis the business of the Assessee, benefit received by the Assessee, the benchmarking approach adopted by the Assessee from recipient’s perspective and also from the service provider’s perspective, manner of allocation of costs by the service provider vis-à-vis the Assessee. He also explained the meaning of nature of stewardship services and as to how the payment made by the Assessee to its AE, are not in the nature of stewardship services. He drew our attention to certain cases of Hon’ble High Courts in India and various Benches of Income Tax Appellate Tribunal on the approach that should be adopted in determining ALP in cases of intra group services received from group companies (AE). We will make a reference to these decisions later.

18. The observation of the Revenue authorities is not specific but general in nature that the assessee has failed on the benefit test but nowhere any specific instances have been given to show that the so-called services taken by the assessee company from its AE under various agreements are not related to the nature of Assessment Year: 2016-17 & 2017-18 M/s TDK India Limited (formerly known as EPCOS India Pvt. Ltd.) business carried on by the assessee. It is not the case that the assessee which is carrying on manufacturing of electronic business has paid the intra group service charges for some other unrelated business activity.

Assessment Year: 2016-17 & 2017-18 M/s TDK India Limited (formerly known as EPCOS India Pvt. Ltd.) 23. In this regard, the Ld. Counsel also referred to the recent decision of Kolkata ITAT wherein on similar facts, the determination of IGS at ALP Nil was deleted by the Hon’ble bench in the case of AT&S India Private Limited (I.T.A. No. 1311/Kol/2018), wherein this Tribunal dealing with similar issue held as follows:- “It was alleged by the Revenue that the Ld. CIT(A) erred in concluding that the payment for intra-group services was at arm’s length without examining the cost of such service provider and without examining mark-up element incorporated in the quantum of service fee charged by the AE. In this connection, it is noted that as per the ‘I T Cost Pooling Agreement’, total cost was allocated to the AT&S group companies using appropriate allocation keys. It is further noted the TPO did not make any adverse comment in his order regarding the cost allocation certificate issued by the independent auditor namely PwC Wirtschaftsprüfung GmbH vide letter dated 17th April, 2014 and the allocation keys used for the purpose of allocation of cost to the individual group companies including the assessee. It is noted that the TPO did not raise any issue regarding the cost incurred by the service provider and mark-up element in the sum paid/payable by the assessee to AT&S AG. The sole allegation of the TPO was that the intra-group activities under the ‘IT Cost Pooling Agreement’ were in the nature of stewardship services and hence, he determined the arm’s length price of the international transaction under consideration at Nil value. Therefore, we note that the Revenue is raising an issue before this Tribunal in relation to which the TPO has not raised any objection. ………….In view of the above, we are of the considered view that the aforesaid allegation raised by the Revenue has no valid basis. As per the aforesaid decision of the Hon’ble High Court of Bombay, the jurisdiction of the TPO is specific and limited, i.e., to determine the arm’s length price of an international transaction by applying any of the methods prescribed under subsections (1) and (2) of section 92C of the I.T. Act, being the most appropriate method. However, the TPO, in the instant case, determined the arm’s length price of the international transaction at Nil value without applying any of the methods prescribed under subsections (1) and (2) of section 92C of the I.T. Act. The AO, in the instant case, had not disallowed the expenditure under section 37 of the I.T. Act but only adopted the ALP determined by the TPO in his order. 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 value) is without jurisdiction and it goes against the basic tenet of the Indian Transfer Pricing Regulation.

25. We see no reason to take any view of the matter other than the view taken by the Division Bench of this Tribunal in assessee’s own case for the assessment years 2009-10, 2010-11, 2011-12 and 2013-14. As the issue is squarely covered in favour of the assessee by the decisions of the Division Bench in the assessee’s own case (supra) and there is no change in facts and law, we, respectfully following the above binding precedent, uphold the order of the CIT(A) for the assessment year 2014-15 and the contention of the assessee and we delete the ALP adjustment of INR 4,10,08,010/- made by the AO/TPO. Hence, the ground nos. (1), (2), (3), (4) and (5) are dismissed.”

24. In this regard, we would like to place reliance on the decision of Hon’ble Kolkata Tribunal itself in the case of N L C Nalco India Private Limited which states as under : “20. …..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. In the instant case, TPO computed the arm's length price of intra-group services received by assessee from Nalco Pacific under the aforesaid agreements at 'nil' value without applying any of the transfer pricing methodologies prescribed under section 92C of the Act read with rule 10B and 10C of the Rules. Accordingly, the action of the TPO in arriving at the arm's length price of the relevant international transactions at 'nil' value without application of any transfer pricing methodology, was without any basis and hence, was not sustainable. In the instant case, TPO was authorised to determine, by order in writing, the arm's length price of an international transaction in accordance with section 92C (3) of the Act. We find that the TPO did not make any adverse comments in his order upon the arm's length analysis carried out by assessee under the TNMM as per section 92C of the Act read with rule 10B of the Rules. Accordingly, we feel that TPO made proper enquiry and applied his mind to the details brought on record by assessee. He had agreed with the assessee that the international transactions covered by the TNMM analysis (including the intra-group service charge paid /payable to Nalco Pacific) adhered to the arm's length principle Transfer Pricing Regulation Accordingly, We are of the view that the first ground for confirming disallowance by CIT (A) that no independent documentary evidence had been furnished by assessee to show that the fact of actual services having been rendered to assessee and Nalco Pacific too could not substantiate the claim for provision of actual services with documentary evidence, has no leg to stand.”

26. In view of our conclusion that the Ld. TPO and Hon’ble DRP were in error in holding that the nature of services rendered by AE were in the nature of stewardship activity or Assessment Year: 2016-17 & 2017-18 M/s TDK India Limited (formerly known as EPCOS India Pvt. Ltd.) shareholder activity, we hold that the TPO’s conclusion that no charges ought to have been paid by the Assessee is without any basis. After considering all the evidences submitted by the Assessee and various judicial precedents relied on the Ld. Counsel, we conclude that the charges paid by the Assessee to AE are held to be at Arm’s Length. Consequently, the addition made by the revenue authorities in this regard are directed to be deleted and relevant grounds raised on this issue are allowed.” 7.1. Therefore, respectfully following the above decision of Co-ordinate Bench in assessee own case (supra), 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 the Hon’ble Apex Court in the case of Radhasoami Satsang vs. CIT [1992] 193 ITR 321 (SC) 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. 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 by the Hon’ble Calcutta High Court in the case of CIT vs. Britannia Industries Ltd. [2003] 257 ITR 225 (Cal) , decision of Hon’ble Apex Court in the case of CIT vs. Excel Industries Ltd. in Civil Appeal Nos. 5195 of 2011 and 125,9100 & 9101 of 2013. Accordingly, ground no. 6 to 11 are allowed.

“5.4. Similar facts emerge from the data and invoices in this year. Accordingly, since in this year also the transactions related to the export of capacitors and ferrite products for resale to the AEs are identical, TPO/AO is directed to verify the details submitted by the assessee during the TP proceedings and compute the arms length margin in accordance with the directions given by DRP in AY 2014-15 and 2015-16.” Pertinent to note that similar instructions were given by DRP for AY 2017-18 also.

Here it is pertinent to mention that the total value of this transaction is approx.. INR 367 crores along with a sales margin of INR 31 crores which the assessee has entered into with 9 AEs. The CUP analysis that the assessee has furnished is for sale amounting to only approx. INR 3.4 lakhs. Further, the CUP analysis has only been furnished with EPCOS SRO and not with other entities. Therefore, the analysis presented by the assessee is incomplete and cannot be accepted. Further, it is well-established transfer pricing procedure that CUP analysis cannot be submitted on a sample basis. CUP analysis always has to be furnished for all the international transactions with the AEs. Only the supporting invoices may be furnished on a sample basis for examination. Therefore, the adjustment made on for the transaction of export of ferrite for resale and payment of sales margin still stands.

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 by the Hon’ble Apex Court in the case of Radhasoami Satsang (supra). Accordingly, we direct the AO to delete the adjustment. Consequently ground nos. 14 and 15 are allowed.

19. Issue raised in ground no. 2 and 9 are not pressed at the time of hearing. Accordingly the grounds raised by the assessee are dismissed as not pressed.

20. Issue raised in ground no. 12 to 14 is against the disallowance of foreign exchange loss of Rs. 5,11,16,904/-.

21. Facts in brief are that during the assessment year under consideration, the assessee debited forex fluctuation loss of Rs. 12,77,92,261/- 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. Such amount was reported as capital expenditure under clause 21a of the Tax Audit Report since the inception. Out of the aforesaid sum of Rs. 12,77,92,261/-, Rs. 7,6,75,357/- was incurred in Assessment Year: 2016-17 & 2017-18 M/s TDK India Limited (formerly known as EPCOS India Pvt. Ltd.) connection with acquisition of imported assets which were duly disallowed in the computation of total income and added to block of assets as per Section 43A of the Act. The remaining amount of Rs. 5,11,16,904/- represented realized loss on settlement of external commercial borrowing used for purchase of capital goods from domestic market. This amount was reported for disallowance in the tax audit report in view of the provisions prevailing in the Act before the introduction of Income Computation and Disclosure Standards (ICDS). Vide Finance Act, 2018, the provisions of Section 43AA were introduced in the Act with retrospective effect from 1st April, 2017. Accordingly, the assessee claimed Rs. 5,11,16,904/- in the revised return of income. Pertinent to mention that the purpose of borrowings of ECB was duly declared before the Reserve Bank of India in form 83 viz. import of capital goods as well as local sourcing of capital goods. In the intimation issued u/s 143(1) of the Act ,the claim made by the assessee u/s 43AA of the Act was disallowed due to inconsistency between the tax audit report and return of income. In the assessment order u/s 143(3) of the Act, the AO considered the disallowance as part of the draft assessment order without providing any opportunity of hearing to the assessee to explain the same.

22. In the proceedings before the DRP, the Ld. DRP erred in adjudicating the same as transfer pricing perspective and ignored the fact that this issue pertains to the corporate tax. The direction of DRP is reproduced below:

“The standard principle in judicial decisions on the matter of foreign currency gain/loss has been that where such gain/ loss is related to sales/ trade receivable/ payable in relation to the international transaction and not on capital account, it will be operating in nature. Accordingly, I line with DRP directions in other cases, the AO/TPO is directed to treat the foreign currency gain as operating if the assessee company bears the foreign exchange fluctuation risk and if such risk is on account of sales of the assessee in respect of the benchmarked international transactions and not on capital account. Similar treatment should be given in respect of the comparables after taking into account hedging policies if any, in respect of such foreign exchange fluctuations as recorded in P&L A/c within the scope of Section 144C(13) of the IT Act. In case such adjustment cannot be made for the comparables due to non-availability of reliable data, the foreign currency gain shall be excluded from operating income/expense of the assessee as well as that of the comparables while calculating the PLI for determining the Assessment Year: 2016-17 & 2017-18 M/s TDK India Limited (formerly known as EPCOS India Pvt. Ltd.) Arm’s length price in order to ensure a consistent and reliable comparison. It is also noted that the assessee follows the mercantile system of accounting. Hence, provision for doubtful debt and advances are to be considered as non-operating in nature. The objection of the assessee is accordingly disposed off.” The assessee has also filed a rectification application before the DRP on 11.03.2022. However, no rectification order was passed so far.

24. Issue raised in ground no. 15 and 16 is against the disallowance of actual payment of leave encashment.

25. Facts in brief are that during the instant financial year, the assessee created provision for leave encashment amounting to Rs. 1,54,03,861/- and made payment of Rs. 3,68,324/- towards the leave encashment. While filing the return of income the assessee has disallowed the net amount of Rs. 1,50,83,315/- and did not claim any deduction for the payment of leave encashment separately. However, the assessee inadvertently deducted Rs. 3,20,546/- instead of Rs. 3,68,324/- from provision for leave encashment created during the year while reporting net disallowance u/s 43B(f) of the Act in the return of income. While processing the return u/s 143(1) of the Act the adjustment was made. However, no opportunity was given to the assessee for proposing such adjustment so as to explain the issue. In the DRP proceedings, the Ld. DRP gave the following direction:

“8.1. The assessee has stated that it inadvertently deduction INR 3,20,546/- instead of INR 3,68324/- from the provision for leave encashment during the year while reporting disallowance under Section 43B(f) of the Act in its Return of income. The assessee has submitted that it had created a provision for leave encashment amounting to INR 1,54,03,861/- and had made payments of INR 3,68,245/- towards leave encashment. The AO is directed and to give relief to the assessee as per law after due verification.”

Assessment Year: 2016-17 & 2017-18 M/s TDK India Limited (formerly known as EPCOS India Pvt. Ltd.) However, the 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.

Sd/- Sd/- (Pradip Kumar Choubey /�द�प कुमार चौबे) (Rajesh Kumar/राजेश कुमार) Judicial Member/�या�यक सद�य Accountant Member/लेखा सद�य Dated: 22nd January, 2025 SM, Sr. PS Copy of the order forwarded to: 1. Appellant- M/s TDK India Pvt. Limited (formerly known as EPCOS India Pvt. Ltd.) WBIDC Growth Centre, Kulia, Kanchrapara Road, PO, NS sanatorium, Kalyani, Nadia, Kolkata-741251 2. Respondent – DCIT, Circle-11(1), Kolkata 3. Ld. DRP, Panel-2, New Delhi 4. Ld. Pr. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata (sent through e-mail)