2016 (2) TMI 836 - AT - Income Tax

Tribunal favors assessee in tax appeal, corrects errors, prevents double taxation, grants relief.

M/s Satellite Television Asian Region Limited and Others Versus DDIT (IT) -2 (1), Scindia House, Mumbai

The Tribunal consolidated identical appeals and ruled in favor of the assessee, directing the deletion of various disallowances and additions. It ... Transfer pricing adjustment - application of Profits Split Method (PSM) - Held that:- In this case, the DRP has accepted the PSM for 80% of the ad-revenue in PSM Pool, therefore, it would not be proper that for the balance, a separate determination of profit is required and that to be at a higher profit rate of 28%. Once the combined net profit has been arrived at by taking into account all the transactions of AE as well as non-AE which is factored into all the costs and revenue then to separate out non-AE transaction over and above such a profit determined is not desirable. Thus, we hold that any income if at all from non-AE cannot be taxed separately by applying net profit rate of 28%, because it has already included in the combined profit of entire international transaction of the entities and have already been taxed on the profit rate of 27.18%. Thus, the addition of ₹ 118,59,30,000/- cannot be separately made and we direct to delete the addition.- Decided in favour of assessee Addition on account of distribution revenues - 50% of total distribution revenues which has been taxed on protective basis under section 44DA and balance 50% has been taxed in the hands of Channel Companies - Held that:- Such an amount cannot be added separately, because it has already been included in the PSM Pool and in the combined rate of 27.18% and accordingly, the same is directed to be deleted, because it will be subject to double taxation when all the revenues has been factored into the combined profit of 27.18%. It is not understood as to why DRP/AO is again taxing part of same revenue again. This is wholly and arbitrary action which cannot be upheld.- Decided in favour of assessee Disallowance of cost on advertisement revenue - non deduction of TDS - Held that:- No separate addition is called for; firstly, the provision of withholding tax cannot be applied on the basis of any amendment which has come subsequently by giving retrospective effect, as held by various Courts, on the reasoning that assessee cannot be expected to withhold tax when there was no such provision under the statute and secondly, prior to such amendment, there was a judgment of Hon'ble Supreme Court in the case of Vodafone International Holdings BV (2012 (1) TMI 52 - SUPREME COURT OF INDIA ) that payment made by one non-resident to another non-resident, provisions of TDS are not applicable; thirdly, when income has been determined under PSM, inter-company transactions are eliminated and in such a methodology the combined net profit is first worked out and then divided as per the relevant functions and role of each entity. Last but not the least, the channel companies have been separately assessed and they have discharged their tax liability and, therefore, there is no requirement by the assessee to deduct tax and accordingly, no disallowance can be made.- Decided in favour of assessee Disallowances made under section 40(a)(i) on account of payment made to Asia SAT, payment for foreign content and payment for technical cost, also cannot be made for the reasons given above that, while computing the profit under PSM at 27.18%, there is no requirement for making separate disallowances under section 40(a)(i) and same are directed to be deleted. - Decided in favour of assessee Taxation of service fee income @ 41.82% on the gross basis as against applicable @ 10.455% on gross basis - Held that:- We direct the AO to apply the correct tax rate in accordance with section 115A and examine the contention of the assessee that tax rate of 10.45% and 20.91% should be applied.- Decided in favour of assessee Disallowance of interest expense - Held that:- Addition should also be deleted, because it stands already disallowed by the assessee while computing PSM profit. Thus, such disallowance made by the AO in the computation of income, as incorporated above stands deleted on the reasons stated herein above.- Decided in favour of assessee Levy of interest under section 234B - Held that:- we find that this issue stands covered in favour of the assessee by the decision of Hon'ble Delhi High Court in the case of NGC Network Asia LLC (2009 (1) TMI 174 - BOMBAY HIGH COURT ). The High Court further held that the primary liability of deducting tax was that of the payer. The payer would be an assessee in default, on failure to discharge the obligation to deduct tax, under Section 201 of the Act and no interest was leviable on the respondent assessees under Section 234B, even though they filed returns declaring NIL income at the stage of reassessment. - Decided in favour of assessee Issues Involved:1. Non-application of Profits Split Method (PSM) on non-AE transactions.2. Double taxation of distribution revenue.3. Incorrect taxation rate on service fee income.4. Double disallowance under section 40(a)(i).5. Double disallowance of interest expenses.6. Disallowance of cost of advertising air-time under section 40(a)(i).7. Non-grant of reversal of disallowance for AY 2005-06.8. Denial of set-off of brought forward losses for AY 2006-07.9. Levy of interest under section 234B.Detailed Analysis:1. Non-application of Profits Split Method (PSM) on non-AE transactions:The Tribunal noted that the issues in all the appeals were identical and based on the same facts, thus consolidating them for convenience. The main appeal discussed was that of Satellite Television Asia Region Ltd. The assessee challenged the non-application of PSM on non-AE transactions, arguing that the entire revenue from the sale of advertisement airtime should be computed under PSM. The Tribunal observed that PSM was the Most Appropriate Method (MAM) for determining the combined profit of the entities due to the highly integrated operations. The Tribunal rejected the AO's approach of segregating non-AE revenues and taxing them separately at 28%, affirming that the combined profit should be determined by considering all transactions, including those with non-AEs.2. Double taxation of distribution revenue:The assessee contended that the distribution revenue amounting to Rs. 124,82,45,000/- was subjected to double taxation. The Tribunal agreed, noting that the revenue was already included in the PSM pool and taxed at the combined profit rate of 27.18%. The Tribunal directed the deletion of the addition, preventing double taxation.3. Incorrect taxation rate on service fee income:The assessee argued that the service fee income was incorrectly taxed at 41.82% on a gross basis instead of the applicable 10.455%. The Tribunal directed the AO to apply the correct tax rate in accordance with section 115A, ensuring the appropriate rate of 10.45% and 20.91% was applied.4. Double disallowance under section 40(a)(i):The Tribunal addressed the issue of double disallowance under section 40(a)(i) for various payments, including those to Asia Satellite Telecommunications Ltd for transponder hire charges, foreign content procuring charges, and technical costs. The Tribunal held that these disallowances were already factored into the PSM profit rate of 27.18%, thus no separate disallowance was required. The Tribunal directed the deletion of these disallowances.5. Double disallowance of interest expenses:The assessee challenged the double disallowance of interest expenses amounting to Rs. 30,08,28,766/-. The Tribunal agreed, noting that the interest expenses were already disallowed while computing the PSM profit of 27.18%. The Tribunal directed the deletion of this disallowance.6. Disallowance of cost of advertising air-time under section 40(a)(i):The Tribunal addressed the disallowance of the cost of advertising air-time amounting to Rs. 896,13,47,000/-. The Tribunal held that the provision of withholding tax could not be applied retrospectively and that the income had already been determined under PSM. The Tribunal directed the deletion of this disallowance.7. Non-grant of reversal of disallowance for AY 2005-06:The assessee raised the issue of non-grant of reversal of disallowance of cost of advertising air-time for AY 2005-06 upon the payment of taxes in the instant assessment year. The Tribunal directed the AO to grant the relief in accordance with the law.8. Denial of set-off of brought forward losses for AY 2006-07:The assessee challenged the denial of set-off of brought forward losses amounting to Rs. 1004,27,61,307/- for AY 2006-07. The Tribunal directed the AO to look into the matter and grant the relief in accordance with the law.9. Levy of interest under section 234B:The Tribunal found that the issue of levy of interest under section 234B was covered in favor of the assessee by the decision of the Hon'ble Delhi High Court in the case of NGC Network Asia LLC. The Tribunal directed that no interest was leviable under section 234B.Conclusion:The Tribunal allowed the appeals of the assessee, directing the deletion of various disallowances and additions, and ensuring the correct application of tax rates and provisions. The Tribunal emphasized the proper application of PSM and the prevention of double taxation and disallowance.