2018 (8) TMI 259 - AT - Income Tax

TPA - selection of companies as comparable - activities mixed up for distorting the functionality and justifying the selection of channel owner companies - Held that - The assessee is mainly engaged in the business of marketing and distribution of satellite channels of Cartoon Network, CNN, POGO, HBO, etc. i.e., TV channels owned by Turner International Inc. Its functions are primarily driven towards promoting the channels and associated proprietary intangible assets of Turner Group, thus companies functionally dissimilar need to be deselected. The Tribunal in assessee s own case for the Assessment Year 2007-08 and 2008-09 and also in Assessment Year 2006-07 have held that Satellite TV channels and cable network operators have significantly different operating models and provide earning model and once the Tribunal has held that such channel/content owner companies should not be included for the purpose of comparability analysis, then there is no reason why the TPO is again selecting such companies for the purpose of benchmarking the ALP of the assessee s distribution segment. Before us, the learned counsel has already clarified on the basis of material available on record that distribution activity and ancillary/production activity of the assessee are two distinct set of transactions for which, not only separate benchmarking has been done but also separate remuneration has been earned for each of the said activities. So far as production activity is concern, the same has been found at arm s length by the TPO and once these are two different segments then there is no justification to mix up the functions of such ancillary activities with that of distribution activity so as to justify selection of such channel/content owner companies, especially when transaction from such ancillary services constitutes only 4% of the value of the international transaction of the assessee. Apart from that, the assessee is providing these services as a captive service provider for which it is remunerated separately and ALP of such transaction is not in dispute. Accordingly, we reject the DRPs and TPO action for mixing the functionality of distribution and production activities which are in fact independent and also separately benchmarked. We are in tandem with the contention of the learned counsel that these two activities cannot be mixed up for distorting the functionality and justifying the selection of channel owner companies.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Corporate Tax Issues
3. Nature of Expenditure
4. Disallowance of Deduction
5. Penalty Proceedings
6. Interest Charges
7. Tax Credit

Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue was the transfer pricing adjustment of INR 10,07,35,464 to the total income concerning the distribution segment of the appellant. The Tribunal had previously directed a fresh comparability analysis for the distribution segment, emphasizing that only distributors should be selected as comparables. The TPO's fresh analysis included companies engaged in broadcasting and distribution of TV channels, rejecting two comparables suggested by the assessee due to functional dissimilarity and persistent losses. The DRP upheld the TPO's selection but directed verification of margins and granted working capital adjustment.

The Tribunal found that the TPO misinterpreted the functionality of the assessee’s distribution segment, erroneously mixing it with production activities. The Tribunal reiterated that only distributors should be used as comparables, excluding channel/content owners. The Tribunal directed the exclusion of seven comparables (Malayalam Communications Ltd., Raj Television Network Ltd., TV Today Network Ltd., Sun TV Network Ltd., Zee Entertainment Enterprises Ltd., Zee Media Corporation Ltd., and UTV Software Communications Ltd.), and accepted three comparables (Empower Industries India Ltd., Sonata Information Technologies Ltd., and Softcell Technologies Ltd.). Additionally, the Tribunal included Trijal Industries Ltd. as a valid comparable, resulting in four comparables for benchmarking.

2. Corporate Tax Issues:
The Tribunal noted that corporate tax issues were not adjudicated in the first round of proceedings, and the assessee had filed a miscellaneous application for recalling the order. Consequently, the corporate tax grounds in this appeal were deemed infructuous and dismissed.

3. Nature of Expenditure:
The assessee contested the AO's decision to treat relocation expenses of INR 1,53,283 and INR 2,25,107 as capital in nature. The Tribunal did not specifically address this issue in the provided text.

4. Disallowance of Deduction:
The AO disallowed a deduction of INR 3,77,963 under section 40(a)(ia) of the Act. The Tribunal did not specifically address this issue in the provided text.

5. Penalty Proceedings:
The Tribunal deemed the initiation of penalty proceedings under section 271(1)(c) as premature and dismissed the ground.

6. Interest Charges:
The Tribunal considered the charging of interest under sections 234B and 234C as consequential and dismissed the ground.

7. Tax Credit:
The Tribunal directed the AO to verify the records and allow the complete credit of taxes paid by the assessee.

Conclusion:
The appeal was partly allowed, with significant directions on transfer pricing adjustments, exclusion of inappropriate comparables, and instructions to verify tax credits. Corporate tax issues were dismissed as infructuous, and penalty and interest-related grounds were deemed premature or consequential.