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Facts
The assessee, M/s Sony Pictures Networks India Private Limited, filed an appeal against the order of the Commissioner of Income-tax (Appeals). The appeal pertained to the assessment year 2011-12 and involved adjustments made by the Assessing Officer and Transfer Pricing Officer concerning distribution income and reimbursement of expenses. The assessee was engaged in marketing and distribution of sports programs and TV channels.
Held
The Tribunal held that the transaction for the period 1st October 2010 to 31st March 2011, wherein the assessee's revenue share was reduced, was not at arm's length. The Tribunal also held that reimbursement of expenses, where no benefit was proved, was correctly determined at NIL. However, the disallowance of interest on delayed payment of service tax was directed to be deleted.
Key Issues
The primary issues revolved around the determination of the Arm's Length Price (ALP) for distribution income and reimbursement of expenses, and the disallowance of interest on delayed payment of service tax.
Sections Cited
Section 143(3), Section 144C(3), Section 92CA(3), Section 37(1)
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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
PER PRASHANT MAHARISHI, AM:
This appeal is filed by Taj Television India Private Limited, formerly known as M/s Sony Pictures Networks India Pvt. Ltd. being Taj Television India Private Limited for A.Y. 2011-12, in ITA No. 7210/Mum/2019, against the appellate order passed by Commissioner of Income-tax (Appeals)-58, Mumbai dated 24th September, 2019, wherein the appeal filed by the assessee against the assessment order passed by the Asst. Commissioner of Income Tax-16 (1), Mumbai (the learned Assessing Officer) under Section 143(3) read with section 144C (3)
The assessee has aggrieved with the above order and has raised following nine grounds in this appeal:-
“The following grounds of appeal are distinct and separate and without prejudice to each other:
1.0 Ground No. 1: Erred in rejecting the Appeal of the Appellant
On the facts and circumstances of the case and in law, the Hon'ble Commissioner of Income-Tax (Appeals) ['CIT(A)'] has erred in confirming the action of the Learned Assessing Officer ('AO') / Learned Transfer Pricing Officer ('TPO') in making an adjustment to the income of the Appellant by not considering the detailed documentation maintained by the Appellant and ignoring the commercial expediency and business environment in which the Appellant operates.
2.0 Ground No. 2: Erred in not considering the international transaction in entirety for the complete year and considering periodic segments bifurcated into 6 months period for the same international transactions (first 6 months' segment vis-à-vis second 6 months' segment)
On the facts and in the circumstances of the case, the Hon'ble CIT(A) has erred in law and in facts of the
3.0 Ground No. 3: Erred in cherry-picking one particular period of an international transaction undertaken with the same Associated Enterprise and carried out the TP adjustment
On the facts and in the circumstance of the case, the Hon'ble CIT(A) has erred in cherry picking one particular period for the same international transaction (i.e. 6 Months period from October 2010 to March 2011) carried out with the same Associated Enterprise to carry out TP adjustment. Same international transaction with same AE needs to be seen in entirety for a particular year.
Ground No. 4: Without prejudice to the above, the excess revenue share earned by the Appellant over and above the arm's length price during one period of the year shall be allowed to be set off for the same transaction with the same AE for another period of the same financial year
On the facts and in the circumstance of the case, even if Hon'ble CIT(A) believes that the same international transaction was to be considered separately for Arm's Length Price determination for 1st half of the year and 2nd half of the year, in that
This is on account of the fact that the Indian Transfer Pricing regulations provide that the ALP of the international transaction entered into with the AE during a particular financial year is to be determined to be at ALP. In the instant case, the international transaction pertaining to both the period is same (i.e. Distribution of revenue) and the AE with whom the transaction is undertaken is also the same (i.e. Taj TV Limited).
5.0 Ground No.5: Without prejudice to the above, if one transaction is re-classified/ re-characterized as two different transactions for two different period during the same year, then an opportunity shall be provided to separately benchmark the re- classified/re-characterized transactions
Without prejudice to the above, considering that the Hon'ble CIT(A) has erred in re- classifying and re- characterizing one single transaction as two different separate transaction, then the Appellant urges your goodself to provide an opportunity to carry out a separate benchmarking analysis for the re- classified/re-characterized transactions.
6.0 Ground No. 6: Rejection of TNMM as the corroborative benchmarking analysis to determine the Arm's Length Price
7.0 Ground No. 7: Erred in not considering the fact that the AE's international transaction was also scrutinized and was accepted to be at ALP
On the facts and in the circumstances of the case, the Hon'ble CIT(A) has erred in not considering the fact that the AE's international transaction of share of distribution revenue was also scrutinized under transfer pricing assessment and the same was accepted to be at ALP by the Learned TPO. Hence, it can be construed that there was no shifting of profits outside India.
8.0 Ground No. 8: Erred in considering the value of reimbursement of expenses as NIL by stepping into commercial expediencies of the transaction
Ground No. 9: Rejection in allowance of delayed payment of services tax
On the facts and in the circumstances of the case, the Learned CIT(A) has erred in law and in facts of the case in considering the interest on delayed payment of service tax of Rs. 10,85,876 as disallowable by virtue of Explanation 1 to Section 37 of the Act.
Each of the above grounds of appeal are independent and without prejudice to the other grounds of appeal.”
Brief facts of the case shows that assessee / appellant, is engaged in the business of commissioning and marketing of sports programs, events and distribution and dissemination of TV channels. The assessee was appointed as an agent for providing advertising support services and for distribution of Ten Sports channel for Indian Territory. These, rights were exclusive right given to the assessee on revenue sharing model between Taj Limited Mauritius and the assessee, as an agent.
For the period 1st April, 2010, to 30th September, 2010, 04. assessee retained 25% of distribution proceeds and in
During the year, assessee earned distribution income of ₹76,50,33,442/-. Based on this assessee filed return of income on 27th November, 2012, at ₹4,12,14,410/-. It was revised on 29th March, 2013, at ₹12,22,95,807/-. The return was picked up for scrutiny.
As the assessee has entered into an international transaction of advertisement agency and distribution services along with reimbursement of expenses and recovery of expenses, reference was made to the learned Transfer Pricing Officer for determination of Arm's Length Price.
It was found that assessee has entered into an international transaction of provision of advertisement agency services of ₹10,66,77,589/- and distribution services of ₹76,50,33,442/- with Associated Enterprises, Taj TV Limited, Mauritius as an agent. As per the transfer pricing study report, assessee submitted that the above revenue of distribution is based on revenue share model. For distribution income, assessee has retained 19.77% of distribution revenue and remitted 80% to Taj TV Limited, Mauritius. For the distribution network, assessee adopted Comparable Uncontrolled Price (CUP) method and stated that assessee in India has remitted 80.23% of collection to
On examination, the learned Transfer Pricing Officer accepted the CUP as the most appropriate method. However, he noted that for 1st April, 2010 to 31st September, 2010, assessee’s share of distribution revenue was 25% but from 1st October to 31st March, 2011, it was merely 14% of gross revenue. He further noted by an amendment to the agreement dated 5th November, 2010, the share of the assessee was reduced. While benchmarking the above transaction, assessee also did not provide any reason for fall in the share of the Revenue of the assessee. He further noted that there is no such change in the comparable of Pakistan and Nepal adopted by the assessee for the similar period. Thus, such reduction is only with the assessee. He held that assessee has not given any reason for reduction in the revenue by carrying out any benchmarking analysis. Therefore, according to him, the distribution fee international transaction from 1st October, 2010, to 31st March, 2011, is
The assessee has also shown an international transaction of reimbursement of expenses of ₹21,33,618/-. The assessee submitted that the above transactions are at cost by submitting the copy of the invoices raised by the Associated Enterprises and other independent entity. The learned Transfer Pricing Officer challenged the same that whether the assessee has been benefited by the above expenditure or not. Since the benefit received was not proved , He determined the Arm's Length Price of reimbursement of expenses of ₹21,36,018/- at ₹ nil.
Accordingly, the orders under Section 92CA(3) of the Act on 8th January, 2015, by proposing an adjustment of ₹2,72,44,449/-. The assessee has also claimed deduction on interest on delayed payment of service tax amounting to ₹10,85,876/-, which was disallowed by the learned Assessing Officer holding that it is an expenses which is an offence or prohibited by law and therefore, same was disallowed.
The total income of the assessee was assessed at ₹15,11,24,130/- by an assessment order under Section 143(3) read with section 144C(3) of the Income-tax Act, 1961 (the Act) on 21st May, 2015.
The assessee aggrieved with the same challenged both the above adjustments as well as the corporate addition
Assessee submitting as under on transfer pricing issues:-
“In relation to comparability of uncontrolled transaction with Nepal entity, the Appellant submits that the transaction with Nepal entity is a comparable transaction. The Ld. TΡΟ has not disputed any of the other comparability criteria and has merely rejected the comparability on the basis that Nepal entity provided minimum guarantee whereas the Appellant did not provide minimum guarantee. The Appellant submits that the same in no manner disqualifies Nepal entity as being comparable. It is not significantly impacting degree of comparability in the international transaction and the uncontrolled transaction to reject it as a comparable. The South Asian continent being a cricket frenzy territory lays the basis for comparison of distribution agreements of different regions for telecast rights of international cricket matches. At max, the Ld. TPO could have made certain adjustments on account of the said difference.
In relation to aggregation of the transaction with the AE, the Appellant submits that the Ld. TPO erred in not appreciating that there was no change in the class of services or the rights between the parties. There was no change in the functions, assets and risks assumed. The same class of service was provided by the Appellant to the same AE throughout
The Appellant in this regard places reliance on the decision of the Hon'ble Mumbai Tribunal in the case of Essar Steels Ltd. vs. ACIT (50 taxmann.com 183), wherein the Hon'ble held that Rule 10(A)(a) of the Rules defines a transaction to include a number of closely linked transactions. In case they are closely related, the same can be aggregated. Similar view has been taken by the Hon'ble Mumbai Tribunal in the case Barclays Bank PLC vs. Add. DIT (IT) (100 taxmann.com 476) The Appellant submits that the case of the Appellant is better in as much as the transaction is the same, the Ld. TPO is seeking to make an artificial distinction on the basis of change in revenue model without there being any change in the FAR.
The Ld. TPO failed in not appreciating that that the distribution sharing ratio of the Assessee was kept higher during the initial phase of its distribution business in order to capture the market in India. Upon establishing the Indian market for Ten Sports channel, and due to substantial increase in cost, revenue and subscribers the revenue sharing ratio was further revised. The Ld. TPO erred in not appreciating that the cost of content has increased
The Appellant without prejudice submits that if the transaction for period 01 October 2010 to 31 March 2011 as separate international transaction instead of considering the same in totality, then in that case the excess revenue share earned over and above the arm's length price during the 1 half of the year shall be allowed to be set off against the second half of the same financial year.
Considering all the above contentions, the international transaction entered into with Taj TV Mauritius by the Assessee appears to be consistent with the arm's length standard from an Indian transfer pricing perspective.
The Assessee acts as principal distributor of the Ten Sports channel in India. The expenses are nature of part of incentives to employees and to contract as a motivational tool for the employees and its existing business partners viz. Distributors and clients. These reimbursements neither include provision of any services nor has an intention of providing any direct or approximate benefit to either of the parties.
Also, it is pertinent to note that these expenses were incurred by the AE of the Assessee for purely administrative convenience and the actual cost incurred was reimbursed on cost to cost basis without any addition of mark-up.
Further, the Ld. TPO has made reference to the High Court ruling of Cushman and Wakefield (India) Pvt. Ltd. (ITA No. 475/2012) wherein it was held that in relation to the transaction of reimbursement, it is necessary to test whether cost is not inflated by carrying out comprehensive transfer pricing analysis. In relation to the same, the Appellant would like to state that the said case law is not relevant as these costs are incurred by the AE on behalf of the Appellant and are reimbursed on cost-to-cost basis without any addition of mark-up and relevant supporting have been provided in our aforesaid submission to the learned TPΟ.
In view of the same and having regard to the fact that the transactions were undertaken on a cost-to- cost basis, the Appellant humbly submits that the international transactions of reimbursement of expenses should not require any separate analysis and could be considered to be consistent with the arm's length standard from an Indian transfer pricing perspective.”
The learned Departmental Representative vehemently supported order of the learned Transfer Pricing Officer on the Transfer Pricing issue. He submitted that the assessee has reduced its revenue share with effect from 1st October, 2010 to 31st March, 2011, from 24% to 14% without any justification, further, the assessee has consistently adopted and accepted the benchmarking of international transaction by adopting the CUP as the most appropriate method with respect to the Transactional Net Margin Method. The learned Transfer Pricing Officer has rejected it also on the basis of functional analysis. He further claimed that all the arguments raised by the assessee are baseless. He submits that the transactions can be connected because those are not linked but are covered by separate agreements. It was further stated that without prejudice submission of the assessee is not supported by law and therefore, so far as the distribution adjustment is concerned it deserves to be upheld.
On the issue of delayed payment of service tax, resulting into interest payment he submits that it is hit by proviso to Section 37(1) of the Act and even otherwise, the same is not the business expenditure. He submits that the judicial precedents relied upon by the assessee are distinguishable. He accordingly submitted that orders of the lower authorities may be upheld.
We have carefully considered the rival contention and perused the orders of the lower authorities. We have also carefully considered judgments relied upon.
The first issue is with respect to the adjustment of the Arm's Length Price of distribution of income earned by the assessee from its Associated Enterprises. The fact shows that assessee is an agent of Taj TV Limited, Mauritius under the distribution of Ten Sports Channel, in India. The assessee has shown the distribution revenue of the assessee having 25% of shares for the period from 1st April, 2010 to 30th September, 2010 and 75% of share of Taj Mauritius. Subsequently, for the second half from 1st October, 2010 to 31st March, 2011, the assessee earned revenue shares of distribution income of 14% and remitted 86% to the Associated Enterprises. The assessee treated the same transaction as a single transaction. It adopted CUP method as the most appropriate method and
As per ground number 4 the claim of the assessee is that excess revenue share on by the appellant or and about the arm's-length price during one period Of the year shall be allowed to be set off for the same transaction with the same AE for another period Of the same financial year also cannot be acceded to for the simple reason that both the transactions are separate transactions. Hence, same is also rejected.
Ground number 5 states that if one transaction is reclassified as to different transactions for two different. During the same year the assessee should have been granted an opportunity to fresh benchmarking of these transaction also cannot be accepted because assessee has already benchmarked both the transactions at the time of transfer pricing assessment. Hence same is rejected.
Ground number 6 is with respect to the alternative benchmarking methodology of transactional net margin method, is devoid of any merit because assessee has accepted comparable uncontrolled price method as the most appropriate method. The learned transfer pricing officer is also accepted the same. Therefore, this ground is dismissed.
Ground number 8 of the appeal is with respect to benchmarking of the reimbursement of expenses by the learned TPO at Rs Nil. We find that the learned transfer
With respect to ground number 9 where the delayed payment of service tax resulting into interest payment of ₹ 1,085,876/– was disallowed by the learned assessing officer and confirmed by the learned CIT – A as covered by the proviso to section 37 (1) of the act being expenditure in provision of law. We find that this issue is covered in favour of the assessee by the decision of the honourable Gujarat High Court in case of COMMISSIONER OF INCOME TAX Versus KAYPEE MECHANICAL INDIA PVT. LTD... TAX APPEAL No. 186 of 2014 dated 21 April 2014. Accordingly
In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 26.04.2024.
Sd/- Sd/- (SANDEEP SINGH KARHAIL) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 26.04.2024 Sudip Sarkar, Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent 3. CIT DR, ITAT, Mumbai 4. 5. Guard file. BY ORDER, True Copy//
Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai