MSM DISCOVERY P.LTD,MUMBAI vs. ASST CIT CEN CIR 12(3)(2), MUMBAI

Brief facts of the case are that the assessee is a joint venture between Multi Screen Media Private Limited (now known as Sony Pictures Networks India Private Limited and Discovery Communications India) during the relevant Financial Year, the assessee was engaged in the business of distribution of channels to Local Cable Operators (‘LCOs’), Multi System Operators (‘MSOs’) and Direct to Home (‘DTH’) operators. The assessee while filing return of income reported international transaction with its Associate Enterprises (AE) of distribution fee. The assessee in Form 3CEB, reported international transaction of license fee paid/payable for distribution of Television Channels in the following manner:

The assessee bench marked the transaction of distribution fee by adopting Transaction Net Margin Method (‘TNMM’) and selected software distributor i.e. company engaged in selling intangible products as comparable on the ground that information regarding the companies carrying on the same function was not available in the public domain. The assessee selected the following eight comparable:

The assessee has shown its margin of 3.48% from distribution of AE Channel which was higher than the arithmetical means of 0.42% earned by comparable company, hence, the assessee claimed that its transaction with its AE was at arm’s length. 6 Mum 2016- Sony Pictures Networks India Pvt. Ltd.

However, during the Transfer Pricing assessment proceeding before the Transfer Pricing Officer (TPO), the assessee was asked to bench mark its transaction taking local cable operators (LCOs), Multi system operators (MSOs) &directs to home ( D.T.H) Operators as comparable. Accordingly, the assessee undertook the search to identify the LCOs, MSOs and D.T.H. Operator and identified eight comparable. The search resulted in the comparable having arithmetical means of 4.86% and the assessee claimed it was within +/- 5% range and qualified for Arms Length Test.

Thereafter, the TPO further issued a show-cause notice dated 27.01.2015 as to why the software distribution search carried out about the assessee should not be rejected. It was confronted that as to why the Royalty-stat database should not be selected for the purpose of benchmarking the transaction of “distribution fees”. The TPO recorded that no reply was filed by assessee. The TPO also took his view that “distribution fees” was in the nature of Royalty and Royalty agreements found in the Royalty-Stat Database were better functionally comparable to the assessee than the comparables selected by assessee. The assessee was also show-caused to disclose the rate charge with 3rd party channel Via Com 18 India Pvt. Ltd., ND Television Ltd. and T.P. Today Network for distribution activity and that why the same rate should not be applied. 9. The TPO recorded that no reply was received from assessee. However, in assessee’s reply dated 11.11.2015 the assessee stated that MSMD has to pay Mum 2016- Sony Pictures Networks India Pvt. Ltd. guarantee fee to the channel operator in addition to revenue. But under the distributor agreement with its AEs MSMD is not required to pay any minimum guarantee fees. The assessee is exclusive channel distribution for its AE channels and there is no internal CUP available.

The TPO after considering the reply and in absence of detailed furnished by the assessee that no benchmarking is possible, the TPO held that distribution fee paid by assessee is in the nature of Royalty and accordingly benchmarked the international transaction on the basis of 7 Royalty-stat database in the following manner:

The TPO made the adjustment in the following manner:

Thus, the TPO suggested adjustment of Rs. 335,69,71,528/- on account of distribution fee to its AE. On receipt of report of TPO, the Assessing Officer passed the draft assessment order under section 143(3) r.w.s. 144C(1) dated 27.02.2015. The copy of draft assessment order was served upon the assessee. The assessee exercised its option for filing objection before the Dispute Resolution Panel (DRP). During the hearing before the DRP, the assessee furnished the details of 3rd party channel distributor and urged that 9 Mum 2016- Sony Pictures Networks India Pvt. Ltd. due to insufficient time, the assessee could not furnish the same before the TPO. The Net Margin of assessee from AE segment was 3.48% compared to 4.77% from Non-AE segment. Thus, the assessee claimed its transaction with AE is within +/- 5% as prescribed under section 92C(2).

The DRP vide its direction dated 30.11.2015 held that distribution fee paid by assessee to its AE is in the nature of Royalty as the Auditors of assessee in assessee’s report in Form 3CEB have used word “licence fee” to decide the distribution fee paid to its AE and accordingly upheld the action of TPO in considering Royalty agreement as comparable to distribution agreement by the assessee. However, the ld. DRP excluded 4 royalty agreements out of 7 agreements selected by TPO on the ground that 4 agreements were not in force during the previous relevant year. 14. The ld. DRP also carried out alternative benchmarking by applying internal TNMM as compared Net Margin earned by assessee by distributing the AE channel as compared the Net Margin earned by assessee distributing Non- AE channels. The ld. DRP while making comparison, benchmarked the allocation of expenses to the AE and Non-AE segment at 5.84% which was within +/- 5% tolerance range as prescribed under section 92C(2). The ld. DRP also made alternative adjustment of Rs. 63,77,22,598/- by applying internal TNMM/CUP compared the Gross Margin earned from distribution of AE channel vis-à-vis Gross Margin earned from distribution of Non-AE channel. Mum 2016- Sony Pictures Networks India Pvt. Ltd.

On receipt of the direction of the DPR , the assessing officer passed the final assessment order dated 31.12.2015 by making T.P. Adjustment to Rs. 297,62,51,177/-. The adjustment was rectified by TPO and the adjustment was restricted to Rs. 212,55,29,284/- vide order dated 06.12.2019. Thus, further aggrieved, the assessee has filed this appeal before the Tribunal.

We have heard the submission of ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the revenue and perused the material available on record. The ld. AR of the assessee submits that royalty stat search undertaken by TPO and royalty agreements identified as a comparable in two folds namely (i) distribution fee paid by assessee to its AE is not in the nature of royalty, hence, royalty search undertaken by TPO is not appropriate and (ii) royalty agreements selected are functionally not comparable to the distribution agreements entered into by assessee for distribution of AE channels. In support of his first contention, the ld. AR of the assessee submits that the distribution agreements entered by assessee only grants the right to distribute the channel owned by the AE over various platforms namely Cable, DTH and other digital platforms. The assessee only acts as an intermediary between the Broadcaster and the ultimate customer who views the channel. The assessee neither any right in the content that is broadcasted over the channel nor any right to make any changes in the content to be broadcasted on the channel. The assessee simply acts as a distributor and distributes the channel Mum 2016- Sony Pictures Networks India Pvt. Ltd. to various LCOs/MSOs/DTH operators in the chain who in turn distribute it further to the ultimate viewer. Thus, the distribution fees paid by the assessee cannot be termed as “Royalty” within the meaning of section 9(1)(vi) by making the payment it does not acquire any right to use any copyright or rights relating to the content that is broadcasted on the channel. 17. The ld. AR of the assessee further submits that “distribution fees” is not in the nature of Royalty has been upheld by Tribunal and affirmed by Hon’ble Bombay High Court in the hands of payer as well as the recipient of distribution fees in case of SET India Private Limited (ITA No. 1347/2013 and in case of recipient of distribution fees in CIT vs. MSM Satellite (Singapore) Pte Limited (ITA No. 103 & 207/2017. Further, the ld. DRP in case of MSM Satellite (Singapore) Pte Limited in A.Y. 2010-11 & 2011-12 has held that income received from MSMD as distribution fee is not in the nature of royalty; the copy of order of DRP is filed. Copies of all three aforesaid decisions are placed on record.

Accordingly, the ld. AR of the assessee submits that distribution paid by the assessee to its AEs cannot be characterized as Royalty as held by the Hon’ble Bombay High Court. Hence, the view of TPO to determine ALP paid by assessee to its AE by comparing the payment with the royalty agreements is devoid of merits and deserves to be rejected.

On second contention regarding royalty agreements selected are functionally not comparable to the distribution agreement by assessee with Mum 2016- Sony Pictures Networks India Pvt. Ltd. its AE. The ld. AR of the assessee submits that royalty agreements selected by TPO from the Royalty-stat database fail the comparability criteria. The ld. AR of the assessee furnished the comparable criteria which he will refer while discussing the comparability, if necessity arise.

On benchmarking of transaction selecting software comparable, the ld. AR of the assessee submits that benchmarking carried out by assessee by applying TNMM and selecting the software comparable is in accordance with the law for the reasons that software distributors were accepted in A.Y. 2010-11 by TPO/DRP after detailed analysis. The copy of order of ld. DRP is placed on record. The ld. AR of the assessee submits that if comparable accepted in A.Y. 2010-11 are considered for the year under consideration, the ALP will be at 3.46% based on two comparable which are common in the year under consideration. The ld. AR for the assessee furnished the detail chart showing the functional comparability of four comparable rejected by the TPO. The ld. AR of the assessee further submits that software distributions are appropriate comparable to benchmarking channel distribution activities and is upheld by Tribunal in the following cases.  ACIT vs NGC Network (India) Pvt. Ltd. (ITA No. 5307/M/2008) dt. 23.02.2011,  Turner International India Private Limited vs ACIT (ITA No. 1204/Del/2018 dt. 18.06.2018,  Turner International India Private Limited vs DCIT (ITA No. 218/Del/2017 & ITA No. 1069/Del/2014) dt. 01.01.2019 and ITA No. 971 Mum 2016- Sony Pictures Networks India Pvt. Ltd.  Turner International India Private Limited vs DCIT [2019] 101 taxmann.com 446 (Del Trib.) dt. 08.10.2018.

On the other hand the ld. DR for the revenue supported the order of lower authorities. The ld. DR further submits that in its TPSR the assessee contended that that no direct comparable companies are available for channel distributor result. In absence of details no benchmarking was possible. The TPO has no option but to go to search Royalty stat data for searching comparable. The decision of High Court in NGC Network (India) Pvt Ltd (supra) is based on different facts and the ratio of order in that case is not applicable on the facts of this case. While examining the comparability functionality has to be seen predominantly.

We have considered the rival submissions of the parties and have gone through the orders of the lower authorities. The first issue for our consideration is whether the ‘distribution fee’ is in the nature of ‘Royalty’ or not. Before us the ld. AR for the assessee vehemently submitted that the TPO wrongly characterized the channel distribution fee as Royalty. It was further explained that the assessee acts as a intermediary between the broadcaster and the ultimate customers who uses the channels. Thus, distribution fee paid by the assessee cannot be termed as Royalty. This fact in not controverted by ld. DR for the revenue nor any contrary facts were brought on record by the lower authorities. The ld. DRP in assessee’s MSM Satellite (Singapore) Pte Ltd in its order dated 19.12.2014 for AY 2010-11 by following the order of Tribunal for AY 2005-06 & 2006-07 dated 14 Mum 2016- Sony Pictures Networks India Pvt. Ltd. 28.08.2015 held that distribution revenue is not Royalty income. The Hon’ble Bombay High Court in CIT Vs SET India Pvt Ltd (ITA No. 1347 of 2013) held that the distribution fee paid is not in the nature of royalty.

Now, turning to the benchmarking of transaction on the basis of software distributors. The assessee benchmarked its transaction by adopting TNMM and selected software comparables. The assessee selected 8 comparable companies. Out of 8 comparable companies, the TPO rejected 4 comparable companies on the ground of functional dissimilarity. Before us, the ld. AR of the assessee submitted that 4 comparable were wrongly rejected by TPO which are functionally comparable. The ld. AR further submits that Avance Technology Ltd. (Avance), Empower Industries Ltd. (Empower), Sonata Information Technology (Sonata) and SVM Software Ltd. are comparable with the assessee. All these comparable companies are engaged in distribution of software product and good comparable with the assessee. In Mum 2016- Sony Pictures Networks India Pvt. Ltd. support of submission, the ld. AR relied on the decision which we have mentioned in para 20 above.

On the other hand, the ld. DR for the revenue supported the order of lower authorities.

We have considered the submission of both the parties and perused the record. The TPO during the TP Adjustment proceeding rejected Avance on the ground that this companies is engaged in software trading, sales of hardware and other services and no segmental information is available. DRP upheld the action of on the basis of order for A.Y. 2010-11.Before Tribunal, the assessee has placed on record the financial statement of Avance. Perusal of financial statement reveals that this company has earned Rs. 140 Crore from sale of software out of total sales of Rs. 176 Crore. This company has approximately 80% of its income from software product. Thus, segmental information as placed before us is available at (Page No. 204 to 205 of Paper Book). Further, while rejecting Empower, the TPO held that this company is engaged in selling of hardware and no segmental are available.

Next ground of appeal (Ground No. 24) relates to short deduction of TDS of Rs. 1.61 Crore. And Ground No. 25 relates to MAT Credit. Ground No. 26 & 27 relates to interest u/s 234B. Although, no specific submission was made by ld. representative of the parties. However, keeping in view the principle of natural justice, the AO is directed to verify the TDS details and grant appropriate relief to the assessee as per law. Similarly on MAT Credit, the AO is directed to verify the fact and grant relief to the assessee in accordance with law. So far as levy of interest u/s 234B is concerned, this interest is consequential, thus, the AO is directed to work out the interest as per law. Ground No. 28 relates to initiation of penalty u/s 271(1)(c). This ground of appeal is premature and needs no specific direction.

In the result, appeal of the assessee is partly allowed.