TMI Blog2014 (8) TMI 1035X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee and arithmetic mean of the comparable parties is within the safe harbour of +/-5%, then no addition on account of TP adjustment should be made. Adjustment on account of depreciation - Applicability of rule 10B(1)(e)(iii) - Held that:- We direct the TPO to adopt the adjusted profit margin of the comparables as well as assessee after brining at par the treatment of the claim of depreciation. This exercise has been done by TPO in the remand proceedings and those figures should be adopted for the purpose of computing arithmetic mean of the margin of the comparables and the profit margin of the assessee Computation of PLI - Held that:- A uniform approach has been adopted by the TPO in respect of computation of PLI in the case of assessee as well as in the case of comparables. If the uniform approach is adopted, unless any contrary material has been brought on record, we see no infirmity in such basis of the calculation. - ITA No. 2414/MUM/2013 & ITA No. 2474/MUM/2013 - - - Dated:- 6-8-2014 - SHRI I.P. BANSAL, JUDICIAL MEMBER/AND SHRI D.KARUNAKARA RAO, ACCOUNTANT MEMBER For the Appellant: Shri. Manjunath Swamy For the Respondent: Shri Vijay Mehta O R D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw, whether the Ld.CIT(A) was justified in rejecting the depreciation adjustment carried out by the TPO in his remand report due to the differences in depreciation rates followed by the assessee and comparable companies under straight line method materially impacting the profit margin. 8. On the facts and in the circumstances of the case and in law, whether the Ld.CIT(A) was justified in rejecting the depreciation adjustment carried out by the TPO in his remand report even when comparable companies are following more accelerated depreciation rates than that of the assessee, under straight line method, materially impacting the profit margin. Grounds of Assessee s Appeal in ITA No.2474/Mum/2013: 1) The Ld. CIT (A) I TPO erred in law and facts in: 1.1 Arbitrarily applying Related Party Transaction (RPT) filter of 15% instead of 20% only to reject two most functionally appropriate and suitable comparables (NDTV UTV). 1.2 Arbitrarily applying Turnover (TO) filter of ₹ 10 Cr. (1.2%) against tested party s turnover of 868 to reject one comparable (Aastha) and select two comparables with TO of ₹ 20 Crs 38.56 Cr. (less than 2% TO) (Raj TV Cinevist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not adjudicating assessee s claim for allowing 5% deduction from difference between the arm s length price determined (PLI of comparables) and price at which the international transaction actually undertaken (PLI of the assessee) as per proviso to sub. Sec. (2) of Sec. 92C of the Act. 6. The Ld. CIT (A) TPO ought to have excluded the losses of the new channels, new business and other abnormalities for computing PLI of the assessee to have better comparability. Disallowance u/s 14A: 7.1 The Ld. CIT (A) erred in law and facts in upholding the disallowance of ₹ 6,80,401/- u/s 14A out of interest by considering interest of ₹ 52,84,750/- ₹ 2,69,88,393/- on working capital loans as indirect interest and applying formula prescribed under Rule 8D and failed to consider these interest related to business and deduct from total interest for calculating disallowance as per Rule 8D. 7.2 The Ld. CIT (A) erred in law and facts in upholding the interest of ₹ 52,84,750/- on FCCB is not directly attributable to business and did not deduct from total interest as per rule 8D (2) (ii). He failed to appreciate that FCCB proceeds cannot be used for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 143,241,930 CUP 140,303,636 6. Distribution of Pay TV(Paid) 28,648,386 28,060,727 7. Interest received 16,361,769 CUP 21,203,872 8. Interest Paid on Installments - CUP 972,307 9. Transmission Services Paid 49,824,563 CUP 67,190.905 10. Reimbursements received 71,759,644 Actuals 34,012,372 11. Purchase of Assets/Rights - CPM 1,123,750 Total 122,40,16,141 106,86,88,235 The T.P adjustment has been made only with respect to transaction mentioned at Sl.No.1 i.e. for a sum of 83.78 crores. The assessee had purchased television programs and has sold these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41.42 11. ETC Networks Limited 28.86 2.09 7.24 12. TV 18 India Limited 134.3 59.66 59.66 Arithmetic mean Assessee 655.58 273.54 41.72 3.2 From the above comparables it was noticed by the TPO that some of the above comparables were having significant Related Party Transactions(RPT), therefore, he proposed the assessee to exclude seven comparables ( i.e. comparables on the ground that they were having RPT of more than 20% sl.No.2,4,5,6,11,12) and one comparable having sale turnover less than ₹ 10.00 crores (i.e. Sl.No.7). In response to such query of the TPO revised calculation was filed by the assessee to show that arithmetic mean of comparables is 33.49% and assessee s PLI is 41.72%. This table is also appearing at page 3 4 of order of TPO. S.No. Name of the Comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S.No. Name of the Comparable Company PLI% T/O RPT (Rs. In crores) RPT(%) 1 Raj Television Metwork Ltd. 69.38 40.37 0 0.00 4 Cinevistaas Ltd. 58.02 20.27 0 0.00 8 TV Today Network Ltd. 47.56 188.91 1.36 0.72 10 Jain Studios Ltd 41.27 21.54 2.4 11.14 11 TV 18 India Ltd. 40.29 193.95 7 3.61 Arithmetic Mean 51.30 Assessee 41.72* 3.4 The TPO also recalculated PLI of the assessee at 30.61% and an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee in its appeal is aggrieved by the order of Ld. CIT(A) on several counts which inter-alia include exclusion of UTV Software Communications Ltd. as one of the comparable party. It is the main case of the assessee that since RPT transaction in the case of UTV Software Communications are less than 25%, therefore, the same cannot be excluded from the list of comparables and if the said party is included in the list of comparables, then the PLI of the assessee will be within the safe harbour of +/- 5% and other issue on which TP adjustment has been assailed will become academic. 6. On the other hand, it is the case of the Revenue that Ld. CIT(A) has committed an error in admitting the additional evidences in the shape of final audited accounts of the comparables. It is also the case of the Revenue that Ld. CIT(A) has committed an error in holding that the margin of the comparables cannot be adjusted as per depreciation claim of the assessee. 7. It is on the basis of these submissions and arguments both the parties had argued the issue relating to TP adjustment. 8. It was submitted by Ld. AR that during the course of hearing before Ld. CIT(A) TPO submitted two remand repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f comparables is mentioned and the said table is also reproduced in the above part of this order in para-3.2. It was the submission of Ld. AR that bench mark of 15% in relation to RPT has been fixed by TPO on the basis of decision of Tribunal in the case of Sony India (P) Ltd., 114 ITD 448(Del). It was submitted by him that in several decisions ITAT after considering the decision of Sony India (P) Ltd. (supra) has come to the conclusion that bench mark for RPT filter should be applied at 25% instead of 15%. Ld. AR referred to the following decisions of Tribunal for taking this view and copies of these decisions are also enclosed. (a) Actis Advisers Pvt. Ltd. v. DCIT and vice versa for A.Ys. 2006-07 and 2007-08 in ITA Nos.958/Del/2012 and 5277/Del/2011 dated 12.10.2012 (after considering Sony India Pvt. Ltd). (b) DSM Anti Infectives India Ltd. v. DCIT and vice versa for A.Ys. 2005- 06 and 2006-07 in ITA Nos. 1395/Chd/2010 and 1455/Chd/2010 dated 08.08.2013 (after considering Sony India Pvt. Ltd). (c) Global Logic India Pvt. Ltd. v. DCIT for A.Y. 2006-07 in ITA No. 5110/Del/2010 dated 1.12.2012 (after considering Sony India Pvt. Ltd.). 8.2 From the decision in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was drawn to the following observations of the Tribunal: 60. Similar view has been laid down by other Benches of the Tribunal. The learned AR, far the assessee placed strong reliance on the issue laid down in Sony India (P) Ltd. and CRM Services India (P) Ltd (supra) but we find no merit in the stand of the assessee. Applying the ratio laid down by Delhi Bench of the Tribunal in Actis Advisers Pvt. Ltd. vs. DCIT (supra) we hold that the an entity with whom related party transaction do not exceed 25% of the total revenue, is an uncontrolled entity. Applying the above said filter to the facts of the present case we are in conformity with the report of the TPO in assessment year 2006-07 in selecting Autombindo Pharma Ltd. as one of the comparables which admittedly had RPT of 21.77% to the sales. The said results as do not exceed threshold of related party transaction to be applied for benchmarking the comparables and hence the results of such companies were to be applied in order to determine arms length price of international transaction entered upon by the assessee. The said companies should also be used as filter in the preceding year in case the related party transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that on the basis of Ground No.1,2 3 of the Revenue s appeal the adjustment made by TPO should be upheld. 8.7 It was further submitted by Ld. DR that Ground No7 8 raised in the Revenue s appeal should be allowed as Ld. CIT(A) is not correct in deleting the action of TPO regarding adjustment of depreciation while calculating ALP. It was submitted that TPO was very much right in making such adjustment and Ld. CIT(A) has committed an error in holding that such adjustment was not permissible as per Rule 10B(1)(e)(iii) of Income Tax Rules, 1962. He submitted that the said rule duly support the case of TPO and, therefore, order of Ld. CIT(A) on this account should be set aside and that of TPO should be restored. 8.8 We have heard both the parties and their contentions have carefully been considered. It is the main arguments of Ld. AR that UTV Software Communications having RPT transaction of 18.19% should be included in the list of comparable. This argument of Ld. AR is based on decisions of ITAT in the case of Actis Advisory Pvt. Ltd.; DSM Anti Infectives India Ltd. (supra) and Global Logic India vs. DCIT (supra). The main case of the TPO applying bench mark of 15% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactional net margin method, by which,- .. (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the difference, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; 8.10 Ld. CIT(A) while deciding the issue in favour of assessee has observed that such adjustment can be made only in a case where such adjustment materially effect the amount of net profit margin in the open market. Adjustment of depreciation if taken as per straight line method and as per Income-tax Rules would make material impact on the net profit margin of the concern. The TPO in his second remand report has clearly brought the case of the assessee as well as comparables at par so far as it relates to claim of depreciation. There has to be similarity in respect of depreciation claim while computing the profit margin of the comparables as well as the tested party. Therefore, we are of the view that Ld. CIT(A)has comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Expenses Operating Profit = Operating Revenues Operating Expenses xii. OPERATING REVENUES means the amount of the total receipts from the provision of services. But, it does not include revenues which are non-operating in nature and not related to the business operations of the relevant financial year. For example, the following incomes which are non-operating in nature and nothing to do with the business operations of the company for the relevant financial year are excluded from operating revenues. i. Interest ii. Dividends iii. Gain on sale of assets /investments iv. Income from investments v. Gain o revaluation of assets. vi. Other incomes not pertaining to the business operations of the relevant financial year. xiii. OPERATING EXPENSES includes all expenses except for interest expenses not related to the operation of the relevant business activity. Operating expenses ordinarily include expenses associated with advertising, promotion, sales, marketing, warehousing and distribution, administration, and depreciation. But, it does not include expenses not related to the business operations of the relevant financial year. For example, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bles, we do not go into other issues raised in the grounds of appeal filed by the assessee and which were also not argued before us. Therefore, the other grievances of the assessee relating to TP adjustment have become academic and are treated as infructuous. 12. The other issue remain in the assessee s appeal is regarding disallowance under section 14A of the Act. During the year under consideration the assessee has earned tax free dividend of ₹ 1,93,47,596/-. As per assessment order the investment of the assessee in stocks of subsidiary company was ₹ 1345,88,95,000/-. The assessee also had interest expenses of ₹ 14,71,94,156/-. Therefore, AO while computing the disallowance under section 14A with reference to Rule 8D has disallowed a sum of ₹ 57,74,561/-. While considering the grievance of the assessee Ld. CIT(A) though has held that Rule 8D could not be applied but he has worked out the disallowance after referring to the formula described in Rule 8D and restricted the addition to a total sum of ₹ 33,51,401/-. 12.1 It is the case of Ld. AR that according to the decision of Hon ble Bombay High Court in the case of Godrej Boyce Mfg. Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in the years earlier to the assessment year 2008-09. The relevant portion of the said judgment of the Bombay High Court (supra) reads as under: 4. So far as question (b) is concerned, the Tribunal in its impugned order dated 179.2010 while applying the decision of this court in the matter of Godrej (supra) has disallowed the expenditure only to the extent of 2% of the total exempt income earned by the respondent-assessee on the basis its order dated 272.2009 for the assessment year 2002-2003 and order dated 10.9.2009 for the Assessment Years 2003-2004 and 2004-2005 wherein disallowance was restricted to 2%of the exempt income. Further; the Tribunal has remanded the matter to the AC t verify the disallowance claimed and restrict the disallowance only to the extent to 2% of the total exempt income. We find no fault with the order of the Tribunal. 36. Considering the binding nature of the judgment and the overall factual matrix of the present case, we restrict the disallowance to 5% of the total exempt income. Accordingly, ground nos.III and IV raised by the Revenue are partly allowed. 13. On the other hand, Ld. DR relied upon the order passed by Ld. CIT(A). ..... X X X X Extracts X X X X X X X X Extracts X X X X
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