2020 (1) TMI 615 - AT - Income Tax

Ad hoc addition of 10% under transfer pricing adjustment - addition has been made by the TPO not in respect of any expenditure having been incurred but with respect to income derived by the assessee, part of which was distributed among the RPs according to their respective entitlements as worked out on the basis of their subscribers - HELD THAT - We found that while upholding 10% of addition in respect of the amount distributed, the DRP have clearly observed that the TPO was not justified in making addition to the extent of 50%. DRP held that consumer numbers represent a key parameter for deciding the amount or placement charges and in the facts and circumstances of the case held that allocation made by the assessee with respect to the total placement charges received is fair and proper. After this finding being recorded by the DRP, there is no justification even for upholding 10% of the addition, in so far as the assessee has distributed income on the basis of actual subscribers being commanded by the RPs. DRP has categorically observed that the assessee has performed more functions that include making efforts to consolidate the RPs presenting their position and negotiating with the broadcasters for RPs. DRP has further categorically rejected the findings of the TPO that just because each RP individually represents mere 5% to 7% of the subscriber base which is not in a position to negotiate individually with the broadcasters. Finding of the TPO for the RPs should be allowed just 50% of the amount attributable to its subscriber base has been rejected by the DRP. DRP has held that by way of this transaction, the assessee was given an authority by the RPs to negotiate with the broadcasters for the placement charges for the entire group. The DRP acknowledges the fact that clubbing of such rights with one person ensured better charges for the entire group. And that the assessee itself has been benefitted from such pooling. Furthermore, the DRP has not categorically held that other than giving such rights of negotiation to the assessee, no other risks are transferred to the assessee nor there is any deployment of capital on behalf of the RPs. DRP has held that it is a transaction of rendering of services of marketing of the channel placement rights with the broadcasters and arms length consideration is to be received by the assessee with respect of functions performed in rendering these services,. After giving all these findings by the DRP, there is no justification for upholding any ad hoc addition of 10%. From the record we further found that the adjustment of 10% so upheld by the DRP was without following any of the prescribed methods U/s 92C(1) of the Act nor has any benchmarking been adopted in determination of the ALP. The Hon ble Jurisdictional High Court in the case of CIT Vs Lever India Exports Limited 2017 (2) TMI 120 - BOMBAY HIGH COURT have held that the ad hoc determination of ALP de-hors Section 92C of the Act cannot be sustained, rendering the entire transfer pricing adjustment unsustainable in law. We do not find any merit in the action of the DRP for upholding ad hoc addition of 10% under transfer pricing adjustment. - Decided in favour of assessee.

Summary

Issues Involved:
1. Payment of placement charges
2. Applicability of provisions of Specified Domestic Transaction under Section 92BA(i)
3. Reference to the Transfer Pricing Officer (TPO) under Section 92CA of the Income Tax Act

Detailed Analysis:

1. Payment of Placement Charges:
The crux of the issue revolves around the decision of the Dispute Resolution Panel (DRP) for upholding 10% of the ad hoc addition made on account of income distributed for the services rendered for marketing of channel placement rights. The assessee company operates as a "multi-system operator" (MSO) in the distribution of television channels and internet services. The company and its Related Parties (RPs) negotiate and settle with broadcasters for placement charges, which are shared based on their subscriber base. The TPO did not accept the proportional allocation system, arguing that the benchmarking was ad hoc and did not justify the allocation. The TPO determined the Arm's Length Price (ALP) of placement charges at 50% of the amount and directed an adjustment of ?34,80,05,601/-. The DRP restricted the ad hoc addition to 10%, noting that the assessee performed more functions, including negotiating for RPs, but each RP also took its own risks and deployed its own capital. The ITAT found no merit in the DRP's action for upholding the 10% ad hoc addition, noting that the adjustment was made without following any prescribed methods under Section 92C(1) of the Act or any benchmarking.

2. Applicability of Provisions of Specified Domestic Transaction:
The assessee argued that the provisions of Section 92BA(i) were omitted and not repealed by the Finance Act 2017. This issue was not pressed further by the assessee's representative during the hearing, and thus, the ITAT dismissed this ground as not pressed.

3. Reference to the Transfer Pricing Officer (TPO) under Section 92CA of the Act:
The assessee contended that the AO erred in making a reference to the TPO by mechanically following the directions of the Principal Commissioner of Income Tax under Section 263 of the Act, which is not mandated by Section 92CA. The assessee also argued that the AO did not demonstrate the motive of the appellant to reduce taxable profits by manipulating prices of Specified Domestic Transactions. These grounds were also not pressed by the assessee's representative during the hearing, leading the ITAT to dismiss them as not pressed.

Conclusion:
The ITAT concluded that there was no justification for upholding any ad hoc addition of 10% under transfer pricing adjustment, as the DRP's findings were not supported by any prescribed methods or benchmarking. The appeal of the assessee was partly allowed, with the ITAT dismissing the other grounds as not pressed. The order was pronounced in the open court on 10th January 2020.