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Facts
The assessee, Warner Media India P. Ltd., is appealing against a transfer pricing adjustment made by the AO/TPO/DRP concerning its distribution segment and imputed interest on overdue receivables. The core of the dispute revolves around the selection of comparable companies for determining the arm's length price (ALP).
Held
The Tribunal, referencing its own prior orders and the High Court's affirmation, held that channel/content owner companies are not valid comparables for the assessee's distribution segment. It also agreed that software distribution companies can be considered comparables. Consequently, specific channel owner companies were excluded, and certain software distributors were included in the final comparable set.
Key Issues
Whether channel owner companies are valid comparables for benchmarking a distributor's arm's length price, and whether software distribution companies can be used as comparables for this purpose.
Sections Cited
143(3), 144C(13), 144C(5), 92, 270A, 244A
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Income Tax Appellate Tribunal, DELHI BENCH, ‘I’: NEW DELHI
Before: SHRI C.N. PRASAD & SHRI M. BALAGANESH, ACCONTANT MEMBER
ORDER
PER C.N. PRASAD, JM,
This appeal is filed by the assessee against dated 30.04.2022 passed final assessment order u/s.143(3) r.w.s. 144C(13) of the Act pursuant to the directions of the DRP dated 12.11.2021 passed u/s. 144C(5) of the Act for the A.Y. 2017-18. 2 The assessee has raised following grounds of appeal :-
On the facts and circumstances of the case and in law, the Learned Assessing Officer (Ld. AO) has erred in passing an assessment order under section 143(3) read with section 144C of the Income-tax Act, 1961 (the Act) dated 30 April 2022 giving effect to the directions of the Learned Dispute Resolution Panel ('Ld. DRP) dated 12 November 2021. Each ground is referred to separately, which may be kindly considered independent of each other and without prejudice to each other.
1. That on the facts and circumstances of the case, and in law, the Ld. AO/ Learned Transfer Pricing Officer (Ld. TPO)/ Ld. DRP have erred in making a transfer pricing adjustment of INR 70,013,697 to the total income with respect to the distribution segment of the Appellant and a transfer pricing adjustment of INR 168,252 to the total income by imputing interest on alleged overdue receivables from the Associated Enterprise ('AEs') on an ad-hoc basis.
2. That in relation to the transfer pricing addition with respect to the distribution segment of the Appellant, the order issued by the Ld. AO/TPO and directions issued by the Ld. DRP are not in conformity with the order passed by the Hon'ble Income Tax Appellant Tribunal ('Hon'ble ITAT) in the Appellant's own case for AY 2006- 07 (second round of appeal) which is squarely applicable in the instant case as well, thus, violating the principle of judicial discipline.
3. That in relation to the transfer pricing addition with respect to the distribution segment of the Appellant, the Ld. AO/Ld. TPO/Ld. DRP have erred in disregarding the Hon'ble ITAT's order in Appellant's own case for AY 2005-06 and AY 2006-07 (first round of appeals) and AY 2007-08 and AY 2008-09 (first round of appeals).
4. That in relation to the transfer pricing addition with respect to the distribution segment of the Appellant, the Ld. AO/ Ld. TPO/Ld. DRP have erred in disregarding the order passed by the Hon'ble ITAT in the case of NGC Network (India) Pvt. Ltd. (ITA No. 5307/M/2008) which is squarely applicable in the Appellant's case.
5. That in relation to the transfer pricing addition with respect to the distribution segment of the Appellant, the Ld. AO/Ld. TPO/Ld. DRP have erred:
5.1 In not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ('the Rules'); 5.2 In conducting a fresh comparability analysis and selecting companies as comparables in contradiction to the Hon’ble ITAT’s directions in Appellant’s own case for earlier years; 5.3 In failing to understand and appreciate the functions performed, assets employed and risks assumed by the Appellant and the AE’s, thereby comparing companies which are functionally not comparable vis-à-vis the distribution segment of the Appellant: 5.4 In rejecting functionally comparable companies and instead selecting functionally dissimilar companies to determine the arm's length price for the distribution segment of the Appellant based on the fresh search conducted by the Ld. TPO.
6. That in relation to transfer pricing addition with respect to alleged overdue receivables, the Ld. AO/Ld. TPO/L4. DRP have erred: 6.1 In re-characterizing outstanding receivables from AE as a loan advanced to AF; 6.2 In not appreciating the fact that the Appellant is a debt-free entity and hence does not incur any interest cost for funding its working capital requirement: 6.3 In not appreciating that receivables is a consequence of the main transaction and cannot be considered as separate international transaction; 6.4 In not appreciating that the working capital adjustment subsumes the impact of outstanding receivables and payables of the Appellant; 6.5 In applying a mark-up of 250 basis points on LIBOR on ad-hoc basis.
7. That on the facts and circumstances of the case and in law, the Ld. AO erred in not allowing complete credit of tax deducted at source claimed by the Appellant.
8. That on the facts and circumstances of the case and in law, the Ld. AO erred in not granting applicable interest on refund in accordance with Section 244A of the Act.
9. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270A of the Act against the Appellant.
3. Ground NO.2 to 5.4 of grounds of appeal are in respect of transfer pricing adjustment made in distribution segment of the assessee and the Ld. Counsel for the assessee submitted that the seven comparables selected namely Vision Corporation Ltd., News
24. Broadcast India Ltd, TV Vision Ltd, Enter
10. Television Pvt. Ltd, Malayalam Communications Pvt. Ltd, Odisha Television Ltd. and TV Today Network Ltd. are functionally different was rejected by the TPO on the premise that the assessee was engaged in planning channel content and production services alongwith its content for channels like HBO, POGO, Cartoon modification was undertaken by the assessee. The AO held that there was little difference between these comparables being “channel owner” and the risk assumed by the assessee while distribution of such channels. The Ld. Counsel submits that additionally it was observed by the TPO that since the assessee had adopted transactional net margin method (“TNMM”) as the most appropriate method minor differences between the comparables and the assessee were of no consequence.
The Ld. Counsel for the assessee submitted that the TPO while discussing the reliance of the assessee on its own orders passed by the Hon’ble Tribunal, relies upon the first-round order passed for the AY 2005-06 to 2008-09. The Ld. Counsel for the assessee further submits that the DRP relying on directions issued by the DRP for previous assessment year i.e. for A.Y. 2015-15 and 2016-17, rejected the objections of the assessee.
5. The Ld. Counsel submitted that the TPO while following the directions issued by DRP included these comparables in the final set for determination of ALP u/s.92 of the Act.
6. The Ld. Counsel for the assessee submits that this issue is no longer res-integra and the Hon’ble Tribunal in assessee’s own case for AY 2006-07, vide order dated 18.06.2018, passed in the second round of litigation, has categorically held that the comparables being the channel and content owners who are full-fledged channel companies undertaking content creation on their own, could not be held to be a valid comparable to benchmark the distribution segment of the assessee company. The Ld. Counsel submitted that the Tribunal’s order is placed at pages 999 to 1002 of the paper book.
7. The Ld. Counsel further submitted that the Hon’ble High Court vide its judgment dated 10.09.2024 has affirmed the order passed by this Tribunal for A.Y.2016-17 in its entirety and the copy of the decision is placed at pages 1081 to 1084 of the paper book.
The Ld. Counsel further with respect to the companies namely PS IT Infrastructure and Services Ltd., JMD Ventures Ltd. (Seg), Compuage Infocom Ltd. submitted that the TPO rejected the TP study and the comparables on the premise that the assessee was not engaged in mere distribution activities and as such, software distribution companies cannot be held to be valid comparables to benchmark the ALP of distribution segment.
The Ld. Counsel submitted that the DRP while following the directions issue by DRP for previous assessment year rejected the inclusion of the said three comparables.
10. The Ld. Counsel further submitted that the TPO while following the directions issued by the DRP, excluded these comparables from the final set, for determination of ALP under section 92 of the Act. The Ld. Counsel submits that this issue is also no longer res-integra and this Hon’ble Tribunal in assessee’s own case for AY 2006-07, in the second round of litigation upheld the approach adopted by the assessee i.e. selection of software distribution companies as comparables for benchmarking distribution segment of the Assessee. It was held that comparables engaged in trading of computer packages and classified as software distribution companies are good comparables for determination of ALP of the distribution segment.
The Ld. Counsel further submitted that the Hon’ble High Court of Delhi vide its judgment dated 10.09.2024 has affirmed the order passed by the Tribunal for AY. 2006-07 in its entirety Page | 6 and the judgment of High Court is placed at pages 1081 to 1084 of the paper book.
12. On the other hand the Ld. DR supported the orders of the authorities below.
13. Heard rival contentions, perused the orders of the authorities below and the order of the Tribunal for the A.Y. 2006-07 and the order of the Hon’ble High Court. We find that the issue in appeal is decided in faovur of the assessee by the Tribunal for AY 2006-07 by observing as under :-
The facts in brief are that the assessee, M/s. Turner International India Pvt. Ltd. is a subsidiary of Historic TBS Asia LLC and is a part of Time Warner Group. The assessee is mainly engaged business of marketing 'and distribution of satellite channels of Cartoon Network, CNN, POGO, HBO, etc. i... TV channels owned by Turner International Inc. Its functions are primarily driven towards promoting the channels and associated proprietary intangible assets of Turner Group. In the transfer pricing study report, following key functions and conduct of business have been enumerated which are as under:- "Sub distribution of distribution rights for Turner Group 'channels'. For the Turner Group channels in FY 2005- 06, it received a 10% return on its operating expenses. Marketing of advertisement airtime for the Turner Group 'channels. For the Turner Turner group channels, TIIPL is entitled to 15% of the net advertising revenue. Purchase of distribution and, advertisement rights for HBO channel. For HBQ channel, TIIPL (for the sub- distribution and marketing of advertisement airtime activity) would pay a fixed fee of USD 1,395,833 per month to HBO PP. Provision of product, and promotional licensing services for certain "cartoon characters". TIIPL is entitled to 40% of revenues collected.
Provision of production services. TIIPL is entitled to a return of 10% on costs incurred toward this activity 1.2.4 In conduct of its business, TIIPL engages in the following inter-company transactions with its Group Companies: Part of subscription fee (collected from users in India) paid/ payable. Commission on 'account of the marketer of advertisements activity. Part of Promotional license and product license fee for sub-licensing of certain proprietary "cartoon characters" Income from Production Payment of fixed Fee to HBO for subscription and advertisement representation Interest expense on loans received from Group Companies. Receipt of reimbursement of expenses from Group Companies. 1.2.5 From a transfer pricing perspective, TIPL's business activities have been analysed separately. Its activities of acting as a marketer of advertisements and distributing sub-distribution rights for the Turner group channels (including HBO) have been aggregated. These activities are essentially driven towards promoting channels, by increasing their spread, awareness and viewership. Thus, the activities are inter-related and complementary to each other. Overall, this aggregate segment contributed to approximately 95% of the Company's total revenues during 2005-06. 1.2.6 Further, the following international transactions have been separately analyzed. Income from production 1.2.7. Based on an analysis of the functions performed and risks assumed, we conclude TIIPL has less complex operations and bears lesser share of risks and was accordingly selected as the tested party for this analysis.”
3. The segmented financial information of the assessee for the year ended 31st March, 2006 for various stream of income was treated as under :-
4. The International transactions reported by the assessee for the year under consideration and the most appropriate method adopted for bench marking the same was as under :-
The present proceedings are second round of proceedings in pursuance of direction given by the Tribunal vide order dated 20th May 2016, wherein the matter was remanded back to the file of the TPO/ AO for undertaking fresh comparability analysis for the distribution segment of the assessee. The main issue before the Tribunal was with respect to category/ class of comparable that are to be selected for bench that only a distributor would be a valid comparable for the purpose of bench marking the distribution segment. The relevant observations of the Tribunal are at paragraph 12 and 14. For the sake of ready reference are reproduced hereunder:-
“12...... The learned TPO ignoring the same erred in comparing the appellant with the entities involved in service activities. He erred in selecting service companies as comparables for the distribution segment of the appellant. The learned TPO was also not justified in ignoring the companies presented by the appellant in the TP documentation and the fresh search submitted. We concur with the submissions of the Learned AR for benchmarking a distributor like the appellant, only distributors, should be selected as comparables and since distributors of channels were not available in public domain, distributors of broadly comparables products/services should have been selected. In the appeals for the assessment years 2007-08 and 2008-09 in the case of appellant itself on similar Issues, the ITAT has upheld that the comparables selected by both the Revenue and the appellant are not appropriate and has set aside the orders of the Assessing Officer and remitted back the matter to the file of the Assessing Officer to undertake fresh search of comparables companies.
In view of above submissions and the findings of the ITAT in the appeal for the assessment year 2007, 08 and 2008-09 in the case of assessee itself on an identical issue, we in the interest of justice and to meet out ends of justice set aside the matter to the file of the Assessing Officer to decide the issue afresh after undertaking fresh search of comparable companies. It is needless to mention over here that while deciding the issue afresh, the Assessing Officer will afford opportunity of being heard to the assessee and will meet out the submission of the assessee by speaking order."
In pursuance of direction given by the Tribunal, the TPO undertook fresh comparability analysis and assessee furnished fresh search comparable which were in distribution of software to bench mark the distribution segment. The TPO, also undertook a fresh comparability analysis wherein companies engaged in the business of broadcasting and distribution of TV channels were to seven identified. In addition comparable engaged in business of broadcasting and distribution of TV channels identified by him, he also accepted certain comparables provided by the assessee in his fresh search. However, the TPO rejected two comparables of the assessee, namely, Trijal Industries Ltd. and Svam Softwares Ltd. on the ground of functional dissimilarity and persistent loss making. Finally, the set of ten comparable companies with average mean margin (based on PLI of operating profit/operating revenue), of 13.53% was selected by the TPO to bench mark the impugned segment and Rs. accordingly. an upward adjustment 12,78,34,821/- was proposed. Apart from that further of adjustment of Rs.7,56,353/ was made on account of corporate tax issues.
Before the DRP, the assessee mainly objected to the selection of companies by the TPO which were engaged in the business of broadcasting and distribution of TV channels and exclusion of the two companies selected by the assessee which were engaged in software distribution. Certain error in computing the margin of companies was also raised along with denial of benefit of working capital adjustment. The DRP directed the TPO to verify the margins of the comparable companies and also granted the benefit of working capital adjustment to the assessee. However, the assessee's contention with respect to the inclusion/exclusion of comparables was rejected. Thus, from the stage of the DRP following set of comparables were finalized with an average mean of 11.95%.
8. Before us, learned counsel for the assessee, Shri Rahul Mitra, submitted that, first of all the TPO has grossly misinterpreted the functionality of the assessee's distribution segment, as he has proceeded with the premise that the assessee is engaged in production activities without appreciating the fact that the transactions of distribution and production/ancillary activities are independent of each other for which a separate remuneration is earned by the assessee. Regarding international distribution rights with respect to the channels held by the group companies, he Page | 11 pointed out that they have the sole right to determine the content of the channels and the same has been duly captured in the transfer pricing study report. The distribution activity and production activity two were completely different set of transactions and separate remunerations were earned said activity benchmarking has also been done in the TP study is and separate cannot be report. In fact, in the first round of proceedings the TPO accepted the above mentioned ancillary services and no adverse inference was drawn by the TPO, because these services constituted roughly 4% of the entire value of international transaction and these services were provided in the capacity of contract service provider, which being remunerated separately. The channel/content owner companies. which have been selected by the assessee company perform these functions in the capacity of an entrepreneur whereas assessee characterized as an entity that plans or manages the content. He strongly emphasized that the ancillary services are separate and distinct from distribution segment and must be considered de hors to the main transaction under adjudication. The separate benchmarking of these transactions was found to be at arm's length during the first round of assessment proceedings. He also pointed out that the DRP had sought for a remand report from the TPO in respect of assesseé's contention and the TPO in his remand report himself stated that it is the AEs who are playing crucial role of planning and determining channel contents and he himself clarified that assessee is not engaged in planning channel content as has been contended by the TPO in his transfer pricing order. Thus, TPO in his impugned order has had aggregated erred in stating that assessee distribution transaction with production services. Again, the remand report was sought from the TPO by the DRP, who furnished an the alternative analysis as are was wherein companies engaged as software distributors were searched. However, the DRP held them to be a result, the inappropriate comparables and additional comparables furnished by the TPO in his remand report has been rejected by the learned DRP. Thus, he submitted that for bench marking the distributors distribution segment only appropriate comparables for bench marking the impugned international transaction and this was the direction of the Tribunal also wherein it categorically held that assessee cannot be compared to channel owners. Consequently, channel/content owners comparables selected by the TPO should be excluded for benchmarking the impugned distribution segment, for the reason that, firstly, neither the DRP nor the TPO could substantiate that performs production of manages the content of programmes distributed by it; secondly, production segment has already been held to be at arm's length; thirdly, production activities are carried out as captive/contract service provider and functions are carried out only at the behest of AEs only and further this transaction is only 4% of the value international transaction; and lastly, the Tribunal has already upheld that assessee is a distributor and this finding of the Tribunal has not been challenged by the Revenue. Accordingly, he submitted that there is a gross violation ITATS order by selecting channel/content owner companies which should be out rightly rejected/excluded. of 9. Mr. Mitra's other limb of argument was that software distributor companies can be taken as a comparable because, in assessee's own case for the Assessment Year 2012-13 software distributors have been directed to be included by the DRP and in Assessment Year 2013-14 TPO has accepted the software distributors. He also relied upon the decision of Tribunal in the case of ACIT vs. M/s. NGC Network (India) Pvt. Ltd., in wherein it was held that companies engaged in distribution of software can be adopted as comparable for companies engaged in distribution of TV channels. Apart from that, he also filed a brief synopsis on each and every comparable to point out the FAR difference of the channel/content owner companies as selected by the TPO/DRP and submitted that they should be rejected on FAR basis. For the sake of ready reference, the main contentions of the assessee with regard to each and every channel owner companies are as under :-
On the other hand, learned DR strongly relied upon the order of the TPO as well as the DRP and submitted that the DRP' has given detailed reason for selecting channel/content assessee's functions are in relation to distribution of owners, because TV channels only which quite similar to the selected ΤΡΟ. Alternatively, content channel he owner companies by submitted that if the companies are to be excluded then matter should be restored back for selection of software distribution companies and based on that fresh benchmarking should be done.
11.We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well Page | 14 as the material referred to before us. From the stage of the DRP, ten comparables have been selected with an average mean of 11.95% and based comparables adjustment such on Rs. 10,07,35,464/- has been made in the distribution segment. The details of these comparable companies with this average margin have already been incorporated above. Out of the said comparable companies, seven comparables have been sought to be excluded by the assessee which are channel and contents owners who are full-fledged channel companies who owned and operate various TV channels and undertake content creation on their own. The Tribunal in assessee's own case for the Assessment Year 2007-08 and 2008-09 and also in Assessment Year 2006-07 have held that Satellite TV channels and network operators significantly different operating models and provide have earning model and once the Tribunal has held that such channel/content owner companies should not be included for the purpose of comparability analysis, then there is no reason why the TPO is again selecting such companies for the purpose of benchmarking the ALP of the assessee's distribution segment. Before us, the learned counsel has already clarified on the basis of material available on record that distribution activity and ancillary/production activity of the assessee are two distinct set of transactions for which, not only separate benchmarking has been done but also separate remuneration has been earned for each of the said activities. So far as production activity is concern, the same has been found at arm's length by the TPO and once these are two different segments then there is no justification to mix up the functions of such ancillary activities with that of distribution activity so as to justify selection of such channel/content owner companies, especially when transaction from such ancillary services constitutes only 4% of the value of the international transaction of the assessee. Apart from that, the assessee is providing these services as a captive service provider for which it is remunerated separately and ALP of such transaction is not in dispute. Accordingly, we reject the DRPs and TPO action for mixing the functionality of distribution and production activities which are in fact independent and also separately benchmarked. We are in tandem with the contention of the learned counsel that these two activities cannot Sun TV be mixed up for distorting, the functionality and justifying the selection of channel owner companies. Thus, we hold that the seven comparable companies, namely, i) Malayalam' Communications Ltd.; ii) Raj Television Network Ltd.; iii) TV Today Network Ltd. iv) Network Ltd.; v), Zee Entertainment Enterprises Ltd.; vi) Zee Media Corporation Ltd.; and vii) UTV Software Communications Ltd.; are directed to be excluded. The other three comparables, namely, Empower Industries India Ltd. (56.65%), Sonata Information Technologies Ltd. (4.54%) and Softcell Technologies Ltd. (4.23%), have been accepted by the assessee. However, after working capital adjustment OP/OR of these three companies are as under:-
In so far as the contention of the assessee that Trijal Industries Ltd. and Svam Software Ltd. should be included, the learned counsel first of all submitted that, these are software distribution companies and in the case of NGC India Ltd. (supra), the Tribunal has held that the companies engaged in distribution of software are also good comparables for benchmarking the distribution of TV channel companies. Further, in the subsequent years the DRP as well as the TPO have also accepted software distributors as a good comparable, therefore, it was contended that these two companies which are engaged in the software distribution should also be included. Even if Svam Software Ltd. which is a persistently loss company is removed, then it was submitted that Trijal Industries Ltd. should be accepted.
In so far as the aforesaid contention of the learned counsel that Software Distribution Company should be accepted, we agree in principle that such companies can be taken for comparability analysis, when there are no direct comparable dealing with distribution of satellite channels are available. Such an acceptability of software distribution companies in the case of distribution of TV channels has found favour by the co- ordinate bench in the case of NGC India Pvt. Ltd. (supra). Thus, we hold that software companies can also be included for the purpose of comparability analysis, because in assessee's case for the subsequent years such companies have been accepted to be good comparables and Trijal Industries Ltd. too Page | 16 has been accepted as a valid comparable by the TPO in the Assessment Year 2013-14. and is own In so far as Trijal Industries Ltd. is concerned, it is seen that this company is engaged in trading of mainly Software computer packages Distribution Company and hence can be taken as good comparable. The functions carried out are quite akin with the distribution activity of the assessee company, which can be analysed atleast under TNMM. Even if we agree with the contention of the learned DR that in case software companies are to be included then matter should be remanded back to the TPO for searching for other software companies. However, looking to the fact that already two rounds of litigations have been done in the case of the assessee and matter pertains to the Assessment Year 2006-07, therefore, to give finality on the issues, we hold that following four comparables with working capital adjustment should be taken and should be benchmarked with the assessee’s margin fo 2.07% on PLI of OP/ OR:- (i) Empower Industries India Ltd. (ii) Sonata Information Technologies Ltd. (iii) Softcell Technologies Ltd. (iv) Trijal Industries Ltd.
14. With this direction, the grounds raised by the assessee on transfer pricing adjustment are treated as allowed.