TaxTMI 
TaxTMI 
2016 (2) TMI 836
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....gether and are being disposed off for the sake of convenience by way of this consolidated order. 3. To understand the facts and its implication on the issues involved, we are first discussing the case of Satellite Television Asia Region Ltd. ITA No. 8683/Mum/2011, which is the main appeal and has a bearing in all the other appeals of the aforementioned assessees. In the grounds of appeal as many as 29 grounds have been raised and besides this, three additional grounds have also been raised vide separate petition. Since grounds are very argumentative in nature and not specific as is required under the rules therefore, we are proceeding on the basis of issues raised in various grounds, which are summarized as under: (i) Ground no. 1 is general in nature; (ii) In ground nos. 2 to 5, the assessee has challenged that, the Ld. DRP as well as AO has erred in law and on facts in not applying the Profits Split Method (PSM) which was approved by the TPO, on non-AE transactions and thereby holding that revenue of Rs. 118,59,30,000/- from sale of advertisement airtime from non-AE needs to be separately computed and on such revenue applying 28% of profit; (iii) In ....
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....cing) - 11(4) ('TPO') for computing the Arm's Length Price ('ALP') under Profit Split Method ('PSM'). Ground number 31: without considering the similarity in the facts and return filing positions in case of the Appellant in AY 2007-08 and AY 2008-09, erred in adopting a divergent position with respect to adjustments prescribed under section 40(a)(i) of the Act, while considering the profitability rate. Ground number 32: erred in not specifying that after accepting in case of the Appellant (along with its AEs1), the profitability of 27.18% (equivalent to Rs. 3,452,612,000) of the India Revenues comprising of 14.04% (Rs. 1,783,683,000) being the ALP and 13.14% (Rs. 1,668,929,000) being adjustment under section 40(a)(i) of the Act". 5. Before us, the Ld. Senior Counsel, Shri Porus Kaka submitted that, the whole controversy in all the appeals is that, Profits Split Method (PSM) has not been properly applied and has not been appreciated by the AO and the DRP in a proper perspective, which has led to various disallowances and double disallowances. After referring to the material placed before us and the impugned orders, h....
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....distribution rights to Star Ltd, which distributes these channels in return for subscription revenues. The channel companies also advertise air-time on the channel and received ad revenue's net of any commissions retained by ad agents. All the transactions undertaken for earning of the revenues are amongst these entities only. 6. Given the complex and inter-related functions, the risks and assets of these companies, PSM was selected as most appropriate method (MAM) to determine the reasonable allocation of deemed taxable profit in India. The Profit Split was calculated on the basis of detail analysis undertaken and allocation of deemed taxable income between the said companies and the resultant net profit as worked out to 14.04%. The percentage of allocation of taxable income was made in the following manner: Sr. No. Name of the Company Percentagewise allocation of taxable income i Star Ltd. 49% ii SGL 1% iii STEL 33% iv SIML 4% v SAML 4% vi SARF 6% vii Channel V 3% So far as allocation of proportionate taxable income in above ratio, same is not in dispute. One very important fact in all the....
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....llowances offered in the return of income filed was in respect of payment made to third parties without withholding the taxes u/s 40(a)(i). As a result the profit rate offered for income was 27.18%. This uplifted rate of profitability has been applied to India sourced revenues of STAR Group entities, i.e. Advertising revenues earned from Indian advertising; Distribution/subscription revenues earned from India; and Syndication/Licensing revenues earned from India. Before us, Mr. Porus Kaka pointed out that, though, such disallowances were no longer required to be made in view of the judgment of the Supreme Court in the case of Vodafone International BV vs. UOI, reported in 341 ITR 1 and even after the retrospective amendment brought by the Finance Act, 2012, (subsequent to Vodafone decision) various Courts have held that, it is impossible for the assessee to comply with the provisions for withholding of tax prior to the introduction of such provisions. Despite this, the assessee had offered higher combined profit over and above accepted by TPO. Thus, the profit on receipts in India offered for taxation was in the following manner: Particulars -year ending 31st March, 2007 ....
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....00 Star Asian Movies Limited 696,547,000 Star International Movies Limited 535,531,000 Channel [V] Music Networks Limited Partnership 242,969,000 Star Asia Region FZ LLC 1,245,808,000 Total 8,961,347,000 Thus, amount of Rs. 896,13,47,000/- payable to the Channel companies towards cost of advertisement air-time was disallowed and added to the total income of the assessee. 10. After making the aforesaid disallowances, the AO further proceeded to tax the subscription revenues amounting to Rs. 124,82,45,000/- (50% of the gross turnover of Rs. 249,64,90,000/- as the same was payable to the channel companies). The said amount was taxed on the ground that the same was taxable in the hands of the assessee as profits and gains from business or profession under section 44DA as "royalty". Thereafter, he also proceeded to make various disallowance under section 40(a)(i) on the payment made by the assessee to various different entities, the details of which are as under: Sr. No. Nature of payment made to the Parties Quantum of disallowance in (Rs.) 1 Payment made to Asia SAT for transponder hire charges 37,74,29,655 2 Payment....
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.... disallowances on several counts. He submitted that, in the present case, it is an undisputed fact that firstly, PSM is the Most Appropriate Method; secondly, amounts remitted from India would be the starting point for the application of the method; thirdly, the method, the manner and application of determination of income satisfy the Arm's Length Profit as per the TPO which has been accepted under the Transfer Pricing proceedings and Lastly, all the companies are taxable at the same rate and their allocation of combined net profit to each entity is based on their role and functions performed. From the help of a chart, he explained that first of all, all the income and expenses of the Star Group were consolidated to arrive at net results of the entities' operation on a consolidated basis including India and non-India revenues. Thereafter, the effects of inter-company transactions have been eliminated so that correct third party revenue is arrived at. Based on such analysis and determination, global combined profit was arrived at 14.04% which has been found to be at ALP by the TPO. In the next step, the assessee has made certain suo-motu disallowance and uplifted profit rate....
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.... the transaction with AE and non-AE especially when the Arm's Length Prices have been determined by the TPO at 14.01% at all the transactional level and the entire revenue has been considered. In fact there are no Non-AEs revenues separately. Mr. Kaka reiterated that, otherwise also the income of Rs. 118,59,30,000/- has been taxed twice, once when the profit of the whole transactions which has been taken at 27.18% being part of PSM computation and second, taxed separately again by applying profit rate of 28%. PSM is applied only when there is contribution from multiple entities and revenue generated out of operations that are highly integrated. 13. Regarding double taxation of distribution revenue of Rs. 124,82,45,000, he submitted that the 50% of total distribution revenue is being taxed on protective basis in the hands of the Star Ltd., which in fact is the part of the PSM profit rate of 27.18%. Once, that is so, then again 50% of the distribution cannot be taxed on substantive basis, therefore, it is amounts to double disallowance. Regarding taxation of service fee and up-linking income, he submitted that, the assessee had offered tax @ 10.45% and 20.91%, respectively in ....
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.... only such profit alone for computing Arm's Length Price should have been accepted and disallowance under section 40(a)(i) made by the assessee in the return of income should not be considered. Further, if the assessee has paid the tax in respect of disallowance made under section 40(a)(i) in the return of income, the AO should be directed to grant reversal of grant of such disallowance in the year in which the taxes were consequently paid in accordance with the law. 16. On the other hand, Ld. CIT DR, accepted that, PSM is Most Appropriate Method (MAM) for determining the combined profit of the entities. However on the issue of segregation of non-AE advertisement revenues from the PSM Pool, he strongly relied upon the order of the DRP and submitted that under PSM only AE transaction have to considered for the combined profit and not at entity level. Regarding various disallowance made under section 40(a)(i), he submitted that, the same will be applicable retrospectively in view of the amendment brought in by the Finance Act, 2012. 17. So far as the chargeability of interest u/s 234B, he relied upon the decision of Delhi High Court in the case of DIT vs Alcatell Lucent USA....
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....payments for up-linking/maintenance of equipments and lastly, by disallowance of interest expenses. Such disallowances had led to upliftment of profit rate of 27.18%. Thus, the taxable income was shown @ 27.18% which has been apportioned amongst entities as per the percentage which has been incorporated in the foregoing paragraphs. The first and foremost issue is, whether the DRP was justified in segregating the revenues from non-AE and directed the AO to tax separately @ 28% by applying Rule 10 of the Income-tax Rules. Further, whether the disallowance under section 40(a)(i) is required to be made on account of various payments which either were already offered by the assessee or were part of combined profit determined on account of transactions of the entities and whether such a disallowance has led to multifold or double disallowances. 21. The Profit Split Method (PSM) is applied where operations of the related parties are highly integrated making the evaluation on individual basis is very difficult and all the parties owned valuable non-routine intangible assets for which no comparable data could be available and thereby making it impossible to apply other methods, which are....
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....rst instance together with the residual and profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction". From the plain reading of the above method, it is evident that, first step is to identify the combined net profit of the AE arising from the international transactions, in which they are engaged. Such a combined net profit is determined by taking into account all the transactions undertaken by all the AEs. In the second step, the relative contribution made by each of the entities which have contributed to the earning of such combined net profit is evaluated on FAR analysis of each entity and based on that, it is seen how such contribution should be evaluated by unrelated enterprise performing functions in similar circumstances; thirdly, the combined net profit is split between the related enterprise on the basis of any proportion to their related contribution which has been evaluated after carrying out FAR analysis and lastly, the profit which has been apportioned to the assessee is taken into account to arrive at Arm's Length Price analysis to the intern....
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....in INR Advertisement revenue 10,147,277,000 Distribution revenues 2,496,481,000 Syndication revenues 60,534,958 Total India revenues 12,704,292,958 Profitability percentage (determined separately) 14.04% Arm's length taxable profits 1,783,683,000 The above income has been then allocated amongst the various entities after considering further disallowances offered by assessee; Thirdly, the evaluation of contribution made by AEs has been done on FAR analysis on the basis of external factors and data, because based on such evaluation by unrelated enterprise performing comparable functions has been benchmarked to arrive at the ALP; and lastly, once the assessee has taken all the revenues and factored all the costs to arrive at combined net profit then it is not permitted to segregate part of the revenue and tax it again by applying profit rate of 28%. Such an exercise will only lead to double disallowance. Thus, action of the AO in pursuance of the direction given by the DRP is rejected. Further, we also do not agree with the revenue that, non-AE transactions needs to be determined under Rule 10, because once such an international tra....
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.... 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 (supra) 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. 25. Likewise, various 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 4....