Case Law Summary - Quantum of documents required to substantiate Receipt of Services from Associated Enterprise - Indian Transfer Pricing Perspective

Quantum of documents required to substantiate Receipt of Services from Associated Enterprise (AE). Whether it is possible to place on record concrete evidence before the tax authorities which would irrefutably prove the rendering of such services?

Dear Readers,

Please find the below case law summary for your reference which will help to adress the above questions. The case law is in relation with the recent ruling of Mumbai ITAT judgement in case of Henkel Chembond SurfaceTechnologies Limited (now known as Henkel Surface Technologies Pvt. Ltd.) Click on the link for complete judgement file.

Facts of the Case

• During the year the Assessee availed Regional Management (RMC) Services from its AE.
• During that TP assessment proceedings, the assessee provided various documentary evidences as follows:
• Copy of Regional Service Agreement
• Details of Regional Management Charges
• Copies of Debit Notes raised on the assessee by its AE
• Details of Cost Benefit Analysis of the RMC as follows
• Requirement to avail the RMC,
• Description of services received by the assessee,
• Information of visits by the overseas employees for rendering the services,
• Other backup documents which substantiates the benefits received by the Assessee from rendering the aforesaid services by the AE.
• The TPO determined the ALP at ‘NIL’ against the transaction value; on the ground that the Assessee failed to provide any documentary evidence in support of the same.

Argument by the Assessee before the ITAT

• The TPO has exceeded jurisdiction and have wrongly assumed the powers which fall in the domain of the AO.
• The TPO’s jurisdiction is limited to determining the Arm’s Length Price of the international transaction and not whether the documentary evidence supporting such International Transactions were adequate or not.
• The power for examining the sufficiency of documentary evidence for the purpose of availability of an expense under section 37(1) of the act is vested with the AO and not with the TPO.
• The TPO without following any one of the methods prescribed in law, had exceeded his jurisdiction.

Department's defense before the ITAT 

• Assessee had failed to place on record documents which would evidence rendering of RMC by the AE.
• The TPO has rightly worked out the ALP of the said services at ‘nil’

ITAT’s judgement

The ITAT discussed and concluded the above TP adjustment on the following two aspects

Whether documentary evidences provided by the Assessee were concrete enough to substantiate the services availed from AE?

• Observed the various documentary evidence as above submitted by the assessee before the TPO and held that the observations of the lower authorities does not find favor.
• The material placed on record by the Assessee constitute substantial evidence clearly establishing receipt of Regional Management Services from its AEs.
• The services received from the AE are intangible in nature therefore evidences in support of such services can only be demonstrated by narrations, descriptions and documentary evidence.
• It agreed with the argument of the Assessee that it will be difficult to place on record concrete evidence which would irrefutably prove the rendering of such services.

No Method followed by the TPO

• The TPO by not following any one of the methods prescribed in section 92(1) of the Act has divested its jurisdiction in benchmarking the International Transaction of an assessee at nil.
• The TPO is not permitted to determine the ALP of the international transaction without following any one of the prescribed method in the Act.

In case of any query / comments, do let me know in comments section below.

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