ACIT (LTU), New Delhi V. Max New York Life Insurance Company Ltd., New Delhi

ITA 1768/DEL/2011

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 4063 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 6 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 27-07-2017
• Assessment Year: 2002-2003
• Appeal Filed On: 11-04-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Assessee Lawyers: SYALI
• Keywords: Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Wholly owned subsidiary
• Section: 44AD; 43B; 14A; 115JB; 28; 92

Judgement Text

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), NBCC PLAZA, PUSHP VIHAR, NEW DELHI. VS. MAX NEW YORK LIFE INSURANCE COMPANY LTD., 3 RD FLOOR, MAX HOUSE, 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 ORD ER PASSED BY THE CIT(A) ON 30.12.2010 IN RELATION TO THE ASSESSMENT YEAR 2002-03. ITA NO.1768/DEL/2011 2 2. THE REVENUE IS AGGRIEVED AGAINST THE DELETION OF ADDITION OF RS.2,02,00,860/- MADE BY THE ASSESSING OFFICER (AO) ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT N EW YORK LIFE GROUP (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 SUBSID IARIES WHICH, IN TURN, HOLD STOCK IN VARIOUS COMPANIES ACROSS THE GLOBE. NEW YORK LIFE INTERNATIONAL LLC (NYLI) IS ONE SUCH WHOLLY OWNED S UBSIDIARY OF NEW YORK LIFE INSURANCE COMPANY. MAX INDIA LTD. IS THE ULTIMATE HOLDING COMPANY OF THE MAX INDIA GROUP OF COMPANIES. THE A SSESSEE IS A JOINT VENTURE BETWEEN MAX INDIA LTD. AND NYLI. NYLI HOLD S 26% SHARES IN THE ASSESSEE COMPANY THROUGH ITS 100% SUBSIDIARY, N EW YORK LIFE INTERNATIONAL HOLDINGS LTD. (MAURITIUS). THE ASSES SEE COMPANY WAS INCORPORATED IN THE YEAR 2000 AND IS ENGAGED IN THE BUSINESS OF LIFE INSURANCE. IT UNDERTAKES ALL ROUTINE FUNCTIONS ENTA ILED IN THE BUSINESS OF LIFE INSURANCE, SUCH AS, ACTUARIAL FUNCTION, AGENCY FUNCTION, CUSTOMER ITA NO.1768/DEL/2011 3 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 PR ICING OFFICER (TPO) FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE REPORTED INTERNATIONAL TRANSACTIONS. THE ONLY TRANSACTION IN DISPUTE IS PAID FOR SHORT-TERM CONSULTANCY AND ASSISTANCE (LIFE INSURAN CE BUSINESS) WITH TRANSACTED VALUE OF RS.3,76,54,642/-. THE ASSESSEE APPLIED COMPARABLE UNCONTROLLED PRICE METHOD (CUP) FOR DEMONSTRATING T HAT THE INTERNATIONAL TRANSACTION WAS AT ALP. THE TPO OBSER VED THAT THE INTERNATIONAL TRANSACTION WAS OF PAYMENT FOR SHORT- TERM ASSIGNMENT OF EMPLOYEES OF NYLI WHO PROVIDED ASSISTANCE TO THE AS SESSEE IN ITS START UP PHASE. THE ASSESSEE TREATED NYLI, BEING THE CHA RGING ENTITY, AS THE TESTED PARTY, WHICH WAS ACCEPTED BY THE TPO VIDE PA RA 5.1 OF HIS ORDER, WHEREIN HE OBSERVED THAT THE ASSESSEE CANNOT BE MAD E THE TESTED PARTY. THE ASSESSEE CLAIMED TO HAVE ENTERED INTO AGREEMENT S 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 01.01.2 001. THE SHORT-TERM ITA NO.1768/DEL/2011 4 CONSULTANCY SERVICES INCLUDED DEVELOPING NEW INSURA NCE PRODUCTS, DEVELOPING SALES STRATEGY, DEVELOPING REINSURANCE M ODEL, DEVELOPING UNDERWRITING PERSONNEL IN THE FIELD OF CUSTOMER SER VICES AND UNDERWRITING SERVICES. SUCH SERVICES WERE TO BE RE NDERED 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 DI EM EMPLOYEES AT ASSTT. VICE PRESIDENT LEVEL 2,000 USD PER DIEM 4. THE ASSESSEE FURNISHED COMPARABILITY OF RATES UN DER THE CUP METHOD AS UNDER :- MEAN CHARGEOUT RATE OF COMPARABLES (USD) PER HOUR CHARGEOUT RATE OF NYLI (USD) PER HOUR AVP 254 250 VP 302 312.5 SVP 364 375 5. IN THE LIGHT OF THE ABOVE, IT WAS CLAIMED THAT I TS INTERNATIONAL TRANSACTION WAS AT ARMS LENGTH. THE TPO DID NOT A CCEPT THE APPLICATION OF CUP AS THE MOST APPROPRIATE METHOD AS THE CONSUL TING FIRMS WHOSE RATES WERE CITED IN THE TP STUDY REPORT WERE ONLY Q UOTATIONS AND NOT ITA NO.1768/DEL/2011 5 ACTUAL RATES. SUCH RATES WERE QUOTED IN A RANGE WI THOUT REFERENCE TO ANY LEVEL. SINCE THESE WERE QUOTATIONS, THE TPO HELD TH AT THESE WERE NOT PRICES OF UNCONTROLLED TRANSACTIONS. THE TPO FURTHE R OBSERVED THAT THE ASSESSEE CARRIED OUT BENCHMARKING WITH THE RATES OF CONSULTANTS WORKING FOR CONSULTING FIRMS ENGAGED IN AREAS OF LAW, TAX A ND AUDIT. HE REJECTED SUCH COMPARISON AS THE ASSESSEE WAS SIMPLY PROVIDED EMPLOYEES BY ITS ASSOCIATED ENTERPRISE (AE) ON SECONDMENT BASIS, WHI CH POSITION WAS NOTICED ON GOING THROUGH PARA 6.2.3 AT PAGE 55 OF T P 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 N OT EQUIVALENT TO PROVIDING CONSULTANCY WORK. THE TPO REJECTED THE C UP METHOD AND INSTEAD, TREATED THE TRANSACTIONAL NET MARGIN METHO D (TNMM) AS THE MOST APPROPRIATE METHOD. THEREAFTER, HE PROCEEDED TO COMPUTE THE ALP OF THE INTERNATIONAL TRANSACTION UNDER THE TNMM. T HE ASSESSEE WAS CALLED UPON TO FURNISH SALARY DETAILS OF THE EMPLOY EES ASSIGNED BY NYLI TO INDIA FOR SHORT-TERM PROJECTS. THE ASSESSEE DID NOT FURNISH ANY DETAILS. THE TPO NOTICED THAT ANOTHER NYLI EMPLOYEE WAS SECO NDED TO THE ITA NO.1768/DEL/2011 6 ASSESSEE FOR ONE YEAR. SUCH EMPLOYEE, NAMELY, MR. PAUL SOLGAN WAS THE EXECUTIVE VICE PRESIDENT. TOTAL REMUNERATION PAID T O HIM AFTER EXCLUSION OF RELOCATION EXPENSES, WAS RS.2,08,05,42 1/-. 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 TAKE N AS 120% OF THE COST OF VP AND FOR ASSISTANT VP THE COST PER DAY WAS TAK EN 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 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 ITA NO.1768/DEL/2011 7 6. THEREAFTER, THE TPO DREW A LIST OF COMPARABLES G IVING AVERAGE MARGIN OF 12.89% AS UNDER:- S.NO. COMPANIES 2001 2000 WEIGHTED AVERAGE NET COST PLUS MARGIN % 1. AMERICAN NATIONAL INSURANCE COMPANY 5.59 12.50 8.67 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 CORPORATION 9.39 9.11 9.25 6. PROTECTIVE LIFE CORPORATION 14.96 18.35 16.49 7. PRUDENTIAL FINANCIAL INC 1.78 5.37 3.53 8. STANCORP FINANCIAL GROUP INC 11.19 10.37 10.79 9. TORCHMARK CORPORATION 28.49 28.69 28.58 ARITHMETIC MEAN 12.89 7. THIS ARITHMETIC MEAN OF 12.89% WAS TAKEN AS ARM S LENGTH MARGIN, WHICH WAS APPLIED TO THE ABOVE CALCULATED UNCONTROL LED COSTS INCURRED BY NYLI IN ASSIGNING EMPLOYEES AT RS.1,54,60,875/- FOR WORKING OUT THE ARMS LENGTH PRICE AT RS.1,74,53,782/-. AS THE ASS ESSEE 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 8 LD. CIT(A) DELETED THE ADDITION BY HOLDING THAT I) IT WAS A CASE OF RECEIVING CONSULTANCY SERVICES AND NOT SECONDMENT O F EMPLOYEES AS THE CONSULTANTS CAME TO INDIA ON SHORT VISITS FROM TIME TO TIME PURSUANT TO THE SERVICE AGREEMENT AND WORKED UNDER THE SUPERVIS ION 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 ARMS LENGTH PRICE AS THE SERVICES PROVIDED BY NYLI CONSULTANTS WERE FUNCTIONALLY COMPARABLE. 8. THE REVENUE IS AGGRIEVED AGAINST THE DELETI ON 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 RS.2,0 2,00,860/- ALP ADJUSTMENT. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE CIT(A) HAS ERRED IN HOLDING THAT THE RATES CHARGE B Y REPUTED SERVICE PROVIDERS FROM NYLI, THE TESTED PARTY, FAIRLY REPRE SENT THE ALP FOR SUCH SERVICES AND DELETED THE ADDITION WITHOUT ADJU DICATING THE ISSUE OF MOST APPROPRIATE METHOD TO BE ADOPTED FOR COMPUT ING ALP. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N 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 T AKEN AS TESTED PARTY WHEN THE ASSESSEE HAS USED THE RANGE O F RATES QUOTED BY VARIOUS CONSULTANCY FIRM. ITA NO.1768/DEL/2011 9 4. THE APPELLANT CRAVES LEAVE TO ADD TO, ALTER, AME ND OR VARY FROM THE ABOVE GROUNDS OF APPEAL AT OR BEFORE THE TIME O F HEARING. 9. AT THE OUTSET, SHRI M.S. SYALI, THE LD. SR. COUN SEL, 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 MAK ING ADJUSTMENTS PROVIDED FOR IN CHAPTER X OF THE ACT WITHOUT APPREC IATING THAT TOTAL INCOME OF THE ASSESSEE IS TO BE COMPUTED AS PER SPE CIAL COMPUTATIONAL PROVISIONS OF SECTION 44 R.W. RULE 2 OF FIRST SCHEDULE. 10. RULE 27 OF THE ITAT RULES, 1963 PROVIDES THAT: THE RESPONDENT, THOUGH HE MAY NOT HAVE APPEALED, MAY SUPPORT THE OR DER APPEALED AGAINST ON ANY OF THE GROUNDS DECIDED AGAINST HIM. IT IS OBSERVED THAT THE ASSESSEE RAISED THE ABOVE LEGAL ISSUE BEFORE TH E LD. CIT(A) AS WELL BY MEANS OF GROUND NO. 2, AS HAS BEEN REPRODUCED ON PA GE 2 OF THE IMPUGNED ORDER. HOWEVER, THE LD. CIT(A) DID NOT AD JUDICATE THE SAME AS HE PROCEEDED TO DECIDE THE ISSUE ON MERITS. SINC E THE ASSESSEE- RESPONDENT NOW IS TRYING TO SUPPORT THE IMPUGNED OR DER DELETING THE ADDITION BY MEANS OF THE ABOVE LEGAL GROUND WHICH W AS IMPLIEDLY DECIDED AGAINST IT BY MEANS OF NO DECISION BY THE L D. CIT(A), RULE 27 ITA NO.1768/DEL/2011 10 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 TH E ABOVE ADDITIONAL GROUND, WHICH IS HEREBY ADMITTED F OR DECISION UNDER RULE 27 OF THE ITAT RULES, 1963. ACCORDINGLY, THE GROUND IS ESPOUSED FOR DISPOSAL ON MERITS. 11. THE LD. SR. COUNSEL SUBMITTED THAT THE PROVISI ONS OF SECTION 92 OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED A S THE ACT) DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIO N 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 INSURAN CE 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 TH E OPERATION OF SECTION 44 OF THE ACT. ITA NO.1768/DEL/2011 11 12. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IN ORDER TO DECIDE THIS CONTROV ERSY, 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 FR OM OTHER SOURCES', OR IN SECTION 199 OR IN SECTIONS 28 TO 43 B, THE PROFITS AND GAINS OF ANY BUSINESS OF INSURANCE, INCLUDING A NY SUCH BUSINESS CARRIED ON BY A MUTUAL INSURANCE COMPANY O R BY A CO- OPERATIVE SOCIETY, SHALL BE COMPUTED IN ACCORDANCE WITH THE RULES CONTAINED IN THE FIRST SCHEDULE. (EMPHASI S SUPPLIED BY US) 13. ON CIRCUMSPECTION OF THE PRESCRIPTION OF SECTIO N 44, IT EMERGES THAT THIS SECTION STARTS WITH A NON-OBSTANTE CLAUSE (BOLD PART) QUA THE COMPUTATION OF INCOME CHARGEABLE UNDER THE HEAD IN TEREST ON SECURITIES, INCOME FROM HOUSE PROPERTY, CAPIT AL GAINS, OR INCOME FROM OTHER SOURCES OR IN SECTION 199 OR IN SECTIONS 28 TO 43B ( ITALICIZED BOLD PART). IT PROVIDES THAT PROFITS AN D GAINS OF INSURANCE BUSINESS (NORMAL PART) SHALL BE COMPUTED (NORMAL IT ALICIZED 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 12 PROVISIONS SPECIFICALLY ENUMERATED HEREIN WILL BE S UPERSEDED AND THE PROFITS AND GAINS OF ANY BUSINESS OF INSURANCE SHAL L BE COMPUTED IN ACCORDANCE WITH THE RULES CONTAINED IN THE FIRST SC HEDULE. WHEN WE READ SECTION 44 IN JUXTAPOSITION TO THE FIRST SCHED ULE, IT BECOMES VIVID THAT THE PROFITS AND GAINS OF ANY BUSINESS OF INSUR ANCE SHALL BE COMPUTED IN ACCORDANCE WITH THE FIRST SCHEDULE TO THE ACT AN D 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 D ISPUTE BETWEEN THE RIVAL PARTIES ON THE ABOVE PROPOSITION. THE POINT OF CONTROVERSY ARGUED BY THE LD. SENIOR AR IS THAT ONCE INCOME OF THE ASS ESSEE IS TO BE COMPUTED UNDER RULE 2 OF THE FIRST SCHEDULE, THE AP PLICATION OF THE PROVISIONS OF SECTION 92 OF THE ACT SHALL ALSO BE O USTED BECAUSE SECTION 44 OVERRIDES ALL PROVISIONS DEALING WITH THE COMPUT ATION OF INCOME INCLUDING SECTION 92. ITA NO.1768/DEL/2011 13 14. AT THIS JUNCTURE, IT IS PERTINENT TO NOTE TH E SCHEME OF THE ACT REGARDING THE CHARGEABILITY AND COMPUTATION OF INCO ME UNDER DIFFERENT HEADS. CHAPTER IV STARTS WITH SECTION 14, WHICH PRO VIDES THAT : `SAVE AS OTHERWISE PROVIDED BY THIS ACT, ALL INCOME SHALL, F OR THE PURPOSES OF CHARGE OF INCOME-TAX AND COMPUTATION OF TOTAL INCOM E, BE CLASSIFIED UNDER THE FOLLOWING HEADS OF INCOME : A.SALARIES; C.INCOME FROM HOUSE PROPERTY; D.PROFITS AND GAINS OF BUSINESS O R PROFESSION.; E. CAPITAL GAINS.; F.INCOME FROM OTHER SOURCES. PRO VISIONS CREATING CHARGE AND COMPUTATION HAVE BEEN SEPARATELY PROVIDE D UNDER EACH HEAD OF INCOME. FOR EXAMPLE, SECTION 22 DEALING WITH `IN COME FROM HOUSE PROPERTY CONTAINS CHARGING PROVISION WHICH PROVID ES THAT : `THE ANNUAL VALUE OF PROPERTY CONSISTING OF ANY BUILDINGS OR LA NDS 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 PRO VIDES THAT : `ANY ITA NO.1768/DEL/2011 14 PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAP ITAL ASSET EFFECTED IN THE PREVIOUS YEAR SHALL, .BE CHARGEABLE . AND THE COMPUTATION PROVISION IS CONTAINED IN SECTION 48, WHICH PROVIDE S THAT : `THE INCOME CHARGEABLE UNDER THE HEAD 'CAPITAL GAINS' SHALL BE COMPUTED, BY .. IN THE LIKE MANNER, CHARGEABILITY UNDER THE HEAD `INCO ME FROM OTHER SOURCES IS CONTAINED IN SECTION 56(1) AND THE COMP UTATION PROVISION IS CONTAINED IN SECTION 57. COMING TO THE INCOME UND ER THE HEAD `PROFITS AND GAINS OF BUSINESS OR PROFESSION, THE CHARGEABI LITY IS ENSHRINED IN SECTION 28, WHICH PROVIDES THAT : `THE FOLLOWING IN COME 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 SEC TION 28 SHALL BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SECT IONS 30 TO 43D. IT IS MANIFEST FROM THE ABOVE DISCUSSION THAT THE COMPUTATION OF INCOME UNDER EACH HEAD IS SEPARATELY ENCLOSED IN CH APTER IV, WHICH CONTAINS NOT ONLY THE CHARGING BUT ALSO THE COMPUTA TION PROVISIONS. HOWEVER, SECTION 92 HAS BEEN PLACED IN A SEPARATE C HAPTER X, WITH THE CAPTION `SPECIAL PROVISIONS RELATING TO AVOIDANCE O F TAX. SECTION 92 WITH ITA NO.1768/DEL/2011 15 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 T HE RESPECTIVE PARTS OF CHAPTER IV. 15. SECTION 92CA PROVIDES THAT THE ASSESSING OFF ICER MAY REFER THE COMPUTATION OF THE ALP IN RELATION TO AN INTERNATIO NAL TRANSACTION TO THE TPO. ON SUCH A REFERENCE, THE TPO COMMENCES THE PR OCEEDINGS FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIO N, WHICH CULMINATE IN AN ORDER PASSED BY HIM DETERMINING THE AMOUNT OF TR ANSFER PRICING ADJUSTMENT, IF THERE IS DIFFERENCE IN THE TRANSACTE D PRICE AND THE ARMS LENGTH PRICE. THE ASSESSING OFFICER, THEN, PASSES A DRAFT ORDER UNDER SECTION 144C OF THE ACT. IN SUCH A DRAFT ORDER, TH E INCOME IS FIRST COMPUTED BY THE ASSESSING OFFICER UNDER RESPECTIVE HEADS, SUCH AS, ITA NO.1768/DEL/2011 16 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 2 9; INCOME UNDER THE HEAD `CAPITAL GAINS IS COMPUTED UNDER SECTION 48; AND INCOME UNDER THE HEAD `INCOME FROM OTHER SOURCES IS COMPUTED UN DER 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 TRA NSACTION. 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 RESPE CTIVE HEADS, WHICH EXERCISE IS UNDERTAKEN BY THE AO AND SECOND IS THE COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTION BY DETERMININ G 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 CO MPLIANCE WITH THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANEL. HERE IT IS RELEVANT TO TAKE NOTE OF THE MANDATE OF SUB-SECTION (3) OF SECT ION 92, WHICH STATES THAT THE PROVISIONS OF THIS SECTION SHALL NOT APPLY IN A CASE WHERE THE ITA NO.1768/DEL/2011 17 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 YEA R 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 NECESSARI LY 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 F IRST COMPUTATION. IF ON THE OTHER HAND, THE SECOND COMPUTATION RESULTS I N REDUCTION OF THE INCOME COMPUTED UNDER THE FIRST COMPUTATION, THE SA ME IS IGNORED AND THE ASSESSMENT IS FINALIZED ON THE BASIS OF FIRST C OMPUTATION ALONE. THIS MECHANISM OF TWO COMPUTATIONS CAN BE UNDERSTOOD WIT H 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 R S.6/-. SUCH FIRST COMPUTATION OF INCOME OF RS.6/- GETS ENHANCED BY TH E SECOND COMPUTATION BASED ON THE TRANSFER PRICING ADJUSTMEN T OF RS.15/-, IF THE ALP OF THE SALE TRANSACTION TO THE AE IS DETERMINED AT RS.115/-. THE ITA NO.1768/DEL/2011 18 RESULTANT TOTAL INCOME COMES TO RS.21/- (RS.6/- UND ER THE FIRST COMPUTATION PLUS RS.15/- UNDER THE SECOND COMPUTATI ON). SECTION 44, IN OUR ABOVE ILLUSTRATION, HAS DONE AWAY WITH THE FIRS T COMPUTATION OF INCOME OF RS.6/- AND HAS GIVEN ITS OWN MECHANISM F OR DETERMINATION OF INCOME FROM INSURANCE BUSINESS UNDER THE FIRST SCHE DULE. HOWEVER, THE SECOND COMPUTATION OF INCOME FROM INTERNATIONAL TRA NSACTION HAVING REGARD TO ALP, AS IS RS.15/- IN THE ABOVE EXAMPLE, IS IN ADDITION TO THE NORMAL COMPUTATION AND IS NOT HIT BY SECTION 44 OF THE ACT. 17. IT WILL BE SEEN HEREINAFTER THAT SECTION 44 SIMPLY SUBSTITUTES THE FIRST COMPUTATION AND IT HAS NO ROLE WHATSOEVER IN SO FAR AS THE SECOND COMPUTATION OF DETERMINATION OF ALP OF AN INTERNATI ONAL TRANSACTION U/S 92 OF THE ACT IS CONCERNED. 18. TO ESTABLISH THIS, WE AGAIN REVERT TO THE R ELEVANT PARTS OF THE LANGUAGE OF SECTION 44 OF THE ACT WHICH READ THAT : ` NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THE PROVISION S OF THIS ACT RELATING TO THE COMPUTATION OF INCOME CHARGEABLE UNDER THE H EAD 'INTEREST ON SECURITIES', 'INCOME FROM HOUSE PROPERTY', 'CAPITAL GAINS' OR 'INCOME ITA NO.1768/DEL/2011 19 FROM OTHER SOURCES', OR IN SECTION 199 OR IN SECTIO NS 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 B EEN INSERTED QUA `COMPUTATION OF INCOME CHARGEABLE UNDER THE HEAD 'I NTEREST ON SECURITIES', 'INCOME FROM HOUSE PROPERTY', 'CAPITAL GAINS' OR 'INCOME FROM OTHER SOURCES', OR IN SECTION 199 OR IN SECTIO NS 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. COUN SEL. THERE IS NO GAINSAYING THAT ONLY SUCH PROVISIONS OF THE ACT ARE SUPERSEDED, WHICH ARE SPECIFICALLY REFERRED TO IN THE PROVISION CONTA INING A NON OBSTANTE CLAUSE. WHEN THERE IS A SPECIFIC REFERENCE TO CERTA IN SECTIONS, THEN OTHER UNMENTIONED PROVISIONS OF THE STATUTE REMAIN APPLIC ABLE AND ALIVE. A BARE PERUSAL OF THE LANGUAGE OF SECTION 44 TRANSPIR ES THAT ONLY THE PROVISIONS : `RELATING TO THE COMPUTATION OF INCOME CHARGEABLE UNDER THE HEAD 'INTEREST ON SECURITIES', 'INCOME FROM HOUSE P ROPERTY', 'CAPITAL GAINS' OR 'INCOME FROM OTHER SOURCES', OR IN SECTIO N 199 OR IN SECTIONS 28 TO 43B HAVE BEEN MADE INOPERATIVE. THE LEGISLAT URE IN ITS WISDOM ITA NO.1768/DEL/2011 20 DID NOT SPECIFICALLY MENTION THE SECOND COMPUTATION OF INCOME ENVISAGED U/S 92 IN RELATION TO INTERNATIONAL TRANS ACTIONS. 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 COMPUTATIO N OF INCOME AND ENDING WITH `SECTIONS 28 TO 43B WOULD HAVE BEEN OM ITTED, IN WHICH CASE, SECTION 44 WOULD HAVE READ AS : ``NOTWITHSTA NDING ANYTHING TO THE CONTRARY CONTAINED IN THE PROVISIONS OF THIS ACT, THE PROFITS AND GAINS OF ANY BUSINESS OF INSURANCE, INCLUDING ANY SUCH BUSIN ESS CARRIED ON BY A MUTUAL INSURANCE COMPANY OR BY A CO-OPERATIVE SOCIE TY, SHALL BE COMPUTED IN ACCORDANCE WITH THE RULES CONTAINED IN THE FIRST SCHEDULE. THIS IS NOT SOMETHING UNKNOWN TO THE LAW. THE PARLI AMENT HAS WORDED THE NON-OBSTANTE CLAUSE IN RELEVANT PROVISIONS IN A CCORDANCE WITH ITS INTENT. THE IMMEDIATELY SUCCEEDING SECTION 44A IS AGAIN A SPECIAL PROVISION FOR DEDUCTION IN THE CASE OF TRADE, PROFE SSIONAL OR SIMILAR ASSOCIATION. THIS PROVISION TOO, LIKE SECTION 44, O PENS WITH A NON OBSTANTE CLAUSE BUT OVERRIDES ALL THE PROVISIONS OF THE ACT, AS IS EVIDENT FROM ITS LANGUAGE, WHICH SAYS `NOTWITHSTANDING ANYT HING TO THE CONTRARY ITA NO.1768/DEL/2011 21 CONTAINED IN THIS ACT,. SIMILARLY, SECTION 44AD IS ALSO A SPECIAL PROVISION FOR COMPUTING PROFITS AND GAINS OF BUSINE SS ON PRESUMPTIVE BASIS. THIS ALSO OPENS WITH A NON OBSTANTE CLAUSE B UT SUPERSEDES ONLY THE PROVISIONS OF SECTION 28 TO 43C, WHICH IS MANIFEST FROM THE LANGUAGE PROVIDING: `NOTWITHSTANDING ANYTHING TO THE CONTRAR Y CONTAINED IN SECTIONS 28 TO 43C,. IT IS DISCERNIBLE ON A CO NJOINT READING OF SECTIONS 44AD, 44A AND 44 THAT WHILE DRAFTING SECTION 44AD, THE PARLIAMENT MADE INEFFECTIVE THE PROVISIONS OF SECTIONS 28 TO 4 3C; WHILE DRAFTING SECTION 44A, IT SAVED THE PRESCRIPTION OF THIS SECT ION ALONE AND MADE FUTILE ALL PROVISIONS OF THE ACT; AND WHILE DRAFTI NG SECTION 44, IT RENDERED USELESS ONLY THE PROVISIONS RELATING TO TH E COMPUTATION OF INCOME CHARGEABLE UNDER THE HEAD 'INTEREST ON SECUR ITIES', 'INCOME FROM HOUSE PROPERTY', 'CAPITAL GAINS' OR 'INCOME FROM OT HER SOURCES', OR IN SECTION 199 OR IN SECTIONS 28 TO 43B. SINCE THERE I S NO SPECIFIC REFERENCE TO SECTION 92 IN SECTION 44 AND FURTHER THE PROVISI ON HAS NOT BEEN WORDED SO AS TO EXCLUDE ALL OTHER PROVISIONS OF THE ACT, W E CANNOT INFER THE OMISSION OF THE SECOND COMPUTATION OF INCOME ENVISA GED U/S 92 OF THE ITA NO.1768/DEL/2011 22 ACT. SUCH AN ATTEMPT AMOUNTS TO REDRAFTING THE PROV ISION, WHICH OBVIOUSLY CANNOT BE SUSTAINED. 19. RELIANCE OF THE LD. SENIOR COUNSEL ON THE JUDGM ENT OF THE HON'BLE 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 HO N'BLE HIGH COURT HELD THAT BEFORE APPLYING PROVISIONS OF SECTION 92, THER E OUGHT TO BE SOME INCOME CHARGEABLE TO TAX ARISING FROM AN INTERNATIO NAL TRANSACTION. IF THERE IS NO INCOME CHARGEABLE TO TAX IN THE FIRST I NSTANCE, THERE CAN BE NO QUESTION OF DETERMINING THE ALP OF THE INTERNATIONA L TRANSACTION. THERE CANNOT BE ANY DISPUTE ON THE PROPOSITION THAT SECTI ON 92 IS A COMPUTATION PROVISION AND NOT A CHARGING PROVISION. THIS PROVI SION IN ITSELF CANNOT CREATE A CHARGE. FOR THE APPLICABILITY OF THIS SEC TION, 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 COMPUT ATION AVAILABLE ITA NO.1768/DEL/2011 23 UNDER SECTION 44 OF THE ACT AND THE INTERNATIONAL T RANSACTION CONCERNS WITH SUCH INCOME ALONE. IT IS NOT A CASE OF STARTIN G THE SECOND COMPUTATION U/S 92 WITHOUT THERE BEING ANY FIRST CO MPUTATION. 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 HO N'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, THE RE IS ANY REFERENCE TO THE NON-APPLICABILITY OF SECTION 92, BEING THE SECO ND COMPUTATION DEALING WITH THE DETERMINATION OF THE ALP OF AN INT ERNATIONAL TRANSACTION OF AN ASSESSEE CARRYING ON INSURANCE BUSINESS. SIM ILARLY, THE ASSESSEE CANT 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 24 COMPUTATION OF BOOK PROFITS U/S 115JB AND THE TRIBU NAL HELD THAT EXPLANATION 1 TO SECTION 115JB (2) DOES NOT COVER A NY TRANSFER PRICING ADJUSTMENT. IT IS SIMPLE AND PLAIN THAT THE COMPUT ATION 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 LIK E 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 TH E 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 COMPREH END AS TO HOW THE RATIO DECIDENDI LAID DOWN IN THESE DECISIONS SUPPORTS THE VIEW POIN T OF THE ASSESSEE FOR NON-APPLICABILITY OF THE TRANSFER PRICING PROVISIONS CONTAINED IN SECTION 92, WHICH IS A SECOND COMPUTAT ION OF INCOME. IN VIEW OF THE FOREGOING DISCUSSION, WE ARE FULLY CONV INCED THAT THE PROVISIONS OF SECTION 92 OF THE ACT APPLY TO AN ASS ESSEE CARRYING ON INSURANCE BUSINESS. THE TWO-STAGED COMPUTATION OF INCOME IN SUCH A ITA NO.1768/DEL/2011 25 CASE IS TO BE DONE, FIRSTLY, BY COMPUTING INCOME U/ S 44 READ WITH THE FIRST SCHEDULE, IN DISREGARD TO THE PROVISIONS RELA TING TO THE COMPUTATION OF INCOME CHARGEABLE UNDER THE HEAD 'INTEREST ON SE CURITIES', 'INCOME FROM HOUSE PROPERTY', 'CAPITAL GAINS' OR 'INCOME FR OM OTHER SOURCES', OR IN SECTION 199 OR IN SECTIONS 28 TO 43B, AND THE N SECONDLY, BY COMPUTING INCOME IN TERMS OF SECTION 92 OF THE ACT, BY MAKING ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT, IF WARRA NTED. THE ADDITIONAL GROUND RAISED UNDER RULE 27 OF THE ITAT RULES, 1963 , IS, THEREFORE, DISMISSED. 21. NOW WE TAKE UP THE ISSUE ON MERITS. IT IS ESS ENTIAL TO MENTION THAT SH. M.S. SYALI, THE LD. SR ADVOCATE ARGUED THE ADDI TIONAL 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-CONCURR ENCE WITH THE ADDITIONAL GROUND ARGUED BY THE LD. SENIOR COUNSEL AND ASKED THE PARTIES TO GO AHEAD WITH THE APPEAL ON MERITS, SH. TARNADEE P SINGH, THE LD. COUNSEL TOOK UP THE PROCEEDINGS FOR FURTHER ARGUMEN TS. DURING THE COURSE OF SUCH HEARING, IT WAS PRIMA FACIE NOTICED THAT THE LD. CIT(A) ITA NO.1768/DEL/2011 26 FAILED TO DEAL WITH ALL THE POINTS RAISED IN THE OR DER PASSED BY THE TPO. AS SUCH, IT WAS CONSIDERED EXPEDIENT TO PROPERLY EX AMINE THE MATTER. IT WAS ACCORDINGLY DIRECTED TO BOTH THE SIDES TO FILE A COPY OF THE AGREEMENT PURSUANT TO WHICH THE SERVICES WERE RECEI VED BY THE ASSESSEE AND ALSO A COPY OF THE TRANSFER PRICING STUDY REPOR T 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 A LLOWED. 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 WEEKS 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 T HE 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 TRIBU NAL. THE REQUEST OF THE ASSESSEE WAS TURNED DOWN AS THE LD. DR HAD SIMP LY FILED A COPY OF THE AGREEMENT AT THE INSTANCE OF THE BENCH, WHICH W AS FILED BY THE ITA NO.1768/DEL/2011 27 ASSESSEE ITSELF DURING THE COURSE OF HEARING BEFORE THE TPO/AO. STILL TO MEET THE PRINCIPLES OF NATURAL JUSTICE, THE CASE WA S ADJOURNED FOR TWO DAYS TO BE FINALLY TAKEN UP FOR HEARING ON 11.10.20 17. 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 HONBLE PRESIDENT REQUESTING HIM TO CONSTITUTE A SPECIAL BENCH ON THE LEGAL ISSUE WHICH WAS ARGUED BY SH. SYALI BEFOR E US. ON ENQUIRY, IT WAS CANDIDLY ADMITTED THAT NO ORDER HAS SO FAR BEEN PASSED BY THE HONBLE PRESIDENT ON THE ASSESSEES REQUEST. THE L D. AR WAS CONVEYED THAT HIS ADJOURNMENT APPLICATION CANNOT BE ACCEPTED AS THERE IS NEITHER ANY EXISTING ORDER OF THE MUMBAI TRIBUNAL ON THE LE GAL ISSUE NOR HIS APPLICATION FOR THE CONSTITUTION OF THE SPECIAL BEN CH HAS BEEN ACCEPTED SO FAR. ALTHOUGH HE REMAINED SEATED DURING THE COUR SE 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. 3CE B BUT WITHOUT ANY OF THE RELEVANT AGREEMENTS, YET HE REFUSED TO PUT F ORTH 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 ITA NO.1768/DEL/2011 28 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 CO NCERNED. 22. IT IS NOTICED THAT THE LD. CIT(A) DELETED T HE ADDITION BY HOLDING THAT IT WAS A CASE OF RECEIVING CONSULTANCY SERVICE S 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 F UNCTIONALLY COMPARABLE. 23. LET US EXAMINE IF THE ASSESSEE RECEIVED CONS ULTANCY SERVICES OR SECONDMENT OF EMPLOYEES ON SHORT TERM ASSIGNMENTS F OR WHICH THE PAYMENT IN QUESTION WAS MADE AND WHETHER THE COMPAN IES CHOSEN BY THE ASSESSEE ARE, IN FACT, COMPARABLE UNDER THE CUP MET HOD. 24. WE HAVE NOTED ABOVE THAT THE LD. DR PLACED ON RECORD A COPY OF AGREEMENT DATED 31.01.2003 EFFECTIVE FROM 01.01.200 2 (HEREINAFTER ALSO CALLED `THE AGREEMENT). THE SAME IS ACCOMPANIED B Y A LETTER DATED ITA NO.1768/DEL/2011 29 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 ADVIS ORS (HEREINAFTER REFERRED TO AS THE SERVICES.). CLAUSE 1.2 STATES THAT : `NYLI WILL SEND TRAINED PERSONNEL TO THE DESIGNATED MNYL SITES IN I NDIA 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 TH EY HAVE THE AUTHORITY TO OR BE ASKED BY MNYL TO EXERCISE MANAGE MENT AUTHORITY WITH RESPECT TO MNYLS BUSINESS. THE OBLIGATION OF NYLI AND THAT OF ITS PERSONNEL IS TO ACT IN GOOD FAITH AND TO EXERCI SE THEIR BEST EFFORTS IN THE INTEREST OF MNYL. ARTICLE III WITH THE HEADIN G PERSONNEL ITA NO.1768/DEL/2011 30 PROVIDES THROUGH CLAUSE 3.1 THAT : `NYLI SHALL ASS IGN PERSONNEL TO PERFORM THE SERVICES WHO ARE QUALIFIED BY TRAINING/EXPERIENCE TO PERFOR M IT. ARTICLE IV DISCUSSES FEES AND REIMBURSEMENTS . CLAUSE 4.1 PROVIDES THAT NYLI SHALL BE ENTITLED TO A VARIABLE FEE AS UN DER :- `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 N YLI PERSONNEL, THE TIME SPENT BY NYLI PERSONNEL ON TRAVEL AND SUCH OTH ER TIME WHEN NO WORK COULD BE DONE DUE TO REASONS OUTSIDE THE CONTR OL OF THE NYLI PERSONNEL WOULD ALSO BE INCLUDED. NO PAYMENT HOWEV ER WOULD BE DUE FOR ANY HOLIDAYS, WHICH NYLI PERSONNEL MAY TAKE DUR ING HIS STAY AT THE SITE OF MNYL. 26. CLAUSE 4.3 OF THE AGREEMENT, WHICH ALSO HAS SOME BEARING ON THE ISSUE, READS AS UNDER:- 4.3 BILLING CYCLE AND STATEMENT OF ACCOUNT WITHIN ONE MONTH OF THE COMPLETION OF THE PROJECT O R THE TERM, WHICHEVER IS LATER, NYLI SHALL SUBMIT TO MNYL A COM PREHENSIVE 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 WIL L PROVIDE THE NECESSARY SUPPORT DOCUMENTS AND STATEMENTS IN REGAR D TO THE SAID EXPENSES INCURRED ON BEHALF OF MNYL. THE AMOUNT OF ANY BILL RECEIVED ITA NO.1768/DEL/2011 31 BY MNYL SHALL BE DUE FOR PAYMENT ONLY AFTER VERIFIC ATION OF THE BILL AND THE SUPPORTS PROVIDED WITH THE BILL (HEREINAFTER RE FERRED TO AS DUE DATE) BY NYLI TO MNYL. 27. ON GOING THROUGH THE ABOVE CLAUSES OF THE A GREEMENT, EFFECTIVE FROM 01.01.2002, I.E., COVERING THREE MONTHS OF THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION , IT BECOMES CLEAR THAT NYLI AGREED TO `ADVISE AND ASSIST MNYL IN DEVI SING TRAINING PROGRAMMES FOR MNYL AGENT ADVISORS. THIS WAS TO BE DONE BY NYLI BY SENDING: `TRAINED PERSONNEL TO THE DESIGNATED MN YL SITES IN INDIA OR ABROAD. IT IS FURTHER EVIDENT THAT NYLI DEPUTED I TS EMPLOYEES AS INDEPENDENT CONTRACTOR WHO: SHALL NOT BE CONSIDERE D TO BE THE EMPLOYEES OF MNYL. IT IS FURTHER CLEAR THAT THE EM PLOYEES WERE TO BE PAID ON PER DAY BASIS AND EVEN THE TIME SPENT BY NY LI PERSONNEL ON TRAVEL ETC. WAS TO BE PAID BY THE ASSESSEE. SUCH PA YMENT WAS SUPPOSED TO BE MADE: `WITHIN ONE MONTH OF THE COMPLETION OF THE PROJECT OR ..., WHICHEVER IS LATER. AN OVERVIEW OF THE ABOVE CLAUS ES MAKES IT MANIFEST THAT NYLI DEPUTED ITS PERSONNEL TO THE ASSESSEE FOR DEVISING TRAINING PROGRAMME FOR THE ASSESSEES AGENT ADVISORS. THIS DISCERNS THAT THE TRANSACTION WAS MORE OF THE NATURE OF SHORT-TERM AS SIGNMENT OF ITA NO.1768/DEL/2011 32 EMPLOYEES AND NO `CONSULTANCY SERVICES WERE SOUGHT TO BE RECEIVED BY THE ASSESSEE. THAT APART, NYLI ITSELF IS NOT A CON SULTING COMPANY AS IT IS ENGAGED IN THE BUSINESS OF SELLING VARIOUS INSURANC E PRODUCTS AND THE ENTIRE EMPHASIS OF SENDING ITS PERSONNEL WAS TO TRA IN AND ASSIST THE ASSESSEE IN ITS START UP PHASE. HERE IT IS PERTINE NT TO MENTION THAT THE TPO HAS REFERRED TO TWO AGREEMENTS I.E., ONE FOR TR AINING AND ONE FOR ACTUARIAL SERVICES UNDER WHICH THE EMPLOYEES WERE A SSIGNED TO THE ASSESSEE. THESE AGREEMENTS AS PER TPOS ORDER WERE ENTERED INTO ON 07.12.2001 AND WERE EFFECTIVE FOR A PERIOD OF ONE Y EAR FROM 01.01.2001. THESE AGREEMENTS WERE TO TERMINATE ON 31.12.2001. I T IS THEREAFTER THAT THE ASSESSEE ENTERED INTO THE AFORE REFERRED AGREEM ENT EFFECTIVE FROM 01.01.2002, A COPY OF WHICH HAS BEEN SUPPLIED BY TH E 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 CON SIDERATION. ON THE BASIS OF THE AGREEMENT, IT IS VIVID THAT THE ASSES SEE DID NOT RECEIVE ANY `CONSULTANCY SERVICES AS HAS BEEN HELD BY THE LD. CIT(A). THIS IS ITA NO.1768/DEL/2011 33 FURTHER CORROBORATED FROM PARA 6.23 OF THE ASSESSEE S OWN TRANSFER PRICING STUDY REPORT, WHICH STATES THAT : A) NYLI SHALL ASSIGN PERSONNEL TO PERFORM THE SERVICES WHO ARE QUALIFIED BY TRAINING AND/OR EXPERIENCE TO PERFORM THE SAME. 28. NOW, WE TURN TO THE NEXT ASPECT, VIZ., DETERM INATION OF THE ALP UNDER THE CUP METHOD. IT IS APPARENT FROM THE ASSES SEES TRANSFER PRICING STUDY REPORT, A COPY OF WHICH HAS BEEN PLAC ED ON RECORD BOTH BY THE ASSESSEE AS WELL AS THE LD. DR, THAT CERTAIN CO MPANIES 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 PROV IDED BELOW: TABLE 5: SUMMARY OF RATES CHARGED BY THE COMPARABLES NAME OF SELECTED COMPANY/FIRM NATURE OF SERVICES HOURLY CHARGE-OUT RATES TILLINGHAST TOWERS PERRIN & CO. ('TILLINGHAST') ACTUARIAL AND MANAGEMENT CONSULTING TO LIFE INSURANCE AND FINANCIAL SERVICES COMPANIES, HEALTH CARE ORGANISATION, REINSURANCE ORGANISATIONS, ETC., INCLUDING CONSULTING IN RESPECT OF MERGERS, US $ 300 (THIS IS A BLENDED RATE) ITA NO.1768/DEL/2011 34 ACQUISITIONS AND RESTRUCTURING, PRODUCT DEVELOPMENT AND MANAGEMENT, MARKET ENTRY, ANALYSIS AND POSITIONING, DISTRIBUTION ECONOMICS AND STRATEGY, RISK MANAGEMENT, ETC. BUCK CONSULTANTS AND ACTUARIES CONSULTANCY IN THE FIELD OF HUMAN RESOURCES, INCLUDING HEALTH AND WELFARE CONSULTING AND CONSULTANCY SERVICES ALSO IN RESPECT OF COMPENSATION AND BENEFITS, HUMAN RESOURCE EFFECTIVENESS AND TECHNOLOGIES, AND BENEFITS ADMINISTRATION. US$ 370 FOR A PRINCIPAL 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 ITA NO.1768/DEL/2011 35 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 TRANS FER PRICING STUDY REPORT THAT: THE ABOVE LISTED HOURLY CHARGE-OUT RATES FOR THE S ELECTED COMPANIES/ FIRMS ARE FOR EMPLOYEES AT VARIOUS LEVELS/ DESIGNAT IONS. 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 EQUA TED TO THE EMPLOYEE LEVELS/ DESIGNATIONS/ HIERARCHY OF NYLI EMPLOYEES W HO RENDERED THE SHORT TERM CONSULTANCY AND ASSISTANCE TO MNYL, I.E., TO T HE LEVELS OF SENIOR VICE ITA NO.1768/DEL/2011 36 PRESIDENT AND ABOVE ('SVP'), VICE PRESIDENT ('VP') AND ASSISTANT VICE PRESIDENT/ CONSULTANT (AVP'). 30. IT CAN FURTHER BE OBSERVED THAT THE ASSESSEE MADE SEVERAL ASSUMPTIONS WHILE MAKING COMPARISON, WHICH HAVE BEE N LISTED ON PAGE 60 OF THE TRANSFER PRICING STUDY REPORT, AS UNDER : - OTHER ASSUMPTIONS WERE ALSO MADE TO ENABLE THE ABO VE MENTIONED COMPARISON. SOME OF THE KEY ASSUMPTIONS WHICH WERE MADE WHILE MAKING THE ABOVE MENTIONED COMPARISON HAVE BEEN LIS TED BELOW: (A) SENIOR MANAGER EMPLOYED AT ERNST & YOUNG COULD BE EQUATED TO AVP AT NYLI (B) AS REGARDS, DELOITTE TOUCHE TOHMATSU AND SOLOM ON CONSULTING, SINCE WE HAD ACCESS TO A RANGE OF HOURLY CHARGE-OUT RATES, WHICH INDICATED THAT THE LOWER VALUE OF THE RANGE WOULD P OSSIBLY 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 P OSSIBLY BE FOR THEIR VERY SENIOR EMPLOYEE WHO COULD BE EQUATED TO AN SVP AT NYLI. (C) THE PARTNERS AND SENIOR LAWYERS AT MILLIMAN ASI A, HONGKONG COULD BE EQUATED TO VP AND AVP AT NYLI, RESPECTIVELY. (D) THE PRINCIPAL/ACTUARY AND CONSULTANT EMPLOYED A T BUCK CONSULTANTS AND ACTUARIES COULD BE EQUATED TO SVP AND AVP AT NY LI, RESPECTIVELY. HOWEVER, SINCE NO LEVEL OF EMPLOYEE SPECIFIED IN CA SE OF BUCK CONSULTANTS AND ACTUARIES COULD BE EQUATED TO VP AT NYLI, AN AVERAGE OF THE HOURLY CHARGE-OUT RATES FOR A PRINCIPAL/ ACT UARY AND OF A CONSULTANT WAS CONSIDERED TO BE APPROPRIATE FOR A L EVEL AT BUCK CONSULTANTS AND ACTUARIES, WHICH COULD BE EQUATED T O VP AT NYLI. ITA NO.1768/DEL/2011 37 (E) THE SENIOR HEALTH AND WELFARE CONSULTANT/ACTUA RY AND CONSULTANT EMPLOYED AT MERCER HUMAN RESOURCE CONSULTING COULD BE EQUATED TO SVP AND AVP AT NYLI, RESPECTIVELY. HOWEVER, SINCE N O .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 MER CER HUMAN RESOURCE CONSULTING, WHICH COULD BE EQUATED TO VP AT NYLI. (F) THE ACTUARY AND CONSULTANT EMPLOYED AT RAEL & L ETSON CONSULTANTS 'AND ACTUARIES COULD BE EQUATED TO SVP AND AVP AT N YLI, RESPECTIVELY. HOWEVER, SINCE NO LEVEL OF EMPLOYEE SPECIFIED IN CA SE 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 O F 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 C HARGE-OUT RATE OF US$ 200 WAS NOT SPECIFIED WITH A CORRESPONDING LEVE L OF EMPLOYEE. ACCORDINGLY, IT WAS ASSUMED THAT THIS RATE WAS AN A VERAGE RATE APPLICABLE ACROSS ALL LEVELS. 31. IT IS OVERT FROM THE ABOVE THAT THE ASSESSEE WENT ON MAKING ASSUMPTION AFTER ASSUMPTION FOR EQUATING CONSULTANT S FROM THE COMPANIES SHORTLISTED BY IT WITH THE EMPLOYEES OF N YLI ASSIGNED TO IT WHO WERE QUALIFIED FOR TRAINING ETC. FIRSTLY, THER E IS NO SUBSTANTIATION OF THE HOURLY CHARGE OUT RATES AS GIVEN BY THE ASSES SEE IN ITS TRANSFER PRICING STUDY REPORT AS A BENCHMARK AND, SECONDLY, THE COMPANIES SO ITA NO.1768/DEL/2011 38 SELECTED ARE IN ALTOGETHER DIFFERENT FIELDS RANGING FROM SENIOR LAWYERS AT MILLIMAN ASIA, HONG KONG, TO HEALTH AND WELFARE CON SULTANTS. 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 PROV IDED BY NYLI TO THE APPELLANT WAS NOT IN THE NATURE OF PROVISION OF ANY SERVICES BUT WERE PURSUANT TO SECONDMENT OF NYLI EMPLOYEES TO TH E APPELLANT COMPANY IN INDIA. I FIND THAT THE APPELLANT HAS ENT ERED INTO A SEPARATE EXPATRIATE SALARY REIMBURSEMENT AGREEMENT WITH NYLI DURING THE RELEVANT PERIOD ONE EMPLOYEE BY THE NAME OF PAUL CO LGAN WAS ON DEPUTATION TO INDIA UNDER THE SAID AGREEMENT. IN T HE PRESENT CASE, THE CONSULTANTS CAME TO INDIA ON SHORT VISITS FROM TIME TO TIME PURSUANT TO THE SERVICE AGREEMENT AND WORKED UNDER THE SUPERVIS ION 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 39 10.2 CONSIDERING THE ABOVE, IN MY VIEW THE RATES PR EVAILING 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 PRIC E FOR SUCH SERVICES DURING THE RELEVANT PERIOD. I HAVE ALREADY OBSERVE D THAT THE SERVICES PROVIDED BY NYLI CONSULTANTS ARE FUNCTIONALLY COMPA RABLE. I ALSO FIND THAT THE RATES ACTUALLY PAID TO NYLI BY THE APPELLA NT WERE LOWER THAN THE RATES DETERMINED BY THE MODIFIED CUP ESTABLISHE D BY USING ONLY SUCH RATES AS WERE ACTUALLY CHARGED FROM NYLI, THE TESTED PARTY, DURING THE RELEVANT PERIOD BY INDEPENDENT SERVICE P ROVIDERS. 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 ARMS LENGTH P RICE 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 ASID E THE FINDING OF THE ASSESSING OFFICER ON SECONDMENT OF EMPLOYEES VIS-- VIS CONSULTANCY WITHOUT CONSIDERING THAT THE NYLI ASSIGNED PERSONNE L 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 PROJE CTED; AND IN PARA 10.2 HE SIMPLY HELD THAT THE RATES PREVAILING IN T HE INTERNATIONAL MARKET FOR SUCH SERVICES FAIRLY REPRESENT THE ARMS LENGTH PRICE WITHOUT NOTICING THAT, FIRSTLY, THE ASSESSEE MADE COMPARISON OF TH E `ASSIGNMENT OF ITA NO.1768/DEL/2011 40 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 COM PARABLE BUT ALSO FAILED TO NOTE THE ORIGIN OF SUCH RATES, WHICH ARE BASED S IMPLY ON SEVERAL ASSUMPTIONS AS EXTRACTED ABOVE FROM THE ASSESSEES TRANSFER PRICING STUDY REPORT. THE DELETION OF ADDITION BY THE LD. C IT(A) IS IN COMPLETE DISREGARD TO THE TPOS ELABORATE FINDINGS GIVEN ON PAGES 2 TO 7 OF HIS ORDER. IT CAN BE SEEN FROM THE TPOS 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 RA TES 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 A NY 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 ITA NO.1768/DEL/2011 41 ARE UNABLE TO APPROVE THE VIEW TAKEN BY THE LD. CIT (A) IN DELETING THE ADDITION. 33. HAVING FOUND THAT THE VIEW TAKEN BY THE LD. C IT(A) CANNOT BE COUNTENANCED, IT REMAINS TO BE SEEN IF THE ACTION O F THE TPO IS SUSTAINABLE. AFTER REJECTING THE APPLICATION OF THE CUP METHOD, THE TPO INVOKED THE TNMM AS THE MOST APPROPRIATE METHOD. LE T 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 ENTERPRI SE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPR ISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASS ETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE ; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPR ISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTI ON OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE ; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLA USE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRAN SACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN TH E ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET ; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPR ISE 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 42 (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS 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 INTERNATI ONAL TRANSACTION IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASS ETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE. SUB-CLAUSE (II) PROVIDES THAT THE NET OPERATING PRO FIT MARGIN REALISED BY A COMPARABLE UNCONTROLLED TRANSACTION SHOULD BE COMPU TED HAVING REGARD TO THE SAME BASE AS THAT TAKEN IN SUB-CLAUSE (I) FO R THE ASSESSEE. IN THE FORMULA FOR CALCULATING THE PROFIT MARGIN UNDER RUL E 10B(1)(E) UNDER SUB-CLAUSES (I) AND (II), THERE CAN BE ANY DENOMINA TOR, SUCH AS, COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED. HOWEVER, THE NUMERATOR IS UNIFORM, WHICH IS, NET OP ERATING MARGIN. IN FACT, THE NUMERATOR IS `OPERATING PROFIT AND NOT T HE `NET PROFIT. WHEREAS, OPERATING PROFIT IS THE EXCESS OF OPERATIN G REVENUE OVER THE OPERATING COSTS, NET PROFIT IS THE EXCESS OF REVENU E OVER ALL COSTS, BOTH OPERATING AND NON-OPERATING. ITA NO.1768/DEL/2011 43 35. COMING BACK TO THE DECISION OF THE TPO, IT I S FOUND THAT HE PROCEEDED TO COMPUTE THE ALP BY CONSIDERING THAT ON E MR. PAUL SOLGAN, THE EXECUTIVE VICE PRESIDENT, WAS SECONDED TO THE A SSESSEE 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 ASSIST ANT VP TO WORK OUT THE TOTAL COST AT RS. 1,54,60,875, WHICH WAS INCREASED BY THE ARMS LENGTH MARGIN OF COMPARABLES AT 12.89% FOR DETERMINING TH E ARMS 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 METHODOLO GY ADOPTED BY THE TPO FOR DETERMINING UNDER THE TNMM DOES NOT CONFORM TO THE METHOD PRESCRIBED UNDER RULE 10B(1)(E) AND HENCE CANNOT BE APPROVED. 36. WE ARE CONFRONTED WITH A SITUATION IN WHICH THE ACTION OF THE CIT(A) IN DELETING THE TRANSFER PRICING ADDITION CA NNOT BE UPHELD AND EQUALLY THE VIEW OF THE TPO IN APPLYING THE TNMM AL SO CANNOT BE APPROVED FOR THE REASONS ASSIGNED SUPRA, ALBEIT HIS EXERCISE OF REJECTING THE ASSESSEES DETERMINATION OF ALP IS CORRECT. UND ER SUCH ITA NO.1768/DEL/2011 44 CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THA T 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 ASSESS EE. 37. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 17.10.201 7. SD/- SD/- [SUDHANSHU SRIVASTAVA] [R.S. SYAL] JUDICIAL MEMBER VICE PRESIDENT DATED, 17 TH OCTOBER, 2017. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.