NGC NETWORK (INDIA) PVT. LTD.,MUMBAI vs. A.C.I.T. RG. 11(1), MUMBAI

Assessee by: Shri. Porus Kaka Revenue by : Shri. Pavan K Beerla (DR) सुनवाई की तारीख /Date of Hearing : 24-04-2019 घोषणा की तारीख /Date of Pronouncement : 23-07-2019 आदेश / O R D E R PER RAMIT KOCHAR, Accountant Member These are cross appeals filed by the assessee and Revenue, being respectively both for assessment year 2007-08 , which are directed against appellate order dated 02.04.2012 in Appeal No. CIT(A)- 15/Curr.46/11-12 passed by learned Commissioner of Income Tax (Appeals)-15, Mumbai (hereinafter called “the CIT(A)”), for I.T.A. No.4388/Mum/2012 assessment year(AY) 2007-08, the appellate proceedings had arisen before learned CIT(A) from assessment order dated 01 st February 2011 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) read with Section 144C of the Income-tax Act, 1961 (hereinafter called “the Act”) for AY 2007- 08, which was passed in pursuance to transfer pricing additions with respect to international transaction entered into by the assessee with its Associated Enterprises(AE) , as were made by Transfer Pricing Officer(TPO) in its order dated 23.08.2010 passed u/s 92CA(3) of the 1961 Act.

“1. The learned CIT(A) has erred in upholding the transfer pricing adjustment of Rs 4,904,938 made by the Assessing Officer ('AO') and not giving due cognizance to the submissions placed on record by the Appellant. Your Appellant prays that the transfer pricing adjustment of Rs 4,904,938 made by the AO should be deleted.

2. The learned CIT(A) has erred in upholding the action of the AO of referring the Appellant's case to the Transfer Pricing Officer ('TPO') under Section 92CA(3) of the Act, without satisfying the conditions specified therein. Your Appellant prays that the reference of the Appellant's case to the TPO should be considered bad in law and void.

3. The learned CIT(A) has erred in law and in facts in upholding the action of the AO of rejecting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962, ('Rules'). Further, the learned CIT(A) has also erred in upholding the action of the AO of using single year data (i.e. for FY 2006-07) for computing the operating margins of the companies considered to be comparable. Your Appellant prays that the economic analysis undertaken by the Appellant using 3-year weighted average data of comparables in accordance with the provisions of the Act read with the Rules, should be upheld.

4. The learned CIT(A) has erred in law and in facts in upholding the action of the AO of rejecting certain companies considered to be comparable by the Appellant in the benchmarking analysis for determination of the arm's length price and in not accepting the Appellant's contentions against certain additional companies considered by the AO to be comparable to the Appellant. Your Appellant prays that the companies considered to be comparable by the Appellant should be reinstated and the additional companies considered to be comparable by the TPO should be rejected.

5. The learned CIT(A) has erred in upholding the action of AO of not considering the effect of differences in the functional and risk profile of the Appellant and the comparable companies and thus not granting any adjustments to the Appellant in this regard in terms of the transfer pricing regulations. Your Appellant prays that it should be granted adjustments to account for differences in the functional and risk profile of the Appellant and the comparable companies.

6. The learned CIT(A) has erred in law and in facts in upholding the action of the AO of 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. Your Appellant prays that any adjustment to the arm's length price, if any, should be limited to the lower end of the 5 percent range. Each of the above grounds of appeal is without prejudice to and independent of one another. The Appellant craves leave to add, alter, amend or delete the above grounds of appeal at or before the time of hearing of the appeal, so as to enable the Hon'ble Income tax Appellate Tribunal to decide this appeal according to law.”

2.2 The grounds of appeal raised by Revenue in its appeal in memo of appeal filed with the tribunal in for AY 2007-08, read as under:-

“ 1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in allowing deduction in respect of 'Advertisement and Publicity expenses' amounting to Rs.7,34.37,217/- ignoring the facts that the said expenditure was not incurred wholly and exclusively for the purpose of business, as provided in Section 37(1) r.w.s. 40A(2) of the Act.

2. The appellant prays that the order of the CIT(Appeals) on the above grounds be set aside and that of the Assessing Officer restored.

3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

3. At the outset Ld. Senior Counsel for the assessee Shri. Porus Kaka submitted that the assessee does not want to pursue its appeal filed with the tribunal in AY 2007-08 owing to low quantum of tax-effect and prayers were made before the Bench by learned Senior Counsel to dismiss appeal filed by the assessee as not being pressed . The Ld. DR did not raised any objection to the dismissal of the assessee‟s appeal in for AY 2007-08 . After hearing both the parties , we dismiss assessee‟s appeal in ITA no. 4534/Mum/2012 for AY 2007-08 filed with tribunal as not being pressed. Thus, in nutshell assessee‟s appeal I.T.A. No.4388/Mum/2012 in for AY 2007-08 stand dismissed as not being pressed. We order accordingly.

4. This leads us to Revenue‟s appeal in ITA No. 4388/Mum/2012 in which only one effective ground is raised by Revenue concerning allowability of deduction in respect of „Advertisement and Publicity expenses‟ amounting to Rs. 7,34,37,217/- which was added to the income by the AO while framing assessment against the assessee, which additions to income was later deleted by learned CIT(A) vide first appellate order dated 02.04.2012 wherein deductions for „Advertisement and Publicity Expenses‟ to the tune of Rs. 7,34,37,217/- were allowed by Ld. CIT(A) while computing income of the assessee. Revenue is aggrieved by appellate order dated 02.04.2012 passed by learned CIT(A) granting aforesaid relief to the assessee and has now filed this appeal with tribunal. 4.2 The learned DR at the outset submitted that these Advertisement and Publicity Expenses were not incurred wholly and exclusively for the purposes of business of the assessee as provided u/s. 37(1) r.w.s. 40A(2) of the 1961 Act. The Ld. DR submitted that the channel is owned by foreign entity and the assessee is acting as agents in India for promoting their channel for which revenues are realised by way of advertisements and fixed sum is paid to foreign entity w.e.f. 01.05.2006 as prior to that it was variable amount which was paid to foreign entity. The learned DR also drew to our attention to the assessment order passed by the AO and reliance was placed by learned DR upon assessment order passed by the AO. 4.3 The Ld. Counsel for the assessee submitted that this issue of allowability of „Advertisement and Publicity Expenses‟ is recurring issue on year to year basis in assessee‟s own case and our attention was drawn to para 5.2 of the appellate order dated 02.04.2012 passed by learned CIT(A) for the impugned assessment who has granted relief to the assessee for impugned assessment year by allowing these Advertisement and Publicity Expenses as deduction while computing business income of the assessee, by following confirmatory order dated 29.07.2011 passed by tribunal to confirm the appellate order dated 17.06.2011 passed by Third Member of Mumbai-tribunal in ITA no. 635/Mum/2010 for AY 2005-06 in assessee‟s own case ,wherein Third Member appointed to adjudicate this issue owing to differences between members of the Division Bench held in favour of the assessee . The learned CIT(A) while adjudicating appeal for impugned assessment year decided the issue in favour of the assessee by holding as under:- “ 5.2 The submissions of the appellant are summarized as under; i) During AY 2007-08, the Appellant has incurred advertisement and publicity expenses amounting to Rs 110,155,825 for the purpose of promoting its channels. Accordingly, the Appellant has claimed the same as a deduction under Section 37(1) of the Act while computing taxable income, inter-alia, on the ground that there is a direct nexus between incurring the expenditure and the revenues of NGC India. The details of advertisement and publicity expenses amounting to Rs 110,155,825 were enclosed as Annexure 4 of the submission. ii) The learned Assessing Officer ('AO') has allowed only 33.33% of the total advertisement and publicity expenditure and has disallowed the balance amount of Rs73,437,217. iii) In this connection, the Appellant submitted that the issue under consideration has already been decided favorably by the Third member of the Hon'ble Mumbai tribunal in Appellant's own case in AY 2005-06. Relevant extracts of the favorable order passed by the Third member of the Mumbai Tribunal is as follows: “... I have carefully considered the rival submissions and perused the record. In my considered opinion the expenditure incurred by the assessee can be said to be wholly and exclusively incurred for the purpose of business. No doubt, there is no straight jacket formula to apply the test for commercial expediency it has to be analysed by taking into consideration various facts.... ... It is not disputed by the Assessing Officer that by virtue of advertisements the principals would get greater revenue in the form if subscription fees as well as advertisement revenue and a percentage thereof has to be shared with the assessee. The very fact that l/3rd of the expenditure was allowed by the assessing officer indicates his satisfaction that the expenditure was incurred wholly and exclusively for the purpose of business. However, he was of the opinion that section 40A(2) comes into play since there is a probability of principals getting higher revenue at the expense of the assessee and thus he sought to disallow 2/3rd of the expenditure invoking section 40A(2) of the Act. Learned CIT(A) rightly observed that section 40A(2) has no application in the instant case and this view was accepted by the learned Accountant Member. Learned Judicial Member however proceeded on the footing that the expenditure incurred by the assessee is more than the total income declared and thus it cannot be said to be exclusively incurred for the purpose of business overlooking the fact that the expenditure has to be compared with the gross revenue and not with reference to income declared by the assessee. In the instant case the gross revenue is more than 40 crores where as the expenditure incurred by the assessee is only 6.21 crores on advertisement. Even taking cue from the circular issued by the CBDT, the gross total income declared by the assesses is more than 10% of the gross revenue and the total income declared by the assessee after debiting a sum of 6.21 crores and thus income declared by the assessee cannot be said to be low. Consequently, the expenditure cannot be said to be excessive or unreasonable... ... Once the main test is satisfied, as held by the Apex Court, in the case of Sassoon J Dravid & Co. Ltd vs CIT (supra), merely because a third party is benefited by virtue of such expenditure, it cannot take the case out of the purview of Section 37 (1) of the Act. Assessing Officer has not disputed the fact that subscription fees/ distribution revenue is not fixed but variable and depends upon the popularity and viewer-ship of the channels in which event it has to be assumed that the expenditure on advertisement is intimately connected to the revenue earned by the assessee. The expression 'trader' or 'businessman ' cannot be viewed in its narrow sense and even an agent rendering services for and on behalf of principal has to be treated as a businessman since the agency services are rendered in his capacity as a businessman. Thus, taking a holistic view of the matter, I am in agreement with the view taken by the learned Accountant Member... " A copy of the said order of ITAT for AY 2005-06 was enclosed as Annexure 5 of the submission. iv) Relying on the said order of the Third member of the Hon'ble Mumbai tribunal, the Mumbai Tribunal has in Appellant's own ease for AY 2003-04, decided the Issue on deducibility of advertisement and publicity expenditure in favour of the Appellant. Relevant extracts of the order is as follows: "...In view of (he fact that reassessment itself is quasher; merits of the additions made during the reassessment proceedings are wholly academic issue. However, we may record the fact that both the parties agree that the issue is covered by Third Member decision dated 17.6.2011 of this Tribunal, in assesses 's own case for the assessment year 2005-06 and also on merits also, assessee deserves to succeed... " A copy of the said order of the ITAT for AY 2003-04 was enclosed as Annexure 6 of the submission. v) It was further submitted that a similar issue of deductibility of advertisement and publicity expenditure, has 6 | P a g e I.T.A. No.4388/Mum/2012 been decided favorably by the various orders of CIT(A) in Appellant's own case for various AYs i.e. AY 2002-03, AY 2003- 04 and AY 2005-06. Relevant extracts of the said orders passed by the CIT(A) were also reproduced in the submission of the appellant. Copies of all the above orders were enclosed as Annexure 7 of the submission. vi) It was submitted that thus, this ground is covered by various ITAT/CIT(A)'s orders in Appellant's own case for various assessment years as mentioned above. Further, it was submitted that it is a settled principle of law that the decision of jurisdictional Tribunal is binding on all authorities under its jurisdiction. In this regard, reliance was placed on the decision of the Hon'ble Supreme Court in the case of Union of India vs. Kamalakshmi Finance Corporation Limited[(1992) AIR (SC) 711)]; in the case of Nokia Corporation vs DIT (292 ITR 22) (Del); in case of Agrawal Warehousing and Leasing Ltd. vs. CIT (257 ITR 235) (MP) and also on the case of Bunk of Baroda vs. H.C. Shirivatsava (256 ITR 385) (Bom). vii) In view of the above, applying the principles laid down by the above judicial precedents including Hon'ble SC decision in the case of Kamalakshmi Finance Corporation Limited [(1992) AIR (SC) 711], it was submitted that the above decision of the jurisdictional Mumbai Tribunal in case of NGC India is binding and accordingly, it was requested to consider this ground of appeal favorably. 5.3 I have considered the facts of the case and the submission of the appellant as against the observations/findings of the AO in his order u/s 143(3) of the Act. This issue on similar facts have been subject matter of consideration in the case of the appellant in the earlier years. The issue has been decided in favour of the appellant in the A.Y. 05-06 by my Ld. Predecessor in the office and has been affirmed by the third member decision of the Hon'ble ITAT Mumbai in ITA No. 635/Mum/2010. Further following such decisions of the Ld. CIT(A)/ITAT, the case of the appellant for the A.Y. 2003-04 was decided in its favour. Accordingly keeping in view the principles of judicial discipline and principles of judicial consistency, the grounds of appeal so raised are allowed.” 4.4 Further our attention was drawn by learned Senior Counsel of the assessee to judgment dated 13.10.2014 passed by Hon‟ble Bombay High Court in of 2012 for AY 2005-06 in assessee‟s own case wherein Hon‟ble Bombay High Court has upheld the confirmatory order dated 29.07.2011 of the tribunal for AY 2005-06 in ITA no. 635/Mum/2010 and held that these Advertisement and Publicity Expenses are allowable business expenses as these expenses were incurred wholly and exclusively for the I.T.A. No.4388/Mum/2012 purposes of the business of the assessee. It has been submitted by learned counsel for the assessee that for other assessment years also , Hon‟ble Bombay High Court has held that these expenses were incurred wholly and exclusively for the purposes of the business of the assessee. Our attention was also drawn to judgment of Hon‟ble Bombay High Court in of 2012 with ITA no. 595 of 2012, vide common judgment dated 13.10.2014 in assessee‟s own case wherein Hon‟ble Bombay High Court followed its own judgment in ITA no. 538 of 2012 of even date and held these expenses were incurred wholly and exclusively for the purposes of the business of the assessee. Our attention was also drawn to judgment of Hon‟ble Bombay High Court in ITA no. 161 of 2013 , dated 09.01.2015 wherein Hon‟ble Bombay High Court held these expenses were incurred wholly and exclusively for the purposes of the business of the assessee, in assessee‟s own case for AY 2002-03. 5.We have considered rival contentions and perused the material on record including cited case laws. We have observed that the assessee is resident company and is engaged in the business of marketing and distribution of National Geographic , History and Entertainment Channel , sale of advertisement airtime on the above channel and other incidental activities. These channels are owned by foreign entities. The assessee has claimed that upto 30.04.2006 , it had an agreement with NGC Network Asia LLC ( hereinafter called “ the NGC Asia”) and Fox International Channels (US) Inc. (hereinafter called “ the FOX”) for distributing their channels. The agreement was on P2A model wherein the assessee was appointed as an marketing and collection agent for channels of NGC Asia and FOX while wef 01.05.2006, the agreement was on P2P model wherein NGC Asia/ FOX sold the advertisement and sponsorship time on the channels to assessee on a principal to principal basis for a lumpsum basis from 01.05.2006 to 31.03.2007. The assessee had incurred Advertising and Publicity Expenses to the tune of Rs. 11,01,55,825/- during the year under consideration. The AO has disallowed these expenses to the tune of 66.67% on the ground that the assessee could not explain commercial expediency and rest of the 33.33% expenses were allowed by the AO , which led to the disallowance of said expenses to the tune of Rs. 7,34,37,271/- which was added by the AO to the income of the assessee. The learned CIT(A) has granted relief to the I.T.A. No.4388/Mum/2012 assessee by holding that these expenses were incurred wholly and exclusively for the purposes of business of the assessee, mainly by following decision of Mumbai-tribunal for AY 2005-06 in assessee‟s own case.

5.2 We have observed that tribunal has consistently held in assessee‟s own case that these „Advertisement and Publicity Expenses‟ were incurred wholly and exclusively for the purposes of business of the assessee and are to be allowed as business expenses, in for AY 2005-06, ITA no. 3545/Mum/2010 for AY 2004-05, ITA no. 5499/Mum/2010 for AY 2003-04 and ITA no. 2867/Mum/2010 for AY 2002-03. We have also observed that Hon‟ble Bombay High Court has consistently held that these expenses are business expense incurred wholly and exclusively for the purposes of business of the assessee . The judgment of Hon‟ble Bombay High Court in ITA no. 538 of 2012 for AY 2005-06 in assessee‟s own case is reproduced as hereunder:-

1. This appeal seeks to challenge the order of the Income Tax Appellate Tribunal dated 29th July, 2011 being a confirmatory order recording formation of a majority view pursuant to the order passed by the Third Member dismissing the appeal filed by the revenue. The Appellant seeks to raise following questions :- “(a) Whether in the facts and circumstances of the case and in law, the Hon'ble ITAT is justified in confirming the order of the CIT(A) deleting the disallowance of Rs.4,14,20,843/- made by the Assessing Officer out of advertisement and publicity expenses incurred by the Assessee ? (b) Whether in the facts and circumstances of the case and in law, the Hon'ble ITAT was justified in not taking cognizance of the transfer pricing provisions because, the expenditure incurred by the Assessee by way of advertisement and publicity expenses, substantially benefited the two foreign principals and the Assessee did not receive any compensation on that account from the foreign principals and whether upon the aforesaid consideration, the Hon'ble ITAT was justified in not upholding the order of the Assessing Officer ? (c) Whether in the facts and circumstances of the case and in law, the Hon'ble ITAT was justified in rejecting the alternative claim of the Revenue that the huge advertisement and publicity expenses should be treated as deferred revenue expenditure since, the benefit of the expenditure spread over future years ? 2. It will be convenient to narrate few facts which led upto present appeal : The respondent – assessee is a company incorporated in India and engaged in the business of distribution of T.V. channels popularly known as National Geographic and History Channel. The assessee - NGC Network (India) P. Ltd. also acts as airtime advertising Sales Representative for its principals NGC Network Asia LLC (“NGC Asia ) which operates the National Geographic Channel and Fox International Channels (US) Inc. (“FOX”) which owns and operates “the History channel”. The Assessee has paid fixed fees to “NGC Asia” and “FOX” in consideration for being appointed as distributor of the two channels. The distribution fees are paid by way of lump sum amounts. The assessee being distributor was entitled to enter into agreements with re-distributors, cable networks and other media distributors (collecting operators) to ensure that the contents of channels are viewed by the consumers. The assessee collects subscription fees for such re-distributors. The consumer would pay the subscription fees to view such channels.

Furthermore, the Appellant's case during argument that the fact of the foreign principal benefiting had been disclosed in the Form 3CEB and the Transfer Pricing Officer `could' have taken a different view. Admittedly therefore the Transfer Pricing Officer had followed a possible view which cannot now be faulted.