2017 (11) TMI 586 - HC - Income Tax

Clubbing of income for Arm s Length Price (ALP) determination - clubbing of two distinct revenue streams i.e. sale of air time with distribution business, advertisements, sale business, etc by ITAT - ITAT upheld the Appellate Commissioner s findings that the transactions in question ought to be analyzed in conjunction i.e. after aggregation for arm s length purposes and also found that the assessee had structured itself in a manner that its profit was maximized as a whole rather than independently as regards these two activities - Held that - The Court is of the opinion that the ITAT s decision cannot be faulted. The rejection of the RBI guidelines and the TPO s omission given due weight to the down linking guidelines were a relevant factor, which in our opinion, the CIT(A) and the ITAT correctly noted to reverse the original findings. It is a settled proposition that whether to segregate or not segregate two transactions, is entirely a fact dependent exercise that cannot per se be treated as a question of law. In the present case, the reasons which impelled the lower authorities i.e. the CIT (A) and the ITAT to uphold the assessee s plea with regard to aggregation for ALP purposes, are reasonable and cannot be interfered with. - Decided against revenue

Issues involved:
1. Clubbing of distinct revenue streams for Arm's Length Price (ALP) determination.
2. Appropriateness of clubbing segments for benchmarking international transactions.
3. Distortion due to aggregation of two business segments.
4. Rejection of RBI guidelines and relevance of downlinking guidelines.
5. Correctness of decision on aggregation for arm's length purposes.

Issue 1: Clubbing of distinct revenue streams for ALP determination:
The Revenue contended that the ITAT erred in clubbing two distinct revenue streams - sale of airtime and distribution business - for ALP determination. The TPO considered these businesses separate and distinct, while the assessee argued for their aggregation based on common features. The CIT (A) upheld the aggregation, noting that the businesses were closely related and mutually reinforced each other. The ITAT, after considering practical aspects and shared assets, supported the aggregation for ALP determination.

Issue 2: Appropriateness of clubbing segments for benchmarking international transactions:
The CIT (A) supported the aggregation of segments for benchmarking international transactions, citing the interrelation between subscription and advertisement sales influenced by channel popularity. The CIT (A) found that separately benchmarking these segments would deviate from reality. The ITAT concurred, emphasizing the practical considerations that made merging comparables for profits unfeasible, ultimately determining an operating profit margin of 7.82%.

Issue 3: Distortion due to aggregation of two business segments:
The Revenue argued that aggregating the two business segments distorted the financial picture, especially as the advertisement sales segment showed profits in earlier years but recorded losses in the year under consideration. The ITAT, however, rejected this argument, highlighting the interdependence of distribution and advertisement air time activities, particularly in relation to subscriber base and advertisement revenue.

Issue 4: Rejection of RBI guidelines and relevance of downlinking guidelines:
The ITAT rejected the Revenue's reliance on the RBI guidelines, emphasizing the impact of Ministry of Information and Broadcasting's downlinking guidelines on the assessee's business decisions. The ITAT noted that the change in business model was strategic and aligned with the guidelines, necessitating the aggregation of channel subscription and air time sale segments for arm's length analysis.

Issue 5: Correctness of decision on aggregation for arm's length purposes:
The High Court affirmed the ITAT's decision, emphasizing that the lower authorities correctly upheld the aggregation for ALP purposes. The Court considered the relevance of RBI guidelines and downlinking guidelines, concluding that the reasons supporting aggregation were reasonable and not subject to interference. The Court dismissed the appeals, upholding the decision in favor of the assessee.

← Previous Next →