2016 (6) TMI 203 - AT - Income Tax

Tribunal rules in favor of assessee in transfer pricing case, upholds deductibility of license fees

M/s. Star India Pvt. Ltd. Versus ACIT, Range-11 (1), Mumbai

The Tribunal ruled in favor of the assessee in a case involving transfer pricing adjustments, emphasizing proper selection of comparables. The Tribunal ... Transfer pricing adjustment - selection of comparables - Held that:- FAR analysis of the assessee and the comparables reveal that they are not similar in any of the three fields. Therefore, comparing it with both these companies was not justifiable at all. One more important issue is of non availability of data in the public domain of NDTV for the year under appeal. The assessee had specifically raised this issue before the FAA, but he had not dealt with it. It is not known as to how and from where the TPO had got the data. He did not reveal the assessee the source of his information thought a specific request was made by it. The non-supply of basic data vitiate the whole TP exercise. As a quasi judicial authority TPO is required to follow the principles of natural justice. The TPO ignored them and the FAA allowed the violation of them. Tax liability cannot be fastened to an assessee in that manner. Being a representative of the Sovereign the TPO should have supplied the information to the assessee if he wanted to use it to against it. Collecting information behind the back is permissible but using the same without confronting the assessee is impermissible. The FAA had also missed a very important fact that during the year under appeal NDTV was a pure content producer. Therefore, selection of NDTV, as a comparable in our opinion was not justified. Similarly, he should not have selected CL as a comparable because it was supplying contents to various entities including the assessee. Thus, there were two basic flaws in the approach of the TPO and the FAA. First to hold that the assessee was a producer of contents and secondly to include NDTV and CL in the list of the comparables. If both these comparables are taken out of the list no TP adjustment will be required. - Decided in favour of assessee Deductibility of license fee - Held that:- As decided in assessee's own case for the AY.2002-03 the Assessing Officer has disallowed the entire claim of payment of licence fee without looking into the merits of the case and the relevant provisions of the Act. In the impugned assessment year the claim of the assessee should have been examined in the light of the report of the Transfer Pricing Officer and the evidences filed by the assessee but the Assessing Officer as well as the CIT(A) have not adjudicated the issue in accordance with law. We, therefore, are of the view that this issue requires fresh adjudication. Since the report of the Transfer Pricing Officer has already been obtained and the issue requires proper examination by the Assessing Officer in the light of the report of TPO, detailed analysis of licence fee paid and other evidences filed by the assessee, we set aside the order of the CIT(A) in this regard and the matter is restored to the file of the Assessing Officer to readjudicate the issue in terms indicated above. Deductibility of advertisement and publicity expenses - Held that:- This issue is covered in favour of the assessee by the decision of the Tribunal for Assessment Year's 1997-98 to 1999-2000 wherein it has been held that such expenditure was incurred wholly and exclusively for the purpose of business and therefore no disallowance could be made in this regard. Since the matter is covered by the earlier decision of the Tribunal in assessee's own case we have refrained ourselves from narrating the necessary facts and details in this regard. Following the decision of the Tribunal for earlier years, the issue is decided in favour of the assessee Addition made on account of point of accrual of commission income - Held that:- We do not find any material difference since under both the agreements, the commission is to be paid on the basis of amount collected by the assessee. Clause (E)(4) specifically provides that no commission shall be due to the assessee against the amounts not received. Therefore it is clear from the terms of both the agreements that commission income accrued to the assessee only when the invoiced amount was received by the assessee on behalf of principle. Therefore there is no reason to deviate from the earlier order of the Tribunal. Following the said decision of the Tribunal for earlier years, the issue is decided in favour of the assessee by holding that accrual of commission income arose in the year in which the invoiced amount were received by the assessee even under the Mercantile System of accounting Net commission and net miscellaneous income from the profit of business while computing deduction u/s.80HHF - Held that:- Similar issue was decided by the Tribunal against the AO in the appeal filed for the AY.2000-01 to 2002-03. As decided in ACG Associated Capsules(P.) Ltd., (2012 (2) TMI 101 - SUPREME COURT OF INDIA) if any quantum of any receipt of the nature mentioned in clause (1) of Explanation (baa) has not been included in the profits of business of an assessee as computed under the head “Profits and gains of business or profession”, ninety per cent. of such quantum of the receipt cannot be deducted under Explanation (baa) to section 80HHC . . that ninety per cent. of not the gross rent or gross interest but only the net interest or net rent, which had been included in the profits of business of the assessee as computed under the head “Profits and gains of business or profession”, was to be deducted under clause (1) of Explanation (baa) to section 80HHC for determining the profits of the business - Decided in favour of the assessee Depreciation of computer peripherals like servers, cable connection, KVM switches etc - Held that:- All the items were necessary to run the computers, thus in the circumstances of the case, are to be included in the block of 'computer' entitled to depreciation @ 60 per cent. See Datacrafts India Ltd.( 2010 (7) TMI 642 - ITAT, MUMBAI ) and BSES Rajdhani Powers Ltd (2010 (8) TMI 58 - DELHI HIGH COURT).- Decided in favour of the assessee Issues Involved:1. Transfer Pricing Adjustment2. Deductibility of License Fee3. Deductibility of Advertisement and Publicity Expenses4. Accrual of Commission Income5. Deductibility of Net Commission and Net Miscellaneous Income for Section 80HHF Deduction6. Depreciation on Computer Peripherals1. Transfer Pricing Adjustment:The assessee, engaged in producing and procuring TV programs for overseas media companies, filed its return declaring an income of Rs. 42.79 Crores. The AO determined the income at Rs. 311.49 Crores. The TPO selected comparables with an arithmetic mean margin of 12.89%, leading to a TP adjustment of Rs. 18.85 Crores. The assessee argued that it procured more than 90% of its content from external producers and was not engaged in significant content creation. The FAA upheld the AO's order, stating the assessee acted as a content creator/producer. The Tribunal found that the assessee had rightly claimed minimal in-house production and that the TPO's selection of comparables, including NDTV and Cinevistaas Limited, was faulty. The Tribunal held that the comparables were not similar in functions, assets, and risks (FAR) analysis and thus, reversed the FAA's order, deciding the ground in favor of the assessee.2. Deductibility of License Fee:The AO disallowed the license fee, but the Tribunal had previously decided the issue in favor of the assessee for AY 2001-02, upheld by the Hon’ble Bombay HC and the Supreme Court. The Tribunal directed the AO to reconsider the claim for AY 2002-03, following the Transfer Pricing Officer's report and relevant evidences. Respectfully following the above, the Tribunal restored the issue to the TPO/AO for fresh adjudication, deciding the ground in favor of the AO, in part.3. Deductibility of Advertisement and Publicity Expenses:The Tribunal had decided the issue against the AO for AYs 1997-98 to 2000-2003, and the Hon’ble High Court and the Apex Court did not entertain the department's appeals. Following the Tribunal's previous decisions, the Tribunal dismissed the second ground of appeal.4. Accrual of Commission Income:The Tribunal had previously decided the issue in favor of the assessee for AYs 1997-98 to 1999-2000 and AY 2000-01, holding that commission income accrued when the amount was received. The department did not succeed in appeals before the Hon’ble High Court or the Supreme Court. Respectfully following the above, the Tribunal decided the third ground against the AO.5. Deductibility of Net Commission and Net Miscellaneous Income for Section 80HHF Deduction:The Tribunal had decided the issue against the AO in appeals for AY 2000-01 to 2002-03, directing the AO to decide the issue in light of the Tribunal's order. The Hon’ble Supreme Court in ACG Associated Capsules (P.) Ltd. held that only 90% of the net amount of receipts included in the profits of the business should be deducted. Respectfully following the above, the Tribunal decided the fourth ground against the AO.6. Depreciation on Computer Peripherals:The AO allowed depreciation at 25% for certain computer peripherals, but the FAA held that the issue was covered in favor of the assessee by the Kolkata Tribunal's decision, treating peripherals as part of the computer for higher depreciation. The Tribunal, following the Special Bench decision in Datacrafts India Ltd., held that routers and switches used along with a computer should be classified as computer hardware, eligible for 60% depreciation. Respectfully following the above, the Tribunal decided the fifth ground against the AO.Conclusion:The assessee's appeal was partly allowed, and the AO's appeal was dismissed. The Tribunal's detailed analysis emphasized adherence to proper selection procedures for comparables and consistent application of legal principles regarding deductions and depreciation.