2019 (10) TMI 1342 - AT - Income Tax

TP Adjustment - Comparable selection - abnormal fall in rate of profit - HELD THAT - The Transfer Pricing Officer has rejected Jain Studios Ltd. and Television 18 India Ltd. primarily on account of abnormal fall in rate of profit. Likewise he has rejected Raj Television Network Ltd. due to sharp fall in margin by attributing to high amount of bad debt written-off during the year - none of these companies can be classified as persistent loss making companies. In various decisions it has been held that unless the company declares loss consistently for three consecutive assessment years it cannot be considered as a persistent loss making company. As in assessee s own case for the assessment year 2008-09 the Tribunal has accepted Jain Studios Ltd. as a comparable - Transfer Pricing Officer himself has accepted Television 18 India Ltd. as a comparable in assessment years 2007-08 and 2008-09. That being the case both Jain Studios Ltd. and Television 18 India Ltd. should not be rejected as a comparable. Insofar as Raj Television Network Ltd. is concerned undisputedly the profit margin shown by the company in the assessment year 2007-08 and 2008-09 is substantially high. Though in the impugned assessment year the profit margin has fallen drastically the company has still shown profit of 1.04%. Even if the fall in profit rate is due to write-off of bad debt still this company cannot be excluded as a comparable since bad debts are operating in nature. In view of the aforesaid we direct the Assessing Officer/Transfer Pricing Officer to include the aforesaid three companies as comparable. Non applying PSM to non-AE transaction and determining the profit on estimate basis - HELD THAT - Admittedly the Assessing Officer simply relying upon the direction of learned DRP in assessment year 2007-08 has estimated the profit on non-AE transactions. However as could be seen the Tribunal while deciding the issue relating to identical addition made in assessment year 2007-08 as observed that once the combined net profit has been arrived at by taking into account the transactions of both AEs/non-AEs which is factored into all the costs and revenue then to segregate a non-AE transaction over and above such profit determined is not proper. Thus ultimately the Bench held that the income from non-AE transaction cannot be taxed separately by applying net profit rate of 28%. It is relevant to observe the aforesaid decision of the Tribunal was not contested by the Revenue in the appeal preferred before the Hon ble Jurisdictional High Court - we delete the addition made by the Assessing Officer. Bringing to tax the royalty income by applying the rate of 42.23% - HELD THAT - Identical issue arising in assessee s own case in preceding assessment years has been decided by the Tribunal in favour of the assessee. Consistent with the view taken by the Tribunal in assessee s own case in earlier assessment years we direct the Assessing Officer to tax the royalty income at the appropriate rate as provided under section 115A of the Act. TDS u/s 195 - disallowance made under section 40(a)(i) - transponder hire charges paid to Asia Satellite Telecommunication Ltd. without deducting tax at source - HELD THAT - Payment made is not in the nature of royalty. Accordingly the addition was deleted. Facts being identical respectfully following the consistent view of the Tribunal in assessee s own case in earlier assessment years we delete the disallowance made under section 40(a)(i) of the Act. Grounds are allowed.

Summary

Issues Involved:
1. Transfer pricing adjustment and comparability of selected companies.
2. Application of Profit Split Method (PSM) to non-AE transactions.
3. Tax rate applicable to royalty income.
4. Disallowance under section 40(a)(i) for non-deduction of tax on transponder hire charges.
5. Initiation of penalty proceedings.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment and Comparability of Selected Companies:
The assessee challenged the addition of Rs. 42,00,08,539 on account of transfer pricing adjustment. The assessee, a non-resident company, engaged in distributing channels and advertising, used the Profit Split Method (PSM) for benchmarking international transactions. The Transfer Pricing Officer (TPO) excluded four comparables due to their loss-making or low-profit nature, resulting in an adjustment of Rs. 84,00,17,078, with 50% attributed to the assessee. The Dispute Resolution Panel (DRP) upheld the TPO's decision. The assessee argued for the inclusion of Jain Studios Ltd., Television 18 India Ltd., and Raj Television Network Ltd. The Tribunal found that these companies could not be classified as persistent loss-making and directed their inclusion as comparables, thereby allowing these grounds.

2. Application of Profit Split Method (PSM) to Non-AE Transactions:
The assessee contested the Assessing Officer's (AO) decision to estimate profit on non-AE transactions at 28% of gross receipts. The AO argued that the assessee did not furnish India-specific profit and loss accounts. The Tribunal noted that in the previous assessment year, it was held that once combined net profit is determined, segregating non-AE transactions is improper. The Tribunal upheld this view and deleted the addition, allowing these grounds.

3. Tax Rate Applicable to Royalty Income:
The assessee challenged the AO's application of a 42.23% tax rate on royalty income instead of the rate under section 115A of the Act. The Tribunal, consistent with its decisions in earlier assessment years, directed the AO to apply the appropriate tax rate under section 115A, thereby allowing these grounds.

4. Disallowance Under Section 40(a)(i) for Non-Deduction of Tax on Transponder Hire Charges:
The assessee argued against the disallowance of Rs. 17,01,27,540 paid to Asia Satellite Telecommunication Ltd. without tax deduction, citing the Delhi High Court's decision in Asia Satellite Telecommunication Ltd. v/s. CIT. The Tribunal noted that the retrospective amendment to section 195 could not impose a tax deduction obligation on the assessee for past payments. Following its earlier decisions, the Tribunal deleted the disallowance, allowing these grounds.

5. Initiation of Penalty Proceedings:
The assessee's challenge to the initiation of penalty proceedings was deemed premature by the Tribunal and thus dismissed.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the inclusion of certain comparables for transfer pricing, deleting the estimated profit addition on non-AE transactions, applying the appropriate tax rate to royalty income, and deleting the disallowance for non-deduction of tax on transponder hire charges. The initiation of penalty proceedings was dismissed as premature.