TaxTMI 
TaxTMI 
2021 (11) TMI 1221
X X X X Extracts X X X X
X X X X Extracts X X X X
....ily in India. The assessee is a broadcaster of various channels owned by it, such as, Star Plus, Star One, Star Utsav, Star Gold, Life OK, etc. ESPN Star Sports Ltd (ESS), a US based associated enterprise (AE) of the assessee, having its branch office and headquarters in Singapore is engaged in the business of owning and operating sports channels in certain territories in Asia including India. As stated, ESS conducted business in India through Star Sports India Pvt Ltd (SSIPL) for earning distribution and advertisement revenue with some margin left to SSIPL. Intending to establish its own sports channel, the assessee bidded for obtaining rights in tournaments held by Board of Cricket Control in India (BCCI) and was successful. To further expand its foray into sports channels, assessee initially obtained slots on channels owned by ESS. Subsequently, ESS agreed to grant access to the sports broadcasting on a bundle basis and not on an individual rights basis. After negotiation and deliberation between the assessee and ESS, the assessee entered into an agreement with ESS termed as Master Rights Agreement (MRA) executed on 31-10-2013. By virtue of such agreement, the assessee acquired ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....parison with third party cost at the hands of ESS may not be acceptable. The TPO observed, as per the independent valuer, cost approach method may not be advantageous as it only considers the cost to purchase the asset and it does not consider the future economic benefit arising from access to the bundle of rights so determined by ESS based on various market conditions existing at the time of bidding the events, which, must have undergone change on the date of transfer to the assessee. The TPO observed, one of the major deficiencies in the valuation report of the independent valuer is the incorporation of terminal value extrapolated till perpetuity for the purpose of valuation of an asset with a finite period of life. The TPO observed, the assessee has obtained the rights from the AE for a limited finite period of time which expires subsequently. Therefore, the value that is derived from these rights has also a finite life span. Whereas, the independent valuer has adopted terminal value under discounted cash flow (DCF) method presuming that the value will be generated till perpetuity, though, the rights themselves may not exist. The TPO observed, as per the valuation report, there ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e valuer, the TPO observed, while the valuer has stated that the bundle of rights the assessee had purchased would enable it to generate enough cash to buy or renew rights after the expiry period; however, he has contradicted his own valuation as the cash flow has been found to be negative for the explicit period. That being the case, there is a chance that the bundle of rights purchased by the assessee will leave it with lesser cash flow for renewing the right. He observed, the valuer has also not considered the possibility of some other party bidding a higher price for subsequent rights and consequently, the assessee not being able to buy or renew the rights after the expiry period. He observed, the valuer has also not considered the possibility that the assessee may decide not to continue with sports telecast business due to some economic or strategic reasons. In that case also, cash flow after explicit period will be zero. Therefore, the valuer has committed a fundamental error. The TPO observed, there is a big probability that the rights which are now available with the assessee under the bundle may not be available or may be renewed. In this context, he specifically referred ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aluer are based on incorrect / unverified assumption. In this context, the TPO discussed the projected and the actual figures in a tabular form. As per the said table, though, in financial year 2015-16, the actual loss was USD 536 million; however, the valuer has projected at USD 165 million. After analyzing valuation report and the submissions of the assessee, the TPO observed that the consistent loss incurred by ESS clearly indicate that the assumption of huge profit in future projection in case of the assessee is totally misplaced. He observed, as per the principles of valuation, primary reliance is to be placed on available historical data. He observed, the valuer has conveniently ignored the historical data available in the case of ESS and built up on his assumption to project distributor profit in distant future to justify the transaction. After rejecting the valuation report as well as submissions of the assessee, the TPO ultimately concluded that the terminal value of USD 548 million for which payment was made as part of payment made towards acquiring the bundle of rights is not at arm's length. Accordingly, he determined the ALP value of consideration paid at USD 411 m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e TPO cannot question the business rationale of any transaction undertaken by the assessee. The learned counsel submitted, while benchmarking the transaction with AE assessee had applied CUP, being the amount paid by AE to ISB. He submitted, while the AE had paid USD 1338 million to ISB for acquiring the sports rights, assessee acquired such rights from the AE at a discounted price of USD 1211 million. Therefore, since the payment made by the AE to third parties is more than the payment made by the assessee to the AE for the same set of rights, a valid CUP exists. Learned Counsel submitted, to support the amount paid to the AE for acquiring bundle of rights, the assessee has furnished valuation report of an independent valuer, whereas, the TPO has accepted the valuation report selectively by conveniently cherry-picking a part of the report while partly rejecting it. 11. He submitted, the TPO has erroneously concluded that the independent valuer has rejected the cost approach and considered it as unsuitable for determining the value of bundle of sports rights. He submitted, on the contrary, the independent valuer has clearly stated that the cost approach suffers from the disadvanta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....caster in India. Assessee's revenue from sports business has grown exponentially to almost five times in financial year 2018-19. Presently, the assessee operates more than 10 sports channel on 24x7 basis. It has also enabled the assessee to successfully bid and renew various ICC and BCCI rights including IPL right in spite of stiff competition from other sports channels. Thus, he submitted, all these factors would show that the independent valuer has correctly considered the economic life of the bundle of broadcasting rights to be valued beyond the finite period of the right. He submitted, the TPO has completely overlooked / disregarded all these facts while rejecting the terminal value in the valuation report. He submitted, to justify his view, the TPO has erroneously and selectively relied upon various literatures. He submitted, even while doing so also the TPO has committed gross error. He submitted, the reference by the TPO to international valuation standards on intangible assets as well as the book written by Shri Aswath Damodaran is also perfunctory. 14. He submitted, similar is the fact relating to reference made by the TPO to investopaedia.com. He submitted, in course....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d counsel submitted, one of the experts, Duff & Phelps has pointed out that at the time of the transaction OECD guidelines of 2013 was applicable, whereas, the TPO has erroneously applied OECD transfer pricing guidelines, 2017 which was in draft form at that time and not in existence in 2013. Therefore, the comparison done by the TPO and consequent actualization is not supported by law. In this context, he relied upon the following decisions :- 16. He submitted, in addition to the original valuation report, the assessee had also obtained a valuation report from another independent valuer to support the reasonableness of the value determined as per the original valuation. He submitted, in the second valuation report, though the valuer has adopted the market approach method; however, the value determined by the second valuer, viz. Duff & Phelps, LLC for the bundle of sports rights would be in the range of USD 1142 million to 1223 million. Thus, he submitted, the value determined by the second valuer also matches the ALP computed by the assessee by applying CUP as also the value determined by the original independent valuer applying DCF method. He submitted, in the second valuation r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....neously at USD 411 million. He submitted, when ESS is required to pay third parties USD 1338 million, it will never part with the right at USD 411 million as determined by the TPO. He submitted, no prudent businessman would accept such a huge loss while selling the bundle of rights. He submitted, while the valuation of the bundle of rights done by the assessee through independent valuer was not a mere formal exercise, but a properly conducted procedure for arriving at the value of rights, the TPO has grossly erred in challenging the independence of the independent value and alleging that the valuation report was a mere formal exercise having no relation with the value of bundle of sports rights. He submitted, the observation of the TPO that while entering into master rights agreement with ESS on 3-10- 2013, the assessee did not know the value of bundle of rights as the original valuation report is dated 05-11-2013. 18. The learned counsel submitted, both the assessee and ESS had appointed the valuer so that the value for the bundle of sports rights could be determined based on recognized valuation principle. He submitted, even the master rights agreement also says that the conside....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it is very much clear that the valuer has relied upon the profit estimated by the management of the two companies and he has not carried out profit risk evaluation and estimation. Therefore, he had over-valued the rights. He submitted, the TPO considered the nature of intangibles transferred, i.e. a bundle of sports rights which had a finite period, maximum being for a period of 7 years. Drawing our attention to the original valuation report and the observations of the TPO, the learned departmental representative submitted that there are a number of deficiencies in the valuation report as pointed out by the TPO. He submitted, as per the valuation report the projected revenue exceeded the actual revenue by 38%. He submitted, since payment for rights are made on year on year basis; therefore, after acquisition, rights would be amortized. Therefore, the absolute value needs to be calculated from the value of rights. He submitted, applying the ratio of absolute value to present value as computed by the independent valuer at 1.40 the assessee and the AE were sure that as per their own valuation, the bundle of rights was not only going to lead to losses in the present foreseeable period,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....not have been acquired, as would have happened in an uncontrolled transaction; (v) While the MRA for acquisition of bundle of rights was signed on 31.10.2013, the final valuation report is dt. 5.11.2013, which shows that the valuation report was a post facto justification exercise for a transaction which had already taken place between two related parties. This shows that the transaction was not executed as per valuation, but the valuation was carried out to somehow justify the transaction. This defeats the very purpose of valuation and clearly shows the controlled nature of the transaction, as in an uncontrolled transaction, such a thing would have never come to pass. (vi) The same value valued the transaction from the side of the assessee as well as AE, which again would have hardly happened in an uncontrolled transaction. For the reasons, inter alia, which show that the Valuation Report was fundamentally erroneous, the TPO assailed the Valuation Report, and suitably modified it to arrive at an arm's length price." 22. As regards the rejection of terminal value determined by the independent valuer, the learned DR submitted that out of the total value of USD 1211 millio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....case has to be considered while evaluating the economic life of an intangible asset. He submitted, in case of the assessee, the rights granted by way of bundle of rights exists for a maximum period of seven years. He submitted, as per international valuation standard, the economic life of the bundle of rights in a particular case may extend to the period of right. In some cases, it may be lesser than the period of right and in a third category of cases may extend beyond the period of right. Therefore, in the first two eventualities, the terminal value of the asset would be Nil. He submitted, in case of the assessee, the rights are in the form of sports broadcasting rights, whereas, in case of general entertainment channel viewer loyalty is built to channel so that new serials have more TRP on channels with higher following than on channels with lower following. In contrast, in case of sports channels the viewer loyalty is to the event rather than the channel. By way of illustration, he submitted, an India-Australia cricket match would have huge viewership whether it is on star sports or in any other channel. If the rights to such a match are transferred from one channel to the othe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....To demonstrate that the amount paid by the assessee to acquire the bundle of sports rights is at arm's length, the assessee has furnished a valuation report of an independent valuer, viz. D H Consultants Pvt Ltd based at DCF method determining the value at USD 1211 million. Undisputedly, the aforesaid valuation report was also furnished before the TPO. However, though, the TPO did not have much quarrel with adoption of DCF method for valuation purpose, however, he did not agree with the value determined by the independent valuer. 26. The major arena of dispute between the TPO and the valuation report of the independent valuer is with regard to the determination of terminal value for the bundle of sports rights and comparison of actual profit & loss / revenue with the projected value. The TPO has, apparently, rejected the terminal value of USD 548 million. Further, the TPO has also found fault with the spread over of cost incurred on termination of Champions League T20 tournament over a period of time instead of considering it in the year, wherein, the cost was incurred. It is evident, to support the value determined by the independent valuer, in course of proceedings before le....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ject the objections of the revenue. 29. Though, detailed submissions have been made from both sides in favour and against the value determined by the independent valuer, however, it has to be stated that valuation of an asset is a highly technical job, which requires expertise in technical knowledge and skill on the subject. Undoubtedly, the assessee has furnished independent valuer's report and expert opinion to support the value of the bundle of sports rights for which payment has been made to ESS. Whereas, no such exercise has been undertaken by the revenue to counter assessee's valuation. Instead of entrusting the job of finding out the correctness in assessee's valuation as per the independent valuer's report, the departmental authorities have taken up the task themselves in pointing out various deficiencies in the valuation report. In the process, the TPO has referred to certain materials available in the some valuation book and had used them selectively to reject the valuation of the assessee. In our view, this is a thoroughly incorrect approach. Since, the subject of valuation is highly technical, and can only be done by a person having expertise over the s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e ALP of payment made towards availing of transitional services. 33. Briefly the facts are, as discussed earlier, assessee was desirous of starting its own sports channel, hence, entered into an agreement with ESS for acquiring bundle of sports rights with effect from 04-11-2013. Thus, the assessee expanded its broadcasting operation by setting up, operating and managing a 24x7 sports channel in addition to its existing business. For the purpose of its expanded broadcasting activities, the assessee applied to the Ministry of Information & Broadcasting for permission to uplink and downlink sports channels on 09-01- 2013. However, the permission of uplinking and downlinking was granted only on 28-08-2014. Further, the assessee was yet to establish suitable facilities in India for the operation of its sports channel business. Therefore, for the purpose of obtaining these facilities in the transitional period, the assessee requested ESS to provide certain services and facilities for a specific period, which was provided by ESS for a consideration. Considering the transaction and functional and risk profile of the entities, the assessee selected transactional net margin method (TNMM) a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ubmitted, merely applying the benefit test, a part of the payment made cannot be rejected / disallowed. In support of such contention, he relied upon the following decisions :- 1. Jabil Circuit India Pvt Ltd ITA No.2200 of 2017 & 867 of 2018 2. NLC Nalco India Ltd ITA No.1256 /Kol/2009 & 529/Kol/2008 35. Without prejudice, he submitted, income received on account of rendering of transitional services has already been offered to tax by ESS. He submitted, ESS has undertaken due compliance including transfer pricing compliance in India and there is no transfer pricing adjustment at the hands of ESS. In this context, he drew our attention to order passed under section 92CA(3) of the Act in case of ESS. 36. We have considered rival submissions and perused materials on record. As could be seen, for setting up its sports business in India, the assessee had applied to Government authorities for permission to uplink and downlink sports channel. However, since there was delay in getting permission and the assessee was newly setting up its sports business, it availed certain technical as well as administrative services from its A.E., ESS on payment of cost with a mark up of 5%. Though, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2017. 39. The aforesaid factual position remains uncontroverted before us. Thus, keeping in view the decision of the co-ordinate bench in assessee's own case for assessment year 2011-12 and 2012-13 as referred to above, we allow assessee's claim of depreciation. Grounds are allowed. 40. In ground 16, the assessee has contested the disallowance of deduction claimed towards reimbursement of property tax amounting to Rs.28,97,568/ -. 41. Briefly the facts are, in course of assessment proceedings, the assessing officer noticed that the assessee has claimed deduction of an amount of Rs.28,97,568/- towards reimbursement of property tax paid by Precision Components Pvt Ltd (PCPL). Noticing that similar deduction claimed by the assessee in the preceding assessment years were disallowed which was upheld by learned DRP, the assessing officer proceeded to disallow the deduction claimed by the assessee. Learned DRP also sustained the disallowance relying upon their decision in assessee's own case for assessment year 2013-14. 42. The learned counsel for the assessee submitted, while deciding identical issue in assessee's own case in assessment year 2006-07, the Tribunal has ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rit in view taken by tax authorities. However, we notice that they have taken adverse view without conducting any enquiry. The learned A,R. contended the reimbursement of property tax partakes the character of rent only. There is merit in its said contention also. Hence, what is required to be seen is as to whether to aggregate amount of rent plus reimbursements compares well with the earlier years payment. If it does not compare well, then it is the duty of the assessee to justify the payment. In view of the above, this issue required fresh examination at the end of Assessing Officer. Accordingly we set aside the order of learned CIT(A) on this issue and restore this issue to the file of Assessing Officer for fresh examination." 45. Facts being identical, respectfully following the aforesaid decision of the co-ordinate bench, we restore the issue to the assessing officer with similar direction. This ground is allowed, for statistical purpose. 46. In grounds 17 and 18, the assessee has challenged the disallowance of marketing and publicity expenses. 47. Briefly the facts are, in course of assessment proceedings, the assessing officer noticed that the assessee had claimed ded....
X X X X Extracts X X X X
X X X X Extracts X X X X
....penditure of Rs. 9,75 crores by way of marketing and publicity expenses and claimed them as deduction u/s 37(1) of the Act for promoting its channels viz. regional channels such as Star Pravah and Star Mazha. However, this promotion as per the AO inter alia resulted also into promotion of the slat brand which is owned by M/s. Star Ltd. to whom the assessee had paid brand royalty for using the star brand where as the royalty agreement did not required the assessee to incur such marketing and publicly expenditure which also benefited M/s. Star Ltd. Under these circumstances, the AO allowed only 75% of the said expenses holding that portion as relating to the assessee's business only was allowable, thereby disallowing the balance 25% of such expenses amounting to Rs.2,48 crores. In this connection, the AO placed reliance on the ruling of the Hon'ble Special Bench in the case of CIT Vs. LG Electrolics Pvt. Ltd. (1TA. No. 5140/Del/2011). The assessee on the other hand, relied on the Third Member decision of the Hon 'ble Mumbai Tribunal in the cases of ACIT Vs. Star India Pvt. Ltd. and ACIT Vs. NGC India Ltd. In these cases, subsequently, Hon 'ble Bombay High Court had di....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dentally provided some benefits to some other entity also, then that itself would not make the said expenses as not related to business of the assesseeor not having been incurred during the course of or for the purpose expenses is that it should be incurred during the course of and for the purpose of business of the assessee, which is duly passed here, and beyond that nothing more is to be examined. If any expenses is to be examined strictly from this point of view as has been done by the AO, then we are afi-ais that many more expenses would become disallowable which is neither the intention nor the requirement of the law. It is noted by u.5 that Hon 'hie Bombay High Court in the case of NGC Networks in its order dated 13.10.2014 in ITA. No. 538 of 2012 has extensively discussed this issue and held that this kind of disallowance in not permissible under the law. Similarly view has been taken by Hon 'ble Bombay HighCourt in its other judgment in the case of CITvStar India ITA. No. 165, 282, 283 of 2009. Thus keeping in view facts of this case and respectfully following these judgments, we find that order of the DRP is in accordance with law and facts and is interference is c....