2019 (8) TMI 1464 - AT - Income Tax

TP Adjustment - International transactions of provision of support services for distribution of television channels and in relation to international transactions of provision of support services - Comparable selection - HELD THAT - APTICO is influenced by Govt. Procedures and budget allocation. We also notice that the share holding is by public sector undertakings and the support received by the government and its public sector share holders in the functioning of APTICO. For practical purposes it is a Government company. Even the company is not functionally comparable as per the Director s of the Company and Schedules to the profit and loss account. It can be seen that the company generates revenue from services such as cluster development project development services entrepreneurship development and training asset reconstruction and management services micro enterprises development tourism and research studies skill development energy and environment management related services. APTICO also offers wide range of consulting services in the nature of project identification project counseling pre feasibility reports detailed project feasibility reports infrastructure planning market assessment expansion diversification and turn around strategies skill development project appraisals asset valuation HRD intervention capacity building etc. These services provided by the APTICO are in the nature of high end consultancy / project related services and hence APTICO cannot be compare as comparable to support to service providers. Companies functionally dissimilar with that of assessee need to be deselected from final list. International transaction of availing of management services - HELD THAT - The management fee is allocated to each channel companies in the proportion of revenues generated by individual channel companies to the consolidated revenues of all the channel companies taken together. At the time of hearing the calculation for monthly invoice of the management fees paid to STAR Ltd. was sought and the details were filed vide Annexure 5. We noted from the information submitted by the assessee in its paper book and the fact that the management costs were allocated in the ratio of Revenue which is an accepted methodology internationally and in several judicial precedents. The assessee placed its reliance on the decisions which we have already discussed in the arguments of both the sides above wherein allocation of management charges based on sales revenue were accepted as appropriate cost allocation methodology. No intention to shift profits and to explain this it stated that the recipient AE (STAR Ltd) had been regularly assessed to tax in India and had duly offered this income to tax in India even for AY 2011-12. Therefore the question of India tax base erosion does not arise as noted by the TPO. Another aspect is that even on the Principle of commercial expediency / business rationale of a particular expenditure incurred by an assessee for smooth functioning and furtherance of its business is the prerogative of the assessee. The reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue authorities. We are of the view that the TPO cannot question the commercial viability of the expenses incurred by the assessee for its own business and the commercial viability of the expenses incurred by the assessee which were necessary to carry on the business cannot be questioned. Even the transactions of management charges have always been accepted to be at arm s length in the previous assessment proceedings of the channel companies and STAR Ltd. then on account of mere merger of channel companies with SIPI. Hence we are of the view that the value taken by assessee of this transaction is correct. Hence we direct the AO/ TPO accordingly. Payment towards brand license - as determined based on valuation of the brand by an independent valuer and the said payment towards brand license was capitalized in the books of accounts and depreciation was claimed under the Act only on yearly basis - what rights have been obtained by the assessee from Star Ltd. Can it assign the rights to a third party or not? Does it have an interest in the brand now? - HELD THAT - Since SIPL could not run its operations without the Star brand it entered into a licensing arrangement for 10 years. Approval of the RIB to brand license fee was taken and for the purpose of making lump sum payment to STAR Ltd had determined the total value of brand license to be of USD 36.02 million for the use of STAR mark for a tenure of two years on the basis of a valuation by third party valuer. SIPL intended to pay the above payment in six installments. Considering the deferral in the payments an interest component was considered to the overall value based on which the total value was determined to of USD 36.95 million. After consideration the reserve bank refused to permit the assessee to pay the amount of US 36.95 Million and only approved all of USD 36.02 Million thereby excluding any interest on the value of brand license fees was approved basis the letter dated 01.08.2011 received by Deutsche Bank AG (authorized representative) from the Reserve Bank of India (RBI ) providing approval for the payment of USD 36.02 million to be made by SIPI to STAR Ltd subject to non-payment of interest component. Once the payments including the amount have been approved by the competent authority (RBI) that had specifically considered the value of the brand license fees paid for the STAR Mark and there cannot be any disallowance of expenses by the TPO that the assessee has not gained any benefits. In view of the above we are of the view that no disallowance shall be made and we direct the AO / TPO accordingly. Disallowance u/s 14A r.w.r. 8D - HELD THAT - Once there is no exempt income the issue is squarely covered by the decision of Hon ble Bombay High Court in the case of Ballarpur Industries Limited 2016 (10) TMI 1039 - BOMBAY HIGH COURT . Respectfully following the Hon ble Jurisdictional High Court we direct the AO/ TPO to delete this addition. Disallowance of deduction of property tax reimbursed to Precision Components Private Limited - HELD THAT - As decided in own case 2016 (4) TMI 1384 - ITAT MUMBAI A.R. contended the reimbursement of property tax partakes the character of rent only. There is merit in its said contention also. Hence what is required to be seen is as to whether to aggregate amount of rent plus reimbursements compares well with the earlier years payment. If it does not compare well then it is the duty of the assessee to justify the payment.In view of the above this issue required fresh examination at the end of Assessing Officer. Depreciation in relation to computer software held as capital in nature - HELD THAT - DRP has already directed the AO to verify records and grant depreciation on opening WDV of software expenses earlier held as capital expenditure. We find no infirmity in the directions and AO can allow depreciation accordingly. Depreciation on cumulative addition made to lease hold improvements - HELD THAT - DRP has already directed the AO to verify from records whether in earlier years the additions made to leasehold agreements have been capitalized or not and in case the same is capitalized allow depreciation accordingly. We find no infirmity in the directions. Hence we direct the AO accordingly. Depreciation on cumulative additions made to leasehold improvements in earlier years @10% allowed Depreciation @ 60% on printers and scanners instead @ 15% - HELD THAT - As decided in ow case 2016 (4) TMI 1384 - ITAT MUMBAI we noted that the devices like Printer scanner etc. are devices which are connected to the computer and are used for performing functions of the computer viz. storage processing etc. Hence the same form part of the block of assets under the head computer and accordingly are eligible for depreciation at the rate of 60%. Software expenses claimed by the assessee as revenue in nature instead of capital allowed. Disallowance u/s. 40(a)(ia) rws 194J of Channel Placement Fees - Whether definition of term process in Explanation 6 to section 9(1)(vi) by way of retrospective amendment is Clarificatory in nature and did not amend definition of royalty per se ? - HELD THAT - Assessee has rightly deducted tax at source under Section 194C of the Act and therefore it should not be treated as an assessee in default under the provisions of Section 201

Summary

Issues Involved:
1. Mechanical approval for referring the case to the TPO.
2. Transfer pricing analysis for international transactions of support services for distribution of television channels.
3. Transfer pricing analysis for international transactions under the broadcasting segment for franchise channels and merged entities.
4. International transaction of availing management services.
5. International transaction of payment of brand license fees.
6. Disallowance under Section 14A read with Rule 8D.
7. Deduction of property tax reimbursed.
8. Depreciation in relation to computer software.
9. Depreciation on cumulative additions to leasehold improvements.
10. Allowability of depreciation on computer peripherals.
11. Allowability of software expenses.
12. Disallowance of Channel Placement Fee expenses.

Issue-wise Detailed Analysis:

1. Mechanical approval for referring the case to the TPO:
The appellant raised the issue regarding the AO mechanically seeking approval from the CIT for referring the case to the TPO based on transaction value exceeding INR 15 Crores. However, this issue was considered academic and was not adjudicated.

2. Transfer pricing analysis for international transactions of support services for distribution of television channels:
The assessee provided services for the distribution of channels and was remunerated with a cost-plus 10% mark-up. The TPO did not dispute the functional role or FAR analysis but rejected the comparables selected by the assessee without providing reasons. The Tribunal directed the AO to exclude APITCO Ltd and TSR Darashaw Ltd from the list of comparables, as they were not functionally comparable.

3. Transfer pricing analysis for international transactions under the broadcasting segment for franchise channels and merged entities:
The TPO rejected four comparables selected by the assessee. The Tribunal directed the AO to include UTV Software Communications Ltd, IBN 18 Broadcast Ltd, and Raj Television Network Ltd as comparables, as they were functionally similar and not consistent loss-making companies. The Tribunal also applied the same reasoning for AY 2012-13.

4. International transaction of availing management services:
The TPO determined the ALP of management services availed from STAR Ltd to be 'NIL' and the DRP upheld this. The Tribunal, however, directed the AO to accept the assessee's valuation, noting that the management services were necessary for the business and the costs were allocated based on revenue, an accepted methodology.

5. International transaction of payment of brand license fees:
The TPO disallowed the depreciation claim on brand license fees, determining the ALP to be 'NIL'. The Tribunal directed the AO to accept the brand license fees as the valuation was done by an independent valuer and the payment was approved by the RBI. The Tribunal also applied the same reasoning for AY 2012-13.

6. Disallowance under Section 14A read with Rule 8D:
The Tribunal noted that the assessee had not earned any exempt income during the year and directed the AO to delete the disallowance, following the decision of the Hon’ble Bombay High Court in the case of Pr. CIT vs. Ballarpur Industries Limited.

7. Deduction of property tax reimbursed:
The Tribunal remanded the matter back to the AO for fresh examination, following the decision in the assessee's own case for AY 2006-07. The Tribunal also applied the same reasoning for AY 2012-13.

8. Depreciation in relation to computer software:
The DRP directed the AO to verify records and grant depreciation on the opening WDV of software expenses earlier held as capital expenditure. The Tribunal found no infirmity in this direction and applied the same reasoning for AY 2012-13.

9. Depreciation on cumulative additions to leasehold improvements:
The DRP directed the AO to verify if the additions made to leasehold improvements in earlier years were capitalized and, if so, to allow depreciation accordingly. The Tribunal found no infirmity in this direction and applied the same reasoning for AY 2012-13.

10. Allowability of depreciation on computer peripherals:
The Tribunal upheld the DRP's direction to allow depreciation at the rate of 60% on computer peripherals, following the decision in the assessee's own case for AY 2006-07. The Tribunal also applied the same reasoning for AY 2012-13.

11. Allowability of software expenses:
The DRP accepted the software expenses as revenue in nature, following earlier years' precedence. The Tribunal found no infirmity in this direction and applied the same reasoning for AY 2012-13.

12. Disallowance of Channel Placement Fee expenses:
The DRP deleted the disallowance under section 40(a)(ia) following the decision in the assessee's own case for AY 2009-10. The Tribunal found no infirmity in this direction and applied the same reasoning for AY 2012-13.

Conclusion:
The appeals of the assessee were partly allowed, and the appeal of the Revenue was dismissed. The Tribunal directed the AO to follow the consistent view taken in earlier years for similar issues.