Income Tax Appellate Tribunal - Delhi
Espn Software India (P) Ltd. , Haryana vs Assessee on 10 December, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
[ DELHI BENCH "B" DELHI ]
BEFORE SHRI A. D. JAIN, JM AND SHRI K. D. RANJAN, AM
I. T. A. No. 4106 (Del) of 2010
Assessment year : 2006-07.
ESPN Software India (P.) Ltd., Asstt. Commissioner of Income-tax,
7th Floor, Tower-C, Infinity Towers, Vs. Large Taxpayer Unit [ L T U ];
DLF Phase : II, GURGAON [Haryana]. N E W D E L H I.
P A N / G I R No. AAA CE 2334 C.
( Appellant ) ( Respondent )
Assessee by : Shri Rahul K. Mitra, C. A.;
Department by : Shri Stephen George [CIT] - D. R.;
O R D E R.
PER K. D. RANJAN, AM :
This appeal by the assessee for assessment year 2006-07 arises out of order of the assessing officer made under section 143(3) read with 144-C of the Income-tax Act, 1961 [hereinafter referred to as the Act].
2. The only issue for consideration in assessee's appeal relates to determination of arm's length price in respect of international transactions with Associated Enterprises. The facts of the case stated in brief are that the assessee is engaged in the business of marketing and distribution of two sports channels - ESPN and Star Sports, owned by ESPN Group in Indian territories. The assessee is also engaged in limited programme production activities for sports events for Indian market. During the financial year 2005-06 the assessee under-took international transactions with its Associated Enterprises in respect of remittance for subscription, payment for advertisement air-time inventory cost, production revenue and cost reimbursements received. These transactions were duly reported in Chartered Accountant's report in form No.3-CEB filed along with return of income. For the purpose of establishing compliance with arm's length 2 I. T. A. No. 4106 (Del) of 2010 standard the assessee segregated its business operations into two business segments i.e. (i) distribution segment covering the distribution of channels and advertisement air-time inventory; & (ii) production segment covering the limited programme production activity for sports events carried out by the assessee.
3. The assessing officer in order to determine the arm's length price referred the matter to the TPO. The assessee's international transactions in production segment and cost reimbursement have been accepted by TPO to be arm's length. During the course of transfer pricing assessment proceedings, the transfer pricing officer directed the assessee to submit current years' data for comparable companies considered in its TP study. Further the transfer pricing officer proposed to segregate the air-time inventory and channel distribution business of the assessee within the distribution segment. In response to the query raised by the TPO, it was submitted by the assessee that if at all, the approach followed by the TPO of analyzing air-time advertisement inventory activity of the assessee separately is to be accepted, then the resale price method [RPM] should be used to evaluate the arm's length nature of purchase of advertisement air-time inventory from a transfer pricing regulations perspective. It was also submitted that the assessee had undertaken, a fresh search for functional comparable companies. At the onset of search process, the assessee aimed to identify companies in the same line of business i.e. distribution of advertisement air-time. However, the assessee was not able to identify any comparable company in the same line of business. Accordingly the comparables search was broadened, thus, covering companies engaged in distribution product like electronic equipment, I. T. product etc. which could be closely compared with the distribution of sales activities by the assessee and performing similar functions as undertaken by the assessee. The assessee found six comparables whose adjusted gross profit was 14 per cent as against assessee's gross profit margin of 13.22 per cent. Based on these facts it was submitted that +/-5% range prescribed in section 92C(2) was to be applied in order to determine the arm's length price. Therefore, no addition was to be made on account of arm's length price.
3I. T. A. No. 4106 (Del) of 2010
4. The TPO, however, rejected the assessee's contentions and analyzed the assessee's international transactions of acquisition of air-time inventory on a stand-alone basis. However, with respect to air-time inventory segment, the TPO held the same to be not in line with arm's length standard only on the premise that the assessee had incurred a loss in the said transaction. The TPO also rejected six comparables, which the assessee has submitted in fresh search by mentioning that those companies were engaged in totally different products. Further in order to bench-mark the said transaction, the TPO relied upon set of three companies with a mean operative profit margin of 24.37 per cent thereby arriving at adjustment of Rs.20,75,41,007/-. The comparables selected by TPO were Sahara One Media and Entertainment with operating margin 2.62 per cent; Sun TV Ltd. with operating margin 58.65 per cent; (iii) Mid-day Multimedia Ltd. with operating margin 11.87 per cent. Pursuant to order passed by the TPO the issued a draft order computing total income of the assessee at Rs 35,33,37,436/- after considering TP adjustments of Rs Rs.20,75,41,007/-.
5. Aggrieved by the draft order of assessing officer, the assessee filed its detailed submissions in the form of objections before DRP. The DRP, however, issued a very cryptic order, which is nothing but a mere replica of the order of the TPO.
6. Before us it has been submitted that the assessee based on detailed Functional Asset Risk [FAR] analyses carried out in the TP report, on account of a direct nexus, between the advertisement air-time inventory and channels business of the assessee, two business activities were aggregated and were bench-marked together as distribution segment. However, the TPO contended that two businesses of distribution of channels and distribution of air-time inventory could not be merged as one business assignment for the reasons that the assessee had maintained different segmental audited accounts; and the business models of distribution of channels and distribution of advertisement air-time inventory activities were different. It was explained by the assessee that operationally the assessee was organized into separate business divisions. The audited financials of the company, therefore, set out segmental profitability based on such divisions. However, for transfer pricing purposes, keeping in view the integrated economic 4 I. T. A. No. 4106 (Del) of 2010 view, business dynamics and functionality, distribution of channels and distribution of advertisement of air-time inventory have been aggregated. Commercial considerations were more reliable for transfer pricing purposes, while for segmental reporting more importance was given to the internal organization and financial reporting / management of the structure of the entity. He placed reliance on the decision of Hon'ble Supreme Court in the case of Tuticorin Alkaline Chemicals & Ltd. Vs. CIT 227 ITR 172 (SC) for the proposition that question whether a receipt of money is taxable or not, or whether certain deduction from that receipt are permissible or not, is to be decided according to principal of law and not accountancy practice. Accounting practice cannot over-ride section 56 or any other provisions of the Act. He further submitted that the subscription and air time activity collectively derived the business operations of the assessee. The higher the subscriber base of the channels the greater are the chances of aired advertisements being viewed by a large target audience. It is evident that if there is no viewership base for a channel, no advertiser would like to advertise on the channel. Thus the integrated activities of subscription and advertisement air-time inventory are driven to the same and the promotion of the channels of the assessee and cannot be analyzed separately from a transfer pricing perspective. The basic contention of the assessee is that distribution of channels and advertisements entry segments are closely inter-linked to each other The assessee placed reliance on the principles enunciated by OECD [Organization for Economic Co-operation and Development] and US regulations wherein it has been held that for transfer pricing purposes the concept of aggregation of transaction driven by economics and business dynamics of the tax- payer and that commercial considerations are relevant for transfer pricing purposes and should be given due regard. He placed reliance on the decision of ITAT, Mumbai Bench in the case of Star India Pvt. Ltd. (2008) TIOL 426 ITAT, Mum., wherein the assessee acted as a distributor in the distribution of satellite distribution activity and as an agent in connection with advertisement sales activity and hence aggregated both the segments on account of different business profile of a distributor and agent. Whereas the Department contended that the assessee for the purpose of transfer pricing be analyzed on a company-wide basis and hence aggregated the channel distribution and sale activity of the assessee. The ITAT, Mumbai Bench upheld the approach followed by the assessee stating that independent activity of distribution right could not be linked with the other activity of the assessee i.e. with the commission for collecting advertisement sales, where the assessee acted as a marketing and collecting agent. However, in the case of assessee 5 I. T. A. No. 4106 (Del) of 2010 under both the business segments of distribution of channels and advertisement air-time inventory acted as a distributor, who was engaged in purchasing channel distribution rights and advertisement air-time inventory from its Associated Enterprises for allotment to third party in the Indian market. In no way the functions undertaken by the assessee in its distribution of channel segment could be considered similar to those undertaken by commission agents. Since in both segments the assessee undertook distribution functions and both were inter-related and inter-dependent, the business segment distribution of channels and advertisement air-time inventory were to be aggregated. It has further been submitted that TPO has relied on the observation of the ITAT, Mumbai Bench, in the case of UCB India Ltd. Vs. ACIT (2009) TIOL 184 ITAT, Mum. that under TNMM an international transaction or class of such transaction should be evaluated on a stand-alone basis. Based on the above judgments of the ITAT, TPO had opined that the international transaction of distribution of advertisement air-inventory be valued under TNMM on a stand-alone basis without merging it with the channel distribution activity. According to assessee the comparison of operating profits of the assessee-company as a whole, with the overall operating profits of certain other companies without any adjustments in would not satisfy the requirements of evaluating an international transaction under TNMM, for the purpose of arriving at the arm's length price. In this case, the assessee had taken all the activities of the company as one unit and on an analysis of its profit and loss account, arrived at an overall operating profit margin of 27 per cent. It has further been submitted that both the distribution of channels and distribution of advertisement air-time inventory is to be taken as one activity. The invoice was raised by the assessee in respect of both the activities. He further submitted that DRP had not dealt with the issue by passing a speaking order. They have only upheld the stand taken by the TPO without appreciating the facts of the case. On the other hand, the ld. [CIT] - DR supported the order of the assessing officer.
7. We have heard both the parties and gone through the material available on record. From the order passed under section 144-C of the Act, the DRP has decided the objection raised by the assessee by observing as under :-
6I. T. A. No. 4106 (Del) of 2010 " 2.2 The DRP has considered the objections raised by the assessee company and has gone through the submissions filed. The assessee argued that till AY 2004-05, the assessee was an agent on 10 per cent commission. This year risk profile change has not been recognized by the TPO. It is seen that the TPO has given detailed reasons while segregating the Revenues into advertisement air-time inventory" and channel distribution business. Similarly, choosing the comparables has also been adequately justified. Approach adopted by the assessee on the transfer pricing issue has been examined in detail by TPO before determining the arm's length price. We have considered the arguments of the assessee, change especially in the risk profile this year.
On merits, we decline to interfere in the matter. "
8. From the order of the DRP it is clear that DRP has not considered the submissions raised by the assessee as to why the activities of advertisement air-time inventory and channel distribution business should not be taken as one. The TPO had accepted the distribution channel business at arm's length price whereas he has rejected the comparables in relation to advertisement air-time inventory. DRP has passed order without considering the arguments and evidence submitted by the assessee. DRP has not passed a speaking order. Therefore, we set aside the matter to the file of the DRP with the directions to consider the objections of the assessee in respect of determination of arm's length price of international transactions. The ld. DRP will pass a speaking order after providing the assessee an opportunity of being heard.
9. In the result, the appeal filed by the assessee is allowed, for statistical purposes.
The order was pronounced in the open court on 10.12.2010 after close of hearing.
Sd/- Sd/-
[ A. D. JAIN ] [ K. D. RANJAN ]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 10. 12. 2010
*MEHTA*
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I. T. A. No. 4106 (Del) of 2010
" Copy of the order forwarded to : -
1. Appellant.
2. Respondent.
3. CIT,
4. CIT (Appeals),
5. DR, ITAT, NEW DELHI.
True Copy. By Order.
Assistant Registrar, ITAT. "