2014 (2) TMI 233 - AT - Income Tax

Determination of Arm s Length Price - Marketing agent arrangement Transfer pricing adjustment Held that - The findings of the CIT(A) confirmed that carrying out advertising to increase the viewership is not the part of normal job profile of independent marketing agents (for telecast companies) - It has rightly been observed by TPO as confirmed by CIT(A) that advertising and publicity targeted towards viewers is done under the ambit of distribution activity and not under the advertisement sales activity - The distribution activity involves expansion of subscriber base leading to higher subscriber fees and add sales activity involves attracting potential clients and add agency through specific sales pitch - it was not the normal entrepreneur activity - Such an activity is not performed by a prudent businessman free of cost and without any markup - it was not a mere case of reimbursement of advertisement expenses but a markup was also required to be added as assessee was rendering specific service in this regard - cost of funds had to be separately charged over and above the reimbursement which was also covered under the markup thus, TPO was right in adding a markup as not independent and prudent entrepreneur will provide any service free of cost Decided against Assessee. Disallowance u/s 14A of the Act Expenses incurred for earning dividend income Held that - The decision in Maxopp Investment Ltd. v. CIT 2011 (11) TMI 267 - Delhi High Court followed - the Rule 8D is applicable w.e.f. 1st April, 2007 and, therefore, the computation made by CIT(A) by applying Rule 8D for AY 2002-03 was not justified order of the CIT(A) set aside Decided in favour of Assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment on Advertisement Expenses
2. Disallowance of Expenses under Section 14A of the Income Tax Act

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on Advertisement Expenses:

The assessee, a media company, engaged in three distinct business activities, filed its return declaring an income of Rs. 2,23,01,518/-. The Transfer Pricing Officer (TPO) scrutinized the international transactions, particularly focusing on the marketing agent arrangement with CNBC channel, where the assessee retained 15% of gross revenues from advertisers, remitting the balance to TV 18 Mauritius. The TPO observed that the assessee incurred significant advertising and marketing promotion expenses but did not receive reimbursement from its associated enterprise (AE) as stipulated in the agreement.

The TPO noted that the assessee's low profitability was due to heavy expenditure on advertising and marketing promotion. He concluded that the assessee performed additional functions beyond a typical marketing agent's role, warranting a markup on the reimbursement of advertising expenses. Accordingly, the TPO determined an arm's length price, adding a markup of 8.53% to the advertisement expenditure, resulting in an addition of Rs. 54,00,469/-.

The assessee appealed, arguing that the markup was unwarranted as they received a separate commission. However, the appellate authority upheld the TPO's decision, emphasizing that the assessee's activities were not typical of an independent marketing agent and involved substantial service elements justifying the markup.

The tribunal agreed with the TPO and appellate authority, noting that the assessee's role in promoting the channel and increasing its viewership was beyond normal marketing activities. The tribunal upheld the addition of the markup, recognizing the need for adequate remuneration for the additional services provided.

2. Disallowance of Expenses under Section 14A of the Income Tax Act:

The Assessing Officer (AO) noted that the assessee claimed exempt dividend income of Rs. 20,83,632/- but did not disallow any expenses related to earning this income under Section 14A. The AO attributed 5% of the dividend income towards expenses, resulting in a disallowance of Rs. 1,04,182/-. The appellate authority, applying Rule 8D, computed the disallowance at Rs. 50,89,404/-.

The assessee challenged this, arguing that Rule 8D, introduced by the Finance Act, 2006, effective from 1st April 2007, should not apply retrospectively to the assessment year 2002-03. The tribunal referred to the Delhi High Court's decision in Maxopp Investment Ltd. v. CIT, which held that Rule 8D is applicable from 1st April 2007. Consequently, the tribunal set aside the appellate authority's order and upheld the AO's original disallowance of Rs. 1,04,182/-.

Conclusion:

The tribunal's judgment partially allowed the assessee's appeal, upholding the transfer pricing adjustment on advertisement expenses but setting aside the enhanced disallowance under Section 14A. The order emphasized the need for appropriate remuneration for additional services and clarified the applicability of Rule 8D for disallowance calculations.