TMI Blog2023 (6) TMI 348X X X X Extracts X X X X X X X X Extracts X X X X ..... at matter any assessing authority or appellate authority, does not fulfil the requirement of rule 10 C (2) of the rules and new MAM selected fulfils it. There is no bar to any of the parties in concluding the most appropriate method by reselling the earlier method selected by it, if it is confirming to the requirement of rule 10C (2) of The Income Tax Rules. Thus, to that extent agree with the view expressed of VP. As decided by Shri Aby T. Varkey (J.M.) - As find in agreement with both learned brothers [VP and AM] that the assessee, in principle, can resile from the most appropriate method as was adopted in the TPSR, provided that the new method confirms to the requirement of Rule 10C(2) of the Income tax Rules, 1962. Moreover, this Tribunal being the last fact finding authority is duty bound to ascertain the correct facts, nature class of transactions, the FAR analysis, reliability of data and thereafter arrive at the Most Appropriate Method to benchmark the impugned international transaction, which may resile from the Method adopted by the assessee in the TPSR. What is most appropriate MAM in the transaction under consideration? - other method v/s CUP method - As d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bundle of Sport Broadcasting Rights, on the basis of deficiencies found by him in the valuation report submitted by the assessee? 2. The assessee, who is the appellant, did not raise any objection to the question. However, the ld DR was not convinced. It will be seen infra that the question represents correct controversy between the parties as the transfer pricing adjustment in the international transaction under consideration has been made solely on the basis of deficiencies found in the valuation report submitted by the assessee. 3. Succinctly, the factual panorama of the case is that the assessee furnished revised return declaring total loss of Rs. 1334.14 crore. It also filed Form No.3CEB containing a list of international transactions, including, payment of Rs. 3075,24,15,714/- for acquiring Bundle of Sport Broadcasting Rights (BSB Rights) hitherto held by its US based Associated Enterprise (AE), namely, ESPN Star Sports Ltd. (ESS). The transaction of acquiring the BSB Rights (rights to broadcast through television/internet/mobile various sports events like ICC Tournaments including Cricket World cup, Champions League T20 cricket, Formula-1 GP2 and Wimbledon Championsh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so, the assessee was incurring losses. He, therefore, determined ALP of the international transaction at 411 USD million by taking ALP of Terminal Value at Nil; and ALP of Finite period at 411 USD million. This resulted into variation between actual consideration (1211 USD million) and ALP consideration (411 USD million) at 800 USD million, being, 66.06% [800(1211-411)/1211*100] of the actual consideration. The assessee had reported value of this international transaction for the A.Y. 2014-15 at Rs. 1013.26 crore. By applying 66.06% to the value of the transaction, the TPO proposed transfer pricing adjustment of Rs. 669.36 crore for the immediately preceding year. No succor was provided by the Dispute Resolution Panel (DRP), which culminated into making transfer pricing addition of the equal amount in the final assessment order passed by the AO for the A.Y. 2014-15. The Tribunal took note of the fact that the assessee submitted an expert s opinion as well as another valuation report before the DRP for the first time supporting its earlier valuation, which was again contradicted by the TPO during the remand proceedings. On consideration of the entire conspectus of the case, the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... els in certain territories in Asia including India. The assessee and ESS (both related parties) entered into the Master Rights Agreement (MRA) dated 31.10.2013, under which the assessee agreed to purchase from ESS a bundle of broadcasting rights of sports events, such as, Cricket World cup, Championship league, T20 cricket, Formula-1 GP2 and Wimbledon etc. Prior to this, ESS was holding broadcasting rights for such sports events for certain number of years with a well defined year-wise consideration payable each year on the happening of the sports events and the assessee s sister concern, namely, Star Sports India Pvt. Ltd. (SSIPL) was involved in the sale of advertisement airtime and subscription of sports Channels in India when the broadcasting was done by the ESS. Almost simultaneous with the assessee entering into the MRA with ESS for purchase of bundle of rights on 31-10-2013, SSIPL got merged with the assessee w.e.f. 04-11-2013 vide High Court order dated 22-08-2014. With such acquisition of bundle of broadcasting rights from ESS and merger of SSIPL, the assessee became a full-fledged broadcasting owner of sports Channels run by Star group in India. By virtue of the MRA, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is reproduced as under : Season Touring Team(s) Total Scheduled Matches Scheduled Tour Dates 12/13 South Africa 3 Tests November 2012 Sri Lanka 3 Tests December 2012-January 2013 Sri Lanka 5 ODIs Sri Lanka 2 Twenty20s West Indies 5 ODIs February 2013 13/14 England 5 Tests November 2013-January 2014 England 3 ODIs England 3 Twenty 20s 14/15 South Africa 5 ODIs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Is $15,000,000 Australia v England 2 ODIs $550,000 Final 1 ODI $7,500,000 10. The Payment schedule has been set out in clause 9 of the Agreement, which provides through clause 9.2 as under : Thirty five percent (35%) of the Valuation of each Event as set out in Item 1 of Schedule 3 (as may be adjusted pursuant to Clause 7) to be paid no later than thirty (30) days prior to the commencement of each such Event subject to the Licensor confirming that the Event shall take place as scheduled. (a) If the Event does not commence as scheduled after payment is made by the Licensee then the Licensor shall refund the thirty five percent (35%) paid by the Licensee within fourteen (14) days of the earlier of; (i) the date the Event was scheduled to commence; or (ii) notification that such Event has been postponed provided that no refund shall be required where the Event has commenced within the aforesaid fourteen (14) days or where the Event is scheduled to commence within the next thirty (30) days. (b) The balance of the Valuation of each Eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchased by ESS from third parties were passed on to the assessee in a bundled manner either by novation or sub-licensing. 14. Table 1 of the Schedule to the MRA contains a list of novated contracts. Similarly, Table 2 of the Schedule contains a list of the Designated Rights in the Designated Rights contracts to be sublicensed to the assessee. The term Designated Rights has been defined to mean (a) Sports Media Rights (b) Cricket Hockey Media Rights; (c) the Archive Rights. The term Designated Territory has also been defined to mean - (i) in respect of an event involving Cricket and/or Hockey, all the territories in which ESS has the right to exploit Media Rights with respect to such events and (ii) in respect of Sporting Event (other than cricket and hockey) such territories in the Indian sub-continent for which ESS has the right to exploit media Rights in Asia Specific in relation to the said events. Here it is pertinent to note the second category of broadcasting rights given to the assesee only in Indian sub-continent rather than Asia specific, which constituted only 3% of total value of the rights. 15. Clause 2.2 of MRA deals with Novation of Designated Rights Contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h respect to each of the Designated Rights listed in Table 2 of the Schedule, the Designated Rights under such contracts shall be treated as sub-licensed by ESS to SIPL, subject to any consents and/or any other written document that may be required under any specific Designated Rights Contract to give effect to such sub-license, for the sole and exclusive use and exploitation by SIPL with effect from the Effective Date, to the same extent such Designated Rights are available to ESS under the Designated Rights Contract, such sub-licensing to be on terms where SIPL assumes and agreed to comply with all obligations under such Designated Rights Contract that are attributable to the Designated Rights sublicensed to it and otherwise on terms set out hereunder or as set out in any separate sub-licensing agreement between ESS and SIPL in respect of the sub-license of such Designated Rights. 18. This clause also indicates that all the rights and obligations of ESS under the Designated Rights Contracts with third parties accrued to the same extent to the assessee on sub-licensing. Such Designated Rights which were available to ESS under the Designated Rights Contract, got sub-licensed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corporate the foregoing, provided, however, it is agreed that the amount of the Agreed Consideration will not be changed. 3.1.3 Subject to receiving an invoice from ESS, SIPL shall pay to ESS the portion of the Agreed Consideration allocated for each Sporting Event in accordance with the Payment Schedule. All payments of the Agreed Consideration will be subject to any adjustments (if required) in accordance with Clause 3.2. 20. To buttress the implementation of the above payment clause, the ld. AR placed on record a Table indicating year-wise Value as per original contract schedule between ESS and third parties and the Value as per Form 3CEB showing the discharge of such obligation by the assessee in respective years, reading as under: Value as per original contract schedule Particulars AY 2014-15 AY 2015-16 AY 2016-17 AY 2017-18 AY 2018-19 AY 2019-20 AY 2020-21 Total British Premiere League 26.10 49.88 52.32 10.14 - - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 107.03 ICC 123.89 191.62 - - - - - 315.51 Others 6.35 11.11 13.79 1.83 0.02 0.02 0.02 33.15 CLT20 - 118.31 465.14 - - - - 583.45 Cricket Australia 5.62 71.18 52.26 8.03 - - - 137.09 1,312.02 Discount 9.5% (net of advances) -3.36 -32.01 -47.29 -1.18 -0.35 - - -84.19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alia (Continuing Party) and assessee (New Party), which became effective from 01-05-2013, whose copy has been placed at page 652 onwards of the paper book. The preamble of this Agreement reads as under : (A) The Original Party and the Continuing Party entered into the Agreement. (B) That the Original Party wishes for the New Party to become a party to the Agreement and assume all rights and obligations under the Agreement in place of the Original Party, which shall be released and discharged from all its obligations under the Agreement from the Effective Date. (C) The Parties have agreed that the rights and obligations under the Agreement shall novate from the Original Party to the New Party on the terms set out in this Novation Agreement. 24. The assessee was substituted with ESS in the agreement between Cricket Australia to assume all the rights and obligations under the agreement in place of the Original party which shall be released and discharged from all its obligations . 25. Clause 2, with the heading Novation and Release , reads as under : (a) in consideration of the covenants on the part of the New party in this Novation Agreement, it is hereby agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luding but not limited to Clause 7 of Schedule 1 of the Agreement in US$ without, and free from any and all set-offs, deductions, withholdings or taxes (including without limitation, withholding taxes levied in India, Singapore or any other country), to the Designated Account from time to time as set forth in Clause 8 of Schedule 1 of the Agreement in accordance with the Payments Schedule set forth in the Agreement, including but not limited to Clause 9 of Schedule 1 of the Agreement irrespective of whether or not the Continuing Party has exhibited the Programmes as of such date; (g) agrees to indemnify and hold harmless the Continuing Party from and against any and all Indian laws or regulations regarding repatriation of income, including any financial liabilities or reporting compliance costs resulting, in whole or in part, from the effect of the parties agreeing to or giving effect to this Agreement; and (h) agrees that the Continuing Party shall be entitled to all rights, powers, interests and benefits under the Agreement which would, but for this Novation Agreement, subsist in favour of or be exercisable by the Continuing Party on and after the Effective Date. in each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions in seriatim for discussion and decision. I. CAN ASSESSEE RESILE FROM THE MOST APPROPRIATE METHOD ADOPTED IN ITS T.P.S.R.? 33.1. The assessee adopted the `Other method as the most appropriate method as per its Transfer Pricing Study Report. Then it advocated for the CUP as the most appropriate method in front of the TPO. Before the Tribunal also, the ld. AR heavily banked upon the CUP method to demonstrate that the international transaction was at ALP. This was opposed tooth and nail by the ld. DR contending that a method once chosen as the most appropriate in its TPSR cannot be changed by the assessee in further proceedings, much less the Tribunal for the first time. We need to examine if an assessee is entitled to switch over to a new method, different from the one taken in TPSR, as the most appropriate method? 33.2. Section 92 of the Act provides that any income arising from an international transaction shall be computed having regard to the arm s length price. Section 92C dealing with computation of ALP provides through sub-section (1) that the ALP shall be determined by any of the following methods, being the most appropriate method, having regard to the natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the method earlier selected provided the new method is actually the most appropriate having regard to the nature of the transaction under consideration. In both the scenarios, viz., where either the TPO rejects the assessee s selection of the method or the assessee itself realizes its mistake in the selection of the method, it is for the Tribunal (the next appellate authority in hierarchy) to examine the correctness of the newly selected method as the most appropriate in the facts and circumstances of the case. If the Tribunal holds that the change in the method by the TPO or the assessee resiling from its earlier selection is correct, then there can be no impediment in switching over to the new method because the legislature stipulates that the most appropriate method shall be applied for determining the ALP. The point to be noted is the selection of actual most appropriate method in the facts of the case is essential and not the perception of the assessee or the TPO to this effect. It thus follows that there can be no estoppel to the change of a method so long as the new method is, in fact, most appropriate for determining the ALP. Mere urging for the application of a differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Method. 33.3. Adverting to the facts of the extant case, it is seen that the assessee applied `Other method in its TPSR with a note on para 7.3 that : `Given that the Other method has been selected as the most appropriate method, the other methods (CUP, RPM, CPM, PSM, TNMM) have not been evaluated further . This shows that the assessee did not remark that the CUP was not the most appropriate method and simply left it from evaluation. However, it was categorically urged before the TPO, as is evident from para 12.4 of his order, that: `since the payment made to the third party is more than the payment made to the AE for the same set of rights, a CUP exists . Para 12.5 of the TPO s order also records the defending by the assessee of the CUP method. Thus it is graphically clear that the assessee not only argued before the existence and the applicability of the CUP before the TPO as the most appropriate method, but also heavily relied on the same during the course of the hearing before the Tribunal. Without batting for the applicability of the CUP method before the TPO, the assessee could have even validly pressed for the change of the `Other method as the most appropriate method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ropriate method as was adopted in its transfer pricing study report. II. WHICH IS MOST APPROPRIATE METHOD IN THE TRANSACTION UNDER CONSIDERATION? 34.1. The controversy in the present case revolves around the selection of the most appropriate method between the CUP method and the `Other method . We have noted above that section 92C(1) enlists five specific and another method for the ALP determination. One of such six methods needs to be applied for the ALP determination having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons etc. The first method (CUP) and the last method (`other method ) are price-based, whereas the remaining methods (RPM, CPM, PSM and TNMM) are profit-based. The manner of determination of ALP under section 92C has been set out in rule 10B, which states that: `For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely . Clause (a) of rule 10B(1) prescribes the manner of determination of the ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion or a specified domestic transaction shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between nonassociated enterprises, under similar circumstances, considering all the relevant facts. 34.4. This method stipulates for determining the ALP of a transaction under any method, which takes into account (and not directly considering) the price charged or paid, or that would have been charged or paid, for the same or similar uncontrolled transaction considering all the relevant facts. The term `would have been charged or paid may encompass quotations or valuation reports etc. Under this method, a benchmark transaction comprises of a benchmark price, being, the price actually transacted or the price that would have been transacted in a comparable uncontrolled situation; and the benchmark property is same or similar property transacted. On a comparative analysis of both the price-based methods, it follows that the CUP method has an edge over the `other method because it employs the actually transacted price exclusively over the `other method taking i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the position regarding the Cost plus method, which natters of adjusting the amount of normal gross profit mark up to such costs arising from . in a comparable uncontrolled transaction . It again does not refer to the amount of normal gross profit mark up that would have been earned in a hypothetical transaction. This method also refers only to the actual normal gross profit mark-up in a transaction between two unrelated parties. The TNMM also follows the rule by considering the net profit margin actually realized by an enterprise from a comparable controlled transaction. It again refers to the actual net profit margin realized by or between the two unrelated enterprises in an existing transaction and not of a theoretical profit margin in a non-existing transaction. 34.7. The above discussion vividly points out that the other method given in Rule 10AB contemplates the determination of ALP on the basis of the price which has been charged or paid or would have been charged or paid for the same or similar property, which is a step at distance from the specific methods, such as, the Comparable Uncontrolled Price, Resale Price, Cost plus etc., which provide for the ALP determina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be resorted to only when none of the five specific methods can be applied. Narrowing down the proposition, if the CUP method is pitted against the `other method , then there is no prize for guessing that it is the former which will prevail over the latter provided the comparable uncontrolled data required for it is available. The ensuing discussion will demonstrate that the data required for the application of the CUP exists and is on record. We, ergo, hold that the CUP is the most appropriate method in the facts and circumstances of the case. III. WHETHER ALP DETERMINED BY ASSESSEE IS CORRECT? 35.1. Having found that the CUP gains an advantage over the `other method generally, let us proceed to determine whether the international transaction of purchase of broadcasting rights in the facts and circumstances of the case is at ALP under the CUP method? We have noted above the mechanism for determining the ALP under this method and also emphasized on higher degree of comparability required between the international transaction and the benchmark transaction. The nature of transaction of `Purchase of Bundle of Sport Broadcasting Rights is purchase on aggregate basis by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... happening of the number of sports events. Thus, it is manifest that though the agreement was entered in the year 2011, but there was a well defined amount to be paid by ESS in each year covered under the agreement depending upon the number of sports events taking place in such year. It is not a case that ESS agreed to pay total consideration for all the years covered under the agreement in the year 2011 only, which, would have been the present value at that time of the amounts to be paid over a number of years ahead. Definitely, it could not have constituted a benchmark price for a separate comparable uncontrolled transaction taking place in the year 2014 or 2015 etc. Here is a case in which ESS agreed in the year 2011 to pay to the Cricket Australia specific amounts in the year 2014 or 2015 etc. Now pursuant to the MRA in the year 2013, the assessee acquired the broadcasting rights for the remaining period and agreed to discharge the obligation of ESS for and in the years 2014 and 2015 etc. at the same level which would have otherwise been paid by ESS in such years. This shows that the payment made by the assessee in this year is the present value of what ESS would have paid to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be affirmed. We are not impressed with the argument that valuation report can be a comparable uncontrolled transaction under the CUP method. When we talk of benchmark price under the CUP method, being, an actually transacted price, a valuation report, which is just a valuation and not a bargained price, ceases to have any say in it. Even if a valuation report is succeeded by and constitutes the basis for determining the actual bargained price, still it will be the resultant actual price, and not the valuation report, which can constitute a benchmark price under the CUP method. Moreover, it is just a pleading by the assessee, to which the Hon ble High Court has not accorded its imprimatur. It is consequently held that valuation report in itself does not constitute a benchmark transaction under the CUP method. 35.7. The ld. DR was vociferous in arguing that the assessee paid a highly inflated price of the bundle of broadcasting rights because the value of the broadcasting rights of CLT20 purchased by ESS in the year 2007 had considerably depleted later on. He relied on certain newspaper reports and articles suggesting that CLT20 was a disaster from the point of view of revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by ESS. Admittedly, CLT20 did not rise up to the expectations as speculated in the year 2007 and suffered serious setback in terms of viewership, which led to decline in its revenue generations over the period culminating into not a good deal of purchase on individual basis. However, we need to remind ourselves that the purchase was a composite deal of all broadcasting rights from different third parties that ESS had acquired. Whereas CLT20 right declined in terms of revenue, some other broadcasting rights were on premium. This is evidenced from the written submissions made by the assessee to the TPO, a copy placed at page 562 of the paper book, as also referred to in the directions of the DRP at page 20, that the bid price of the ICC deal entered into by ESS in the year 2007 for 1100 USD million, transferred to the assessee under the MRA on 13.10.2013 at the same bargained price, was re-negotiated by the assessee in October 2014 for 1900 USD million. This shows that the additional burden of paying compensation of 465.14 USD million, and that too, in the next year on cancellation of CLT20 right for the remaining period, got set off with the premium of around 800 USD (1900 USD mill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on page 20 of the DRP direction, that ZEE Entertainment enterprise was also a loss making sports broadcasting business and Sony Pictures Network purchased it by agreeing to pay to the third parties for the remaining period of rights, at the same price which was contractually agreed earlier between ZEE and them. Such a contention has not been controverted. This shows that the purchase by the assessee of less remunerative CLT20 on a standalone basis at a discount of 9.5%, is on a much stronger footing when seen in the hue of the Sony-ZEE deal taking place at par price between ZEE and third parties, despite ZEE also running into losses. This, in itself, is a good comparable uncontrolled transaction to the assessee s purchase of CLT20 broadcasting rights on individual basis. We clarify that this part of the discussion has been made just to meet with the argument of the ld. DR about the separate CLT20 transaction. Actually, we do not subscribe to the argument of the ALP determination of individual rights, when the transaction is of purchase of several broadcasting rights in a bundled manner. We thus countenance the bundle of transactions approach as discussed supra and hold that the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Form No. 3CEB at Rs. 3075.24 crore. 36.2. We are not persuaded by the argument put forth on behalf of the Revenue for the obvious reason that the TPO himself, on page 6 of his order, considered the amount as reported in the Form No. 3CEB by the assessee (A) in INR 3075,24,15,714/- . This proves that the TPO also recognized the assessee reporting the value of purchase of broadcasting rights for the year at Rs. 3075.24 crore. As against that, the ld. DR continued to argue that the TPO went wrong in noting down the exact figure of the value of purchase of broadcasting rights in Form No. 3CEB, which was even less than Rs. 2000/- crore. This argument of the ld. DR, in our opinion, tantamounts to crossing his brief and arguing beyond jurisdiction. 36.3. We have also taken note of the argument of the ld. DR in an earlier part of this order to the effect that the discount of 9.5% was not at ALP and rejected the same as it was not the case of the TPO. 36.4. At this stage, we want to elucidate that there are distinct powers statutorily vesting in the competent tax authorities. The power of the DR extends only to supporting the order of the AO and not setting up a new case or findin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proposed by the ld. Vice President. I am in i. agreement with the view expressed that Assessee can resile from the Most Appropriate method selected earlier , if new method is in accordance with applicable provisions, is 'The Most Appropriate Method.' ii. However, I am unable to persuade myself that on the facts and circumstances of the impugned case, that 'The Most Appropriate method' [MAM] to determine Arm's Length price [ALP] of The Impugned international transaction is ' CUP' [Comparable Uncontrolled price] method. According to me, The Most Appropriate method in this case is ' Other method.' I have set out facts, circumstances and my reasons for holding so hereinafter. 2) Assessee is a company engaged in the business of broadcasting and distribution of various satellite channels primarily in India. It is engaged in broadcast and distribution of its own General Entertainment Channel such as Star Plus , star Gold , Star word , life OK , movies OK , Star Movies, star Sports in India and outside India. It enters into franchisee agreements with its associated enterprise for exclusive rights to broadcast star world, Star movies, FX and Fox ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom assets. Therefore, the application of this approach is only appropriate for assets which are usually accounted for by the cost of reproduction such as software.So, it was rejected. It also rejected the marketapproach, giving several reasons. It ultimately states that they are unable to conclude on the value of the bundle of rights under market approach. As per income approach, it gives buyer s and seller s perspective valuation. As per ESPN Star sports perspective, it reached the absolute value of bundle of rights at US$ 1166 million. The valuation from assessee s perspective was also derived at absolute value of bundle of rights at US$ 1255 million. It provided weight of 1 each to the above two perspectives and determined the fair value of bundle of rights at US$ 1211 million. It allocated total value amongst different rights where the contracts are novated of designated rights and designated rights licensed or anticipated to be novated. Ultimately it valued agreed considerationat US$ 1210659,000/- whose contract price from November 2103 till end of contract is US$ 1338031132/-Thus, apparently there was a discount of 9.5% amounting to US$ 127 million. The payment schedule for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Most Appropriate Method of the methods prescribed under section 92C of the act for acquisition of sports rights. Based on the valuation report of an independent valuer, it was concluded by the assessee that the prices of the above transaction were at arm s-length as provided under section 92C read with third proviso to section 92C (2) of the act. 8) In its transfer pricing study report at Para number 7.3 it reported this transaction as under:- 7.3 Acquisition of Sports Rights Under Master Rights Agreement SIPL has acquired bundle rights in respect of various sporting events, from ESS (subsequently novated to FIC Singapore) either through novation of original contract between ESS and the sports bodies (SBs) or through the sublicense of rights by ESS. The value of the bundle rights was determined by an independent valuer appointed by ESS and SIPL under the Master Rights Agreement (MRA). In the case of Novated agreements for sports rights, SIPL makes payment for the sports rights directly to SBs. The price paid by SIPL for such rights as per the original contract between the SB s and ESS/FIC Singapore. Further, as the price determined under the MRA between ESS and SI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is required to have bird s eye view of that assessment year. For assessment year 2014 15, assessee disclosed the above transaction in Form No. 3CEBas purchase of licensing of sports rights amounting to Rs. 10132613124, adopted Comparable Uncontrolled Price Method [ CUP ] as the Most Appropriate Method. In its transfer pricing study report for that year in para number 1.5 it was stated that:- During the year under consideration, SIPL was granted access to a bundle of broadcast rights, in respect of various sporting events, by ESS, either throughNovation of original contract between ESS and the international sports bodies (ISBs) or through sub- license of the rights by ESS. Considering the functional and risk profile of this transaction, Comparable Uncontrolled Price (CUP) method was selected as the Most Appropriate Method. For the purpose of determining the value of licensing the bundle of rights by ESS to SIPL, the parties i.e., ESS and SIPL agreed to adopt the consideration determined by an independent valuer. Since the value has been determined by an independent valuer considering the appropriate valuation methodology and suitable exceptions, it can be concluded th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cipant would have paid to acquire these subject broadcasting rights for the balance period of the contract as per the Master Rights Agreement. It also stated that the adjustment can be either positive or negative depending on how the market factors have moved between the two dates. 14) In conclusion, it found that the transaction value payable by ESS to various sports bodies of US $ 1338 million, it reached at a range where the lower value range was US dollar 1142 million and higher value range was US dollar 1223 million. Therefore, the transaction value is Within the estimated valuation range. 15) Assessee further supported its transaction by submitting expert opinion issued by Prof. Israel Shaked, and actualization report on financial projections and estimates made by valuer by BDO India LLP.Valuation as per actualization exercise, valuation as per ESS perspective was US dollar 1166 millionwhereas valuation as per the assessee s perspective was US$ 1045 million. Both the valuations were after assigning equal weight to each perspective was arrived at US$ 1105 million. 16) The learned DRP confirmed the action of the learned TPO. 17) For that year, matter reached before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the ESS as per the business needs and market conditions, since these rights were acquired through a bidding process, basis and projections are neither relevant nor available at this point of time. The learned dispute resolution panel,thereafter, following the direction for assessment year 2014 15 rejected the contentions of the assessee. Consequently, the final assessment order was passed which is subject matter of appeal before tribunal. 20) Meanwhile as order of the tribunal for assessment year 2014 15 was challenged by assessee before the honourable High Court, honourable High Court pleased to pass an order on 10 February 2023which resulted in the formation of the special bench. 21) The question raised is:- Whether on the facts and in law, the assessing officer was justified in making transfer pricing adjustment anent to the international transaction of acquiring bundle of sports broadcasting rights, on the basis of deficiencies found by him in the valuation reports submitted by the assessee ? 22) Three issues were identified in this appeal for determination. 23) The first question that arises is whether the assessee can resile from the Most Appropriat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extent and reliability of assumptions required to be made in application of a method. 26) Therefore, undoubtedly every assessee, transfer pricing officer, Dispute Resolution Panel or any appellate authority determining the arm s-length price or adjudicating the same are duty-bound to follow the mandate of rule 10 C to hold what is the most appropriate method out of the method prescribed under section 92C of the act. Therefore, The Most Appropriate Method is a single method selected out of 6 methods prescribed under that section.This is also the mandate of the honourable Delhi High Court in case of Principal Commissioner of Income Tax Versus Metrix Cellular International Services Private Limited [2018] 90 taxmann.com 54 (Delhi). However, the only rider that can be placed is that it should be justifiable in accordance with rule 10 C (2) of The Income Tax Rules. Of course, one has to consider the nature and class of the international transaction, parties to the transaction and functions performed by them with respect to the assets employed and risks assumed. Further, the most important is the availability, coverage, and reliability of data necessary for application of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 2015 16, for the same transaction, assessee adopted in its Form No 3CEB adopted other method as the most appropriate method. For this, it adopted the same valuation report which it relied upon in assessment year 2014 15 justifying the CUP method as the most appropriate method. In its transfer pricing study report, which is reproduced above for assessment year 2015 16, placed at page number 52 of the paper book of the assessee clearly says that it has selected the other method as the most appropriate method. Rationale given is it is supported by the valuation report, in such valuation report the nature of functions performed and services provided are taken care of, along with the nature of the assessee and associated enterprises as well as the transaction and its documents such as Master Rights Agreement. It further stated that as other method has been selected as The Most Appropriate Method, it did not evaluate any of the other methods prescribed such as CUP, RPM, CPM, PSM and TNMM. (iii) For AY 2015-16 , before the learned transfer pricing officer at page number 5 of the TP order, which is a reproduction of the transfer pricing order for assessment year 2014 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. By this novation, the assessee shall become a direct party to the designated rights contract - with sports bodies replacing ESS with effect from the effective date. Thereafter the assessee undertakes to perform, discharge, and observe all obligations and liabilities on the part of ESS under the novated designated rights contracts which are to be performed, discharged, or observed from the effective date of novation of such contracts. (Para number 2.2.1 of the master rights agreement). If the novation is not completed before the effective date, for all such contracts ESS shall be deemed to have sublicensed the rights in that contract to the assessee. Similarly, as per para number 2.3 of the master rights agreement , all risk and reward from the effective date are transferred in the name of ESS to the assessee by sub licensing. There is a further clause of 2 .5 of the refunds which speaks that if the assessee receives a refund from any sports body of any fees paid by ESS to such sports bodies under a novated contract, then assessee shall release the entire amount so received by it to the assessee as soon as practicable but in any event within 30 days of receipt of such refund. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hird-parties, obtained by the assessee at discount from ESS. Therefore, whatever it has got from its associated enterprise is less than what is required to be paid in discharge of the obligation of the ESS, hence, the transaction entered into by the assessee is at arm s-length by CUP method. 35) We are unable to appreciate arguments of the ld. AR that such price paid to ESS is comparable to the prices paid to sports bodies ( third Parties) will constitute CUP . CUP Method Compares the price charged with regard to a controlled transaction for transfer of goods or services to the price charged for transfer of goods or services in a third-party scenario having comparable circumstances. Necessarily there have to be two prices for CUP to succeed. The Price paid in controlled environment for transaction [ AE scenario] Price paid for similar or same transaction in uncontrolled environment [ Third party scenario]. Price paid in controlled scenario is available, however there is no third party scenario exits at all. No evidence is available that a third party has purchased such sporting rights from another party. The Amount paid by assessee to various sports bodies, which was an obligati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iv. It further states that the value of various rights were determined by ESS based on the various market conditions existing at the time of bidding events . These conditions might have undergone a change as at the valuation date. v. Further the bidding price was determined based on the future economic benefits estimated to be arrived from ESS perspective only. The future economic benefits from third party perspective may be different. vi. Therefore, the cost approach does not provide an appropriate basis to ascertain the value of a bundle of rights. 38) Thus, this valuation report negates the adoption of the CUP method as the Most Appropriate Method as it does not satisfy the test of comparability of nature and class of international transaction because of changes in the perspective related to future economic benefits. The Time factor and changes in economic and market conditions in future will affect the price and hence, the CUP method is not suitable. It also does not satisfy the condition that the rights obtained by the ESS were for an earlier period and there is a change in the market conditions on which date the Master Rights Agreement i.e., 2013 was entered int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analyzing market trend factors, which are essential consideration to appropriately value the subject rights. Market trend factors include an analysis of historical and comparable trends in even to specific broadcasting rights, overall broadcasting rights, advertising, sponsorships, subscription data and overall market dynamics and viewership. These adjustments (market trend factors) at a normative level provide useful insight into the increase or decrease in the values of similar assets classes over a period of time. Valuer states that 5 specific contracts have significant valuation impact as they are large in value. It analyzed each of the five major contracts covered in the bundle of sports rights and found that there is an increase/decrease in the value of each of the contracts due to the market trends. Such market trend effects are considered from the date on which ESS negotiated prices with the sports bodies and at the time/date on which these contracts are novated in favour of the assessee by master rights agreement. Thus, Duff and Phelps , a valuer who was engaged by 21stcentury fox on behalf of the assessee, to provide the valuation services, has categorically held that ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue of the subject rights and income or market approach would be most appropriate. They have also stated so with utmost care, showing that market trend factors applicable to the base price of the subject asset have undergone substantial change, it might have increased or decreased the fair market value of the subject asset. They have given an example by taking five of the most significant contracts involved in the whole bundle of sports rights. If one looks at the lower and higher range of each of the contractsanalyzed by the valuer, anybody will agree that there are significant market trends which have changed the value of the rights transacted. The valuer has given 18 work papers to show how the underlying asset transacted has undergone change. Of course , there may be a downward revision of a value of the contract or upward revision of a value of the contract based on different market conditions operating in different region, different sporting event, held across the globe, changes in the viewership, changes in preference of the viewers, etc.The variation of Lower and Higher range with Respect to five major contracts of weighted Annual Trend factor range speaks for themselves. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... using the market approach was not possible. Hence, we have valued the assets individually. We failed to understand where the comparison between the price agreed by ESS is to be paid to various sports bodies, which assessee is now obliged to pay, due to the several factors mentioned by an expert of international repute. Thus, the second export also confirms that only method available for valuation of this international transaction is other method. 44) In assessment year 2014 15, assessee also supported the valuation report by obtaining expert opinion of Duff Phelps LLC (page number 838 864 of the paper book), which has justified the valuation report in all its aspect including the approach for valuation to determine the arm s-length price. Thus, the other method was once again stamped by another expert. 45) Coming to the Rights Valuation Report Prepared for Actualization Exercise by another entity BDO India LLP , (surprisingly the person who certified the valuation of bundle of rights in the original agreement by DH consultants and BDO LLP is the same person,who signed both the reports) (page number 1024 1037 of the paper book), clearly once again confirms that, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited dated 5 November 2013 and also considered T P assessment order for assessment year 2014 15. [ page no. 662 to 837 of paper book ] In this report spanning over 172 pages, he has considered various aspects of sporting rights. He also considered the factors prevailing in the sporting media, he also supported his findings with market evidence, in his opinion he states that even negative cash flow does not hamper the valuation. In certain cases, he clearly opined that the valuation methodology at least for determining arm s-length price of the bundle of sporting rights in this case is only market approach . Both parties agreed before that there is no reservation on the level of expertise of the professional. Therefore, it clearly gives an idea that only the other method is the most appropriate method in this case. 47) Now we consider the argument of the assessee thatpurchase of bundle of sports broadcasting rights is purchase on aggregate basis by the assessee from ESS for the remaining years of distinct sports broadcasting rights acquired by ESS at a price settled separately in respect of each year covered there in from third parties in earlier years at a consideration lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable uncontrolled transaction in comparable circumstances.We emphatically state that there is no evidence available that any independent party has purchased identical/similar sports broadcasting right purchased at same time. Therefore, as there are no comparable uncontrolled transaction prices are available, the CUP method is not the most appropriate method as the comparability standards under rule 10C(2)(c) with respect to the availability, coverage, and reliability of that data necessary for application of the method.Thus, traditional transfer pricing method are not suitable for determination of ALP in this case. 50) The five Sports Broadcasting agreementsanalyzed by the expert clearly shows how the market prices of these sports broadcasting rights swings positively or negatively! 51) We also support our reason by giving an example thatwhat is the contention of the assessee:- (i) an associated enterprise (A) (ESS) agreed to purchase the property ( Sports Broadcasting Rights) from a third-party (Y) ( Sports Bodies) in prior periodat Rs. 100/-. Agreed consideration of Rs. 100/ to be paid by (A) (ESS) to (Y) ( Sports Bodies) in future years on happening of some event ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant consideration in determining the arm s-length price of the international transaction of purchase of bundle of sports rights. 53) Further, by Novation agreement the assessee has stepped into the shoes of ESS , qua its rights and liability towards sports bodies. That means now instead of ESS, assessee has obtained rights which were available to ESS and obligations which were to be discharged by ESS towards those sports bodies. Therefore, the payment made by the assessee to the sports bodies is merely a transaction arising fromthe Master Rights Agreement. The Master Rights Agreement was entered into 31/10/213. The rights acquired by ESS which are transferred through this master rights agreement in earlier years. The CUP method requires a high degree of comparability and similarity in terms of quality of product, contractual terms, level of market, market conditions, business strategies, geographical factors, and associated risk. By entering into Master Rights Agreement in 2013, assessee has assumed all risks and rewards which were available to ESS when it entered into respective agreements with respective sports bodies. Therefore, assessee by agreeing to pay in 2013 onwards, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on that commercial rationale is the CUP. It is very pertinent to refer para no 14.3 of the directionsof DRP page no 110 of 115 which is as under :- 14.3 Furthermore, in order to appreciate the claim of the assessee as to the findings of the TPO in this matter, learned authorized representatives of the assessee were asked to provide details of basis and projection on the basis of which the bidding were done by ESS supporting the contention of the assessee in respect to ground number (3) to (9) above. In response to the same, the assessee vide letter dated 7 August 2019 has informed that the process to bid and acquire rights is a matter of pure commercial rationale. Even when the assessee acquired these sporting rights by ISBs, it has acquired it through a competitive bidding process. These bids/the gauche Asians were concluded by the management of the ESS as per the business needs and market conditions. The assessee further submitted that, since these rights were acquired through a bidding process, basis and projections are neither relevant nor available at this point of time. 57) Since, no evidencehas been produced before us that the market conditions remain the similar o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arged or paid, whereas other method also includes the price which would have been charged or paid or it also considers the price proposed to be charged against the actual price charged or paid as per CUP method. Thus, the other method has a wider applicability. It takes intoaccount:- (i) prevalent prices which might not have actually been transacted / charged , (ii) takes care of relevant circumstances and (iii) also considers all relevant facts. 61) Even OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration 2022 in paragraph number 2.9 clearly advocates about freedom to apply the other method for determination of the arm s-length price if the method prescribed are not appropriate to the facts and circumstances of the case. In case, where other method is used in selection, it should be supported by the explanation where other traditional methods are regarded as less appropriate or non-workable in circumstances of the case and of the reasons why the selected other method was regarded as providing a better solution. A taxpayer should maintain and be prepared to provide documentation regarding how its transfer prices were established ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts broadcasting rights, and accordingly, we hold. 65) At this stage I do not want to emphasize the various factors and values that have undergone changes with figures and various conditions with respect to each of the contracts comprising in the bundle of rights, as it is not appropriate to discuss at this stage because , examination of ALP by Other method is the domain of the Division bench, as determination of ALP applying 'Other method' as MAM is not at all argued before us. 66) As we have held that the Most Appropriate Method to determine the arm s-length price of the international transaction of sale of bundle of rights is the other method , the ALP of this international transaction is to be determined applying other method . As we have already rejected the adoption of CUP method as the most appropriate method, there is no need to determine the arm s-length price of the international transaction applying CUP method. Even before us, arguments were only raised with respect to the applicability of CUP as the most appropriate method and determination of arm s-length price of the international transaction under that method only. In view of our forgoing discussion an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk property is the same property transferred, whereas the other method covers the price transacted or the price that would have been transacted under same or similar uncontrolled conditions. Naturally therefore, CUP Method when pitted against Other Method would prevail, provided reliable data under uncontrolled conditions is available. 4. Having held so as above, I find myself in agreement with the Ld. AM that, in the given facts of the present case, the Other Method and not the CUP Method was not the most appropriate method. To recapitulate the facts, ESS had entered into several agreements with different sports bodies in prior years to acquire bundle of designated rights in terms of which ESS has assumed several liabilities obligations which it was required to discharge in future years over the tenure of the contracts/agreements. Vide MSA dated 31-10-2013, ESS essentially novated/sub-licensed all the contracts/agreements with the third parties in favour of the assessee, by virtue of which the assessee entered into the shoes of ESS and assumed all the liabilities as well as rewards which had been contracted by ESS in the earlier years. The Consideration under this MSA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration. The Independent Valuer had categorically observed that the value of various rights were determined by ESS based on the market conditions, surrounding circumstances existing at the time of contracting with sporting bodies and they may or would have undergone change as on valuation date. It is for this reason that the liabilities worth USD 1338.03 million contracted in the earlier years by ESS was not considered as suitable replacement cost to ascertain the independent valuation of these designated rights for the purposes of MSA. The fallacy of the contention of the appellant stands fortified by this report of the Independent Valuer. If the assessee s manner of application of CUP Method is to be taken to its logical conclusion, then the benchmark price ought to have been the value of the contracted liabilities i.e. USD 1338.03 million and there would not have been any reason for ESS under uncontrolled circumstances to give discount of 9.5% and bear loss on this count. The very fact that the independent consideration agreed by the assessee and ESS of USD 1210.65 million was different than the value of contracted liabilities of USD 1338.03 million shows that the market co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at there cannot be a reliable and accurate adjustment if there is any difference. Thus, the CUP method was rejected by the valuer who was requested by both the parties to determine the sale consideration. Had there been a CUP available to the value, it is unusual for such an expert who has valued the consideration itself in the master rights agreement, would have rejected it straightway. Therefore, the CUP method was not found to be the appropriate method , leave aside 'the most appropriate Method' in the opinion of such an expert. The valuer authoritatively and exhaustively negatived applicability of CUP method. 9. Ultimately, I find myself in agreement with the Ld. AM that the MAM to benchmark the international transaction in question is the Other Method and not CUP Method . Before us, since no arguments were put forth regarding the manner of application of Other Method and the deficiencies in the valuation report as pointed out by Ld. TPO, the instant appeal may be placed before the Division Bench on the issue of determination of ALP of the international transaction in question by adopting Other Method . Order Pronounced on this day of 5th June 2023. - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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