ESPN SOFTWARE INDIA (P) LTD.,GURGAON vs. DCIT (LTU), NEW DELHI

The appeal by the department for the assessment year 2005-06 is directed against the order dated 24.02.2012 of the ld. CIT(A)-20, New Delhi and the appeal by the assessee for the assessment year 2006-07 is directed against the order dated ESPN Software India Ltd. 30.04.2013 passed by the AO u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as the Act).

Facts of the case in brief are that the assessee filed the return of income on 30.10.2005 declaring an income of Rs.32,78,57,120/-. Later on, the case was selected for scrutiny. The AO referred the matter to the Transfer Pricing Officer (TPO) for determination of the Arm’s Length Price (ALP) u/s 92CA(3) of the Act in respect of the international transaction entered into by the assessee during the financial year 2004- 05 relevant to the assessment year under consideration. The TPO vide order dated 30.10.2008 passed u/s 92CA(3) of the Act recommended that the income of the assessee be enhanced by Rs.19,14,48,497/-. The TPO noted from the TP study and the audited account that the assessee was maintaining separate audited segmental accounts for subscription/distribution business, advertisement sale business, production revenue business and set out segmental profitability based on such division. However, for transfer pricing purposes, the assessee had aggregated financials of both the distribution business and advertisement sale business leaving financial of third division relating to production business as it is. He also observed that the assessee had selected TNMM as the most appropriate method with OP/TC as a Profit Level Indicator (PLI) which was computed at 7.82% and the OP/TC of ten comparables ESPN Software India Ltd. identified on the basis of search criteria in the TP report had been computed at 1.01% on the basis of multiple year data. He further observed that for other segment relating to production of revenue, the PLI was computed at 6.78%, the PLI of the comparables for this segment had been computed at 8.53% and on the basis of ±5% analysis of the TP report, it was claimed that all the transactions were at Arm’s Length Price. The TPO selected new comparables which were objected by the assessee. The assessee submitted before the TPO that the clubbing of distribution of channels and distribution of advertisement inventory was justified, reliance was placed on paras 1.42 and 1.44 of the OECD guidelines. The assessee also submitted that international transaction of distribution of advertisement air time should be bench marked using the resale price method (RPM). It was also stated that gross profit/sales ratio of the assessee for advertisement inventory segment was 13.87%. The assessee worked out the average GP/sales of 10 comparables at 14.05% and claimed that international transactions relating to advertisement purchased was at arm’s length price. The assessee objected to the use of financial year 2004-05 data in the cases of comparables selected by the TPO and also stated to use of positive PBIT. The objection of the assessee for each comparable selected by the TPO were as under: “(a) Aaren Initiative Outdoor Advertising Private Limited - It had been stated that this company is engaged into outdoor advisement of its product by putting hoardings on the road ESPN Software India Ltd. side, vehicles etc. It had been stated that the functional profile is different than this comparable. (b) Adbur Private Limited- It had been stated that only financial data is available in the public domain. The other qualitative details like director's report, management discussion, notes of accounts are not available in the public domain. (c) Empire Industries Ltd. - It had been stated that this company is engaged in different product profile of manufacturing, glass bottle for the pharmaceutical industries. (d) Sun TV Ltd. - It had been stated that this company had different product profile. The ratio of intangible asset to total asset had been stated to 22.23%. It had been stated that this company is not comparable to the assessee. (e) Mid-day Multimedia Ltd. - It had been stated that the functional profile of company is different than the assessee. It had also been stated that the ratio of intangible asset as a percentage of total fixed assets was 14.83%. Assessee had stated that in the annexure 9 and page 35 of the Annual Report there where the related party transactions. Therefore, this company should not be used as a comparable.”

The assessee also identified additional comparable and stated that the average margin of 10 comparables after excluding SUN TV selected by the TPO was at 0.35% as per following details: Sr. Name of the Company Operating Profit Margin No. on Sales (In %) ESPN Software India Ltd. 1 Aaren Initiative Outdoor Advertising 3.00% Pvt. Ltd. 2 Adbur Pvt. Ltd. 0.00% 3 Innetwork Entertainment Ltd. 0.24% 4 Living Media India Ltd. 0.58% 5 Magna Publishing Co. Ltd. 2.97% 6 Mathrubhuali Printing & Publishing 2.87% Co. Ltd. 7 Mid-Day Multimedia Ltd. 10.00% 8 Rashtra Deepika Ltd. 3.86% 9 Rediff.Com India Ltd. -20.84% 10 Empire Industries Limited (Trading 0.8l% & Indenting) Average 0.35%

The TPO considered the submissions of the assessee and did not accept this contention that distribution of channels and advertisement sale inventory were closely linked business segment for the following reasons: “(a) The assessee has three different and distinct economic activities and for this reason the assessee had drawn accounts for each of these economic activities separately. However, for transfer pricing purpose the assessee had merged financial of two different audited segmental accounts i.e., financial of distribution business segment were merged with financial of advertisement sale business segment only leaving third audited segmental account for production service business segment. The main reason for the merger of distribution business segment with advertisement sale business segment was to conceal loss of Rs.1.07 crore from advertisement sale segment which got absorbed in profit of ESPN Software India Ltd. Rs. 29.38 crores from distribution business segment and to reduce profit of distribution business segment. (b) The assessee was following two different business model for advertisement sale and distribution business segment. In both the models mode of compensation to the assessee was different, accordingly benchmarking of margin of two different business models after making an artificial aggregation will breach the concept of comparability analysis. (c) The transfer pricing legislation in India is based on the determination of arm's length price for each Intl. transactions. The reference to this office by the A.O is also transaction based. Therefore, the aggregation of Intl. transaction for the bench marking has to be an exception rather than a rule. (d) The reliance placed by the assessee on OECD guidelines is also misplaced. The OECD guidelines in para 1.42 has clearly provided that for most precise approximation of fair market value, the arm's length principle should be applied on a transaction-by-transaction basis. Therefore, the conclusion drawn by the assessee for the aggregation of intl. transaction on the basis of the OECD guideline is based on incorrect appreciation of guidelines.”

The TPO finally selected the following comparables with OP/sales PLI as under: Name Company Sales FY OP/Sales ended Aaren Initiative Outdoor 30.49 200503 0.03 Advertising Pvt. Ltd. ITA No. 2059/Del/2012 ESPN Software India Ltd. Adbur Pvt. Ltd. 95.37 200503 0 Empire Industries Ld. 91.39 200503 0.1 Mid-Day Multimedia Ltd. 102.43 200503 0.1 SUN TV Network Ltd. 290.69 200503 0.43 Average (%) 13.2%

The TPO held that the economic activities carried out by the assessee should have been shown the PLI of 13.2%. The TPO worked out the adjustment of Rs.19,14,48,497/- by observing as under: “10 Determination of Arm's length price:- The arm's length price is determined as under- PLI of the comparables (OP/Sales) =13.2% Total sales for advertisement segment as per the audited account (controlled segment) = Rs.136,92,13,236 Profit of the above controlled segment (A) = (-) Rs.1,07,12,350 The profit of the controlled segment at PLI of 13.2% (B) = 13.2% * 136,92,13,236 = Rs.18,07,36,147 Difference (B-A) C = Rs.19,14,48,497 The purchase price of ad-inventory (D) = Rs.117,93,47,659 Arm's length price of ad-inventory (D-C)E = Rs. 98,78,99,162 The purchase price of ad-inventory was overstated by Rs.19,14,48,497. The percentage of difference arm's length price is 19.38%, which is more than 5%. Therefore, proviso to section 92C (2) is not attracted, The purchase price of ad-inventory needs to be reduced by Rs. 19,14,48,497 to bring the international transaction.” ESPN Software India Ltd.

The TPO summarized his findings in para 11 of the order dated 30.10.2008 as under: “(a) I have accepted TNMM as most appropriate method as disclosed by the assessee. (b) In this case, the assessee in its transfer pricing report had merged two audited separate business segments i.e., distribution business segment and advertisement sale segment in order to conceal the loss incurred by the assessee in advertisement sale segment as discussed in paras 5.2 and 5.3.4 of this order. (c) The assessee had incurred loss in advertisement sale segment due to change in business and compensation model in the year which was unduly favorable to the AE and against the assessee as discussed in para 5.3.4. (d) Since the assessee had selected comparables engaged in distribution business to benchmark margin of distinct and separate advertisement sale segment after merging the same with distribution business, the transfer pricing approach of the assessee was rejected and financials of the advertisements sales business segment as reported in audited accounts were used for comparability analysis and benchmarking of the profit ignoring merged financials of both distribution and advertisement segments. (e) It is a peculiar case where the assessee has adjusted the loss of advertisement segment against the profit of distribution segment by deliberating merging two distinct and separate audited segments and had benchmarked the margin of advertisement segment with the comparable ESPN Software India Ltd. engaged in different line of business i.e. distribution business segment. (f) For the afore stated reasons a new search was undertaken and to identify comparables of advertisement segment and comparability analysis was made to determine the margin of advertisement segment separately as discussed in paras 6 to 6.3 and 8 to 8.9 of this order. (g) In this case the AE of the assessee was located in low tax country i.e. Mauritius. The AE by entering into an agreement with the assessee transferred all the functions and risk on the issue, due to which it incurred loss against the profit in earlier years and corresponding income was shifted to the low tax country. (h) A finding that the assessee could not have incurred any loss on the advertisement sale business is corroborated with the fact that in old business model the assessee had earned profit @16% of total advertisement sale proceeds in immediately preceding year. It is also noted from comparable companies that these were earning substantial margin.”

Accordingly, the TPO directed the AO to increase the income by Rs.19,14,48,497/-. Thereafter, the AO passed the assessment order dated 22.12.2008 and made the adjustment of Rs.19,14,48,497/-.

Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted that the two activities i.e. sale of air time for advertisement and distribution of channels were closely inter twined ESPN Software India Ltd. functionally and also the business model of the assessee used the same set of assets for carrying out those activities and that the business model of the assessee was structured in such a way that the profit was maximized as a whole rather than independently in these two activities and the popularity of the channel depended on various factors. It was further stated that when there were big ticket cricketing activities the channel earned more advertisement revenue, the subscription for the channel also went up and in the lean period where not much of high profile cricketing activity was happening the revenue from sale of air time came down. It was further stated that the distribution of the channel depended on such popular sports events. It was contended that due to the regulatory framework in India, the assessee bought the distribution rights for the channel as well as air time for advertisement from its Associated Enterprises (AEs) and distributed the same to the cable operators and also direct to home operators (like Tata Sky, Dish TV etc.). It was submitted that in case of channel rights and to general advertisers (like consumer product companies, Pepsi, Coke etc.) and in case of air time sale, higher the number of viewers, the rate for the air time will be higher, in other words, the viewership and advertisement revenue from air time sale were directly related. Therefore, the functions of those two activities were closely connected and need to be clubbed together for benchmarking the international transaction. The assessee also raised objections for the use of the comparables selected by the ESPN Software India Ltd. TPO in the sale of air time segment. The main objection was in using Sun TV Network as comparable. The submission of the assessee as reproduced in para 5.5 of the impugned order were as under: “The Appellant would like to submit to your Honour that it is unable to find the Annual Report of this company for the year under reference (i.e. FY 2004-05) and has been able to find only the Annual Report for FY 2005-06. In view of the same and during the time of the assessment proceedings, the Appellant requested the Ld. TPO to provide the annual report of this company for FY 2004-05. However, the Ld. TPO did not give due consideration to this contention of the Appellant and failed to provide the annual report of this company. Different Functional Profile: However, on perusal of the Annual Report of the Company for FY 2005-06, it can be seen that Sun TV is primarily engaged in producing and broad casting satellite television software programming in the regional languages of southern India. This fact is evident from the following excerpt from the Annual Report of this company: "The Company has an extensive programming content, including one of the largest movie libraries in India. It has internal production capabilities, which enable us to develop new programming quickly and efficiently catering to the local preferences.” "The Company engages in producing and broadcasting satellite television software programming in the regional languages of southern India predominantly to viewers in India, Sri Lanka, Singapore, Malaysia, United Kingdom, United States and Australia. The Company's flagship ESPN Software India Ltd. channel is Sun TV. The other satellite channels of the Company are Surya TV, Kiran TV, Sun News, Sun Music and KTV. The Company is also into the business of FM Radio broadcasting in Chennai, Coimbatore and Tirunelveli." From the above it can be seen that the company is predominantly catering to viewers in India, Sri Lanka, Singapore, Malaysia, United Kingdom, United States and Australia. The Company's flagship channel is Sun TV. The company also has a number of satellite channels, viz., Surya TV, Kiran TV, Sun News, Sun Music and KTV. Further, the Company is also into the business of FM Radio broadcasting in Channel, Coimbatore and Trunelveli. Moreover, it is also evident that the company has an internal production team to develop new programs. Further this company also owns the channel and has plans to launch new channels and FM Radio stations across the country. From the perusal of annual report of the company, it is also observed that this company also has advertisement income. However, segmental of advertisement income is not available in the annual report. The Ld. TPO has gone on to compare the distribution of advertisements activity undertaken by the appellant with channel owning companies. It is like comparing the business operations of a distributor of Mercedes with the Mercedes car itself owning significant intellectual property. Accordingly, the business profile of the appellant is quite different from the above company. In view of the above this company is functionally not comparable with the distribution function of the Appellant under the distribution ESPN Software India Ltd. function of the appellant under the advertisement airtime inventory business segment. Owns intangibles: On going through the annual report of the Company, it is also observed that this company owns intangible assets in the form of right for the broadcast of films and serials and licenses. From the perusal of the same, it can be observed that the ratio of intangible assets to total fixed assets, owned by the Company, as on April 1, 2005, is 22.23%. The details of the same are as follows: Table 8 - Percentage of Intangible Assets to Total Assets Particulars Amount (In Million) Film and Program Broadcasting Rights 659.2 Computer Software 2.8 Total intangible assets 662.00 Total fixed assets 2,978.10 Intangible assets as a percentage of total 22.23% fixed assets Accordingly, quite evidently, even the asset profile of the company is completely different to that of the appellant's advertisement airtime inventory business. In this regard, the appellant relies on the following observation made by the Hon'ble Bench in the Sony Ruling: Comments about differences on account of possessing research and development as also valuable, intangible are applicable in this case. The taxpayer unlike VIL does not have an advantage of R&D unit or valuable intangible on which it can always expect some reasonable returns.

The ld. CIT(A) after considering the submissions of the assessee observed that the TPO had made observation in general about the objections raised by the assessee, however, he had not rebutted the contention of the assessee about the use of these comparables except speaking in generalities. The ld. CIT(A) referred to the decision of the ITAT Bombay Bench in the case of Maersk Global Service Centre (India) Pvt. Ltd. (2011-TII-133-ITAT-MUM-TP) and held that it is the duty of TPO to give reasons for rejection of any comparable chosen by the assessee as well as by implication rebut the argument of the assessee regarding inclusion of any comparables. The ld. CIT(A) was of the view that the inclusion of Sun TV Network as a comparable was unjustified because the said company was engaged in multi-dimensional activities apart from being the owner of various channels and the asset profile of the said company was much higher than the assessee and it employed various intangible assets. The ld. CIT(A) opined that M/s Sun TV ESPN Software India Ltd. Network was not a comparable case to the assessee. He also observed that M/s Empire Industries Ltd. was a company engaged in manufacturing of glass bottles for the pharmaceutical industry, it was not a comparable company to the assessee because of different product profile and industry segment in which it operated. The rest of the comparables selected by the TPO were accepted by the ld. CIT(A) for the reason that in the TP report of the assessee itself, the companies used as comparable were no better than the ones used by the TPO. Accordingly, the ld. CIT(A) held that all other comparables choosen by the TPO should have been taken as comparable. The ld. CIT(A) worked out the average mean at 4.3% in the following manner:

These two segments employ same set of assets. Therefore, separately benchmarking these two segments takes away the case from reality, Moreover, it is not possible to get similar comparables if they are segregated. Therefore, the practical consideration of availability of appropriate comparables has also bearing on the clubbing of these two activities together.”

The ld. CIT(A) worked out the operating profit margin at 7.82% as under: ESPN India FY 2004-05 Particulars Distribution Segment Operating Income 3,246,665,759 Less: Operating Expenses 3,011,054,423 Operating Profit 235,611,336 Operating Profit Margin 7.82% 15. As the margin earned by the assessee at 7.82% was more than the mean margin of the comparable at 4.3%, the ld. CIT(A) held the international transaction at arm’s length. Accordingly, the addition made by the AO was deleted.

Now the department is in appeal. The ld. DR strongly supported the orders of the AO and the TPO and further submitted that the assessee in its transfer pricing report had merged two audited separate business ESPN Software India Ltd. segment i.e. distribution business segment and sale of air time advertisement in order to conceal the loss incurred by the assessee in advertisement sale segment. It was also stated that in earlier years, in the advertisement sale segment there was a profit however in the year under consideration the assessee had shown loss. Therefore, these two business segment should not have been clubbed. It was further submitted that the assessee over stated purchase price of advertisement inventory by Rs.19,14,48,497/- which was rightly added by the AO for the reason that the assessee had adjusted the loss of advertisement segment against the profit of distribution segment by deliberately merging two distinct and separate audited segment and benchmarked the margin of advertisement segment with the comparable engaged in different line of business i.e. distribution business segment. It was also stated that the AE of the assessee was located in low tax country i.e. Mauritius and the AE by entering into an agreement with the assessee transferred all the functions and risk on the issue, due to which it incurred loss against the profit earned in earlier years and corresponding income was shifted to the low tax country. It was also pointed out that in old business model the assessee had earned profit @ 16% of the total advertisement sale proceeds in immediately preceding year but for the year under consideration the assessee had shown the loss. It was also submitted that the assessee had choosen the wrong comparables and the TPO selected the companies which were comparable to the assessee. Therefore, the ld. ITA No. 2059/Del/2012 ESPN Software India Ltd. CIT(A) was not justified in directing to exclude the company M/s Sun TV Ltd. and M/s Empire Industries Ltd. from the list of the comparables.

In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that prior to financial year 2004-05 relevant to the assessment year consideration, the assessee operated as a commission agent for its AE wherein it solicited advertisements in the Indian market and was at the option of the AE. Accordingly, the limited functions were formed by the assessee, the remuneration for the commission provided in respect of advertising sales inventory business was a fixed percentage of the net billings achieved by the AE from such advertisements. However, w.e.f. 01.04.2004, the assessee shifted to the distribution model pursuant to the change in foreign regulations of the RBI under which the assessee was engaged in acquisition of advertisement air time from its AE for further allotment to third parties in India as an entrepreneur. It was emphasized that the Ministry of Information and Broadcasting has formulated several guidelines that Indian companies engaged in downlinking of foreign channels must have both the channel subscription rights and also to sell the advertisement air time inventory on the same. It was stated that in this regard downlinking Guidelines Number 13/2/2002- BP&L/BC-IV were issued on 11.11.2005 and according to those guidelines, if the respondent decided to relinquish advertisement air time ITA No. 2059/Del/2012 ESPN Software India Ltd. inventory rights on account of losses, it would also have to relinquish the subscription rights to the channel which have resulted in profits. Hence, the regulatory requirement established unambiguously that the arm’s length analysis of both the channel subscription and air time sale segment must be done on an aggregated basis. Therefore, the assessee also aggregated both the distribution segment and the advertisement air time inventory distribution segment. It was further submitted that the TPO failed to appreciate that the liberalized regulatory requirement allowed the assessee to evaluate its business prospects and allowed it to operate in the best suitable way to its business and commercial needs. It was further submitted that in the conduct of its distribution activities, the assessee approached advertisers/sponsors, conducted negotiations finalized the pricing and recovered the sales proceeds from the customers on its own accord. It was further submitted that under the distributor model, the assessee was free to accept any advertiser/sponsor and negotiate prices based on its business fundamentals (without any involvement of the AE). Hence, under this business model, the assessee operated as a full risk distributor and undertook all the related business functions and risks in connection with its allotment of advertisement air time inventory in India. It was pointed out that willingness of the advertisers/sponsors to buy advertisement air time was dependent on the number and the type of sports events broadcasted on the assessee’s sports channels. Our attention was drawn towards chart showing the ESPN Software India Ltd. trend of the revenue and profitability of the assessee air time inventory and distribution activity over the period starting from FY 2004-05 to FY 2009-10 which read as under: FY 2005-06 FY 2004-05 FY 2006-07 FY 2007-08 FY 2008-09 FY 2009-10 Ad Sales Segment 1. ICC 1. Asia Cup 1. England-India Champions Trophy in South Africa 2. 2O:20 2. Bangladesh - World Cup India-WI-Zim 2. CL T-20 3. England-India 3. Australia-India Names of India 1. Asia Cup 1. Zimbabwe - Cricket Events 1. South Africa- India India 4. Australia- 3. 20:20 World India-Sri Lanka Cup 5. Asia Cup-On Air 6. Asia Cup-On Ground Sales 1369213236 1195149126 3629085246 489620318 3073013927 984155054 1,17.93,47,671 1,08,34,79,520 3,16,46,52,589 42,49,03,708 2,56,69,29,642 79,78,19,517 Payment for Advertisement slot Gross Profit 18,98,65,565 11,16,69,606 46,44,32,657 6,47,16,610 50,60,84,285 18,63,35,537 13-87% 13.22% 9-34% 16.47% 18.93% 12.80% Gross Profit / Sales Total Cost (TC) 1,379,925,586 577-840,854 1,213,869,489 2,790,861,320 948,837,192 3-380,355,508 -10,712,350 -88,220,536 -18720363 282152608 35317863 248729738 Operating Profit / (Loss) OP/Sales -0.78% -18.02% -1.57% 9.18% 3.59% 6.85% ESPN Software India Ltd.

On the basis of the aforesaid chart, it was stated that there was direct correlation between the number of cricket events involving India and the advertisement air time revenue earned by the assessee. It was further stated that in the initial years the assessee suffered net losses in its distribution business however, in FY 2007-08 onwards, the assessee had booked substantial profits on account of healthy revenues in its advertisement air time inventory business. Therefore, on account of loss incurred in the year under consideration, the TPO was not justified in taking the distribution of channels segment separately from the distribution of advertisement air time inventory which deserves to be aggregated as has been done by the assessee. It was further submitted that on account of direct nexus and integration of the activities of the subscription and advertisement air time (as they were driven towards the same end of promotion of channels), they were aggregated and benchmarked together. It was stated that keeping in view the integrated economics, business dynamics and functionality, distribution of channels and sale of advertisement air time inventory had been aggregated, both of them collectively derived business operations of the assessee. It was further stated that higher the subscriber base of a channel, the greater are the chances of aired advertisements being viewed by a large target audience. So there is a direct positive relationship between the viewership base and the advertisement air time inventory is a package deal, so it should be considered as one international transaction and ESPN Software India Ltd. needs to be aggregated. The reliance was placed on the following case laws: � N.G.C Network ((India) P. Ltd. (2014) 50 Taxmann.com 240 (Bom) � Knorr Bremse India P. Ltd. (2016) 380 ITR 307 (P&H) 19. The ld. Counsel for the assessee submitted that the ld. CIT(A) was fully justified in accepting the stand of the assessee for aggregation of activities. As regards to the exclusion of M/s Sun TV Network India Ltd. and M/s Empire Industries ltd. which were selected by the TPO as comparable, it was stated that M/s Sun TV Network India Ltd. is primarily engaged in producing and broadcasting satellite television software in the regional languages of southern India and the said company is also into the business of FM Radio broadcasting in Chennai, Coimbatore and Trunelveli and has an internal production team to develop new programmes and the segmental of advertisement income is not available in its annual report. Therefore, the business profile of the assessee is totally different from that of M/s Sun TV Network India Ltd. and it is not functionally comparable with the distribution function of the assessee under the advertisement air time business segment. It was also stated that the said company M/s Sun TV Network India Ltd. also owns intangible assets in the form of right for the broadcasting films and serials and that the ratio of intangible assets to the total assets as on 01.04.2005 was 22.23% as per following details: ESPN Software India Ltd. Particulars Amount (In crores) Film and Program Broadcasting Rights 65.92 Computer Software 0.28 Total intangible assets 66.20 Total fixed assets 2,97.81 Intangible assets as a percentage of total 22.23% fixed assets It was submitted that the company M/s Sun TV Network India Ltd. should not be considered as comparable to the assessee and the ld. CIT(A) rightly held so. As regards to the another company M/s Empire Industries Ltd., it was stated that the said company was engaged in the manufacturing of glass bottles for the pharmaceutical industry and held three segments, namely, manufacturing, trading & indenting and educational programmes. Therefore, the functional profile of the assessee cannot be compared with the said company and the ld. CIT(A) was justified in directing the AO to exclude this company also from the list of the comparables.

We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, the main controversy to be resolved relates to the aggregation of the activities, namely, distribution of channels segment and sale of air time inventory segment. The main reason given by the TPO/AO for not accepting the aggregation of the two activities was that in the advertisement air time inventory, there was a loss in the year ESPN Software India Ltd. under consideration while in the earlier years the assessee was earning the profit. In the present case, it is noticed that activities of distribution of channels and advertisement air time inventory allotment are inter- related because higher the subscriber base of channel, the greater are chances of the aired advertisement being viewed by a large target audience because the advertisers want the widest possible coverage to their messages and both the activities i.e. subscription and advertisement air time drive towards the same end of promotion of channels. As regards to the objection of the TPO/AO that there was a loss in the advertisement air time inventory business in the year under consideration while in the earlier year there was profit, the ld. Counsel for the assessee explained that in the earlier years the assessee was acting only as a commission agent for its AE and solicited advertisements in the Indian market for its AE for that purpose the assessee was getting a fixed percentage of commission while for the year under consideration and in the succeeding years, the assessee shifted to the distribution model in pursuant to the change in the foreign exchange regulations of the RBI vide Circular No. 76 which relaxed the condition of export earnings by advertisers in Foreign Television Channels and the assessee, without prior approval from RBI, could have bought air time on a bulk basis and allot the same directly to third parties i.e. advertisement agencies etc. It is also noticed that Ministry of Information and Broadcasting formulated several guidelines vide ESPN Software India Ltd. Downlinking Guidelines Number 13/2/2002-BP&L/BC-IV dated 11.11.2005. The said guidelines were as under: “1.3 The applicant company must either own the channel it wants downlinked for public viewing, or must enjoy, for the territory of India, exclusive marketing/distribution rights for the same, inclusive of the rights to the advertising and subscription revenues for the channel and must submit adequate proof at the time of application. 1.4 In case the applicant company has exclusive marketing / distribution rights, it should also have the authority to conclude contracts on behalf of the channel for advertisements, subscription and programme content."

In view of the aforesaid guidelines, if the assessee decided to relinquish advertisement air time inventory rights on account of losses, it would also have to relinquish the subscription rights to the channel which have resulted in profits. Therefore, the assessee was required to aggregate both the activities i.e. channel subscription and air time sale segment. Accordingly, the assessee aggregated both the activities for the purpose of arm’s length analysis. It is also noticed that the advertisement air time revenue earned by the assessee has a direct correlation with the number of cricket events which is evident from the chart furnished by the assessee, reproduced in the former part of this order. On perusal of the said chart, it would be clear that when the cricket events were more in the FYs 2007-08 and 2009-10. The OP/sales ratio jumped to 9.18% and 6.85% respectively from the negative ratio of 0.78% in the FY ITA No. 2059/Del/2012 ESPN Software India Ltd. 2004-05 when the cricket events were less. In the present case, by changing the business model, the assessee was getting more control over the distribution of function and it was a part of the business strategy of the assessee. It is also noticed that OECD guidelines clearly states that closely linked transaction should have been aggregated and evaluated together in this regard. It is relevant to refer OECD guidelines which read as under: “Ideally, in order to arrive at the most precise approximation of arm’s length conditions, the arm’s length principle should be applied on a transaction-by-transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis.”

Furthermore, the US Regulation 1.482-1(f)(2)(i) stipulates as under: “The combined effect of two or more separate transactions (whether before, during, or after the taxable year under review) may be considered, if such transactions, taken as a whole, are so interrelated that consideration of multiple transactions is the most reliable means of determining the arm’s length consideration for the controlled transactions….”

From the co-joint readings of the aforesaid OECD Transfer Pricing Guidelines and US Transfer Pricing Regulations, it is clear that where two transactions are closely inter-related from a commercial perspective, the transactions must be analyzed in conjunction for arm’s length analysis. In the present case, the assessee is structured in such a way that ESPN Software India Ltd. the profit is maximized, as a whole rather than independently in these two activities. It is also an admitted fact that when there are big ticket cricketing activities the channel earned more advertisement revenue and the subscription for the channel also went up and that when the subscriber base is higher the viewers of aired advertisement are also more. Thus, both the activities i.e. distribution of channels and aired advertisements are inter-related and inextricably connected so these required to be aggregated. In view of the aforesaid discussion we are of the confirmed view that the ld. CIT(A) was fully justified in directing the AO that the arm’s length analysis of both the channels subscription and air time sale segment must be done on an aggregated basis.

The next issue agitated by the department relates to the exclusion of the company M/s Sun TV Network India Ltd. from the list of the comparable selected by the TPO.

As regards to this issue it is noticed that the said company is primarily connected in producing and broadcasting satellite television software in the regional languages of southern India and companies flagship channel is Sun TV. The other satellite channels are Surya TV, Kiran TV, Sun News, Sun Music and DTV. The said company also engaged in the business of FM Radio broadcasting in Chennai, Coimbatore and Tirunelveli while the assessee is engaged in the business of marketing and distribution of two sports channels ESPN & ESPN Software India Ltd. Star Sports and sale of advertisement slots of the said channels. Therefore, the business profile of the assessee is quite different from M/s Sun TV Network India Ltd. It is also noticed that the intangible assets of M/s Sun TV India Ltd. as on 01.04.2005 were at Rs.66.20 crores and the total fixed assets were at Rs.297.81 crores which shows that intangible assets as a percentage of total fixed assets was at 22.3% while the assessee is not having intangible assets. Therefore, the said company should not be considered as comparable to the assessee, so it should be excluded from the list of the comparables and if this company is excluded alongwith M/s Empire Industries Ltd. (exclusion of this by the company has not been challenged by the department in this appeal) are excluded than the operating profit margin of the comparables comes at 4.3% while that of the assessee comes at 7.82% as worked out by the ld. CIT(A) in the impugned order. Therefore, the international transaction is to be considered at arm’s length and no adjustment was required. In that view of the matter we are of the view that the ld. CIT(A) rightly directed the AO to delete the impugned addition. Accordingly, we do not see any merit in this appeal of the department.

Now we will deal with the appeal of the assessee in 2006-07. Following grounds have been raised in this appeal: “1. That the Assessment Order passed in pursuance to the fresh directions issued by the Hon'ble Dispute Resolution Panel ESPN Software India Ltd. ('Hon'ble DRP') is a vitiated order as the Hon'ble DRP erred both on facts and in law in confirming the addition made by the Ld. Assessing Officer (Id. AO') to the appellant's income by issuing an order without appreciation of facts and law;

Vide Ground Nos. 2 to 2.9, the main grievance of the assessee relates to the segregating the advertisement airtime inventory distribution and channel distribution business and inclusion of the companies Sun TV Ltd. and Mid-day Multimedia Ltd. in the list of the comparable.

The aforesaid issues we have already adjudicated in the former part of this order while deciding the appeal of the department in ITA No. 2059/Del/2012. Since the facts related to this year are similar to the facts involved in the preceding year 2005-06 and even the rival contention were also similar. We, therefore, direct the AO to aggregate the advertisement air time inventory distribution and channels distribution business of the assessee for the purpose of benchmarking analysis while ESPN Software India Ltd. determining the arm’s length price. We also direct the AO to exclude Sun TV Ltd. from the final set off of the comparables.

As regards to the another comparables Mid-day Multimedia Ltd., the main contention of the ld. Counsel for the assessee was that the said company was having intangible assets while the assessee does not owns any tangible assets. The said company is also engaged in newspaper circulating and services which is functionally not comparable to the advertisement air time inventory business of the assessee. The said company had been selected by the TPO on the basis that it was selected by his predecessor. The intangible assets of this company constitute 8.9% of the total assets. Therefore, this company is functionally different and owing intangible assets, so it is not comparable with the assessee and to be excluded from the list of the comparables. The ld. CIT DR in his rival submissions supported the orders of the DRP and TPO/AO. After considering the submissions of both the parties, we find merit in the submissions of the ld. Counsel for the assessee and direct the AO to exclude M/s Mid-day Multimedia Ltd. from the list of the comparables.

In Ground No. 3, the contention of the assessee is that the AO had not followed the directions of the DRP to consider the operating margin of Adbur Pvt. Ltd. and Aaren Initiative Outdoor Advertising Pvt. Ltd. for the purpose of computing the arm’s length margin. ESPN Software India Ltd.

It is noticed that the DRP in its order dated 20.03.2013 directed the TPO as under: “The assessee has contended that the TPO has erred in not considering Adbur Pvt. Ltd. selected in TP order for F.Y. 2004-05. We find that the assessee itself had said that the financial of this company were not available. Moreover, the TPO has stated that the margin of this company is not available. The assessee has submitted the margins of Adbur before us. The TPO is directed by the DRP to consider the margin of this company as also that of Aaren Initiative Outdoor Advertising Pvt. Ltd. which could not be considered by the TPO for want of margins. The objection is partly accepted.” 33. In view of the above, we direct the TPO/AO to follow the aforesaid direction of the DRP.

In the result, the appeal of the department is dismissed and that of the assessee is allowed. (Order Pronounced in the Court on 08/02/2017)