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2016 (2) TMI 836 - ITAT MUMBAI

2016 (2) TMI 836 - ITAT MUMBAI - TMI - Transfer pricing adjustment - application of Profits Split Method (PSM) - Held that:- 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 .....

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addition.- Decided in favour of assessee

Addition on account of distribution revenues - 50% of total distribution revenues which has been taxed on protective basis under section 44DA and balance 50% has been taxed in the hands of Channel Companies - Held that:- Such an amount cannot be added separately, because it has already been included in the PSM Pool and in the combined rate of 27.18% and accordingly, the same is directed to be deleted, because it will be subject to double taxat .....

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by giving retrospective effect, as held by various Courts, on the reasoning that assessee cannot be expected to withhold tax when there was no such provision under the statute and secondly, prior to such amendment, there was a judgment of Hon'ble Supreme Court in the case of Vodafone International Holdings BV (2012 (1) TMI 52 - SUPREME COURT OF INDIA ) that payment made by one non-resident to another non-resident, provisions of TDS are not applicable; thirdly, when income has been determined un .....

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tion 40(a)(i) on account of payment made to Asia SAT, payment for foreign content and payment for technical cost, also cannot be made for the reasons given above that, while computing the profit under PSM at 27.18%, there is no requirement for making separate disallowances under section 40(a)(i) and same are directed to be deleted. - Decided in favour of assessee

Taxation of service fee income @ 41.82% on the gross basis as against applicable @ 10.455% on gross basis - Held that:- We .....

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ted herein above.- Decided in favour of assessee

Levy of interest under section 234B - Held that:- we find that this issue stands covered in favour of the assessee by the decision of Hon'ble Delhi High Court in the case of NGC Network Asia LLC (2009 (1) TMI 174 - BOMBAY HIGH COURT ). The High Court further held that the primary liability of deducting tax was that of the payer. The payer would be an assessee in default, on failure to discharge the obligation to deduct tax, under Sectio .....

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vesh Chawala For The Respondent : Shri N K Chand ORDER The aforesaid appeals have been filed by the different assessees as mentioned above against separate impugned final assessment order passed by the Deputy Director of Income-tax (International Taxation) Range-2(1), Mumbai, hereinafter referred to as Assessing Officer (AO), under section 144C(13) r.w.s. 143(3) for the assessment year 2007-08, in pursuance of direction given by the Dispute Resolution Panel-II (DRP). 2. Since the issues involved .....

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e aforementioned assessees. In the grounds of appeal as many as 29 grounds have been raised and besides this, three additional grounds have also been raised vide separate petition. Since grounds are very argumentative in nature and not specific as is required under the rules therefore, we are proceeding on the basis of issues raised in various grounds, which are summarized as under: (i) Ground no. 1 is general in nature; (ii) In ground nos. 2 to 5, the assessee has challenged that, the Ld. DRP a .....

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subjected to double taxation without appreciating that income comprised therein on the said amount has already been assessed; (iv) In ground nos. 7 & 8, the assessee has challenged the taxation of service fee income @ 41.82% on the gross basis as against applicable @ 10.455% on gross basis; (v) In ground no. 9, the assessee has challenged the action of the AO in making the double disallowance u/s 40(a)(i), without considering the fact that same has already been factored into PSM profit @ 27 .....

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wance of interest expenses amounting to ₹ 30,08,28,766/-; (vii) In ground nos. 11 to 14, the assessee has challenged the disallowance of cost advertising air-time u/s 40(a)(i) amounting to ₹ 896,13,47,000/-; (viii) In ground no. 26, the assessee has raised the issue on non-grant of reversal of disallowance of cost of at air-time u/s 40(a)(i) for AY 2005-06 upon the payment of taxes therein in the instant assessment year [Rs. 665,41,36,516/-]; (ix) In ground no. 27, the assessee has c .....

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of 14.04% and 13.14% towards specific tax adjustments under Section 40(a)(i) of the Act as determined by the Additional Commissioner of Income-tax (Transfer Pricing) - 11(4) ('TPO') for computing the Arm's Length Price ('ALP') under Profit Split Method ('PSM'). Ground number 31: without considering the similarity in the facts and return filing positions in case of the Appellant in AY 2007-08 and AY 2008-09, erred in adopting a divergent position with respect to adjust .....

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that, the whole controversy in all the appeals is that, Profits Split Method (PSM) has not been properly applied and has not been appreciated by the AO and the DRP in a proper perspective, which has led to various disallowances and double disallowances. After referring to the material placed before us and the impugned orders, he briefly explained the relevant facts and the background of the case, which are discussed hereinafter. M/s Satellite Television Asia Region Ltd. (Star Ltd.) and Star Cha .....

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All these companies of Star Group can be classified on the basis of functions performed into three categories:- (i) Firstly, the Star Ltd, which is primarily engaged in production and broadcasting of television programming across the Asia region. More specifically, it has involved in the sale of broadcasting air-time, the distribution of channels, the provision for infrastructure services, the supply of transponder capacity and the provision of management services. It also owns and operates chan .....

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ies, viz,:- (a) Channel International Movies Ltd; (b) Channel V Music Networks Ltd; (c) Star Television Entertainment Ltd; (d) Star Asia Entertainment Ltd; & (e) Star Asia Regional FLLLC. These channel companies are primarily engaged in the business of developing channel concept and creating, owning and broadcasting the channels. They decide the genre, the look and the feel of channels i.e. nature of programming, target age of audience etc. They also decide the sequencing of the programme an .....

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ies only. 6. Given the complex and inter-related functions, the risks and assets of these companies, PSM was selected as most appropriate method (MAM) to determine the reasonable allocation of deemed taxable profit in India. The Profit Split was calculated on the basis of detail analysis undertaken and allocation of deemed taxable income between the said companies and the resultant net profit as worked out to 14.04%. The percentage of allocation of taxable income was made in the following manner .....

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these entities have been placed in the paper book from pages 234 to 239. 7. All these companies voluntarily decided to accept the chargeability of entire receipts remitted from India and no apportionment was sought between the activities in India and outside of India. Mr. Kaka pointed out that all the significant activities in connection with telecasting of the content on the channels are conducted outside India, including hiring of transponders, up-linking, studio facilities, placement of cont .....

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d basis including India and non-India revenues. Such a consolidation of results ensures that all inter-company costs, profits and losses are eliminated and the correct quantum of profit based on correct analysis of third party revenues cost can be arrived at. (ii) Thereafter, the effect of inter-companies double counting of revenue stream is eliminated. This step ensures that correct third party revenue is arrived at. (iii) Based on the aforesaid process/steps combined net profit was arrived at .....

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ned net-profit was arrived at 23.98%. This was further increased to 27.18% by disallowing the interest expenses incurred in respect of payment of Indian taxes. Thus, the disallowances offered in the return of income filed was in respect of payment made to third parties without withholding the taxes u/s 40(a)(i). As a result the profit rate offered for income was 27.18%. This uplifted rate of profitability has been applied to India sourced revenues of STAR Group entities, i.e. Advertising revenue .....

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that, it is impossible for the assessee to comply with the provisions for withholding of tax prior to the introduction of such provisions. Despite this, the assessee had offered higher combined profit over and above accepted by TPO. Thus, the profit on receipts in India offered for taxation was in the following manner: Particulars -year ending 31st March, 2007 (Amount in Rs. lakhs) Advertising revenue from India A 1,01,472.78 Distribution revenue from India B 24,964.81 Syndication revenues from .....

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solidated Global Profitability based on the consolidated global financial statements of all the respective companies of the Star Group is not in accordance with the provisions of the Act and the Rules. The DRP directed the AO that, the profits from non-AE revenues has to be separately computed and will not be covered under PSM and directed the AO to tax the revenue on account of non-AE transactions @ 28%. The relevant portion of the AO following the DRP's order reads as under: "Respectf .....

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f ₹ 1,85,92,430/-, though partly from AE (ie Star Games) is taxed 100% as the assessee has not claimed any expenses against the same". Thereafter, the AO held that, payment made to Channel companies, that is, inter-company transactions should be disallowed once again under section 40(a)(i) for non-deduction of tax-at-source and accordingly, he observed that on following payments disallowance under section 40(a)(i) should be made:- Particulars Cost of advt. air-time (Rs.) Star Televisi .....

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cription revenues amounting to ₹ 124,82,45,000/- (50% of the gross turnover of ₹ 249,64,90,000/- as the same was payable to the channel companies). The said amount was taxed on the ground that the same was taxable in the hands of the assessee as profits and gains from business or profession under section 44DA as "royalty". Thereafter, he also proceeded to make various disallowance under section 40(a)(i) on the payment made by the assessee to various different entities, the .....

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,28,766/-. The total income after making by these additions/disallowances was computed by the AO in the following manner:- Particulars Amount (Rs) Amount(Rs) Advertisement revenue 10,147,277,000 Distribution revenue (Taxable on protective basis) 1,248,240,500 Syndication Revenue 60,534,958 Other Income (As per Return of Income) 18,592,430 Revenues received from India 11,474,644,888 Non-AE Transactions Advertisement Revenue 1,185,930,000 Taxable Income Taxable profits from India operation (as app .....

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48,245,000 Disallowance of content cost (as per Return of Income) [1 USD = ₹ 43.17] 699,176,571 Disallowance of technical cost (as per Return of Income) [1 USD = ₹ 43.17] 108,968,117 Less: Cost of Advertisement Airtime disallowed in AY 2004-05 now allowed (6,242,854,000) Total Disallowances 5,453,141,109 Total Income Chargeable to tax in India 7,524,838,940 12. Before us, Ld. Senior Counsel Shri Porous Kaka submitted that, here in this case, not only there has been non-appreciation o .....

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d Lastly, all the companies are taxable at the same rate and their allocation of combined net profit to each entity is based on their role and functions performed. From the help of a chart, he explained that first of all, all the income and expenses of the Star Group were consolidated to arrive at net results of the entities' operation on a consolidated basis including India and non-India revenues. Thereafter, the effects of inter-company transactions have been eliminated so that correct thi .....

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ctional level of the entities from all the international transactions. Here the combined net profit has been determined on the inter se transaction as there are no other transaction which is evident from the functions performed and revenue generated in such transaction. Thus, all the transactions in respect of distribution stream and advertisement stream cannot be segregated nor can be the expenses. The assessee was not required to make any disallowance in respect of the payment made to third pa .....

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tatute book at the time of making the payments. Thus, the combined profit of 27.18% on all the transactions was far too high to reflect the combined profit of the entire revenue and the cost. Here in this case, the DRP has accepted that assessee's income from distribution and syndication are entirely from AEs and even the advertisement revenues of more than 80% are from AEs only, however DRP held that balance revenue from advertisement are from non-AEs which is to be taxed @ 28% under Rule 1 .....

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et included under the PSM. The AO has mis-construed that the profits earned from non-AE are at 28% as there cannot be separate earning and separate profit with the transaction with AE and non-AE especially when the Arm's Length Prices have been determined by the TPO at 14.01% at all the transactional level and the entire revenue has been considered. In fact there are no Non-AEs revenues separately. Mr. Kaka reiterated that, otherwise also the income of ₹ 118,59,30,000/- has been taxed .....

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nds of the Star Ltd., which in fact is the part of the PSM profit rate of 27.18%. Once, that is so, then again 50% of the distribution cannot be taxed on substantive basis, therefore, it is amounts to double disallowance. Regarding taxation of service fee and up-linking income, he submitted that, the assessee had offered tax @ 10.45% and 20.91%, respectively in the return of income which is in accordance with section 115A and the same has been taxed by the AO at 42.82% which is not correct. As r .....

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has duly discharged its liability to pay the tax on the said income; thirdly, already the disallowance u/s 40(a)(i) has been made while computing the PSM profit of 27.18% and, therefore, no separate disallowance can be made under section 40(a)(i); fourthly, the whole of the transactions undertaken by the entities are taken for arriving at the combined net profit of the group taking into account all the revenues generated through AE and also non-AE transactions if they are part of the interrelate .....

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hat, mainly direction is sought for that AO should give proper effect on the issue of denial of set-off of brought forward return loss of AY 2006-07 in accordance with the law. 14. On the issue of levy of interest u/s 234B, he submitted that the same is not chargeable in the case of the assessee in view of the decision of Hon'ble jurisdictional High Court in the case of DIT(IT) v NGC Asia Network LLC, Bombay reported in 313 ITR 187 (Bom). 15. On the additional grounds, he submitted that same .....

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n respect of disallowance made under section 40(a)(i) in the return of income, the AO should be directed to grant reversal of grant of such disallowance in the year in which the taxes were consequently paid in accordance with the law. 16. On the other hand, Ld. CIT DR, accepted that, PSM is Most Appropriate Method (MAM) for determining the combined profit of the entities. However on the issue of segregation of non-AE advertisement revenues from the PSM Pool, he strongly relied upon the order of .....

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en accepted that the assessee has a business connection in India, then interest under section 234B is chargeable. On other disallowances, he strongly relied upon the order of the AO. 18. On the issues raised in the additional grounds, it has been submitted that, it is only a matter of calculation under the PSM and when assessee itself has offered profit rate of 27.14%, then such a profit cannot be lowered now. 19. Mr. Kaka, on the issue of levy of interest under section 234B, submitted that, the .....

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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 .....

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Length by the TPO in the reference made under section 92(CA). Thereafter, the assessee has made suo motu disallowance under section 40(a)(i) in the return of income with regard to the payment made to the third party on account of expenditure related to content source from foreign suppliers; payments to third parties for hire transponder and payments for up-linking/maintenance of equipments and lastly, by disallowance of interest expenses. Such disallowances had led to upliftment of profit rate .....

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lready offered by the assessee or were part of combined profit determined on account of transactions of the entities and whether such a disallowance has led to multifold or double disallowances. 21. The Profit Split Method (PSM) is applied where operations of the related parties are highly integrated making the evaluation on individual basis is very difficult and all the parties owned valuable non-routine intangible assets for which no comparable data could be available and thereby making it imp .....

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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 rela .....

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ortion to their relative contributions, as evaluated under sub-clause (ii); (iv) the profit thus apportioned to the assessee is taken into account to arrive at an arm's length price in relation to the international transaction: Provided that the combined net profit referred to in sub-clause (i) may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction in which it is engaged, with referen .....

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ve contribution shall be taken to be the net profit arising to that enterprise from the international transaction". From the plain reading of the above method, it is evident that, first step is to identify the combined net profit of the AE arising from the international transactions, in which they are engaged. Such a combined net profit is determined by taking into account all the transactions undertaken by all the AEs. In the second step, the relative contribution made by each of the entit .....

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the assessee is taken into account to arrive at Arm's Length Price analysis to the international transactions. The object of detailed functional analysis in such a method is to assess the related contribution and risk taken 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 disp .....

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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 .....

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such revenues separately. Such an approach, in our opinion is untenable; firstly, there is no separate source or stream of revenue from Non-AE transaction; secondly, the combined profit has been determined by taking the gross revenues from all the streams by each of the entities and all the costs i.e. gross expenses has been worked out and deducted. The resultant profit percentage of 14.04% has been arrived from the revenues from all the streams are as under:- Particulars Amount in INR Advertis .....

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based on such evaluation by unrelated enterprise performing comparable functions has been benchmarked to arrive at the ALP; and lastly, once the assessee has taken all the revenues and factored all the costs to arrive at combined net profit then it is not permitted to segregate part of the revenue and tax it again by applying profit rate of 28%. Such an exercise will only lead to double disallowance. Thus, action of the AO in pursuance of the direction given by the DRP is rejected. Further, we a .....

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annot 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-A .....

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and we direct to delete the addition. 24. As regards the addition on account of distribution revenues of ₹ 124,82,45,000/-, being 50% of total distribution revenues of ₹ 249,64,90,000/- which has been taxed on protective basis under section 44DA and balance 50% has been taxed in the hands of Channel Companies. Such an amount cannot be added separately, because it has already been included in the PSM Pool and in the combined rate of 27.18% and accordingly, the same is directed to be .....

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ly by giving retrospective effect, as held by various Courts, on the reasoning that assessee cannot be expected to withhold tax when there was no such provision under the statute and secondly, prior to such amendment, there was a judgment of Hon'ble Supreme Court in the case of Vodafone International Holdings BV (supra) that payment made by one non-resident to another non-resident, provisions of TDS are not applicable; thirdly, when income has been determined under PSM, inter-company transac .....

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AT, payment for foreign content and payment for technical cost, also cannot be made for the reasons given above that, while computing the profit under PSM at 27.18%, there is no requirement for making separate disallowances under section 40(a)(i) and same are directed to be deleted. 26. So far as issue raised vide grounds 7 and 8, the assessee has challenged the taxation of service fee income @ 41.82% on the gross basis as against applicable @ 10.455% on gross basis. We direct the AO to apply th .....

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of reversal of disallowance of cost on advertising air-time u/s 40(a)(i) for AY 2005-06 and denial of set-off of brought forward losses for AY 2006-07, we direct the AO to look into the matter and grant the relief in accordance with the law. 29 Lastly, regarding levy of interest under section 234B, we find that this issue stands covered in favour of the assessee by the decision of Hon'ble Delhi High Court in the case of NGC Network Asia LLC (supra). As regards reliance placed by Ld. CIT DR .....

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