TURNER INTERNATIONAL INDIA PVT. LTD.,NEW DELHI vs. ACIT, CIRCLE- 25(2), NEW DELHI

The facts in brief are that the assessee, M/s. Turner International India Pvt. Ltd. is a subsidiary of Historic TBS Asia LLC and is a part of Time Warner Group. The assessee is mainly engaged in the business of marketing and distribution of satellite channels of Cartoon Network, CNN, POGO, HBO, etc. i.e., TV channels owned by Turner International Inc. Its functions are primarily driven towards promoting the channels and associated proprietary intangible assets of Turner Group. In the transfer pricing study report, following key functions and conduct of business have been enumerated which are as under:- “Sub distribution of distribution rights for Turner Group ‘channels’. For the Turner Group channels in FY 2005-06, it received a 10% return on its operating expenses. Marketing of advertisement airtime for the Turner Group ‘channels’. For the Turner group channels, TIIPL is entitled to 15% of the net advertising revenue. Purchase of distribution and advertisement rights for HBO channel. For HBQ channel, TIIPL (for the sub- distribution and marketing of advertisement airtime activity) would pay a fixed fee of USD 1,395,833 per month to HBO PP. • Provision of product and promotional licensing services for certain “cartoon characters”. TIIPL is entitled to 40% of revenues collected. • Provision of production services. TIIPL is entitled to a return of 10% on costs incurred toward this activity.

The International transactions reported by the assessee for the year under consideration and the most appropriate method adopted for bench marking, the same was as under:-

The present proceedings are second round of proceedings in pursuance of direction given by the Tribunal vide order dated 20th May, 2016, wherein the matter was remanded back to the file of the TPO/AO for undertaking fresh comparability analysis for the distribution segment of the assessee. The main issue before the Tribunal was with respect to category/class of comparable that are to be selected for bench marking the distribution segment. The Tribunal held that only a distributor would be a valid comparable for the purpose of bench marking the distribution segment. The relevant observations of the Tribunal are at paragraph 12 and 14. For the sake of ready reference are reproduced hereunder:-

In pursuance of direction given by the Tribunal, the TPO undertook fresh comparability analysis and assessee furnished fresh search comparable which were in distribution of software to bench mark the distribution segment. The TPO also undertook a fresh comparability analysis wherein companies engaged in the business of broadcasting and distribution of TV channels were identified. In addition to seven comparable engaged in business of broadcasting and distribution of TV channels identified by him, he also accepted certain comparables provided by the assessee in his fresh search. However, the TPO rejected two comparables of the assessee, namely, Trijal Industries Ltd. and Svam Softwares Ltd. on the ground of functional dissimilarity and persistent loss making. Finally, the set of ten comparable companies with average mean margin [based on PLI of operating profit/operating revenue] of 13.53% was selected by the TPO to bench mark the impugned segment and accordingly, an upward adjustment of Rs. 12,78,34,821/- was proposed. Apart from that further adjustment of Rs.7,56,353/- was made on account of corporate tax issues.

Before the DRP, the assessee mainly objected to the selection of companies by the TPO which were engaged in the business of broadcasting and distribution of TV channels and exclusion of the two companies selected by the assessee which were engaged in software distribution. Certain error in computing the margin of companies was also raised along with denial of benefit of working capital adjustment. The DRP directed the TPO to verify the margins of the comparable companies and also granted the benefit of working capital adjustment to the assessee. However, the assessee’s contention with respect to the inclusion/exclusion of comparables was rejected. Thus, from the stage of the DRP following set of comparables were finalized with an average mean of 11.95%.

Before us, learned counsel for the assessee, Shri Rahul Mitra, submitted that, first of all the TPO has grossly misinterpreted the functionality of the assessee’s distribution segment, as he has proceeded with the premise that the assessee is engaged in production activities without appreciating the fact that the transactions of distribution and production/ ancillary activities are independent of each other for which a separate remuneration is earned by the assessee. Regarding international distribution rights with respect to the channels held by the group companies, he pointed out that they have the sole right to determine the content of the channels and the same has been duly captured in the transfer pricing study report. The distribution activity and production activity were two completely different set of transactions and separate remunerations were earned for each of the said activity and separate benchmarking has also been done in the TP study report. In fact, in the first round of proceedings the TPO accepted the above mentioned ancillary services and no adverse inference was drawn by the TPO, because these services constituted roughly 4% of the entire value of international transaction and these services were provided in the capacity of contract service provider, which is being remunerated separately. The channel/content owner companies which have been selected by the assessee company perform these functions in the capacity of an entrepreneur whereas assessee cannot be characterized as an entity that plans or manages the content. He strongly emphasized that the ancillary services are separate and distinct from the distribution segment and must be considered de hors to the main transaction under adjudication. The separate benchmarking of these transactions was found to be at arm’s length during the first round of assessment proceedings. He also pointed out that the DRP had sought for a remand report from the TPO in respect of assessee’s contention and the TPO in his remand report himself stated that it is the AEs who are playing crucial role of planning and determining channel contents and he himself clarified that assessee is not engaged in planning channel content as has been contended by the TPO in his transfer pricing order. Thus, TPO in his impugned order has erred in stating that assessee had aggregated distribution transaction with production services. Again, the remand report was sought from the TPO by the DRP, who furnished an alternative analysis wherein companies engaged as software distributors were searched. However, the DRP held them to be inappropriate comparables and as a result, the additional comparables furnished by the TPO in his remand report has been rejected by the learned DRP. Thus, he submitted that for bench marking the distribution segment only the distributors are appropriate comparables for bench marking the impugned international transaction and this was the direction of the Tribunal also wherein it was categorically held that assessee cannot be compared to channel owners. Consequently, channel/content owners comparables selected by the TPO should be excluded for benchmarking the impugned distribution segment, for the reason that, firstly, neither the DRP nor the TPO could substantiate that assessee performs production or manages the content of programmes distributed by it; secondly, production segment has already been held to be at arm’s length; thirdly, production activities are carried out as captive/contract service provider and functions are carried out only at the behest of AEs only and further this transaction is only 4% of the value of international transaction; and lastly, the Tribunal has already upheld that assessee is a distributor and this finding of the Tribunal has not been challenged by the Revenue. Accordingly, he submitted that there is a gross violation of ITATs order by selecting channel/content owner companies which should be out rightly rejected/excluded.

Mr. Mitra’s other limb of argument was that software distributor companies can be taken as a comparable because, in assessee’s own case for the Assessment Year 2012-13 software distributors have been directed to be included by the DRP and in Assessment Year 2013-14 TPO has accepted the software distributors. He also relied upon the decision of Tribunal in the case of ACIT vs. M/s. NGC Network (India) Pvt. Ltd., in Mum/2008, wherein it was held that companies engaged in distribution of software can be adopted as comparable for companies engaged in distribution of TV channels. Apart from that, he also filed a brief synopsis on each and every comparable to point out the FAR difference of the channel/content owner companies as selected by the TPO/DRP and submitted that they should be rejected on FAR basis. For the sake of ready reference, the main contentions of the assessee with regard to each and every channel owner companies are as under:-

On the other hand, learned DR strongly relied upon the order of the TPO as well as the DRP and submitted that the DRP has given detailed reason for selecting of channel/content owners, because assessee’s functions are in relation to distribution of TV channels only which quite similar to the companies selected by TPO. Alternatively, he submitted that if the channel content owner companies are to be excluded then matter should be restored back for selection of software distribution companies and based on that fresh benchmarking should be done.

We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well as the material referred to before us. From the stage of the DRP, ten comparables have been selected with an average mean of 11.95% and based on such comparables adjustment of Rs.10,07,35,464/- has been made in the distribution segment. The details of these comparable companies with this average margin have already been incorporated above. Out of the said comparable companies, seven comparables have been sought to be excluded by the assessee which are channel and contents owners who are full-fledged channel companies who owned and operate various TV channels and undertake content creation on their own. The Tribunal in assessee’s own case for the Assessment Year 2007-08 and 2008-09 and also in Assessment Year 2006-07 have held that Satellite TV channels and cable network operators have significantly different operating models and provide earning model and once the Tribunal has held that such channel/content owner companies should not be included for the purpose of comparability analysis, then there is no reason why the TPO is again selecting such companies for the purpose of benchmarking the ALP of the assessee’s distribution segment. Before us, the learned counsel has already clarified on the basis of material available on record that distribution activity and ancillary/production activity of the assessee are two distinct set of transactions for which, not only separate benchmarking has been done but also separate remuneration has been earned for each of the said activities. So far as production activity is concern, the same has been found at arm’s length by the TPO and once these are two different segments then there is no justification to mix up the functions of such ancillary activities with that of distribution activity so as to justify selection of such channel/content owner companies, especially when transaction from such ancillary services constitutes only 4% of the value of the international transaction of the assessee. Apart from that, the assessee is providing these services as a captive service provider for which it is remunerated separately and ALP of such transaction is not in dispute. Accordingly, we reject the DRPs and TPO action for mixing the functionality of distribution and production activities which are in fact independent and also separately benchmarked. We are in tandem with the contention of the learned counsel that these two activities cannot be mixed up for distorting the functionality and justifying the selection of channel owner companies. Thus, we hold that the seven comparable companies, namely, i) Malayalam Communications Ltd.; ii) Raj Television Network Ltd.; iii) TV Today Network Ltd. iv) Sun TV Network Ltd.; v) Zee Entertainment Enterprises Ltd.; vi) Zee Media Corporation Ltd.; and vii) UTV Software Communications Ltd.; are directed to be excluded. The other three comparables, namely, Empower Industries India Ltd. (56.65%), Sonata Information Technologies Ltd. (4.54%) and Softcell Technologies Ltd. (4.23%), have been accepted by the assessee. However, after working capital adjustment OP/OR of these three companies are as under:-

Softcell Technologies Ltd. 2.24% Mean 1.11%

In so far as the contention of the assessee that Trijal Industries Ltd. and Svam Software Ltd. should be included, the learned counsel first of all submitted that, these are software distribution companies and in the case of NGC India Ltd. (supra), the Tribunal has held that the companies engaged in distribution of software are also good comparables for benchmarking the distribution of TV channel companies. Further, in the subsequent years the DRP as well as the TPO have also accepted software distributors as a good comparable, therefore, it was contended that these two companies which are engaged in the software distribution should also be included. Even if Svam Software Ltd. which is a persistently loss company is removed, then it was submitted that Trijal Industries Ltd. should be accepted.

In so far as the aforesaid contention of the learned counsel that Software Distribution Company should be accepted, we agree in principle that such companies can be taken for comparability analysis, when there are no direct comparable dealing with distribution of satellite channels are available. Such an acceptability of software distribution companies in the case of distribution of TV channels has found favour by the co-ordinate bench in the case of NGC India Pvt. Ltd. (supra). Thus, we hold that software companies can also be included for the purpose of comparability analysis, because in assessee’s own case for the subsequent years such companies have been accepted to be good comparables and Trijal Industries Ltd. too has been accepted as a valid comparable by the TPO in the Assessment Year 2013- 14. In so far as Trijal Industries Ltd. is concerned, it is seen that this company is engaged in trading of computer packages and is mainly Software Distribution Company and hence can be taken as good comparable. The functions carried out are quite akin with the distribution activity of the assessee company, which can be analysed atleast under TNMM. Even if we agree with the contention of the learned DR that in case software companies are to be included then matter should be remanded back to the TPO for searching for other software companies. However, looking to the fact that already two rounds of litigations have been done in the case of the assessee and matter pertains to the Assessment Year 2006-07, therefore, to give finality on the issues, we hold that following four comparables with working capital adjustment should be taken and should be benchmarked with the assessee’s margin of 2.07% on PLI of OP/OR:-

In so far as the corporate issues are concerned, the learned counsel for the assessee submitted that in the first round of proceedings, the Tribunal has failed to adjudicate the corporate issues for which assessee has filed miscellaneous application for recalling of the said order, and therefore, in this appeal the grounds on corporate tax issues have become infructuous. In view of the above, we hold that corporate tax grounds which are a subject matter of miscellaneous application before the Tribunal, therefore, these grounds have become infructuous in this appeal. Accordingly, these grounds are dismissed as infructuous.

Ground no.6 which is for initiation of proceedings u/s. 271(1)(c) is premature and ground no.7 for charging of interest u/s.234B and 234C are consequential. Hence, both the grounds are dismissed.

In so far as the ground no.8 is concern, the Assessing Officer has erred in allowing the complete credit of taxes, we direct the Assessing Officer to verify the same from the records and give appropriate credit of taxes paid by the assessee. Accordingly, the appeal of the assessee is partly allowed.