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Income Tax Appellate Tribunal, “J” Bench, Mumbai
Before: Shri Shamim Yahya (AM) Shri Amarjit Singh (JM)
O R D E R Per Shamim Yahya (AM):-
This appeal by the assessee is directed against the order of the Assessing Officer dated 31.1.2017 and pertains to A.Y. 2011-12 which was passed pursuant to direction of learned Dispute Resolution Panel (DRP) dated 27.1.2016.
First issue raised pertains to transfer pricing adjustment of Rs. 1,62,93,672/-.
Brief facts of the case are that Universal Music India Private Limited ('UMIPL), 'the Company', or 'the Assesses') is a part of huge conglomerate group Universal Music Group, was set up in the year 2001. It was created to cater to the Indian customers of Licensed Music. The basic business model of the enterprise is the same as that of any other music company. The first step involved in the development of music rights. This is done by entering into negotiations with either the artists or producer or any owner of the intellectual property rights of a certain album/track. The enterprise may have to pay a 2 Universal Music (India) Pvt. Ltd.
lump sum consideration to get the copyright or on the contrary it may have to pay a royalty as negotiated in the agreement. The second step involves manufacturing of the album: this is done through one of the vendors. Only in case the demand for a certain product does not match the MOQ (Minimum Order Quantity) levels for production does UMHPL prefer to import the repertoire in case of International titles. The final step involves marketing and distribution of the product through various distribution channels. This is major step it involves garnering and generating demand for the repertoire.
During AY 2012-13, the Assessee has entered into various international transactions with its Associated Enterprises ('AEs') which was duly reported by it in Form 3CEB under Section 92E of the Income-tax Act, 1961 ('the Act'), and filed along with the return of income for AY 2012-13. The Assessee had prepared a Transfer Pricing (TP') Study report and maintained the prescribed documentation as per Section 92D of the Act and Rule 10D of the Income-tax Rules, 1962 ('the Rules').The AO referred the Assessee's case to the TPO for AY 2012-13.
UMIPL's business consists of development of music and the subsequent sales of such music. The royalty income arises out of this licensing that is done by UMIPL. The same is fair economic compensation for the exploitation of the track owned by UMIPL. The royalty amount to be receivable is as per the Inter Company Licensing Agreement ('ICLA') entered into by all the group entities. The ICLA imposes a blanket rate of 15% royalty on the sales value of the catalogues, which are interchanged by the AE. The royalty rates in case of digital transmission or usage of digital medium is a blanket rate of 23%. The Assessee entered into following international transactions with its AEs: • Receipt of Royalty; and • Payment of Royalty.
With respect to the transaction pertaining to receipt of royalty, the Assessee in its TP documentation maintained under Section 92D of the Act read with Rule 10D of the Rules and detailed submissions made before the 3 Universal Music (India) Pvt. Ltd.
TPO, contended that the transaction was not inconsistent with the arm's length standard considering the economic and commercial factors surrounding the transaction.
TPO's approach
The Ld. AO/ TPO rejected the TP documentation maintained by the Assessee by giving following reasons:
a. The Assessee had adopted TNMM Method and the PL1 of OP/Sales to benchmark the transaction under consideration but it was observed by the TPO that the transaction of receipt is greater than payments and as such the receipts being the tainted transaction, the PLI of OP/OC was considered by the TPO. b. Further, on perusal of the annual reports of the Assessee and the comparables, it was seen that the workings were erroneous and the same were reworked giving the following results:
Assessee' s Margin (OP/OC) 2.07% Comparables Margins (OP/OC) 23.66% c. The Profitability of Assessee i.e. 2.07% was lower than the average of the PLIs of the comparable company's i.e. 23.66% as selected by the Assessee.
The AO/TPO determined the ALP of receipt of royalty as VNR 9,33,24,476 instead of INR 7,70,30,804 thereby proposing an adjustment of INR 1,62,93,672.
Against the above adjustment the assessee objected before the learned DRP. The contention of the assessee were noted by learned DRP as under :-
5.1 During the year under consideration, the Assessee had established the ALP by following TNMM as most appropriate method. For the purpose, PLI has been selected as Operating Profit (OP) / Operating Revenue (OR).
5.2 Further, there is no rationale or logic for changing the PLI from OP/OR to OP/OC on a solitary reason of receipt being greater than payments. In the case of the Assessee, which is having its operation at relatively on smaller scale and nature of modalities of business being
4 Universal Music (India) Pvt. Ltd. different, the cost structure, per se, is not comparable with the companies considered for comparability.
5.3 In a particular year, if the projects are more successful OP/OC will be improved and vice versa, if there are many projects getting flopped. Therefore, in present case, considering the facts of the particular year, wherein, there have been more projects, which are flopped, have not been so successful, the OP/OC gives a substantial lower PLI, which, per se, is not comparable. This is so because royalty income is basically from a different segment i.e. Digital sales (95%).
5.4 Further, it is a well settled principle in transfer pricing laws that OP/ OR ratio is preferred to be considered as most appropriate method for the purpose of calculation of PLI if the Assessee is in the business of distribution and marketing. As explained above, Assesse is in the business of Distribution and Marketing of Licensed Music and hence OP/ OR is the appropriate PLI.
5.5 Suo-Moto Disallowances
5.5.1 Without prejudice to the above submissions, the Assessee had made certain suo-moto disallowances to the extent of Rs. 14,84,89,629/-. Therefore revised PLI after considering the above would be as under:
Particular Amount in Rs.) Total income from operations of the assessee (per the 45,70,84,647 TPO order) Add: Release of provision for margin on future 55,77,143 returns (per the TPO order) Total Operating income-I 46,26,61, 790 Total operating cost (as per the TPO order) 45,32,93,971 Less: Disallowances (as mentioned above) (14,84,89,629) Net Operating cost (OC) - II 30,48,04,342 Net Operating profit (OP) - (I-II) 15,78,57,448 Operating margin ratio (OP/OC) 50.78%
5.6 Royalty Income, received from third parties by AE
5.6.1 Considering the facts of the transaction with regard to royalty income, there is no adjustment warranted since majority of income pertains to distribution of Global income originally received from un-related parties by the AE and which are distributed to respective companies being correct/ real beneficiaries.
5 Universal Music (India) Pvt. Ltd.
5.6.2 Therefore 95% of the royalty income received during the year under consideration by the Assessee i.e. Rs. 7,30,74,072/- is in fact received from third parties by AE which distributes it to various group companies including the Assessee. Such arrangement has been done for administrative convenience, efficiency and control to the entire Group of the Assessee.
Learned DRP was not convinced. It rejected the assessee’s contention by observing as under :- 9.1 We have carefully considered the facts and the arguments submitted by the assessee as well as by the Ld. TPO on the above issues and has come to various, conclusions, which are contained in the following paragraphs.
9.2 The Assessee's argument of the PLI being taken erroneously by the TPO cannot be accepted as it can be seen that the transaction of receipt is greater than payments and hence, the receipts being the tainted transaction, the PLI of OP/OC as considered by the TPO is correct and is in accordance with the provisions of TP regulations.
9.3 Further, the Assessee's contention of considering the suo-moto disallowances considered by the Assessee is not accepted as the same cannot be verified that the expenses are in nature of operating or non- operating. Since, the information to the same were not available, the contention of the assessee is rejected and the profitability of the assessee as reworked by the TPO is considered i.e the Assessee's profitability of 2.07% is lower than the average of the PLIs of 23.66% of the comparable companies. Hence, the Assessee's international transaction with its AE is not at arm's length.
9.4 In view of the above factual and legal position, the ALP in relation to receipt of Royalty as determined by AO/TPO is upheld and the adjustment of Rs. 1,62,93,672 is confirmed (Objection 1).
Against the above order assessee is in appeal before us. We have heard both the counsel and perused the records.
Learned Counsel of the assessee contended that learned DRP has rejected the assessee’s c contention related to suo-moto disallowance without proper examination. He contended that all information was available. Learned DRP has erred in rejecting the same by holding that it cannot be verified. Further learned counsel contended that there was another contention before
6 Universal Music (India) Pvt. Ltd. learned DRP which was submitted to learned DRP vide its letter dated 3.9.2016. In this the assessee has made pleading as under : “It is interesting fact to note that substantial part of such royalty income (95 percent i.e. Rs. 7,30,74,072/- out of total of Rs. 7,70,30,8O4/- pertains to originally received from third parties which are merely collected by the Associated Enterprises and distributed to the Appellant. In view of the fact that such royalty collection and distribution is merely for administrative convenience, there cannot be any transfer pricing adjustment on this account as the amount is ultimately received from the third parties”.
In this regard learned counsel submitted that this pleading has considerable relevance as it is has now been considered in the light of Hon'ble Jurisdictional High Court decision in the case of Principal CIT Vs. KSS Ltd. (in of 2016 vide order dated 26.11.2018. In this case Hon'ble Jurisdictional High Court has expounded as under :- Explanation to Section 92B clarifies certain doubts. As per clause (c) of this explanation, capital financing including any type of long-term or short-term borrowings, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising in the course of business would be included within the expression "international transaction". Learned counsel for the Revenue had heavily relied on this explanation. However, having regard to the nature of entire arrangement and the different transactions, noted above, in our opinion, the said explanation would not cover the present situation. As noted, the present case is a simple one where the money was routed through the AE by the assessee for the purpose of acquisition of distributorship. This is not a case of either financing or landing or advancing of any moneys. The back to back agreements, the contents thereof and most significantly, the fact that neither at the point of payment nor at the point of refund of money, the AE retained the same for any significant period of time, in our opinion, would be crucial. This transaction did not result into diversion of income of the assessee to its AE. The Tribunal, therefore, committed no error. No question of law arises in this respect. Once we come to the conclusion that the transaction did not give rise to the international transaction, the rest of the issues would become academic.
Hence, learned Counsel of the assessee pleaded that this issue has not been adjudicated by the authorities below.
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Per contra, learned Departmental Representative supported the order of learned DRP for the proposition that OP/OC has been rightly considered by the authorities below. However, he fairly agreed that the issue may be remitted the file of TPO to consider other two aspects of assessee’s contention which have remained unadjudicated. Learned Counsel of the assessee fairly agreed that even if TPO’s approach considering PLI as OP/OC is accepted, matter may be remanded for examination of the issue to suo-moto disallowance made by the assessee and other contention with regard to considering the royalty collection and distribution as merely administrative convenience and not a transfer pricing issue as such on the touchstone of Hon'ble Hon'ble Jurisdictional High Court decision referred above.
Accordingly, in the background of the aforesaid discussion, these issues are remitted to the file of TPO for consideration as directed.
Another issue raised is adhoc disallowance of 20% out of miscellaneous expenses.
On this issue the Assessing Officer noted that the assessee debited Rs. 3,32,57,650/- under the head ‘miscellaneous expenses’. The Assessing Officer further noted that in the office and general expenses the assessee has debited Rs. 69,62,110/-. The Assessing Officer was of the opinion that nature of these expenses were of provisions/prior period expenses/write off etc. The Assessing Officer observed that from the nature of these expenses it can be said that these expenditures are not incurred wholly and exclusively for the purpose of business and profession. So the Assessing Officer disallowed 20% of Rs. 69,62,110/- amounting to Rs. 13,92,422/-.
Against the above order, the assessee is in appeal before us.
We have heard both the counsel and perused the records. We find that the above disallowance has been done on adhoc basis without complete and cogent material. Both the counsel fairly agreed that this miscellaneous
8 Universal Music (India) Pvt. Ltd. disallowance may be restricted to 10%. Accordingly we direct that this disallowance be restricted to 10%.
Another issue raised in Ground No. 3 relates to disallowance of Rs. 22,300/-. This has not pressed by learned Counsel of the assessee. Hence, the same is dismissed as not pressed.
Another ground raised is disallowance of Rs. 3,17,470/-. On this issue the Assessing Officer made disallowance by observing as under :-
“On perusal of the same, it was noticed that the assessee has made the payments through credit card amounting to Rs.3,17,470/- appearing in AIR but the assessee has net accounted expenses in books; of accounts. Hence, the authorised representative of the assessee was asked to reconcile the discrepancy and explain the same. In response to the same, the authorized representative of the assessee has filed the letter dated 29.03.2016, stated therein that:
"Regarding credit card payments of Rs.3,17,470/- by Mr. Rukesh R. Nigam, we would like to state that, Mr. Rakesh R. Nigam was employee of the assessee company and left the company in December, 2003. Full and final settlement of Mr. Rakesh R. Nigam was made in 2004 by the assessee company. Thus, this payment is not related to the assessee company. "
The contention putforth by the authorised representative of the assessee has been duly considered but not found acceptable. Moreover, as per AIR information generated through system reflects the transaction and the same are not accounted by the assessee company in the books of accounts during the year under consideration. In view of the above, amount of Rs.3,17,470/- is hereby added back to the total income of the assessee.
Against the above order the assessee is in appeal before us.
Learned Counsel of the assessee fairly agreed that he does not have any cogent material to argue against the above disallowance. Accordingly, we do not find any infirmity in the order passed by the authorities below. Hence we uphold the same.
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In the result, appeal filed by the assessee stands partly allowed. Order has been pronounced in the Court on 11.7.2019.