TMI Blog2019 (7) TMI 1318X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion expressed by us in this order, on merits in accordance with law. We order accordingly. Inclusion of Raj Television Network Limited as comparable cannot be excluded as it is not persistent loss making company because after the exclusion of exceptional losses , the said company Raj TV is in profits in the year under consideration while for immediately preceding year admittedly it was in losses. Thus, we direct inclusion of Raj TV after making adjustment of these exceptional expenses to the tune of ₹ 1628.79 lacs, wherein PLI is to be recomputed by AO/TPO. The AO/TPO are directed to include Raj TV as comparable after making adjustment for exceptional item of expenses to the tune of ₹ 1628.79 lacs. Applying profitability of 28% on transactions of the assessee with its non-AE s - Respectfully following aforesaid decisions of the ITAT in assessee s own case [ 2016 (9) TMI 1328 - ITAT MUMBAI] and keeping in view similar facts and circumstances for the year under consideration before us, we hold that no adjustment to income is required by computing ALP @28% on transactions of the assessee with non AE s. - I.T.A. No. 1519, 1637/Mum/2016 (Assessment Year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other: On the facts and in the circumstances of the case and in law, the learned DRP/ learned Joint Commissioner of Income-tax (Transfer Pricing) - 2(2) ('TPO') and the learned AO has Ground number 1 erred in determining the taxable income of the Appellant at INR 8,96,44,590 instead of loss of INR 19,78,03,073 as determined by the Appellant in its revised return of income. Ground number 2 erred in not giving effect to the directions of the Ld. DRP which are binding on the AO as per Section 144C(10) of the Act. . Ground number 3 erred in applying transfer pricing provisions to profit arrived after the application of Profit Split Method ('PSM') ignoring that such profit effectively represents profits from transactions with third parties. Ground number 4 erred in determining the arm's length profitability rate ('ALP rate') of 21.26 percent as against the ALP rate of 15.81 percent computed by the Appellant and its Group Entities (together referred to as STAR Group Entities).(The assessee has in its foot notes declared entities, namely Satellite Television Asi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies) in the hands of STAR Ltd, thereby double taxing India sourced revenues to the extent of INR 1,82,66,04,071 in the case of STAR Group entities. Ground number 12 erred in granting short credit of taxes deducted at source amounting to INR 87,94,972. Ground number 13 erred in granting short credit of Advance tax amounting to INR 2,69,275. Ground number 14 erred in granting short credit of self-assessment tax amounting to INR 1,10,925. Ground number 15 erred in levying interest of INR 7,96,638 under Section 234C of the Act. Ground number 16 erred in computing levy of interest under Section 234D of the Act at INR 63,95,161. Ground number 17 erred in initiating penalty proceedings under Section 271(1)(c) of the Act without appreciating the fact that the Appellant has not concealed any income nor furnished any inaccurate particulars of its income. The Appellant craves leave to add, alter, amend or delete one or more of the ground at any time before, or at the time of, hearing. 3. The brief facts of the case are that the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e) Provision of broadcast operations related services by Star Ltd. to Vijay Television Private Limited (VTPL) Thus, Star Limited , has rendered agency services in relation to advertising and distribution of the respective channels of various Channel Companies. The Star Limited has also rendered management services to the Channel Companies during the relevant period. 3.2.3 The TPO observed that of the Channel Companies, SIML and Channel V are foreign companies and STEL,SAML and SARF have merged with SIPL w.e.f. 01.04.2009 vide Hon ble Bombay High Court judgment dated 18th February 2010. The TPO observed that all the above Channel companies are engaged in the satellite television business. The TPO observed that these companies including assessee derived revenue from various markets , a significant portion arising from the Indian market , inter-alia, from the following : a) Sale of Advertisement time of the television channels. b) Distribution of television channels c) Syndication of content on the channels. 3.2.4 The assessee has transaction with its associated entities(AE s) within Star Group which were reported in Form No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE Amount in revised From 3CEB Method 1 Procurement of content Star India Pvt. Ltd., INR 315,868,823 TNMM 2 Grant of franchise rights Star India Pvt. Ltd. INR 16,401,447 TNMM 3 Grant of license for distribution of channels Star Den Media Services Pvt. Ltd. INR 234,199,645 TNMM 4 Availing of management services Star Ltd. USD 355,565 TNMM 5 Availing services in connection with sale of advertisement airtime, distribution of channels and syndication of content, including services relating to pre-production, post production, playout, uplinking and transmission of the channel of the Assessee Star L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Merged entities were ascertained. The TPO observed that SIML and V Partnership , being non-residents, would be subject to tax only in respect of profits earned from the Indian market. The TPO observed that no India specific financial statements were maintained by SIML and V partnership . The AO observed that the assessee has adopted a methodology to compute income chargeable to tax wherein, the consolidated profits were compared to the total of India revenues earned by SIML / V Partnership during the 6 months period April 1, 2010 to September 30, 2010 and global revenues earned by the Overseas Merged Entities for the period commencing from April 1, 2010 till such time that they continued to exist in their local jurisdiction which reflected an overall profit rate of 15.81% percent ( profit as percentage of income). A detailed computation was provided , which is reproduced as under:- Notes: 1. In the case of STEL and SAML, the global advertisement, distribution and syndication revenues for the period April 1, 2010 to May 31, 2010 have been considered. 2. In the case of SIML and V Partnership, India advertisement, distribution and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... animation programming, dubbing and home video sales on delivery basis. These revenue streams are different from that of the assesse. Hence, this is not a fit comparable. * Ibn 18 Broadcast Ltd: It is a consistent loss making entity with total accumulated losses of ₹ 2,283,592,931 as on 31st March 2011 * India Vision Satellite Communication Ltd: Then company does not pass the RPT Filter as out of total income of ₹ 3,13,69,230, the auditor's report state that ₹ 1,48,80,000 is from a foreign company in DUBAl, United Arab Emirates. Viz. India vision International FZ LLC. The assesss holds 51% shareholding in it as per memorandum of association of the said LLC company. * Raj Television: The annual accounts of the company show that it is a consistent loss making company. 3.2.10 The TPO after rejecting aforesaid four comparables, accepted five comparables of the assessee to benchmark the broadcasting transactions of the assessee, as under:- Sr. No. Company Margine on revenue (March 2011) Margine on cost (March 2011) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s , the AO observed that profitability was determined by Revenue in case of Star Group for the preceding years as provided below: AY In respect of transactions with Associated Enterprises In respect of transactions with non-Associated Enterprises 2007-08 27.18% 28% 2008-09 22.57% 28% 2009-10 13.54% 28% 2010-11 21.26% 28% 3. 2.13 The AO observed that the Star Group has offered for taxation income pertaining to entire India specific Revenues( from AE and non AE s) by applying the arms length profitability rate of 15.81%. The AO followed directions of learned DRP for AY 2007-08 and held that so far as transactions of the assessee with AE is concerned directions of the TPO are binding , but for transaction of the assessee with non AE s , Rule 10(i) of the 1962 Rules is applicable and as details of India speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.03.2015 passed by the AO u/s 144C(1) read with Section 143(3) of the 1961 Act, filed objection with learned DRP and made detailed submissions and learned DRP issued directions dated 22.12.2015 u/s 144C(5) of the 1961 Act , as under:- 8. Discussions and Directions of DRP: We have considered the grounds 3, 8, 9 10 of objection raised by the assessee and the submission made by it. We find that it is a recurring issue and similar additions have been made by the AO/TPO in the earlier years also which have been upheld by the DRP in the respective years. Respectfully following the decision of DRP in A.Y. 2009 -10, 2008-09 and earlier years, the addition made by the AO is confirmed and grounds of objection 3,8,9 10 raised by the assessee are rejected. 9. Ground of objection No.4: The learned Joint Commissioner of Income-tax (Transfer Pricing) -2(2) {'TPO'} and the learned AO erred in determining the arms' length profitability rate ('ALP rate'} of 21.26% as against the ALP rate of 15.81% computed by the Assessee and Channel Companies (together referred to as STAR Group Entities); 10. Ground of objection No.5: The learned T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions effectively with third parties. 7 Without prejudice to the submissions that once PSM is applied, there is no requirement to apply other method, it is submitted that with a view to avoid litigation and to demonstrate its bonafide, STAR Group Entities suo moto compared the consolidated global profit rate of 15.81% with the profit earned by the comparables. 8 In this regard, it is submitted that FICAPL and the Channel Companies identified the following comparables and considered their weighted average margin for benchmarking their transaction. Sr. No. Company name Weighted Average of 2009, 2010 and 2011 (net profit on revenue) 1 TV Today Network Ltd 15.16% 2. Zee News Ltd 15.17% 3. I/TV Software Communications -3.10% 4. Ibn 18 Broadcast Ltd {TV18 Broadcast Limited) 4.11% 5, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... V Today' or 'the Company'} TV Today was incorporated in the year 1999. The Company operates predominantly in only one business segment viz. 'News broadcasting operations'. 'Aajtak' is a popular news channel run by the Company. ii. Zee News Limited ( Zee News' or 'the Company ) Zee News was incorporated in the year 1999 and operates as media and entertainment company in India. The Company broadcasts news and current affairs through its channels, including Zee News, Zee Business, Zee Marathi, Zee Bangla, Zee Punjabi , Zee Gujarati, Zee 24 Taas, Zee Kannada, and Zee Telugu, The Company also provides advertising services. iii. UTV Software Communications Ltd UTV Software Communications Limited was incorporated in the year 1990. It is an India based integrated media company. The Company started as a television content production company and has developed into a media and entertainment company. It operates in the following segments: Television, Movies, Games and interactive segments. The Television business of the Company inter-alia includes broadcasting of four speciality genre channels, UTV Action, UT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered. vii.Zee Entertainment Enterprises Limited ( Zee Entertainment or the Company ) Zee Entertainment, promoted by Subhash Chandra and associates, was incorporated in the year 1982. The Company's principal activities are to produce content, distribute TV channels and provide educational services. Content production includes developing, producing and procuring television programs and film content The company distributes pay TV channels to homes through cable operators and delivers satellite and internet content on cables to homes. The Company is also engaged in distribution of software learning products and provides IT educational services. . viii. Malayalam Communications Ltd Molayalam Communications limited {'the Company') was incorporated in the year 2000 in Thiruvananthapuram. The Company is in the business of television broadcasting. The Company currently operates channels; Kairali TV; People and We. For the purpose of our analysis, the Profit and Loss account of the Company has been considered. ix. Raj Television Limited ('Raj Television' or 'the Company1) Raj Television Network Limited is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterprises Ltd (consolidated segmental) 28.30% 5. Malayalam Communications Ltd 32.93% Total 21.26% 14. Since the operating margin earned by FICAPL and the Channel Companies (at15.81%) is less than the arithmetic mean of comparable companies as considered by the Learned TPO (at 21.26%), a transfer pricing adjustment was proposed in the manner detailed below: Particulars Rs. Revenues of Channel V 290,011,580/- Profit at the rate of 21.26 percent 6,16,56,462/- Profit at the rate of 15.81 percent 4,58,50,831/- Adjustment amount 1,58,05,631/- 15. Further, the learned TPO accepted the arrangement in place amongst the STAR Group Entities and held that based on the FAR analysis, FICAPL is entitled to 50% of the overall profit/loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submit that the Assessee has considered the consolidated financial statements of the comparable companies for the purpose of comparability on account of the reasons mentioned below: The combined results of the Assessee and the its Group Entities have been used for benchmarking purpose as it reflects the entire gamut of operations typically performed in the broadcasting business for the purpose of earning income from advertisement sale and from subscription. While computing the profit margins of the comparables, consolidated financials were used to ensure that the related parties transactions amongst group companies did not influence the comparable margins (as these get set off for consolidation purposes) and also to ensure that the margins of the comparables are related to the operations that are comparable to the combined operations of the Specified AE s. Given the fact that the Assesses has used consolidated financials, we wish to submit that the approach of the learned TPO to reject the company on the basis of information mentioned in the standalone financials is not appropriate. Moreover, on perusal of the subsidiary details given in the annual report of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent are similar to the activities undertaken by the STAR Group entities, we request your Honor to accept the contention of the Assessee and reinstate the comparable company for the purpose of determining the arm's length price of the subject international transaction. Raj Television Limited The learned TPO has rejected the company stating it has consistently incurred losses. In doing so, the learned TPO has overlooked the fact that Raj Television has earned an operating margin of 1.04% during FY 2008-09, which has been considered by the learned TPO's predecessor in the transfer pricing order passed in the case of the STAR Group entities for AY 2009-10 , In this regard, it is humbly submitted that the Assesses has also applied a similar filler in its TP study for the purpose of selection of comparables, wherein any company incurring losses for 3 consecutive years (including the year under consideration) has been rejected on account of persistent operating losses. This position adopted by the Assessee is consistent with the position adopted in the previous assessment years also, which was accepted by the learned TPO. In this regard. It is submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies in that industry. The ALP cannot be tied to the arithmetic mean of the operating margins of only profitable comparable companies in any industry, when that industry contains some or many unprofitable companies that are equally comparable. Under the Act, the term 'income' includes profits as well as losses. Therefore, it would be prudent to consider both profit making as well as companies incurring losses as comparables as long as they satisfy the comparability criteria as specified under the Rules. Further, it weald be relevant to note that this selection criterion of rejecting companies incurring persistent operating losses is in contradiction to the learned TPO's position that data of only FY 2010- 11 should only be used for comparability analysis. Hence, the Assesses submits that rejection of a company on the basis that it has incurred losses for less than 3 consecutive prior years is not appropriate* Further, the very fact that these companies continue to operate indicates that they anticipate earning profits in future and that It is only the inherent risk in the market that is driving such companies to diminishing revenues. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing company is not appropriate. The TPO has considered the fact that the company has been toss making in the previous two years i.e. FY 2008-09 and FY 2009-10 and has categorised the company to be a persistent loss maker. However, we wish to bring it to your Honour's notice the fact that in the year under consideration i.e. FY 2010-11, the company has made a profit of 4.33%. Further, on the basis of the arguments raised by us in connection with the rejection of Raj Television Ltd, it can be concluded that a company is a consistent loss maker only if it has incurred a loss for consecutive 3 previous years including the year under consideration. Thus, given the fact that the company has a profit in the concerned year and has not been incurring losses for 3 consecutive years, it is not appropriate for the learned TPO to consider it as a consistent loss maker. The learned TPO has also stated that the company has accumulated losses as on March 2011. In this regard, we wish to submit that a company can be categorised as a persistent loss maker if it has been incurring operating losses continuously year on year. A company cannot be a consistent loss maker merely on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to organize their affairs in a manner they perceive to have been accepted by the authorities over a period of time. If the learned authorities under the Act wish to take a different view for the two periods in question from the periods proceeding thereto and following thereafter, adequate justification regarding the same should be provided to the taxpayer. 24 In this regard, we invite Your Honour's attention to the following decisions: * Radhasoami Satsang vs. CIT 193 ITR 321 (SC) Each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspects permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year, * Bharat Sanchar Nigam Ltd Vs Union of India (2006) (3 SCC 1) (SC) Res judicata does not apply in matters pertaining to tax for different assessment years because res judicata applies to debar courts from entertaining issues on the same cause of action ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Birlasoft (India) ltd Vs DCIT (Delhi Tribunal) In the present order passed by the TPO, he has not given any reason to deviate from the method accepted by him in the immediately preceding assessment year, in the course of hearing of this appeal, the learned DR has also not been able to point out any reason for such deviation except contending that the segmental result submitted by the assessee by making in internal comparables was not reliable as the assessee has not maintained separate account of each segmental. We have already held above that in terms of AS-17, the assessee was not required to maintain separately segmental account inasmuch as the nature of services and product in respect of transactions undertaken with related parties and unrelated parties are same and identical. Therefore, to maintain consistency, the Transfer Pricing Officer should have adopted the method of internal bench marking for determining the arm's length price of the transaction entered into with the related parties as so done by him in the immediately preceding assessment year 2005-06. *Brintons Carpets Asia (P) ltd Vs DCIT (139 TTJ 177} (Pune) Regardin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel had taken Datamatics as comparable in its T. P. Audit, the taxpayer is entitled to point out to the Tribunal that above enterprise has wrongly been taken as comparable. In fact there are vast differences between tested party and the Datamatics. The case of Datamatics is like that of imercius Technologies representing extreme positions. If Imercius Technologies has suffered heavy losses and, therefore, it is not treated as comparable by the tax authorities, they also have to consider that the Datamatics has earned extraordinary profit and has a huge turnover, besides differences in assets and other characteristics referred to by Shri Aggarwal * SAP Labs India Private Limited (2010 TII-44-ITAT-Bang-TP) 86. At the cost of repetition, we have to say that extreme cases should not be included in samples and extreme comparables mean not only the positive higher side but also the lower side. In the list of 22 comparables, many of them are having very low margin rate, not only less than 10 or 5, even below that. We have already considered that the agreement entered into by the assessee with its German associate concern has contemplated a compensation of cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is able to demonstrate that the company has earned a profit in the F.Y. under consideration, UTV Software Communications ltd. The TPO has rejected this comparable because the company is not functionally comparable with the assessee whereas it is the claim of the assessee that it has considered accounts of only television segment of the company which is comparable to the business of the assessee. In this regard, it is seen from the page 50 of the annual report of the company that Television segment involves four main functions (1) production of television content (2) airtime sales, which includes managing slots and selling commercial air time on other broadcasting networks, (3) dubbing; and (4) broadcasting of four speciality genre channels, UTV Action, UTV World Movies, UTV Movies and UTV Bindass distributed through out India and selected international markets . . Thus, the revenues of the television segment include the revenue from production of television content also. Clearly, the company cannot be said to be functionary comparable to the assessee. Therefore, rejection of this comparable by the TPO is upheld. Raj Television ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out by the assessee. The TPO has commented on the use of multiple year data. He has dealt with each of the comparable selected by the assessee and has pointed out the defects in it. In any case, the disputed comparables are being dealt with us subsequently. In view of the facts and details narrated in the order, it is clear that the assessee does not comply with the provisions of section 92C(3) of the Act. So far as the use of single year data is concerned, Rule 10B(4) very clearly states that the data of the comparable transactions should be the data pertaining to the financial year in which the taxpayer has entered into international transaction The word used is shall and not may . It implies that neIther the tax payer nor the department has any choice regarding the use of relevant financial year data. 14.1.3 Further, proviso to Rule 10B(4} says that earlier period data may also be considered only if it reveals certain facts which have an influence on the determination of transfer prices in relation to the transactions being compared. This implies that earlier year data is in addition to the data pertaining to relevant financial year and moreover, earlier year data ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of DRP u/s. 144C(5) dated 22.12.2015, passed assessment order dated 14.01.2016 u/s 144C(13) read with Section 143(3) of the 1961 Act. 6. Aggrieved by an assessment framed by the AO vide assessment order dated 14.01.2016 passed u/s 144C(13) read with Section 143(3) of the 1961 Act , in pursuance to Directions issued by learned DRP u/s 144C(5) of the 1961 Act, the assessee has now filed an appeal before the tribunal. At the outset Ld. Senior Counsel for the assessee submitted that both the appeals filed by different assessee s before the tribunal raises identical issues as facts are similar and these appeals can be heard together and decided vide common order. It was submitted that there are two effective grounds being ground no. 5 and ground no. 7 raised by the assessee in memo of appeal filed with tribunal with respect to appeal number ITA no/ 1519/M/2016 , while rest of the grounds are inter-related to these two grounds of appeals and if these two grounds are adjudicated on merits in accordance with law, then the assessee grievances before the tribunal will be resolved. It was submitted that rest of the grounds be dismissed as not been pressed. It was submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the paper book, wherein in vide said assessment order , the AO accepted the directions of DRP , by holding as under:- 2. The assessee approached the Dispute Resolution Panel-1, Mumbai (the DRP] by filing objections against the above draft assessment order. The DRP issued direction under 144C(5) of the Act vide its order dated 22.12.2015, received in this office on 30.12.2015, as under: **** 12. IBN 18 Broadcast Ltd. The TPO has rejected this comparable because It has been incurring losses in lost two years and it has also incurred losses in the F.Y. under consideration. However, it is the claim of the assessee that the company has made a profit of 4.33% on its revenue in the Broadcasting and Content segment. The assessee has not submitted any working in support of claim. From the examination of annual report of the company we are unable to accent the claim of the assessee because income from operations reported by the company is ₹ 2,43,25,58,348/- whereas its production administrative and other cost is ₹ 1,69,72,26,570/- and personal expenses are ₹ 80,53,27,884/- Other income of ₹ 9,51,39,418/- reported by the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of group company viz. Star Limited which is placed in the legal paper book. Our attention was drawn to conclusions arrived at by tribunal at para. 20-23 of the said order placed in the legal paper book wherein the tribunal ordered for deletion of adjustment to profit by applying a profit rate of 28% to its transactions with non-AE s, in the case of the aforesaid order of Star Limited, which is reproduced here under:- 20. We have considered the rival contentions raised by the parties, perused the relevant finding given in the impugned order and material placed on record. We have already discussed succinctly the relevant facts and the background of the case. The whole issue boils down to the manner in which Profits Split Method (PSM) is to be applied. STAR Ltd and Star Channel companies derive revenues from the distribution of T. V. Channels and sale of advertisement time to be aired on these channels. The role and functions performed by these companies have been elaborated in the earlier part of the order. All the transactions leading to the earning of various streams of revenues are amongst the entities only and are highly integrated. That is why, there is no disput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 associated 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 (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of their contribution is concerned, same is not in dispute. First of all, for determination of combined profit, net revenues from all the transaction relating to generation of revenues are to be taken into account. Here in this case, it has been contended that all the revenue streams have been from inter-se transactions arising from the functions performed amongst the AEs only. Even the generation of ad revenues is purely from the sale of airtime in Channel companies. Thus, the ad revenue is arising from the integrated activities only. After taking the combined net profit of the group as a whole from all the international transactions, the combined net profit has been taken. Thereafter, the effects of inter-company double accounting of revenue streams are eliminated so that the correct third party revenue is arrived at for the purpose of benchmarking the profitability. It also ensures that inter-company costs, profits or losses are eliminated and correct quantum of profit based on third party revenue and costs can be arrived at. If such an exercise is not done then a situation would arise whether among the transactions between the related entities true and correct picture of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 23. Here, in this case, the DRP has accepted the PSM for 80% of the adrevenue in PSM Pool, therefore, it would not be proper that for the balance, a separate determination of profit is required and that to be at a higher profit rate of 28%. Once the combined net profit has been arrived at by taking into account all the transactions of AE as well as non-AE which is factored into all the costs and revenue then to separate out non-AE transaction over and above such a profit determined is not desirable. Thus, we hold that any income if at all from non-AE cannot be taxed separately by applying net profit rate of 28%, because it has already included in the combined profit of entire internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gy of the PSM of benchmarking of transactions with AE including all inter-related international transactions relating to advertisement and distribution streams of income. The Assessee made full disclosure of the fact that its commercial uplifted profitability is 17.30% as per PSM which is as per section 92CA (4) of the Act. Once the TPO has accepted the methodology neither the AO nor the DRP can change the same in view of Section 92CA (4). The combined net profit as per the PSM under Rule 10B (1) (d) at 17.30% has been found to be at arm`s length except for the exclusion of 3 companies for 10% turnover filter applied by the TPO. On the present facts, all the international transactions in respect of the advertisement and distribution stream cannot be separated. The DRP`s reliance on Rule 10 of the Rules is contrary to the provisions of the Act and Law since if it is accepted that transactions are closely inter related then they must be included under PSM in accordance with the Act The arm`s length price determined by the TPO is 22.57% and considering the profits earned from Non-AE`s arbitrarily at 28%, is unjustified as there can not be such variation between profit from transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal in ITA no. 1637/Mum/2016 for AY 2011-12 in the case of Star International Movies Limited, facts are similar to appeal in ITA no. 1519/Mum/2016 and similar contentions shall apply . 6.5 The Ld. DR on the other hand submitted that the issue be decided on merits in accordance with law and the learned DR would place reliance on orders/directions passed by the authorities. 7. We have considered rival contentions and have perused the material on record including cited case laws. We have observed that the assessee is a non-resident limited liability partnership firm and is a tax resident of Hong Kong belonging to Star Television group of cases. The assessee has also claimed to be owner of satellite television Channel being Channel V and also owner of content broadcast on this Channel. The dispute between rival parties have its germane to additions made to income by invocation of transfer pricing provisions wherein Arms Length Price was computed of international transactions entered into by assessee with its Associated Enterprises (AE s) in India and consequently additions were made to the income of the assessee . The AO made reference to Transfer Pricing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TPO observed that these companies including assessee derived revenue from various markets , a significant portion arising from the Indian market , inter-alia, from the following : a) Sale of Advertisement time of the television channels. b) Distribution of television channels c) Syndication of content on the channels. 7.5 The assessee has transaction with its associated entities(AE s) within Star Group which were reported in Form No. 3CEB but later revised Form No. 3CEB was submitted by assessee, as detailed hereunder vide Revised Form No. 3CEB :- Sr No. Nature of Transaction AE Amount in revised From 3CEB Method 1 Procurement of content Star India Pvt. Ltd., INR 315,868,823 TNMM 2 Grant of franchise rights Star India Pvt. Ltd. INR 16,401,447 TNMM 3 Gra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the 12 month period from 1st April 2010 to 31st March 2011. 7.7 The assessee has not maintained India specific financial statements. The overall profit rate of 15.81% percent (profit as percentage of income) was computed attributable to assessee based on contribution made by assessee to group activities . While computing profitability by adopting PSM method, all intra group transactions were eliminated. A detailed computation as furnished by assessee is reproduced as under:- Notes: 1. In the case of STEL and SAML, the global advertisement, distribution and syndication revenues for the period April 1, 2010 to May 31, 2010 have been considered. 2. In the case of SIML and V Partnership, India advertisement, distribution and syndication revenues for the period April 1, 2010 to September 30, 2010 have been considered. 3. In the case of SAR the global advertisement, distribution and syndication revenues for the month of April 2010 have been considered. 7.8 The assessee had claimed that average margin of the comparable was 8.47% based on weighted average for earlier years while based on the financials for the y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The TPO accepted rest of the five comparables and margin on revenue was computed @21.26% (PLI), as detailed hereunder: Sr. No. Company Margine on revenue (March 2011) Margine on cost (March 2011) 1. T.V. Today Network Ltd. 12.50 14.29 2. Zee News Ltd. 13.31 15.36 3. Maa Television Network Ltd. 19.28 23.88 4. Zee Entertainment Enterprise Ltd. 28.30 39.46 5. Malayalam Communication Ltd. 32.93 49.10 Arithmetic Mean (%) 21.26 28.42 7.10 The assessee is aggrived by exclusion of IBN18 Broadcast and Raj Television Limited before us. 7.11 Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicable and as details of India specific were not forthcoming from assessee, the AO computed income @28% for taxing its transactions with non-AE. The AO adopted profitability of 28% for non-AE receipts while profitability rate of 21.26% was determined and applied by AO in respect of business income( Advertisement and distribution income) with reference to its international transactions with AE s. 7.13 The AO observed that the assessee has provided following details of its total Revenue with AE s and non AE s during AY 2011-12, as under: (In Rs.) Streams of Revenues Total Revenues from India/India operations Revenue from the AE s Revenue from the Non AE s Advertisement 17,21,51,260 2,42,044 17,19,09,216 Distribution 11,78,60,320 11,78,60,320 - Franchise Fee 1,64,01,447 1,64,01,447 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with Section 144C(13) of the 1961 Act based on TPO agreeing that this comparable is to be included while computing ALP as IBN18 Braodcast Limited is not a persistent loss making company. We have observed that wherein in vide said assessment order dated 29.01.2016 in the case of Star Limited, the AO accepted the directions of DRP , by holding as under:- 2. The assessee approached the Dispute Resolution Panel-1, Mumbai (the DRP] by filing objections against the above draft assessment order. The DRP issued direction under 144C(5) of the Act vide its order dated 22.12.2015, received in this office on 30.12.2015, as under: **** 12. IBN 18 Broadcast Ltd. The TPO has rejected this comparable because It has been incurring losses in lost two years and it has also incurred losses in the F.Y. under consideration. However, it is the claim of the assessee that the company has made a profit of 4.33% on its revenue in the Broadcasting and Content segment. The assessee has not submitted any working in support of claim. From the examination of annual report of the company we are unable to accent the claim of the assessee because income from operations rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oduction and Distribution at consolidated level, wherein consolidated turnover is ₹ 9,78,01,512/- wherein segment consolidated losses in this segment were to the tune of ₹ 4,02,69,198/-. Thus, IBN18 has earned consolidated profit in this segment at consolidated level which is prior to interest expenses. Thus, it cannot be said that the said comparable IBN18 is persistently loss making company, so far as consolidated financial accounts are concerned. However, while going through standalone audited financial accounts of the said IBN18, wherein at page 67/pb is the schedule 11 where income of operations are stipulated as income from Advertisement and subscription income , sale of content and equipment rental as well other receipts. Thus, at standalone, this entity is comparable as having only one segment which is comparable to assessee, In the segment reporting at para 12 to notes to accounts/schedules forming part of accounts, it is stipulated that the IBN 18 Broadcast Limited( TV 18 Broadcast Limited) is engaged in business of production and telecast of news and current affairs programmes primarily in India. It is further stated that this company operates in single busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explanations/evidences to substantiate for its inclusion as comparable. The AO/TPO are directed to adjudicate on this comparable unhindered by any opinion expressed by us in this order, on merits in accordance with law. We order accordingly. 7.19 With respect to inclusion of Raj Television Network Limited as comparable, we have perused the audited financial statements of the said company Raj Television Network Limited for FY 2010-11 which is placed in paper book at page 130-167. The Director Report of said company is reproduced hereunder:- Financial Results: The Financial Performance of your Company for the year ended March 31. 2011 is summarized below: Particulars For the year ended 31 March 2011 31* March 2010 Total Income 4509.53 4617.68 Total Expenses 5105.72 5854.54 Operating Profit / (Loss) (EBIDTA) (596.19) (1236.86) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tune of ₹ 1628.79 lacs.We order accordingly. 7.20 So far as second issue is concerned , it was submitted that Rule 10 of the 1962 Rules was applied by the authorities below and arm length profit was applied @28% on non AE transactions entered into by the assessee. The assessee had drawn our attention to order dated 02.02.2016 passed by Mumbai-tribunal for AY 2007-08 in ITA no. 8683/Mum/2011 in the case of group company viz. Star Limited, which order of the tribunal is placed in the legal paper book. We have observed that tribunal in its order at para 20-23 in the case of the aforesaid Star Limited, has held as hereunder:- 20. We have considered the rival contentions raised by the parties, perused the relevant finding given in the impugned order and material placed on record. We have already discussed succinctly the relevant facts and the background of the case. The whole issue boils down to the manner in which Profits Split Method (PSM) is to be applied. STAR Ltd and Star Channel companies derive revenues from the distribution of T. V. Channels and sale of advertisement time to be aired on these channels. The role and functions performed by these companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions amongst 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 associated 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 enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by each party and thereby assigned income accordingly. 22. Here in this case, so far as FAR analysis of relative contribution made by each of the entities and apportionment of combined net profit based on evaluation of their contribution is concerned, same is not in dispute. First of all, for determination of combined profit, net revenues from all the transaction relating to generation of revenues are to be taken into account. Here in this case, it has been contended that all the revenue streams have been from inter-se transactions arising from the functions performed amongst the AEs only. Even the generation of ad revenues is purely from the sale of airtime in Channel companies. Thus, the ad revenue is arising from the integrated activities only. After taking the combined net profit of the group as a whole from all the international transactions, the combined net profit has been taken. Thereafter, the effects of inter-company double accounting of revenue streams are eliminated so that the correct third party revenue is arrived at for the purpose of benchmarking the profitability. It also ensures that inter-company costs, profits or losses are eliminated and correct qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 23. Here, in this case, the DRP has accepted the PSM for 80% of the ad-revenue in PSM Pool, therefore, it would not be proper that for the balance, a separate determination of profit is required and that to be at a higher profit rate of 28%. Once the combined net profit has been arrived at by taking into account all the transactions of AE as well as non-AE which is factored into all the costs and revenue then to separate out non-AE transaction over and above such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RP has however, only excluded one stream and that also in parts namely, receipts by STAR Ltd but not what has been received thereafter by the channel companies in respect of same advertisement stream from STAR Ltd. The TPO has totally approved the computation methodology of the PSM of benchmarking of transactions with AE including all interrelated international transactions relating to advertisement and distribution streams of income. The Assessee made full disclosure of the fact that its commercial uplifted profitability is 17.30% as per PSM which is as per section 92CA (4) of the Act. Once the TPO has accepted the methodology neither the AO nor the DRP can change the same in view of Section 92CA (4). The combined net profit as per the PSM under Rule 10B (1) (d) at 17.30% has been found to be at arm`s length except for the exclusion of 3 companies for 10% turnover filter applied by the TPO. On the present facts, all the international transactions in respect of the advertisement and distribution stream cannot be separated. The DRP`s reliance on Rule 10 of the Rules is contrary to the provisions of the Act and Law since if it is accepted that transactions are closely inter related t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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