2017 (5) TMI 719 - AT - Income Tax

Addition on account of Arm s Length Price - rejection of TNM Method - selection of MAM - sale of television programmes and film rights to ATL Mauritius - Held that - Transfer Pricing Officer has not brought out any justifiable reasons to depart from adopting the TNM method, which has otherwise been found to be applicable in the assessments of past as well as subsequent assessment years upto to the assessment year 2012-13, as stated before us by the Ld. Representative for the assessee before us. Therefore, on the principle of consistency also, we are unable to uphold the selection of RPM method as the most appropriate method by the Transfer Pricing Officer in preference to the TNM method selected by the assessee. It would be inappropriate to factually conclude that the Transfer Pricing Officer has not verified the TNM method applied by the assessee company . In fact, in terms of page 108 of the Paper Book, wherein is placed a copy of assessee s communication to Transfer Pricing Officer dated 07/10/2011, the assessee had submitted a working to demonstrate that even if the concerns which were selected by the Transfer Pricing Officer for assessment year 2007-08 are taken as comparables for the instant year also, the transactions with ATL-Mauritius would still to be at arm s length price. All this goes to show that the Transfer Pricing Officer was fully aware of the manner in which the TNM method was applied by the assessee company and there is no adverse observations in this regard. The material on record, in our view, clearly belies the averment of the Revenue that the matter be restored back to the file of Transfer Pricing Officer for verifying the application of TNM method. Rather, in our view, the fact-situation clearly points to the contrary inasmuch as the assessee had fully explained its position in the course of proceedings before the Transfer Pricing Officer and no justifiable fault has been pointed out by the Transfer Pricing Officer; and, even before us the same position continues on behalf of the Revenue. Under these circumstances, in our view, the plea of the Ld. Departmental Representative is untenable and is hereby rejected. In the final analysis, it is held that the action of the Transfer Pricing Officer in determining the transfer pricing adjustment of ₹ 24,91,59,200/- with regard to the sale of television programmes and film rights to ATL-Mauritius deserves to be set-aside. - Decided in favour of assessee Addition of arm s length fee for corporate guarantee given by the assessee to the bank on behalf of its associated enterprise, ATL-Mauritius for the loan facility availed by it from the bank - Held that - We are inclined to uphold the rate of 0.5% for the purposes of determining arm s length rate of the corporate guarantee commission/fee. Thus, on this aspect, we set-aside the order of CIT(A) and direct the Assessing Officer to recompute the addition as per our aforesaid direction. Thus, on this aspect assessee partly succeeds. Disallowance under section 14A - Held that - Following the ratio in the case of Reliance Utilities & Power Ltd.(2009 (1) TMI 4 - BOMBAY HIGH COURT) it has to be presumed that the investments are out of own interest free funds. The said proposition is also applicable in the context of section 14A of the Act as held by the Hon ble Bombay High Court in the case of HDFC Bank Ltd. vs. DCIT (2014 (8) TMI 119 - BOMBAY HIGH COURT). Therefore, considering the aforesaid fact-situation, we find no reason to uphold the disallowance made under section 14A of the Act on account of interest expenditure. So far as the disallowance out of overhead expenses Assessing Officer has adequately brought out that during the year assessee has undertaken activities, which involve taking investment decisions and, therefore, some amount of management/administrative costs are liable to be attributed to such activity. Considering the entirety of circumstances, in our view , in so far as the administrative expenses is concerned, the application of Rule 8D(2)(iii) of the Rules to compute disallowance under section 14A of the Act is quite justified. Thus, on this aspect, we hereby affirm the stand of the Revenue. Addition of write off of advance given to the Board of Control for Cricket in India (BCCI) - allowable deduction u/s 37(1) - Held that - In the assessment year 2007-08 assessee has asserted that part of the amount paid to BCCI has been debited in the Profit and Loss account and there is no dispute on this count. In this background, in our view, the plea of the Assessing Officer to say that the impugned loss was capital in nature is not tenable. At this stage, it may also be relevant to mention that the Assessing Officer has only made a bald assertion and not given reason to justify as to why the acquisition of media rights in terms of the agreement dated 12/04/2006 has to be treated as capital in nature. Therefore, considering the entirety of the facts and circum stances of the case, in our view, the assessee made no mistake in treating the amount forfeited by BCCI as a deduction allowable while computing the income for the year under consideration. Thus, on this aspect assessee succeeds. Structured interest swap loss - treated as a speculation loss as against business loss treated by the assessee - Held that - In order to treat the impugned interest rate swap arrangement to be speculative in terms of section 43(5) of the Act, the Revenue would have to demonstrate that an interest rate swap arrangement was a tradable commodity. This crucial aspect has not been addressed by the lower authorities and infact the assessee has been consistently arguing that instant arrangement do not qualify to be a commodity for the purposes of section 43(5) of the Act. No doubt, before us the Ld. CIT-DR has attempted to show that interest rate swap arrangements are akin to. tradable derivates, but no such aspect is emerging from the respective orders of the lower authorities. Infact, the order of the Assessing Officer is quite inconsistent because at one place he says that the present transactions are not derivative transactions , while at other place he says that the transaction of interest rate swap is a derivative falling within the meaning . . . . . Thus, in our view, the said issue requires to be revisited by the Assessing Officer to bring out why the impugned transaction falls for consideration as a speculative transaction for the purposes of section 43(5) of the Act so that the assessee can meet the point in an appropriate manner. Therefore, we setaside the order of the CIT(A) on this aspect and restore the issue back to the file of the Assessing Officer for a de novo consideration

Summary

Issues Involved:
1. Addition on account of Arm's Length Price by TPO ? 24,91,59,200/-
2. Addition on account of Corporate Guarantee for AE by TPO ? 1,63,16,370/-
3. Disallowance u/s 14A ? 69,94,985/-
4. BCCI advance Written off ? 33,54,01,600/-
5. Structured Interest Swap Loss treated as Speculation Loss & Disallowed ? 26,17,93,000/-
6. Dismissal of appeal by CIT(A) without considering the submissions of the assessee.

Detailed Analysis:

1. Addition on account of Arm's Length Price by TPO ? 24,91,59,200/-
The appellant challenged the addition made by the Assessing Officer (AO) based on the Transfer Pricing Officer's (TPO) determination of the arm's length price (ALP) for the international transaction of selling TV programs and films to an associated enterprise (AE). The TPO rejected the Transaction Net Margin Method (TNMM) used by the appellant and adopted the Resale Price Method (RPM) instead. The TPO selected the AE as the tested party and attributed 90% of the gross profits to the appellant, resulting in an addition of ? 24,91,59,200/-. The appellant argued that the RPM was inappropriately applied as the transactions between the AE and its subsidiaries were not between unrelated entities. The Tribunal agreed with the appellant, stating that the transactions between related parties could not justify the adoption of RPM and that the TPO's approach was unsustainable. The Tribunal also noted that the TNMM had been accepted in previous and subsequent years, and there was no reason to deviate from this method. The Tribunal set aside the TPO's adjustment and allowed the appellant's ground of appeal.

2. Addition on account of Corporate Guarantee for AE by TPO ? 1,63,16,370/-
The appellant contested the addition made by the AO for not charging a fee or commission for providing a corporate guarantee to a bank on behalf of its AE. The TPO determined a rate of 3% as the arm's length rate for the corporate guarantee fee, resulting in an addition of ? 1,63,16,370/-. The appellant argued that the rate should be lower, citing the financial health of the AE and the lack of risk assumed by the appellant. The Tribunal referred to the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Everest Kanto Cylinders Ltd., which approved an arm's length rate of 0.50% for corporate guarantee fees. The Tribunal rejected the 3% rate adopted by the TPO and directed the AO to recompute the addition using a rate of 0.5%. The appellant's ground of appeal was partly allowed.

3. Disallowance u/s 14A ? 69,94,985/-
The appellant challenged the disallowance made by the AO under section 14A of the Income Tax Act for expenses incurred in relation to earning exempt income. The AO applied the formula in Rule 8D(2) of the Income Tax Rules, resulting in a disallowance of ? 69,94,985/-. The appellant argued that the investments were made out of internal accruals and interest-free funds, and no borrowed funds were utilized for earning exempt income. The Tribunal agreed with the appellant, noting that the owned interest-free funds were in excess of the investments made, and following the ratio of the Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd., the investments were presumed to be made out of interest-free funds. The Tribunal upheld the disallowance of overhead expenses calculated under Rule 8D(2)(iii) but deleted the disallowance of interest expenditure. The appellant's ground of appeal was partly allowed.

4. BCCI advance Written off ? 33,54,01,600/-
The appellant contested the disallowance of ? 33,54,01,600/- representing a trade advance given to the Board of Control for Cricket in India (BCCI) for acquiring media rights, which was written off as irrecoverable. The AO disallowed the claim, stating that the write-off was premature and the amount was a capital loss. The Tribunal noted that the agreement with BCCI was in the normal course of business, and the write-off was due to external developments affecting the viability of the agreement. The Tribunal found that the bonafides of the non-recovery were not in doubt and that the amount was not recovered later. The Tribunal allowed the appellant's claim for deduction of the irrecoverable amount, treating it as a revenue expenditure. The appellant's ground of appeal was allowed.

5. Structured Interest Swap Loss treated as Speculation Loss & Disallowed ? 26,17,93,000/-
The appellant challenged the treatment of a loss of ? 26,17,93,000/- on account of interest swap transactions as a speculation loss by the AO. The AO held that the transaction was speculative within the meaning of section 43(5) of the Act. The Tribunal noted that the interest rate swap was an arrangement to hedge risks associated with volatile interest rates and currency exchange rates and was not a tradable commodity. The Tribunal found that the lower authorities had not demonstrated that the transaction fell within the definition of a speculative transaction under section 43(5). The Tribunal set aside the order of the CIT(A) and remanded the issue back to the AO for de novo consideration, directing the AO to provide an appropriate opportunity of being heard to the appellant. The appellant's ground of appeal was allowed for statistical purposes.

6. Dismissal of appeal by CIT(A) without considering the submissions of the assessee
The appellant argued that the CIT(A) dismissed the appeal without considering the submissions and evidence provided by the appellant, thereby denying justice and acting against the principles of natural justice. The Tribunal's detailed analysis and decisions on each ground of appeal indicate that the issues raised by the appellant were thoroughly considered and adjudicated upon.

Conclusion:
The appeal of the appellant was partly allowed, with the Tribunal setting aside certain additions and disallowances made by the AO and TPO, and directing the AO to recompute or reconsider specific issues as per the Tribunal's directions.