HENKEL CHEMBOND SURFACE TECHNOLOGIES LTD,NAVI MUMBAI vs. DCIT CIR 7(1)(2), MUMBAI

The present appeal filed by the assessee company is directed against the order passed by the A.O under Sec. 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (for short „Act‟), dated 31.12.2015 for A.Y. 2011-12. The assessee has assailed the impugned order on the following grounds of appeal before us: “Grounds relating to Transfer Pricing adjustment

Looking to the facts and in the circumstances of the case and in law, the DRP has erred in directing and the AO has erred in making disallowance of expenditure aggregating Rs.1,84,946/- debited to Sales promotion expenses incurred on account of purchase of gold coin etc. and distributed as gifts on the ground that details as to whom the gifts were given was not provided and that it was not possible to verify the genuineness of the expenditure.

The appellant craves leave to add, to alter, to amend, to withdraw, to delete the above grounds of appeal or any one of them at the time of hearing.”

Briefly stated, the assessee company which is primarily engaged in the business of manufacturing/trading of chemicals is a joint venture company wherein 51% of the equity is held by Henkel AG & Co. KGaA, Germany and 49% is held by Chembond Chemicals Ltd., India. The assessee company had filed its return of income for A.Y. 2011-12 on 29.11.2011, declaring its total income at Rs.17,52,45,539/-. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. Observing, that the assessee had carried out international transactions during the year under consideration, the A.O in the course of the assessment proceedings made a reference under Sec. 92CA(1) of the Act to the Transfer Pricing Officer (for short „TPO‟) for determining the Arm‟s Length Price (for short „ALP‟) of the said international transactions. On the basis of his order passed under Sec. 92CA(3), dated 19.01.2015 the TPO inter alia determined the ALP of the regional management services received by the assessee from its AE, viz. Henkel AG & Company KGaA at Rs.nil, as against an amount of Rs. 2,61,63,288/- shown by the assessee. Accordingly, the TPO vide his order passed under Sec. 92CA(3), dated 19.01.2015 suggested an adjustment of Rs.2,61,63,288/-.

The assessee objected to the additions/adjustments as were proposed by the A.O vide his order passed under Sec. 143(3) r.w.s 144C(1), dated 27.02.2015 before the Dispute Resolution Panel-1, Mumbai (for short „DRP‟). The DRP vide its order passed under Sec.144C(5), dated 14.11.2015 rejected the objections filed by the assessee.

The A.O after receiving the order passed by the DRP under Sec. 144C(5), dated 14.11.2015 therein passed the final assessment order under Sec. 143(3) r.w.s. 144C(13) of the Act, dated 31.12.2015 and assessed the income of the assessee at Rs. 20,39,25,170/-.

The assessee being aggrieved with the order passed by the A.O under Sec. 143(3) r.w.s 144C(13), dated 31.12.2015 has carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) for the assessee took us through the issues on the basis of which the assessment order had been assailed before us. It was submitted by the ld. A.R that the TPO had exceeded his jurisdiction and worked out the ALP of the regional management 5 Henkel Chembond Surface Technology Ltd. Vs. ACIT,Circle 7(1)(2) services received by the assessee from its AE, viz. Henkel AG & Company KGaA at Rs.nil, as against that shown by the assessee at Rs.2,61,63,288/-. It was submitted by the ld. A.R that the TPO had inter alia arrived at the ALP of the regional management services at Rs.nil on the ground that the assessee had failed to provide any documentary evidence in support of the same. Rebutting the aforesaid observation of the TPO/DRP, it was submitted by the ld. A.R that the assessee in order to substantiate the factum of having received regional management services from its AE viz. Henkel AG & Co. KGaA had placed on record supporting documentary evidence, viz. copy of the regional service agreement dated 23.11.2010 executed between the assessee and its AE Henkel AG & Co. KGaA, complete details of the regional management charges, copies of the debit notes raised on the assessee by its AE, description of the services received by the assessee from its AE, information in relation to visits by the overseas employees for rendering the services, and also the back up documents substantiating the benefits which were received by the assessee from rendering of the aforesaid services by its AE. It was vehemently submitted by the ld. A.R that the lower authorities had erred in observing that the assessee had failed to place on record documentary evidence in support of the regional management services which were provided to it by its AE. In order to drive home his aforesaid claim the ld. A.R took us through the relevant pages of the assessee‟s paper book. Apart from that, it was averred by the ld. A.R that the TPO while arriving at the ALP of the regional management services at Rs.nil, for the reason, that the assessee had failed to substantiate rendering of the aforesaid services by its AE, viz. Henkel AG & Co. KGaA had exceeded his jurisdiction and had wrongly assumed the powers which fall in the exclusive domain of the A.O. In furtherance of his aforesaid claim, it was submitted by the ld. A.R that on a reference made to the TPO under Sec. 92CA(1) the latters jurisdiction is limited to determining of the ALP of the international transactions and not for determining as to whether the documentary evidence supporting such international transactions were adequate or not. It was averred by the ld. A.R 6 Henkel Chembond Surface Technology Ltd. Vs. ACIT,Circle 7(1)(2) that the aforesaid jurisdiction to decide the adequacy or sufficiency of the documentary evidence for the purpose of allowability of an expenditure under Sec. 37(1) of the Act is vested with the A.O and not with the TPO. In the backdrop of his aforesaid claim, it was averred by the ld. A.R that the TPO in the present case by dwelling on the issue pertaining to sufficiency of the documentary evidence in support of the regional management services received by the assessee from its AE, viz. Henkel AG & Company KGaA, had therein assumed the jurisdiction which was exclusively vested with the A.O under Sec. 37 of the Act. It was further submitted by the ld. A.R that the TPO by determining the ALP of the regional management services at Rs. Nil without following any one of the prescribed methods contemplated in law had clearly exceeded his jurisdiction. It was averred by the ld. A.R that the TPO/DRP had erred in observing that the assessee had failed to establish rendering of regional management services by its AE viz. Henkel AG & Company KGaA in lieu whereof an amount of Rs.2,61,63,288/- was therein paid to the latter. In order to buttress his claim that the observations of the TPO/DRP were contrary to the facts borne from the records the ld. A.R took us through the relevant pages of the assessee‟s paper book. Further, the ld. A.R assailed the corporate additions/disallowances made by the A.O while framing the assessment, viz. (i) disallowance of professional charges; and (ii) disallowance of sales promotion expenses. It was submitted by the ld. A.R that though the assessee had placed on record the requisite supporting documentary evidence, however, the lower authorities losing sight of the same had therein proceeded with and disallowed the assessee‟s claim for deduction of the aforementioned expenses.

Per contra, the ld. Departmental Representative (for short „D.R‟) relied on the orders of the lower authorities. It was submitted by the ld. D.R that as the assessee had failed to place on record documents which would evidence rendering of regional management services by the AE, therefore, the A.O/TPO had rightly worked out the Arm‟s Length Price (for short „ALP‟) of the said services at Rs.nil. As regards the assessee‟s claim for deduction of expenses 7 Henkel Chembond Surface Technology Ltd. Vs. ACIT,Circle 7(1)(2) viz. (i) professional charges: Rs.3,62,693/-; (ii) sales promotion expenses: Rs.19,68,708/-; and (iii) expenses incurred towards provision of gifts to clients: Rs.1,84,946/-, it was submitted by the ld. D.R that as the assessee had failed to prove that the said expenses were incurred in the course of its business, therefore, the A.O/DRP had rightly disallowed the same. In the backdrop of his aforesaid submissions it was averred by the ld. D.R that the appeal filed by the assessee being devoid and bereft of any merit was liable to be dismissed.

We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record as well as the judicial pronouncements pressed into service by them to drive home their respective contentions. As observed by us hereinabove, the A.O while framing the assessment had made a reference under Sec. 92CA(1) to the TPO for determining the ALP of the international transactions of the assessee for the year under consideration. Thereafter, the TPO vide his order passed under Sec. 92CA(3), dated 19.01.2015 after deliberating on the multiple services claimed by the assessee to have been received from its AE, viz. Henkel AG & Company KGaA, had observed, that de hors supporting documentary evidence the assessee‟s claim of having received regional management services from its AE could not be accepted. Accordingly, the TPO backed by his aforesaid observation had determined the ALP of the regional management services received by the assessee from its AE at nil, as against that claimed by the assessee at Rs. 2,61,63,288/-, observing as under:

We shall first deal with the assessee‟s claim that supporting documentary evidence clearly establishing rendering of regional management services by the AE was duly placed on record in the course of the proceedings before the lower authorities, viz. (i) copy of regional management services “agreement”, dated 23.11.2010 executed between the assessee and its AE i.e Henkel AG & Company KGaA; (ii) details of regional management charges; and (iii). copies of “debit notes” raised on the assessee by its AE towards regional management charges. Apart from that, we find that the assessee vide its letter dated 31.12.2014 had submitted with the lower authorities the statement of “Cost Benefit Analysis” of Regional Management Cost for the year under consideration along with details viz. (i) requirement to avail the 10 Henkel Chembond Surface Technology Ltd. Vs. ACIT,Circle 7(1)(2) regional management services; (ii) description of services received from the AE; (iii) information in relation to the visits by the overseas employees for rendering the services; and (iv) back up documentation substantiating the benefits received by the assessee in lieu of the services provided by its AE. On a perusal of the “Regional Management Agreement”, dated 23.11.2010 executed between the assessee and its AE, viz. Henkel AG & Company KGaA, we find, that the details of various services received by the assessee company are therein duly specified. It has been the claim of the assessee before the lower authorities that the regional management services provided by its AE, viz. Henkel AG & Company KGaA had assisted it in its decision making and adoption of the best policies and practises which had therein resulted in a better market position and ultimate increase in its sales. As observed by us hereinabove, the A.O/TPO had determined the ALP of the regional management services received by the assessee from its AE at Rs.nil, for the reason, that no material was placed on record by the assessee which would evidence availing of any such services by the assessee from its AE. We have perused the material available on record and are afraid that the aforesaid observations of the lower authorities do not find favour with us. On a perusal of the “Regional Services Agreement”, dated 23.11.2010 executed between the assessee and its AE, viz. Henkel AG & Company, KGaA, we find that the complete details of the regional management services to be rendered by the AE to the assessee are therein clearly described at length. Further, the assessee had in the course of the proceedings before the lower authorities placed on record the copies of the “debit notes” which were raised on it by its AE viz. Henkel AG & Company, KGaA for rendering of the aforesaid services. Also, copies of the various e-mail correspondences between the assessee and its aforesaid AE supporting the factum of rendering of regional management services by the AE to the assessee company were filed in the course of the proceedings before the lower authorities. In fact, the assessee had also placed on record the complete details of the payments made by the assessee to its AE for provision of regional management services. Cost 11 Henkel Chembond Surface Technology Ltd. Vs. ACIT,Circle 7(1)(2) benefit analysis of regional management cost (RMC) pertaining to a range of regional services rendered by the AE within the group, viz.(i) regional planning and guiding services; (ii) regional marketing services; (iii) regional supply and chain operational support services; and (iv) regional safety, health and environment support compliance services, therein explaining the benefits derived by the assessee from the services rendered by the AE were also filed by the assessee before the lower authorities in order to drive home its claim of having received the aforesaid services along with benefit derived therefrom. In the backdrop of the aforesaid documentary evidence, we are unable to comprehend as to how the AO/TPO had concluded that the assessee had failed to furnish the requisite documentary evidence which would substantiate rendering of regional management services by the AE, viz. Henkel AG & Company, KGaA to the assessee during the year under consideration. In our considered view, the material placed on record by the assessee does constitute substantial evidence which clearly establishes that the assessee had received regional management services from its AE, viz. Henkel AG & Company, KGaA. We find that the assessee had entered into the regional management service “agreement” with its AE, viz. Henkel AG & Company, KGaA primarily to benefit from the services provided by the latter on the basis of its experienced personnel who were possessed of rich experience in understanding the practical aspects of the nature of business of the assessee along with its service requirement. Fact that the services received by the assessee from its AE had vastly benefitted it can also safely be gathered from the cost benefit analysis of RMC as was submitted by the assessee with the AO/TPO. In the backdrop of our aforesaid deliberations, we are unable to concur with the observations of the lower authorities that the assessee had failed to place on record documentary evidence which would substantiate the rendering of regional management services by its AE, viz. Henkel AG & Company, KGaA to the assessee company. We are persuaded to subscribe to the claim of the ld. A.R that as the regional management services received by the assessee from its AE are intangible in nature, therefore, evidence in 12 Henkel Chembond Surface Technology Ltd. Vs. ACIT,Circle 7(1)(2) support of availing of such services and the benefit received therefrom can only be demonstrated by narrations, descriptions and documentary evidence. As observed by us hereinabove, the assessee in order to support its claim of having received the aforesaid services had placed on record documentary evidence in the form of e-mails, correspondences, reports etc, which in our considered view clearly establish rendering of the said services by the AE to the assessee. Considering the fact that the aforesaid services rendered by the AE to the assessee are intangible in nature, we are in agreement with the claim of the ld. A.R that it would be difficult to place on record concrete evidence which would irrefutably prove to the hilt rendering of such services. In fact, a coordinate bench of the Tribunal i.e ITAT, Hyderabad in the case of TNS India Pvt. Ltd. vs. ACIT, had observed, that in order to prove rendering of advice by various group centres to the group companies in day to day manner it would be difficult to place on record concrete evidence, but then, the same can be established and perceived after considering the way business is conducted. Interestingly, the Tribunal had compared the advisory services rendered by the assessee before them to its group companies with the role played by an anaesthesiologist while assisting a surgeon in an operation. It was observed by the Tribunal that just like in a case where an operation is performed by a surgeon the sutures and scars therein left would evidence the role of the surgeon but that of an anaesthesiologist cannot be similarly evidenced on the basis of similarly placed evidence. The Tribunal while concluding as hereinabove had observed as under:

Apart from our aforesaid observations wherein it stands clearly established that the assessee had received regional management services from its AE, viz. Henkel AG & Company, KGaA, we are even otherwise unable to concur to the determining of the ALP of the regional management services received by the assessee from its AE, viz. Henkel AG & Company, KGaA by the TPO at Rs. Nil i.e without following any one of the prescribed methods contemplated in Sec.92C(1) of the Act, as against that determined by the assessee at Rs. Rs.2,61,63,288/- by adopting TNMM as the most appropriate method. In fact, our aforesaid view that the TPO is divested of his jurisdiction in benchmarking the international transactions of an assessee at nil or in an ad hoc manner without following any one of the prescribed methods is fortified by the judgments of the Hon‟ble High Court of Bombay viz. (i) CIT Vs. Merck Limited. (ITA No. 272 of 2014), dated 08.08.2016; (ii) CIT Vs. Lever India Exports Limited (ITA No.1306, 1307 and 1349 of 2014), dated 23.01.2017; (iii) CIT Vs. Johnson & Johnson Ltd. (ITA No.1030 of 2014), dated 07.03.2017; and (iv) CIT vs. Kodak India Pvt. Ltd.(ITA No.15 of 2014), dated 11.07.2016. As observed by the Hon‟ble High Court of Bombay in the aforementioned cases, the TPO is not permitted to determine the ALP of the International transactions without following any one of the methods prescribed under Sec. 92C(1) of the Act. Accordingly, in the backdrop of our aforesaid observations we are unable to sustain the determination of the ALP of the regional management services received by the assessee from its AE, viz. Henkel AG & 14 Henkel Chembond Surface Technology Ltd. Vs. ACIT,Circle 7(1)(2) Company, KGaA, at Rs. nil by the TPO without resorting to any transfer pricing exercise as per any of the method prescribed in Sec.92C(1) of the Act, as against that determined by the assessee at Rs. 2,61,63,288/- by adopting TNMM as the most appropriate method. We thus in terms of our aforesaid deliberations vacate the addition towards TP adjustment of Rs.2,61,63,288/- made by the AO/TPO. The Grounds of appeal