AI Drafter 
TaxTMI 
TaxTMI 
2017 (10) TMI 1086
X X X X Extracts X X X X
X X X X Extracts X X X X
....fe 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 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 as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....valent 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 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) -....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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. 4. The appellant craves leave to add to, alter, amend or vary from the above grounds of appeal at or before the time of hearing." 9. At the outset, Shri M.S. Syali, the ld. Sr. Counsel, moved an application under Rule 27 of Income-tax (Appellate Tribunal) Rules 1963, raising the following legal ground:- "That on facts and in law the A.O. has erred in making adjustments provided for in Chapter X of the Act without appreciating that total income of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d gains of any business of insurance, including any such business carried on by a mutual insurance company or by a cooperative 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 nonobstante 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 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 shal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nters 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 Schedul....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... '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 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, whi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce of the ld. AR on the judgments in the case of LIC vs. CIT (1964) 51 ITR 773 (SC) and CIT vs. Oriental Fire and General Insurance Company Ltd., 291 ITR370 (SC), etc. is again not germane to the issue under consideration. In these judgments and the other decisions relied by the ld. Senior counsel, the Hon'ble Courts have held that the profits of insurance business are governed by the rules in Schedule and the Assessing Officer cannot make any adjustments in accounts. This proposition is obviously undisputed and cannot be called into question. But, in none of these decisions, there is any reference to the non-applicability of section 92, being the second computation dealing with the determination of the ALP of an international transaction of an assessee carrying on insurance business. Similarly, the assessee can't drive home any benefit from certain decisions including Cash Edge India (P) Ltd. vs. ITO (Mumbai) in which the question was about 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rvices 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 two days to be finally taken up for hearin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ning 'Scope of services' provides through clause 1.1 that the services: 'shall be to advice and assist MNYL in devising Training Programme for MNYL Agent Advisors (hereinafter referred to as the 'Services.').' Clause 1.2 states that : 'NYLI will send trained personnel to the designated MNYL sites in India or abroad as required by MNYL to provide the Services.' Article II with the heading "NYLI as independent contractor" states that: 'NYLI agrees to perform the Services under this Agreement as an independent contractor. The personnel provided by or through NYLI to MNYL shall not be considered to be the employees of MNYL nor shall they have the authority to or be asked by MNYL to exercise management authority with respect to MNYL's business. The obligation of NYLI and that of its personnel is to act in good faith and to exercise their best efforts in the interest of MNYL.' Article III with the heading 'Personnel' 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 :- '....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt 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 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 'consultan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ustomer relationship management, marketing technology, and business strategy. US$ 200 (no level specified) PricewaterhouseCoopers for a New York based Actuary Consulting in actuarial services US$ 500 for an Actuary Solomon Consulting Consultancy to law firms the field of strategic planning, organisational architecture, law practice acquisition, hiring procedures and system issues, compensation system, etc. US$ 195 to US$ 495 Ernst & Young Consultancy/solutions in the fields of audit, tax, corporate finance, enterprise risk management, valuation of intangibles, business performance, etc. US$ 250 for Senior Managers on tax advice Deloitte Touche Tohmatsu Consultancy / solutions in the fields of accounting, assurance, tax, legal, management, financial and human capital. US$ 70 to US $ 420 Milliman Asia, Hongkong Consulting In the field of actuarial services, employee benefits, health consulting, etc. US$ 450 for Partners US$ 300 for Senior Lawyers 29. The assessee noted in para 6.30 of its Transfer pricing study report that: "The above listed hourly charge-out rates for the selected companies/ firms are for employees at various levels....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t/Actuary and of a Consultant, was considered to be appropriate for a level at Mercer Human Resource Consulting, which could be equated to VP at NYLI. (f) The Actuary and Consultant employed at Rael & Letson Consultants 'and Actuaries could be equated to SVP and AVP at NYLI, respectively. However, since no level of employee specified in case of Rael & Letson Consultants and Actuaries could be equated to VP at NYLI, an average of the hourly charge-out rates for an Actuary and of a Consultant, was considered to be appropriate for a level at Rael & Letson Consultants and Actuaries, which could be equated to VP at NYLI. (g) The New York based actuary could be equated to SVP at NYLI. (h) As regards, Argo Navis Consulting, the hourly charge-out rate of US$ 200 was not specified with a corresponding level of employee. Accordingly, it was assumed that this rate was an average rate applicable across all levels." 31. It is overt from the above that the assessee went on making assumption after assumption for equating consultants from the companies shortlisted by it with the employees of NYLI assigned to it who were qualified for training etc. Firstly, there i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ncy are at an arm's length price as substantiated by the CUP method. As a result I hereby delete the addition of Rs. 20,200,860/- inflicted by the TPO/AO for AY 2002-03." 32. It can be seen that in para 10.1, he set aside the finding of the Assessing Officer on secondment of employees vis-à-vis consultancy without considering that the NYLI assigned personnel to perform the 'Services' in the nature of advising and assisting the assessee 'in devising Training Programme' for its agents advisors, which is miles away from receiving 'consultancy services' as projected; and in para 10.2 he simply held that the rates prevailing in the international market for such services fairly represent the arm's length price without noticing that, firstly, the assessee made comparison of the 'assignment of 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he 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. 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 al....