2019 (3) TMI 460 - AT - Income Tax

TP adjustment - comparable selection - functinal dissimilarity - broadcasting companies are not comparables with content producers like assessee - FAR analysis of content producer and broadcasting companies - HELD THAT - we are of the view that the media content and TV broadcasting are totally dissimilar activities except the only linkage is that of media content is made only for the purpose of broadcasting on the TV channels. Production of media content is one of the functions of the assessee while broadcasting is the function of its AE and hence, due to functional divide & due to this aspect, this is the prime reason for entering into international transaction by the assessee with its AE. Hence, the activity of producing content and broadcasting the content is altogether different and not at all comparable. Even investment requires for making same content is very less compared to investment required for carrying out the broadcasting activity. Hence, on economic factor, functional analysis and the activities, these two are entities are dissimilar and cannot be compared. Hence, the CIT(A) has rightly directed the AO/ TPO to exclude the broadcasting companies taken by Revenue and by assessee while comparing the two. Inclusion of creative Eye Limited as comparables - HELD THAT - We find that the Creative Eye Limited is functionally similar to the assessee company reason being it is also engaged in production of film production that is why is functionally same with the assessee. Even otherwise, in this year only, the loss is made by Creative Eye Limited due to loss of volume because of competitive pressure on account of production of 3D film Abra Ka Dabra . Hence, we find no infirmity in the order of CIT(A) and the same is confirmed. This issue of Revenue s appeal is dismissed. Transfer Pricing adjustment made on account of income from distribution i.e. distribution Revenue (payment segment) - selection of MAM - CUP v/s TNMM - HELD THAT - We find that the assessee while making transfer pricing study under Cup Method, which is direct method available to the assessee and assessee has used the proper and scientific data which is available for comparison. But the TPO applied TNMM method for computing Arms Length Price without any basis just on the basis of search conducted on Google and comparing the data with cable TV operators. The assessee is consistently following the CUP method for benchmarking the transaction with its AE s and for which scientific and correct data is available. TPO or the AO has not pointed out any ambiguity in the data supplied by the assessee for benchmarking the Cup Method in the TP study. The AO applied TNMM method which is without any data or any basis. Hence, we are of the view that the CIT(A) has rightly deleted the adjustment and we confirm the same. Adjustment made to the reimbursement of advertisement and sale promotion expenses - HELD THAT - Assessee has not availed any specific manpower for this purpose and existing manpower of the assessee has carried out for the incidental activity. In this process, the assessee also received indirect benefit in the shape of increased market development, as a result of major advertisement and sales promotion costs. Such costs will increase the viewership of the channel which will in turn result in higher income for the assessee in term of increase sales and distribution of adds receipt on the channels. Hence, according to us, no further expenditure has been incurred by assessee and consequently no further reimbursement was made by the assessee and hence, no markup can be added. Hence, we confirm the order of CIT(A) deleting the addition. This appeal of Revenue is dismissed. Disallowing of advertisement and sale promotion expenses as incurred for assessee s own business - HELD THAT - The issue is squarely covered by Tribunal s decision in assessee s own case as held assessee was in the business of acting as advertising sales agent in India and as the assessee was to receive a percentage of advertising revenue received in India as its commission, it was in the business interests of the assessee to incur advertisement and sales promotion expenditure so that there is increased advertisement revenue which in turn would entitle the assessee to receive increased commission. Accordingly, the expenditure claimed by the assessee was allowed as business expenditure. - Decided against revenue

Summary

Issues Involved:
1. Transfer pricing adjustment for the content segment.
2. Inclusion of Creative Eye Limited as a comparable.
3. Transfer pricing adjustment for distribution revenue (payment segment).
4. Adjustment to reimbursement of advertisement and sales promotion expenses.
5. Disallowance of advertisement and sales promotion expenses.

Detailed Analysis:

1. Transfer Pricing Adjustment for the Content Segment:
The primary issue was whether broadcasting companies are comparable to content producers for transfer pricing purposes. The assessee argued that broadcasting companies should be excluded as comparables and that Creative Eye Limited should be included. The CIT(A) held that TV broadcasting and content production are functionally different businesses, and therefore, broadcasting companies should be excluded from the comparables. The Tribunal upheld this decision, noting the significant differences in functions, assets, and risks between content producers and broadcasters. The Tribunal confirmed that the CIT(A) correctly directed the AO/TPO to exclude broadcasting companies from the comparables.

2. Inclusion of Creative Eye Limited as a Comparable:
The TPO excluded Creative Eye Limited due to its significant loss in the relevant year. However, the CIT(A) included it, noting that the company was profitable in previous and subsequent years and that the loss was due to a specific business failure. The Tribunal agreed with the CIT(A), stating that a company should not be excluded merely because it incurred a loss in one year if it is otherwise functionally similar. The Tribunal confirmed the inclusion of Creative Eye Limited as a comparable.

3. Transfer Pricing Adjustment for Distribution Revenue (Payment Segment):
The assessee used the CUP method to benchmark its transaction, while the TPO adopted the TNMM method. The CIT(A) found that the CUP method was appropriate and that the TPO erred in adopting the TNMM method. The Tribunal upheld the CIT(A)'s decision, noting that the CUP method was consistently used by the assessee and accepted by the Revenue in previous years. The Tribunal confirmed that the TPO's adjustment was incorrect and that the CUP method should be used.

4. Adjustment to Reimbursement of Advertisement and Sales Promotion Expenses:
The TPO added a 10% markup to the reimbursement of advertisement and sales promotion expenses. The CIT(A) deleted this adjustment, noting that the reimbursements were normal business activities and benefited the assessee. The Tribunal agreed, stating that no specific manpower was used for these activities and that the assessee received indirect benefits from increased market development. The Tribunal confirmed the CIT(A)'s decision to delete the adjustment.

5. Disallowance of Advertisement and Sales Promotion Expenses:
The AO disallowed a portion of the advertisement and sales promotion expenses, considering them not incurred for the assessee's own business. The CIT(A) deleted this disallowance, referencing a previous Tribunal decision in the assessee's favor. The Tribunal upheld the CIT(A)'s decision, noting that the expenses were incurred to promote the MTV brand, which directly benefited the assessee's business. The Tribunal confirmed that the expenses were deductible and dismissed the Revenue's appeal.

Conclusion:
The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s decisions on all issues. The Tribunal upheld the exclusion of broadcasting companies from comparables, the inclusion of Creative Eye Limited, the use of the CUP method for distribution revenue, and the deletion of adjustments related to advertisement and sales promotion expenses.