TaxTMI 
TaxTMI 
2020 (11) TMI 93
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.... 3 ('Hon'ble DRP'), Mumbai, on the following grounds: On the facts and circumstances of the case and in law, the Learned AO, based on the directions of the Hon'ble DRP has: General Ground erred in assessing the total income of the Appellant at Rs. 436,47,34,833 against Rs. 22,51,21,420 as computed by the Appellant in its return of income; 2. erred in making a transfer pricing adjustment of Rs. 413,96,13,415 to the total income of the Appellant on the premise that the international transactions entered by the Appellant with its associated enterprises ('AEs') were not at arm's length; Reference made to the Transfer Pricing Officer 3. erred in referring the Appellant's case to the Learned Transfer Pricing Officer ('TPO') under Section 92CA(1) of the Act, without satisfying the conditions specified therein; TPO erred in characterizing the distribution fee paid by MSMD to its AE as royalty 4. erred in characterizing the distribution fee paid/ payable by the Appellant to its AES to be in the nature of royalty; Rejection of economic analysis undertaken by the Appellant ....
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.... DRP/ learned TPO to benchmark the Appellant's international transactions: 12. erred in not subtracting the waiver of license fee of Rs. 213,750,000 by Neo Sports Broadcast Private Limited from the subscription revenue in third party segment so as to bring the third party segment on the same footing as AE segment since it is an extra-ordinary item; 13. erred in not appreciating that where internal comparables are considered as suitable comparables, net margins should be considered over gross margins to benchmark the international transaction of distribution fee paid to AEs; 14. erred in computing the net margin earned by the Appellant from distribution of AE channels at 1.32% and non AE channels at 18.53%; 15. erred in not appreciating that turnover' is not an appropriate allocation key to allocate the common overheads; 16. erred in not granting economic adjustments on account of the differences in AE and Non AE segment; Short grant of tax deducted at source (TDS) 17. erred in short granting credit of taxes deducted at source of Rs. 2,64,14,172 while computing the tax liability for the year, Interest un....
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....id by the assessee to its AE's were payments in the nature of royalty was not adjudicated upon by the Tribunal, the assessee had therefore filed a miscellaneous application. After necessary deliberations, the Tribunal disposed off the assessee's miscellaneous application vide its order passed in M.A.No.731/Mum/2018, dated 14.03.2019 and recalled its order that was passed while disposing off the assesse's appeal for the year under consideration in ITA No. 1935/Mum/2017, dated 02.05.2018. At this stage, we may herein observe that involving identical facts in the assessee's case for the immediately preceding year i.e A.Y 2011-12, the Tribunal that was seized of the same issue, viz. as to whether or not the distribution fees paid by the assessee to its AE's were to be treated as payments in the nature of royalty, had instead of adjudicating the same restored the matter to the file of the TPO for fresh benchmarking of the international transactions of the assessee. Further, the miscellaneous application filed by the assessee in A.Y 2011-12 seeking recall of the order of the Tribunal for adjudication of the aforesaid issue on merits was dismissed. Assailing the order passed by the Tribun....
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....ort 'MSM India') (now known as Sony Pictures Networks India Pvt. Ltd.) AND Discovery Communications India, and is involved in the distribution of channels to Local Cable Operators ('LCOs')/Multi System Operators('MSOs')/DTH Operators. The assessee company aggregates and distributes a bouquet of AE and third party channels, viz. general entertainment channels, lifestyle channels, animation channels, kids channels, entertainment channels, knowledge channels, music channels and news channels. The assessee company contracts directly with its AEs for distribution of its channels in India. Under the said distribution agreements the assessee collects subscription revenues and would remit 90% of the same to its AEs as license fee, and retain the balance 10% of the amount 4. The assessee during the year under consideration had e-filed its return of income for A.Y 2012-13 on 28.11.2012, declaring its total income at Rs. 22,51,21,420/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. As the assessee during the year had entered into international transactions with its AEs, therefore, a reference was made by the A.O to the Transfer Pr....
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....A.Y. 2011-12, wherein it was held that the income received from MSM Discovery Pvt. Ltd. (i.e the assessee) as distribution fee was not to be treated as royalty. However, the DRP was not persuaded to subscribe to the aforesaid claim of the assessee. Observing, that the assessee and its auditor had nomenclatured the payments as 'license fee paid/payable towards distribution of television channels, the DRP concluded that the payments made to the AEs were in the nature of license fees/royalty for distribution of television channels. Relying on the observations of the panel in the assessee's own case for A.Y. 2011-12, the DRP concluded, that as the assessee had been granted exclusive license rights for distribution of channels in a particular territory, it could thus safely be concluded that it had entered into a license agreement. Further, it was observed by the DRP that a similar claim of the assessee that it had only entered into a distribution agreement and not a license agreement was rejected by the panel in A.Y. 2011-12. Also, it was observed by the DRP, that the panel while disposing off the assessee's objections for A.Y. 2011-12, had held, that the comparable companies identifie....
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....les for benchmarking the channels distribution activity. Accordingly, it was submitted by the assessee that the TPO had erred in rejecting the companies engaged in the business of distribution of software products as comparables on the ground of functional dissimilarity. On the basis of its aforesaid submissions, it was the claim of the assessee that the companies which were selected by it in its TP study report, being functionally comparable ought to have been accepted as comparables, viz. (i) Avance Technology Ltd; (ii) Empower Industries India Ltd.; (iii) Sonata Technology Ltd.; and (iv) Integra Telecommunication and Software Ltd. 7. However, the DRP after exhaustive deliberations rejected the claim of the assessee that its international transactions were rightly benchmarked by selecting comparables from the business activity of licensed software distribution. It was observed by the DRP that the business activity of channel distribution was functionally different from that of distribution of license software. It was observed by the DRP that unlike software distribution, as the assessee in the business of channel distribution had to guarantee minimum business running into seve....
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....bmitted by the ld. A.R that as the Tribunal while disposing off the appeal of the assessee for the immediately preceding year i.e A.Y. 2011-12, despite recording the assessee's submissions on the fundamental dispute viz. that the distribution fee paid by it to its AEs was not in the nature of royalty, had instead of adjudicating the same restored the issue to the file of the A.O/TPO for determining the issue afresh, therefore, the assessee had by way of writ petition i.e CWP No. 3508 of 2018 assailed the said order before the Hon'ble High Court of Bombay. It was submitted by the ld. A.R that the Hon'ble High Court while disposing off the said writ petition had observed, that the Tribunal ought to have decided the issue as to whether the distribution fees was royalty or not as all the facts were available before it rather than remanding the issue to the TPO. Accordingly, the appeal of the assessee for A.Y 2011-12, viz. ITA No. 971/Mum/2016 was restored by the High Court to the file of the Tribunal for fresh disposal in accordance with law. It was submitted by the ld. A.R that the Tribunal pursuant to the aforesaid directions of the Hon'ble High Court had thereafter disposed off the ....
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.... India Limited (-)1.19% 3. Integra Telecommunication and Software Limited 0.21% 4. Sonata Information Technology Ltd. (-)0.52% Arithmetic Mean (-)0.48% However, the TPO had rejected the aforesaid comparables that were selected by the assessee in its TP study report by carrying out software distribution search, and had determined the ALP on the basis of RoyaltyStat search. Apart from that, as stated by the ld. A.R the aforesaid companies were even otherwise held by the TPO as functionally not comparable by observing as under: "1.Advance Technologies Limited: This company is involved in niche segment of mobile value added services and short code services, m tex, web based SMS, SMS API, mobile marketing solutions, campaign audit, Email web integration etc. Whether the company is engaged in sof tware distribut ion or not is also clear from the financials or the website of the company. The Hon'ble DRP has rejected this comparable in AY 2010-11. Accordingly, the same is rejected in this year also. 2. Empower Industries India Limited: Empower lndustries India Limited is engaged in the business of computer electronics, power ele....
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....international transactions of the assessee for the year under consideration. At the same time, it was submitted by the ld. A.R, that inadvertently the Tribunal in its aforesaid order for A.Y. 2013-14 in ITA No. 6676/Mum/2017 had directed the A.O/TPO to verify the segmental data of the aforesaid four comparable companies in the relevant financial year as per Rule 10B(4), and re-compute the TP adjustment afresh. It was submitted by the ld. A.R that the software distribution was the only segment of the aforementioned comparables. Accordingly, it was submitted by the ld. A.R, that considering the observations of the Tribunal in its aforesaid orders passed in the assessee's own case for A.Y. 2011-12 and A.Y. 2013-14 the matter may be restored to the file of the A.O/TPO with a direction to benchmark the international transactions of the assessee after including the aforementioned four companies in the final list of comparables. 11. Adverting to the additional grounds of appeal which were raised by the assesses before us, it was submitted by the ld. A.R that in case if the aforementioned four companies which were into software distribution business were accepted as valid comparables, t....
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....g any further, we shall first deal with the issue as to whether or not the additional ground of appeal No. 23 raised by the assessee before us, wherein it had sought deduction of "Education cess" and "Secondary and higher education cess" paid on the income-tax liability while computing its income under the head "Profits and gains of business or profession", merits admission. It was submitted by the ld. A.R that the aforesaid additional ground of appeal was being raised on the basis of the recent judgment of the Hon'ble High Court of Bombay in the case of Sesa Goa Limited vs. Joint Commissioner of Income-tax (2020) 107 CCH 375 (Bom). The ld. A.R submitted that the Hon'ble High Court in its said judgment had observed, that if the legislature intended to prohibit the deduction of amounts paid by an assessee towards "Education Cess" or any other "Cess" and Higher and Secondary Education Cess, then, the legislature could have easily included reference to "cess" in clause (ii) of Sec. 40(a). It was further submitted by the ld. A.R that the High Court had observed, that as the legislature had not included "education cess" or any other "cess" in clause (ii) of Sec. 40(a), therefore, it wou....
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....d by the assessee may not be admitted. 17. As observed by us hereinabove, the assessee has sought an adjudication on an issue i.e as to whether or not the amount paid by an assessee towards "Education Cess" or any "other cess" viz. the Secondary and Higher Education Cess is disallowable as an expenditure u/s 40(a)(ii) of the Income-tax Act, 1961. We have deliberated at length on the objections raised by the ld. D.R to the raising of the aforesaid additional ground of appeal by the assessee and are unable to persuade ourselves to subscribe to the same. Before adverting any further, we shall look into the various judicial pronouncements, on the aspect, that an assessee is vested with a right to raise an additional claim which though might not have been raised in the return of income, and the appellate authorities are entitled to consider and adjudicate the same. We find that the issue as to whether an assessee in the course of the assessment proceedings could be permitted to raise a claim which would lead to exclusion of an income offered by him in his return of income had been deliberated upon at length by the Hon'ble High Court of Bombay in the case of CIT Vs. Pruthvi Brokers & ....
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.... the order of the Tribunal that had allowed the assessee's claim of deduction. Insofar the judgment of the Hon'ble Supreme Court in the case of Goetze (India) Limited v. Commissioner of Income-tax (2006) 284 ITR 323 (SC) was concerned, the Hon'ble High court in its aforesaid order had observed, that even if a claim is not made before the assessing officer, it can be made before the appellate authorities. As regards the jurisdiction of the appellate authorities to entertain a claim that was not raised by the assessee in its return of income, the Hon'ble High Court after referring to the judgment of the Hon'ble Supreme Court in the case of Goetze (India) Limited (supra), had made it clear that the issue in the case before the Hon'ble Apex Court was limited to the power of the assessing authority in entertaining a fresh claim raised by an assessee otherwise than by filing of a revised return of income, and the same did not impinge on the powers of the Tribunal. In the case before the Full Bench of the Hon'ble High Court of Bombay in Ahmedabad Electricity Limited v. Commissioner of Income-tax, (1993) 199 ITR 351 (Bom)(FB), the assessee had not claimed deduction in respect of the amount....
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....he question was one of law and had material bearing on the order of assessment. It was observed by the Hon'ble High Court that as the eventual destination of every litigation is justice, therefore, technicality should not be permitted to prevail as speed breaker in the course of dispensation of justice. On the basis of the aforesaid judicial pronouncements, we are of the considered view, that in the case before us as the assessee has by way of the aforesaid additional ground of appeal raised a purely legal issue which would not require any verification of facts, therefore, the same merits to be admitted. 18. We shall now deal with the sustainability of the observations of the lower authorities, and the consequential additions made/sustained by them. As observed by us hereinabove, the ld. A.R at the very outset of the hearing of the appeal had assailed the characterisation of the channel distribution fees paid by the assessee to its AE's, as royalty by the A.O/DRP. We have deliberated at length on the issue under consideration, and find, that the issue that channel distribution fees cannot be held as royalty is squarely covered by the judgment of the Hon'ble High Court of Bombay ....
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.... the distribution fee paid is not in the nature of royalty. Similar view was affirmed by Hon'ble Bombay High Court in CIT Vs MSM satellite (Singapore) Pte. Ltd (ITA No. 103 of 2017). Considering the decision of the Hon'ble Jurisdictional High Court and respectfully following the same, we are of the view that the payment of distribution fee cannot be termed as 'Royalty'. Since, we have held that distribution fee cannot be termed as 'Royalty' thus; discussion on the royalty agreement selected for comparability has become academic." As the facts and the issue involved in the present appeal is squarely covered by the aforesaid order of the Tribunal in the assessee's own case for A.Y 2011-12 in ITA No. 971/Mum/2016, dated 13.03.2020, we therefore respectfully follow the same. Accordingly, we herein vacate the view taken by the lower authorities that channel distribution fees paid by the assessee to its AEs was in the nature of payment of royalty. The Ground of appeal No. 4 is allowed. 19. We shall now advert to the adoption of the aforementioned four companies engaged in the business of software distribution as comparables by the assessee for benchmarking i....
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....y had not witnessed any change as in comparison to the immediately preceding and succeeding years i.e A.Y.2012-13 and A.Y. 2013-14, therefore, finding no reason to take a different view we respectfully follow the aforesaid order of the Tribunal, and direct the A.O/TPO to include the aforementioned company in the final list of comparables for benchmarking the international transactions of the assessee for the year under consideration. (B) Empower Industrial India Ltd.: As is discernible from the order of the TPO, we find that the aforementioned company was rejected as a comparable by him for the reasons viz. (i) that the company was engaged in selling hardware, HR and telecom services for which no segmental were available; (ii) that the company was inter alia engaged in software development; (iii) that the company had computer assets of Rs. 9.1 crores; and (iv) that the company had diminishing returns during the year under consideration. As a matter of fact, the aforesaid view was borrowed by the TPO from that arrived at by his predecessor in the immediately preceding year i.e A.Y. 2011-12. (ii) On a perusal of the financial statements of the aforementioned company, we find....
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....that the fact that the aforementioned company had diminishing returns formed a basis for rejecting it as a comparable, we are afraid cannot be accepted. As the company is not a persistent loss maker, and in fact, has earned a profit in the previous year i.e financial year 2010-11, thus it could not have been rejected merely on the basis of a generalised view of diminishing returns arrived at by the TPO. On the basis of the aforesaid observations, we are unable to persuade ourselves to subscribe to the view taken by the TPO/DRP that the aforementioned company could not have been selected as a valid comparable for benchmarking the international transactions of the assessee for the year under consideration. (iii). Independent of our aforesaid observations, we find, that the aforementioned company viz. Empower Industries India Ltd. had been accepted by the Tribunal as a valid comparable in the assessee's own case for the immediately preceding year i.e. A.Y. 2011-12. Also, we find that the aforementioned company had been accepted as a valid comparable by the coordinate benches of the Tribunal in the following cases: (i) Turner International India Pvt. Ltd. VS. ACIT (ITA No. 1204/Del/....
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....entioned company did not have the employees with the requisite skill set to provide consulting services and business solution which are high end services in nature. Accordingly, on the basis of our aforesaid observations, we are unable to to subscribe to the reasoning given by the TPO for rejecting the aforementioned company as a valid comparable for benchmarking the international transactions of the assessee for the year under consideration. (iv). Independent of our aforesaid observations, we find, that the Tribunal in the assesses own case for the immediately preceding year i.e. A.Y. 2011-12 had accepted the aforementioned company whose generation of revenue from software distribution during the said year was 97%, as a valid comparable, for benchmarking the international transactions of the assessee for the said preceding year. Also, the aforementioned company was selected as a valid comparable by the Tribunal while disposing off the assessee's appeal for A.Y. 2013-14 in ITA 6676/Mum/2017, dated 29.06.2020. In the backdrop of our aforesaid deliberations, as the functionality of the aforementioned company and also the assessee had not witnessed any change during the year under ....
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....ned company viz. Integra Telecommunication and software had been accepted as a valid comparable by the Tribunal in the assessee's own case for A.Y. 2013-14 in ITA No. 6676/Mum/2017, dated 29.06.2020. In the backdrop of our aforesaid observations, as the functionality of the aforementioned company and also the assessee had not witnessed any change during the year under consideration, therefore, we find no reason in taking a view contrary to that arrived at by the Tribunal while accepting the said company as a valid comparable for benchmarking the international transactions of the assessee in A.Y 2013-14. Accordingly, we herein direct the A.O/TPO to include the aforementioned company as a valid comparable for the purpose of benchmarking the international transactions of the assessee for the year under consideration. On the basis of our aforesaid deliberations, the A.O/TPO is directed to include the aforesaid four companies viz. (i). Avance Technology Limited; (ii). Empower Industries India Limited; (iii). Integra Telecommunication and Software Limited; and (iv). Sonata Information Technology Limited, in the final list of comparables for benchmarking the international transactions of ....
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....ronouncements relied upon by them in context of the aforesaid issue raised before us. Insofar the claim of the Ld. A.R that unlike "rates" and "taxes" the amount paid by an assessee towards "Education Cess" or any "other cess" viz. the Secondary and Higher Education Cess is not a disallowable expenditure u/s 40(a)(ii) of the Income-tax Act, 1961, we find, that the said issue is squarely covered by the recent order of the Hon'ble High Court of Bombay in the case of Sesa Goa Limited vs. Joint Commissioner of Income-tax (2020) 107 CCH 375 (Bom). In the case before the Hon'ble High Court the following substantial question of law was inter alia raised : "iii. Whether on the facts and in the circumstances of the case and in law, the Education Cess and Higher and Secondary Education Cess is allowable as a deduction in the year of payment." After exhaustive deliberations, the Hon'ble High Court had observed that the legislature in Sec. 40(a)(ii) had though provided that "any rate or tax levied" on "profits and gains of business or profession" shall not be deducted in computing the income chargeable under the head "profits and gains of business or profession", but then there was....
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....20 sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A;] 17. Therefore, the question which arises for determination is whether the expression "any rate or tax levied" as it appears in Section 40(a)(ii) of the IT Act includes "cess". The Appellant - Assessee contends that the expression does not include "cess" and therefore, the amounts paid towards "cess" are liable to be deducted in computing the income chargeable under the head "profits and gains of business or profession". However, the Respondent - Revenue contends that "cess" is also included in the scope and import of the expression "any rate or tax levied" and consequently, the amounts paid towards the "cess" are not liable for deduction in computing the income chargeable under the head "profits and gains of business or profession". 18. In relation to taxing statute, certain principles of interpretation are quite well settled. In New Shorrock Spinning and Manufacturing Co. Ltd. Vs Raval, 37 ITR 41 (Bom.), it is held that one safe and infallible principle, which is of guidance in these matters, is to read the words through and see if the rule is....
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....business or profession". Acceptance of such a contention will amount to reading something in the text of the provision which is not to be found in the text of the provision in Section 40(a)(ii) of the IT Act. 23. If the legislature intended to prohibit the deduction of amounts paid by a Assessee towards say, "education cess" or any other "cess", then, the legislature could have easily included reference to "cess" in clause (ii) of Section 40(a) of the IT Act. The fact that the legislature has not done so means that the legislature did not intend to prevent the deduction of amounts paid by a Assessee towards the "cess", when it comes to computing income chargeable under the head "profits and gains of business or profession". 24. The legislative history bears out that the Income Tax Bill, 1961, as introduced in the Parliament, had Section 40(a)(ii) which read as follows : "(ii) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains" 25. However, when the matter came up before the Select Committee of the Parl....
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....ssion "any rate or tax levied" as appearing in Section 40(a)(ii) of the IT Act. 28. In the Income Tax Act, 1922, Section 10(4) had banned allowance of any sum paid on account of 'any cess, rate or tax levied on the profits or gains of any business or profession'. In the corresponding Section 40(a)(ii) of the IT Act, 1961 the expression "cess" is quite conspicuous by its absence. In fact, legislative history bears out that this expression was in fact to be found in the Income Tax Bill, 1961 which was introduced in the Parliament. However, the Select Committee recommended the omission of expression "cess" and consequently, this expression finds no place in the final text of the provision in Section 40(a)(ii) of the IT Act, 1961. The effect of such omission is that the provision in Section 40(a)(ii) does not include, "cess" and consequently, "cess" whenever paid in relation to business, is allowable as deductable expenditure. 29. In Kanga and Palkhivala's "The Law and Practice of Income Tax" (Tenth Edition), several decisions have been analyzed in the context of provisions of Section 40(a)(ii) of the IT Act, 1961. There is reference to the decision of Pri....
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....were liable for deduction in computing the income chargeable under the head of "profits and gains of business or profession". They are as follows :- (i) DCIT Vs Peerless General Finance and Investment and Co. Ltd. (ITA No.1469 and 1470/Kol/2019 decided on 5th December, 2019 by the ITAT, Calcutta; (ii) DCIT Vs Graphite India Ltd. (ITA No.472 and 474 Co. No.64 and 66/Kol/2018 decided on 22nd November, 2019 )by the ITAT, Calcutta; (iii) DCIT Vs Bajaj Allianz General Insurance (ITA No.1111 and 1112/PUN/2017 decided on 25th July, 2019) by the ITAT, Pune. 32. Again, Ms. Linhares, learned Standing Counsel for the Revenue was unable to say whether the Revenue had instituted the appeals in the aforesaid matters. Mr. Ramani, learned Senior Advocate for the Appellant submitted that to the best of his research, no appeals were instituted by the Revenue against the aforesaid decisions of the ITAT. 33. The ITAT, in the impugned judgment and order, has reasoned that since "cess" is collected as a part of the income tax and fringe benefit tax, therefore, such "cess" is to be construed as "tax". According to us, there is no scope for such implications, when construing a taxing sta....
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....n its original return, had never claimed deduction towards the amounts paid by it as "cess". She submits that neither was any such claim made by filing any revised return before the Assessing Officer. She therefore relied upon the decision of the Supreme Court in Goetze (India) Ltd. Vs Commissioner of Income Tax (2006) 284 ITR 323 (SC) to submit that the Assessing Officer, was not only quite right in denying such a deduction, but further the Assessing Officer had no power or jurisdiction to grant such a deduction to the Appellant - Assessee. She submits that this is what precisely held by the ITAT in its impugned judgments and orders and therefore, the same, warrants no interference. 38. Although, it is true that the Appellant - Assessee did not claim any deduction in respect of amounts paid by it towards "cess" in their original return of income nor did the Appellant - Assessee file any revised return of income, according to us, this was no bar to the Commissioner (Appeals) or the ITAT to consider and allow such deductions to the Appellant - Assessee in the facts and circumstances of the present case. The record bears out that such deduction was clearly claimed by the App....