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2008 (5) TMI 660 - AT - Income TaxTransfer Pricing Determine the Arms length price - Disallowance on interest - expenditure attributable to dividend income by virtue to Section 14A - Deduction u/s 80HHF - Advertisement commission income - consideration revived by the assessee by way of cable subscriptions amounts to turnover - Disallowance of security deposit written off - bad debt written off. Transfer Pricing Determine the Arms length price - Grant of deduction of 20% of the total payment for licence fee - Payment to two entities - HELD THAT:- In the instant case the assessee has obtained the approval from the RBI before making the payment of licence fee, as such the nature of payment cannot be out rightly rejected or doubted. It requires proper adjudication in the light of detailed analysis and relevant evidences furnished by the assessee. Whereas the AO has disallowed the entire claim of payment of licence fee without looking into the merits of the case and the relevant provisions of the Act. In the impugned assessment year the claim of the assessee should have been examined in the light of the report of the Transfer Pricing Officer and the evidences filed by the assessee but the AO as well as the CIT(A) have not adjudicated the issue in accordance with law. We, therefore, are of the view that this issue requires fresh adjudication - Since the report of the Transfer Pricing Officer has already been obtained and the issue requires proper examination by the AO in the light of the report of TPO, detailed analysis of licence fee paid and other evidences filed by the assessee, we set aside the order of the CIT(A) in this regard and the matter is restored to the file of the AO to readjudicate the issue in terms indicated above. Disallowance on interest - expenditure attributable to dividend income by virtue to Section 14A - Assessee has incurred interest expenses paid on the Loan borrowings - HELD THAT:- In the instant, case the assessee has paid a substantial amount of interest on the borrowed funds and he has also earned the dividend income from investment in Mutual Funds which is exempted from tax and from the details furnished before the AO and even before us it is not clear as to what was the sources of investment in Mutual Funds. Was it from the aforesaid short term deposits which was initially borrowed from the Credit Lyonnais Bank or the surplus funds of the assessee. Even before to the assessee could not furnish the complete details - We, however, in the interest of justice afford one more opportunity to the assessee to explain with evidence as to from where investments were made in Mutual Funds. If it was made out' of short term deposit with the Scotia Bank corresponding disallowance of interest deserves to be made as the short term deposits was made out of the borrowed funds from the Credit Lyonnais Bank which were kept in short term deposits with the ICIC1 Bank Ltd. first then Scotia Bank - If the assessee succeeds in proving that the investment in Mutual Funds was made out of the surplus funds of the assessee on which no interest was paid no corresponding disallowance can be u/s 14A of the IT matter to the file of the AO with the direction to readjudicate the issue in terms, indicated above after affording an opportunity of being-heard to the assessee. Deduction u/s 80HHF - Advertisement commission income - HELD THAT:- We find that while re-computing deduction u/s. 80HHF the AO has excluded or reduced 90% of the gross receipt of commission from the profits of business, as computed under the head profit and gains of business or profession in order to compute profits of the business as per clause (baa) of Explanation to Section 80HHF whereas the assessee claimed deduction of 90% of the not commission received. The CIT(A) has simply followed earlier years order and confirmed the disallowance - According to the Revenue the judgment of Bangalore Clothing Co. [2003 (1) TMI 89 - BOMBAY HIGH COURT] has been over ruled by the Apex Court in the case of K.Ravindranathan Nair [2007 (11) TMI 10 - SUPREME COURT] by holding that the processing charged is held to be included in the total turnover and 90% of the same is also to be reduced as per Explanation (baa). But, according to the assessee, the judgment of the Bangalore Clothing Co. of the jurisdictional High Court, as still holds the field inasmuch the issue / question before the Apex Court was entirely different - This controversy has been examined by the Tribunal in the assessee's own case pertaining to the AY 2000-2001. Copy of the Order is placed on record and from its careful perusal we find that Tribunal has examined this aspect in detail with the help of various judicial pronouncements in his order before concluding that judgment in the case of Bangalore Clothing Co. is not over ruled as the judgment of the Apex Court in the case of K.Ravindranathan Nair (supra) was rendered in different contexts - Therefore, On perusal of the order clearly reveals that amendment was made to exclude only those incomes which do not have element of turnover. It is pertinent to note that legislature referred to element of turnover and not export turnover. Therefore, considering the above circular which is binding on the tax authorities, we are of the view that any income arising from an activity involving turnover cannot be excluded from the profits of business in terms of Explanation (baa) to section 80HHC/Explanation (f) to section 80HHF. Whether consideration revived by the assessee by way of cable subscriptions amounts to turnover - scope of the word 'turnover' may vary in section 80HHC and Section 80HHF - HELD THAT:- In the present case, the right to exhibit the programmes telecasted by various channels owned by 'Star Group' in the Indian territory is with the assessee, the cable operators are the distributors through whom such programmes are exhibited to the subscribers of the public. Assessee receives the consideration on account of transfer of right to exhibition of programmes contained in such software and, therefore, the same would amount to turnover - There is no there that activity of distribution of channel Programmes is an independent activity and therefore the profits arising there-from would also form part of the profits of business. Accordingly, as per the test laid downin the case of K. Ravindranathan Nair, the cable subscription has to be treated as turnover - The test laid down by the Hon'ble Bombay High Court in the case of Bangalore Clothing Co. (supra) is that if the profits arising from an activity is in the nature of operational income then receipts from such activity would form part of profits of business as well as total turnover. There is no dispute that cable subscription activity is part of main objects of the assessee company and therefore the receipts arising from the same would form part of the operational income. Consequently such receipt would form part of turnove - The Constitution Bench of the hon'ble Supreme Court in the case of Navnit Lal C. Jhaveri vs. K.K. Sen [1964 (10) TMI 16 - SUPREME COURT] held that circulars issued by the Board which are beneficial to the assessee are binding on the lax authorities. Keeping in mind the above binding judgement and the circular mentioned, it must be held that cable subscription having element of turnover cannot be executed from the profits of business computed under the head 'profits and gains of business or profession'. We hold accordingly. We are therefore, of the view that receipt of particular percentage of commission on collecting the advertisements for the principal's cannot be called to be the part of the operational income of the assessee, as such, it attracts the provisions of Explanation (baa) and 90% of the same is to be reduced. Moreover, the commission received from its principal does not have an element of turnover as it is to be received on realisation of consideration from advertisement and as such cannot be included in the total turnover, because it does not accrue from the main business of export of television programmes/content for which deduction under S. 80HHF is claimed - Hence, it falls outside the purview of explanation (1) of S. 80HHF of the Act. We have also considered the alternative arguments of the assessee that netting be allowed in case of Explanation (baa) is held to be applicable. In this regard, we find force in the contention of the assessee and we are of the view that whatever expenses are incurred by the assessee which were not debited to the accounts of the principal, are required to be set off against the commission received by the assessee. If nexus are proved in the light of the Order of the Special Bench in the case of Lalsons Enterprises [2004 (2) TMI 294 - ITAT DELHI-E] and the judgment of the Delhi High Court in the case of Shree Ram Honda Power Equipment [2007 (1) TMI 86 - HIGH COURT, DELHI]. Accordingly, we, restore the matter to the file of the AO to allow netting between the expenses incurred to earn the commission and the commission received, if nexus are proved. Accordingly, this issue is disposed off. Disallowance of security deposit written off - bad debt written off - HELD THAT:- In the instant case the security deposit, which was claimed to be written off in this year were neither credited to the PandL Account nor taken into account while computing the income of the assessee either in the previous year relevant to the impugned assessment year or in earlier assessment years. We, therefore, of the view that assessee is not entitled for deduction as bad debt written off under Section 36(2)(vii) of the Act - We have carefully examined the facts of the case in the light of the aforesaid judgement and we find that nothing has been brought on record to show that the advance given by the assessee has become irrecoverable. Before the Assessing Officer assessee has claimed deduction of this debt as bad debt by writing it off in the year under consideration under Section 36(1)(vii) of the Act. The claim of the assessee was not examined in the light of the judgement of the jurisdictional High Court in the case of IBM World Trade Corporation vs. CIT. We accordingly set aside the order of the CIT(A) and restore it to the Assessing Officer to examine it in the light of above mentioned judgement. If the advance amount is found to be irrecoverable despite the efforts of the assessee it may be allowed as business loss. Determination of arms length u/s 92CA(1) - Transfer pricing adjustment - international transactions with associated enterprises - We find that the assessee is in fact involved in three independent activities, i.e. (a) distribution activity for which assessee has to pay the license fee for the right to distribute the Star channels to Asian Broadcasting Corporation Ltd also based in Dubai and Indian Region Broad Casting Ltd., a company based in Hong Kong. This distribution right cannot be linked up with other activities of the assessee, i.e. with commission for collecting the advertisement sales or with the export of TV programmes. The other activity that results in receipt of commission is also independent activity and the assessee acts as a marketing and collecting agent for Star Ltd. and NGC Asia in relation to advertisement sales to the satellite television channels broadcast by them in India - From a perusal of the TPO's report and the detailed analysis furnished by the assessee, we find that neither the assessee has taken the comparable cases involved in similar activities nor the TPO has determined the Arms Length Price in the light of the guidelines laid down by the Special Bench of the Tribunal in the case of Aztec Software and Technical Services [2007 (7) TMI 50 - ITAT BANGALORE] - We are therefore of the view that Arms Length Price in relation to the impugned activities are not properly determined either by the assessee or by the TPO or the AO. As such, it requires a fresh determination in the light of the order of the Special Bench in the case of Aztec Software and Technical Services . We accordingly set aside the order of the CIT(A), confirming the order of the AO in this regard and restore the matter to the file of the AO with a direction to make a further reference to the TPO for determination of Arms Length Price in respect of each of the assessee's independent activities in the light of the comparable cases and also in the light of the decision of the Special Bench of the Tribunal in the case of Aztec Software and Technical Services (supra) and other order/judgment rendered on the issue. In the result, Appeals of the assessee as well as the Revenue are partly allowed for statistical purposes.
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