TaxTMI 
TaxTMI 
2017 (2) TMI 1577
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.... in deleting the addition of Rs. 19,14,48,497/- being the Transfer Pricing adjustment made by the TPO as per his order u/s 92 CA (3) dated 30.10.2008. 2. On the facts and in the circumstances of the case, the Ld. CIT(A) had erred considering the operating margin of the assessee company by clubbing together the segments of distribution of channels and sale of air time advertisements, when the amount of international transactions relating to the two activities was almost at par, and, when the operating margins in the three cases considered by the CIT(A) himself as comparable cases related only to the segment of sale of air time advertisement. 3.On the facts in the circumstances of the case, the Ld CIT (A) has erred in holding that Sun TV Network India Ltd. is not a comparable case, when the TPO had compared the operating margins in the same segment, i.e. sale of air time advertisement. 4.The appellant craves leave to add to, alter, errand or vary from the above grounds of appeal at or before the time of hearing." 3. From the above grounds, it is gathered that the main grievance of the department relates to the deletion of addition of Rs. 19,14,48,497/- made by the AO on a....
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....ables at 14.05% and claimed that international transactions relating to advertisement purchased was at arm's length price. The assessee objected to the use of financial year 2004-05 data in the cases of comparables selected by the TPO and also stated to use of positive PBIT. The objection of the assessee for each comparable selected by the TPO were as under: "(a) Aaren Initiative Outdoor Advertising Private Limited - It had been stated that this company is engaged into outdoor advisement of its product by putting hoardings on the road side, vehicles etc. It had been stated that the functional profile is different than this comparable. (b) Adbur Private Limited- It had been stated that only financial data is available in the public domain. The other qualitative details like director's report, management discussion, notes of accounts are not available in the public domain. (c) Empire Industries Ltd. - It had been stated that this company is engaged in different product profile of manufacturing, glass bottle for the pharmaceutical industries. (d) Sun TV Ltd. - It had been stated that this company had different product profile. The ratio of intangible asset to total ass....
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....ment sale and distribution business segment. In both the models mode of compensation to the assessee was different, accordingly benchmarking of margin of two different business models after making an artificial aggregation will breach the concept of comparability analysis. (c) The transfer pricing legislation in India is based on the determination of arm's length price for each Intl. transactions. The reference to this office by the A.O is also transaction based. Therefore, the aggregation of Intl. transaction for the bench marking has to be an exception rather than a rule. (d) The reliance placed by the assessee on OECD guidelines is also misplaced. The OECD guidelines in para 1.42 has clearly provided that for most precise approximation of fair market value, the arm's length principle should be applied on a transaction-by-transaction basis. Therefore, the conclusion drawn by the assessee for the aggregation of intl. transaction on the basis of the OECD guideline is based on incorrect appreciation of guidelines." 7. The TPO finally selected the following comparables with OP/sales PLI as under: Name Company Sales FY ended OP/Sales Aaren Initiative Ou....
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....ng the same with distribution business, the transfer pricing approach of the assessee was rejected and financials of the advertisements sales business segment as reported in audited accounts were used for comparability analysis and benchmarking of the profit ignoring merged financials of both distribution and advertisement segments. (e) It is a peculiar case where the assessee has adjusted the loss of advertisement segment against the profit of distribution segment by deliberating merging two distinct and separate audited segments and had benchmarked the margin of advertisement segment with the comparable engaged in different line of business i.e. distribution business segment. (f) For the afore stated reasons a new search was undertaken and to identify comparables of advertisement segment and comparability analysis was made to determine the margin of advertisement segment separately as discussed in paras 6 to 6.3 and 8 to 8.9 of this order. (g) In this case the AE of the assessee was located in low tax country i.e. Mauritius. The AE by entering into an agreement with the assessee transferred all the functions and risk on the issue, due to which it incurred loss against th....
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....lso raised objections for the use of the comparables selected by the TPO in the sale of air time segment. The main objection was in using Sun TV Network as comparable. The submission of the assessee as reproduced in para 5.5 of the impugned order were as under: "The Appellant would like to submit to your Honour that it is unable to find the Annual Report of this company for the year under reference (i.e. FY 2004-05) and has been able to find only the Annual Report for FY 2005-06. In view of the same and during the time of the assessment proceedings, the Appellant requested the Ld. TPO to provide the annual report of this company for FY 2004-05. However, the Ld. TPO did not give due consideration to this contention of the Appellant and failed to provide the annual report of this company. Different Functional Profile: However, on perusal of the Annual Report of the Company for FY 2005-06, it can be seen that Sun TV is primarily engaged in producing and broad casting satellite television software programming in the regional languages of southern India. This fact is evident from the following excerpt from the Annual Report of this company: "The Company has an extensive program....
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....rusal of the same, it can be observed that the ratio of intangible assets to total fixed assets, owned by the Company, as on April 1, 2005, is 22.23%. The details of the same are as follows: Table 8 - Percentage of Intangible Assets to Total Assets Particulars Amount (In Million) Film and Program Broadcasting Rights 659.2 Computer Software 2.8 Total intangible assets 662.00 Total fixed assets 2,978.10 Intangible assets as a percentage of total fixed assets 22.23% Accordingly, quite evidently, even the asset profile of the company is completely different to that of the appellant's advertisement airtime inventory business. In this regard, the appellant relies on the following observation made by the Hon'ble Bench in the Sony Ruling: Comments about differences on account of possessing research and development as also valuable, intangible are applicable in this case. The taxpayer unlike VIL does not have an advantage of R&D unit or valuable intangible on which it can always expect some reasonable returns. Given the above guidance, the operating profit margin of this company would be implicitly embedded with the return on....
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.... company was much higher than the assessee and it employed various intangible assets. The ld. CIT(A) opined that M/s Sun TV Network was not a comparable case to the assessee. He also observed that M/s Empire Industries Ltd. was a company engaged in manufacturing of glass bottles for the pharmaceutical industry, it was not a comparable company to the assessee because of different product profile and industry segment in which it operated. The rest of the comparables selected by the TPO were accepted by the ld. CIT(A) for the reason that in the TP report of the assessee itself, the companies used as comparable were no better than the ones used by the TPO. Accordingly, the ld. CIT(A) held that all other comparables choosen by the TPO should have been taken as comparable. The ld. CIT(A) worked out the average mean at 4.3% in the following manner: S. No. Name of Company Operating Margin 1. Aaren Initiative Outdoor Advt. Pvt. Ltd. 0.03 2. Aadbur Pvt. Ltd. 0 3. Mid-Day Multimedia Ltd. 0.1 Mean 4.3% 13. The ld. CIT(A) was of the view that the air time sale and channels distribution segment should be clubbed while benchmarking,....
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....f advertisement segment with the comparable engaged in different line of business i.e. distribution business segment. It was also stated that the AE of the assessee was located in low tax country i.e. Mauritius and the AE by entering into an agreement with the assessee transferred all the functions and risk on the issue, due to which it incurred loss against the profit earned in earlier years and corresponding income was shifted to the low tax country. It was also pointed out that in old business model the assessee had earned profit @ 16% of the total advertisement sale proceeds in immediately preceding year but for the year under consideration the assessee had shown the loss. It was also submitted that the assessee had choosen the wrong comparables and the TPO selected the companies which were comparable to the assessee. Therefore, the ld. CIT(A) was not justified in directing to exclude the company M/s Sun TV Ltd. and M/s Empire Industries Ltd. from the list of the comparables. 17. In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that prior to financial year 2004-05 relevant to the asse....
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....ssee operated as a full risk distributor and undertook all the related business functions and risks in connection with its allotment of advertisement air time inventory in India. It was pointed out that willingness of the advertisers/sponsors to buy advertisement air time was dependent on the number and the type of sports events broadcasted on the assessee's sports channels. Our attention was drawn towards chart showing the trend of the revenue and profitability of the assessee air time inventory and distribution activity over the period starting from FY 2004-05 to FY 2009-10 which read as under: 18. On the basis of the aforesaid chart, it was stated that there was direct correlation between the number of cricket events involving India and the advertisement air time revenue earned by the assessee. It was further stated that in the initial years the assessee suffered net losses in its distribution business however, in FY 2007-08 onwards, the assessee had booked substantial profits on account of healthy revenues in its advertisement air time inventory business. Therefore, on account of loss incurred in the year under consideration, the TPO was not justified in taking the distribut....
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.... of intangible assets to the total assets as on 01.04.2005 was 22.23% as per following details: Particulars Amount (In crores) Film and Program Broadcasting Rights 65.92 Computer Software 0.28 Total intangible assets 66.20 Total fixed assets 2,97.81 Intangible assets as a percentage of total fixed assets 22.23% It was submitted that the company M/s Sun TV Network India Ltd. should not be considered as comparable to the assessee and the ld. CIT(A) rightly held so. As regards to the another company M/s Empire Industries Ltd., it was stated that the said company was engaged in the manufacturing of glass bottles for the pharmaceutical industry and held three segments, namely, manufacturing, trading & indenting and educational programmes. Therefore, the functional profile of the assessee cannot be compared with the said company and the ld. CIT(A) was justified in directing the AO to exclude this company also from the list of the comparables. 20. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, the main controversy to be resolved relates to the a....
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...., it should also have the authority to conclude contracts on behalf of the channel for advertisements, subscription and programme content." 21. In view of the aforesaid guidelines, if the assessee decided to relinquish advertisement air time inventory rights on account of losses, it would also have to relinquish the subscription rights to the channel which have resulted in profits. Therefore, the assessee was required to aggregate both the activities i.e. channel subscription and air time sale segment. Accordingly, the assessee aggregated both the activities for the purpose of arm's length analysis. It is also noticed that the advertisement air time revenue earned by the assessee has a direct correlation with the number of cricket events which is evident from the chart furnished by the assessee, reproduced in the former part of this order. On perusal of the said chart, it would be clear that when the cricket events were more in the FYs 2007-08 and 2009-10. The OP/sales ratio jumped to 9.18% and 6.85% respectively from the negative ratio of 0.78% in the FY 2004-05 when the cricket events were less. In the present case, by changing the business model, the assessee was getting more....
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.... 25. As regards to this issue it is noticed that the said company is primarily connected in producing and broadcasting satellite television software in the regional languages of southern India and companies flagship channel is Sun TV. The other satellite channels are Surya TV, Kiran TV, Sun News, Sun Music and DTV. The said company also engaged in the business of FM Radio broadcasting in Chennai, Coimbatore and Tirunelveli while the assessee is engaged in the business of marketing and distribution of two sports channels ESPN & Star Sports and sale of advertisement slots of the said channels. Therefore, the business profile of the assessee is quite different from M/s Sun TV Network India Ltd. It is also noticed that the intangible assets of M/s Sun TV India Ltd. as on 01.04.2005 were at Rs. 66.20 crores and the total fixed assets were at Rs. 297.81 crores which shows that intangible assets as a percentage of total fixed assets was at 22.3% while the assessee is not having intangible assets. Therefore, the said company should not be considered as comparable to the assessee, so it should be excluded from the list of the comparables and if this company is excluded alongwith M/s Empir....
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....ppreciate the business/ commercial reasons for the loss incurred by the appellant in its advertisement airtime inventory business, 2.5. failure to appreciate the fact that the international transaction of purchase of advertisement airtime inventory was at arm's length even by applying the Resale Price Method, which was applied by the appellant as an alternative method and on a without prejudice basis, 2.6. disregarding multiple year/ prior years' data as used by the appellant in the TP documentation report and holding that current year (i.e., FY 2005-06) data for comparable companies should be used despite the fact that the same was not available to the appellant at the time of preparing its TP documentation, 2.7. grossly violating the principles of natural justice by disregarding the comparable companies identified by the appellant after undertaking a fresh search using data for FY 2005-06 and arbitrarily including companies in the comparable set used to benchmark the appellants purchase of advertisement airtime inventory, 2.8. resorting to arbitrary and mechanical selection of companies merely based on the companies selected in the TP Order of AY 2005-06, and ....