THE WALT DISNEY COMPANY (I) P.LTD,MUMBAI vs. DCIT 7(3), MUMBAI

In its appeal, the assessee has raised the following Grounds of appeal :-

The learned AO erred in making a reference of the Appellant's case to the learned Transfer Pricing Officer ('TPO') and then making a transfer pricing adjustment of Rs 34,185,321 under Section 92C(4) of the Act to the total income of the Appellant for AY 2008-09.

The learned TPO / AO erred in not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 (‘Rules’) and determining the arm's length operating margin with respect to the international transaction of support and supply of content to be 22.55% and for the international transaction of provision of general management support services to be 13.26%.

The learned TPO / AO erred in rejecting the benchmarking analysis undertaken by the Appellant for its international transactions, more specifically with respect to the international transactions of supply and support of content and provision of general management support services in its transfer pricing documentation, maintained under Section 92D of the Act read with Rule 10D(4) of Rules and determining the arm's length operating margin for these transactions using only the updated Financial Year 2007-08 operating margins of the comparable companies, as available at the time of the assessment.

The learned TPO / AO erred in rejecting loss making comparables while determining the arm's length operating margin for the international transaction of supply and support of content.

Without prejudice to the ground number 4, the learned TPO / AO erred in not excluding companies earning super normal profits, where loss making companies are excluded, while determining the arm's length operating margin for the international transaction of supply and support of content.

The learned TPO / AO erred in computing the operating margin of Creative Eye Limited (comparable company) while determining the arm's length operating margin for the international transaction of support and supply of content.

The learned TPO / AO erred in considering the 'media division' as the comparable segment instead of 'health care division' for In House Productions Limited while determining the arm's length operating margin for the international transactions of supply and support of content.

The learned TPO / AO erred in not allowing the Appellant the benefit of the working capital adjustment with relation to the international transactions of supply and support of content and provision of general management support services which is required to be undertaken in its case to account for the difference in working capital levels between the Appellant and the comparable companies.

The learned TPO / AO erred in not allowing the Appellant the benefit of the risk adjustment with relation to the international transactions of supply and support of content and provision of general management support services, to account for the difference between the risks assumed by the Appellant and those assumed by the comparable companies.

The learned TPO / AO erred by not considering that adjustment to the arm's length price, if any, should be limited to the lower end of the 5 percent range as the Appellant has the right to exercise this option under the proviso to Section 92C (2) of the Act.

The learned AO has erred in making an addition of Rs 77,13,648 on account of non-reconciliation of ITS details.

Without prejudice to the ground number 11 above, the information provided by the learned AO was insufficient for the Appellant to undertake a reconciliation of the ITS details.

The learned AO has erred in granting short credit of TDS amounting to Rs 2,60,19,233.

The learned AO has erred in levying interest under Section 234B of the Act amounting to Rs 35,59,140.

The learned AO has erred in levying interest under Section 234C of the Act amounting to Rs 3,74,452.”

The appellant before us is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of television broadcasting and for the assessment year under consideration it filed a return of income declaring NIL income as per the normal provisions of the Act whereas the tax liability was determined in terms of Sec. 115JB of the Act. The assessment has been finalised by the Assessing Officer u/s 143(3) r.w.s. 144C(5) of the Act on 29.10.2012 in conformity with the directions of the Dispute Resolution Panel (DRP) whereby the total income has been assessed at NIL under the normal provisions of the Act whereas the income returned u/s 115JB of the Act has been varied. Be that as it may, even the assessment made under the normal provisions of the Act has resulted in scaling down of the loss returned by the assessee on account of certain additions, primarily on account of the transfer pricing adjustment of Rs.3,41,85,321/-. The appellant-company was found to have entered into certain international transactions within the meaning of Sec. 92B of the Act with its associated enterprises and, therefore, the Assessing Officer had referred the matter to the Transfer Pricing Officer (TPO) for determination of the arm’s length price of the international transactions. The TPO vide order dated 27.10.2010 passed u/s 92CA(3)

As a perusal of the Grounds of appeal reveal, the substantive dispute is with regard to the adjustment made to the total income in the process of determining the arm’s length price of the international transactions. In this background, we will now briefly touch upon the relevant facts in this regard. The appellant company belongs to the Disney Group. The principal activity of assessee is to provide support to Buena Vista International, Inc. (in short ‘BVI’) for production and acquisition of television content/programme. It is also producing promos in respect of programmes/content to be aired on Disney channels. Apart therefrom, it is also engaged in sale of advertising and sponsorship air-time on the Disney channels in the Indian territory to advertising agencies, advertisers and sponsors. It also undertakes distribution of the Disney channel and the Toon Disney channel in the territories of India, Sri Lanka, Nepal and Bhutan. The assessee also acquires non-exclusive right to use Disney characters/logos for the

Insofar as the Content supply and Support segment is concerned, the services rendered by the assessee, inter-alia, include support for production of TV programme content for BVI, which is aired on various Disney channels. The specific services rendered by the assessee in this segment have been noted by the TPO, which are to provide services for programme acquisition, programme scheduling and quality control with respect to content aired on the channels. The assessee is compensated at cost + mark-up basis for these services and the mark-up over cost is stated at 10%. In its Transfer Pricing Study, assessee had selected the Transactional Net Margin (TNM) method as the most appropriate method to benchmark the said international transactions and the Profit Level Indicator (PLI) was characterised as Operating profit/Operating cost. Though, in the Transfer Pricing Study, assessee had used the average of the multiple year’s data of the comparables to calculate the average margins, but in the course of the proceedings before the TPO, assessee had furnished the revised margins based on the single year’s data corresponding to the financial year under consideration, and on

On the aforesaid basis, the Assessing Officer noted the arithmetic mean of the comparables at 22.55% and after comparing it with the stated margin of assessee of 11.75%, he has worked out an adjustment of Rs.2,77,08,038/-, which according to him was required to be made to the stated value of transactions in order to bring them to the level of arm’s length price. We find that in the final assessment order passed after considering the directions of the DRP, the adjustment has been worked out at Rs.2,77,08,038/-, whereas the TPO had worked out the adjustment of Rs.2,07,08,038/-. The difference in the two figures is on account of revised margin of two of the ten comparables and, in any case, the same is not the subject matter of dispute before us, therefore, we proceed further on the premise that the adjustment of Rs.2,77,08,038/- has been made on this count.

In this background, the learned representative for the assessee had made two points with regard to the concerns included in the final set of comparables. The first grievance is against the stand of the TPO in excluding Twenty Twenty Television Company Ltd. from the final set of comparables. The learned representative had referred to point (x) of Part A of para 7 of the order of TPO, to point out that the said concern has been excluded by the TPO on the ground that it had incurred an operating loss. It has been canvassed that the action of the TPO to

On the other hand, the ld. CIT-DR appearing for the Revenue has primarily reiterated the discussion by the TPO in the order to support the case of Revenue, which we have already noted in the earlier paras and is not being repeated for the sake of brevity.

Having considered the rival stands on this issue, we find that the TPO sought to exclude Twenty Twenty Television Company from the

The only other point raised before us is with regard to correction of margin of one of the concerns included in the final set of comparables, i.e., Creative Eye Ltd. As the tabulation enumerated in the earlier part of the order would show, the margin of the said concern has been adopted at 7.33%, whereas the stand of the appellant is that the correct margin of the said concern is 0.47% and that the lower authorities have erred in calculating the margin at 7.33%.

In this background, the learned representative for the assessee referred to page 493 of the Paper Book to point out that there was an error on the part of the TPO in determining the margin at 7.33% inasmuch as certain items of the Profit & Loss Account, namely depreciation – Rs.1,96,73,699/- and Provision of FBT – Rs.3,18,168/- have been excluded for the purpose of computing the Total Operating Expenses. It is emphasised, with reference to a tabulation placed at page 493 of the Paper Book that the calculation of margin in the case of other concerns selected as comparables has been done by considering the aforesaid two items as a part of Total Operating Expenses. It was, therefore, contended that if the aforesaid two items are considered as a part of Total Operating Expenses, as done in the case of other concerns appearing in the final set of comparables, the correct margin would come to 0.47%.

On the other hand, the ld. CIT-DR appearing for the Revenue referred to the discussion made by the TPO in point (viii) of part A of para 7 of the order whereby it is specifically noted that the margin of Creative Eye Ltd. comes to 7.33%, as against 0.47% canvassed by the assessee. On this basis, the DRP also rejected the claim of assessee that the correct margin of the said concern is 0.47%.

We have considered the rival stands and find that there is an apparent inconsistency on the part of the TPO in calculating the margin of Creative Eye Ltd. vis-a-vis the other concerns selected as comparables. As per the tabulation furnished by the assessee as Annexure – B to the written submissions it is clear that in the case of other comparable concerns, the Total Operating Expenses have been calculated after taking into account the Depreciation and Provision of FBT; and, that it is only in the case of Creative Eye Ltd. the same have been excluded. Quite clearly, the determination of margin in the case of all the comparable concerns needs to be uniformly done, so as to impart rationality to the comparability analysis. Having regard to the material on record, we are satisfied that the correct margin of Creative Eye Ltd. is to be taken as 0.47% and that the DRP has unjustifiably rejected the plea of the assessee. As a consequence, we direct the TPO/Assessing Officer to consider the margin of Creative Eye Ltd. at 0.47%, and thereafter rework the determination of arm’s length price.

At the time of hearing, the learned representative for the assessee submitted that if the plea for inclusion of Twenty Twenty Television Company Ltd. and the corrected margin of Creative Eye Ltd.

In the result, insofar as the Content and Support segment is concerned, the TPO/Assessing Officer is directed to re-work the arm’s length price of the international transactions in accordance with the aforesaid directions.

Now, we may take up the dispute arising from benchmarking of international transactions in the General Management Support Services segment.

In this segment, assessee has rendered General management & support services in the nature of secretarial assistance, handling documents, etc. to BVI, Walt Disney Internet group, Disney Worldwide Services and The Walt Disney Company, i.e. to the associated concerns of the Walt Disney group. For the services so rendered in this segment, assessee is being compensated at cost + mark-up basis, such mark-up being 5%. During the year under consideration, assessee received a consideration of Rs.8,23,38,337/- on account of Provision of General management and support services to its associated enterprises. In its Transfer Pricing Study, assessee used multiple year’s data of the comparable concerns whereas in the course of proceedings before the

In this background, the first plea of the assessee is by way of an additional Ground of appeal in terms of which it is canvassed that Access India Advisors Ltd. be excluded from the final set of comparables. The learned representative for the assessee explained that the said concern deserves to be excluded on the ground that its margins have wide fluctuations over the years and in this context, he referred to page 492 of the Paper Book wherein the margin of the said concern from the years 2005 to 2010 have been tabulated. The learned representative for the assessee justified the admission of the said plea, which was hitherto not raised before the lower authorities on the ground that the necessary information showing fluctuation in margins was available in public domain only subsequently.

On the other hand, the ld. CIT-DR appearing for the Revenue opposed the plea of the assessee by pointing out that the assessee was not justified in seeking exclusion of the said concern from the final set of comparables because the said concern has been included by the assessee itself as a good comparable in its Transfer Pricing Study. In support of his stand, the ld. CIT-DR has relied on the decision of the Hyderabad Bench of the Tribunal in the case of App Labs Technologies (P.) Ltd., 149 ITD 99 (Hyd) to contend that where the assessee had not raised any objection with regard to selection of a concern as a comparable before the DRP, it could not be allowed to raise the objection for the first time before the Tribunal.

In reply, the learned representative for the assessee pointed out that the exclusion is sought by the assessee on the ground that the margin of the said concern fluctuates over a period of time and, therefore, such a concern is liable to be excluded. In support, the learned representative has relied upon the following decisions :-

At the time of hearing, the learned representative also made a submission to the effect that the assessee would be satisfied if the matter is remitted back for verification of the workings and to examine as to whether the margin of the said concern is volatile over the years and if it is so found, then the same should be directed to be excluded. The learned representative also submitted that there are justifiable reasons for seeking the exclusion of the said concern before the Tribunal, which hitherto could not be raised before the lower authorities.

We have carefully considered the rival submissions. At the outset, we may refer to the tabulation placed at page 492 of the Paper Book regarding the margins of Access India Advisors Ltd., which is as under :-

We may now take up the argument raised by the ld. CIT-DR to the effect that the said concern has been included by the assessee itself as comparable. Ostensibly, in the Transfer Pricing Study, the assessee had carried out the comparability analysis by adopting multiple year’s data of the comparables which would have off-set the wide fluctuations. It is only in the course of proceedings before the TPO, the adoption of multiple year’s data of the comparables was negated and assessee carried out a comparability analysis after adopting single year’s data of the comparables relating to the period under consideration. It has also

As per the Pune Bench of the Tribunal, the onus is on the assessee to justify exclusion of a concern from the final set of comparables, if initially the same concern has been adopted as a comparable by the assessee. In the present case, assessee has sought exclusion of Access India Advisors Ltd. on the ground that the profit margins of the said concern fluctuate widely and in the instant assessment year itself it is quite high at 45.97%, which goes down to 6.62% in the next year and thereafter there is a negative margin of 74.60%. Similarly, with regard to the earlier three years, the margin levels are quite in variance not only in comparison with the level of margin in the instant assessment year but also in relation to the subsequent two years. Be that as it may, the financial data of the succeeding years, which is essential to examine any abnormal profit trends, was not available to the assessee at the time of carrying out its Transfer Pricing Study and, therefore, once such an information is available in public domain, it is only thereafter that the assessee can feasibly raise such a ground based on the abnormal fluctuations in the margins. Notably, insofar as the instant case is concerned, there is ostensibly a justifiable reason for the assessee to raise such a plea before us, which was hitherto not raised before the lower authorities. Therefore, on this aspect, we admit for consideration the plea of assessee for exclusion of Access India Advisors Ltd. from the final set of comparables.

Insofar as the plea of ld. CIT-DR based on the decision of Hyderabad Bench of the Tribunal in the case of App Labs Technologies (P.) Ltd. (supra) is concerned, we have carefully perused the said decision. The Tribunal in the case of App Labs Technologies (P.) Ltd. (supra) denied the assessee to raise a plea for exclusion of a concern which had been considered by the assessee itself as a comparable at an earlier stage. The said negation by the Tribunal was founded on the ground that assessee could not show “any reasonable cause” as to why the assessee had not objected to the inclusion of the particular concern before the lower authorities. Quite clearly, the fact-situation in the case before us stands on a different footing inasmuch as on the basis of our aforesaid discussion it is quite clear that there is a justifiable reason prevailing with the assessee, which prevented it from raising the plea for exclusion of Access India Advisors Ltd. before the lower authorities. Therefore, the ratio of the decision of Hyderabad Bench of the Tribunal in the case of App Labs Technologies (P.) Ltd. (supra) does not help the Revenue in the present case.

Having admitted the plea of assessee seeking exclusion of Access India Advisors Ltd. from the final set of comparables, and for the reason that such a plea was hitherto not before the lower authorities, we deem it fit and proper to remand the matter back to the file of Assessing Officer/TPO for an appropriate verification. The Assessing Officer/TPO shall verify the working of the Operating margins of Access India Advisors Ltd. furnished by the assessee for the various years and if it is found to be volatile without reflecting any normal business condition, then, the Assessing Officer/TPO shall exclude the same from the final

Another plea of the assessee with regard to the segment of Provision of General management and support services is to seek inclusion of Educational Consultants (India) Ltd. in the final set of comparables. The exclusion of the said concern has been sought to be justified by the ld. CIT-DR based on the discussion of TPO in points (viii) and (ix) of part A of para 7. Notably, the TPO has observed that Educational Consultants (India) Ltd. is functionally dissimilar and, therefore, the same is liable to be excluded. The ld. CIT-DR has emphasised the aforesaid discussion in the order of TPO to justify the stand of the Revenue.

The plea of the appellant is that the said concern has been found to be a comparable in the preceding three Assessment Years of 2005-06 to 2007-08. The learned representative for the assessee also pointed out that between Assessment Years 2009-10 to 2013-14, the said concern has also been accepted as a comparable and in Assessment Years 2010-11 and 2013-14, the assessments were completed u/s 143(3) of the Act. In sum and substance, the learned representative has justified the inclusion of the said concern on the basis of principle of consistency. In this context, the learned representative has referred to the decision of the Delhi Bench of the Tribunal in the case of Eli Lilly &

We have carefully considered the rival submissions. The plea of assessee to include Educational Consultants (India) Ltd. (Seg.) in the final set of comparables is primarily based on the need to adopt a uniform approach in different years so long as the fact-situation continues to remain the same. On the basis of the discussion in the order of Tribunal in the case of Eli Lilly & Co. (India) Pvt. Ltd. (supra), it is sought to be established that insofar as the activities of Educational Consultants (India) Ltd. (Seg.) over the years is concerned, the same are similar. It is also factually emerging that in the other assessment years referred to by the appellant, the said concern has been accepted as a

Apart from the aforesaid, the only other ground argued by the assessee in relation to the General management and support services segment is relating to allowing of suitable adjustment for risks. The aforesaid plea of the assessee was raised before the DRP, but it was declined on the ground that where the comparability analysis is being carried out by applying TNM method, there was no requirement for allowing adjustment for risks.

Before us, the learned representative for the assessee has relied upon the following decisions for allowability of risk adjustment :-

The learned representative also referred to page 560 of the Paper Book to point out the basis for working out the risk adjustment and contended that the matter may be set-aside to the file of TPO/Assessing Officer for appropriate verification.

On this aspect, the ld. CIT-DR appearing for the Revenue has opposed the plea of assessee for allowing risk adjustment by reiterating the stand of the DRP, which we have already noted earlier, and is not being repeated for the sake of brevity.

On this aspect of the matter, we find that the plea of assessee has been declined by the DRP in a rather casual manner. Notably, the appellant had canvassed before the lower authorities that adjustment for the difference between the risk assumed by the assessee and those assumed by the comparable concerns was required to be made. Notably, the assessee had also sought the benefit of working capital adjustment to account for the difference in the level of working capital deployed by the assessee vis-a-vis the comparable concerns. The DRP in para 9.1 of his order has denied both the claims primarily on the ground that the comparables have been “chosen with due regard to their functions, assets and risks”. As per the DRP, in the TNM method the concerns are taken as comparables based on broad similarities and that taking of the mean of the margins of the comparable concerns would even out the minor differences in the risk profile of the concerns. For the said reasons, the DRP declined the claim and also noted that the claim was “without any working or any definite outlining of the

We have considered the aforesaid stand of the DRP and find that the case of assessee for adjustment on account of difference in working capital and risks assumed has been shut out even before examining the same in some detail. Before us, the learned representative has furnished the workings of working capital adjustment and risk adjusted margin of the comparable concerns to point out that on facts also, such adjustments are justified. Even otherwise, we find that our coordinate benches in the case of Intellinet Technologies India Pvt. Ltd. (supra) and Schlumberger Global Support Centre Ltd (supra) have found that even in the course of comparability analysis carried out by applying the TNM method, suitable risk adjustments are permissible if the facts of the case so warrant. Ostensibly, the workings referred by the assessee before us culling out justification for allowing working capital and risk adjustments have not been verified by the lower authorities. Therefore, while we uphold the stand of the assessee in-principle, so however, it would be imperative for the assessee to factually demonstrate the justifiability of the adjustments on account of difference in working capital and risks assumed vis-a-vis the comparables before the lower authorities. Therefore, the matter is set- aside to the file of TPO/Assessing Officer with directions to consider the plea of the assessee in accordance with law. Thus, on this aspect, assessee succeeds for statistical purposes.

Insofar as the issue relating to the transfer pricing adjustment is concerned, no further arguments have been raised by the assessee and accordingly, we direct the Assessing Officer to re-determine the arm’s length price of international transactions on the basis of our aforesaid directions.

The next Ground is with regard to addition of Rs.77,13,648/- made by the Assessing Officer on account of non-reconciliation of ITS data. In this context, the relevant facts are that the Assessing Officer provided assessee with ITS data in terms of which there was a difference vis-a-vis entries made in the account books of the assessee- company. Before the lower authorities, assessee pointed out that it had duly reported its incomes in the financial statements and that the ITS details were obtained on the basis of the TDS returns filed by the deductors and that assessee had no control on such filings. One of the points made out by the assessee was that the ITS details provided by the Assessing Officer were insufficient to carry out exact reconciliation inasmuch as it does not indicate the PAN of the other party, invoice number or date. However, the Assessing Officer as well as the DRP held that the transactions appearing in the ITS details are mapped only with the transactions which take place on the PAN of assessee and, therefore, the onus was on the assessee to reconcile the data. In the absence of the reconciliation, the difference of Rs.77,13,648/- has been sustained as addition in the final assessment order.

On this aspect, the learned representative for the assessee pointed out that the total revenues as per the financial statements of

On the other hand, the ld. CIT-DR has reiterated the stand of the lower authorities by pointing out that the onus was on the assessee to reconcile the ITS details and, therefore, the addition is sustainable.

We have carefully considered the rival submissions. No doubt, the onus is on the assessee to reconcile the details, so however, the reconciliation is to be based on availability of appropriate details. At the time of hearing, the assessee-company had referred to a communication dated 12.12.2011 addressed to the Assessing Officer which succinctly details the reasons for the difference and the reason for which proper reconciliation could not be made. In the said communication, assessee had explained that the ITS details was

The only other issue in this appeal is with regard to the grant of credit for TDS amounting to Rs.2,60,19,233/-. At the time of hearing, the learned representative for the assessee submitted that assessee had already moved an application to the Assessing Officer seeking credit for the TDS. Considering the aforesaid, we direct the Assessing Officer to consider the application of the assessee in accordance with law. Thus, on this aspect, assessee succeeds for statistical purposes.

Insofar as the levy of interest u/s 234B & 234C of the Act is concerned, no specific arguments have been raised and they being consequential in nature are accordingly dismissed.

Resultantly, appeal of the assessee is partly allowed, as above.