TaxTMI 
TaxTMI 
2019 (3) TMI 460
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....final list of comparables, while making transfer pricing adjustment. For this Revenue has raised the following ground No. 1: - "1. On the facts and in the circumstances of the case and in law, the IA. CIT(A) Mumbai has erred in directing the A.O. to delete the transfer pricing adjustment of Rs. 7,33,23,877/- made to the content segment of the assessee on the ground that broadcasting companies were to be excluded and Creative Eye Ltd is to be included in the TPO set of comparables thus changing the Arm's Length adopted by the AO." 3. Briefly stated facts are that the assessee company is engaged in the export of entertainment programs/concern, acting as advertising agent in India for MTVA LDC, Singapore (MTVA) and Nickelodeon Asia Pte Ltd., Singapore (NICKA), Distribution of channels of MTVA and NICKA, Licensing and merchandising. In regard to the first issue of export of contents segment and transfer pricing adjustment made by the TPO while computing the Arms Length Price of International transaction of export of contents at Rs. 59,36,86,881/- as against the transaction disclosed by assessee at Rs. 52,03,63,004/- and thereby made adjustment of Rs. 7,33,23,877/-. The ....
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....ing Transfer pricing adjustment by observing in Para 4.4 to 4.6 as under: - "4.4 I have considered the TPO's order and the written and submission of the appellant. The core issues which needs to be addressed on this ground are (I) Whether TV broadcasting and Media Content are functionally one and the same. (ii) Whether it was fair and proper to exclude Creative Eye Ltd. which is Media Content Company but has suffered a loss this year. 4.5 Broadcasting and content are two different sets of business. Content means production of programs whereas Broadcasting includes up linking and down linking of the channels so that the ultimate viewer is able to watch the content on Television. The above is also supported from the codes allotted in Prowess database i.e. Broadcasting has been allotted NIC code (NIC code 92200) whereas the NIC code of entertainment content provider is 92490. The appellant is in the content business whereby it produces programs which are sold to its AEs. The AEs are in the broadcasting business whereby they uplink channels and provide down linking facilities so that the programs can be ultimately viewed by the television vi....
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....dcasters companies was pointed out and the assessee also filed a complete chart drawing the difference as under: - Sl No. Particulars Content Producer Broadcasting Company 1. Functions Producing T.V. Programs /TV Content which involves following activities: 1) Develop the show's elements, consisting of the concept, the characters, the crew and cast. 2) Get the scripts approved from Broadcaster and then start Pre- production which includes storyboarding, construction of sets, props, and costumes, casting guest stars, budgeting, acquiring resources like lighting, special effects, stunts, etc. 3) Filming of the episodes, adding visual and digital video effects to the film of the TV program and assembling the completed show in digital format. 4) After production, the show is handed over to the broadcaster. 1) Continuous monitoring of the viewing tastes of the audience and aligning the TV programme accordingly. 2) Conceptualizing T.V. programs on the basis of point no.1 above. 3) Directing the content producer to execute the production of the programs conceptualized in 2 above. 4) Broadcasting (i.e. Uplinking/ Downlinking) the content produced by t....
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....ation and regulation (increasing need for differentiated content due to the increase in the number of channels) 4) Competition with other channel owners for viewership, advertising spots, subscription revenue 5) Product liability risks - Providing all the specifications for the encryption and decoding of the channels thus bearing the risk of loss of goodwill if viewers do not received good picture quality. Continuously reviewing the existing system of operation and has to upgrade any change in technology from time to time. 6) Pricing risk: In many areas some cable operators enjoy a local monopoly status leading to non-standard pricing for the consumers. 8. We have gone through the distinction brought out by the CIT(A) and now assessee's Counsel before us between the broadcasting company and content producer which are functionally different. This is clear from the FAR analysis of content producer and broadcasting companies that functionally these are two different entities. Hence, we are of the view that the media content and TV broadcasting are totally dissimilar activities except the only linkage is that of media content is made only for the purpose of broadc....
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.... company rather the TPO himself admitted that in earlier years and subsequent years, the company has disclosed profits. The CIT(A) directed the AO/ TPO to include this company as comparables by observing in Para 4.7 and 4.8 as under: - "4.7 Further on CEL, it is evident that 'Abra ka Dabra' is a normal business activity of the company which has unfortunately contributed to the losses of the company. However, rejecting company simply because it is loss making is not the right approach. If a company is functionally similar the outcome of the function, either profit or loss; cannot be used as rejection criteria. CEL is a company which is into similar business as that of the appellant's content segment. It is observed from the Annual Report that its turnover has increased from Rs. 11.01 crores in FY 2003-04 to Rs. 17.30 crores this year. The reason for its loss is failure of its 3D plus movie "Abara Ka Dabra" produced during the year. Otherwise the company was making profits in the earlier years as well as subsequent years. Form the accounts, it is observed that it has positive net worth also. The various judicial pronouncements discussed above, also uphold this position. Furt....
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....unctionally same with the assessee. Even otherwise, in this year only, the loss is made by Creative Eye Limited due to loss of volume because of competitive pressure on account of production of 3D film 'Abra Ka Dabra'. Hence, we find no infirmity in the order of CIT(A) and the same is confirmed. This issue of Revenue's appeal is dismissed. 13. The next issue in this appeal of Revenue is against the order of CIT(A) deleting the Transfer Pricing adjustment made by TPO / AO on account of income from distribution i.e. distribution Revenue (payment segment). For this Revenue has raised the following ground No. 2: - "2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the A.O. to delete the adjustment of Rs. 4,47,43,612/- made to the distribution revenue (payment) segment of the assessee by holding that CUP method has been rightly adopted by the assessee and the TPO erred in adopting TNMM method." 14. Briefly stated facts are that the assessee has adopted the CUP method in regard to distribution of Revenue (payments to the AEs'), for comparing between assessee's share of Revenue with that of AE and with that of Sub distributor....
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....s. The appellant, during the course of hearing has also submitted that its arrangement with the AEs (50.50) has remained the same though it has incurred losses in the initial year and earned profit in the future years. This provides evidence that the transactions between the appellant and its AEs are not the reasons for the appellant's losses in the distribution segment. Conclusions regarding comparability in Transfer Pricing are subject to the analysis of the five "factors determining comparability" described in the OECD guidelines in respect of the Arms Length Principle. These are characteristics of property or services. - Functional Analysis - Contractual Analysis - Economic circumstances - Business Strategies The TPO has ignored the famous relating to Economic Circumstances and Business strategies. The fact that the appellant is showing better results every subsequent year makes these facts extremely relevant. 5.14 I have also analysed the submission made by the appellant and am of the view that since CUP, a direct method was available in the case of the appellant the TPO should have used the same instead of applyin....
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....at no adjustment should have been made. Further, on merits also the learned Counsel for the assessee stated that as per the distribution agreement i.e. agreement with Sub-Distributor Set Discovery Limited and Zee Turner Limited, the same is relating to granting of rights but distribute the channels are similar to the terms of distribution agreement. As per the terms of distribution agreement of the assessee that MTV, VH1 channel and Nickelodeon, the assessee has remitted 50% of distribution revenue calculated by it from the cable operators or the subscribers as their share of revenue. For the 50% of the Revenue is the share of the assessee from which it has to incur various distribution costs in India. There are two type of sharing of distribution revenue i.e. the first set of sub distributors i.e. Set Discovery Limited and assessee is in the ratio of 31.60 and 68.40. Similarly, the distribution ratio between Zee Turner Limited and the assessee is 37.50 and 62.50 respectively. Whereas, as per distribution agreement sharing arrangement with distribution i.e. between the assessee and MTV and Nickelodeon i.e. broadcasters 5:50 which is remained the same. We find that the assessee whil....
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....concur with the appellant that the nature of reimbursement are normal to the business of the appellant and the same is incidental activity and the appellant itself is being benefited by that activity. 6.7 Accordingly, the AO is hereby directed to delete the adjustment of Rs. 8,64,348/- made to the reimbursement of advertisement and sales promotion expenses and as a consequential effect of this order the arm's length price of the international transaction of reimbursement of advertisement and sales promotion expense is considered to be at Rs. 86,43,476/-." Aggrieved, Revenue came in appeal before Tribunal. 20. We find that as per agreement between the assessee and his AE in respect of advertising sale agency, it keeps 15% of gross sale revenue and for this income, the assessee bears the normal advertising and sales promotion costs. Further, in case of certain major marketing costs incurred by it at the instances of its AE it is entitled to reimbursement of the same. During the financial year, the assessee incurred certain major advertisement and sales promotion costs amounting to Rs. 86,43,476/- on behalf of its AE Nickelodeon the same was reimbursed by Nickelodeon as....
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....ddition by observing in Para 8.6 to 8.7 as under:- "8.6 I have considered the submissions made by the assessee. From the assessment order, it is evident that the genuineness of the advertisement expenditure being incurred by the Appellant has not at all been doubted by the Assessing Officer. 8.7 It is also observed that the claim for deductibility of such advertisement expenditure has been decided by the Hon'ble jurisdictional Mumbai Tribunal (ITA No. 5057/Mum/07) in the assessee's own case for AY 2003-04 wherein too the assessee was amongst other business activities was engaged in program export business and learned AO had disallowed some portion of advertisement expense. The Mumbai Tribunal has upheld the claim of assessee company and allowed entire expenditure incurred by the assessee company for advertisement and sales promotion." Aggrieved, now Revenue came in appeal before Tribunal. 23. Before us, the learned Counsel for the assessee stated that the issue is squarely covered by Tribunal's decision in assessee's own case vide order in ITA No. 5057/Mum/07 for AY 2003-04 dated 04.12.2010, wherein Tribunal vide Para 8 observed as under:- "8. We ha....