STAR ASIA REGION FZ LLC,MUMBAI vs. DDIT (IT) 2(1), MUMBAI

The common issues contended in both the appeals through various grounds are tabulated below:- Sr Particulars / Issues SARF STEL No. 1 General Ground Gr.No.1-3 Gr.No.1-3 2 Rejection of the comparability analysis carried out by Gr.No.4-6 Gr.No.4-6 the Appellant 3 Non application of PSM approved by the TPO for AE Gr.No.7 & 11 Gr.No.7 & 11 transaction to third party transaction 4 Application of certain TP principles Gr.No.8-10 Gr.No.8-10 5 Double taxation of India sourced revenue at the Arm’s Gr.No.12-14 Gr.No.12-14 length rate determined by the TPO, i.e. 13.54% without considering the 50:50 split of revenues between STAR Ltd and Channel Companies as approved by the TPO 6 Transfer of Channels (i.e. Vijay TV and STAR World) Gr.No.15-16 Gr.No.15-16 held liable to tax in India as Short Term Capital Gain by holding that the channel / assets of the channel are located in India 7 Taxation of royalty income (income from transfer of Gr.No.17 - content) at the rate of 42.23% instead of the applicable rate of 10.5575% on gross basis 8 Short grant of credit of TDS amounting to - - Rs.1,82,84,887 9 Non grant of credit of advance tax amounting to - -

The assessee has shown the transfer pricing analysis considering the transactions between the assessee and the following companies, viz. – 1. Star Televison Asian Region Ltd (STAR Ltd) 2. Star International Movies Ltd (SIML) 3. Star Asian Movies Ltd (SAML) 4. Star Asian Region FZ LLP (SAR) 5. Channel V Networks Ltd – Partnership (Channel V)

The consolidated profits computed above as a percentage of the total revenues earned by the Channel Companies from India during the 12 month period April 1,2008 to March 31,2009 translated into an overall profit rate of 8.48 percent the detailed computation which is provided below: Channel Companies India revenues Global profitability Arm’s length profit percentage – as per attributable to India global financial statements for the year ended Jun 30, 2009 STEL 10,136,005,721 4.96% 502,304,311 SIML 1,292,907,615 12.27% 158,672,687

The assessee submitted that though there was no need for benchmarking under PSM, with a view to avoid litigation, the assessee has chosen 9 comparables, the average margin of which was given to be 4.85% based on weighted average of earlier years. Accordingly, the assessee held that the transactions with AEs are at arm’s length. The TPO observed that out of the comparables chosen by the assessee, the following companies are loss making or low profit making and called on the assessee to show cause why the company could not be excluded:- Sr.No. Company name 2009 (net profit on revenue) 1. Aastha Broadcasting Network Ltd -291.23% 2. Jain Studios Ltd (consolidated) -15.87% 3. Television Eighteen India Ltd (consolidated) -34.96% 4. Raj Television Network Ltd 1.04%

The assessee filed a detailed submission stating that all comparable companies proposed to be excluded by the TPO are full-fledged entertainment broadcasters and functionally comparable to Star group and, therefore, should not be excluded. The TPO did not accept the submissions of the assessee and proceeded to arrive at the final set of comparables as listed below:-

The average mean of comparable as computed by the TPO was 13.54% as against the consolidated profitability of 8.48% earned by the Assessee. To analyze whether the Assessee falls within + 5% safe limits the TPO prepared the below working with reference to the PLI of Operating Profit / Revenue. The working is as follows:- Particulars Star Plus 5 Minus 5 ALP Group percent percent Revenue 100 100 100 100 Cost 91.52 86.94 96.098 86.46 Profit 8.48 13.06 3.90 13.54 Profit as percentage 8.48% 13.06% 3.90% 13.54% of revenue 10. Accordingly, the TPO arrived at the TP adjustments as below:- Particulars INR Revenues 16,598,783,475 Profit at the rate of 13.54 percent 2,246,906,824 Profit at the rate of 8.48 percent 1,406,889,746 Adjustment amount 840,017,078 11. The TPO held that it would be appropriate to apportion 50% of the adjustment to Star Limited and 50% to channel companies and split the 50% amongst the channel companies as below to make an adjustment of Rs.25,64,77,167/-:-

The assessee submitted before the DRP that all the 9 comparables chosen by the assessee should be retained and exclusion of companies on the ground that they are loss making, is not correct. The DRP rejected the submissions of the assessee and upheld the TP addition.

Ground No.4 to 6 is with regard to the inclusion of Jain Studios Ltd., Television 18 India Ltd., and Raj Television Network Ltd. The Ld.AR in this regard submitted that the co-ordinate bench in group company’s case, Star International Movies Ltd (ITA No.185/Mum/2014 for AY 2009-10 dated 18.10.2019) has considered the issue of exclusion of these comparables where it has been held that these three comparables are to be included. The relevant observations of the Tribunal are as extracted below:- “9. We have considered rival submissions and perused material on record. We have also applied our mind to the decision relied upon. As could be seen from the factual matrix of the issue, both the Transfer Pricing Officer and the DRP have not disputed applicability of PSM as the most appropriate method to benchmark the transaction with the AEs. The dispute is only confined to the comparability of three comparables as noted above. The Transfer Pricing Officer has rejected Jain Studios Ltd. and Television 18 India Ltd., primarily on account of abnormal fall in rate of profit. Likewise, he has rejected Raj Television Network Ltd. due to sharp fall in margin by attributing to high amount of bad debt written–off during the year. From the facts on record, it is clear that none of these companies can be classified as persistent loss making companies. In various decisions it has been held that unless the company declares loss consistently for three consecutive assessment years, it cannot be considered as a persistent loss making company. In this context, we may refer to the decision of the Tribunal in 10 ITA 1813 & 1814/Mum/2014 Star Television Entertainment Ltd & Star Asian Region FZ LLP

The Ld.DR relied on the order of the lower authorities.

We heard the parties and perused the materials on record. In the case of the assessee, the Assessing Officer has excluded the above 3 comparables for the same reasons that those companies are loss making and the profit margin is low. Therefore, the ratio laid down by the co-ordinate bench in the above case is applicable to assessee also and, therefore, respectfully following the above decision of the co-ordinate bench, we hold that these comparables cannot be excluded. The TPO is directed to include these comparables and re-compute the ALP accordingly. 16. Ground 7 & 11 and 12 to 14 is with regard to the decision of the Assessing Officer in not applying the PSM as approved by the TPO to non AE transactions and determining the profit on estimate basis. The Assessing Officer, while passing the draft assessment order held that though the Transfer Pricing Officer has determined a taxable income in India under PSM, such transaction is restricted to 11 ITA 1813 & 1814/Mum/2014 Star Television Entertainment Ltd & Star Asian Region FZ LLP intra-group /AE transactions only and that the profitability from non-AE transactions are to be determined by the assessing officer. In this regard the Assessing Officer, called on the assessee to furnish India -specific P& L Account so as to identify and determine the income from operations in India and to properly allocate the profit attributable to Indian operations. The assessee submitted that it is not statutorily required to maintain the India specific account and therefore, it did not prepare such accounts. The assessee further submitted that the global profitability of channel companies is applied to the channel revenue from Indian operations to arrive at the income taxable in India. The assessing officer did not accept the submissions of the assessee and the manner in which the income is computed. The Assessing Officer held that the income of the assessee is liable to be computed as per Rule 10(i) read with Rule 10(iii) of the Income-tax Rules, 962 which provides that income of the assessee may be determined at a reasonable percentage of turnover and in this regard relied on the findings given by DRP in assessee's own case for AY 2007-08. Accordingly, the Assessing Officer estimated the profitability of non AE transactions at 28% and for AE transactions, applied the rate of 13.54% as determined by the TPO. The taxable income as worked out by the Assessing Officer in the hands of the assessee is as given below that resulted in the overall addition of Rs. 238,64,48,179 which is split between the AE and non-AE transactions:- Entity Indian Profitabiltiy Non-A.E. Non-A.E. Non-A.E. Total Non- Total A.E. Total Non Total A.E. Total Indian Revnues Adv. Adv. Syndication Associated A.E. @28% @13.54% Income Revenues Revenues Revenues Enterprises 1 2 3 4 5 6 7=4+5+6 8=2-7 9=7x28% 10=8x13.54% 11=9+10 STEL 10136005721 4.96 7685743846 NIL 18495464 7704239310 2431766411 2157187007 329261172 2386448179 SIML 1292907615 12.27 775293699 NIL NIL 775293699 517613916 217082236 70084924 287167160 SAML 1702206539 8.56 1095227617 NIL 128316111 1223543728 478662811 342592244 64810945 407403188 SARF 2854166988 -2.91 1804147631 NIL 1619109 1805766740 1198371171* 505614687 162263394 667878081

The Ld.AR in this regard submitted that the addition has been made purely on estimate basis and, therefore, cannot be sustained. The Ld.AR further submitted that the issue is covered by the decision of the co-ordinate bench in the case Star International Movies Ltd (supra) has considered the similar issue and has deleted the addition made by the Assessing Officer. The ld AR also submitted that the assessing officer in assessee's case has made the addition in similar as in the case of Star International Movies Ltd (supra) and therefore the decision of the coordinate bench is applicable to assessee's case also.

The Ld.DR relied on the order of the lower authorities. 19. We heard the parties and perused the materials on record. We notice that the coordinate bench in the case of Star International Movies Ltd (supra) has considered a similar issue where it is held that – 14. We have considered rival submissions and perused material on record. Admittedly, the Assessing Officer simply relying upon the direction of learned DRP in assessment year 2007–08 has estimated the profit on non– AE transactions. However, as could be seen, the Tribunal while deciding the issue relating to identical addition made in assessment year 2007–08 in ITA no.8683/Mum./2011, dated 2nd February 2016, has observed that once the combined net profit has been arrived at by taking into account the transactions of both AEs/non–AEs, which is factored into all the costs and revenue, then, to segregate a non–AE transaction over and above such profit determined is not proper. Thus, ultimately, the Bench held that the income from non–AE transaction cannot be taxed separately by applying net profit rate of 28%. It is relevant to observe, the aforesaid decision of the Tribunal was not contested by the Revenue in the appeal preferred before the Hon'ble Jurisdictional High Court. Notably, the same view was again expressed by the Tribunal while deciding assessee’s appeal for the assessment year 2008–09 in ITA no. 7680/Mum./2012 & Ors., dated 16th September 2016. In view of the aforesaid, we delete the addition made by the Assessing Officer. Grounds are allowed.

The Ld.DRP upheld the addition for the reason that the assets such as brand name, logo, goodwill, contents, terms, licenses, approval, customer base, viewers base are all located in India and, therefore, the asset cannot be held to be located outside India.

The Ld.AR submitted that the transfer of Star World Channel happened between assessee and Star International Movies Ltd both being non-resident and that in the case of non residents, the liability to pay tax arises on the income derived by him which received or deemed to be received in India or which accrues or arises in India or which accrues or arises or is deemed to accrue or arise in India. The Ld.AR drew our attention to section 9 of the Act which lays down various circumstances under which income would be deemed to accrue or arise in India and submitted that as per the said provisions, in the case of non residents, the income received from transfer of a capital asset is deemed to accrue or arise in India if the capital asset is situated in India. In the given case however the intangible asset being Star World Channel, is not an asset situated in India and therefore, the Ld.AR submitted that there cannot be any capital gain on transfer of an asset situated outside India in the hands of non residents, i.e. the assessee. With regard to the contention of the revenue that location of the advertisers and viewers are in India and, therefore, the gain on transfer of Star World channel is taxable in India, the Ld.AR submitted that it is a common business practice among all channel broadcasting companies to enter into contract with local advertisers for display of advertisement and that merely because the advertisers are located in India, the Assessing Officer cannot hold that the situs of the channel asset is situated in India. The Ld.AR further submitted that the location of the viewers does not constitute a source of income in India and in this regard, relied on the decision of the Hon’ble Delhi High Court in the case of Asia Satellite Telecommunications Co Ltd vs DIT 332 ITR 340 (Del). The Ld.AR also submitted that in the case of intangible asset, the situs of the intangible asset is to be determined based on the location of the owner of such intangible asset. The 18 ITA 1813 & 1814/Mum/2014 Star Television Entertainment Ltd & Star Asian Region FZ LLP Ld.AR in this regard further submitted that the Hon’ble Delhi High Court in the case of Cub Pty Ltd (2016) 71 taxmann.com 315 has considered a similar issue regarding the situs of the intangible asset and taxability of consideration received on transfer of such asset in India in the hands of non-resident and held that situs of intangible asset shall be at the location of the owner. The ld AR further submitted that in the said case the intangibles relating to a brand was exploited in India and even under such circumstances, the Hon’ble Court has held the intangible assets to be situated outside India since the ownership lies outside India. The Ld.AR accordingly submitted that assessee’s case is in a better position that the Channel viewing is not restricted to India but is across the globe. Therefore, the ratio laid down by the Hon’ble Delhi High Court is squarely applicable in assessee’s case. To substantiate the claim that the ownership of the channel asset being ‘Star World’ is outside India, the Ld.AR drew our attention to the guidelines issued by the Ministry of information and Broadcasting of India, which requires a foreign taxing company, i.e. the channel which is uplinked from outside India to obtain down linking license in India and accordingly, down linking license were obtained by the assessee to operate Star World channel in India. This would, according to the Ld.AR, evidence that the channel is owned and uplinked from outside India and, therefore, the ownership of the intangible asset is outside India.

The ld DR on the other hand vehemently argued that Explanation 5 to section 9(1)(i) would be applicable in assessee's case the assessee derives its value in the form of viewership substantially from India. The ld DR further submitted that even otherwise the income earned would fall within section 9(1)(i) itself and 19 ITA 1813 & 1814/Mum/2014 Star Television Entertainment Ltd & Star Asian Region FZ LLP that in the case of intangible assets the situs need not always be where the owner is present.

We heard the parties and perused the material on record. The assessee has sold the channel i.e. "Star World 24 hour" an English channel to another sister concern ‘Star International Movies Ltd (SIML) vide business agreement dated 28/02/2009 for a consideration of Rs.42,55,32,513/-. The Assessing Officer contended that there is clear cut nexus and strong business connection of the transferred asset to India due to very nature of the asset and its ability to continually and regularly generate income from India. The Assessing Officer further contended that the basic elements of the assets being brand name, logo, goodwill, contents, permits, licenses, approvals, pre-existing agreements, customer base (Advertisements), viewers base etc., are all located in India and therefore the asset being a "Channel" is held to be located in India. Accordingly the Assessing Officer held that the income on transfer of the channel is an income arising to the assessee within the provisions of section 9(1)(i) and therefore taxable in India. The assessee's argument is that the channel being an intangible asset, the situs is where the owner of the asset as is situated which in the given case is outside India and therefore the asset which is transferred is not an asset in India to fall within the provisions of section 9(1)(i). The ld AR during the course of hearing further argued that the impugned transaction will not be covered even by explanation (5) to section 9(1)(i) since the transaction does not involve transfer of any share or interest in the company but an intangible asset being the Star World Channel. Therefore before proceeding further we will look at the provisions of section 9(1)(i) which is relevant to assessee's case that read as under -

Explanation 5 was added to section 9(1)(i) in the Act by the Finance Act, 2012, with retrospective effect from 01.04.1962 which provides that such shares/interest shall be deemed to be situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. With the insertion of the said explanation the legislature has brought in clarity with respect to the situs of the capital asset being share or interest in a company by stating that if the share or interest derives, directly or indirectly, its value substantially from the assets located in India is shall be treated as an asset situated in India. However there is no such specific provision with regard to the situs of intangible assets, such as trademarks, brands, logos, etc. We in this regard notice that the Hon'ble Delhi High Court in the case of Cub Pty Ltd (supra) has considered the issue of situs of the capital asset being intangible asset i.e. when it shall be deemed to be situated in India and held that – 19. The issue of situs of an intangible asset, such as the intellectual property rights in trademarks, brands, logos etc. is indeed a tricky one. Insofar as the tangible assets are concerned, there is absolutely no difficulty. They exist in physical form and their existence is at specific locations. Thus, fixing their situs does not pose any problem. An intangible capital asset, by its very nature, does not have any physical form. Therefore, it does not exist in a physical form at any particular location. The 21 ITA 1813 & 1814/Mum/2014 Star Television Entertainment Ltd & Star Asian Region FZ LLP legislature could have, through a deeming fiction, provided for the location of an intangible capital asset, such as intellectual property rights, but, it has not done so insofar as India is concerned. With regard to a share or interest in a company registered/incorporated outside India, Explanation 5 has been added to Section 9(1)(i) of the Income Tax Act, 1961 by virtue of the Finance Act, 2012 with retrospective effect from 01.04.1962. The said Explanation 5 reads as under: — "Explanation 5. - For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India."

Thus, the legislature, where it wanted to specifically provide for a particular situation, as in the case of shares, where the share derives, directly or indirectly, its value substantially from assets located in India, it did so. There is no such provision with regard to intangible assets, such as trademarks, brands, logos, i.e., intellectual property rights. Therefore, the well accepted principle of 'mobilia sequuntur personam' would have to be followed. The situs of the owner of an intangible asset would be the closest approximation of the situs of an intangible asset. This is an internationally accepted rule, unless it is altered by local legislation. Since there is no such alteration in the Indian context, we would agree with the submissions made on behalf of the petitioner that the situs of the trademarks and intellectual property rights, which were assigned pursuant to the ISPA, would not be in India. This is so because the owner thereof was not located in India at the time of the transaction.

As a consequence of the foregoing discussion, the view taken by the AAR on question (1), which was placed before the AAR, cannot be accepted and the answer to the said question would be that the income accruing to the petitioner from the transfer of its right, title or interest in and to the trademarks in Foster's brand intellectual property is not taxable in India under the Income Tax Act, 1961. That being the case, question (2), which was posed before the AAR, would not arise.

The Hon'ble High Court by following the principle of 'mobilia sequuntur personam' which means “movables follow the law of the person” and accordingly held that the situs of the owner of an intangible asset would be the closest approximation of the situs of an intangible asset. In the issue under consideration it is an undisputed fact that the asset transferred i.e. Star World Channel is an 22 ITA 1813 & 1814/Mum/2014 Star Television Entertainment Ltd & Star Asian Region FZ LLP intangible asset. From the perusal of the down linking license obtained by the assessee from Ministry of information and Broadcasting of India to operate Star World channel in India, it is also established that the ownership of the Star World channel is outside India. Given this, when the ratio laid down by the Hon'ble Delhi High Court in the above case is applied, we see merit in the argument of the ld AR that the impugned asset is not an asset situated in India since it is owned by a person outside India and therefore the situs of the asset is also outside India. Accordingly in our considered view, the income arising out of the transfer of Star World channel, being an asset outside India by the assessee to SIML will not fall within the provisions of section 9(1)(i) and accordingly not taxable in India

One more contention of the revenue is that the asset is situated in India since there is clear cut nexus and strong business connection of the transferred asset to India due to very nature of the asset and its ability to continually and regularly generate income from India and therefore taxable in India. We have already held that in the case of intangible asset the situs of the asset depends on the owner's location and therefore generating income from India cannot be the factor to decide to the situs of the asset. In this regard it is relevant to notice that the legislature through Explanation 6 to section provides even in the case of share or interest, referred to in Explanation 5 shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if the value of such assets exceeds the amount of ten crore rupees; and represents at least fifty per cent of the value of all the assets owned by the company or entity, as the case may be. Though we have already stated that Explanation 5 does not cover intangible assets, in our considered view even otherwise, for the asset to be treated as situated in 23 ITA 1813 & 1814/Mum/2014 Star Television Entertainment Ltd & Star Asian Region FZ LLP India the conditions mentioned in explanation 6 needs to established. In the given case the assessing officer, did not called for any valuation report to analyse whether the value of viewership in India being intangible asset is included in the valuation and price paid for the transaction is substantially derived due to the viewership in India. Though there may be merit in the argument that viewership in India affects the valuation / purchase price of the transaction, we are not in a position to concur with the said contention of the revenue in the absence of any concrete material brought on record to prove the claim that the substantial value of the channel is derived from assets located in India. We further notice that the Hon’ble Delhi High Court in the case of Asia Satellite Telecommunications Co Ltd (supra) has held that merely because the footprint area includes India and the programmers by ultimate consumers/viewers are watching the programs in India, even when they are uplinked and relayed outside India, would not mean that the assessee is carrying out its business operations in India. Applying the said ratio to the issue under consideration, we are of the view that the Star World Channel having viewership India generation income cannot be a reason for holding that the channel is an asset situated in India. Therefore on this count also the addition made is not tenable.

Ground No.17 to 19 The assessee is contending the initiation of penalty proceedings through these grounds. The issue is premature not warranting any adjudication.

The grounds of appeal raised by SARF (assessee in this case) in assessment year 2009-10 are tabulated in the earlier part of this order, from which it is clear that all the issues arising in the case of the SARF are similar to the ground raised in the case of STEL except taxation of ‘royalty income (Ground No.17). Considering the fact that the facts being identical our decision with respect to all the issued contended, through Ground Nos.1 to 19 in the case of STEL are mutatis mutandis applicable to SARF also.

We have while adjudicating the issue of transfer of STAR World channel by STEL to SIML held that for an intangible asset the situs is where the owner of the asset is situated and since the STAR World is owned by STEL who is a non resident the intangible asset being the channel is not a capital asset situated in India and accordingly the gain on transfer of such asset is not taxable in India. (refer para 26 to 28 of this order). Reliance in this regard is placed on the decision of the Hon'ble Delhi High Court in the case of Cub Pty Ltd (supra). Applying the ratio of the decision of the Hon'ble High Court to the case of the present assessee (SARF), in our considered view that the situs of STAR Vijay channel, an intangible asset which is owned by SARF a non resident is out side India and therefore not a capital asset in India. Accordingly in our considered view, the income arising out of the transfer of STAR Vijay channel, being an asset outside India by the SARF to VTPL will not fall within the provisions of section 9(1)(i) and accordingly not taxable in India. The findings given in para 29 regarding the contention of the revenue based on viewership in India, is also mutatis mutandis applicable to the transfer by SARF. Therefore on that count also the addition made by the Assessing Officer is not tenable.

Ground No.17 is with regard to taxation of ‘royalty income @42.23% by the assessing officer. The Ld.AR in this regard submitted that since the assessee being a foreign company, the applicable tax rate of royalty income is as provided under section 115A of the Act which is at 10.5575% whereas the Assessing Officer has applied the tax rate at 42.23%. The Ld.AR further submitted that identical issue in assessee’s own case for A.Y. 2007-08 TO 2009-10 has been considered by the co-ordinate bench and that the issue is decided in favour of the assessee.

The Ld.DR, on the other hand, relied on the orders of lower authorities.

We heard the parties and perused the material on record. We notice that the co-ordinate bench in the case of Star International Movies Ltd (supra) for A.Y. 2009-10 has considered the similar issue and held that – “18. We have heard the parties and perused materials on record. Undisputedly, identical issue arising in assessee’s own case in preceding assessment years has been decided by the Tribunal in favour of the assessee. Consistent with the view taken by the Tribunal in assessee’s own case in earlier assessment years, we direct the Assessing Officer to tax the royalty income at the appropriate rate as provided under section 115A of the Act.” 40. Respectfully following the above decision of the co-ordinate bench, we direct the Assessing Officer to tax the royalty income at the appropriate rate as provided in section 115A of the Act. 41. Ground No.18 to 20 The assessee is contending the initiation of penalty proceedings through these grounds. The issue is premature not warranting any adjudication.

In result the appeal of the STEL in and SARF in are allowed.