2020 (7) TMI 494 - AT - Income Tax

Characterization of distribution fee i.e. Royalty or not? - HELD THAT - In assessee s own case for AY 2011-12 on the issue held that the distribution fee paid by the assessee to its AE is not Royalty . Comparable selection - Considering the facts that the Avance and Sonata were accepted as valid comparable in assessee s own case in AY 2011-12 2020 (3) TMI 781 - ITAT MUMBAI and Trijel and Integra was held as valid comparable with channel distribution therefore we in principal agree and accept the submission of ld. AR of the assessee to accept these four comparable as comparable with assessee. However we have seen that the TPO rejected the comparability of these comparable summarily without examining their segmental data hence we direct the AO/TPO to verify the segmental data of these four comparable for the relevant financial years as per Rule 10B(4) and recompute the TP adjustment afresh and allow appropriate relief to the assessee. The assessee is also directed to provide all necessary information and evidence to the TPO/AO. Needless to order that before passing the order the TPO/Assessing Officer shall grant opportunity to the assessee. In the result the grounds related to comparability of comparable are allowed in accordance with the aforesaid directions. Short deduction of TDS - HELD THAT - Considering the submissions of the ld. AR for the assessee the assessing officer is directed to verify the TDS details and grant appropriate relief to the assessee after verifying the details as early as possible. Deduction of education secondary and higher education cess - admitting the additional ground of appeal - HELD THAT - gone through the copy of income tax return furnished by the assessee and the assessment order passed by the assessing officer and the working of income tax calculated and rectified by assessing officer. Considering the facts and circumstances of the case and the submissions of ld representatives of the parties that no additional facts are required to the brought on record and the necessary facts for adjudicating the additional grounds of appeal are already available on record we admits the additional ground of appeal. Considering the facts that the assessee has raised the additional ground for the first time before the Tribunal therefore we direct the assessing officer to verify the facts and pass the order afresh on this issue (claim) after considering the decision SESA GOA LIMITED VERSUS THE JOINT COMMISSIONER OF INCOME-TAX RANGE 1 PANAJI GOA. 2020 (3) TMI 347 - BOMBAY HIGH COURT

Issues Involved:
1. Assessment of total income.
2. Transfer pricing adjustment.
3. Reference to the Transfer Pricing Officer (TPO).
4. Characterization of distribution fee as royalty.
5. Rejection of the economic analysis by the appellant.
6. Rejection of specific companies as comparables.
7. Benchmarking analysis using royalty agreements.
8. Internal comparability.
9. Selection of local cable operators (LCO)/multisystem operators (MSO)/direct-to-home (DTH) as comparables.
10. Short grant of tax deducted at source (TDS).
11. Penalty proceedings.
12. Deduction of education and secondary and higher education cess.

Detailed Analysis:

1. Assessment of Total Income:
The appellant contested the assessment of total income at Rs. 544,03,97,977/- against Rs. 30,24,26,907/- as computed in its return of income. The Tribunal's analysis focused on the transfer pricing adjustments and the characterization of distribution fees.

2. Transfer Pricing Adjustment:
The appellant challenged the transfer pricing adjustment of Rs. 513,79,71,070/- on the grounds that the international transactions with its associated enterprises (AEs) were not at arm's length. The Tribunal referred to its decision in the appellant's case for AY 2011-12, where it was held that the distribution fee paid to AEs is not "Royalty." This precedent was upheld by the Hon'ble Bombay High Court.

3. Reference to the Transfer Pricing Officer (TPO):
The appellant argued that the reference to the TPO under Section 92CA(I) was made without satisfying the specified conditions. The Tribunal examined the procedural aspects but primarily focused on the substantive issues of transfer pricing and comparability.

4. Characterization of Distribution Fee as Royalty:
The TPO characterized the distribution fee paid by the appellant to its AE as royalty. The Tribunal, following its earlier decision and the Bombay High Court's ruling, concluded that the distribution fee is not royalty. This determination rendered the discussion on royalty agreements for comparability academic.

5. Rejection of Economic Analysis by the Appellant:
The appellant's economic analysis, which used software distributors as comparables, was rejected by the TPO. The Tribunal noted that the TPO did not adequately examine the benchmarking of comparables and directed a fresh assessment.

6. Rejection of Specific Companies as Comparables:
The TPO rejected the appellant's selected comparables, including Avance Technology Limited, Integra Technology and Software Limited, Sonata Information Technology Limited, and Trijal Industries Limited. The Tribunal, referencing its prior decision and other Tribunal rulings, accepted these companies as valid comparables for the appellant's transactions, subject to verification of segmental data by the TPO.

7. Benchmarking Analysis Using Royalty Agreements:
The TPO used royalty agreements as the Comparable Uncontrolled Price (CUP) to benchmark the appellant's transactions. The Tribunal rejected this approach, aligning with its stance that the distribution fee is not royalty.

8. Internal Comparability:
The appellant argued for the use of internal comparables over the royalty agreements selected by the TPO. The Tribunal's acceptance of software distributors as valid comparables addressed this issue.

9. Selection of Local Cable Operators (LCO)/Multisystem Operators (MSO)/Direct-to-Home (DTH) as Comparables:
The Tribunal did not specifically address the selection of LCO/MSO/DTH as comparables, as the acceptance of software distributors resolved the primary comparability issue.

10. Short Grant of Tax Deducted at Source (TDS):
The appellant claimed a short grant of TDS credit amounting to Rs. 362,81,929/-. The Tribunal directed the assessing officer to verify the TDS details and grant appropriate relief.

11. Penalty Proceedings:
The initiation of penalty proceedings under Section 271(1)(c) was deemed premature by the Tribunal and required no specific direction.

12. Deduction of Education and Secondary and Higher Education Cess:
The appellant raised an additional ground for the deduction of education cess and secondary higher education cess. The Tribunal admitted the additional ground and directed the assessing officer to verify the facts and pass an order afresh, considering the Bombay High Court's decision in Sesa Goa Ltd.

Conclusion:
The Tribunal partly allowed the appeal, directing the TPO to reassess the transfer pricing adjustments by verifying the segmental data of the comparables and granting appropriate relief. The assessing officer was also instructed to verify the TDS details and consider the deduction of education cess. The penalty proceedings were left unaddressed as premature.

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