TaxTMI 
TaxTMI 
2026 (9) TMI 1171
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....o the TPO, without complying to provisions of Section 92CA, and thereby making a transfer pricing ('TP') adjustment of Rs. 8,28,63,654 to the total income of the Appellant in respect of the international transaction of payment of license fees for TV syndication segment which is bad in law; Rejection of economic analysis undertaken by the Appellant in its transfer pricing study report. 3. erred in rejecting the transfer pricing analysis for international transaction of payment of license fees for TV syndication segment undertaken by the Appellant ie selection of TNMM as the most appropriate method and also choice of comparables ie software distributors companies and incorrectly applying revenue split mechanism under Other Method; TNMM requires only functional similarity and not product similarity 4. erred in not appreciating that TNMM only requires companies with functional similarity and not product similarity, and hence absent direct comparables, software distributors companies selected by the Appellant were appropriate comparables and thereby approach of the Hon'ble DRP/ learned TPO should be rejected; Principle of res judicata 5. erre....
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....e Ld.DRP. 3. The assessee contending that, benchmarking undertaken by it under Transactional Net Margine Method (TNMM) using software comparables ought to be accepted. Without prejudice, the assessee also furnished a computation under the Revenue Split Method(RSM) to contend that even on such basis the international transaction was at arm's length. 3.1. The Ld.DRP, however, did not accept the objections of the assessee and upheld the action of the Ld.TPO. On receipt of the DRP direction, the Ld.AO passed, final assessment order on 28/01/2022 assessing total income of the assessee at Rs. 21,79,68,850/-. Aggrieved, by the final assessment order, the assessee is in appeal before this Tribunal. 4. The Ld.Sr.Counsel briefly described the transaction as under: SPE Holding being the AE granted the assessee the right to distribute films, programs and digital content ('licensed content) in the territories of India, Nepal, Bhutan and Sikkim ('identified territory'). As per the inter-company agreement, the assessee is entitled to earn an assured distribution fee of 2% of revenues, after recovering all the operating expenses, for distributing the content licensed ....
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.... wherein the Assessee was considered as the tested party. It was submitted that as the aforesaid activity undertaken by assessee was similar to the distribution activity undertaken for any intangible product sold off the shelf, to the public at large, the activities undertaken by assessee were considered akin to those entities engaged in the distribution of software. In support, the assessee relied on the decision of coordinate bench of this Tribunal in the case of: Sony Pictures Networks India Pvt. Ltd (Successor of MSM Discovery (P.) Ltd) ACIT Vs NGC Network (India) Pvt Ltd ('NGC') (ITA No 5307/M/2008) 4.4. It was submitted that these rulings upheld the use of companies engaged in distribution of software for benchmarking distribution of content. The search process by the assessee thus resulted in following 14 comparables:- S No. Name of the Company Weighted average unadjusted margin as per TP report (%) 1 Unisys Software and Holding Industries Ltd -0.34% 2 Empower India Ltd -0.10% 3 Avance Technologies Ltd -0.05% 4 JMD Ventures Ltd 0.13% 5 PS IT Infrastructure & Services Ltd 0.20% 6 Dimensio....
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....ned in detail in the show cause notices quoted above. The reasons for it is implied from the fact that for the software distributors, the proportion of payouts as Royalty are on an average 30% of the receipts, while here, they have been approximately 95% of the receipts. The value of the Indian market, the efforts that the Assessee has put in order to distribute this content and the efforts that are taken by the assessee to comply with the legal and statutory compliances which are involved in distribution of Media content, the role it plays in liasoning with different clients, the functions it performs for marketing, can not be compared with those of software distributors. It is understood that since the content here is Not Indian, the weightage given to the asset should be more than what it was provided earlier. The value assigned to risks and functions is therefore reduced to that proportion and the revised ratio of profits which should be shared between the assessee and its AE as per the FAR analysis, is: 15:75:10, for the functions performed, Assets deployed and risks taken. The ratios within the Functions performed are also changed because now it is understood that the role of....
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.... 8,28,63,645/-, being the difference between the pay out as a percentage of revenue determined by assessee's TP policy of 94.79% vis-a vis pay out as percentage of revenue determined by the Ld.TPO's estimation approach @90%. 4.9. The Ld.AO passed the draft assessment order on 01/04/2921 by adding the proposed adjustment to the total income of the assessee. On receipt of the draft assessment order, the assessee preferred objections before the DRP. 5. The primary objection of the assessee before the DRP was regarding Ld.TPO's incorrect characterization of assessee's FAR profile, inappropriate rejection of economic analysis, inappropriate benchmarking analysis adopted by the Ld.TPO by adopting adhoc allocation of weightage under RSM which is not supported by the transfer pricing provisions under the statute. 5.1. It is submitted that the assessee in alternative reworked assessee's share form the TV syndication operation as a without prejudice based on the risk undertaken between the AE and the assessee. The Ld.TPO had adopted 50:50 whereas, assessee in its TP study had adopted 89:11. It was submitted that the assessee did not assume significant economic risk and the allocatio....
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....and the identified territory. The Ld.Sr.Counsel pictographically depicted the TV Syndication business transaction between the assessee and its AE as under: 6.2. During the year under consideration, the AE granted the assessee the right to distribute Hollywood films (i.e., English shows and movies) (referred to as, 'distribution rights') to broadcasters and OTT platforms in the territories of India, Bangladesh, Nepal, Pakistan, Sri Lanka, Maldives and Bhutan ('identified territory'). The supply chain for TV syndication business and the role of each of the entities (i.e. SPE India, SPE LLC and third parties) in this business is presented by way of a graphical representation below: Content Owner Content distributor Broadcasters / Platform OTT Viewers (creator/acquirer) SPE LLC is the IP owner/distributor for unrelated third parties outside India and decides the release of the film worldwide on all modes of exploitation SPE India (tax payer) merely distributes the Hollywood films on an As is Basis Channel OTT owners the content owners/platform showcase End users As can be seen from above, SPE India's role is limited to distribution of the film ....
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....and its AE clearly demonstrate that the assessee operated as a limited-risk distributor of the licensed English content in the specified territories. HE submitted that the assessee merely undertook the distribution functions, while the significant commercial and economic risks associated with the acquisition, development and ownership of the content remained with AE. 6.7. The Ld.Sr.Counsel submitted that, to determine the ALP of the international transaction relating to payment of licence fees for the television syndication business, assessee undertook transfer pricing study through an independent external consultant. A detailed analysis of the functions performed, assets employed and risks assumed (FAR analysis) by the assessee and its AE was carried out in respect of the relevant international transaction. 6.8. Based on such FAR analysis undertaken independently, assessee was characterized as a limited-risk distributor performing limited distribution functions under the guidance of its AE in the identified territories. On the other hand, AE was characterized as the entrepreneurial entity responsible for owning or acquiring the content licensed to the assessee and bearing th....
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.... therefore, appropriately evaluated by reference to the net operating margin earned from its distribution functions. 6.11. The Ld.Sr.Counsel submitted that, CUP could not be reliably applied in the present case, as there were no uncontrolled transactions involving comparable television syndication rights, licensed Hollywood content, territories, contractual terms and economic circumstances. The licence fees payable to the AE were intrinsically linked to the revenues generated from exploitation of the licensed content and the overall distribution arrangement. In the absence of reliable uncontrolled transactions involving comparable rights, a direct price comparison would not provide a dependable basis for determining the arm's length price. 6.12. The Ld.Sr.Counsel further submitted that the application of the Cost Plus Method was not appropriate, since the international transaction did not involve the provision of services by the assessee to the AE on a cost-plus basis. The consideration payable to the AE was linked to the gross revenues earned from exploitation of the licensed content, after taking into account the distribution expenses and the assured distribution fee. T....
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....ee. Accordingly, their operating margins could provide a reasonable basis for benchmarking the assessee's international transaction, subject to an examination of the relevant comparability factors. 6.16. The Ld.Sr.Counsel submitted that the assessee's distribution activity was functionally closer to the distribution of intangible or technology-related products, such as computer software, than to the development or creation of content. The assessee neither developed the licensed content nor undertook significant value addition to the underlying intellectual property. Its role was limited to commercially exploiting and distributing the licensed content in the identified territories. Accordingly, companies engaged in software distribution, or in comparable distribution functions involving technology-related products, could be considered for the purpose of applying the TNMM, subject to verification of their actual functions and risk profiles. He placed reliance on the decision of coordinate bench of this Tribunal in case of Netflix Entertainment Services India LLP vs.DCIT reported in (2025) 179 taxmann.com 644. 6.17. It was further submitted that the TNMM was less sensitive t....
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....ssion, which is summarised as under: The Ld. DR, placing reliance on the orders of the Ld.TPO and the DRP, submitted that the benchmarking carried out by the assessee by adopting companies engaged in the software industry as comparables was fundamentally inappropriate, considering the complete functional dissimilarity between the software industry and the assessee's business of distribution of licensed television/film content. It was submitted that the decisions relied by the assessee, wherein software companies had been accepted as comparables, were rendered in circumstances where reliable third-party comparables from the television, film and media industry were unavailable and the alternative methods adopted by the TPO/DRP were found unsuitable. According to the Ld. DR, the said decisions would therefore not assist the assessee in the present case, since the Ld. TPO had adopted the RSM to benchmark the impugned transaction. It was further submitted that the overall weightage of 15:75:10 adopted in respect of functions, assets and risks was accepted both by the assessee and the Ld.TPO and, therefore, the dispute was essentially regarding the appropriate allocation of such weigh....
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....ctual provisions exposed the assessee to consequences including termination for failure to discharge its obligations. Accordingly, the Ld.DR proposed equal allocation of the market risk relating to failure of licensed content, i.e., 10% each between the AE and the assessee, instead of 15% and 5% respectively. Likewise, the credit and collection risk, which had been allocated entirely to the AE, was proposed to be divided equally at 10% each. 7.4. In respect of unauthorised exploitation/piracy risk, against the assessee's allocation of 40% to the AE and 5% to itself, the Ld. DR contended that piracy affected the assessee's revenue directly and that the contractual obligation for copyright protection was cast upon the assessee. The said risk was, therefore, proposed to be shared equally at 22.5% each. On the other hand, the allocation relating to shortage of licensed content and foreign exchange risk was substantially retained. On such reallocation, the weighted risk attribution worked out to 5.65% for the AE and 4.35% for the assessee. 7.5. Accordingly, the Ld.DR submitted that, after recasting the FAR analysis, the total relevant weightage worked out to 14.65% for the AE and ....
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....urse of hearing accepted the non-availability of suitable comparables engaged in the same distribution business. It was, therefore, contended that the benchmarking adopted by the assessee could not be rejected merely because the comparables were drawn from the software industry. Reliance was placed, inter alia, on the decisions in ACIT v. NGC Network India Pvt. Ltd(supra)., Turner International India (P.) Ltd. v. ACIT(supra), PCIT v. Warner Media India P. Ltd.(supra), Sony Pictures Networks India Pvt. Ltd. v. DCIT (supra) and Netflix Entertainment Services India LLP v. DCIT(supra). 8.1. The Ld.Sr.Counsel further controverted Revenue's reliance on the "other method" prescribed under Rule 10AB. It was submitted that Rule 10AB contemplates determination of the arm's length price with reference to the price charged or paid, or which would have been charged or paid, for the same or similar uncontrolled transaction between non-associated enterprises under similar circumstances. In the present case, according to the assessee, the Ld.TPO did not bring on record any comparable uncontrolled transaction and instead determined the ALP by assigning weightages of 15:75:10 to functions, assets....
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....at the licensed content, including prints, tapes, digital files and other elements, was made available to the assessee for onward distribution in India. According to the Ld.Sr.Counsel, the activities relating to obtaining approvals and invoicing/collection were routine and administrative functions performed after the core logistics function had been undertaken by the AE. 8.5. As regards market risk, the Ld.Sr.Counsel submitted that only 5% was appropriately attributable to the assessee since the assessee was assured a net margin of 2% after recovery of all expenses under the agreement. Any fall in revenue, according to the assessee, would therefore primarily affect the AE and not the assessee in the manner suggested by the Ld.DR. The Ld.Sr.Counsel also disputed the Revenue's reliance on the termination clause and submitted that termination could arise only upon fulfilment of contractual conditions and not merely on account of fluctuations in revenue. 8.6. In respect of credit and collection risk, the assessee reiterated that no such risk was borne by it because it was assured the stipulated net margin after recovery of expenses. The risk of non-payment by third parties, accor....
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.... Network India Pvt. Ltd., the matter was restored for recomputation under TNMM using the appropriate year's comparable data and not for a fresh search or reconsideration of the comparables themselves. The Ld.Sr.Counsel submitted that no case was made out for remanding the present matter to the Ld.TPO and prayed that the Revenue's objections as well as the alternative plea for remand be rejected. We have perused the submission advanced by both sides in light of records placed before us. 9. The principal issue for our consideration is whether the Ld. TPO was justified in rejecting the benchmarking undertaken by the assessee under the TNMM and determining the arm's length price of the licence fees payable to the AE by applying the RSplit Method, based on an allocation of functions, assets and risks. 9.1. The assessee was granted rights by its AE to distribute licensed Hollywood content, comprising English television shows and films, to broadcasters and OTT platforms in the identified territories. It is not in dispute that the AE was responsible for the development or acquisition of the content, financing such acquisition, and maintaining and protecting the underlying intellec....
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.... may, depending upon the circumstances, affect comparability. However, such differences do not, by themselves, render a comparable unsuitable where the underlying distribution functions and economic characteristics are sufficiently similar. 9.6. The record, as reflected in the submissions, indicates that the assessee undertook search through the Prowess, Capitaline and ACE databases. The search initially identified a company engaged in theatrical distribution, which was not considered reliable on account of differences in the nature of content, exploitation rights, distribution channels and revenue arrangements. The assessee thereafter undertook a lateral search for distribution companies in other sectors. The Ld.TPO called for the annual reports and updated margins of the companies selected by the assessee, but rejected the benchmarking primarily on the ground that the companies were not engaged in the film or entertainment industry. 9.7. We are of the view that the mere fact that the selected companies were engaged in software or hardware distribution could not, by itself, constitute a sufficient ground for discarding the benchmarking exercise. The relevant functions, asset....
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....orted by an objective economic basis. The burden of demonstrating the correctness of the adjustment remains on the Revenue, and the subsequent reallocation proposed by the Ld.DR, though advanced with reference to the FAR analysis, does not cure the absence of a demonstrated basis for the original allocation adopted by the Ld.TPO. 9.12. We further note that the alternative FAR analysis submitted by the assessee before the DRP was expressly advanced without prejudice. The assessee's primary contention remained that TNMM was the most appropriate method and that the RSM adopted by the Ld.TPO lacked legal and economic foundation. Therefore, the alternative allocation furnished by the assessee cannot be treated as an admission that the RSM, as applied by the Ld.TPO, was validly undertaken. 9.13. The Revenue has also contended that the expression "price" occurring in Rule 10AB would include a margin attributable under independent transaction principles and that the RSM could be applied without identifying a direct comparable uncontrolled transaction. We are of the view that, irrespective of the method selected, the determination of the arm's length price must be based on the statuto....