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TMI Blog2017 (10) TMI 1086X X X X Extracts X X X X X X X X Extracts X X X X ..... s, both operating and non-operating. 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 ₹ 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. Under such ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided ₹ 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 ₹ 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 days of Total Cost Cost to the Company per day for a VP Rs.63,625/- 153 Rs.9734625 Cost to the Company per day for a Sr. VP Rs.76,350 55 Rs.4199250 Cost to the company per day for a Asstt. VP Rs.50,900 30 Rs.1527000 TOTAL Rs.190,875 238 Rs.15460875 6. Thereafter, the TPO drew a list of compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able rates shown by the assessee represented the arm s length price as the services provided by NYLI consultants were functionally comparable. 8. The Revenue is aggrieved against the deletion of addition on the following grounds:- 1. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of ₹ 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. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thing 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 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 herei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontained 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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation of income under sub-section (1) has the effect of reducing the income chargeable to tax computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into. 16. This shows that when an assessee enters into an international transaction, second computation has to be necessarily made u/s 92. If the second computation results into a transfer pricing addition, such an addition is made to the income computed under the first computation. If on the other hand, the second computation results in reduction of the income computed under the first computation, the same is ignored and the assessment is finalized on the basis of first computation alone. This mechanism of two computations can be understood with the help of a simple illustration. An assessee has sale of ₹ 100/- to its AE and the AO computes income under the first computation at ₹ 6/-. Such first computation of income of ₹ 6/- gets enhanced by the second computation based on the transfer pricing adjustment of ₹ 15/-, if the ALP of the sale transaction to the AE is determined at ₹ 115/-. The resultant total i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 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 benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyees 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cipal and for an Actuary US$ 305 for a Consultant Mercer Human Resource Consultancy Consultancy in the field of human resources, including consultancy services provided in respect of health care, retirement benefits, human capital strategy, HR risk management, HR function strategy, performance management, etc. US$ 440 for a Senior Health and Welfare Consultant and for an Actuary US$ 250 for a Consultant Rael Letson Consultants and Actuaries Consultancy in the field of human resources, including health and welfare consulting. US $ 190 for an Actuary US$ 170 for a Consultant Argo Navis Consulting Consultancy in the field of customer 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 architectu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Mercer Human Resource Consulting, which could be equated to VP at NYLI. ( f) The Actuary and Consul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd worked under the supervision and control of NYLI. In my view it was not correct on the part of the A.O. to recharacterize 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 ₹ 20,200,860/- inflicted by the TPO/AO for AY 2002-03. 32. It can be s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) ; ( 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 ..... 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