2011 (2) TMI 59 - AT - Income Tax

Arms length price - The assessee who was mainly engaged in distribution and marketing of National Geographic Channel and the Adventure One Channel and rendering of post-production services to media companies, had international transactions with its associated enterprises i.e. M/s. NGC Asia LLC - The Learned AR on the other hand argued that the assessee had carried out due diligence in selection of comparables and the latest data available on the date of due diligence had been applied - It was found that AO compared the assessee s own payment to its associated enterprises in the immediate preceding year for the purpose of comparison on the ground that in that year the said payment was found to be at arm s length as no adjustments were made License Fees - The AO had accepted the license fees for the month of February and March 2003 to be at arm s length - The position is however different in case of transactions with a related party as in the present case, which has to be compared to unrelated party transactions to find out the arm s length price - It was held that the TNMM is the best method for computing the transfer pricing - Appeal is partly allowed

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Selection of Comparables
3. Application of Transfer Pricing Methods

Detailed Analysis:

1. Transfer Pricing Adjustments:
The primary issue in this appeal is the transfer pricing adjustments made by the Assessing Officer (AO) concerning the license fees paid by the assessee to its associated enterprise, M/s. NGC Asia LLC. The AO disallowed a portion of the license fees paid on the grounds that the increase was not justified by the corresponding increase in revenue. The AO adopted the license fees paid in the previous year as the arm's length price for most of the year, only accepting the increased license fees for the last two months of the year.

2. Selection of Comparables:
The assessee, engaged in the distribution and marketing of satellite television channels, had selected comparables from companies trading in computer software, arguing that both dealt with intangible products. The AO rejected these comparables, noting significant differences in the nature of business activities. The AO also provided his own list of comparables but ultimately concluded that neither set was suitable. Instead, the AO compared the assessee's own transactions from the previous year, which were accepted as at arm's length.

3. Application of Transfer Pricing Methods:
The assessee applied the Transactional Net Margin Method (TNMM) to determine the arm's length price, while the AO appeared to apply the Comparable Uncontrolled Price (CUP) method using the assessee's own previous transactions. The CIT(A) sided with the assessee, noting that the AO did not specify which method should be applied and that the TPO had accepted the assessee's methodology in the subsequent year.

Judgment Analysis:

Transfer Pricing Adjustments:
The AO disallowed a sum of USD 8,33,330 (Rs. 3,04,70,868) for the period from April 2002 to January 2003, based on the previous year's license fees. The CIT(A) overturned this, accepting the assessee's argument that the increase in license fees was justified by the doubling of the subscriber base and the progressive increase in subscription revenues.

Selection of Comparables:
The CIT(A) observed that the AO had not provided a valid basis for rejecting the comparables selected by the assessee. The CIT(A) also noted that the TPO had accepted the same comparables and methodology in the subsequent year, thereby supporting the assessee's position.

Application of Transfer Pricing Methods:
The CIT(A) criticized the AO for not specifying the appropriate method under Rule 10B and for using the assessee's own previous transactions, which were not uncontrolled. The CIT(A) directed the AO to accept the transfer pricing study conducted by the assessee, which indicated no adjustments were necessary.

Final Decision:
The Tribunal set aside the CIT(A)'s order and restored the matter to the AO for reworking the transfer pricing adjustments using TNMM based on the available facts and figures for the assessment year 2003-04. The AO was instructed to pass a fresh order after allowing the assessee an opportunity for a hearing.

Conclusion:
The appeal by the revenue was partly allowed for statistical purposes, with the Tribunal directing a fresh assessment of the transfer pricing adjustments based on the relevant year's data. The decision emphasized the need for appropriate comparables and adherence to prescribed transfer pricing methods.