Income Tax Appellate Tribunal - Delhi
Acit (Ltu), New Delhi vs Max New York Life Insurance Company ... on 17 October, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I : NEW DELHI
BEFORE SHRI R.S. SYAL, VICE PRESIDENT
AND
SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
ITA No.1768/Del/2011
Assessment Year : 2002-03
ACIT (LTU), Vs. Max New York Life
NBCC Plaza, Insurance Company Ltd.,
Pushp Vihar, 3rd Floor, Max House,
New Delhi. 1, Dr. Jha Marg, Okhla,
New Delhi.
PAN: AACCM3201E
(Appellant) (Respondent)
Assessee By : Shri M.S. Syali, Sr. Advocate &
Shri Tarandeep Singh, CA
Department By : Shri Amrendra Kumar, CIT, DR
Date of Hearing : 11.10.2017
Date of Pronouncement : 17.10.2017
ORDER
PER R.S. SYAL, VP:
This appeal by the Revenue is directed against order passed by the CIT(A) on 30.12.2010 in relation to the assessment year 2002-03.ITA No.1768/Del/2011
2. The Revenue is aggrieved against the deletion of addition of Rs.2,02,00,860/- made by the Assessing Officer (AO) on account of transfer pricing adjustment.
3. Briefly stated, the facts of the case are that New York Life Group (NYL) is one of the largest life insurance group of companies in the world having headquarter in New York and operations spread over several countries. It has 9-10 wholly owned subsidiaries which, in turn, hold stock in various companies across the globe. New York Life International LLC (NYLI) is one such wholly owned subsidiary of New York Life Insurance Company. Max India Ltd. is the ultimate holding company of the Max India group of companies. The assessee is a joint venture between Max India Ltd. and NYLI. NYLI holds 26% shares in the assessee company through its 100% subsidiary, New York Life International Holdings Ltd. (Mauritius). The assessee company was incorporated in the year 2000 and is engaged in the business of life insurance. It undertakes all routine functions entailed in the business of life insurance, such as, actuarial function, agency function, customer 2 ITA No.1768/Del/2011 servicing, marketing and investment/fund management etc. The assessee reported two international transactions in Form No. 3CEB. The Assessing Officer made reference to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the reported international transactions. The only transaction in dispute is "Paid for short-term consultancy and assistance (Life Insurance Business)" with transacted value of Rs.3,76,54,642/-. The assessee applied Comparable Uncontrolled Price Method (CUP) for demonstrating that the international transaction was at ALP. The TPO observed that the international transaction was of payment for short-term assignment of employees of NYLI who provided assistance to the assessee in its start up phase. The assessee treated NYLI, being the charging entity, as the tested party, which was accepted by the TPO vide para 5.1 of his order, wherein he observed that the assessee cannot be made the tested party. The assessee claimed to have entered into agreements with NYLI during the year for obtaining various forms of short-term consultancy and assistance. Agreements were entered into on 07.12.2001 and were effective for a period of one year starting 01.01.2001. The short-term 3 ITA No.1768/Del/2011 consultancy services included developing new insurance products, developing sales strategy, developing reinsurance model, developing underwriting personnel in the field of customer services and underwriting services. Such services were to be rendered by the employees of NYLI and the remuneration was fixed as per the following rate chart:-
Employees at Senior Vice President level 3,000 USD per diem Employees at Vice President Level 2,500 USD per diem Employees at Asstt. Vice President level 2,000 USD per diem
4. The assessee furnished comparability of rates under the CUP method as under :-
Mean chargeout rate of Chargeout rate of NYLI comparables (USD) per (USD) per hour hour AVP 254 250 VP 302 312.5 SVP 364 375
5. In the light of the above, it was claimed that its international transaction was at arm's length. The TPO did not accept the application of CUP as the most appropriate method as the consulting firms whose rates were cited in the TP study report were only quotations and not 4 ITA No.1768/Del/2011 actual rates. Such rates were quoted in a range without reference to any level. Since these were quotations, the TPO held that these were not prices of uncontrolled transactions. The TPO further observed that the assessee carried out benchmarking with the rates of consultants working for consulting firms engaged in areas of law, tax and audit. He rejected such comparison as the assessee was simply provided employees by its Associated Enterprise (AE) on secondment basis, which position was noticed on going through para 6.2.3 at page 55 of TP study report stating that : `NYLI shall assign personnel to perform the Services who are qualified by training and experience to perform the same'. He held that the assignment of personnel for short periods was not equivalent to providing consultancy work. The TPO rejected the CUP method and instead, treated the Transactional Net Margin Method (TNMM) as the most appropriate method. Thereafter, he proceeded to compute the ALP of the international transaction under the TNMM. The assessee was called upon to furnish salary details of the employees assigned by NYLI to India for short-term projects. The assessee did not furnish any details. The TPO noticed that another NYLI employee was seconded to the 5 ITA No.1768/Del/2011 assessee for one year. Such employee, namely, Mr. Paul Solgan was the Executive Vice President. Total remuneration paid to him after exclusion of relocation expenses, was Rs.2,08,05,421/-. For working out cost per day of a VP level employee, he divided Rs.2.08 crore with 327 days [after excluding 25 days (five weeks of annual leave); 3 (casual leave); and 10 (public holidays)]. Such cost per day was worked out at Rs.63,625/-. For Sr. VP, the cost per day was taken as 120% of the cost of VP and for Assistant VP the cost per day was taken as 80% of the cost of VP on per day basis. That is how, the TPO determined total cost as under:-
"No. of days: 365-25 (five weeks of annual leave) - 3 (casual leave) - 10 (public holidays) = 327 Cost Cost per day No. of Total Cost days Cost to the Company per day Rs.63,625/- 153 Rs.9734625 for a VP Cost to the Company per day Rs.76,350 55 Rs.4199250 for a Sr. VP Cost to the company per day Rs.50,900 30 Rs.1527000 for a Asstt. VP TOTAL Rs.190,875 238 Rs.15460875 6 ITA No.1768/Del/2011
6. Thereafter, the TPO drew a list of comparables giving average margin of 12.89% as under:-
S.No. Companies 2001 2000 Weighted
Average -
Net Cost
Plus Margin
%
1. American National 5.59 12.50 8.67
Insurance Company
2. AmerUs Group Co 9.62 11.92 10.66
3. Delphi Financial Group Inc 1.96 3.93 2.86
4. Jefferson-Pilot Corporation 25.44 24.92 25.18
5. Lincoln National 9.39 9.11 9.25
Corporation
6. Protective Life Corporation 14.96 18.35 16.49
7. Prudential Financial Inc 1.78 5.37 3.53
8. Stancorp Financial Group 11.19 10.37 10.79
Inc
9. Torchmark Corporation 28.49 28.69 28.58
Arithmetic Mean 12.89
7. This arithmetic mean of 12.89% was taken as arm's length margin, which was applied to the above calculated uncontrolled costs incurred by NYLI in assigning employees at Rs.1,54,60,875/- for working out the arm's length price at Rs.1,74,53,782/-. As the assessee actually paid a sum of Rs.3,76,54,642/-, the TPO proposed transfer pricing adjustment of Rs.2,02,00,860/-. The Assessing Officer made an addition for the said amount in the computation of total income. In the first appeal, the 7 ITA No.1768/Del/2011 ld. CIT(A) deleted the addition by holding that i) it was a case of receiving consultancy services and not secondment of employees as the consultants came to India on short visits from time to time pursuant to the service agreement and worked under the supervision and control of NYLI; ii) the CUP was the most appropriate method in the given circumstances as the uncontrolled comparable rates shown by the assessee represented the arm's length price as the services provided by NYLI consultants were functionally comparable.
8. The Revenue is aggrieved against the deletion of addition on the following grounds:-
"1. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs.2,02,00,860/- ALP adjustment.
2. On the facts and circumstances of the case and in law, the CIT(A) has erred in holding that the rates charge by reputed service providers from NYLI, the tested party, fairly represent the ALP for such services and deleted the addition without adjudicating the issue of most appropriate method to be adopted for computing ALP.
3. On the facts and circumstances of the case and in law, the CIT(A) has erred in not reasoning as to why CUP is most appropriate method as compared to TNMM and why NYLI should be taken as tested party when the assessee has used the range of rates quoted by various consultancy firm.8 ITA No.1768/Del/2011
4. The appellant craves leave to add to, alter, amend or vary from the above grounds of appeal at or before the time of hearing."
9. At the outset, Shri M.S. Syali, the ld. Sr. Counsel, moved an application under Rule 27 of Income-tax (Appellate Tribunal) Rules 1963, raising the following legal ground:-
"That on facts and in law the A.O. has erred in making adjustments provided for in Chapter X of the Act without appreciating that total income of the assessee is to be computed as per special computational provisions of Section 44 r.w. Rule 2 of First Schedule."
10. Rule 27 of the ITAT Rules, 1963 provides that: "The respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him." It is observed that the assessee raised the above legal issue before the ld. CIT(A) as well by means of ground no. 2, as has been reproduced on page 2 of the impugned order. However, the ld. CIT(A) did not adjudicate the same as he proceeded to decide the issue on merits. Since the assessee- respondent now is trying to support the impugned order deleting the addition by means of the above legal ground which was impliedly decided against it by means of no decision by the ld. CIT(A), Rule 27 9 ITA No.1768/Del/2011 rightly comes to its rescue. Our view is fortified by the judgment of the Hon'ble Delhi High Court in CIT vs. Edward Keventer (Successors) Pvt. Ltd. (1980) 123 ITR 200 (Del). Similar view has been taken by the Hon'ble Delhi High Court in Fast Booking (I) P. Ltd. vs. DCIT (2015) 378 ITR 693 (Del). We, therefore, permit the respondent to raise the above additional ground, which is hereby admitted for decision under Rule 27 of the ITAT Rules, 1963. Accordingly, the ground is espoused for disposal on merits.
11. The ld. Sr. Counsel submitted that the provisions of section 92 of the Income-tax Act, 1961 (hereinafter also called as 'the Act') determining the ALP of the international transaction could not have been invoked by the AO for making the transfer pricing addition of Rs.2.02 crore and odd as the assessee is engaged in insurance business and its income has been computed u/s 44 read with the First Schedule to the Act. This argument was strongly opposed by the ld. DR, who stated that the provisions of section 92 are not affected by the operation of section 44 of the Act.
10 ITA No.1768/Del/2011
12. We have heard the rival submissions and perused the relevant material on record. In order to decide this controversy, it would be apt to consider the mandate of section 44 as under :-
`Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under the head "Interest on securities", "Income from house property", "Capital gains" or "Income from other sources", or in section 199 or in sections 28 to 43B, the profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a co- operative society, shall be computed in accordance with the rules contained in the First Schedule.' (emphasis supplied by us)
13. On circumspection of the prescription of section 44, it emerges that this section starts with a non-obstante clause (bold part) qua the computation of income chargeable under the head "interest on securities", "Income from house property", "Capital gains", or "Income from other sources" or in section 199 or in sections 28 to 43B ( italicized bold part). It provides that profits and gains of insurance business (normal part) shall be computed (normal italicized part) in terms of the rules contained in the First Schedule. Effect of the non- obstante clause in the section is that whatever is contained in the 11 ITA No.1768/Del/2011 provisions specifically enumerated herein will be superseded and the profits and gains of any business of insurance shall be computed in accordance with the Rules contained in the First Schedule. When we read section 44 in juxtaposition to the First Schedule, it becomes vivid that the profits and gains of any business of insurance shall be computed in accordance with the First Schedule to the Act and the mandate of the First Schedule shall have an overriding effect over the provisions contained under the heads "Interest on securities", "Income from house property", "Capital gains", or "Income from other sources" or in section 199 or in sections 28 to 43B. There is no dispute between the rival parties on the above proposition. The point of controversy argued by the ld. Senior AR is that once income of the assessee is to be computed under Rule 2 of the First Schedule, the application of the provisions of section 92 of the Act shall also be ousted because section 44 overrides all provisions dealing with the computation of income including section 92.
12 ITA No.1768/Del/2011
14. At this juncture, it is pertinent to note the scheme of the Act regarding the chargeability and computation of income under different heads. Chapter IV starts with section 14, which provides that : `Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income :-- A.--Salaries; C.--Income from house property; D.--Profits and gains of business or profession.; E.-- Capital gains.; F.--Income from other sources'. Provisions creating Charge and Computation have been separately provided under each head of income. For example, section 22 dealing with `Income from house property' contains charging provision which provides that : `The annual value of property consisting of any buildings or lands appurtenant thereto of .... shall be chargeable to income-tax ...'. Then the computation of income under this head has been set out in section 24, providing that the : `Income chargeable under the head "Income from house property" shall be computed after making the following deductions.............'. Similarly, for the income under the head `Capital gains', charging section is 45, which provides that : `Any 13 ITA No.1768/Del/2011 profits or gains arising from the transfer of a capital asset effected in the previous year shall, ....be chargeable ....' and the computation provision is contained in section 48, which provides that : `The income chargeable under the head "Capital gains" shall be computed, by ....'. In the like manner, chargeability under the head `Income from other sources' is contained in section 56(1) and the computation provision is contained in section 57. Coming to the income under the head `Profits and gains of business or profession', the chargeability is enshrined in section 28, which provides that : `The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession".....' and the computation is contained in section 29, which mandates that :`The income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D. It is manifest from the above discussion that the computation of income under each head is separately enclosed in Chapter IV, which contains not only the charging but also the computation provisions. However, section 92 has been placed in a separate Chapter X, with the caption `Special provisions relating to avoidance of tax'. Section 92 with 14 ITA No.1768/Del/2011 the marginal note `Computation of income from international transaction having regard to arm's length price', is the first section of this Chapter. Sub-section (1) provides that: `Any income arising from an international transaction shall be computed having regard to the arm's length price'. This shows that the computation provision contained in section 92, as applicable to income from international transaction falling under any head of income given in section 14, is in addition to and distinct from the regular computational provisions contained in the respective parts of Chapter IV.
15. Section 92CA provides that the Assessing Officer may refer the computation of the ALP in relation to an international transaction to the TPO. On such a reference, the TPO commences the proceedings for determining the ALP of the international transaction, which culminate in an order passed by him determining the amount of transfer pricing adjustment, if there is difference in the transacted price and the arm's length price. The Assessing Officer, then, passes a draft order under section 144C of the Act. In such a draft order, the income is first computed by the Assessing Officer under respective heads, such as, 15 ITA No.1768/Del/2011 income chargeable under the head "Income from house property" is computed under section 24; income under the head `Profits and gains of business or profession' is computed under section 29; income under the head `Capital gains' is computed under section 48; and income under the head `Income from other sources' is computed under section 57. Thereafter, second computation begins as per which an addition is made on account of transfer pricing adjustment proposed by the TPO based on the computation of the ALP of the international transaction. It is after the second computation that the total income is arrived at. Thus, it is evident that there are two computations made in determining the total income, viz, first is the computation of income under respective heads, which exercise is undertaken by the AO and second is the computation of income from international transaction by determining its ALP, which exercise is done by the TPO and given effect by the AO in his order. Thereafter a final assessment order is passed in compliance with the directions given by the Dispute Resolution Panel. Here it is relevant to take note of the mandate of sub-section (3) of section 92, which states that the provisions of this section shall not apply in a case where the 16 ITA No.1768/Del/2011 computation of income under sub-section (1) has the effect of reducing the income chargeable to tax computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into.
16. This shows that when an assessee enters into an international transaction, second computation has to be necessarily made u/s 92. If the second computation results into a transfer pricing addition, such an addition is made to the income computed under the first computation. If on the other hand, the second computation results in reduction of the income computed under the first computation, the same is ignored and the assessment is finalized on the basis of first computation alone. This mechanism of two computations can be understood with the help of a simple illustration. An assessee has sale of Rs.100/- to its AE and the AO computes income under the first computation at Rs.6/-. Such first computation of income of Rs.6/- gets enhanced by the second computation based on the transfer pricing adjustment of Rs.15/-, if the ALP of the sale transaction to the AE is determined at Rs.115/-. The 17 ITA No.1768/Del/2011 resultant total income comes to Rs.21/- (Rs.6/- under the first computation plus Rs.15/- under the second computation). Section 44, in our above illustration, has done away with the first computation of income of Rs.6/- and has given its own mechanism for determination of income from insurance business under the First Schedule. However, the second computation of income from international transaction having regard to ALP, as is Rs.15/- in the above example, is in addition to the normal computation and is not hit by section 44 of the Act.
17. It will be seen hereinafter that section 44 simply substitutes the first computation and it has no role whatsoever in so far as the second computation of determination of ALP of an international transaction u/s 92 of the Act is concerned.
18. To establish this, we again revert to the relevant parts of the language of section 44 of the Act which read that : `Notwithstanding anything to the contrary contained in the provisions of this Act relating to the computation of income chargeable under the head "Interest on securities", "Income from house property", "Capital gains" or "Income 18 ITA No.1768/Del/2011 from other sources", or in section 199 or in sections 28 to 43B, the profits and gains of any business of insurance...., shall be computed in accordance with the rules contained in the First Schedule'. It is overt from the words of the provision that the non-obstante clause has been inserted qua `computation of income chargeable under the head "Interest on securities", "Income from house property", "Capital gains" or "Income from other sources", or in section 199 or in sections 28 to 43B'. The legislature did not make all the provisions of the Act, including section 92, inapplicable as has been argued by the ld. counsel. There is no gainsaying that only such provisions of the Act are superseded, which are specifically referred to in the provision containing a non obstante clause. When there is a specific reference to certain sections, then other unmentioned provisions of the statute remain applicable and alive. A bare perusal of the language of section 44 transpires that only the provisions : `relating to the computation of income chargeable under the head "Interest on securities", "Income from house property", "Capital gains" or "Income from other sources", or in section 199 or in sections 28 to 43B' have been made inoperative. The legislature in its wisdom 19 ITA No.1768/Del/2011 did not specifically mention the second computation of income envisaged u/s 92 in relation to international transactions. If the intention had been to cover section 92 as well, then either a specific reference to section 92 would have been made or the italicized bold portion of the provision starting with `relating to the computation of income' and ending with `sections 28 to 43B' would have been omitted, in which case, section 44 would have read as : ``Notwithstanding anything to the contrary contained in the provisions of this Act, the profits and gains of any business of insurance, including any such business carried on by a mutual insurance company or by a co-operative society, shall be computed in accordance with the rules contained in the First Schedule'. This is not something unknown to the law. The Parliament has worded the non-obstante clause in relevant provisions in accordance with its intent. The immediately succeeding section 44A is again a special provision for deduction in the case of trade, professional or similar association. This provision too, like section 44, opens with a non obstante clause but overrides all the provisions of the Act, as is evident from its language, which says `Notwithstanding anything to the contrary 20 ITA No.1768/Del/2011 contained in this Act,'. Similarly, section 44AD is also a special provision for computing profits and gains of business on presumptive basis. This also opens with a non obstante clause but supersedes only the provisions of section 28 to 43C, which is manifest from the language providing: `Notwithstanding anything to the contrary contained in sections 28 to 43C,'. It is discernible on a conjoint reading of sections 44AD, 44A and 44 that while drafting section 44AD, the Parliament made ineffective the provisions of sections 28 to 43C; while drafting section 44A, it saved the prescription of this section alone and made futile all provisions of the Act; and while drafting section 44, it rendered useless only the provisions relating to the computation of income chargeable under the head "Interest on securities", "Income from house property", "Capital gains" or "Income from other sources", or in section 199 or in sections 28 to 43B. Since there is no specific reference to section 92 in section 44 and further the provision has not been worded so as to exclude all other provisions of the Act, we cannot infer the omission of the second computation of income envisaged u/s 92 of the 21 ITA No.1768/Del/2011 Act. Such an attempt amounts to redrafting the provision, which obviously cannot be sustained.
19. Reliance of the ld. Senior counsel on the judgment of the Hon'ble Bombay High Court in the case of Vodafone India Services (P) Ltd. VS. CIT (2016) 385 ITR 169 (Bom), in our considered opinion, does not advance his case any further. In that case, the Hon'ble High Court held that before applying provisions of section 92, there ought to be some income chargeable to tax arising from an international transaction. If there is no income chargeable to tax in the first instance, there can be no question of determining the ALP of the international transaction. There cannot be any dispute on the proposition that section 92 is a computation provision and not a charging provision. This provision in itself cannot create a charge. For the applicability of this section, it is sine qua non that there must be some existing income chargeable to tax which is processed under Chapter - X to find out its ALP and the resultant transfer pricing adjustment, if any. Adverting to the facts of the instant case, we find that the assessee undoubtedly has an income chargeable to tax which has been computed as per the first computation available 22 ITA No.1768/Del/2011 under section 44 of the Act and the international transaction concerns with such income alone. It is not a case of starting the second computation u/s 92 without there being any first computation.
20. The reliance of the ld. AR on the judgments in the case of LIC vs. CIT (1964) 51 ITR 773 (SC) and CIT vs. Oriental Fire and General Insurance Company Ltd., 291 ITR370 (SC), etc. is again not germane to the issue under consideration. In these judgments and the other decisions relied by the ld. Senior counsel, the Hon'ble Courts have held that the profits of insurance business are governed by the rules in Schedule and the Assessing Officer cannot make any adjustments in accounts. This proposition is obviously undisputed and cannot be called into question. But, in none of these decisions, there is any reference to the non-applicability of section 92, being the second computation dealing with the determination of the ALP of an international transaction of an assessee carrying on insurance business. Similarly, the assessee can't drive home any benefit from certain decisions including Cash Edge India (P) Ltd. vs. ITO (Mumbai) in which the question was about 23 ITA No.1768/Del/2011 computation of book profits u/s 115JB and the Tribunal held that Explanation 1 to section 115JB (2) does not cover any transfer pricing adjustment. It is simple and plain that the computation of `Book profits' has to be necessarily done in terms of Explanation 1 to section 115JB(2), which contains the modus operandi for calculating such book profits. If a particular item of adjustment is not enshrined in such Explanation, the same cannot be read into the provision. In the like manner, reliance of the ld. Senior counsel on the decision of the Delhi Bench of the tribunal in Oriental Insurance Company Ltd. vs. ACIT (2010) 130 TTJ 388 (Del) is, again, misconceived inasmuch as in that case the Tribunal held that the provisions of section 14A cannot be applied in computing the income u/s 44 of the Act. We are unable to comprehend as to how the ratio decidendi laid down in these decisions supports the view point of the assessee for non-applicability of the transfer pricing provisions contained in section 92, which is a second computation of income. In view of the foregoing discussion, we are fully convinced that the provisions of section 92 of the Act apply to an assessee carrying on insurance business. The two-staged computation of income in such a 24 ITA No.1768/Del/2011 case is to be done, firstly, by computing income u/s 44 read with the First Schedule, in disregard to the provisions relating to the computation of income chargeable under the head "Interest on securities", "Income from house property", "Capital gains" or "Income from other sources", or in section 199 or in sections 28 to 43B, and then secondly, by computing income in terms of section 92 of the Act, by making addition on account of transfer pricing adjustment, if warranted. The additional ground raised under Rule 27 of the ITAT Rules, 1963, is, therefore, dismissed.
21. Now we take up the issue on merits. It is essential to mention that Sh. M.S. Syali, the ld. Sr Advocate argued the additional ground raised under rule 27 on 18.9.2017, which was responded by the ld. DR on the same day. When the Bench expressed its non-concurrence with the additional ground argued by the ld. Senior counsel and asked the parties to go ahead with the appeal on merits, Sh. Tarnadeep Singh, the ld. counsel took up the proceedings for further arguments. During the course of such hearing, it was prima facie noticed that the ld. CIT(A) 25 ITA No.1768/Del/2011 failed to deal with all the points raised in the order passed by the TPO. As such, it was considered expedient to properly examine the matter. It was accordingly directed to both the sides to file a copy of the Agreement pursuant to which the services were received by the assessee and also a copy of the Transfer pricing study report of the assessee for the year. Case was adjourned to 21.9.2017. Certain adjournments sought by the ld. AR on account of ill health, were also allowed. When the case eventually came up for hearing on 9.10.2017, the ld. DR placed on record a copy of the Agreement. The ld. AR wanted a week's time, impliedly, treating such a document as a paper book filed by the Revenue in terms of rule 18 of the ITAT Rules, 1963. Knowing well that the additional ground has not been accepted and the proceedings have started on merits, he sought time, inter alia, on the ground that similar legal issue has been heard by the Mumbai bench of the tribunal and the order is awaited. On a pertinent question, it was stated that no order has been passed so far by the Mumbai bench of the tribunal. The request of the assessee was turned down as the ld. DR had simply filed a copy of the Agreement at the instance of the Bench, which was filed by the 26 ITA No.1768/Del/2011 assessee itself during the course of hearing before the TPO/AO. Still to meet the principles of natural justice, the case was adjourned for two days to be finally taken up for hearing on 11.10.2017. The ld. AR again came out with an adjournment application requesting to defer the hearing on the ground that he has moved a petition dated 10.10.2017 to the Hon'ble President requesting him to constitute a Special bench on the legal issue which was argued by Sh. Syali before us. On enquiry, it was candidly admitted that no order has so far been passed by the Hon'ble President on the assessee's request. The ld. AR was conveyed that his adjournment application cannot be accepted as there is neither any existing order of the Mumbai tribunal on the legal issue nor his application for the constitution of the Special Bench has been accepted so far. Although he remained seated during the course of arguments by the ld. DR and also filed a paper book running into 79 pages, consisting of a copy of the T.P. Study report and Form No. 3CEB but without any of the relevant Agreements, yet he refused to put forth his submissions. Law requires granting of an opportunity of hearing to both the sides. Here is a case in which despite giving an adequate opportunity of 27 ITA No.1768/Del/2011 hearing, the ld. AR did not avail the same. As such, we are left with no option but to dispose of the matter on the basis of material available on record in so far as the merits of the appeal are concerned.
22. It is noticed that the ld. CIT(A) deleted the addition by holding that it was a case of receiving consultancy services and not secondment of employees on short assignments; and the CUP was the most appropriate method in the given circumstances since the uncontrolled comparable rates shown by the assessee represented arm' s length price as the services provided by NYLI consultants were functionally comparable.
23. Let us examine if the assessee received consultancy services or secondment of employees on short term assignments for which the payment in question was made and whether the companies chosen by the assessee are, in fact, comparable under the CUP method.
24. We have noted above that the ld. DR placed on record a copy of agreement dated 31.01.2003 effective from 01.01.2002 (hereinafter also called `the Agreement'). The same is accompanied by a letter dated 28 ITA No.1768/Del/2011 22.09.2017 from ACIT addressed to the CIT, DR. The Agreement has been entered into between the assessee and New York Life International, LLC, (NYLI) a company incorporated in the USA.
25. Article 1 of the Agreement containing 'Scope of services' provides through clause 1.1 that the services: `shall be to advice and assist MNYL in devising Training Programme for MNYL Agent Advisors (hereinafter referred to as the 'Services.').' Clause 1.2 states that : `NYLI will send trained personnel to the designated MNYL sites in India or abroad as required by MNYL to provide the Services.' Article II with the heading "NYLI as independent contractor" states that: `NYLI agrees to perform the Services under this Agreement as an independent contractor. The personnel provided by or through NYLI to MNYL shall not be considered to be the employees of MNYL nor shall they have the authority to or be asked by MNYL to exercise management authority with respect to MNYL's business. The obligation of NYLI and that of its personnel is to act in good faith and to exercise their best efforts in the interest of MNYL.' Article III with the heading 'Personnel' 29 ITA No.1768/Del/2011 provides through clause 3.1 that : `NYLI shall assign personnel to perform the services who are qualified by training/experience to perform it.' Article IV discusses 'Fees and reimbursements.' Clause 4.1 provides that NYLI shall be entitled to a Variable Fee as under :-
`Category of Personnel Per Diem Charges
(in United States Dollars)
Senior Vice President & Above 3000
Vice President 2500
Assistant Vice President 2000
For the computation of billable man-days spent by NYLI personnel, the time spent by NYLI personnel on travel and such other time when no work could be done due to reasons outside the control of the NYLI personnel would also be included. No payment however would be due for any holidays, which NYLI personnel may take during his stay at the site of MNYL.'
26. Clause 4.3 of the Agreement, which also has some bearing on the issue, reads as under:-
"4.3 Billing Cycle and Statement of Account Within one month of the Completion of the Project or the Term, whichever is later, NYLI shall submit to MNYL a comprehensive statement of Account, for the fee computation. NYLI shall also seek a reimbursement of any actual expenses incurred by it on behalf of MNYL in accordance with Article IV(4.2) above. NYLI will provide the necessary support documents and statements in regard to the said expenses incurred on behalf of MNYL. The amount of any bill received 30 ITA No.1768/Del/2011 by MNYL shall be due for payment only after verification of the bill and the supports provided with the bill (hereinafter referred to as Due Date) by NYLI to MNYL."
27. On going through the above clauses of the Agreement, effective from 01.01.2002, i.e., covering three months of the previous year relevant to the assessment year under consideration, it becomes clear that NYLI agreed to `advise and assist MNYL in devising Training Programmes for MNYL Agent Advisors.' This was to be done by NYLI by sending: `trained personnel to the designated MNYL sites in India or abroad.' It is further evident that NYLI deputed its employees as independent contractor who: "shall not be considered to be the employees of MNYL." It is further clear that the employees were to be paid on per day basis and even the time spent by NYLI personnel on travel etc. was to be paid by the assessee. Such payment was supposed to be made: `within one month of the completion of the project or ......, whichever is later.' An overview of the above clauses makes it manifest that NYLI deputed its personnel to the assessee for devising Training Programme for the assessee's agent advisors. This discerns that the transaction was more of the nature of short-term assignment of 31 ITA No.1768/Del/2011 employees and no `consultancy services' were sought to be received by the assessee. That apart, NYLI itself is not a consulting company as it is engaged in the business of selling various insurance products and the entire emphasis of sending its personnel was to train and assist the assessee in its start up phase. Here it is pertinent to mention that the TPO has referred to two agreements i.e., one for training and one for actuarial services under which the employees were assigned to the assessee. These Agreements as per TPO's order were entered into on 07.12.2001 and were effective for a period of one year from 01.01.2001. These agreements were to terminate on 31.12.2001. It is thereafter that the assessee entered into the afore referred Agreement effective from 01.01.2002, a copy of which has been supplied by the ld. DR. Both the sides were directed by the Bench to file copies of the relevant agreements. The assessee, as discussed above, did not furnish any agreement and the ld. DR placed on record a copy of the Agreement covering three months' period of the year under consideration. On the basis of the Agreement, it is vivid that the assessee did not receive any `consultancy services' as has been held by the ld. CIT(A). This is 32 ITA No.1768/Del/2011 further corroborated from para 6.23 of the assessee's own Transfer pricing study report, which states that : "a) NYLI shall assign personnel to perform the Services who are qualified by training and/or experience to perform the same."
28. Now, we turn to the next aspect, viz., determination of the ALP under the CUP method. It is apparent from the assessee's Transfer pricing study report, a copy of which has been placed on record both by the assessee as well as the ld. DR, that certain companies claimed as comparable have been shortlisted giving the nature of services and hourly charge out rates, as under :-
`6.29 The list of companies/firms selected, nature of services rendered by them, and their hourly charge-out rates, are provided below:
TABLE 5: SUMMARY OF RATES CHARGED BY THE
COMPARABLES
Name of selected Nature of services Hourly charge-out
company/firm Rates
Tillinghast Towers Perrin Actuarial and management US $ 300 (this is a
& Co. ("Tillinghast") consulting to life insurance blended rate)
and financial services
companies, health care
organisation, reinsurance
organisations, etc.,
including consulting in
respect of mergers,
33
ITA No.1768/Del/2011
acquisitions and
restructuring, product
development and
management, market entry,
analysis and positioning,
distribution economics and
strategy, risk management,
etc.
Buck Consultancy in the field of US$ 370 for a
Consultants and Actuaries human resources, including Principal and for
health and welfare an Actuary
consulting and consultancy
services also in respect of
compensation and benefits, US$ 305 for a
human resource Consultant
effectiveness and
technologies, and benefits
administration.
Mercer Human Resource Consultancy in the field of US$ 440 for a
Consultancy human resources, including Senior Health and
consultancy services Welfare Consultant
provided in respect of health and for an Actuary
care, retirement benefits,
human
capital strategy, HR risk US$ 250 for a
management, HR function Consultant
strategy, performance
management, etc.
Rael & Letson Consultancy in the field of US $ 190 for an
Consultants and Actuaries human resources, including Actuary
health and welfare
consulting. US$ 170 for a
Consultant
Argo Navis Consulting Consultancy in the field of US$ 200 (no level
customer relationship specified)
management, marketing
technology, and business
strategy.
PricewaterhouseCoopers Consulting in actuarial US$ 500 for an
for a New York based services Actuary
Actuary
34
ITA No.1768/Del/2011
Solomon Consulting Consultancy to law firms the US$ 195 to US$
field of strategic planning, 495
organisational architecture,
law practice acquisition,
hiring procedures and
system issues, compensation
system, etc.
Ernst & Young Consultancy/solutions in the US$ 250 for Senior
fields of audit, tax, corporate Managers on tax
finance, enterprise risk advice
management, valuation of
intangibles, business
performance, etc.
Deloitte Touche Tohmatsu Consultancy / solutions in US$ 70 to US $
the fields of accounting, 420
assurance, tax, legal,
management, financial and
human capital.
Milliman Asia, Hongkong Consulting In the field of US$ 450 for
actuarial services, employee Partners
benefits, health consulting,
etc. US$ 300 for Senior
Lawyers
29. The assessee noted in para 6.30 of its Transfer pricing study report that: "The above listed hourly charge-out rates for the selected companies/ firms are for employees at various levels/ designations. However, to facilitate comparison of rates charged by NYLI to MNYL, with the hourly charge-out rates of the selected companies/ firms, the levels/ designations/ hierarchy in respect of the selected companies/ firms, were equated to the employee levels/ designations/ hierarchy of NYLI employees who rendered the short term consultancy and assistance to MNYL, i.e., to the levels of Senior Vice 35 ITA No.1768/Del/2011 President and above ('SVP'), Vice President ('VP') and Assistant Vice President/ Consultant ("AVP')."
30. It can further be observed that the assessee made several assumptions while making comparison, which have been listed on page 60 of the Transfer Pricing Study report, as under :-
"Other assumptions were also made to enable the above mentioned comparison. Some of the key assumptions which were made while making the above mentioned comparison have been listed below:
(a) Senior Manager employed at Ernst & Young could be equated to AVP at NYLI
(b) As regards, Deloitte Touche Tohmatsu and Solomon Consulting, since we had access to a range of hourly charge-out rates, which indicated that the lower value of the range would possibly be for their junior level employees which may not be equitable to either an AVP, VP or SVP at NYLI. However, the upper value would possibly be for their very senior employee who could be equated to an SVP at NYLI.
(c) The Partners and Senior Lawyers at Milliman Asia, Hongkong could be equated to VP and AVP at NYLI, respectively.
(d) The Principal/Actuary and Consultant employed at Buck Consultants and Actuaries could be equated to SVP and AVP at NYLI, respectively.
However, since no level of employee specified in case of Buck Consultants and Actuaries could be equated to VP at NYLI, an average of the hourly charge-out rates for a Principal/ Actuary and of a Consultant was considered to be appropriate for a level at Buck Consultants and Actuaries, which could be equated to VP at NYLI. 36 ITA No.1768/Del/2011
(e) The Senior Health and Welfare Consultant/Actuary and Consultant employed at Mercer Human Resource Consulting could be equated to SVP and AVP at NYLI, respectively. However, since no .level of employee specified in case of Mercer Human Resource Consulting could be equated 'to VP at NYLI, an average of the hourly charge-out rates for a Senior Health and Welfare Consultant/Actuary and of a Consultant, was considered to be appropriate for a level at Mercer Human Resource Consulting, which could be equated to VP at NYLI.
(f) The Actuary and Consultant employed at Rael & Letson Consultants 'and Actuaries could be equated to SVP and AVP at NYLI, respectively. However, since no level of employee specified in case of Rael & Letson Consultants and Actuaries could be equated to VP at NYLI, an average of the hourly charge-out rates for an Actuary and of a Consultant, was considered to be appropriate for a level at Rael & Letson Consultants and Actuaries, which could be equated to VP at NYLI.
(g) The New York based actuary could be equated to SVP at NYLI.
(h) As regards, Argo Navis Consulting, the hourly charge-out rate of US$ 200 was not specified with a corresponding level of employee. Accordingly, it was assumed that this rate was an average rate applicable across all levels."
31. It is overt from the above that the assessee went on making assumption after assumption for equating consultants from the companies shortlisted by it with the employees of NYLI assigned to it who were qualified for training etc. Firstly, there is no substantiation of the 'hourly charge out rates' as given by the assessee in its transfer pricing study report as a benchmark and, secondly, the companies so 37 ITA No.1768/Del/2011 selected are in altogether different fields ranging from senior lawyers at Milliman Asia, Hong Kong, to health and welfare consultants. It, therefore, becomes evident that the ld. CIT(A) fell in error by upholding the price declared by the assessee at ALP under the CUP method. It is further crucial to note that he failed to deal with so many points raised by the TPO in his order and deleted the addition at a single stroke by giving his reasoning confined in paras 10.1 to 10.3 of his order, apart from the computation part discussed in para 11.4. The entire `Finding' given by the ld. CIT(A), apart from the computation part, is reproduced as under:-
"10.1 The A.O. has stated that the consultancy provided by NYLI to the appellant was not in the nature of provision of any services but were pursuant to secondment of NYLI employees to the appellant company in India. I find that the appellant has entered into a separate Expatriate Salary Reimbursement Agreement with NYLI during the relevant period one employee by the name of Paul Colgan was on deputation to India under the said agreement. In the present case, the consultants came to India on short visits from time to time pursuant to the service agreement and worked under the supervision and control of NYLI. In my view it was not correct on the part of the A.O. to re- characterize the consultancy as secondment.38 ITA No.1768/Del/2011
10.2 Considering the above, in my view the rates prevailing in the international market for such services as evidenced by rates actually charged by reputed international service providers from NYLI, the tested party, fairly represent the arms length price for such services during the relevant period. I have already observed that the services provided by NYLI consultants are functionally comparable. I also find that the rates actually paid to NYLI by the appellant were lower than the rates determined by the modified CUP established by using only such rates as were actually charged from NYLI, the tested party, during the relevant period by independent service providers.
10.3 I accordingly decide this ground in favour of the appellant and hold that for AY 2002-03 the payments to NYLI made by the appellant for short term consultancy are at an arm's length price as substantiated by the CUP method. As a result I hereby delete the addition of Rs.20,200,860/- inflicted by the TPO/AO for AY 2002-03."
32. It can be seen that in para 10.1, he set aside the finding of the Assessing Officer on secondment of employees vis-à-vis consultancy without considering that the NYLI assigned personnel to perform the `Services' in the nature of advising and assisting the assessee `in devising Training Programme' for its agents advisors, which is miles away from receiving `consultancy services' as projected; and in para 10.2 he simply held that the rates prevailing in the international market for such services fairly represent the arm's length price without noticing that, firstly, the assessee made comparison of the `assignment of 39 ITA No.1768/Del/2011 personnel' by NYLI with `consultancy services' and secondly, the comparable companies given by the assessee operate in altogether different fields, thereby rendering the comparison meaningless. The ld. CIT(A) not only failed to deal with the objections of the TPO with reference to the adoption of the given rates as comparable but also failed to note the origin of such rates, which are based simply on several assumptions as extracted above from the assessee's transfer pricing study report. The deletion of addition by the ld. CIT(A) is in complete disregard to the TPO's elaborate findings given on pages 2 to 7 of his order. It can be seen from the TPO's order that the assessee was specifically called upon to furnish salary details of the employees assigned by NYLI to India for short-term projects, which the assessee did not. The TPO did not accept the application of CUP as the most appropriate method as the consulting firms whose rates were cited in the TP study report were only quotations and not actual rates. Further, such rates were quoted in a range without reference to any level. Such objections have not been dealt with by the ld. CIT(A), who chose to delete the addition on flimsy grounds. Under these circumstances, we 40 ITA No.1768/Del/2011 are unable to approve the view taken by the ld. CIT(A) in deleting the addition.
33. Having found that the view taken by the ld. CIT(A) cannot be countenanced, it remains to be seen if the action of the TPO is sustainable. After rejecting the application of the CUP method, the TPO invoked the TNMM as the most appropriate method. Let us find out the prescription of working out the ALP under the TNMM under rule 10B(1)(e), reading as under : -
(e) transactional net margin method, by which,--
(i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ;
(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ;
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market ;
(iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ;41 ITA No.1768/Del/2011
(v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.
34. Sub-clause (i) deals with the computation of the net operating profit margin realised by the enterprise from an international transaction in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. Sub-clause (ii) provides that the net operating profit margin realised by a comparable uncontrolled transaction should be computed having regard to the same base as that taken in sub-clause (i) for the assessee. In the formula for calculating the profit margin under rule 10B(1)(e) under sub-clauses (i) and (ii), there can be any denominator, such as, costs incurred or sales effected or assets employed or to be employed. However, the numerator is uniform, which is, net operating margin. In fact, the numerator is `operating profit' and not the `net profit'. Whereas, operating profit is the excess of operating revenue over the operating costs, net profit is the excess of revenue over all costs, both operating and non-operating.
42 ITA No.1768/Del/2011
35. Coming back to the decision of the TPO, it is found that he proceeded to compute the ALP by considering that one Mr. Paul Solgan, the Executive Vice President, was seconded to the assessee in another year. His cost per day was worked out. 120% and 80% of such cost was attributed as the cost per day of Sr. VP and Assistant VP to work out the total cost at Rs. 1,54,60,875, which was increased by the arm's length margin of comparables at 12.89% for determining the arm's length price at Rs.1,74,53,782/-. As the assessee actually paid a sum of Rs.3,76,54,642/-, the TPO proposed transfer pricing adjustment of Rs.2,02,00,860/-. It is obvious that the methodology adopted by the TPO for determining under the TNMM does not conform to the method prescribed under rule 10B(1)(e) and hence cannot be approved.
36. We are confronted with a situation in which the action of the CIT(A) in deleting the transfer pricing addition cannot be upheld and equally the view of the TPO in applying the TNMM also cannot be approved for the reasons assigned supra, albeit his exercise of rejecting the assessee's determination of ALP is correct. Under such 43 ITA No.1768/Del/2011 circumstances, we are of the considered opinion that the ends of justice would adequately meet if, the impugned order is set aside and matter is restored to the file of the AO/TPO with a direction to determine the ALP of the international transaction afresh as per law after allowing a reasonable opportunity of being heard to the assessee.
37. In the result, the appeal is allowed for statistical purposes.
The order pronounced in the open court on 17.10.2017.
Sd/- Sd/-
[SUDHANSHU SRIVASTAVA] [R.S. SYAL]
JUDICIAL MEMBER VICE PRESIDENT
Dated, 17th October, 2017.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
44