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Income Tax Appellate Tribunal, DELHI BENCH “I-2”: NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI PRASHANT MAHARISHI
PER AMIT SHUKLA, J.M. The aforesaid appeal as well as cross objection has been filed by the department and by the assessee against impugned final assessment order dated 16.1.2015, passed by the Assessing Officer u/s 143 (3) read with section 144C (13) in pursuance of the directions given by the DRP-II vide order dated 2.12.2014. The revenue is mainly aggrieved by the direction of the DRP directing the AO to reduce the addition of Rs. 23,64,86,162/- made on account of ALP adjustment.
2. At the outset, Ld. Counsel for the assessee submitted that the only issue involved is inclusion of two comparable companies, Softcell Technologies Ltd.; and Sonata Information Technology Limited as comparables by the TPO; and inclusion of other software distribution companies namely, Empower Industries India Limited; and Trijal Industries Ltd. which was submitted by the assessee by way of fresh search for comparables before DRP; and lastly, upholding the benefit of working capital adjustment. He submitted that similar comparables and issues were involved in the appeal for the assessment year 2006- 07 wherein this issue has been decided by the Tribunal in del 2018 vide order dated 18.6.2018. On the other hand Ld. DR strongly relied upon the order of the TPO.
Brief facts and background of the case are that assessee is a subsidiary of Turner Broadcasting System Asia Pacific, Inc. (‘TBSAP’). The Assessee Company is primarily engaged in the business of distribution of subscription rights of satellite channels of Cartoon Network, WB, CNN POGO and HBO (collectively referred as ‘V’ Channels’) and advertisement inventory to be telecasted on TV Channels. The activities of the assessee are primarily driven towards promoting the channels and associated proprietary intangible assets on the return of income. The key functions performed by the assessee were as under:- i. Sub-distribution of distribution rights, advertisement airtime Rights (advertisement airtime inventory) on the channels, provision of related services and availing of services (collectively referred to as the 'distribution activity') ii. Provision of product and promotional licensing services for certain "cartoon characters" iii. Provision of production services Under the distribution segment, the Assessee is engaged in the distribution of television channels and advertisement inventory for the "Channels' which include" Cartoon network, CNN, POGO, Boomerang, HBO etc.
In the transfer pricing report the assessee has following international transactions with its AEs:- S. No. Nature of Transaction Method Amount (in Rs.) used by Assessee TNMM 1. Purchase of 253,981,256 Advertisement Rights
Purchase of Distribution TNMM 1,919,582,573 and 3. Part of promotional CUP 30,975,867 license fee paid/payable 4. Income from Production TNMM 146,588,484 5. Income from Support TNMM 3,548,129 Services 6. Availing of Services TNMM 90,437,588
The operating profit margin for each segment i.e., distribution, production and promotional licenses are as under:-
Particulars Segment 1 Segment 2 Segment 3 Total Distribution Production Product and Promotional license Sales/Operating 3,344,090,317 146,588,484 52,008,616 3,542,687,417 3,248,842,719 140,251,944 43,485,074 Income 3,432,579,737 Less: Operating Expenses Operating Profit 95,247,597 6,336,541 8,523,542 110,107,680 Operating Margin 2.93% 4.52% 19.60% 3.21% (OP/TC) OP/Sales 2.85% 4.32% 16.39% 3.11% Add: Other Income 62,208,391 - - 62,208,391 Less: Non operating 31,760,242 - - (180,441,975) Expenses Profit for the year 125,695,747 6,336,541 8,523,542 140,555,830
The ALP of international transaction representing distribution on sales activities has been determined by applying TNMM as MAM and the operating profit of total sales ratio has been taken as PLI. The PLI of the assessee company was arrived at 2.85%, whereas the 4 average PLI of the comparable was arrived at 1.32%. In so far as transaction of Promotional Licence Fee which was benchmarked by using CUP method, no adverse inference has been drawn by the TPO. The assessee’s comparables with the updated margins as under:-
S.No. Company Name Source OP/Sales(%) 1 Agro Tech Foods Ltd. P 3.51 2 Chloride International P 1.42 Ltd. 3 Machino Techno Sales P 1.99 Ltd. 4 SPS International Ltd. P -0.73 Mean 1.55
The TPO rejected the assessee’s comparables and carried out own search and finally selected following comparable companies with a average margin of 14.43%:-
S.No. Company Operating Margin (OP/Sales)(%) 1. Cyber Media India Online 28.2 Limited 2. New Delhi Television Ltd. 6.89 3. Sporting & Outdoor Ad-agency 20.42 Private Limited 4. Synergy Adlabs Media Limited 6.94 (now known as Big Synergy Media Limited) 5. Essel Shyam Communication 27.6 Ltd. 6. Adbur Private Limited 0.14 7. Quadrant Communications 11.16 Ltd. Average 14.43
The DRP though upheld the decision of the TPO in rejecting the comparables presented by the assessee but has also analysed the comparable selected by the TPO in view of the objections raised by the assessee for each and every comparables. Before the DRP the assessee has also carried out search for fresh comparables and list of six comparables were given. Out of four comparable companies were rejected by the DRP on the ground that they are not functionally comparable. However, in so far as the comparable, Softcell Technologies Ltd. and Sonata Information Technology Ltd. , the same has been accepted by the DRP after observing and holding as under :- “Softcell Technologies Ltd. and Sonata Information Technology Ltd. are in the area of distribution of software products and computer software packages. These two companies can be taken as comparables for the distribution segment of the assesee. They are having margin of 9.08% and 2.40% respectively. TPO is directed to take Softcell Technologies Ltd. and Sonata Information Technology Ltd. as comparables in this case in addition to the comparables taken in the TP order.”
Further DRP has also allowed working capital adjustment after relying upon various judgments and held that while computing the margin upon by the comparable companies vis-a-vis assessee, difference on account of working capital employee should also be effected into and therefore working capital adjustment has to be given and assessee is directed to produce the calculation of working capital adjustment before the TPO which was to be examined by the TPO.
Before us Ld. Counsel had submitted that even if these two comparables are included and inclusion of two other comparables, namely, Empower Industries India Ltd. and Trijal Industries Ltd. are included then other comparables need not be adjudicated. In support reliance has been placed on the judgment of the Tribunal for the assessment year 2006-07.
We find that in so far as the inclusion of four comparable companies namely, Empower Industries India Ltd., Sonata Information Technology Ltd., Softcell Technologies Ltd. and Trijal Industries Ltd., the same has been accepted by the Tribunal after giving direction to give working capital adjustments. The relevant observation and the finding of the Tribunal reads as under:-
“11. 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 7 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 8 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 is as under:-
S.No. Name of comparable Working capital adjusted OP/OR 1. Empower Industries India Ltd. 0.43% 2. Sonata Information Technologies 0.67% Ltd. 3. Softcell Technologies Ltd. 2.24% Mean 1.11%
12. 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.
13. 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:-
(i) Empower Industries India Ltd. (ii) Sonata Information Technologies Ltd. (iii) Softcell Technologies Ltd. (iv) Trijal Industries Ltd. 14. With this direction, the grounds raised by the assessee on transfer pricing adjustment are treated as allowed.”
Since there is no change in the material facts and therefore following the aforesaid precedence of the earlier order, we direct the TPO to include the aforesaid four comparables after the working capital adjustment. In the result appeal of the revenue is dismissed.
In the cross objection assessee has raised various grounds challenging other comparables. However, in view of the above it has been admitted by the Ld. Counsel that if these four comparables are included, then other ground raised in the cross objection will become purely academic. Accordingly, we dismiss the cross objection as infructuous.