ACIT (LTU), NEW DELHI vs. MAX NEW YORK LIFE INSURANCE COMPANY LTD., NEW DELHI

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., 3rd Floor, Max House, Pushp Vihar, 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

Rs.2,02,00,860/- made by the Assessing Officer (AO) on account of

transfer pricing adjustment.

(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

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

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

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

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

ITA No.1768/Del/2011

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

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

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.

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.

ITA No.1768/Del/2011

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.”

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.

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.

ITA No.1768/Del/2011

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)

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

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.

ITA No.1768/Del/2011

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.

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.

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

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.

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.

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

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

ITA No.1768/Del/2011

Act. Such an attempt amounts to redrafting the provision, which

obviously cannot be sustained.

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.

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

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.

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)

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.

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.

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.

agreement dated 31.01.2003 effective from 01.01.2002 (hereinafter also

called `the Agreement’). The same is accompanied by a letter dated

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.

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’

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.’

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

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.”

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.”

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

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

ITA No.1768/Del/2011

President and above ('SVP'), Vice President ('VP') and Assistant Vice

President/ Consultant (“AVP').”

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.

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.”

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

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.

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.”

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

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.

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) ;

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.

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.

ITA No.1768/Del/2011

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.

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

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.

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.