Foreign company wins on transfer pricing comparables and Star World channel transfer ruled non-taxable under section 9(1)(i)

The ITAT Mumbai ruled on multiple transfer pricing and taxation issues involving a foreign company. The tribunal held that comparables cannot be excluded solely for being loss-making or having low profit margins. Additions made on estimate basis without applying approved PSM to non-AE transactions were deleted, following Star International Movies Ltd precedent. Regarding capital gains from channel transfer, the tribunal determined the Star World channel asset was situated outside India despite Indian viewership, making the transfer income non-taxable under section 9(1)(i). The tribunal rejected revenue's argument about business nexus, citing Asia Satellite Telecommunications precedent. For royalty income, the tribunal directed taxation at 10.5575% under section 115A instead of the 42.23% rate applied by the AO.

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Issues Involved:
1. General Grounds
2. Rejection of the comparability analysis carried out by the Appellant
3. Non-application of PSM approved by the TPO for AE transaction to third party transaction
4. Application of certain TP principles
5. Double taxation of India sourced revenue
6. Taxation of Short Term Capital Gain on transfer of Channels
7. Taxation of royalty income at a higher rate
8. Short grant of credit of TDS
9. Non-grant of credit of advance tax and short grant of credit of SA Tax
10. Initiation of penalty proceedings

Summary:

General Grounds:
The appeals were heard together and disposed of by a common order as the issues contended are common for both assessees, Star Television Entertainment Ltd (STEL) and Star Asian Region FZ LLP (SARF).

Rejection of the Comparability Analysis:
The Transfer Pricing Officer (TPO) rejected certain comparables chosen by the assessee, leading to a Transfer Pricing (TP) adjustment. The Tribunal directed the inclusion of Jain Studios Ltd., Television 18 India Ltd., and Raj Television Network Ltd. as comparables, following a precedent in a group company's case.

Non-application of PSM for Non-AE Transactions:
The Assessing Officer (AO) did not apply the Profit Split Method (PSM) for non-AE transactions and estimated the profit at 28%. The Tribunal, following a precedent, held that the income from non-AE transactions cannot be taxed separately by applying a net profit rate of 28% and deleted the addition made by the AO.

Application of Certain TP Principles:
Given the Tribunal's decision on the TP adjustment, the grounds regarding the application of certain TP principles became academic and did not warrant separate adjudication.

Double Taxation of India Sourced Revenue:
The AO's approach of estimating profitability for non-AE transactions was rejected, and the Tribunal directed a re-computation of the Arm's Length Price (ALP) as per the directions given.

Taxation of Short Term Capital Gain on Transfer of Channels:
The Tribunal held that the situs of an intangible asset is where the owner is located. Since the channels were owned by non-residents, the gains from their transfer were not taxable in India. The Tribunal relied on the principle of 'mobilia sequuntur personam' and the decision of the Hon'ble Delhi High Court in the case of Cub Pty Ltd.

Taxation of Royalty Income at a Higher Rate:
The Tribunal directed the AO to tax the royalty income at the rate provided under section 115A of the Act (10.5575%) instead of the higher rate applied by the AO, following a precedent in the assessee's own case.

Short Grant of Credit of TDS:
This issue was not separately adjudicated as it was not raised in the grounds of appeal for STEL.

Non-grant of Credit of Advance Tax and Short Grant of Credit of SA Tax:
This issue was not separately adjudicated as it was not raised in the grounds of appeal for STEL.

Initiation of Penalty Proceedings:
The Tribunal found the issue premature and did not warrant any adjudication.

Conclusion:
The appeals of STEL and SARF were allowed, with directions to re-compute the ALP and tax the royalty income at the appropriate rate. The Tribunal deleted the additions made by the AO regarding the TP adjustments and the taxation of capital gains on the transfer of channels.

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