TaxTMI 
TaxTMI 
TaxTMI 
2019 (7) TMI 1318
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....bai( hereinafter called " the DRP") dated 22.12.2015 issued u/s 144C(5) of the 1961 Act . Earlier, the AO issued draft assessment order dated 25.03.2015 u/s 144C(1) read with Section 143(3) of the 1961 Act , wherein transfer pricing additions were made by the AO in the aforesaid draft assessment order based on order passed by learned Transfer Pricing Officer, Mumbai (hereinafter called "the TPO") u/s 92CA(3) of the 1961 Act. Subsequently, the assessee filed objections before learned DRP against the aforesaid draft assessment order dated 25.03.2015 passed by the AO , which were disposed off by learned DRP by issuing directions dated 22.12.2015 u/s 144C(5) of the 1961 Act. 2. The grounds of appeal raised by assessee in memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called "the tribunal") in ITA no. 1519/Mum/2016 for AY 2011-12, read as under:- "Based on the facts and circumstances of the case, Channel V Music Networks Limited Partnership (hereinafter referred to as the 'Appellant') respectfully craves leave to prefer an appeal against the order passed by the Deputy Commissioner of Income-tax (International Taxation) -2(1)(1) ('AO'....
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....evenues from non-AEs without appreciating the fact that the ALP rate of 21.26 percent determined by the learned TPO should equally apply to the revenues received by the Appellant from non-AEs. Ground number 9 erred in disregarding the arms' length profit computed by the learned TPO in hands of the Appellant and in re-determining the ALP of the international transactions, thereby exceeding his jurisdiction provided under Section 92CA(4) of the Act. Ground number 10 erred in not following/disregarding the findings of the learned TPO that based on Functions, Assets and Risks ('FAR') analysis, only 50 percent of the entire business profits of the Appellant from India sourced revenues should be apportioned in the hands of the Appellant and the balance 50 percent be apportioned in the hands of STAR Ltd. Ground number 11 erred in assessing total India source revenues of INR 3,65,32,08,142 in the hands of the Channel Companies( the assessee has in foot notes specified namely, itself , SIML, SAML and STEL as channel companies) after having taxed 50 percent of the India sourced revenues amounting to INR 1,82,66,04,071 (i.e. 50 percent of INR 3,65,32,08,142, bein....
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....SAR) e) Channel V Networks Limited Partnership (Channel V) The companies at (a) to (d) above were merged with Star India Private Limited(SIPL) with effect from 1st April 2009 vide Hon'ble Bombay High Court judgment dated 18.02.2010. 3.2.2 During financial year ended 31st March ,2011 , Channel V , had, interalia entered into following transactions with the other entities within Star Group: a) Agency services provided by Star Limited to Channel Companies in connection with sale of advertisement airtime, distribution of channels and syndication of content including services relating to pre-production, post production, playout , uplinking and transmission of the channel; b) Agency Services provided by SIPL to STAR Limited in connection with sale of advertisement airtime, distribution of channels and syndication of content in India; c) Grant of licence by STAR Ltd. to the Channel Companies for use of 'Star Mark' in combination with Channel Mark; d) Provision of management services by Star Ltd. to Channel Companies; e) Provision of broadcast operations related services by Star Ltd. to Vijay Television Private Limited (VTPL) Thus, Star Limited , has rendered agency....
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....ased on revised Form 3CEB , as under:- Sr No. Nature of Transaction AE Amount in revised From 3CEB Method 1 Procurement of content Star India Pvt. Ltd., INR 315,868,823 TNMM 2 Grant of franchise rights Star India Pvt. Ltd. INR 16,401,447 TNMM 3 Grant of license for distribution of channels Star Den Media Services Pvt. Ltd. INR 234,199,645 TNMM 4 Availing of management services Star Ltd. USD 355,565 TNMM 5 Availing services in connection with sale of advertisement airtime, distribution of channels and syndication of content, including services relating to pre-production, post production, playout, uplinking and transmission of the channel of the Assessee Star Ltd USD 3,567,972 TNMM 6 Sale of advertisement spots Star India Pvt Ltd. and Star CJ INR 242,044 CUP 7 Purchase of advertisement spots Star India Pvt. Ltd. INR 1,461,153 CUP This amount also includes fees received by the Assessee for providing services in connection with sale of advertisement airtime, distribution of channels and syndication of content, including services relating to pre-production, post production, playout, uplinking and transmission of t....
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....5.81% percent ( profit as percentage of income). A detailed computation was provided , which is reproduced as under:- Notes: 1. In the case of STEL and SAML, the global advertisement, distribution and syndication revenues for the period April 1, 2010 to May 31, 2010 have been considered. 2. In the case of SIML and V Partnership, India advertisement, distribution and syndication revenues for the period April 1, 2010 to September 30, 2010 have been considered. 3. In the case of SAR the global advertisement, distribution and syndication revenues for the month of April 2010 have been considered. 3.2.8 The assessee submitted that under PSM , there is no need to further benchmark this profitability against the comparables. It was claimed that with a view to avoid litigation and to demonstrate its bonafide, the assessee compared its profitability with 9 external comparables. The assessee had claimed that average margin of the comparable was 8.47% based on weighted average for earlier year. The TPO asked assessee to give updated margins of these comparables. The updated margin of these 9 comparables for the year ended 31.03.2011 as submitted by assessee was 12.87%, which is a....
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....26% which is profit rate to be applied to revenue, leading to transfer pricing additions to the tune of Rs. 79,02,816/- proposed by TPO , vide its order dated 28.01.2015 passed u/s 92CA(3) of the 1961 Act. The said order passed by TPO was forwarded to the AO for framing draft assessment order. 3.2.12 The AO while framing draft assessment order also observed that methodology adopted by assessee i.e. considering the profitability based on the audited global financial statements is not in accordance with provisions of the 1961 Act read with Income-tax Rules, 1962. The AO rejected said methodology and proceeded to compute income as per provisions of the 1961 Act read with 1962 Rules. The AO keeping in view transfer pricing provisions of the 1961 Act accepted the additions as were made by TPO so far as its transactions with AE's. With respect to transactions with non AE's it was observed by the AO that the assessee has not maintained India specific books of accounts , the AO proceeded to compute Arms length profitability separately. The AO followed the directions of the learned DRP for AY 2007- 08 in assessee's own case to compute arms length price of 28% as reasonable in respect of t....
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.... 7,32,43,143/- Other income offered to tax by Assessee in return of income 1,64,01,447 Total Assessed Income 8,96,44,590/- 4. The assessee being aggrieved by draft assessment order dated 25.03.2015 passed by the AO u/s 144C(1) read with Section 143(3) of the 1961 Act, filed objection with learned DRP and made detailed submissions and learned DRP issued directions dated 22.12.2015 u/s 144C(5) of the 1961 Act , as under:- "8. Discussions and Directions of DRP: We have considered the grounds 3, 8, 9 & 10 of objection raised by the assessee and the submission made by it. We find that it is a recurring issue and similar additions have been made by the AO/TPO in the earlier years also which have been upheld by the DRP in the respective years. Respectfully following the decision of DRP in A.Y. 2009 -10, 2008-09 and earlier years, the addition made by the AO is confirmed and grounds of objection 3,8,9 & 10 raised by the assessee are rejected. 9. Ground of objection No.4: The learned Joint Commissioner of Income-tax (Transfer Pricing) -2(2) {'TPO'} and the learned AO erred in determining the arms' length profitability rate ('ALP rate'} of 21.26% as agains....
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....fit so arrived at vis-a-vis the comparables since the profitability so arrived at as per PSM represents the ALP on transactions effectively with third parties. 7 Without prejudice to the submissions that once PSM is applied, there is no requirement to apply other method, it is submitted that with a view to avoid litigation and to demonstrate its bonafide, STAR Group Entities suo moto compared the consolidated global profit rate of 15.81% with the profit earned by the comparables. 8 In this regard, it is submitted that FICAPL and the Channel Companies identified the following comparables and considered their weighted average margin for benchmarking their transaction. Sr. No. Company name Weighted Average of 2009, 2010 and 2011 (net profit on revenue) 1 TV Today Network Ltd 15.16% 2. Zee News Ltd 15.17% 3. I/TV Software Communications -3.10% 4. Ibn 18 Broadcast Ltd {TV18 Broadcast Limited) 4.11% 5, Maa Television Network Ltd 16.16% 6. India Vision Satellite Communications Ltd -11.63% 7. Zee Entertainment Enterprise Ltd 26.47% 8. Malayalam Communications Ltd 29.79% 9.. Raj Television Ltd -16.68% Total 8.38% 9. Further, w....
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....segment from the consolidated financial of the Company has been considered. iv. ibn18 Broadcast Ltd (TV18 Broadcast Ltd.) ibn18 Broadcast Limited was incorporated in the year 2005 as Global Broadcast News Private Limited. The Company operates in the general news and entertainment space with popular general news channels CNN-IBN, IBN7 and IBN Lokmat (a Marathi news channel in partnership with the Lokmat group). It also operates a joint venture with Viacom, called Viacom18 which houses the MTV, VH1 and Nickelodeon channels in India, Viacom18 Motion Pictures, the filmed entertainment operation and COLORS, India's leading Hindi general entertainment channel. Thus, the Company is in the business of broadcasting, telecasting, relaying and transmitting general news programs Given that the company is engaged in the business of broadcasting, for the purpose of benchmarking, we have considered the 'Broadcasting and Content' segment from the consolidated financial of the Company. v. Maa Television Limited ('Maa Television' or 'the Company'} Maa Television was formed in the year 2001 and the channel MAA TV, a leading Telugu general entertainment chann....
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....ital plus, an exclusive movie channel, three Raj Musix, Music Channels, one in each southern regional languages and three 24X7 News Channel. The Company gets its revenue primarily form advertisement and subscription of channels. 11 Based on the analysts of the comparable companies at the time of transfer pricing assessment, the comparable profit/ loss was found to be at 8.38% on a weighted average basis and profit of 12.87% on a single year data basis. TRANSFER PACING ASSESSMENT 12. The learned TPO, in his order, has accepted that PSM is the most appropriate method in the case of Assessee and its Group Entities. 13. However, the learned TPO, rejected the following four comparables out of the nine comparbles selected by STAR Group Entities on the grounds as follows: * UTV Software Communications Ltd: The learned TPO held that company is engaged in businesses apart from broadcasting and hence the revenue stream of the company is not comparable to the Assessee, Hence, it cannot be taken as a comparable; * Ibn 18 Broadcast Ltd: The entity is a consistent loss making entity and hence is not fit to be considered as a comparable; * India Vision Satellite Communication....
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....ts of the aforesaid companies, it is evident that they are incurring expenses such as telecast and uplinking fees, studio and equipment hire charges, content expenses. Such expenses are typically incurred by companies engaged in television broadcasting. » Since the above companies operate in the open market, they would bear all the risks similar to that borne by STAR Group Entities 19 In light of the above and given that the operations undertaken by the STAR Group Entities and the third party comparables are similar, it is submitted that the set of comparable companies considered for the purpose of benchmarking by the Assessee is appropriate and should be accepted. 20 Further, we have provided below our detailed arguments on each of the comparables so rejected by the Learned TPO in his order. i. UTV Software Communications Limited The Learned TPO has rejected the company on the premise that Schedule 21 (h) (Revenue Recognition) in the standalone financial indicates that the company is also engaged in the business of animation programming, dubbing and home video sales, etc and hence cannot be comparable to the Assessee. In this regard, we wish to submit that the....
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....s geographical segments as(i) domestic and (ii) overseas. The secondary segment information has been disclosed accordingly, {ii} Segment Identification : Business segments have been identified on the basis of the nature of the products/services, the risk/return profile of individual businesses, the organisational structure and the Internal reporting system of the group. (iii) Reportable Segments : Reportable segments have been identified as per the criteria prescribed in Accounting Standard 17 - 'Segment Reporting' as specified in the Companies (Accounting Standards) Rules, 2006, (ivj Segment Composition: (a} Television segment comprises television content, airtime sales, dubbing services and the television channel broadcast business: (b) Movies segment comprises the film production, distribution and syndication business; (c) Games and Interactive segment comprise the online, consul, mobile gaming business and the web & mobile business; In light of the above, since the services as provided by UTV Software Communications Limited under the said segment are similar to the activities undertaken by the STAR Group entities, we request your Honor to accept the....
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....ge of results and not rejecting the comparable companies who incur losses for the following reasons: * Proviso to sub-section (2) of section 92 of the Act provides that: "Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices...." The range of prices reflects a proper representation of the comparables functioning in the open market which are affected by market forces. If the industry includes loss making companies then the same should be included in the arm's length margin since it is nothing but as an actual representation of the prevailing market conditions in which the particular assessee is operating. Accordingly, when determining the average price/ margin of an industry, all companies in the industry (whether incurring losses or earning profits) which are comparable to the Assessee need to be considered so that the arithmetic mean is representative of the normal profits/losses earned by companies in that industry. The ALP cannot be tied to the arithmetic mean of the operating margins of only profitable comparable companies in any industry, when th....
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.... where the profitability is linked to the viewership which could fluctuate thus resulting in a volatile profitability on a year-on-year basis. Accordingly, just because a company suffers losses in certain years, it cannot be considered to be consistently loss making. Thus, the industry in which a particular company operates shall also be given due consideration. Accordingly, it is prayed that the submission made by the Assessee should be accepted and Raj Television Limited dropped by the learned TPO be directed to be reinstated / accepted. iii. Ibn 18 Broadcast Limited The learned TPO rejected Ibn 18 Broadcast Ltd on the grounds of the company being a consistently loss making company. Further, the learned TPO has also stated that the company has accumulated lasses of Rs. 2,28,35,92,931/~ as on 31st March 2011. In this regard, we wish to submit that the contention of the learned TPO that the company is a consistently loss making company is not appropriate. The TPO has considered the fact that the company has been toss making in the previous two years i.e. FY 2008-09 and FY 2009-10 and has categorised the company to be a persistent loss maker. However, we wish to bring it to....
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.... for AY 2007-08, the learned TPO had accepted the entire comparable set considered by the STAR Group Entities in its Transfer Pricing Study. However, in AY 2011-12, the learned TPO rejected, UTV Software Communications Limited, Ibn 18 Broadcast Limited and Raj Television Limited on the ground that the comparables are loss making or are non-comparable to the STAR Group Entities. Thus, it is submitted that the learned TPO has adopted a pick and choose approach in respect of selection of comparables for AY 2011-12, which is not in accordance with the law. It is submitted that the action of the learned TPO in rejecting the above three comparables for AY 2011-12 is not in line with the 'principle of consistency', 23 In this connection, the Assessee humbly submits that 'consistency' is generally considered as the hallmark of law and justice, and the taxpayers are thus entitled to organize their affairs in a manner they perceive to have been accepted by the authorities over a period of time. If the learned authorities under the Act wish to take a different view for the two periods in question from the periods proceeding thereto and following thereafter, adequate justifi....
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.... been accepted by the department In the subsequent assessment year i.e. 2004-05. Therefore in our view comparables selected by the assesses have to be adopted for the purpose of computation of transfer pricing adjustments this year also." Thus, this shows that if the learned TPO has used a comparable set in a subsequent year for the purpose of benchmarking the transaction similar to one in a preceding year, so long as the fact pattern and the FAR remains the same, the same set of comparables should be used. * Sony India Pvt Ltd Vs ACIT (Delhi Tribunal) "We further find that the Tribunal reiterated the same order in assessment years 2003-04 and 2004-05, The order, reproduced above, deals with the controversy at length. These preceding orders are in the nature of binding precedent for us and even for the ld. CIT(A)." Birlasoft (India) ltd Vs DCIT (Delhi Tribunal) "In the present order passed by the TPO, he has not given any reason to deviate from the method accepted by him in the immediately preceding assessment year, in the course of hearing of this appeal, the learned DR has also not been able to point out any reason for such deviation except contending that the segment....
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....ons for the assessment year under appeal under the well accepted principles of rule of consistency as propounded by Hon'ble Supreme court judgement in the case of Radhasoami Satsang 82 ITR ..., The nature of the assesses international transactions being same for the last six years an unjustified approach adopted by TPO/DRP is unsustainable" 27 Without prejudice to the above objections, it is also submitted that it is a settled position in law that when the extreme loss making companies are excluded, at the same time even, the extreme profit making companies are also to be excluded. For this proposition, the Assessee relies on the following case laws: * DCIT vs. Quark Systems Private Limited {Chandigarh} (SB) (38 SOT 207} "Even if the taxpayer or its counsel had taken Datamatics as comparable in its T. P. Audit, the taxpayer is entitled to point out to the Tribunal that above enterprise has wrongly been taken as comparable. In fact there are vast differences between tested party and the Datamatics. The case of Datamatics is like that of "imercius Technologies" representing extreme positions. If Imercius Technologies has suffered heavy losses and, therefore, it is not tr....
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....wever, it is the claim of the assessee that the company has made a profit of 4.33% on its revenue in the Broadcasting and Content segment. The assessee has not submitted any working in support of claim. From the examination of annual report of the company we are unable to accept the claim of the assessee because income from operations reported by the company is Rs. 2,43,25,58,348/- whereas its production administrative and other cost is Rs, 1,69,72,26,570/- and personal expenses are Rs, 80,53,27,884/-. Other income of Rs. 9,51,3 9,418/- reported by the company is not at all related to the operations of the company, However, AO/TPO is directed to accept the company is a valid comparable if the assessee is able to demonstrate that the company has earned a profit in the F.Y. under consideration, UTV Software Communications ltd. The TPO has rejected this comparable because the company is not functionally comparable with the assessee whereas it is the claim of the assessee that it has considered accounts of only television segment of the company which is comparable to the business of the assessee. In this regard, it is seen from the page 50 of the annual report of the company that....
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....O not only has the power but also bounden duty to determine ALP by using the current financial year data in the comparability analysis, even if such data was not available to the assessee in the public database at the time of preparation of transfer pricing report. In the case of CIT vs British Paints India Ltd reported in 188 ITR 44, it has been held that it is not only the right but the duty of the Assessing Officer, to act in exercise of his statutory power, for determining, what in his opinion, is the correct taxable income. The analysis of the assessee has been duly examined before arriving at an opinion regarding the study carried out by the assessee. The TPO has commented on the use of multiple year data. He has dealt with each of the comparable selected by the assessee and has pointed out the defects in it. In any case, the disputed comparables are being dealt with us subsequently. In view of the facts and details narrated in the order, it is clear that the assessee does not comply with the provisions of section 92C(3) of the Act. So far as the use of single year data is concerned, Rule 10B(4) very clearly states that the data of the comparable transactions should be ....
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.... (i) AZTEC Software 107 ITD (AT) 141 (SB) (Bang), (it) Mentor Graphic 109 ITD 101 (Del) and (iii) Honeywell Ltd. 209-TI0L-104 (AT) (Pune). In view of the same, the assessee's contention is rejected. It may be mentioned that the issue is also covered against the assessee by the judgement delivered by the Hon'ble High Delhi in the case of Chryscapital Investment Advisors (India) Pvt. Ltd. in ITA NO 417/2014." The DRP has also confirmed application of arm length profit @28% on assessee's transactions with non AE based on the decision of learned DRP for earlier years. The AO after considering the directions of DRP u/s. 144C(5) dated 22.12.2015, passed assessment order dated 14.01.2016 u/s 144C(13) read with Section 143(3) of the 1961 Act. 6. Aggrieved by an assessment framed by the AO vide assessment order dated 14.01.2016 passed u/s 144C(13) read with Section 143(3) of the 1961 Act , in pursuance to Directions issued by learned DRP u/s 144C(5) of the 1961 Act, the assessee has now filed an appeal before the tribunal. At the outset Ld. Senior Counsel for the assessee submitted that both the appeals filed by different assessee's before the tribunal raises identical iss....
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....aced and it was brought to our notice that DRP directed AO in this case to accept IBN18 Broadcast Ltd as a comparable, if the assessee is able to demonstrate that the said company IBN18 has earned profit for F.Y. under consideration, which was accepted by AO while framing aforesaid assessment order dated 29.01.2016 passed u/s 143(3) read with Section 144C(13) of the 1961 Act based on the report of the TPO agreeing with a view of leaned DRP that this comparable is to be included while computing ALP as IBN18 Braodcast Limited is not a persistent loss making company. Our attention was drawn to page no. 392 and 393 of the paper book, wherein in vide said assessment order , the AO accepted the directions of DRP , by holding as under:- "2. The assessee approached the Dispute Resolution Panel-1, Mumbai (the DRP] by filing objections against the above draft assessment order. The DRP issued direction under 144C(5) of the Act vide its order dated 22.12.2015, received in this office on 30.12.2015, as under: **** 12. IBN 18 Broadcast Ltd. The TPO has rejected this comparable because It has been incurring losses in lost two years and it has also incurred losses in the F.Y. under con....
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....y IBN18 Broadcast Limited in this segment during the year under consideration, otherwise at overall level there was a loss in three years. Similar contentions were raised for inclusion of Raj TV as comparable while computing ALP. So far as second issue , it was submitted that Rule 10 of the 1962 Rules was applied by the authorities below and arm length profit was applied @28% on non AE transactions entered into by the assessee. The assessee drew our attention to order dated 02.02.2016 passed by tribunal for AY 2007-08 in ITA no. 8683/Mum/2011 in the case of group company viz. Star Limited which is placed in the legal paper book. Our attention was drawn to conclusions arrived at by tribunal at para. 20-23 of the said order placed in the legal paper book wherein the tribunal ordered for deletion of adjustment to profit by applying a profit rate of 28% to its transactions with non-AE's, in the case of the aforesaid order of Star Limited, which is reproduced here under:- "20. We have considered the rival contentions raised by the parties, perused the relevant finding given in the impugned order and material placed on record. We have already discussed succinctly the relevant facts an....
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.... 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 based on establishing high degree of comparability with uncontrolled comparables. PSM is generally applied in cases involving multiple transactions amongst associated enterprises (AEs) which are so inter-related and closely linked or continuous that they cannot be evaluated on separate basis for the purpose of determining Arm's Length Price of any transaction. Rule 10B(1)(d) of the Income-tax Rules prescribes the method to be applied in the following manner:- "(d) profit split method, which may be applicable mainly in international transactions involving transfer of unique intangibles or in multiple international transactions which are so interrelated that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction, by which- (i) the combined net profit of the associated enterprises arising from the international transaction in which they are engaged, is determined; (ii) the relative contribution made by each of the associated enterprises ....
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.... 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 international transactions. The object of detailed functional analysis in such a method is to assess the related contribution and risk taken by each party and thereby assigned income accordingly. 22. Here in this case, so far as FAR analysis of relative contribution made by each of the entities and apportionment of combined net profit based on evaluation of their contribution is concerned, same is not in dispute. First of all, for determination of combined profit, net revenues from all the transaction relating to generation of revenues are to be taken into account. Here in this case, it has been contended that all the revenue streams have been from inter-se transactions arising from the functions performed amongst the AEs only. Even the generation of ad revenues is purely from the sale of airtime in Channel companies. Thus, the ad revenue is arising from the integrated activities only. After taking the combined net profit of the group as a whole from all the international transactions, the combined net profit has been taken. Thereafter, the eff....
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....do not agree with the revenue that, non-AE transactions needs to be determined under Rule 10, because once such an international transactions are covered under section 92 then there is no need for separate determination of income when all the revenues have been taken for the determination for ALP. Under section 92C(2), the manner prescribed is under Rule 10B and not Rule 10. Otherwise also, Rule 10 is applicable only when the actual amount of the income accrued or arising to a non-resident cannot be definitely ascertained, which here in this case is not the case of the revenue that, the income of the assessee cannot be determined. 23. Here, in this case, the DRP has accepted the PSM for 80% of the adrevenue in PSM Pool, therefore, it would not be proper that for the balance, a separate determination of profit is required and that to be at a higher profit rate of 28%. Once the combined net profit has been arrived at by taking into account all the transactions of AE as well as non-AE which is factored into all the costs and revenue then to separate out non-AE transaction over and above such a profit determined is not desirable. Thus, we hold that any income if at all from non-AE c....
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....t of same advertisement stream from STAR Ltd. The TPO has totally approved the computation methodology of the PSM of benchmarking of transactions with AE including all inter-related international transactions relating to advertisement and distribution streams of income. The Assessee made full disclosure of the fact that its commercial uplifted profitability is 17.30% as per PSM which is as per section 92CA (4) of the Act. Once the TPO has accepted the methodology neither the AO nor the DRP can change the same in view of Section 92CA (4). The combined net profit as per the PSM under Rule 10B (1) (d) at 17.30% has been found to be at arm`s length except for the exclusion of 3 companies for 10% turnover filter applied by the TPO. On the present facts, all the international transactions in respect of the advertisement and distribution stream cannot be separated. The DRP`s reliance on Rule 10 of the Rules is contrary to the provisions of the Act and Law since if it is accepted that transactions are closely inter related then they must be included under PSM in accordance with the Act The arm`s length price determined by the TPO is 22.57% and considering the profits earned from Non-AE`s a....
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.... accepted by Bench . It was also submitted that with respect to other appeal in ITA no. 1637/Mum/2016 for AY 2011-12 in the case of Star International Movies Limited, facts are similar to appeal in ITA no. 1519/Mum/2016 and similar contentions shall apply . 6.5 The Ld. DR on the other hand submitted that the issue be decided on merits in accordance with law and the learned DR would place reliance on orders/directions passed by the authorities. 7. We have considered rival contentions and have perused the material on record including cited case laws. We have observed that the assessee is a non-resident limited liability partnership firm and is a tax resident of Hong Kong belonging to Star Television group of cases. The assessee has also claimed to be owner of satellite television "Channel' being Channel V and also owner of content broadcast on this Channel. The dispute between rival parties have its germane to additions made to income by invocation of transfer pricing provisions wherein Arms Length Price was computed of international transactions entered into by assessee with its Associated Enterprises (AE's) in India and consequently additions were made to the income of the asse....
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....see derived revenue from various markets , a significant portion arising from the Indian market , inter-alia, from the following : a) Sale of Advertisement time of the television channels. b) Distribution of television channels c) Syndication of content on the channels. 7.5 The assessee has transaction with its associated entities(AE's) within Star Group which were reported in Form No. 3CEB but later revised Form No. 3CEB was submitted by assessee, as detailed hereunder vide Revised Form No. 3CEB :- Sr No. Nature of Transaction AE Amount in revised From 3CEB Method 1 Procurement of content Star India Pvt. Ltd., INR 315,868,823 TNMM 2 Grant of franchise rights Star India Pvt. Ltd. INR 16,401,447 TNMM 3 Grant of license for distribution of channels Star Den Media Services Pvt. Ltd. INR 234,199,645 TNMM 4 Availing of management services Star Ltd. USD 416,845 TNMM 5 Availing services in connection with sale of advertisement airtime, distribution of channels and syndication of content, including services relating to pre-production, post production, playout, uplinking and transmission of the channel of the Assessee Star Ltd USD 2,662....
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....idered. 7.8 The assessee had claimed that average margin of the comparable was 8.47% based on weighted average for earlier years while based on the financials for the year under consideration , the arithmetic mean of comparables was computed @ 12.87% , which is as under:- S.No. Company Margine on revenue (March 2011) 1. T.V. Today Network Ltd. 12.50 2. Zee News Ltd. 13.31 3. UTV Software Communications Ltd. 5.99 4. Ibn 18 Broadcast Ltd 4.33 5. Maa Television Network Ltd. 19.28 6. India Vision Satellite Communication Ltd 20.23 7. Zee Entertainment Enterprise Ltd. 28.30 8. Malayalam Communication Ltd. 32.93 9. Raj Television -21.00 Arithmetic Mean (%) 12.87 7.9 The TPO after going through the annual reports of the comparables rejected four comparables out of nine comparables submitted by assessee, by observing as under:- * "UTV Software Communications Ltd: The standalone financials of the company show (Schedule 21(h)-Revenue Recognition) that the company is also into the business of animation programming, dubbing and home video sales on delivery basis. These revenue streams are different from that of the assesse. Hence, this is not a fit c....
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....bserved that profitability was determined by Revenue in case of Star Group for the preceding years as provided below: AY In respect of transactions with Associated Enterprises In respect of transactions with non-Associated Enterprises 2007-08 27.18% 28% 2008-09 22.57% 28% 2009-10 13.54% 28% 2010-11 21.26% 28% 7.13 The AO had observed that the Star Group has offered for taxation income pertaining to entire India specific Revenues( from AE and non AE's) by applying the arms length profitability rate of 15.81%. The AO followed directions of learned DRP for AY 2007-08 and held that so far as transactions of the assessee with AE is concerned directions of the TPO are binding , but for transaction of the assessee with non AE's , Rule 10(i) of the 1962 Rules is applicable and as details of India specific were not forthcoming from assessee, the AO computed income @28% for taxing its transactions with non-AE. The AO adopted profitability of 28% for non-AE receipts while profitability rate of 21.26% was determined and applied by AO in respect of business income( Advertisement and distribution income) with reference to its international transactions with AE's. 7.13 T....
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....d on record that DRP directed AO in this case to accept IBN18 Broadcast Ltd if the said tax-payer is able to demonstrate that the said company has earned a profit for F.Y. under consideration, which was accepted by AO while framing aforesaid assessment order dated 29.01.2016 passed u/s 143(3) read with Section 144C(13) of the 1961 Act based on TPO agreeing that this comparable is to be included while computing ALP as IBN18 Braodcast Limited is not a persistent loss making company. We have observed that wherein in vide said assessment order dated 29.01.2016 in the case of Star Limited, the AO accepted the directions of DRP , by holding as under:- "2. The assessee approached the Dispute Resolution Panel-1, Mumbai (the DRP] by filing objections against the above draft assessment order. The DRP issued direction under 144C(5) of the Act vide its order dated 22.12.2015, received in this office on 30.12.2015, as under: **** 12. IBN 18 Broadcast Ltd. The TPO has rejected this comparable because It has been incurring losses in lost two years and it has also incurred losses in the F.Y. under consideration. However, it is the claim of the assessee that the company has made a....
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....s , wherein the said IBN18 has reported segment consolidated profit for Broadcast Content at Rs. 32,75,01,370/- while consolidated revenue in this segment are to the tune of Rs. 794,44,19,145/- . The IBN18's second segment is Film Production and Distribution at consolidated level, wherein consolidated turnover is Rs. 9,78,01,512/- wherein segment consolidated losses in this segment were to the tune of Rs. 4,02,69,198/-. Thus, IBN18 has earned consolidated profit in this segment at consolidated level which is prior to interest expenses. Thus, it cannot be said that the said comparable IBN18 is persistently loss making company, so far as consolidated financial accounts are concerned. However, while going through standalone audited financial accounts of the said IBN18, wherein at page 67/pb is the schedule 11 where income of operations are stipulated as income from Advertisement and subscription income , sale of content and equipment rental as well other receipts. Thus, at standalone, this entity is comparable as having only one segment which is comparable to assessee, In the segment reporting at para 12 to notes to accounts/schedules forming part of accounts, it is stipulated that th....
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....ain for denovo adjudication for its inclusion/exclusion as to comparable for determining ALP, after considering standalone as well consolidated results vis-à-vis FAR analysis.The assessee is directed to present all explanations/evidences to substantiate for its inclusion as comparable. The AO/TPO are directed to adjudicate on this comparable unhindered by any opinion expressed by us in this order, on merits in accordance with law. We order accordingly. 7.19 With respect to inclusion of Raj Television Network Limited as comparable, we have perused the audited financial statements of the said company Raj Television Network Limited for FY 2010-11 which is placed in paper book at page 130-167. The Director Report of said company is reproduced hereunder:- "Financial Results: The Financial Performance of your Company for the year ended March 31. 2011 is summarized below: Particulars For the year ended 31 March 2011 31* March 2010 Total Income 4509.53 4617.68 Total Expenses 5105.72 5854.54 Operating Profit / (Loss) (EBIDTA) (596.19) (1236.86) Profit / (Loss) alter Depreciation and financial charge (996.84) (1621.57) Prior Period Adjustment ....
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....er book. We have observed that tribunal in its order at para 20-23 in the case of the aforesaid Star Limited, has held as hereunder:- "20. We have considered the rival contentions raised by the parties, perused the relevant finding given in the impugned order and material placed on record. We have already discussed succinctly the relevant facts and the background of the case. The whole issue boils down to the manner in which Profits Split Method (PSM) is to be applied. STAR Ltd and Star Channel companies derive revenues from the distribution of T. V. Channels and sale of advertisement time to be aired on these channels. The role and functions performed by these companies have been elaborated in the earlier part of the order. All the transactions leading to the earning of various streams of revenues are amongst the entities only and are highly integrated. That is why, there is no dispute between the Revenue and the assessee that the Most Appropriate Method (MAM) for benchmarking the profits of the entities is PSM and the allocation of the combined net profit amongst the entities have been apportioned on the basis of their role and functions performed, risks assumed and assets dep....
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....ed that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction, by which- (i) the combined net profit of the associated enterprises arising from the international transaction in which they are engaged, is determined; (ii) the relative contribution made by each of the associated enterprises to the earning of such combined net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances; (iii) the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub-clause (ii); (iv) the profit thus apportioned to the assessee is taken into account to arrive at an arm's length price in relation to the international transaction: Provided that the combined net profit referred to in sub- clause (i) may, in the first instance, be partially allocated to each enterprise so as to provide....
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....ions performed amongst the AEs only. Even the generation of ad revenues is purely from the sale of airtime in Channel companies. Thus, the ad revenue is arising from the integrated activities only. After taking the combined net profit of the group as a whole from all the international transactions, the combined net profit has been taken. Thereafter, the effects of inter-company double accounting of revenue streams are eliminated so that the correct third party revenue is arrived at for the purpose of benchmarking the profitability. It also ensures that inter-company costs, profits or losses are eliminated and correct quantum of profit based on third party revenue and costs can be arrived at. If such an exercise is not done then a situation would arise whether among the transactions between the related entities true and correct picture of the profits can be determined and whether they are at Arm's Length Price will always be a subject matter of suspicion. Here in this case, what the AO has done is that, firstly, he has taken the combined net profit of 27.18% for whole of the transactions and thereafter, he has segregated the so called non-AE revenue and thereby applying the profit @....
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.... that to be at a higher profit rate of 28%. Once the combined net profit has been arrived at by taking into account all the transactions of AE as well as non-AE which is factored into all the costs and revenue then to separate out non-AE transaction over and above such a profit determined is not desirable. Thus, we hold that any income if at all from non-AE cannot be taxed separately by applying net profit rate of 28%, because it has already included in the combined profit of entire international transaction of the entities and have already been taxed on the profit rate of 27.18%. Thus, the addition of Rs. 118,59,30,000/- cannot be separately made and we direct to delete the addition." 7.20.2 We have also observed that tribunal vide order dated 16.09.2016 in the case of assessee in ITA No. 7679/Mum/2012 for AY 2008-09 has dealt with additions to the income by computing profitability @28% on non AE transactions, which is reproduced as here under:- "4. Ground No.5 to 9 relate to determination of higher profitability for advertisement receipts received by STAR Ltd. on the ground that it was a Non-Associated Enterprise (Non-AE) receipt, hence, outside PSM. 4.1 We have heard the....
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....pect of the advertisement and distribution stream cannot be separated. The DRP`s reliance on Rule 10 of the Rules is contrary to the provisions of the Act and Law since if it is accepted that transactions are closely inter related then they must be included under PSM in accordance with the Act The arm`s length price determined by the TPO is 22.57% and considering the profits earned from Non-AE`s arbitrarily at 28%, is unjustified as there can not be such variation between profit from transactions with AEs and transactions with NonAEs. If it is a Non-AE transaction then the question of estimation cannot arise. The assessee also relied on the decision in the case of Globe One India Pvt Ltd. 44 Taxmann.com 100 ( ITAT Del). 4.4 On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand of the DRP/TPO,which we have already noted in earlier paras and is not being repeated for the sake of brevity. 4.5 We have heard the rival parties at length and considered the same carefully. We noticed merit in the submissions of the Ld. AR for the assessee, as the combined net profit as per the PSM under Rule 10B (1) (d) at 17.30% has been found to be at arm`s length except ....