2021 (11) TMI 1221 - AT - Income Tax

ITAT Mumbai allows depreciation on brand license fees and marketing expenses while restoring sports rights valuation for fresh assessment

Star India Pvt Ltd Versus ACIT-16 (1), Mumbai

ITAT Mumbai ruled on multiple transfer pricing and tax issues for the assessee. The tribunal restored the sports rights bundle valuation matter to the ... TP Adjustment - Addition made on account of adjustment made to the payment for grant of access to bundle of sports rights - determination of ALP of the payment - It is the case of the assessee that though ESS had obtained the bundle of rights from ISB at USD 1338 million, however, the assessee has bought the bundle of right from ESS at USD 1255 million with a discount of 9.5% Major arena of dispute between the TPO and the valuation report of the independent valuer is with regard to the determination of terminal value for the bundle of sports rights and comparison of actual profit & loss / revenue with the projected value - HELD THAT:- Valuation is a highly technical subject and can be done by a person having expertise on the subject. If we undertake the exercise of either accepting or rejecting the valuation report of the assessee, we would be committing the same error as was committed by the departmental authorities by assuming the role of a valuer. It is further to be noted, various contentions of the assesse that in subsequent assessment years, the independent value was summoned by the assessing officer / TPO and examined on the issue of valuation needs to be examined. Contention of the assessee that in assessee's own case in assessment year 2009-10, the revenue itself has determined the terminal value, has to be examined. One more issue, which also requires consideration, is the alternative contention of the assessee to exclude the withholding of tax from the amount payable to ISB / ESS by the assessee for making ALP adjustment. Thus, upon overall consideration of facts and circumstances of the case, we are of the opinion that the issue has to be restored back to the assessing officer for fresh adjudication in the light of observations made by us hereinabove. Needless to mention, the assessee must be provided reasonable opportunity of being heard before deciding the issue. Since, we have restored the issue to the assessing officer for the reasons stated above, it is not necessary for us to deal with the various judicial precedents cited before us. With the aforesaid observations, grounds are allowed for statistical purpose. Adjustment made to the ALP of payment made towards availing of transitional services - Though, the TPO had determined the ALP of the transitional fee at Nil, however, learned DRP partly accepting the claim of the assessee has allowed the actual cost incurred by the assessee on back to back basis, whereas, certain other third party cost and other cost have not been allowed, in addition to mark up of 5%. The very fact that a part of the cost incurred has been accepted goes to prove that the assessee has availed services from ESS and derived benefit. In fact, to substantiate its claim, the assessee had furnished certain evidences including a Singapore based auditor's certificate. Therefore, the allegation of the departmental authorities that the assessee could not substantiate that the payment made is commensurate with the services availed, thereby, failing the benefit test, in our view, is baseless and not borne out from record. In any case of the matter, the payment received by ESS towards transitional services has been offered to tax in India. Even, in case of ESS the TPO has accepted the transaction to be at arm's length. That being the factual position, no adjustment is required to be made. Accordingly, we delete the addition. This ground is allowed. Determination of ALP of payment made for brand licence fee at Nil - HELD THAT:- For obtaining the brand licence, the assessee had entered into an agreement and paid a lump sum amount of USD 36.02 million. While examining the arm's length nature of transaction in assessment year 2011-12, the TPO determined the ALP at Nil. As a result, assessee's claim of depreciation on the cost incurred towards brand licence fee was consistently disallowed in assessment year 2011-12, 2012-13 and 2013-14. While deciding assessee's appeal for assessment year 2011-12, the Tribunal deleted the transfer pricing adjustment made by the TPO. Based on the aforesaid decision of the Tribunal, assessee's claim of depreciation on cost incurred towards brand licence fee was allowed while deciding the appeal in assessment year 2012-13 [2019 (8) TMI 1464 - ITAT MUMBAI] The aforesaid factual position remains uncontroverted before us. Thus, keeping in view the decision of the co-ordinate bench in assessee's own case for assessment year 2011-12 and 2012-13 as referred to above, we allow assessee's claim of depreciation. Grounds are allowed. Disallowance of deduction claimed towards reimbursement of property tax - HELD THAT:- We find, while dealing with identical issue in assessee's own case in assessment year 2006-07, the Tribunal in [2016 (4) TMI 1384 - ITAT MUMBAI] has restored the issue to the assessing officer as held what is required to be seen is as to whether to aggregate amount of rent plus reimbursements compares well with the earlier years payment. If it does not compare well, then it is the duty of the assessee to justify the payment. Disallowance of marketing and publicity expenses - allowable business expenditure or not? - HELD THAT:- As decided in own case [2019 (3) TMI 2088 - ITAT MUMBAI] Assessee had incurred impugned expenses primarily for the purpose of its business. If these expenses incidentally provided some benefits to some other entity also, then that itself would not make the said expenses as not related to business of the assessee or not having been incurred during the course of or for the purpose expenses is that it should be incurred during the course of and for the purpose of business of the assessee, which is duly passed here, and beyond that nothing more is to be examined. Decided in favour of assessee. Part disallowance of software expenses - HELD THAT:- The simple claim of the assessee is for allowance of depreciation on the software expenses held as capital expenditure. In our view, if certain expenditure claimed by the assessee on account of purchase of software is held to be of capital nature, depreciation at the appropriate rate has to be allowed. Accordingly, we direct the assessing officer to verify the relevant facts vis-à-vis assessee's claim and allow depreciation as per law. This ground is allowed subject to factual verification. Short grant of TDS and advance-tax AND non grant of foreign tax credit - We direct the assessing officer to verify assessee's claim in the context of facts and materials brought on record and allow foreign tax credit, if permissible in law. The core legal questions considered by the Tribunal in this appeal primarily revolve around the determination of the arm's length price (ALP) of various inter-company transactions under the Income Tax Act, 1961, specifically in the context of transfer pricing. The key issues include:1. Whether the payment made by the assessee for acquiring a bundle of sports broadcasting rights from its associated enterprise (AE) is at arm's length, particularly focusing on the correctness of the valuation report and the determination of terminal value in the discounted cash flow (DCF) method.2. Whether the payment made towards transitional services availed from the AE is at arm's length and the validity of the disallowance of certain portions of such payments.3. The determination of ALP for brand licence fee payments and the consequent allowance of depreciation on such payments.4. The allowability of deduction claimed towards reimbursement of property tax.5. The allowability of marketing and publicity expenses claimed by the assessee.6. The nature of software expenses claimed and the eligibility for depreciation.7. Issues relating to short grant of tax deducted at source (TDS) and advance tax credits.8. The grant of foreign tax credit and minimum alternate tax (MAT) credit claims.Issue-wise Detailed Analysis:1. Determination of ALP for Acquisition of Bundle of Sports RightsThe assessee, a media company part of a larger group, acquired a bundle of sports broadcasting rights from its AE, ESPN Star Sports Ltd (ESS), which held rights from international sports bodies (ISB). The payment made was benchmarked using the Comparable Uncontrolled Price (CUP) method, comparing the amount paid by ESS to ISB (USD 1,338 million) with the amount paid by the assessee to ESS (USD 1,211 million), reflecting a discount of about 9.5%. The assessee supported this with a valuation report by an independent valuer applying the DCF method, determining the value at USD 1,211 million.The Transfer Pricing Officer (TPO) challenged this valuation, particularly the terminal value of USD 548 million incorporated in the DCF method, on the ground that the rights were for a finite period, and terminal value should not be computed for such intangible assets. The TPO relied on international valuation standards and authoritative texts, including the book by Professor Aswath Damodaran and International Valuation Standards, to assert that economic life, not merely legal life, should govern valuation, and for finite period assets, terminal value should be nil.The TPO also pointed out that the independent valuer's projections were overly optimistic and contradicted by the historical losses incurred by ESS and the assessee in the sports broadcasting segment. The TPO noted the valuation report did not consider risks such as non-renewal of rights, competition, and strategic decisions to exit the business, leading to a fundamental error. Consequently, the TPO determined the ALP at USD 411 million, significantly lower than the valuation report.The Dispute Resolution Panel (DRP) upheld the TPO's adjustment.The assessee contended that the valuation report was a bona fide expert exercise, that the terminal value was justified due to the economic benefits beyond the contractual period, including synergy with general entertainment channels, and that the TPO selectively and incorrectly interpreted the valuation report and literature. The assessee also furnished additional expert opinions supporting the valuation and argued that the TPO failed to produce any counter valuation report. The assessee highlighted that the payment was at a discount to the price paid by ESS to ISB and that the valuation process was consistent with accepted principles, including game theory.The Tribunal observed that valuation is a highly technical subject requiring expertise. The TPO's selective use of literature and partial rejection of the valuation report without commissioning a counter valuation was inappropriate. The Tribunal noted that the revenue had not undertaken an independent expert valuation to challenge the assessee's valuation. The Tribunal acknowledged the revenue's objection regarding terminal value but held that the issue required expert examination and could not be conclusively decided by the Tribunal. Accordingly, the Tribunal restored the issue to the Assessing Officer for fresh adjudication, directing that the assessee be given a reasonable opportunity to be heard and that the revenue obtain an independent expert valuation to verify the correctness of the valuation report.2. ALP of Payment for Transitional ServicesThe assessee paid transitional fees to ESS for services and facilities during the period it was setting up its sports broadcasting business and awaiting government permissions. The assessee benchmarked the transaction using the Transactional Net Margin Method (TNMM), claiming it was at arm's length. The TPO rejected the benchmarking, disallowing a significant portion of the payment for lack of evidence of services and benefit. The DRP partly allowed the claim, permitting actual costs incurred on a back-to-back basis but disallowing mark-up and certain other costs.The assessee submitted that the payments were for genuine services, supported by a certificate from a Singapore-based auditor, and that the benefit test was satisfied. The assessee also pointed out that ESS had offered the income to tax in India and complied with transfer pricing regulations.The Tribunal found that the acceptance by the DRP of a portion of the payment demonstrated that services were indeed availed and benefits derived. The Tribunal held that the TPO's rejection based solely on the benefit test was baseless and that no adjustment was required since the income was taxed in India at ESS's end. The Tribunal deleted the addition.3. ALP and Depreciation on Brand Licence FeeThe assessee had paid a brand licence fee to an AE for use of the STAR brand and sought depreciation on the payment. The TPO had determined the ALP at nil, disallowing depreciation in earlier years. However, the Tribunal had earlier deleted the transfer pricing adjustment for the relevant year, allowing depreciation. Following the consistent earlier decisions, the Tribunal allowed the claim of depreciation for the impugned year.4. Deduction for Reimbursement of Property TaxThe assessee claimed deduction for reimbursement of property tax paid on behalf of a related party. The assessing officer disallowed the claim based on earlier decisions and the DRP upheld the disallowance. The Tribunal referred to an earlier decision in the assessee's own case for a prior year, where the issue was restored to the Assessing Officer for fresh examination, noting that the reimbursement appeared disproportionate to rent paid.Following the earlier decision, the Tribunal restored the issue to the Assessing Officer for fresh consideration with appropriate directions.5. Marketing and Publicity ExpensesThe assessee claimed deduction for marketing and publicity expenses. The assessing officer disallowed 25% of such expenses, and the DRP upheld the disallowance relying on earlier decisions. The assessee submitted that the issue had been consistently decided in its favor by the Tribunal and the jurisdictional High Court in preceding years.The Tribunal, after reviewing the precedents including decisions by the High Court and the Tribunal, held that incidental benefit to other entities does not disallow the expenditure if it is incurred wholly and exclusively for the assessee's business. The Tribunal deleted the disallowance.6. Software Expenses and DepreciationThe assessing officer treated part of the software expenses as capital expenditure and allowed depreciation accordingly, disallowing the balance. The DRP upheld the disallowance. The assessee claimed entitlement to depreciation on the software expenses held as capital in nature.The Tribunal directed the Assessing Officer to verify the facts and allow depreciation as per law, subject to factual verification.7. Short Grant of TDS and Advance Tax CreditsThe assessee raised issues regarding short grant of tax deducted at source and advance tax credits. The Tribunal directed the Assessing Officer to verify the claims based on facts and allow credits as per law.8. Foreign Tax Credit and MAT CreditThe assessee claimed foreign tax credit and MAT credit. The Tribunal directed the Assessing Officer to verify the claims in light of facts and allow credits if permissible under law.Significant Holdings and Core Principles EstablishedThe Tribunal emphasized the technical nature of valuation in transfer pricing disputes and underscored that valuation reports by independent experts should not be lightly rejected by tax authorities without commissioning a counter valuation by their own experts. The Tribunal stated:'Valuation is a highly technical subject which requires expertise in technical knowledge and skill on the subject... a person having no technical knowledge/expertise cannot be in a position to decide whether the value determined by the independent valuer and the expert's opinion in support, are incorrect.'The Tribunal held that selective and partial rejection of valuation reports, without proper expert countervaluation, is an incorrect approach.Regarding finite-lived intangible assets, the Tribunal recognized the revenue's contention that terminal value should not be attributed beyond the economic life of the asset but refrained from conclusively deciding the issue, restoring it for expert examination.The Tribunal also affirmed that incidental benefits to other entities do not negate the allowability of marketing and publicity expenses if incurred wholly and exclusively for the assessee's business, following High Court and Tribunal precedents.On transitional services, the Tribunal held that acceptance of part of the payment by the tax authorities and taxation of income at the AE's end negates the need for adjustment.On reimbursement of property tax, the Tribunal followed earlier decisions restoring the issue for fresh examination due to factual complexities.On software expenses, the Tribunal directed factual verification and allowance of depreciation as per law.On credits for TDS, advance tax, foreign tax, and MAT, the Tribunal directed verification and allowance as per law.Finally, the Tribunal allowed grounds challenging the transfer pricing adjustments on brand licence fee payments based on consistent earlier decisions.