SATELLITE TELEVISION ASIAN REGION LTD,MUMBAI vs. DDIT (IT) 2(1), MUMBAI

(ii) In ground no.2 to 5, the assessee has challenged that, the Ld. DRP as well as AO has erred in law and on facts in not applying the Profits Split Method (PSM) which was approved by the TPO, on non-AE transactions and thereby holding that revenue of Rs. 118,59,30,000/- from sale of advertisement air time from non-AE needs to be separately computed and on such revenue applying 28% of profit;

4 M/s Satellite Television Asian Region Limited & Five others to 8685/Mum/2011 ITA Nos. 8693 to 8695/Mum/2011 (iii) In ground no. 6, the assessee has challenged that, there is an error in computation of income inasmuch as distribution revenue amounting to Rs 124,82,45,000/- has subjected to double taxation without appreciating that income comprised therein on the said amount has already been assessed;

(iv) In ground no. 7 & 8, the assessee has challenged the taxation of service fee income @ 41.82% on the gross basis as against applicable @ 10.455% on gross basis;

(v) In ground no. 9, the assessee has challenged the action of the AO in making the double disallowance u/s 40(a)(i), without considering the fact that same has already been factored into PSM profit @ 27.18% and such double disallowance constitutes :-

(a) disallowance of payment to Asia Satellite Telecommunications Ltd (‘Asia Sat’) for Plant

Transponder Hire Charges as “royalty”

(Rs. 37,94,29,655/- ) [Grounds 15 to 19];

(b) payment for foreign content procuring charges u/s 40(a)(i) (Rs. 69,91,76,571/-)[Ground no. 20 to 22];

(c) payment for technical cost u/s 40(a)(i) (Rs. 10,89,68,117/-) [Ground no. 23 to 25];

(vi) In ground no. 10, the assessee has challenged double disallowance of interest expenses amounting to Rs. 30,08,28,766/-;

(vii) In ground no.11 to 14, the assessee has challenged the disallowance of cost advertising air-time u/s 40(a)(i) amounting to Rs. 896,13,47,000/-;

5 M/s Satellite Television Asian Region Limited & Five others to 8685/Mum/2011 ITA Nos. 8693 to 8695/Mum/2011 (viii) In ground no. 26, the assessee has raised the issue on non-grant of reversal of disallowance of cost of at air- time u/s 40(a)(i) for AY 2005-06 upon the payment of taxes therein in the instant assessment year [Rs. 665,41,36,516/-];

(ix) In ground no. 27, the assessee has challenged denial of set off of brought forward losses and amounting to Rs.1004,27,61,307/- for AY 2006-07.

“On the facts and in the circumstances of the case and in law, the learned DRP and the learned AO- Ground number 30: erred in considering the profitability rate of 27.18% [arrived at after consideration of suo moto disallowance under section 40(a)(i) of the Act by the Appellant], instead of profitability rate of 14.04% and 13.14% towards specific tax adjustments under Section 40(a)(i) of the Act as determined by the Additional Commissioner of Income-tax (Transfer Pricing) - 11(4) ('TPO') for computing the Arms' Length Price ('ALP') under Profit Split Method ('PSM'). Ground number 31: without considering the similarity in the facts and return filing positions in case of the Appellant in AY 2007-08 and AY 2008-09, erred in adopting a divergent position with respect to adjustments prescribed under section 40(a)(i) of the Act, while considering the profitability rate. Ground number 32: erred in not specifying that after accepting in case of the Appellant (along with its AEs1), the profitability of 27.18% (equivalent to Rs 3,452,612,000) of the India Revenues comprising of 14.04% (Rs. 1,783,683,000) being the ALP and 13.14% (Rs. 1,668,929,000) being adjustment under section 40(a)(i) of the Act”.

6 M/s Satellite Television Asian Region Limited & Five others to 8685/Mum/2011 ITA Nos. 8693 to 8695/Mum/2011 disallowances. After referring to the material placed before us and the impugned orders, he briefly explained the relevant facts and the background of the case, which are discussed hereinafter. M/s Satellite Television Asia Region Ltd. (Star Ltd.) and Star Channel Companies derive revenues from the Indian market from the distribution of television channels and sale of advertisement time to be aired on these channels. The Star Ltd and the Channel Companies, each undertook unique functions, bear unique risks and offer unique assets to jointly generate these revenues. SGL Entertainment Ltd (SGL) procures the content required for the channels for the entire Star Group that is, it performs a subset of Star Ltd functions necessary for generating revenues. All these companies of Star Group can be classified on the basis of functions performed into three categories:- (i) Firstly, the Star Ltd, which is primarily engaged in production and broadcasting of television programming across the Asia region. More specifically, it has involved in the sale of broadcasting air-time, the distribution of channels, the provision for infrastructure services, the supply of transponder capacity and the provision of management services. It also owns and operates channels directly; (ii) Secondly, SGL Entertainment Ltd (SGL) which is engaged in the content procurement activities on behalf of Star Ltd. In doing so, SGL monitors the market, identifies suitable content providers and liaises between content providers and the customers. SGL also obtains content samples for customers and carries out distinct and quality control on them to determine whether the content meets aggregate standards and specifications / broadcasting; (iii) Thirdly, there are channel companies, viz,:- (a) Channel International Movies Ltd; (b) Channel V Music Networks Ltd;

7 M/s Satellite Television Asian Region Limited & Five others to 8685/Mum/2011 ITA Nos. 8693 to 8695/Mum/2011 (c) Star Television Entertainment Ltd; (d) Star Asia Entertainment Ltd; & (e) Star Asia Regional FLLLC.

These channel companies are primarily engaged in the business of developing channel concept and creating, owning and broadcasting the channels. They decide the genre, the look and the feel of channels i.e. nature of programming, target age of audience etc. They also decide the sequencing of the programme and undertake various activities in relation to the content so that the content can be broadcast in the form of digital signals. Each of the channel companies has granted channel distribution rights to Star Ltd, which distributes these channels in return for subscription revenues. The channel companies also advertise air-time on the channel and received ad revenue’s net of any commissions retained by ad agents. All the transactions undertaken for earning of the revenues are amongst these entities only.

Sr.No. Name of the Percentagewise allocation Company of taxable income i Star Ltd. 49% ii SGL 1% iii STEL 33% iv SIML 4% v SAML 4% vi SARF 6% vii Channel V 3%

8 M/s Satellite Television Asian Region Limited & Five others to 8685/Mum/2011 ITA Nos. 8693 to 8695/Mum/2011 So far as allocation of proportionate taxable income in above ratio, same is not in dispute. One very important fact in all these cases is that in the Transfer Pricing proceedings, the TPO has accepted the net profit of 14.04% at arm’s length. No adjustment whatsoever was made or suggested. The transfer pricing orders in case of all these entities have been placed in the paper book from pages 234 to 239.

(i) The audited global financial statements of all the entities of Star Group were consolidated to arrive at the net result of the entities’ operations on consolidated basis including India and non-India revenues. Such a consolidation of results ensures that all inter-company costs, profits and losses are eliminated and the correct quantum of profit based on correct analysis of third party revenues cost can be arrived at.

(ii) Thereafter, the effect of inter-companies double counting of revenue stream is eliminated. This step ensures that correct third party revenue is arrived at.

9 M/s Satellite Television Asian Region Limited & Five others to 8685/Mum/2011 ITA Nos. 8693 to 8695/Mum/2011 (iii) Based on the aforesaid process / steps combined net profit was arrived at 14.04%, which was accepted by the TPO at Arm’s Length.

Before us, Mr. Porus Kaka pointed out that, though, such disallowances were no longer required to be made in view of the judgment of the Supreme Court in the case of Vodafone International BV vs. UOI, reported in 341 ITR 1 and even after the retrospective amendment brought by the Finance Act, 2012, (subsequent to Vodafone decision) various Courts have held that, it is impossible for the assessee to comply with the provisions for withholding of tax prior to the introduction of such provisions. Despite this, the assessee had offered higher combined profit over and above accepted by TPO. Thus, the profit on receipts in India offered for taxation was in the following manner:

10 M/s Satellite Television Asian Region Limited & Five others to 8685/Mum/2011 ITA Nos. 8693 to 8695/Mum/2011 Particulars –year ending (Amount 31st March, 2007 in Rs. lakhs) Advertising revenue from India A 1,01,472.78 Distribution revenue from India B 24,964.81 Syndication revenues from India C 605.35 Total revenues from India D=A+B+C 1,27,042.94 Profit percentage as per (E) in Step 3 E 23.98% Taxable profit F=DxE 30,464.90 Add: Interest cost disallowance’ G 4,061.22 Total taxable profit H=F+G 34,526.12 i.e. 345,28,12,000.00 Profit % I=H/D 27.18%

“Respectfully, following the directions of the DRP, Rule 10(i) is not applied in the case of the assessee for AY 2007-08 on transactions with Associate Enterprises. The assessee’s income from distribution and syndication is entirely from the AEs. As regards the advertisement revenue, out of the gross ad revenue of Rs. 1014,72,78,000/-. Consequently, the revenue in the assessee’s hand remains at Rs. 118.59 crores which is taxed at the rate of 28%, as directed by the DRP. Interest income of Rs. 1,85,92,430/-, though partly from AE (ie Star Games) is taxed 100% as the assessee has not claimed any expenses against the same”.

Thereafter, the AO held that, payment made to Channel companies, that is, inter-company transactions should be disallowed once again under section 40(a)(i) for non-deduction of 11 M/s Satellite Television Asian Region Limited & Five others to 8685/Mum/2011 ITA Nos. 8693 to 8695/Mum/2011 tax-at-source and accordingly, he observed that on following payments disallowance under section 40(a)(i) should be made:-

Particulars Cost of advt. air time(Rs.) Star Television Entertainment Limited 6,240,492,000 Star Asian Movies Limited 696,547,000 Star International Movies Limited 535,531,000 Channel [V] Music Networks Limited Partnership 242,969,000 Star Asia Region FZ LLC 1,245,808,000 Total 8,961,347,000 Thus, amount of Rs. 896,13,47,000/- payable to the Channel companies towards cost of advertisement air time was disallowed and added to the total income of the assessee.

Sr. Nature of payment made Quantum of disallowance No. to the Parties in (Rs.) 1 Payment made to Asia SAT for transponder hire charges 37,74,29,655 2 Payment for foreign content 69,91,76,571 3 Payment for technical cost 10,89,68,117 11. Besides this, the Ld. AO had taxed the service fee income and up-linking income @ 41.82% on the gross basis which as per the assessee should be applicable @ 10.45% and 20.91% and further disallowed interest expenses of Rs. 30,08,28,766/-. The 12 M/s Satellite Television Asian Region Limited & Five others to 8685/Mum/2011 ITA Nos. 8693 to 8695/Mum/2011 total income after making by these additions/disallowances was computed by the AO in the following manner:- Particulars Amount (Rs) Amount(Rs) Advertisement revenue 10,147,277,000 Distribution revenue (Taxable on protective basis) 1,248,240,500 Syndication Revenue 60,534,958 Other Income (As per Return of Income) 18,592,430 Revenues received from India 11,474,644,888

Non-AE Transactions Advertisement Revenue 1,185,930,000 Taxable Income Taxable profits from India 1,720,845,001 operation (as approved by the (included distribution TPO) income) Taxable profits from India 28% of operation (Non AE Transactions) 1,185,930,000 332,060,400 Other Income (as per Return of Income) 18,592,430 TOTAL 2,071,497,831

Add: Disallowance of cost of airtime u/s 40(a)(i) 8,961,347,000 Disallowance on account of Transponder payment made to AsiaSat u/s 40(a)(i) [1 USD = Rs. 43.17] 377,429,655 Disallowance of interest cost (as per Return of Income) 300,828,766 Income Subscription Revenue 1,248,245,000 Disallowance of content cost (as per Return of Income) [1 USD = Rs. 43.17] 699,176,571 Disallowance of technical cost (as per Return of Income) [1 USD = Rs. 43.17] 108,968,117 Less: Cost of Advertisement Air time disallowed in AY 2004-05 now allowed (6,242,854,000) Total Disallowances 5,453,141,109

Total Income Chargeable to tax in India 7,524,838,940

13 M/s Satellite Television Asian Region Limited & Five others to 8685/Mum/2011 ITA Nos. 8693 to 8695/Mum/2011 be the starting point for the application of the method; thirdly, the method, the manner and application of determination of income satisfy the Arm’s Length Profit as per the TPO which has been accepted under the Transfer Pricing proceedings and Lastly, all the companies are taxable at the same rate and their allocation of combined net profit to each entity is based on their role and functions performed. From the help of a chart, he explained that first of all, all the income and expenses of the Star Group were consolidated to arrive at net results of the entities’ operation on a consolidated basis including India and non-India revenues. Thereafter, the effects of inter-company transactions have been eliminated so that correct third party revenue is arrived at. Based on such analysis and determination, global combined profit was arrived at 14.04% which has been found to be at ALP by the TPO. In the next step, the assessee has made certain suo-motto disallowance and uplifted profit rate to 27.18% which has been apportioned to various companies in the PSM, (the ratio of which has already been incorporated above). He further submitted that, under the PSM, the combined net profit of the group is to be determined at the transactional level of the entities from all the international transactions. Here the combined net profit has been determined on the inter-se transaction as there are no other transaction which is evident from the functions performed and revenue generated in such transaction. Thus, all the transactions in respect of distribution stream and advertisement stream cannot be segregated nor can be the expenses. The assessee was not required to make any disallowance in respect of the payment made to third parties in view of settled legal positions by the decision of Hon’ble Apex Court in the case of Vodafone International BV (supra), G E India Pvt. Ltd. and Delhi High Court decision in the case of Asia Satellite Telecommunications Co. vs DIT. Not only that, even after the retrospective amendment brought by Finance

14 M/s Satellite Television Asian Region Limited & Five others to 8685/Mum/2011 ITA Nos. 8693 to 8695/Mum/2011 Act, 2012 the settled legal position is that, the assessee cannot be made liable to comply with the provisions of withholding of tax when such provisions did not existed in statute book at the time of making the payments. Thus, the combined profit of 27.18% on all the transactions was far too high to reflect the combined profit of the entire revenue and the cost. Here in this case, the DRP has accepted that assessee’s income from distribution and syndication are entirely from AEs and even the advertisement revenues of more than 80% are from AEs only, however DRP held that balance revenue from advertisement are from non-AEs which is to be taxed @ 28% under Rule 10. In such an approach he submitted that there is great folly, firstly, already whole of advertisement revenue is part of combined profit and is in the PSM pool and therefore, the expenses of whole stream cannot be segregated and secondly, it amounts to double taxation, being part of combined profit of 27.18% and then again taxed separately @ 28%. If it is accepted that transaction are closely inter-related and all transactions are from the functions performed by AEs only then all transactions get included under the PSM. The AO has mis-construed that the profits earned from non-AE are at 28% as there cannot be separate earning and separate profit with the transaction with AE and non- AE especially when the Arm’s Length Prices have been determined by the TPO at 14.01% at all the transactional level and the entire revenue has been considered. In fact there are no Non-AEs revenues separately. Mr. Kaka reiterated that, otherwise also the income of Rs. 118,59,30,000/- has been taxed twice, once when the profit of the whole transactions which has been taken at 27.18% being part of PSM computation and second, taxed separately again by applying profit rate of 28%. PSM is applied only when there is contribution from multiple entities and revenue generated out of operations that are highly integrated.

15 M/s Satellite Television Asian Region Limited & Five others to 8685/Mum/2011 ITA Nos. 8693 to 8695/Mum/2011 13. Regarding double taxation of distribution revenue of Rs. 124,82,45,000, he submitted that the 50% of total distribution revenue is being taxed on protective basis in the hands of the Star Ltd., which in fact is the part of the PSM profit rate of 27.18%. Once, that is so, then again 50% of the distribution cannot be taxed on substantive basis, therefore, it is amounts to double disallowance. Regarding taxation of service fee and up-linking income, he submitted that, the assessee had offered tax @ 10.45% and 20.91%, respectively in the return of income which is in accordance with section 115A and the same has been taxed by the AO at 42.82% which is not correct. As regards, double disallowance of interest expense also of Rs. 30,08,28,766/-, he submitted that, again it amounts to double disallowance, because it already constitute disallowance made by the assessee while arriving at profit rate of 27.18%. On various other disallowances made under section 40(a)(i), he submitted that, firstly, no disallowance can be made on account of retrospective amendment in view of the various judicial precedence; secondly, no disallowance can be made when the recipient has duly discharged its liability to pay the tax on the said income; thirdly, already the disallowance u/s 40(a)(i) has been made while computing the PSM profit of 27.18% and, therefore, no separate disallowance can be made under section 40(a)(i); fourthly, the whole of the transactions undertaken by the entities are taken for arriving at the combined net profit of the group taking into account all the revenues generated through AE and also non-AE transactions if they are part of the interrelated transactions; fifthly, all the expenses have to be taken into account and cannot be segregated due to nature of integrated and complex transactions and lastly, Rule 10 cannot be made applicable once the international transactions are covered by the provisions of section 92 of the Act.

14. Regarding non-grant of reversal of disallowance of cost of ad-air-time u/s 40(a)(i) for AY 2005-06 upon the payment of taxes

16 M/s Satellite Television Asian Region Limited & Five others to 8685/Mum/2011 ITA Nos. 8693 to 8695/Mum/2011 therein in the instant assessment year as raised vide ground No.26, he submitted that, mainly direction is sought for that AO should give proper effect on the issue of denial of set off of brought forward return loss of AY 2006-07 in accordance with the law.

17 M/s Satellite Television Asian Region Limited & Five others to 8685/Mum/2011 ITA Nos. 8693 to 8695/Mum/2011 retrospectively in view of the amendment brought in by the Finance Act, 2012.

19 M/s Satellite Television Asian Region Limited & Five others to 8685/Mum/2011 ITA Nos. 8693 to 8695/Mum/2011 associated enterprises (AEs) which are so inter-related and closely linked or continuous that they cannot be evaluated on separate basis for the purpose of determining Arm’s Length Price of any transaction. Rule 10B(1)(d) of the Income-tax Rules prescribes the method to be applied in the following manner:- “(d) profit split method, which may be applicable mainly in international transactions involving transfer of unique intangibles or in multiple international transactions which are so interrelated that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction, by which—

(i) the combined net profit of the associated enterprises arising from the international transaction in which they are engaged, is determined;

(ii) the relative contribution made by each of the asso- ciated enterprises to the earning of such combined net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances;

(iii) the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub-clause (ii);

(iv) the profit thus apportioned to the assessee is taken into account to arrive at an arm's length price in relation to the international transaction:

Provided that the combined net profit referred to in sub- clause (i) may, in the first instance, be partially allocated to each enterprise

20 M/s Satellite Television Asian Region Limited & Five others to 8685/Mum/2011 ITA Nos. 8693 to 8695/Mum/2011 so as to provide it with a basic return appropriate for the type of international transaction in which it is engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the manner specified under sub-clauses (ii) and (iii), and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual and profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction”.

From the plain reading of the above method, it is evident that, first step is to identify the combined net profit of the AE arising from the international transactions, in which they are engaged. Such a combined net profit is determined by taking into account all the transactions undertaken by all the AEs. In the second step, the relative contribution made by each of the entities which have contributed to the earning of such combined net profit is evaluated on FAR analysis of each entity and based on that, it is seen how such contribution should be evaluated by unrelated enterprise performing functions in similar circumstances; thirdly, the combined net profit is split between the related enterprise on the basis of any proportion to their related contribution which has been evaluated after carrying out FAR analysis and lastly, the profit which has been apportioned to the assessee is taken into account to arrive at Arm’s Length Price analysis to the international transactions. The object of detailed functional analysis in such a method is to assess the related contribution and risk taken by each party and thereby assigned income accordingly.

22 M/s Satellite Television Asian Region Limited & Five others to 8685/Mum/2011 ITA Nos. 8693 to 8695/Mum/2011 Particulars Amount in INR Advertisement revenue 10,147,277,000 Distribution revenues 2,496,481,000 Syndication revenues 60,534,958 Total India revenues 12,704,292,958 Profitability percentage (determined separately) 14.04% Arm’s length taxable profits 1,783,683,000 The above income has been then allocated amongst the various entities after considering further disallowances offered by assessee; Thirdly, the evaluation of contribution made by AEs has been done on FAR analysis on the basis of external factors and data, because based on such evaluation by unrelated enterprise performing comparable functions has been benchmarked to arrive at the ALP; and lastly, once the assessee has taken all the revenues and factored all the costs to arrive at combined net profit then it is not permitted to segregate part of the revenue and tax it again by applying profit rate of 28%. Such an exercise will only lead to double disallowance. Thus, action of the AO in pursuance of the direction given by the DRP is rejected. Further, we also do not agree with the revenue that, non-AE transactions needs to be determined under Rule 10, because once such an international transactions are covered under section 92 then there is no need for separate determination of income when all the revenues have been taken for the determination for ALP. Under section 92C(2), the manner prescribed is under Rule 10B and not Rule 10. Otherwise also, Rule 10 is applicable only when the actual amount of the income accrued or arising to a non-resident cannot be definitely ascertained, which here in this case is not the case of the revenue that, the income of the assessee cannot be determined.

25 M/s Satellite Television Asian Region Limited & Five others to 8685/Mum/2011 ITA Nos. 8693 to 8695/Mum/2011 29 Lastly, regarding levy of interest under section 234B, we find that this issue stands covered in favour of the assessee by the decision of Hon’ble Delhi High Court in the case of NGC Network LLC (supra). As regards reliance placed by Ld. CIT DR of the Delhi High Court decision in the case of Alcatel Lucent, it is seen that Hon’ble Delhi High Court has distinguished the ruling of Alcatel and held that the view taken in Alcatel Lucent (supra) would not be applied to this case because if the payer deducts tax at source only when the assessee admits tax liability, then deductions would not be made in cases where the assessee either falsely or under a bona fide mistake denies tax liability. The High Court further held that the primary liability of deducting tax was that of the payer. The payer would be an assessee in default, on failure to discharge the obligation to deduct tax, under Section 201 of the Act and no interest was leviable on the respondent assessees under Section 234B, even though they filed returns declaring NIL income at the stage of reassessment.

26 M/s Satellite Television Asian Region Limited & Five others to 8685/Mum/2011 ITA Nos. 8693 to 8695/Mum/2011 33. In the result, all the appeals of the assessee are allowed.

Order pronounced in the open court on 2nd February, 2016.

Sd/- Sd/- (अशवनी तनेजा) (अिमत शु�ला) लेखा सद�य �याईक सद�य (ASHWANI TANEJA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 2nd February, 2016 ��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The DRP-II /CIT(A) –Concerned____, Mumbai. 4) The CIT/DIT Concerned____,, Mumbai. 5) िवभागीय �ितिनिध ““के” ”, आयकर अपीलीय अिधकरण, मुंबई/ The D.R. “K” Bench, Mumbai. 6) गाड� फाईल \ Copy to Guard File. आदेशानुसार/By Order / / True Copy / /