ASST CIT 16(1), MUMBAI vs. NGC NETWORKS (I) P. LTD, MUMBAI

This appeal by the assessee is directed against the assessment order dated 20/01/2014 passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (in short ‘the Act’).

Brief facts of the case as emanating from the records are: The assessee company is engaged in distribution of Satellite Television Channels namely, National Geographic Channel and History Channel( Now known as Fox Traveller Channel) in India. The assessee during the period relevant to the assessment year under appeal entered into international transaction with two of its Associated Enterprises (AEs) namely;(i) M/s. NGC Network Asia LLC ,USA & (ii) M/s. Fox International Channels (US) Inc. USA. The assessee provided business support services in the form of (a) Promo Production Services; (b) Long Form Production Services; and (c) Quality Control Services in relation to content versioning. To benchmark transactions with its AEs, the , assessee selected eight companies as comparables. The assessee adopted Transaction Net Margin Method( in short ‘TNMM’) as the most appropriate method. The OP/OC was the filter for determining PLI. The Transfer Pricing Officer (TPO) rejected five out of eight comparables selected by the assessee and introduced two fresh comparables. Thus the final set of comparables adopted by the TPO for determining Arms Length Price (ALP) of the assessee’s international transaction and their average arithmetic mean is as under:-

The TPO made adjustment of Rs.29,69,557/- to determine ALP of the international transactions with AEs. On the basis of order of the TPO dated 17/01/2013, the Assessing Officer passed draft assessment order on 25/03/2013. Further, the Assessing Officer in the draft assessment order made disallowance of payment of agency commission Rs.4,70,26,793/- under section 40(a)(ia) of the Act. Aggrieved against the draft assessment order the assessee filed objection before the Dispute Resolution Panel (DRP), inter-alia assailing inclusion of Apitco Ltd. (in short ‘Apitco’) and TSR Darshaw Limited (in short ‘TSRDL’) in the list of comparables by the TPO . The DRP vide direction dated 31/12/2013 rejected the assessee’s objections in toto. The Assessing Officer passed the impugned assessment order in line with the directions of the DRP. Now, the assessee is in appeal before the Tribunal assailing the additions made by the Assessing Officer.

The ld. Authorized Representative for the assessee submitted that TPO has selected Apitco as one of the comparables. The said company is a 100% Government Undertaking and is functionally different from the assessee. The ld. Authorized Representative for the assessee submitted that a perusal of Directors report of Apitco at page 336 of the Paper Book would show that the company is engaged in high end technical consultancy services, such as skill development, tourism and research studies, micro enterprises developments, cluster development, asset reconstruction and management services, energy related services, environment management, infrastructure planning and development, etc. The activities carried out by Apitco are absolutely at variance with the activities of the assessee, which is primarily engaged in providing low end business support services. The ld. Authorized Representative for the assessee submitted that the Tribunal in assessee’s own case in for assessment year 2012-13 decided on 30/04/2019has rejected Apitco as comparable on both ground i.e. the said company being Government Company and being functionally different. The ld. Authorized Representative for the assessee further submitted that in the case of assessee’s group concern, Star India Ltd vs. ACT in ITA No.1902/Mum/2016 for assessment year 2011-12 decided on 01/08/2019, the Tribunal held Apitco is not functionally comparable 6.1 The ld. Authorized Representative for the assessee in order to buttress his contention that a Government company cannot be considered as comparable referred to the decision of Tribunal in the case of M/s.Thyseen Krupp Vs. Addl. CIT, 154 TTJ 689(Mum-Trib). The ld.Authorized Representative of the assessee submitted that the Tribunal excluded Engineers India Ltd. from the list of comparables on the ground that it is a Government Undertaking. The Department carried the issue in appeal before the Hon’ble High Court. The Hon’ble High Court upheld the findings of Tribunal [ CIT vs. Thyseen Krupp reported as 385 ITR 612(Bom).] 6.2 In respect of TSRDL, the ld. Authorized Representative for the assessee submitted that the said company is engaged in BPO/KPO activities and hence, cannot be compared to assessee, a business support provider. The ld. Authorized Representative for the assessee pointed that Tribunal in the case of assessee’s group concern Star India Private Limited vs. ACIT in ITA No.1901/Mum/2016, assessment year 2011-12 decided on 1st Aug.2019 held that TSRDL is engaged in provision of Pay Roll Services and Provident Fund Management Services. The said company is also Registrar and share transfer agent, therefore, it cannot be compared to support service provider. The ld. Authorized Representative for the assessee contended TSRDL has been rejected as comparable by the Tribunal in series of decisions. Some of the Tribunal orders are as under:-

On the other hand, Shri A. Mohan, representing the Department vehemently defended the impugned order and prayed for dismissing the appeal of assessee. The ld.Departmental Representative submitted that merely for the reason that comparable selected by the TPO is a Government Undertaking would not make the comparable bad. The Government Companies work under corporate environment and are competitive in every respect. The ld.Departmental Representative strongly supported the inclusion of Apitco and TSRDL in the list of comparables.

We have heard the submissions made by rival sides and have perused the orders of authorities below. The assessee in appeal has raised 17 grounds. The grounds No.1 to 13 of the appeal are in respect of transfer pricing. The ld.Authorized Representative of the assessee at this stage has confined his submissions only in respect of exclusion of two comparables i.e. Apitco and TSRDL. Our findings on the issue are as under:-

In ground No.14 of the appeal, the assessee has assailed disallowance made under section 40(a)(ia) Rs.4,70,26,793/- The Assessing Officer has made disallowance on account of agency commission under section 40(a)(ia) of the Act on the ground that the assessee has not deducted tax at source under the provisions of section 194H of the Act in respect of said agency commission paid to the agents for procuring business for the assessee. The ld.Authorized Representative of the assessee has explained that the assessee is offering trade discount to its customers and the said trade discount is reflected in the invoice issued by the assessee. The trade discounts labelled as agency commission by Assessing Officer, are neither paid to the agents nor claimed in the books. Therefore, there is no question of deducting tax at source on such alleged payment of agency commission. The ld.Authorized Representative of the assessee has further pointed that in the past assessee was following similar practice of offering trade discounts to its customers, the discounts were reflected in the invoice, no dispute was ever raised by the Department. This fact has not been disputed by the ld. D.R. There has been no change in facts in the assessment year under appeal. Rule of consistency demands that if the transaction has been accepted by the Revenue in the past, without there being any change of facts or the provisions of law, the transaction should not be disturbed.

We find that similar issue had come up before the Tribunal in the case of assessee’s group concern Star Entertainment Media Pvt. Ltd. The Tribunal in an appeal by the Department in after examining the facts on this issue concluded as under:-

Since, we have accepted the contentions of the assessee in excluding Apitco and TSRDL from the list of comparables the margin of the assessee falls within tolerance range of +/- 5%. As a result, the grounds No.1 to 9 and 12 to 13 relating to transfer pricing adjustment have become academic, hence, are not deliberated upon.

The Grounds Nos.15 & 16 of the appeal are respect to charging of interest under section 234B & 234C of the Act. Charging of interest is mandatory and consequential, hence, these grounds are dismissed.

In Ground NO.17 of the appeal, assessee has assailed initiation of penalty proceedings under section 271(1)(c) of the Act. Challenge to penalty proceedings at this stage is premature, therefore, this ground is dismissed as premature.

The ld. Authorized Representative for the assessee submitted that WAPCOS is a Government Company and, hence, should be excluded from the list of comparables for the parity of reasons APPLIED FOR excluding Apitco. The ld. Authorized Representative for the assessee further contended that the Tribunal in the VARIOUS decisions has excluded WAPCOS from the list of comparables being Government Company. To support his contentions, the ld.Authorized Representative for the assessee referred to following decisions:

The ld. Authorized Representative for the assessee further contended that WAPCOS is also liable to be excluded from the list of comparables on account of functional disparity. The ld. Authorized Representative for the assessee pointed that WAPCOS is engaged in providing high end consultancy services and undertakes turnkey contracts on regular basis. To substantiate his contention the ld. Authorized Representative for the assessee referred to P&L Account of the company at page 534 of the Paper Book. The ld. Authorized Representative for the assessee pointed that perusal of the P&L account of the said company would further show that there are two segments i.e. consultancy and engineering project and lumpsum turnkey projects. Thus, the activities carried out by WAPCOS are not comparables with that of the assessee, engaged in providing business support services.

The ld. Authorized Representative for the assessee stated at the bar that though name of some other companies is also mentioned in grounds of appeal but he is not pressing exclusion of other comparables viz. Best Mulyankan Consultancy Ltd., DLF Services, Genins India TPS Ltd., Killick Agencies and Marketing Ltd., Hindustan Housing Co. Ltd.

The ld. Authorized Representative for the assessee further pointed that ground No.14 to 19 of the appeal are on the issue of trade discounts treated as agency commission by the Revenue. The issue is similar to the one addressed in assessment year 2009-10.

The ld. Departmental Representative vehemently supported the finding of TPO/DRP in including WAPCOS Ltd. in the list of comparables. The ld. Departmental Representative fairly admitted that the ground raised in the present appeal are similar to the one raised by the assessee in assessment year 2009-10. The ld. Departmental Representative further contended that submissions made in the appeal of the assessee for assessment year 2009-10 would equally apply to assessment year 2010-11.

Both sides heard. The ground No.1 of the appeal is general in nature. In so far as Transfer Pricing issues raised in ground No.2 to 13, the ld. Authorized Representative for the assessee has restricted his submissions only qua exclusion of three comparables i.e. Apitco, TSRDL and WAPCOS. While deciding the appeal of the assessee in assessment year 2009-10 we have given detailed finding for excluding Apitco and TSRDL from the list of comparables. The aforesaid findings would mutatis mutandis apply to assessment year 2010-11, as well.

As regards exclusion of WAPCOS, the primary contention of the assessee is that the said company is a Government Company and, hence, should be excluded from list of comparables. In addition, the assessee has also assailed inclusion of WAPCOS on the ground of functional difference. The Balance Sheet of the company as on 31/03/2011 and the P&L Account for Financial Year 2009-10 at pages 533 to 564 of the Paper Book reveal that the said company is a Government of India Undertaking. The Co-ordinate Bench of the Tribunal in the case of Jacob Engineering India Pvt. Ltd.(supra) has held that WAPCOS being a Government Company cannot be treated as comparable. Similar view has been taken by the Tribunal in the of Genzyme India Pvt. Ltd vs. ACIT(supra) and Virginia Transformer India P Ltd vs. ITO (supra). The ld. Authorized Representative for the assessee also brought to our notice the business activities carried out by WAPCOS. As per Auditors Report, the company is engaged in providing consultancy and Engineering Project and lumpsum Turnkey Project. The activities carried out by WAPCOS are not comparable to a company engaged in providing business support services. Hence, the said company is liable to be rejected as comparable on account of functional disparity as well as, being a Government Company. In view of our above observation, we direct TPO /Assessing Officer to exclude WAPCOS from the list of comparables.

The assessee in ground No.9 of the appeal has also assailed inclusion of Best Mulyankan Consultants Ltd., DLF Services, Genins India TPA Ltd. and Killick Agencies and Marketing Ltd. The ld. Authorized Representative for the assessee stated at the bar that the assessee is not pressing exclusion of aforementioned companies. Consequently, ground NO.8 of the appeal is allowed and ground No.9 of the appeal is partly allowed.

In ground No.10, the assessee has assailed inclusion of Hindustan Housing Company Ltd. The ld. Authorized Representative for the assessee stated at Bar that he is not pressing ground No.10 of the appeal, therefore, the same is dismissed as not pressed.

Since, we have adjudicated assessee’s grounds relating to exclusion of certain comparables, consequently, the PLI of the assessee falls within +/- 5% range. The other grounds relating to transfer pricing issue raised in ground No.2 to 7 and ground No.11 to 13 have become academic and thus, are not deliberated upon.

In ground No.14 to 19 of the appeal, assessee has assailed the action of Assessing Officer in treating trade discount as agency commission. This issue we have adjudicated in the appeal of the assessee in assessment year 2009-10. Both sides are unanimous in stating that this issue is identical to the one raised in appeal for assessment year 2009-10. The finding given by us while adjudicating the issue of agency commission in assessment year 2009- 10 would mutatis mutandis apply to ground No.14 to 19 of the present appeal. Consequently, these grounds are allowed in similar terms.

In ground No.20 of the appeal, assessee has assailed charging of interest under section 234Bof the Act. The charging of interest under section 234B is mandatory and consequential, hence, the ground raised is dismissed.

In ground No.21, assessee has assailed penalty proceedings under section 271(1)(c) of the Act. This ground is premature at this stage. Accordingly, the same is dismissed as such.

In the result, appeal of the assessee is partly allowed in the terms aforesaid. , CO. 265/MUM/2017 & ITA 1527/MUM/2016.

The grounds raised by the assessee in this appeal are similar to the one raised in assessment year 2009-10 and 2010-11. The ld. Authorized Representative for the assessee has confined his submissions only for exclusion of following comparables:

The ld. Authorized Representative for the assessee contended that the assessee is not pressing inclusion of following companies:

The ld. Authorized Representative for the assessee submitted that if aforementioned four companies are excluded from the list of comparables, the other ground relating to transfer pricing issues would become academic. The ld. Authorized Representative for the assessee submitted that ground No.14 to 18 of the appeal are in respect of trade discount treated as agency commission. This issue is similar to the one raised in assessment year 2009- 10 and 2010-11.The ld. Authorized Representative for the assessee further submitted that in ground No.19 of the appeal the assessee has assailed the findings of authorities below in granting short credit of tax deducted at sources (TDS). The assessee had claimed TDS credit of Rs.3,43,33,893/-. The assessee had furnished necessary documents in support of its claim. However, the assessee allowed TDS credit short by Rs.32,911/-. The ld. Authorized Representative for the assessee prayed that the issue can be restored to Assessing Officer for verification.

The ld. Departmental Representative fairly admitted that the grounds raised by the assessee on transfer pricing issue and corporate issues are similar to the one raised in assessment year 2009-10 and 2010-11. The ld. Authorized Representative for the assessee vehemently defended the finding of Assessing Officer /DRP.

As regards Hindustan Housing Co. Ltd., the assessee is seeking exclusion of the same as the said company fails to qualify RPT Filter. The ld. Authorized Representative for the assessee submitted that the said company is having related party transactions of 25.75% of total revenue. The ld. Authorized Representative for the assessee submitted that the Tribunal in the case of DCIT vs. Aruba Networks India Pvt. Ltd. in IT(TP) A NO.571/Bang/2015 for assessment year 2010-11 decided on 30/09/2016 has excluded Hindustan Housing Limited for the reasons that it has related party transactions exceeding 25% of turnover. Similar view has been taken by the Tribunal in the case of ITO vs. Alcon Laboratories Pvt. Ltd. in IT(TP)A No.391/Bang/2015 in assessment year 2010-11 decided on 21/11/2017. The ld. Authorized Representative for the assessee submitted that there are catena of judgments where the company having related party transactions exceeding 25% of turnover have been rejected as comparable.

We have considered the contentions of the ld. Authorized Representative for the assessee . It is no denying fact that where an entity is having related party transaction in excess of 25% of the total turnover, the same is held to be bad comparables. In various judicial pronouncements tolerance of RPT filter has been accepted as 25% of the total turnover. We find that in the case of DCIT vs. Aruba Network Pvt. Ltd., Bangalore Bench of the Tribunal has excluded Hindustan Housing Co. Ltd. from the list of comparables as it has failed to qualify RPT filter of 25%. Taking into consideration, well settled principle of rejecting comparable by applying RPT filter, we deem it appropriate to refer this comparables to the TPO for re-examination. In case the related party transactions of the said company exceeds 25% of the total turnover, the TPO is directed to exclude said company from the list of comparables.

In view of above findings, ground No.9 of the appeal is partly allowed and the ground No.10 of the appeal is allowed for statistical purpose.

Since, we have accepted assessee’s contention on exclusion of some of the comparables, the PLI of the assessee falls within +/-5% range. Consequently, ground No.2 to 8 and 11 to 13 relating to transfer pricing issue have become academic and hence, not deliberated upon.

In ground No.14 to 19 of the appeal, the assessee has assailed the action of Assessing Officer in treating trade discount as agency commission. This issue we have adjudicated in the appeal by assessee in assessment year 2009-10. Both sides are unanimous in stating that this issue is identical to the one raised in appeal for assessment year 2009-10. The finding given by us while adjudicating this issue in assessment year 2009-10 would mutatis mutandis apply to ground No.14 to 19 of the present appeal. Consequently, these grounds are allowed.

In ground No.19 of the appeal, assessee has assailed the action of TPO in granting short credit of TDS. This issue is restored to the Assessing Officer for re-verification of the supporting documents filed by the assessee for claiming TDS credit. The Assessing Officer is directed to examine the documents filed by the assessee in support of the claim and allow TDS credit, in accordance with law. Thus, ground No.19 of the appeal is allowed for statistical purpose.

In ground No.20 of the appeal, assessee has assailed charging of interest under section 234B of the Act. The charging of interest under section 234B is mandatory and consequential, hence, the ground raised is dismissed.

In ground No.21, assessee has assailed penalty proceedings under section 271(1)(c) of the Act. This ground is premature at this stage. Accordingly, the same is dismissed.

The Revenue in appeal has assailed the findings of Assessing Officer /DRP in deleting disallowance under section 40(a)(ia) r.w.s. 194J of the Act in respect of channel placement fee.

The ld. Authorized Representative for the assessee has submitted that Hon’ble High Court in the case of UTB Entertainment Television Ltd., Times Global Broadcasting Co. Ltd. and in assessee’s own case has deleted the disallowance on account of channel placement fee.

We find that DRP has granted relief to the assessee by placing reliance on the decision of Tribunal in assessee’s own case for the immediately preceding assessment year . Since this issue has already been laid to rest by the decision of the Hon’ble High Court in various cases including in assessee’s own case , we find no infirmity in the directions of DRP in deleting the disallowance on account of channel placement fee. Consequently, ground No.1 to 6 raised in the appeal by the Revenue on the single issue is dismissed. Consequently, appeal of the Revenue are dismissed.

The assessee filed cross objections supporting the findings of Assessing Officer/DRP. Since we have dismissed the appeal of the Revenue, the cross objections filed by the assessee have become infructuous, and the same are dismissed as such.

To sum up, (A.Y.2009-10), ITA NO.1658/MUM/2015, (A.Y.2010-11) and ITA No.1527/Mum/2016 (A.Y.2011- 12) by the assessee are partly allowed. ITA No.1245/Mum/2017(A.Y.2011-12) by the Revenue and C.O. No.265/Mum/2017 by the assessee are dismissed.