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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI MANOJ KUMAR AGGARWAL
The Captioned appeal has been filed by the assessee challenging the order dated 28th January 2014, passed under section 143(3) r/w section 144C(13) of the Income–tax Act, 1961 (for short "the Act") for the assessment year 2009–10.
2 Star International Movies Ltd.
In grounds no.1, to 4, the assessee has challenged the addition made on account of transfer pricing adjustment amounting to ` 42,00,08,539.
Brief facts are, the assessee is a non–resident company incorporated in Hong Kong and is a part of News Corp Group. Basically, the assessee is engaged in the distribution of channels and advertising for channels at a global level. In the course of such activity, the assessee distributes the channels owned by Star Television Entertainment Ltd., Star International Movies Ltd., Star Asian Movies Ltd., Star Region FZ LLC and Channel–V Networks Ltd. Partnership. It needs to be observed, the aforesaid channel companies are non–residents and are engaged in Satellite Television business and derived revenue from various countries in Asia and other parts of the world, including the Indian market, from sale of advertisement time on the Television Channels, distribution of Television Channels and syndication of content on the channels. The aforesaid channel companies appointed the assessee as an agent for the following functions / activities:–
i) To sell, advertising air time and the channels; ii) To distribute the channels in the territories where the channels are broadcasts; and 3 Star International Movies Ltd. iii) To procure syndication revenue in respect of the content on the channels.
As per the terms of agreement, the assessee was also required to incur the cost necessary for the purpose of broadcasting channels including and not limited to lease appropriate transponder space to cover the relevant footprints for broadcast. For performing the aforesaid functions / activities, the assessee was compensated by a fee which was calculated so as to recover all the costs that it incurred in rendering the services including the sub–agent’s commission which also included 50% of the overall profit on the channel operations (calculated after considering the costs incurred by channel companies and the cost of Star Ltd. as adjusted against the overall revenue from the channels). The agreement also provided, in the event of an overall loss, 50% of such loss would be borne by the assessee and the overall fee payable is to be adjusted accordingly. The fee computed, as aforesaid, also subsumed the consideration payable by channel companies to Star Ltd. for use of Star brand. In the transfer pricing study report, the assessee benchmarked the international transaction by selecting the AEs in India as tested party. While, benchmarking the transactions relating to grant of license to channel companies to use Star mark and agency services provided to channel companies, the 4 Star International Movies Ltd.
assessee as well as channel companies used profit split method (PSM) with reference to the Revenue generated in India. While applying PSM, the assessee undertook a step by step process of computing the profits taxable in India. Firstly, the global profitability percentage based on the audited financial statement of the channel companies for the year ended June 30, 2009, was applied to the Indian revenue earned by the channel companies for the 12 month period of 1st April 2008 to 31st March 2009 to ascertain the profitability in respect of Indian revenue earned by the channel companies. While computing the global profitability of the channel companies based on the financial statements for the year ended 30th June 2009, any profit / loss earned / incurred to / by the channel companies on account of the business not related to channel broadcasting was eliminated as extra ordinary transaction. Based on the arrangement between the channel companies and the assessee, entitling the assessee to a fee calculated so as to recover all the costs incurred by the assessee in respect of marketing advertising air time on channels, distributing the channels and syndicate the content telecast on the channels in addition to the 50% of the overall profit on channel operation the profits earned by the assessee and attributable to Indian revenue ought to be equal to the profits earned by the channel companies from India, were also considered as profits earned by the assessee from India during the 5 Star International Movies Ltd. relevant period. The profit earned by the channel companies and the assessee was consolidated to determine the total profits earned in respect of the Indian revenue for the relevant 12 month period of 1st April 2008 to 31st March 2009. Since the profits earned by the channel companies and the assessee were consolidated, the consolidated profit effectively denoted the profit based on third party revenue and third party cost. In the aforesaid process, the assessee computed the overall profit rate of 8.48%. Though, the assessee claimed that once the assessee has determined the profit percentage by applying PSM, there is no further need to benchmark the profitability against comparables, however, to put the comparability analysis beyond doubt, the assessee compared the aforesaid profitability with nine external comparables with average margin of 4.85% based on weighted average of earlier years. Thus, the transaction with the AEs was claimed to be at arm's length. After examining the Transfer Pricing Study Report, the Transfer Pricing Officer was of the view that out of the nine comparables selected by the assessee, four companies viz. Astha Broadcasting Network Ltd., Jain Studios Ltd., Television 18 India Ltd., Raj Television Network Ltd., being either loss making or low profit making companies cannot be treated as comparable. Accordingly, he called upon the assessee to explain why these companies should not be excluded. In response to the query raised by the Transfer Pricing
6 Star International Movies Ltd.
Officer, though, the assessee made elaborate submissions objecting to exclusion of the aforesaid four companies, however, the Transfer Pricing Officer rejecting the objections of the assessee excluded these four companies and retained the other five companies selected by the assessee having average margins of 13.54% as against the profit margin shown by the assessee @ 8.48%. This resulted in an adjustment of ` 84,00,17,078, and as per PSM method, 50% of the aforesaid amount was attributed to the assessee and the balance 50% to the other channel companies. The adjustment made by the Transfer Pricing Officer was added to the income of the assessee while framing the draft assessment order. The aforesaid transfer pricing adjustment was challenged before the Dispute Resolution Panel (DRP), primarily on the issue of exclusion of certain comparables by the Transfer Pricing Officer. However, learned DRP did not interfere with the decision of the Transfer Pricing Officer.
Shri Porus Kaka, learned Sr. Counsel for the assessee restricted his argument to exclusion of following three comparables:–
i) Jain Studios Ltd.; ii) Television 18 India Ltd., and iii) Raj Television Network Ltd.
7 Star International Movies Ltd.
He submitted, Jain Studios Ltd. cannot be considered as a consistent loss making company, since, it has incurred loss only in assessment years 2008–09 and 2009–10. He submitted, in assessment year 2007–08, the company has declared a profit of 13.91%. He submitted, to be classified as a persistent loss making company, it should have incurred loss in three consecutive assessment years. He submitted, since the company has reported profit in assessment year 2007–08 and has incurred loss in only two consecutive assessment years, it cannot be treated as a persistent loss making company to exclude it from the list of comparables.
As regards Television 18 India Ltd., the learned Sr. Counsel for the assessee submitted, the company had declared profit in the assessment years 2007–08 and 2008–09. Therefore, since it has reported loss only in the impugned assessment year, it cannot be excluded as a comparable. As regards Raj Television Network Ltd., the learned Sr. Counsel submitted, the Transfer Pricing Officer rejected the comparable due to write off of bad debts. He submitted, the company has shown high profit margin in the assessment years 2007–08 and 2008–09. He submitted, in the impugned assessment year also, the company has shown a profit margin of 1.04%. Further, he submitted, bad debts are operating in nature, hence, have to be considered for 8 Star International Movies Ltd.
computing profit margin. The learned Sr. Counsel submitted, the Transfer Pricing Officer himself in assessment years 2007–08 and 2008–09 has accepted Television 18 India Ltd. as a good comparable. Thus, he submitted, rule of consistency should apply while accepting / rejecting these two comparables. Further, in support of his submissions, the learned counsel relied upon the following decisions:– i) TPG Capital India Pvt. Ltd., [2017] taxmann.com 101 (Mum. Trib.); ii) Goldman Sachs India Securities Pvt. Ltd., [2016] 69 taxmann.com 19 (Bom.); iii) Bobst India Pvt. Ltd., [2015] 63 taxmann.com 339 (Pun. Trib.); iv) Actavis Pharma Development Centre Pvt. Ltd., 92 taxmann.com 253 (Mum. Trib.); v) WNS Global Services Pvt. Ltd., [2019] 103 taxmann. com 75 (Mum. Trib.); vi) Kenexa Technologies Pvt. Ltd., [2015] 37 ITR(T) 306 (Hyd. Trib.); vii) OSI Systems Pvt. Ltd, [2016] 66 taxmann.com 109 (Hyd. Trib.); viii) Honeywell Automation India Ltd., [2015] 55 taxmann.com 539 (Pun. Trib.); and ix) Hyundai Motor India Engg. Pvt. Ltd., ITA no.87/Hyd./ 2017 (Hyd. Trib.).
The learned Departmental Representative strongly relied upon the observations of learned DRP and the Transfer Pricing Officer.
9 Star International Movies Ltd.
We have considered rival submissions and perused material on record. We have also applied our mind to the decision relied upon. As could be seen from the factual matrix of the issue, both the Transfer Pricing Officer and the DRP have not disputed applicability of PSM as the most appropriate method to benchmark the transaction with the AEs. The dispute is only confined to the comparability of three comparables as noted above. The Transfer Pricing Officer has rejected Jain Studios Ltd. and Television 18 India Ltd., primarily on account of abnormal fall in rate of profit. Likewise, he has rejected Raj Television Network Ltd. due to sharp fall in margin by attributing to high amount of bad debt written–off during the year. From the facts on record, it is clear that none of these companies can be classified as persistent loss making companies. In various decisions it has been held that unless the company declares loss consistently for three consecutive assessment years, it cannot be considered as a persistent loss making company. In this context, we may refer to the decision of the Tribunal in Goldman Sachs India Securities Pvt. Ltd. (supra). The other decisions cited by the learned Sr. Counsel for the assessee also support this view. It is further relevant to observe, in assessee’s own case for the assessment year 2008–09, the Tribunal has accepted Jain Studios Ltd. as a comparable. Further, the Transfer Pricing Officer
10 Star International Movies Ltd. himself has accepted Television 18 India Ltd., as a comparable in assessment years 2007–08 and 2008–09. That being the case, both, Jain Studios Ltd. and Television 18 India Ltd., should not be rejected as a comparable. Insofar as Raj Television Network Ltd. is concerned, undisputedly, the profit margin shown by the company in the assessment year 2007–08 and 2008–09 is substantially high. Though, in the impugned assessment year, the profit margin has fallen drastically, the company has still shown profit of 1.04%. Even if the fall in profit rate is due to write–off of bad debt, still this company cannot be excluded as a comparable since bad debts are operating in nature. In view of the aforesaid, we direct the Assessing Officer / Transfer Pricing Officer to include the aforesaid three companies as comparable and determine the arm's length price accordingly. These grounds are allowed.
In grounds no.5 and 6, the assessee has challenged the decision of the Assessing Officer in not applying PSM to non–AE transaction and determining the profit on estimate basis.
Brief facts are, as observed by the Assessing Officer, in spite of requesting the assessee to prepare and furnish India Specific Profit & Loss account so as to identify and determine the income from operations in India to properly allocate the profit attributable to Indian
11 Star International Movies Ltd. operations, no such account was furnished by the assessee. Thus, the Assessing Officer observed that though the Transfer Pricing Officer has determined the taxable income in India under PSM, however, such determination is restricted to Intra Group / AE transactions only. He observed, since the assessee has non–AE transaction, the arm's length price determined by the Transfer Pricing Officer will not be applicable to the total turnover of the assessee in toto. Thus, he observed, in such situation, there is no option left to him but to estimate the income of the assessee as per rule–10 of the Income Tax Rules, 1962 Therefore, referring to the decision of the DRP in assessee’s own case in assessment year 2007–08, the Assessing Officer proceeded to estimate the taxable profit from non–AE transaction @ 28% of the gross receipts. Accordingly, he added back an amount of ` 19,60,251.
The learned Sr. Counsel for the assessee submitted, the aforesaid addition having been made purely on estimate basis cannot be sustained. Further, he submitted, identical addition made in the assessment year 2007–08, was not only deleted by the Tribunal but the decision of the Tribunal was also upheld by the Hon'ble Jurisdictional High Court. Thus, he submitted, the addition made has to be deleted.
12 Star International Movies Ltd.
The learned Departmental Representative relied upon the observations of the Assessing Officer.
We have considered rival submissions and perused material on record. Admittedly, the Assessing Officer simply relying upon the direction of learned DRP in assessment year 2007–08 has estimated the profit on non–AE transactions. However, as could be seen, the Tribunal while deciding the issue relating to identical addition made in assessment year 2007–08 in ITA no.8683/Mum./2011, dated 2nd February 2016, has observed that once the combined net profit has been arrived at by taking into account the transactions of both AEs/non–AEs, which is factored into all the costs and revenue, then, to segregate a non–AE transaction over and above such profit determined is not proper. Thus, ultimately, the Bench held that the income from non–AE transaction cannot be taxed separately by applying net profit rate of 28%. It is relevant to observe, the aforesaid decision of the Tribunal was not contested by the Revenue in the appeal preferred before the Hon'ble Jurisdictional High Court. Notably, the same view was again expressed by the Tribunal while deciding assessee’s appeal for the assessment year 2008–09 in ITA no. 7680/Mum./2012 & Ors., dated 16th September 2016. In view of the aforesaid, we delete the addition made by the Assessing Officer. Grounds are allowed.
13 Star International Movies Ltd.
In view of our decision in grounds no.1 to 6, grounds no.7 to 12, are of mere academic importance and there is no need to specifically adjudicate them. Hence, these grounds are dismissed.
In grounds no.13 and 14, the assessee has challenged the decision of the Assessing Officer in bringing to tax the royalty income by applying the rate of 42.23%.
Vis–a–vis the issue raised in the aforesaid ground, the learned Sr. Counsel for the assessee submitted, the assessee being a foreign company, the applicable tax rate on royalty income is as provided under section 115A of the Act. He submitted, instead of applying the tax rate provided under section 115A of the Act, the Assessing Officer has taxed it @ 42.23% by treating it as business profit. He submitted, identical issue arising in assessee’s own case in assessment year 2007–08 and 2008–09, have been decided in favour of the assessee. The learned Departmental Representative relied upon the observations of learned DRP and Assessing Officer.
We have heard the parties and perused materials on record. Undisputedly, identical issue arising in assessee’s own case in preceding assessment years has been decided by the Tribunal in favour of the assessee. Consistent with the view taken by the Tribunal
14 Star International Movies Ltd. in assessee’s own case in earlier assessment years, we direct the Assessing Officer to tax the royalty income at the appropriate rate as provided under section 115A of the Act.
In grounds no.15 to 19, the assessee has challenged disallowance made under section 40(a)(i) of the Act in respect of transponder hire charges paid to Asia Satellite Telecommunication Ltd. without deducting tax at source. During the assessment proceedings, the Assessing Officer noticing that the assessee has paid US$ 33,24,102 to Asia Satellite Telecommunication Ltd., without withholding tax under section 195 of the Act, called upon the assessee to explain why the payment made should not be disallowed under section 40(a)(i) of the Act. In response, the assessee submitted that since the payment was made to a non–resident company which has no business connection in India and its income was not taxable in India, there was no requirement to deduct tax at source. In this context, the assessee relied upon the decision of the Hon’ble Delhi High Court in Asia Satellite Telecommunication Ltd. v/s CIT, [2011] 332 ITR 340 (Del.). The Assessing Officer, however, did not find merit in the submissions of the assessee and proceeded to disallow the payment made to Asia Satellite Telecommunication Ltd. amounting to ` 17,01,27,540 under section 40(a)(i) of the Act. Though, the assessee
15 Star International Movies Ltd. objected to the aforesaid disallowance before learned DRP, however, the disallowance was upheld referring to Explanation–5 and 6 to section 9(1)(vi) of the Act, brought with retrospective effect.
Contesting the aforesaid decision of the Departmental Authorities, the learned Sr. Counsel for the assessee made twofold submissions. Firstly, he submitted, the payment for transponder hire charges cannot be regarded as royalty under the provisions of the Act. In this context, he relied upon the decision of the Tribunal in assessee’s own case in assessment years 2002–03, 2007–08 and 2008–09. Without prejudice, he submitted, even accepting that the payment made to Asia Satellite Telecommunication Ltd. (supra) is in the nature of royalty as per the amended provision of section 195 of the Act, sill, the assessee cannot be expected to withhold tax anticipating such retrospective amendment. Thus, he submitted, the disallowance made should be deleted.
The learned Departmental Representative submitted, the assessee is not authorised under the Act to decide the taxability of income at the hands of the channel companies. He submitted, as per the provisions of section 195 of the Act, the assessee is required to deduct tax at source at the time of making payment. Further, he submitted, in case of Asia Satellite Telecommunication Ltd. (supra),
16 Star International Movies Ltd. the Tribunal has held that the transponder lease charges received by it is in the nature of royalty, hence, taxable in India. Therefore, the disallowance made is justified.
We have considered rival submissions and perused material on record. For not withholding tax at source on the payment made to Asia Satellite Telecommunication Ltd., the assessee had primarily advanced two reasons. Firstly, the payment has been made to all non–resident companies which do not have any business connection in India. Therefore, its income is not taxable in India, hence, withholding of tax is not required to be made while making the payment. It is further submitted, even if by virtue of amended provisions of section 195 of the Act, the payment is to be treated as royalty, however, such amendment having been brought with retrospective effect, the assessee could not have foreseen the obligation to deduct tax at source. It is relevant to observe, though, in case of Asia Satellite Telecommunication Ltd. (supra), the Tribunal observed that the payment received by it towards transponder lease charges is in the nature of royalty, hence, taxable in India, however, the said decision of the Tribunal was reversed by the Hon'ble Delhi High Court in the decision cited supra. The Tribunal, while deciding the issue in assessee’s own case in assessment year 2002–03, vide ITA no.6604/
17 Star International Movies Ltd.
Mum./2004 & Ors., dated 5th October 2018, has held that by virtue of retrospective amendment brought in section 195 of the Act, the assessee could not have been fastened with the liability to deduct tax at source and accordingly deleted the disallowance made under section 40(a)(ia) of the Act in respect of payment made to Asia Satellite Telecommunication Ltd. towards transponder hire charges. The same view have been expressed by the Tribunal while deciding identical issue in assessee’s own case in assessment year 2007–08 and 2008– 09 as well. Further, in the aforesaid decision, the Tribunal, following the decision of the Hon’ble Delhi High Court in Asia Satellite Telecommunication Ltd. (supra), has held that the payment made is not in the nature of royalty. Accordingly, the addition was deleted. Facts being identical, respectfully following the consistent view of the Tribunal in assessee’s own case in earlier assessment years, we delete the disallowance made under section 40(a)(i) of the Act. Grounds are allowed.
In grounds no.20 to 22, the assessee challenged initiation of penalty proceedings under various provisions.
The issue raised in these grounds being pre–mature at this stage, do not require adjudication. Hence, these grounds are dismissed.
18 Star International Movies Ltd.
In the result, assessee’s appeal is partly allowed. Order pronounced in the open Court on 18.10.2019