DQ ENTERTAINMENT (INTERNATIONAL) LIMITED ,HYDERABAD vs. DY. COMMISSIONER OF INCOME TAX , CIRCLE-14(1), HYDERABAD

O R D E R Per Shri Rama Kanta Panda, A.M. : This appeal filed by the assessee is directed against the order dt.20.07.2018 passed by the Dy. Commissioner of Income Tax, Circle 14(1), Hyderabad passed u/s. 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in short ‘the Act’) for the Assessment Year 2014-15.

1956, which was formerly existing under the name of “Animation and Multi Media Pvt. Ltd.” The company is engaged in the business of production of animation, visual effects, game art and entertainment content, claiming section 10A benefit from A.Y. 2004-05. The assessee filed original Return of Income for Assessment Year 2014-15 on 29.11.2013 declaring total income of Rs.23,81,02,890 under the normal provisions and book profit of Rs.44,24,73,668 under MAT provisions. The return was processed u/s. 143(1) and the case was selected for scrutiny. Notice u/s. 143(2) was issued to the assessee. Since the assessee had entered into certain international transactions with its AE, the Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) u/s. 92CA of the Act for determining the Arm’s Length Price (ALP) of the international transactions entered into by the assessee. During the course of TP assessment proceedings, the TPO noted that the assessee has entered into the following international transactions during the year under consideration with its Associated Enterprises (AEs) :

Particulars Associated Value of Enterprise International Transactions (Rs.) Product Income DQ Entertainment 53,87,00,538 received (Ireland) Ltd. Professional DQ Entertainment 71,67,196 Consultancy fee (Ireland) Ltd. received Loan given DQ Entertainment 1,85,32,054 (Ireland) Ltd. Reimbursement DQ Entertainment 4,59,64,188 of expenses (Ireland) Ltd. received Reimbursement DQ Entertainment 15,57,500 of expenses PLC received Reimbursement DQ Entertainment 14,95,250 receivable PLC Investment in DQ Entertainment 8,92,45,345 Equity Share (International) Films Capital Ltd. Ireland Corporate DQ Entertainment Nil Guarantee Fee (Ireland) Ltd. Corporate DQ Entertainment Nil Guarantee Fee (Ireland) Ltd. Trade DQ Entertainment 85,43,01,143 receivables. (Ireland) Ltd.

He noted that the assessee company has chosen TNMM as MAM for benchmarking the transactions relating to production, income and receipt of professional consultancy fees. For transactions relating to reimbursement of CUP as the MAM. For investment in equity share capital, Corporate Guarantee fee, trade receivables and reimbursement receivable, the assessee company has chosen MAM method.

3. After considering the submissions made by the assessee from time to time, the TPO made the following TP adjustments :

S.No. International Transaction Adjustment in Rs. 1. Profit attributable 2,84,73,482 2. Commission on Corporate 86,96,183 Guarantee Total : 3,71,69,665 Accordingly, the Assessing Officer in the final draft assessment order made adjustment of the same.

assessment order made the following additions / adjustments :

S.No. International Transaction Adjustment in Rs. 1. Profit attributable 2,84,73,482 2. Commission on Corporate 1,69,66,363 Guarantee Total Adjustment : 4,54,39,845 5.Aggrieved by the order of the Assessing Officer, the assessee filed appeal before the Tribunal by raising the following grounds :

“ 1. The Ld. Dispute Resolution Panel (DRP) I Learned Assessing Officer (AO) are erroneous in law and on the facts of the case.

2. The Ld. DRP IAO are not legally justified in making an adjustment of Rs 2,84,73,482/- as profit attributable to the appellant company under the Profit Split Method in connection with intangible assets which were absolutely sold to AE when such revenue is generated by AE of the appellant company i.e., DQ Ireland as an absolute owner of such intangible assets.

4. The Ld. DRP AO has erred in law and facts, by making an adjustment for commission on guarantee on corporate guarantee provided by the Appellant to its subsidiary company DQ Entertainment (Ireland) Limited.

7. The Ld. AO has erred in law and facts by pronouncing a modification/consequential order dated August 31, 2018 giving effect to the letter of TPO, thereby enhancing the adjustment made in the Final Assessment Order dated July 20, 2018 without appreciating the fact that the Final Assessment Order passed consequent to DRP directions cannot be modified further as per law.

8. Without prejudice to the above grounds the Ld. AO vide his modification order dated August 31, 2018 erred in law and facts by not providing the Minimum Alternate Tax ("MAT") credit u/s. 115JAA which the Appellant is genuinely eligible for.

9. Any other ground that may be urged at the time of hearing with the previous approval of the Hon'ble Tribunal.”

6. The learned counsel for the assessee referring to the grounds raised by the assessee submitted that the addition of Rs.2,84,73,482 relates to TP adjustment and the addition of Rs.1,69,66,363 is on account of commission on corporate guarantee.

Tribunal in assessee's own case for the Assessment Year 2010-11. Referring to the decision of the Tribunal for Assessment Year 2013-14 vide order dt.17.8.2018, he submitted that the Tribunal after considering the orders of the preceding assessment years has held that there is no international transactions during the relevant assessment year and accordingly, the addition made by the Assessing Officer was deleted. Since the facts of the instant year are identical, therefore the order of the Tribunal should be followed. He submitted that merely because the revenue has filed an appeal before the Hon'ble High Court challenging the order of the Tribunal, the same cannot be a ground to take a contrary view than the view taken by the Tribunal unless and until the same is reversed by the Hon'ble High Court.

2013-14, the assessee company has given corporate guarantee amounting to Rs.106,03,97,701 to its subsidiary DQ Entertainment (Ireland) Ltd. in respect of credit facility offered from the Bank. He submitted that it is the responsibility of the parent company DQE India to provide guarantee to subsidiary DQE Ireland which is to be categorized as shareholders activity as specified in OECD Transfer Pricing guidelines, 2010. Accordingly, there is no economic justification of charging DQE Ireland in respect of the guarantee given. He submitted that since the issue of corporate guarantee by the assessee on behalf of its AE is in the nature of quasi capital or shareholder activity and not in the nature of “provision for services”, therefore, the said transaction is to be excluded from the scope of international transaction u/s. 92B of the Act. He submitted that the TPO has computed the guarantee fee at 1.6% p.a. to the assessee company in connection with corporate guarantee given to the AE of Rs.106,03,97,701 at Bank guarantee rate of SBI which is taken at 1.6% which resulted an adjustment of Rs.169,66,383 for the A.Y. 2013-14. Referring to various

0.27% to 0.5% has been held as reasonable. He further submitted that the assessee, in the instant case, has collected whatever amount it has incurred for the bank guarantee and nothing has been paid from the assessee’s coffers. He submitted that charging of commission @ 1.6% on the corporate guarantee appears to be on the higher side and therefore the same should be reduced to 0.5%. For the above proposition, he relied on the decision of the co- ordinate Bench of the Tribunal in the case of DCIT Vs. Lanco Infratech Ltd. (2017) 81 taxmann.com 381 and various other decisions.

“ 2.3.9 Under the Safe Harbour Rules. the safe harbour margin for guaranteeing one hundred crore rupees is at the rate of 2% or more per annum on the amount guaranteed and for the guarantee provided above one hundred crore rupees, the rate is 1.75% or more per annum on the amount guaranteed, As per CBDT (June 2017 notification), commission or fee in case of assessee providing corporate guarantee is prescribed to be not less than one percent per annum on the amount guaranteed. Thus, it could be seen that the Tribunals have upheld the ALP of upto 3.5 %, the safe harbour margin for guaranteeing one hundred crore rupees is at the rate of 2% or more per annum whereas as per the Notification of CBDT issued on 7th June 2017, it should not be less than 1%. As already noted, the perusal of the sanction letters reveal charging of commission at the rate of 1.25% p.a. by Axis Bank. at the rate of 1.75% p.a. by Exim Bank along with service fee of 0.50% of sanction amount and processing fee of Rs.1 Lakh. Further, the guaranteed amount is payable on demand besides the securities offered. Perusal of the sanction letters also show that the bank has given the guarantee based on the counter guarantee of the borrower and all other securities taken by the bank to provide other cash credit facilities. Besides the bank will charge additional interest of 2% / 5.5% if the guarantee was invoked. On the other hand. we note that the risks assumed by the assessee is much more, as it has not taken any counter securities but primarily responsible for the loan amount. Therefore, we are of the view that the ALP of the Corporate Guarantee applied by the TPO of 1.6% is very fair reasonable and appropriate and is accordingly UPHELD. It is also noted that the TPO has taken the effective guarantee value at Rs.54,35,11,471/-, working of which is not available. Therefore, the TPO/AO may cross-check with the information provided in table referred at para 2.3.1 above, and arrive at the correct amount after verification and which may be taken to compute the ALP adjustment on guarantee commission. “

He accordingly submitted that the order of the Assessing Officer on this issue be upheld.

“ 4.3 Having regard to the rival contentions and material on record, we find that this issue is covered in favour of the assessee by the decision of the coordinate bench of this Tribunal in assessee’s own case for AY 2010-11 onwards; and one of us i.e. JM is signatory to the orders of the Tribunal for AYs 2011-12 and 2012-13. For the sake of convenience and ready reference, we reproduce the findings of the Tribunal in AY 2012-13 (ITA No. 441/Hyd/2017, order dated 12/01/2018) as under: “6. Having regard to the rival contentions and the material on record, we find that the issue involved is adjustment towards profit attributable to the assessee company in connection with sale of intangible assets by the assessee to its AE, DQ Entertainment (Ireland). The IPR was sold by the assessee to its AE in the earlier A.Ys and the ALP of the same had arisen for consideration in the A.Y 2010-11. The Coordinate Bench of the Tribunal at Para 15 of its order in dated 22nd June, 2016 has held as under: "15. Considered the submissions of both the parties and perused the material facts on record as well as the orders of revenue authorities. The facts are, the assessee had sold "IP" (Jungle Book) to its "AE" on 30/09/2009 at the development stage. It was not fully developed to generate revenue immediately. As per ld. AR, "AE" was in a position to generate revenue in the last quarter of 2009-10 i.e. Jan- March, 2010. But TPO adopted the whole revenue generated by "AE" in the whole year to arrive the profit arithmetically to the Indian Entity. The main issue before us is, whether the TPO justified to determine the profit attributable to Indian entity (assessee) when he himself determined the sale consideration of IP (Jungle Book). When the TPO agreed that there is a outright sale, there ends the international transaction. Now, TPO is trying to go beyond sales and making TP adjustments. We are asking ourselves, whether there is any international transaction exists. In our considered view, there is no international transaction after outright sale. There is no international transaction exists as per section 92Bof the Act as there is no transaction exists between assessee and with it's AE. We are inclined to reject the stand of the TPO. 15.1 Moreover, after the completion of the sale process, the "AE" has done transaction with the outsiders or outside the jurisdiction of the Indian territory but there is no transaction done with the assessee involving the above IP (jungle book) to consider that there exists a international transaction. Once, the IP is sold and Arm's length price is determined, the "IP" becomes the property of "AE". The assessee has no locus standi to claim any benefit neither the revenue. 15.2 The revenue has grievances on the arrangement and existences of group companies. There is no doubt, there exists tax planning. There can be tax planning within the four corners of the taxation laws. There is enough mechanism in the existing Act and also there is DTAA - arrangement with Ireland, which will take care of the situations of tax avoidance. The revenue has not brought any cogent evidence to prove that there exists any tax avoidance. In our considered view, the action of the TPO is not justified and accordingly, the grounds raised by assessee are allowed".

7. Since the facts and circumstances of the case for the A.Y before us are similar, respectfully following the decision of the Coordinate Bench, we allow the assessee's ground of appeal and hold that there is no international transaction during the relevant financial year. Grounds of appeal 2 & 3 are accordingly allowed.”

Respectfully following the said decision, we hold that there is no international transaction during the relevant AY and the addition made by the AO is accordingly deleted. Thus, Ground Nos. 2 & 3 are allowed.”

Since the facts of the impugned assessment year are identical to the facts of the assessee's own case decided in the immediately preceding assessment year, therefore respectfully following the same and in absence of any contrary material brought to our notice by the learned Departmental Representative we direct the Assessing Officer to delete the addition of Rs.2,84,73,482 made by him on account of Transfer Pricing Adjustment.

AEs as under :

“ i) The Corporate Guarantee as given to the bank provided a distinct advantage to the AE in obtaining credit facilities from the bank. Apart from the benefit to the AE, it always involve an inherent cost to the assessee company as the overall risk exposure of the assessee company becomes high by the quantum of guarantee. Guaranteed loans primarily shift the risk from the lender to the guarantor. The parent company assumes risk on behalf of its associate enterprise, which it would not have undertaken in case of a third party without charging a consideration for it. because there is always an element of benefit or cost on account of such risk undertaken. ii) By providing corporate guarantee, subsidiary's creditworthiness increases and higher credit rating of AE is due to a guarantee by another group member, such association positively enhances the profit making potential of that AE. There was a clear benefit accrued to the AEs by the guarantee provided by the assessee. Besides, the higher risk exposure by the assessee company affects its credibility and capacity to borrow; all of which have a bearing on the profits, income and assets of the assessee company. iii) Thus transaction of providing corporate guarantee result in providing benefit Lo the AE and, therefore, provi~ion5 of transfer pricing should be invoked in respect of such a transaction. An unrelated third party would not provide such benefit or assume 11igher risk without adequate compensation. Hence the provision of guarantee by the assessee to its AEs need to compensated at ALP.”

opinion are distinguishable and not applicable to the facts of the present case. In our opinion, every case depends on its own sets of facts and cannot be applied as a binding precedent in other cases. In this view of the matter and in view of the detailed reasoning given by the DRP/A.O., we uphold the order of the A.O./TPO/DRP on this issue. Accordingly, the grounds raised by the assessee on this issue are dismissed.