2019 (4) TMI 1769 - AT - Income Tax

TP Adjustment - international transaction in dispute is with respect to short-term consultancy and assistance fees - Whether the Insurance companies can be subjected to transfer pricing provisions? - HELD THAT - We are unable to comprehend as to how the ratio decidendi laid down in these decisions supports the view point of the assessee for nonapplicability 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. On the merits of the addition 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 As decided in own case 2017 (10) TMI 1086 - ITAT DELHI 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 ₹ 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 ₹ 1,74,53,782/-. As the assessee actually paid a sum of ₹ 3,76,54,642/-, the TPO proposed transfer pricing adjustment of ₹ 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. We are confronted with a situation in which the action of the CIT(A) in deleting the transfer pricing addition cannot be upheld and equally the view of the TPO in applying the TNMM also cannot be approved for the reasons assigned supra, albeit his exercise of rejecting the assessee's determination of ALP is correct - 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 Adjustment on account of the provision of doubtful debts - HELD THAT - An assessee may have more than one business and 1 of them may be of the life insurance business and to the business of the life insurance the provisions of these rules will apply. Rule 2 provides the computation of income of the life insurance business. According to that rule profits and gains of life insurance business shall be taken to be the annual average of the surplus arrived at by adjusting the surplus or deficit disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938 in respect of the last inter-valuation period ending before the commencement of the assessment year, so as to exclude from it any surplus or deficit included therein which was made in any earlier inter-valuation period. Rule 3 has been omitted w.e.f. 1-4-1977 which provides for certain deductions from the income. Rule 4 provides the mechanism for granting the credit of tax deducted at source against the income as computed in rule 2. Therefore, there is no reference of any deduction available to the assessee from the income computed as per rule 2. Similarly, nothing is provided to include or enhance the income computed under rule 2. Therefore on the issue of provision of doubtful debts and donation which is been debited to the profit and loss account it is necessary for the assessee to prove that these 2 items fall under the provisions of section 28 to 43B of the act. If both these items fall in that compass, then they cannot be adjusted /added to the total income of the assessee. Both these issues have been considered by the coordinate bench in assessee s own case while deciding the issue for assessment year 2010 11, the coordinate bench in its own wisdom has held that provision for doubtful debt is not required to be adjusted but donation is required to be adjusted. Therefore respectfully following the decision of the coordinate bench, we hold that adjustment on account of the provision of doubtful debts cannot be made in the hands of the assessee and the adjustment on account of donation is required to be made. Disallowance of the fringe benefit tax provisions - HELD THAT - Fringe benefit tax is not allowable as a deduction under the provisions of section 40 (ic) of the act, which falls under the bracket of the provisions of section 28 to section 43B of the act. The fringe benefit tax has also been included in the definition of tax under provisions of section 2 (43) of the act Therefore it cannot be said that it is different than income tax. There is no mandate in rule 2 of schedule 1 to the income tax act to make any such addition to the income of life insurance business. Further the reasons given by the coordinate bench in assessee s own case for assessment year 2010 11, also supports the view that any adjustment mentioned in the provisions of section 28 to 43B of the income tax act are not required to added/reduced from the income of the assessee from life insurance business. In view of this, we do not find any merit in the addition made by the learned assessing officer of fringe benefit tax. Accordingly ground number 3 of the appeal of the assessee is allowed. Sale of investments - Addition of sale credited to the profit and loss account separated from income from the business of insurance by the learned assessing officer and taxed as a non-life insurance business income - denying the benefit of provisions of section 44 of the act on the above sum - whether the profit earned by the assessee on sale of its investment is chargeable to tax as part of insurance business or as a separate business? - HELD THAT - Insurance companies are required to invest according to the rules provided by the IRDA of all its controlled funds. It is not the case of the assessee that assessee has invested funds other than its controlled funds. To get out of the provisions of section 44 of the income tax act it is the duty of the assessing officer to show that investment is not part of the insurance business of the assessee. However on our reading of the various regulatory provisions concerning the life insurance business, we find that assessee is investments are part of its insurance business. In view of this we do not subscribe to the view of the learned AO that investment is a separate and identifiable business of the assessee separate from life insurance business. In case of the assessee for assessment year 2005 06 this issue arose and decided by the learned CIT A in assessee s own case in favour of the assessee holding that profit or loss arising on the sale of investment is not chargeable to tax separately, in nutshell, beyond the provisions of section 44 of the act. In view of this we do not find any reason to hold that the profit and loss on by the assessee out of the investment is not part of the life insurance business of the assessee. Accordingly ground number 4 of the appeal is allowed. Exemption u/s 10 (34) - applicability of S. 14A - HELD TAT - As decided in own case 2018 (1) TMI 845 - ITAT DELHI allow exemption to the assessee u/s 10 (34) of the income tax act without disallowing any expenditure u/s 14 A of the income tax act. Accordingly additional ground number 1 raised by the assessee is allowed. Claim of deduction u/s 80 G of the income tax act with respect to the donation disallowed in the hands of the assessee - HELD THAT - As the donation expenditure has been disallowed in the hence of the assessee and added to the total income of the assessee naturally, the assessee is entitled to deduction under Chapter VI- A of the income tax act with respect to the donation u/s 80 G of the act. As the requisite details as required by that section has not been furnished before us we direct the assessee to furnish the relevant information before the assessing officer in accordance with the law to claim any deduction under section 80G of the income tax act along with all donation receipts and the 80G certificates issued by the Donee to the assessee within one month of this order. The learned assessing officer may verify the detail in accordance with the law and if found proper, may grant the deduction.

Summary

Issues Involved
1. Validity of the order passed by the AO u/s 143(3) read with section 144C.
2. Jurisdiction of the AO in making additions to the returned income/loss.
3. Disallowance of fringe benefit tax provision, provision for bad debts, and donation expenditure.
4. Addition of income from the sale of investments.
5. Transfer pricing adjustment for short-term consultancy services.
6. Initiation of penalty proceedings u/s 271(1)(c).
7. Admission of additional grounds of appeal regarding exemption u/s 10(34) and deduction u/s 80G.

Detailed Analysis

1. Validity of the Order Passed by the AO
The assessee challenged the validity of the order passed by the AO u/s 143(3) read with section 144C, contending that it was "bad in law." The Tribunal did not find any merit in this general ground and dismissed it.

2. Jurisdiction of the AO in Making Additions
The assessee argued that the AO exceeded his jurisdiction by making certain additions to the returned income/loss, disregarding the provisions of section 44 read with Rule 1 and 2 of the 1st Schedule of the Act. The Tribunal examined whether these additions were justified under the special provisions applicable to insurance companies.

3. Disallowance of Fringe Benefit Tax Provision, Provision for Bad Debts, and Donation Expenditure
- Fringe Benefit Tax (FBT): The AO disallowed ?2,55,75,000 on account of FBT, arguing that it is not allowable under section 40(a)(ic). The Tribunal held that FBT is an additional income tax and not deductible under the provisions of section 44 read with Rule 1 and 2 of the 1st Schedule.
- Provision for Bad Debts: The AO disallowed ?9,43,000 as a provision for bad debts. The Tribunal, following the coordinate bench's decision in the assessee's own case for AY 2010-11, held that such disallowance is not justified under section 44.
- Donation Expenditure: The AO disallowed ?23,85,358 as donation expenditure. The Tribunal upheld the disallowance, citing the coordinate bench's decision which confirmed that donations are not deductible under section 44.

4. Addition of Income from Sale of Investments
The AO added ?90,48,000 from the sale of investments, treating it as non-life insurance business income. The Tribunal, referring to the insurance laws and regulatory framework, held that such income is part of the life insurance business and should be computed under section 44. The Tribunal allowed this ground in favor of the assessee.

5. Transfer Pricing Adjustment for Short-term Consultancy Services
The AO made a transfer pricing adjustment of ?11,83,536, holding that the international transaction did not satisfy the arm's-length principle. The Tribunal, following its earlier decision, remanded the matter back to the TPO for fresh adjudication.

6. Initiation of Penalty Proceedings u/s 271(1)(c)
The assessee did not press this ground during the hearing, and the Tribunal dismissed it.

7. Admission of Additional Grounds of Appeal
- Exemption u/s 10(34): The assessee sought exemption for dividend income of ?45,05,772. The Tribunal, following its earlier decision, admitted this ground and directed the AO to allow the exemption without disallowing any expenditure u/s 14A.
- Deduction u/s 80G: The assessee sought deduction for donations disallowed by the AO. The Tribunal admitted this ground and directed the AO to verify the relevant details and grant the deduction if found proper.

Conclusion
The Tribunal partly allowed the appeal, providing relief on several grounds related to the computation of income under section 44, transfer pricing adjustments, and additional grounds for exemption and deduction. The Tribunal's decision emphasized adherence to the special provisions governing the taxation of insurance companies.