Income Tax Appellate Tribunal - Delhi
Acit (Ltu), New Delhi vs M/S. Max New York Life Insurance Company ... on 12 February, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I-1', NEW DELHI
Before Sh. N. K. Saini, AM and Sh. K. N. Chary, JM
ITA No. 2727/Del/2011 : Asstt. Year : 2003-04
ITA No. 5705/Del/2011 : Asstt. Year : 2004-05
ITA No. 2861/Del/2011 : Asstt. Year : 2005-06
Asstt. Commissioner of Income Vs M/s Max New York Life Insurance
Tax (LTU), Company Ltd., 3rd Floor, Max
New Delhi-110017 House, 1, Dr. Jha Marg, Okhla,
New Delhi-110020
(APPELLANT) (RESPONDENT)
PAN/GIR No. AACCM3201E
Assessee by : Sh. Tarandeep Singh, Adv.
Revenue by : Sh. Sanjay I. Bara, CIT DR
Date of Hearing : 24.01.2018 Date of Pronouncement : 12.02.2018
ORDER
Per Bench:
These three appeals by the department are directed against the separate orders of ld. CIT(A)-XX, New Delhi dated 24.03.2011, 20.09.2011 and 22.11.2011 for the assessment years 2003-04, 2004-05 and 2005-06 respectively.
2. Since, the grounds raised in these appeals are commo n having similar facts, therefore, these are being disposed off by this common order for the sake of convenience and brevity.
3. The assessee also moved an application under Rule 27 of the Inco me Tax (Appellate Tribunal) Rules, 1963 stating therein as under:
2 ITA Nos. 2727, 5705 & 2861/Del/2011Max New York Life Insurance Co. Ltd.
"Captioned appeals filed by the tax department are next schedule for hearing before your honours on 24 t h January, 2018. In this regard, it is respectfully submitted that by relying upon provisions of Rule 27 of ITAT Rules, 1963, respondent intends to support the impugned order by raising following defensive legal plea:
"That on facts and in law the AO 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."
It is not well settled that respondent is entitled to raise a legal plea in defense of his case subject to the restriction that even if it is accepted, it should be given effect to only for the purpose of sustaining the order in appeal and dismissing the appeal. {Reference Pandit ITO Vs Vijay Kant Sharma reported in 2009-TOIL-554-ITAT-Del (copy enclosed), BR Bamsi Vs CIT reported in 83 ITR 223 (Bom), CIT Vs Edward Keventer (Successors) Pvt. Ltd. reported in 123 ITR 200 (Del)}."
Submitted Accordingly, Yours Truly, Sd/-
(Tarandeep Singh) Advocate
4. The ld. CIT DR sub mitted that similar application was also moved by the assessee under Rule 27 of the Income Tax (Appellate Tribunal) Rules, 1963 for the assessment year 2002-03 and the issue was decided against the assessee.
5. We have considered the submissions of both the parties o n application under Rule 27 of the Income Tax (Appellate Tribunal) 3 ITA Nos. 2727, 5705 & 2861/Del/2011 Max New York Life Insurance Co. Ltd.
Rules, 1963. It is noticed that similar application was filed by the assessee in the preceding assessment year 2002-03 in ITA No.1768/Del/2011 moved by the depart ment wherein vide order dated 17.10.2017, the issue was decided against the assessee b y observing in paras 12 to 20 as under:
"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 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 4 ITA Nos. 2727, 5705 & 2861/Del/2011 Max New York Life Insurance Co. Ltd.
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.
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 5 ITA Nos. 2727, 5705 & 2861/Del/2011 Max New York Life Insurance Co. Ltd.
head 'Capital gains', charging section is 45, which provides that : 'Any 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 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 6 ITA Nos. 2727, 5705 & 2861/Del/2011 Max New York Life Insurance Co. Ltd.
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, 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 t wo 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 wh ere the 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.
7 ITA Nos. 2727, 5705 & 2861/Del/2011Max New York Life Insurance Co. Ltd.
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 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 8 ITA Nos. 2727, 5705 & 2861/Del/2011 Max New York Life Insurance Co. Ltd.
"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...., 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 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.9 ITA Nos. 2727, 5705 & 2861/Del/2011
Max New York Life Insurance Co. Ltd.
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 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: 'Notwi thstanding 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 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. v. CIT [2016] 385 ITR 169/69 taxmann.com 283 (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 10 ITA Nos. 2727, 5705 & 2861/Del/2011 Max New York Life Insurance Co. Ltd.
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 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 v. CIT [1964] 51 ITR 773 (SC) and CIT v. Oriental Fire and General Insurance Co. Ltd., [2007] 291 ITR 370/161 Taxman 181 (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 AL P 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. v. ITO (Mumbai) in which the question was about computation of book profits u/s 115JB and the Tribunal held that Explanation 11 ITA Nos. 2727, 5705 & 2861/Del/2011 Max New York Life Insurance Co. Ltd.
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 Co. Ltd. v. Asstt. CIT [2010] 40 SOT 19 (Delhi) 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 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."
6. So, respectfully following the aforesaid referred to order, the issue raised by the assessee vide application under Rules 27 of the Inco me Tax (Appellate Tribunal) Rules, 1963 relating to adjust ment provided for in Chapter X of the Income Tax Act, 1961 12 ITA Nos. 2727, 5705 & 2861/Del/2011 Max New York Life Insurance Co. Ltd.
as per the provisions of Section 44 of the Act r.w. Rule 2 of the First Schedule is decided against the assessee.
7. Now we will deal with the departmental appeals, the commo n grounds raised in these appeals relates to the deletion of transfe r pricing addition. The grounds raised for the assessment year 2003- 04 read as under:
"1. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs.76,44,878/-.
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.
4. The appellant craves leave to add to, alter, amend or vary from the above grounds of appeal or before the time of hearing."
8. In all other years, the similar deletion of addition has bee n challenged by the depart ment, the only difference is in the a mount involved.
13 ITA Nos. 2727, 5705 & 2861/Del/2011Max New York Life Insurance Co. Ltd.
9. As regards to the aforesaid issue, the ld. Counsel for the assessee at the very outset stated that this issue was also a subject matter of the depart mental appeal for the assessment year 2002-03 wherein the issue has been restored to the file of the AO/TPO with a direction to determine the ALP of the international transactio n afresh after allowing a reasonable opportunity of being heard to the assessee.
10. In his rival submissions, the ld. CIT DR although supported the order of the AO but could not controvert the aforesaid contention of the ld. Counsel for the assessee.
11. After considering the submissions of both the parties and the material on record, it is noticed that an identical issue having similar facts was a subject matter of the departmental appeal in ITA No. 1768/Del/2011 for the assessment year 2002-03 wherein vide order dated 17.10.2017, the issue has been restored to the file of the AO and the relevant findings have been given in paras 21 to 36 which read as under:
"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) 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 14 ITA Nos. 2727, 5705 & 2861/Del/2011 Max New York Life Insurance Co. Ltd.
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 assessee itself during the course of hearing before the TPO/AO. Still to meet the principles of natural justice, the case was adjourned for t wo 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 15 ITA Nos. 2727, 5705 & 2861/Del/2011 Max New York Life Insurance Co. Ltd.
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 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 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 16 ITA Nos. 2727, 5705 & 2861/Del/2011 Max New York Life Insurance Co. Ltd.
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' 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 &
3000
Above
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 17 ITA Nos. 2727, 5705 & 2861/Del/2011 Max New York Life Insurance Co. Ltd.
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 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 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 18 ITA Nos. 2727, 5705 & 2861/Del/2011 Max New York Life Insurance Co. Ltd.
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 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 belo w:
TABLE 5: SUMMARY OF RATES CHARGED BY THE COMPARABLES Name of selected Natu re of servi ces Hourl y cha rge-out compan y/f irm Rates Tillinghast Actuarial and manag ement US $ 300 (t his i s a To wers Perri n & consu lting t o lif e in surance and blended rate) 19 ITA Nos. 2727, 5705 & 2861/Del/2011 Max New York Life Insurance Co. Ltd.
Co. f inancial servi ces comp anies,
("Tilling hast ") health ca re o rgani sati on,
rein su rance o rgani satio ns, etc.,
including con sulti ng in respect
of mergers, acqui sition s and
restru ctu ring, product
develo pment a nd mana gement,
market ent ry, analysis and
positioni ng, dist ribution
economics and st rat egy, ri sk
management, etc.
Buck Con sult ants Consultancy in th e f ield of US$ 370 f or a
and Actuari es human reso urces, including Pri ncipal a nd f or
health and welf are con sulting an Actuary
and con sultan cy services al so in US$ 305 f or a
respect of compensation and Consultant
benef its, human resou rce
eff ectiven ess and technol ogies,
and benef its admin ist ration.
Mercer Hu man Consultancy in th e f ield of US$ 440 f or a
Resou rce human reso urces, including Senio r Hea lth and
Consultancy consu ltancy services p rovi ded in Welf are Con sultant
respect of health care, and f or an Actuary
reti rement benef its, human US$ 250 f or a
capital strat egy, HR ri sk Consultant
management, HR f unction
stra tegy, p erf ormance
management, etc.
Rael & Let son Consultancy in th e f ield of US $ 1 90 f or an
Consultant s and human reso urces, including Actuary
Actuaries health and welf are con sulting. US$ 170 f or a
Consultant
Argo Navi s Consultancy in th e f ield of US$ 200 (n o level
Consulting custo mer relation ship specif ied)
management, marketing
technolo gy, and bu siness
stra tegy.
Pri ce waterhou seC Consulting in actu arial services US$ 500 f or an
oopers f or a Ne w Actuary
Yo rk based
Actuary
Solomon Consultancy to la w f irms the US$ 195 to US$
Consulting f ield of strateg ic planni ng, 495
organi satio nal a rchitect ure, la w
20 ITA Nos. 2727, 5705 & 2861/Del/2011
Max New York Life Insurance Co. Ltd.
practi ce a cqui sition, hi ring
procedu res and syst em i ssues,
compen sati on system, etc.
Ernst & Young Consultancy/solution s in the US$ 250 f or Senior
f ields of audit, tax, corpo rate Managers o n tax
f inance, enterprise ri sk advice
management, val uation of
intangibles, bu siness
perf orma nce, etc.
Deloitte Touche Consultancy/solution s in the US$ 70 to US $
Tohmatsu f ields of accounting, assu rance, 420
tax, legal, mana gement,
f inancial and human capit al.
Milliman Asia, Consulting In th e f ield of US$ 450 f or
Hongkon g actua rial services, emplo yee Partners
benef its, health con sulti ng, etc. US$ 300 f or Senior
La wyers
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 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:21 ITA Nos. 2727, 5705 & 2861/Del/2011
Max New York Life Insurance Co. Ltd.
(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.
(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 22 ITA Nos. 2727, 5705 & 2861/Del/2011 Max New York Life Insurance Co. Ltd.
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 an d Actuaries could be equated to VP at NYLI, a n average of the hourly charge-out rates for an Actuary and of a Consultant, was considere d to be appropriate for a level at Rael & Letso n 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 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 23 ITA Nos. 2727, 5705 & 2861/Del/2011 Max New York Life Insurance Co. Ltd.
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.
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 24 ITA Nos. 2727, 5705 & 2861/Del/2011 Max New York Life Insurance Co. Ltd.
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 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 wa s 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 are unable to approve the view taken by the ld. CIT(A) in deleting the addition.
25 ITA Nos. 2727, 5705 & 2861/Del/2011Max New York Life Insurance Co. Ltd.
33. Having found that the vie w 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, bet ween 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);
(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.
26 ITA Nos. 2727, 5705 & 2861/Del/2011Max New York Life Insurance Co. Ltd.
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.
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 27 ITA Nos. 2727, 5705 & 2861/Del/2011 Max New York Life Insurance Co. Ltd.
the reasons assigned supra, albeit his exercise of rejecting the assessee's determination of ALP is correct. Under such 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 la w after allowing a reasonable opportunity of being heard to the assessee."
12. Since, the facts for the years under consideration are similar to the facts involved in the assessment year 2002-03, so respectfully following the aforesaid referred to order dated 17.10.2017 in ITA No. 1768/Del/2011 for the assessment year 2002-03 in assessee's own case, the issue under consideration is restored to the file of the AO/TPO to be adjudicated afresh in accordance with the directions given in his aforesaid referred to order dated 17.10.2017.
13. In the result, the appeals of the department are allowed for statistical purposes.
(Order Pronounced in the Court on 12/02/2018) Sd/- Sd/-
(K. N. Chary) (N. K. Saini)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 12/02/2018
*Subodh*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5.DR: ITAT
ASSISTANT REGISTRAR