2008 (5) TMI 660 - AT - Income Tax

Transfer Pricing Determine the Arms length price - Disallowance on interest - expenditure attributable to dividend income by virtue to Section 14A - Deduction u/s 80HHF - Advertisement commission income - consideration revived by the assessee by way of cable subscriptions amounts to turnover - Disallowance of security deposit written off - bad debt written off. Transfer Pricing Determine the Arms length price - Grant of deduction of 20% of the total payment for licence fee - Payment to two entities - HELD THAT - In the instant case the assessee has obtained the approval from the RBI before making the payment of licence fee, as such the nature of payment cannot be out rightly rejected or doubted. It requires proper adjudication in the light of detailed analysis and relevant evidences furnished by the assessee. Whereas the AO has disallowed the entire claim of payment of licence fee without looking into the merits of the case and the relevant provisions of the Act. In the impugned assessment year the claim of the assessee should have been examined in the light of the report of the Transfer Pricing Officer and the evidences filed by the assessee but the AO as well as the CIT(A) have not adjudicated the issue in accordance with law. We, therefore, are of the view that this issue requires fresh adjudication - Since the report of the Transfer Pricing Officer has already been obtained and the issue requires proper examination by the AO in the light of the report of TPO, detailed analysis of licence fee paid and other evidences filed by the assessee, we set aside the order of the CIT(A) in this regard and the matter is restored to the file of the AO to readjudicate the issue in terms indicated above. Disallowance on interest - expenditure attributable to dividend income by virtue to Section 14A - Assessee has incurred interest expenses paid on the Loan borrowings - HELD THAT - In the instant, case the assessee has paid a substantial amount of interest on the borrowed funds and he has also earned the dividend income from investment in Mutual Funds which is exempted from tax and from the details furnished before the AO and even before us it is not clear as to what was the sources of investment in Mutual Funds. Was it from the aforesaid short term deposits which was initially borrowed from the Credit Lyonnais Bank or the surplus funds of the assessee. Even before to the assessee could not furnish the complete details - We, however, in the interest of justice afford one more opportunity to the assessee to explain with evidence as to from where investments were made in Mutual Funds. If it was made out' of short term deposit with the Scotia Bank corresponding disallowance of interest deserves to be made as the short term deposits was made out of the borrowed funds from the Credit Lyonnais Bank which were kept in short term deposits with the ICIC1 Bank Ltd. first then Scotia Bank - If the assessee succeeds in proving that the investment in Mutual Funds was made out of the surplus funds of the assessee on which no interest was paid no corresponding disallowance can be u/s 14A of the IT matter to the file of the AO with the direction to readjudicate the issue in terms, indicated above after affording an opportunity of being-heard to the assessee. Deduction u/s 80HHF - Advertisement commission income - HELD THAT - We find that while re-computing deduction u/s. 80HHF the AO has excluded or reduced 90% of the gross receipt of commission from the profits of business, as computed under the head profit and gains of business or profession in order to compute profits of the business as per clause (baa) of Explanation to Section 80HHF whereas the assessee claimed deduction of 90% of the not commission received. The CIT(A) has simply followed earlier years order and confirmed the disallowance - According to the Revenue the judgment of Bangalore Clothing Co. 2003 (1) TMI 89 - BOMBAY HIGH COURT has been over ruled by the Apex Court in the case of K.Ravindranathan Nair 2007 (11) TMI 10 - SUPREME COURT by holding that the processing charged is held to be included in the total turnover and 90% of the same is also to be reduced as per Explanation (baa). But, according to the assessee, the judgment of the Bangalore Clothing Co. of the jurisdictional High Court, as still holds the field inasmuch the issue / question before the Apex Court was entirely different - This controversy has been examined by the Tribunal in the assessee's own case pertaining to the AY 2000-2001. Copy of the Order is placed on record and from its careful perusal we find that Tribunal has examined this aspect in detail with the help of various judicial pronouncements in his order before concluding that judgment in the case of Bangalore Clothing Co. is not over ruled as the judgment of the Apex Court in the case of K.Ravindranathan Nair (supra) was rendered in different contexts - Therefore, On perusal of the order clearly reveals that amendment was made to exclude only those incomes which do not have element of turnover. It is pertinent to note that legislature referred to element of turnover and not export turnover. Therefore, considering the above circular which is binding on the tax authorities, we are of the view that any income arising from an activity involving turnover cannot be excluded from the profits of business in terms of Explanation (baa) to section 80HHC/Explanation (f) to section 80HHF. Whether consideration revived by the assessee by way of cable subscriptions amounts to turnover - scope of the word 'turnover' may vary in section 80HHC and Section 80HHF - HELD THAT - In the present case, the right to exhibit the programmes telecasted by various channels owned by 'Star Group' in the Indian territory is with the assessee, the cable operators are the distributors through whom such programmes are exhibited to the subscribers of the public. Assessee receives the consideration on account of transfer of right to exhibition of programmes contained in such software and, therefore, the same would amount to turnover - There is no there that activity of distribution of channel Programmes is an independent activity and therefore the profits arising there-from would also form part of the profits of business. Accordingly, as per the test laid downin the case of K. Ravindranathan Nair, the cable subscription has to be treated as turnover - The test laid down by the Hon'ble Bombay High Court in the case of Bangalore Clothing Co. (supra) is that if the profits arising from an activity is in the nature of operational income then receipts from such activity would form part of profits of business as well as total turnover. There is no dispute that cable subscription activity is part of main objects of the assessee company and therefore the receipts arising from the same would form part of the operational income. Consequently such receipt would form part of turnove - The Constitution Bench of the hon'ble Supreme Court in the case of Navnit Lal C. Jhaveri vs. K.K. Sen 1964 (10) TMI 16 - SUPREME COURT held that circulars issued by the Board which are beneficial to the assessee are binding on the lax authorities. Keeping in mind the above binding judgement and the circular mentioned, it must be held that cable subscription having element of turnover cannot be executed from the profits of business computed under the head 'profits and gains of business or profession'. We hold accordingly. We are therefore, of the view that receipt of particular percentage of commission on collecting the advertisements for the principal's cannot be called to be the part of the operational income of the assessee, as such, it attracts the provisions of Explanation (baa) and 90% of the same is to be reduced. Moreover, the commission received from its principal does not have an element of turnover as it is to be received on realisation of consideration from advertisement and as such cannot be included in the total turnover, because it does not accrue from the main business of export of television programmes/content for which deduction under S. 80HHF is claimed - Hence, it falls outside the purview of explanation (1) of S. 80HHF of the Act. We have also considered the alternative arguments of the assessee that netting be allowed in case of Explanation (baa) is held to be applicable. In this regard, we find force in the contention of the assessee and we are of the view that whatever expenses are incurred by the assessee which were not debited to the accounts of the principal, are required to be set off against the commission received by the assessee. If nexus are proved in the light of the Order of the Special Bench in the case of Lalsons Enterprises 2004 (2) TMI 294 - ITAT DELHI-E and the judgment of the Delhi High Court in the case of Shree Ram Honda Power Equipment 2007 (1) TMI 86 - HIGH COURT, DELHI . Accordingly, we, restore the matter to the file of the AO to allow netting between the expenses incurred to earn the commission and the commission received, if nexus are proved. Accordingly, this issue is disposed off. Disallowance of security deposit written off - bad debt written off - HELD THAT - In the instant case the security deposit, which was claimed to be written off in this year were neither credited to the PandL Account nor taken into account while computing the income of the assessee either in the previous year relevant to the impugned assessment year or in earlier assessment years. We, therefore, of the view that assessee is not entitled for deduction as bad debt written off under Section 36(2)(vii) of the Act - We have carefully examined the facts of the case in the light of the aforesaid judgement and we find that nothing has been brought on record to show that the advance given by the assessee has become irrecoverable. Before the Assessing Officer assessee has claimed deduction of this debt as bad debt by writing it off in the year under consideration under Section 36(1)(vii) of the Act. The claim of the assessee was not examined in the light of the judgement of the jurisdictional High Court in the case of IBM World Trade Corporation vs. CIT. We accordingly set aside the order of the CIT(A) and restore it to the Assessing Officer to examine it in the light of above mentioned judgement. If the advance amount is found to be irrecoverable despite the efforts of the assessee it may be allowed as business loss. Determination of arms length u/s 92CA(1) - Transfer pricing adjustment - international transactions with associated enterprises - We find that the assessee is in fact involved in three independent activities, i.e. (a) distribution activity for which assessee has to pay the license fee for the right to distribute the Star channels to Asian Broadcasting Corporation Ltd also based in Dubai and Indian Region Broad Casting Ltd., a company based in Hong Kong. This distribution right cannot be linked up with other activities of the assessee, i.e. with commission for collecting the advertisement sales or with the export of TV programmes. The other activity that results in receipt of commission is also independent activity and the assessee acts as a marketing and collecting agent for Star Ltd. and NGC Asia in relation to advertisement sales to the satellite television channels broadcast by them in India - From a perusal of the TPO's report and the detailed analysis furnished by the assessee, we find that neither the assessee has taken the comparable cases involved in similar activities nor the TPO has determined the Arms Length Price in the light of the guidelines laid down by the Special Bench of the Tribunal in the case of Aztec Software and Technical Services 2007 (7) TMI 50 - ITAT BANGALORE - We are therefore of the view that Arms Length Price in relation to the impugned activities are not properly determined either by the assessee or by the TPO or the AO. As such, it requires a fresh determination in the light of the order of the Special Bench in the case of Aztec Software and Technical Services . We accordingly set aside the order of the CIT(A), confirming the order of the AO in this regard and restore the matter to the file of the AO with a direction to make a further reference to the TPO for determination of Arms Length Price in respect of each of the assessee's independent activities in the light of the comparable cases and also in the light of the decision of the Special Bench of the Tribunal in the case of Aztec Software and Technical Services (supra) and other order/judgment rendered on the issue. In the result, Appeals of the assessee as well as the Revenue are partly allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of Rs. 63,25,000/- for leasehold improvements.
2. Disallowance of Rs. 1,39,635/- for Provident Fund contribution.
3. Deduction of 20% of the total payment for license fees of Rs. 105,16,49,528/-.
4. Disallowance of Rs. 2,06,06,456/- on account of software expenditure.
5. Disallowance of Rs. 91,237/- for interest expenditure attributable to dividend income under Section 14A.
6. Addition of Rs. 7,19,94,617/- on account of commission income.
7. Deduction of only 20% out of total expenses of Rs. 37,29,17,000/- incurred on advertisement and publicity.
8. Deduction under Section 80HHF.
9. Disallowance of security deposit written off by the assessee.
10. Transfer pricing adjustment of Rs. 26,30,25,865/-.

Detailed Analysis:

1. Disallowance of Rs. 63,25,000/- for Leasehold Improvements:
The assessee's claim for expenditure on leasehold premises was disallowed by the Assessing Officer, who considered it of capital nature and granted 10% depreciation. The CIT(A) confirmed this disallowance. The Tribunal, noting the identical facts with the Assessment Year 2001-02, set aside the CIT(A)'s order and restored the matter to the Assessing Officer to follow the Tribunal's decision for the Assessment Year 2001-02.

2. Disallowance of Rs. 1,39,635/- for Provident Fund Contribution:
This ground was not pressed by the assessee's counsel during the hearing, and thus, it was dismissed.

3. Deduction of 20% of the Total Payment for License Fees of Rs. 105,16,49,528/-:
The Assessing Officer disallowed the entire claim, suspecting it as a tool to reduce taxable income, without properly examining it under Section 92. The CIT(A) allowed a 20% deduction without considering the Transfer Pricing Officer's (TPO) report. The Tribunal, noting the change in legal position from Assessment Year 2002-03 due to Transfer Pricing Rules, set aside the CIT(A)'s order and restored the matter to the Assessing Officer for fresh adjudication in light of the TPO's report and detailed analysis.

4. Disallowance of Rs. 2,06,06,456/- on Account of Software Expenditure:
The Assessing Officer treated the software expenses as capital expenditure and allowed 25% depreciation. The CIT(A) confirmed this. The Tribunal, referencing the Special Bench decision in Amway India Enterprises, set aside the CIT(A)'s order and directed the Assessing Officer to re-adjudicate the issue.

5. Disallowance of Rs. 91,237/- for Interest Expenditure Attributable to Dividend Income under Section 14A:
The Assessing Officer disallowed 10% of the dividend income as interest allocable to earning exempted income. The CIT(A) confirmed this. The Tribunal noted the need for clarity on whether the investments in Mutual Funds were from borrowed funds or surplus funds and restored the matter to the Assessing Officer for verification.

6. Addition of Rs. 7,19,94,617/- on Account of Commission Income:
The Assessing Officer added this amount, suspecting deviation from regular accounting methods. The CIT(A) confirmed this. The Tribunal, referencing its own decision in the assessee's case for earlier years, held that commission income accrued only when payment due to the principal was realized and deleted the addition.

7. Deduction of Only 20% out of Total Expenses of Rs. 37,29,17,000/- Incurred on Advertisement and Publicity:
The Assessing Officer disallowed the entire amount, and the CIT(A) allowed only 20%. The Tribunal, following the Third Member decision in the assessee's case for earlier years, allowed the entire expenditure as it was incurred wholly and exclusively for business purposes.

8. Deduction under Section 80HHF:
The Assessing Officer reduced 90% of the gross commission receipt for arriving at the profit of business. The CIT(A) confirmed this. The Tribunal, following the jurisdictional High Court's decision in Bangalore Clothing Co. and the Special Bench decision in Lalson Enterprises, restored the matter to the Assessing Officer to allow netting between expenses incurred to earn the commission and the commission received if the nexus is proved.

9. Disallowance of Security Deposit Written Off:
The Assessing Officer disallowed the claim as it did not satisfy Section 36(1)(vii) and 36(2). The CIT(A) confirmed this. The Tribunal, referencing the jurisdictional High Court and the Apex Court judgments, restored the matter to the Assessing Officer to examine if the advance amount became irrecoverable and allow it as a business loss if proved.

10. Transfer Pricing Adjustment of Rs. 26,30,25,865/-:
The TPO determined the adjustment by comparing the profits of the entity as a whole, which was confirmed by the CIT(A). The Tribunal, referencing the Special Bench decision in Aztec Software, held that each international transaction should be evaluated separately and restored the matter to the Assessing Officer for fresh determination of the Arms Length Price for each independent activity.

Revenue's Appeal:
1. Relief of Rs. 7,45,93,400 Given by the CIT(A) Out of Disallowance of Advertisement and Publicity Expenses:
This ground was rejected by the Tribunal, following its decision in the assessee's appeal.

2. Expenditure Incurred on Entrance Fee:
The Tribunal restored this issue to the Assessing Officer to follow the Tribunal's order for Assessment Year 2001-02.

3. Allowance of 20% of the License Fees Claimed by the Assessee:
The Tribunal restored this matter to the Assessing Officer for fresh adjudication in light of the TPO's report and detailed analysis.

Conclusion:
Both the appeals of the assessee and the Revenue were partly allowed for statistical purposes, with several matters restored to the Assessing Officer for fresh adjudication.