DCIT, CIR-11(1), KOLKATA, KOLKATA vs. M/S EPCOS INDIA PVT. LTD., NADIA

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ITA 322/KOL/2016Status: DisposedITAT Kolkata15 December 2017AY 2011-20126 pages
AI SummaryRemanded

What did the Tribunal hold?

The Tribunal condoned the delay in adopting the correct transfer pricing approach due to prior legal advice. The matter was set aside to re-adjudicate the transfer pricing adjustments after considering the additional evidence submitted by the assessee.

What were the facts?

The assessee, Epcos India Pvt. Ltd., had transfer pricing adjustments proposed by the TPO for AYs 2011-12 and 2012-13. Initially, the assessee used an entity-based TNMM approach, but later advised to adopt a transaction-by-transaction method. The assessee sought to submit additional evidence and revise its approach.

What were the issues?

Whether the assessee should be allowed to revise its transfer pricing methodology and submit additional evidence after initial assessment, and if the delay in doing so should be condoned.

Which sections of the Income-tax Act were involved?

Section 144C

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Income Tax Appellate Tribunal, “C” BENCH: KOLKATA

Hearing: 05.12.2017Pronounced: 15.12.2017

Heard together (3 matters)

I.T.A. No. 278/Kol/2016
I.T.A. No. 322/Kol/2016
I.T.A. No. 506/Kol/2017

Read from the judgment's own cause title. This page is filed under one of them.

Per Shri A.T.Varkey, JM and 322/Kol/2016 are cross appeals filed by the assessee and revenue and ITA No. 506/Kol/2017 filed by the assessee are against the directions of Dispute Resolution Panel-2, New Delhi passed u/s. 144C(5) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) dated 26.11.2015 and 28.12.2016 for AYs 2011-12

1.

2 & 322/Kol/2016 & 506/Kol/2017 Epcos India Pvt. Ltd., AYs- 2011-12 & 2012-13 and 2012-13 respectively. Final assessment orders were passed by JCIT, Range-11 and DCIT, Circle-11(1), Kolkata dated 27.01.2016 and 17.02.2017 u/s. 144C(13)/143(3) of the Act respectively.

2.

Brief facts discernible from a perusal of the summary of TP adjustment for both the years has been provided in the table below:

S. No. Nature of transaction Value of Value of TP Value of Value of TP transaction adjustment transaction adjustment AY 2011-12 AY 2012-13 I. Sale of finished goods 67.43 4.95 47.78 13.40 (ferrites) for resale Payment of sales margin 19.40 12.82 21.92 15.10 II. Sale of finished goods 17.09 1.12 18.53 5.17 (ferrites) for consumption III. Payment for business support 16.52 16.52 19.19 19.19 services IV. Payment of non-compete fee - - 8.62 8.62 V. Payment of lump-sum fee for - - 6.65 6.65 technology Total 120.44 35.41 `122.59 68.13 All other international transactions, apart from as stated above, of the Assessee for the mentioned years were considered to be at arm's length by the Ld. Transfer Pricing Officer (TPO).

With respect to AY 2011-12, the Assessee had adopted an overall entity based Transactional Net Margin Method (TNMM) to determine arm's length price of its international transactions. The Ld. TPO adopted a transaction-by-transaction approach considering segmental profitability as per AS 17 which includes transaction with Non-AEs also and alleged that three of its international transactions have not been entered into at arm's length price, thereby proposing a TP adjustment of Rs.35.41 cr.

The Assessee preferred an appeal before the Dispute Resolution Panel (DRP) and continued to press upon the entity based TNMM approach to defend its transaction price. The DRP did not allow Assessee's appeal and stood by the Ld. TPO's conclusion.

3. With respect to AY 2012-13, the Ld. TPO continued its previous year analysis and held the same transactions (as listed in SL. No. I to III above) to be undertaken at non-arm's

3 & 322/Kol/2016 & 506/Kol/2017 Epcos India Pvt. Ltd., AYs- 2011-12 & 2012-13 length price. In addition the Ld. TPO alleged two more transactions (as entered into in AY 2012-13 only i.e. Sl. No. IV & V) to be at non-arm's length price and proposed a TP adjustment of Rs.68.13 cr. In appeal before the Ld. DRP, the Assessee, on being correctly advised on transfer pricing principles, revised the approach to transaction-by-transaction approach for determination of arm's length price and submitted all necessary documents for their consideration (refer page 1535-2682 of part 3 of paper book). According to Ld. AR, the Ld. DRP did not take most of the additional documents into cognizance and adjudicated the matter by rejecting Assessee's plea and holding Ld. TPO's approach as correct.

4.

Being aggrieved by the Ld. DRP's direction, the Assessee has preferred these appeals before us for consideration of revised approach and additional evidences as submitted before the Ld. DRP (for AY 2012-13) and for A.Y 2011-12 also before us, for adjudication of the matter. The copy of submission for both assessment years were filed on 6th October, 2017. We note that the following documents have been filed as additional evidence.

LIST OF ADDITIONAL EVIDENCE

1.

Copy of organization structure of Sales Organizations’ engaged In distribution activity

2. Sample copies of invoices raised by Sales Organisation on the appellant and other Manufacturing units pursuant to Distributorship agreement

3.

Back to back listing of appellant's sales invoices with sale invoices of Sales Organisation for FY 2010-11

4. Certified copies of cost profitability statements of Sales Organisations from undertaking distribution activity of appellant's products

5. Benchmarking report to substantiate Distributorship arrangement with each of the Sales Organisations has been undertaken at arm's length

6. Copy of royalty agreement considered by the Ld. TPO in relation to exploitation of marketing and distribution rights

4 & 322/Kol/2016 & 506/Kol/2017 Epcos India Pvt. Ltd., AYs- 2011-12 & 2012-13 7. Transfer pricing order of AY 2012-13 evidencing selection of Mahindra Hinoday and MMG India Pvt. Ltd. as comparable companies for benchmarking appellant's profitability under its Ferrite segment

8.

Certified copy of financial information showing profitability earned by the appellant under its Kalyani unit (Ferrite segment)

9.

Framework Service Agreement of Epcos AG with other group companies

10.

Individual Service Agreement in relation to IT services of Epcos AG with other group companies

11.

Sample copies of invoices raised by EPCOS AG on Epcos India and other group companies for provision of IT support services

12.

Benchmarking report with respect to the transaction pertaining to payment for business support services (IT support and Export support services

13.

Copy of organization structure of EPCOS AG's IT division engaged in rendering of IT support services to group companies

14.

List of IT users working on IT systems, SAP and other applications

15.

Additional copies of mail communication along with summary of such mails showing benefits received by appellant from IT support services

16.

Copy of agreements entered into between EPCOS AG and other group entities in relation to export support services

17.

Sample copies of invoices raised by EPCOS AG on other group companies for provision of export support services

18.

Evidences of export support services received and consequent benefits therefrom

19.

Copy of annual reports of comparable companies (along with details of margin computation) selected for benchmarking the transaction of sales

5 & 322/Kol/2016 & 506/Kol/2017 Epcos India Pvt. Ltd., AYs- 2011-12 & 2012-13 20. Comparable price details for benchmarking the unit price of ferrite sold by assessee to AEs for consumption purposes along with copies of third party price quotation

21.

English translated copies of IT agreement entered into by EPCOS AG with third party vendors

22.

Organization structure of Epcos AG PM team rendering Export support services to group companies

23.

Sample copies of debit notes raised by third party vendors on EPCOS AG

24.

Details of IT helpdesk tickets raised and resolved during the year FY 10-11

25.

Month-wise details of sales margin as paid by assessee to each of the Sales Organizsations

26.

Distributorship agreement between EPCOS India and EPCOS Sumperk

27.

Cost auditor certificate showing details of capacity utilization and details of contribution earned by EPCOS, Kalyani unit from sale of ferrite for consumption to AEs for AY 11-12 and AY 12-13.

5.

According to assessee, it has appointed the new law firm when the appeal was preferred before the Tribunal for A.Y 2011-12. The New Law firm after analysis of the original T. P study has advised the assessee to adopt transaction by transaction method, in place of entity level bench marking approach. According to the assessee, it should not be penalized for the error/mistake which occurred in the first place, because of wrong legal advice of erstwhile attorneys. We note that the Hon’ble Supreme Court in N. Balakrishnan Vs. M. Krishnamurthy (1998) 7 SCC 123 wherein a similar case where there was a delay of 883 days because of the mis-handling the case by the Advocate of the petitioner, the Hon’ble Supreme Court condoned the delay taking note that the petitioner cannot be faulted due to the latches of the lawyer. Similarly, for substantial justice, the assessee should not suffer because of earlier legal advice which the assessee realizes to be wrong and ready to correct. Therefore, in the interest of justice and fair play, the transfer pricing adjustment ordered by the TPO is set aside with a direction to re-adjudicate only on the issue on which 6 & 322/Kol/2016 & 506/Kol/2017 Epcos India Pvt. Ltd., AYs- 2011-12 & 2012-13 the TPO has found the assessee’s transaction not at arms’ length, which is to be done afresh after taking into consideration, the aforesaid documents filed before us for A.Y 2011-12 and DRP for AY 2012-13 and after hearing the assessee.

6.

In the result, both the appeals of the assessee as well as the cross appeal of revenue are allowed for statistical purposes.

Order is pronounced in the open court on 15th December. 2017.

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