TMI Blog2014 (10) TMI 365X X X X Extracts X X X X X X X X Extracts X X X X ..... ch cannot now be faulted. Relying upon Sassoon J. David And Co. Pvt. Limited Versus Commissioner of Income-Tax, Bombay [1979 (5) TMI 3 - SUPREME Court] - it cannot be said that the expenditure was not wholly or exclusively for benefit of the assessee - The mere fact that foreign principals also benefited does not entail right to deny deduction u/s 37(1) - all the amounts earned by the assessee were brought to tax, especially in view of the fact that the payment of expenses were made to Indian residents and there payments were not required to be included in form 3CEB since Section 92 which governs the effect of form 3CEB covers only international transactions – assessee’s income from subscription fee is variable and through commission received on the advertising sales is 15% of the value of Ad-sales - there is a direct nexus between advertising expenditure and revenue albiet the fact that there may be a lean period before revenue picks up notwithstanding high amount spent on such publicity - the foreign enterprises must compensate the Indian agent for the benefit it receives or it may receive from the advertisement and promotion of its channels by agent in India - The agent in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich owns and operates the History channel . The Assessee has paid fixed fees to NGC Asia and FOX in consideration for being appointed as distributor of the two channels. The distribution fees are paid by way of lump sum amounts. The assessee being distributor was entitled to enter into agreements with re-distributors, cable networks and other media distributors (collecting operators) to ensure that the contents of channels are viewed by the consumers. The assessee collects subscription fees for such re-distributors. The consumer would pay the subscription fees to view such channels. 3. The Advertising Sales representation agreements (Ad-sales agreement) under which the Respondent - assessee was appointed as advertising sales agents came into effect on 1st July, 2004. Under the Ad-sales agreements, the assessee would solicit advertisers, who wish to advertise on air during the telecast of the aforesaid channels in their capacity as agents of the principals, namely, N.G.C. Asia and FOX. By way of agency commission the assessee would earn 15% of the net billed advertising charges collected by the Respondent and balance 85% was remitted by the assessee to the foreign princi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore the Commissioner Income Tax (Appeals) on 13th January, 2009. The Commissioner Income Tax (Appeals) allowed the appeal holding that entire expenditure is allowable under section 37(1). The Commissioner of Income-Tax (Appeals) observed that since expenses were made to Indian residents they were not covered in Form 3CEB as section 92 covers only international transactions. Being aggrieved by the order of the Commissioner of Income-Tax (Appeals) the appellant filed an appeal before the Appellate Tribunal. Two members of the tribunal passed separate orders, one allowing the appeal and the other dismissing it. The accountant member upheld the order of the Commissioner of Income-Tax (Appeals) and whereas judicial member allowed the appeal of revenue. The matter was therefore referred by the President to the third member. The third member vide order dated 17th June, 2011 concurred with the accountant member and thereby upheld the decision of the Commissioner of Income-Tax (Appeals). Pursuant to that a confirmatory order was passed by the Appellate Tribunal on 29th July, 2011. The Revenue is in appeal against this order. 8. Mr.Chottaray, learned counsel appearing on behalf of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transactions with two of its associates, namely, principal NGC Asia and FOX . The transactions recorded did not disclose benefit accruing to foreign principals. He then relied upon the decision of the Delhi High Court in Maruti Suzuki India Ltd. vs. Transfer Pricing Officer in support of his submission that arms length price has to be determined and relied upon conclusion at item (viii). 10. The said judgment observes that expenditure incurred by domestic entity, which is an associated enterprise of a foreign entity on advertising, promotion and marketing of its products using foreign trade mark logo does not require any payment or compensation by the owner of the foreign trade mark/logo to the domestic entity on account of use of the foreign trade mark/logo in the promotion, advertising and marketing undertaken by it, so long as the expenses incurred by the domestic entity do not exceed the expenses incurred by similarly situated and comparable independent domestic entities. Further that the expenses incurred by a domestic entity which is a associated enterprise of a foreign entity a similarly situated and comparable independent domestic entity needs to suitab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court or whether in its opinion earlier view needs to be re-considered. It is not necessary that a similar question of law is to be answered in particular way. Mr.Chhotaray therefore submits that questions of law may be answered in favour of the revenue. 15. Mr.Kaka, learned Senior Counsel appearing on behalf of the respondent-assessee submitted that contentions of the appellant are misconceived. He submitted that the respondentassessee has acquired distribution rights of two channels on exclusive basis after paying due consideration and that it is entitled to thereafter earn profits in its business of distribution. He submitted that in the business of TV channels it is necessary to promote the channels in order to ensure higher viewership and that higher viewership alone brings in advertising interest. He submitted that apart from the business of distributing channels, the respondent-assessee was also engaged in selling of advertising time on channels. The sale proceeds of which are required to be shared with the foreign principals, who are owners/controllers of the channel and channel content. He submitted that as consideration for selling airtime to advertisers/other advertis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the observations/directions given by the High Court in the impugned judgment. Thus the Supreme Court found it to be conclusive. 18. In the instant case the order of Transfer Pricing Officer is not under challenge. The question of law raised did not relate to the order of the Transfer Pricing Officer which is final. In the circumstances Mr.Kaka submits that there is no warrant for interference and the questions must be answered in favour of the assessee. 19. Having considered rival contentions we are in agreement with Mr.Kaka. The main grounds on which the revenue has questioned the order of the tribunal are (a) non disclosure in form 3CEB of the fact that the principal is also a beneficiary of the advertising expenses; (b) that the advertising and promotional expenses are not wholly for the benefit of the assessee but it also benefited the principal who was an associated enterprise; (c) that advertising and publicity expenses were far higher than the amount of revenue earned and lastly, that although foreign principals i.e. Associated Enterprise benefited from advertising and publicity no compensation was paid by the foreign principals to the assessee to avail of such ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and through commission received on the advertising sales is 15% of the value of Ad-sales. The Assessing Officer's contention that the assessee received fixed income is not justified and there is certainly, in our view, a direct nexus between the amount spent on advertising and publicity, and the appellant's revenue. 22. Advertisers who advertise on these channels act through media houses and advertising agencies and they work to media plans designed in the manner so as to maximise value for the advertiser. They will evaluate expenditure with channel penetration in the market place inasmuch as only channels with high viewership would justify the higher advertising rates which is normally sold in seconds. Merely having high quality content will not ensure high viewership. This content has to be publicized. The great reach of the publicity, the higher chances of larger viewership. The larger the viewership, the better chances of obtaining higher advertisement revenue. The higher advertisement revenue, the higher will be commission earned by the respondentassessee. Accordingly, we have no doubt that there is a direct nexus between advertising expenditure and revenue albiet ..... X X X X Extracts X X X X X X X X Extracts X X X X
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