NGC NETWORK INDIA P. LTD,MUMBAI vs. ADDL CIT 11(1), MUMBAI

ORDER PER N.K. PRADHAN, A.M. This is an appeal filed by the assessee. The relevant assessment year is 2008-09. The appeal is directed against the order passed by the Addl. Commissioner of Income Tax, Range-11(1), Mumbai (in short ‘the AO’) u/s 143(3) r.w.s. 144C(13) of the Income Tax Act 1961, (the ‘Act’). 2. The grounds of appeal filed by the assessee read as under :

1. The AO erred in law and in fact in making a transfer pricing adjustment of Rs.135,910,231 under Section 92C(4) of the Act to the total income of the Appellant on the premise that the international transactions entered by the Appellant with its associated enterprise were not at arm's length.

2. The AO erred in referring the Appellant's case to the Transfer Pricing Officer (‘TPO’) under Section 92CA(1) of the Act without satisfying the conditions specified therein. 3. The AO erred in rejecting the transfer pricing analysis undertaken by the Appellant under Section 92C of the Act using 3 year average margin and determining the arm's length margin/ price using only data for financial year ('FY’) 2007-08, which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements. 4. The AO erred in rejecting certain companies considered to be comparable by the Appellant in the benchmarking analysis for determination of the arm's length price for the international transaction of provision of promo production services and in not accepting the Appellant's contentions against certain additional companies considered by the AO to be comparable to the Appellant. 5. The AO erred in using data obtained under Section 133(6) of the Act, for the comparability analysis. Further, the AO erred in not providing the Appellant an opportunity to cross examine the relevant companies. 6. The AO erred in not considering the effect of differences in the functional, asset and risk profiles of the Appellant and the comparable companies and thus not granting any adjustments in the Appellant in this regard in terms of Rule 10C(2)(e) of the Rules. 7. The AO erred in considering incorrect operating margins for certain companies on account of typo/incorrect computation. 8. The AO erred in unilaterally holding that the advertisement marketing and publicity ('AMP’) expenses incurred by the Appellant constitutes a separate international transaction with its associated enterprise u/s 92B(1) of the Act and subjecting the same to transfer pricing provisions.

9. The AO erred in holding that incurring of AMP expenses by the Appellant were for and on behalf of its Associated Enterprises (AEs) and accordingly, the Appellant should have recovered the same from the AEs.

10. Having accepted the principal international transactions of Channel distribution and sale of advertisement airtime to be at arm's length, the TPO has erred in selecting an individual line item of expenses i.e. AMP expenses paid to unrelated parties and making a transfer pricing adjustment in respect of the same. 11. Whilst AMP expenses incurred by the assessee were for its own business and no additional consideration is warranted in respect of the same, the AO erred in using the same set of comparables (used for benchmarking the channel distribution and advertisement airtime sales transaction) to benchmark such AMP expenses by applying TNMM in an erroneous manner. Further, the Assesses was not given adequate opportunity of being heard against the appropriateness of the use of the said comparables' set. 12. The AO erred in considering carriage fees amounting to Rs.52,395,207 paid to Multiple System Operator/Cable Operators for placing a channel in a particular band lo be in the nature of AMP expenses. 13. The AO has erred by not considering the fact that where the AMP expenses are considered to be a separate international transaction, the same ought to be reduced from the total expanses considered in the advertisement and distribution segments, in which case, these segments would reflect substantially high margins which would show an absurd result. 14. The AO erred in passing an order under Section 143(3) r.w.s 144C of the Act based on the order of the DRP which did not give cognizance to certain objections raised by the Appellant and was not in the nature of a speaking order. 15. The AO erred by not considering that the adjustment to the arm's length price, if any, should be limited to the lower end of the 5 percent range as the Appellant has the right to exercise this option under the proviso to section 92C of the Act.

3. The appellant, a company incorporated under the Indian Companies Act, 1956, is primarily engaged in the business of distribution of two satellite television channels namely the National Geographic Channel and the History Channel (hereinafter referred to as ‘the Channels’) in India. Additionally, it also carries out sale of advertisement air time on the channel. It filed its return of income for the assessment year (AY) 2008-09 on 30.09.2008 declaring a total income of Rs.29,30,99,321/-. Along with the return of income, the appellant also filed an Accountant’s Report in Form 3CEB reporting the particulars of its international transactions with its associated enterprises (AEs). During the course of assessment proceedings, the AO referred the case to the Transfer Pricing Officer (TPO) u/s 92CA(1) in order to determine the arm’s length price (ALP) in relation to international transactions entered into by the appellant. The TPO passed an order dated 14.10.2011 proposing a total adjustment of Rs.13,59,10,231/-. The TPO held the primary international transactions of acquisition of distribution rights and purchase of ad airtime from the AE to be at ALP, as the appellant had earned substantially higher margins in these two segments. The TPO disallowed the marketing expenses on the reasons that (i) the appellant AE is the owner of the Channel; (ii) AEs should have expended resources towards popularizing the channel ; (iii) the appellant had no responsibility/business compulsion towards incurring the advertisement and publicity expenses ; (iv) AEs have derived the benefit from these expenses incurred by the appellant, and therefore, AEs should have compensated the appellant at arm’s length, (v) whole scheme of incurring the expenditure falls within the meaning of arrangement between the appellant and AEs and therefore, the amount receivable by the appellant from these two AEs fall within the meaning of international transactions as per section 92B(1) of the Act. Subsequently, the AO issued a draft assessment order dated 12.12.2011 u/s 143(3) r.w.s. 144C proposing an addition of Rs.13,59,10,231/- comprising of TP adjustments, to the returned income of Rs.29,30,99,321/-. The assessee preferred an application against the said draft order before the Dispute Resolution Panel (DRP). It is found that the TP adjustment made by the TPO was upheld by the DRP inter alia on the grounds that the AMP expenditure is higher than comparable companies and that the name of the appellant does not appear in the advertisements. The AO passed an order u/s 143(3) r.w.s. 144C(13) dated 09.10.2012, in pursuance to the direction of the DRP with a transfer pricing adjustment of Rs.13,59,10,231/-.

4.1 Through grounds of appeal Nos. 1, 8 to 13, the appellant has challenged the AMP adjustment made by the TPO and confirmed by the DRP. In this context, the Ld. counsel submits that unlike cases where income is shared with AEs, the appellant is the owner of income qua the distribution and advertisement revenue, and hence, an increase in the income by AMP expenses would solely benefit the appellant only. Further, it is explained that the appellant has acquired the right to distribute the channels from its AE as evident from clause 2.1 of the ‘Distribution Agreement’. Referring to clause 2.4 of the ‘Distribution Agreement’ it is explained that the appellant, at its discretion, determines the price to be charged to cable operators. As per clause 3 of the ‘Distribution Agreement’, the appellant would pay a fixed consideration in advance for obtaining the rights. As per clause 2.4 of the ‘Distribution Agreement’, the appellant is the owner of income earned from distribution of the Channels and retains the entire revenue while recording them in its books of accounts from distribution of channels. Further, it is explained that the appellant also purchased under the same agreements the right to use the brand of the AE for its use in its business (clause 6.2 of the ‘Distribution Agreement’). Similarly, the Ld. counsel submits that the appellant purchases the rights to sell the advertisement airtime ; deals with the advertisement rights at its own risk ; in consideration for the advertisement rights, it pays the AE a fixed fee; the appellant is also the owner of the income earned from advertisements on the Channels; it independently takes decisions for monetizing the distribution and advertisement rights and the appellant also purchased under the same agreements, the right to use the brand of the AE for use in its business. In this regard, reference is made by him to the relevant clauses of the ‘Advertisement Sales Agreement’. The Ld. counsel explains that the transaction for purchase of both these rights has been held to be at ALP and in fact, even after including AMP expenditure, the margin of the appellant is way above the comparables. Further, it is explained that as the owner of the distribution and advertisement income, the appellant incurs AMP expenses, which would only benefit itself through increased distribution and advertisement sales. Further, the appellant pays the AE a fixed fee and not a share/percentage of revenues and hence any increase in the distribution and advertisement revenues on account of AMP expenses is fully retained by the appellant itself, and no benefit can be said to accrue to the AE. Further, it is stated that this position that the AMP expenses are to the benefit of the appellant is upheld in the appellant’s own case by the Third Member decision in ACIT v. NGC Network (India) Pvt. Ltd. (2011) 13 taxmann.com 160, which is subsequently, upheld by the Hon’ble Bombay High Court (2014) 50 taxmann.com (Bom). It is explained that the purpose of the AMP expenses incurred by the appellant is to make the customers aware of the programs being telecast on the channels, give program timing details, etc. to the viewers and these advertisements have a short shelf like (till telecast of the program) and are published by the appellant only a few days prior to telecast of the program on the channel to help create viewers/advertiser’s awareness of the program. Elaborating further, it is explained that the advertisement made by the appellant is towards product promotion as evident from the sample copies of advertisements published by the appellant in newspapers contained in page 1625 to 1640 of the P/B. Referring to it, it is stated that it cannot be said that the advertisement published by the appellant is for brand building since the same is focused on the program being telecast and since the advertisements have a short shelf life, there can be no enduring benefit to the AE to such advertisements. In this regard, reliance is placed by him on the order of the Tribunal in the case of Nivea India (P.) Ltd. v. ACIT [2018] 92 taxmann.com 165 (Mum.), L’Oréal India Private Limited & Ors v. DCIT & Ors (2016) 49 ITR (Trib.) 0473 (Mum.), Mondelez India Foods Private Limited v. ACIT (2016) 47 (CCH 0098 Mum.). Further, it is stated that as per section 92B(1) r.w.s. 92F(v), for the AMP expenditure to qualify as an international transaction, there must be an explicit arrangement between the appellant and its AE for incurring such expenses. In the instant appeal, it is stated by the Ld. counsel that there is no arrangement or agreement between the appellant and its AE to undertake marketing activities/incur the AMP expenses ; the appellant decides the marketing strategy and quantum of AMP expenses to be incurred, which is not dictated by its AE, and hence, there being no arrangement with its AE for undertaking marketing activities/incurring AMP expenditure, the same does not qualify as an ‘international transaction’. Referring to the decision by the Hon’ble Bombay High Court in appellant’s own case in ACIT v. NGC Network (India) Pvt. Ltd. (2014) 50 taxmann.com 240 (Bom), it is stated the view that the AMP expenses incurred by the appellant is not an international transaction is supported by the above decision. In this context, reliance is placed by him inter alia on the decision in Maruti Suzuki India Limited v. CIT [2016] 381 ITR 117 (Del.), Bausch & Lomb Eyecare (India) Pvt. Ltd. & Ors. v. Addl. CIT. (2015) [2016] 381 ITR 227 (Del.), CIT v. Whirpool of India Limited (2015) [2016] 381 ITR 154 (Del.), Honda Siel Power Products Limited v. Deputy CIT (2015) (94 CCH 0170) (Del.). Further, it is stated that the AMP expenses form part of the cost base to compute the margin earned by the appellant for benchmarking the international transactions in the distribution and advertisement airtime segments. Explaining that on a TNMM basis, the appellant’s margin after including these costs is way higher than comparables, it is stated that no adjustment on AMP expenses can be made when the primary international transactions has been accepted by the TPO to be at arm’s length, since the same would be reduced from the total expenses, in which case the segments would reflect substantially even higher margins and show absurd results. Finally, referring to the order of the Tribunal in the case of Johnson & Johnson Pvt. Ltd. v. ACIT (ITA No. 6142/Mum/2017) dated 19.09.2018, the Ld. counsel submits that no AMP adjustment should be made where the margin earned by the appellant is higher than that of comparable companies. Thus the Ld. counsel submits that the transfer pricing adjustment of 13,59,10,231/- made by the AO be deleted.

5. On the other hand, the Ld. Departmental Representative (DR) submits that the appellant is not the owner of the channel and hence, the AMP expenses incurred by it have benefited the AE ; the appellant’s name does not appear in the advertisement ; the decision by the Hon’ble Bombay High Court in appellant’s own case is not applicable since it was in relation to disallowance made to AMP expenses u/s 37(1) of the Act. Further, the Ld. DR argues that the contractual period of the ‘Distribution Agreement’ between the appellant and its AE was only for a limited period of 9 months and hence, it is open to the AE to modify the terms of the agreement to pass on benefits of the AMP to itself. Further, it is stated by him that the AE takes all the key decisions relating to the channels, such as programming, content, scheduling etc. and hence, it cannot be said that the appellant is the owner of the channels. Thus the Ld. DR submits that the transfer pricing adjustment of Rs.13,59,10,231/- made by the AO be confirmed.

“In our opinion, there is a subtle but definite difference between the product promotion and brand promotion. In the first case product is the focus of the advertisement campaign and the brand takes secondary or backseat, whereas in second case, brand is highlighted and not the product. In the case under consideration the assessee was introducing new products in the fields of body - care, deodorants, creams, shower soaps talc, first aid dressing etc. If it has to penetrate the local market, it will have to promote the products that could compete with the similar products of other players.” It is well settled that as per section 92B(1) r.w.s. 92F(v), for the AMP expenditure to qualify as an international transaction, there must be an explicit arrangement between the appellant and its AE for incurring such AMP expenses. In the instant case, we find that there is no arrangement or agreement between the appellant and its AE to undertake marketing activities/incur the said AMP expenses. The appellant decides the marketing the strategy and quantum of AMP expenses to be incurred which is not dictated by its AE, and hence there being no arrangement with its AE for undertaking marketing activities/incurring AMP expenditure, the same does not qualify as an ‘international transaction’. The view that the AMP expenses incurred by the appellant is not an international transaction is supported by the decision of the Hon’ble Bombay High Court in appellant’s own case (supra) ; the relevant extract of the decision is reproduced below : “Furthermore, it is seen that all the amounts earned by the assessee were brought to tax, especially in view of the fact that the payment of expenses were made to Indian residents and there payments were not required to be included in form 3CEB since Section 92 which governs the effect of form 3CEB covers only international transactions.” In Maruti Suzuki India Ltd. (supra), the Hon’ble Delhi High Court held that “there being no international transaction on AMP spend with an ascertainable price, neither substantive nor machinery provision of Chapter X were applicable to the transfer pricing adjustment exercise”. In Bausch & Lomb Eyecare (India) (P.) Ltd. (supra), the Hon’ble Delhi High Court held that “where existence of an international transaction involving AMP expense with an ascertainable price is unable to be shown to exist, even if such price is Nil, Chapter X provisions cannot be invoked to undertake a TP adjustment exercise. In Whirlpool of India Ltd. (supra), the Hon’ble Delhi High Court held that “where revenue has been unable to demonstrate by some tangible material that there is an international transaction involving AMP expenses between Indian subsidiary and foreign parent, revenue cannot proceed to determine ALP of AMP expenses by inferring existence of an international transaction based on bright line test. In Honda Siel Power Products Ltd. (supra), the Hon’ble Delhi High Court held that “when assessee is carrying on business as independent enterprise and is incurring AMP expenses for its own benefit and not at the behest of AE, hence benefit of creation of marketing intangibles for foreign AE on account of AMP expenses can at best said to be incidental”. In view of the principles laid down the in the above decisions, the AMP spend is not an international transaction in the absence of an arrangement between the taxpayer and the AE. In the instant case there cannot be said to be any international transaction between the appellant and the AE for incurring the AMP expenditure.