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2014 (5) TMI 73 - AT - Income TaxTransfer pricing adjustment Determination of ALP of International License Revenue - Cost of international rights Held that - What is the exact amount which is payable to the BCCI in the relevant financial year because this is the only basis of the two adjustments - the assessee had acquired the media rights in respect of BCCI cricket events for a period from the year 2006 to 2010 under a contract with the BCCI on 28th February 2006 - the amount which is payable to the BCCI is dependent upon the tournament and the matches which were to be conducted for which the media rights were assigned to the assessee. The assessee has given the details of the matches conducted in the year - the assessee could have furnished a confirmation from the BCCI - If, for any reasons, the assessee was unable to file such confirmation, then it was the duty of the TPO to ascertain this information directly from the BCCI by carrying out enquiry under section 133(6) instead of making the transfer pricing adjustment on presumption and estimate - Once the correct amount can be ascertained, then there is no requirement of drawing any hypothetical inference for making any huge adjustment / addition - The very premise on which the adjustments have been made is based on indicative value given in the contract, which cannot be sustained, as the same can be ascertained on the basis of actual cricketing events and information from the BCCI which can be sought by either party thus, the matter is remitted back to the TPO for adjudication Decided in favour of Assessee. Determination of mark-up from the A.E - Exploitation of international rights Held that - Neither the assessee nor the TPO have bench marked by applying any proper method or carrying out any comparability analysis vis-a-vis any comparables - no proper analysis of CUP has been done as to how the minimum guarantee amount and the amount actually received will amount to CUP - The CUP has to be seen if an uncontrolled price is the price agreed between unconnected parties for the transfer of goods or services and if this transfer in all material aspect is comparable to the transfers between two related parties then only the price becomes comparable uncontrolled price - no uncontrolled conditions have been analysed - Even the TPO has also not bench marked the mark-up by analyzing from any comparables but has gone on the premise that margin on exploitation of media rights ranges from 5% to 15% - neither the approach of the assessee nor of the TPO can be sustained - The basic premise for determining the ALP under the transfer pricing mechanism is that a controlled transaction has to be bench marked by analyzing the comparable uncontrolled transactions thus, the matter is remitted back to the TPO for adjudication Decided in favour of Assessee. Notional interest on loans and advances given to AE Adjustment of notional interest on outstanding debit balance - Held that - The assessee rightly contended that it has also received various advances on which no interest is payable - This plea has not been taken either before the TPO or the before DRP thus, the matter of the adjustment on account of notional interest on loans and advances given to the AE needs to be remitted back for verification - As decided in assessee s own case for the previous year, the comparable has to be dues recoverable from a debtor and not a borrower - the TPO had adopted interest @ 2.19% LIBOR on balances which exceeded 30 days, but LIBOR rate was relevant only in the case of lending or borrowing of funds and not in the case of commercial over dues - even if the continuing debit balances of Associated Enterprises could be treated as international transactions u/s 92-B, the right course of applying the CUP method, in the case of non-charging of interest on overdue balances, would have been by comparing this not charging of interest with other cases in which the assessee had charged interest on overdues with independent enterprises (internal CUP) or with the cases in which other enterprises had charged interest in respect of overdues in respect of similar business transactions with independent enterprises (external CUP) thus, the adjustment on account of notional interest is set aside Decided partly in favour of Assessee. Notional guarantee commission charges Guarantee extended to the AE Held that - The Tribunal has restricted the T.P. adjustment on the score by re-computing the commission for the guarantee given by the assessee to its A.Es at 0.5% considering it to be at ALP - the AO/ TPO is directed to restrict the TP adjustment by re-computing the commission for guarantee given by the assessee to its A.E. at 0.5% as the basis for ALP Decided in favour of Assessee. Determination of ALP on consultancy revenue Held that - The segmental account filed before the TPO that the assessee has also included the revenue of media rights fee and licence fee - media rights fee and licence fee should be removed so as to arrive at correct profit margin the calculation has been given for the first time thus, the matter is required to be remitted back to the AO/TPO for verification Decided in favour of Assessee. Addition of payment made to BCCI - Acquisition of sports rights Held that - The assessee has made the payment to the BCCI for acquisition of sports rights to the BCCI in respect of three matches - Such a payment is a revenue expenditure which is allowable u/s 37(1) - Just because the assessee has deferred the expenditure for three years in the ratio of 80% ( ) 10% ( ) 10%, it cannot be held that the AO is justified in putting his own apportionment in the ratio of 60% 20% 20% - Once the expenditure has been incurred in the year which is allowable as revenue expenditure, the same should be allowed in the year only thus, the AO is directed to allow the entire claim of the assessee in the year only Decided in favour of Assessee. Addition of website development expenses Expenses treated as capital expenses Held that - The website is meant for dissemination of various information and in case of the assessee it is one of the very important factor in carrying out its business operation as the assessee is mainly engaged in media and entertainment business - Updating of website is the most essential part for running of day-to-day business - such an expenditure for updating the website is no enduring benefit but essential for day-to-day business and it is allowable as revenue expenditure the decision in Empire Jute Co. Ltd. v. CIT 1980 (5) TMI 1 - SUPREME Court followed - the expenditure is to be allowed as revenue expenditure Decided in favour of Assessee. Addition u/s 14A of the Act Held that - The assessee has funds of sums in the form of zero coupon fully convertible debenture on which there was no interest cost - the assessee also had a huge reserve and surplus - Once the assessee had sufficient interest free funds, then it can be held that the disallowance on account of interest cost cannot be made Relying upon CIT v. Reliance Utilities & Power Ltd. 2009 (1) TMI 4 - HIGH COURT BOMBAY thus, the matter is remitted back to the AO for re-working the disallowance u/s 14A after applying the provisions of rule 8D after removing the component of interest paid as the assessee had sufficient interest free funds and workout the disallowance for the administrative and other expenditure Decided in favour of Assessee.
Issues involved:
1. Jurisdiction of Transfer Pricing Proceedings. 2. Assessment of Income. 3. Transfer Pricing Adjustments. 4. Determination of Arm's Length Price (ALP) for International Transactions. 5. Disallowance of Deduction under Section 35-D. 6. Addition of Expenditure on Food, Equipment Hire, etc. 7. Addition of Advances Written Off. 8. Addition Related to Payment to BCCI for Sports Rights. 9. Addition of Website Development Expenses. 10. Addition under Section 14A. Detailed Analysis: 1. Jurisdiction of Transfer Pricing Proceedings: The assessee did not press this ground, so it was dismissed without adjudication. 2. Assessment of Income: The assessee did not press this ground, so it was dismissed without adjudication. 3. Transfer Pricing Adjustments: The assessee challenged several transfer pricing adjustments made by the TPO, which were confirmed by the AO and DRP. These adjustments included: - International License Revenue: The TPO adjusted INR 58,85,90,002 based on the difference between the amount received from the AE and the proportionate indicative value as per the agreement. The Tribunal restored this issue back to the AO/TPO to ascertain the correct amount payable to BCCI and the amount receivable from the AE. - Cost of International Rights: An adjustment of INR 6,05,22,966 was made on the basis of the minimum guarantee receivable from the AE. The Tribunal restored this issue back to the AO/TPO for re-examination. - Return on Exploitation of International Rights: The TPO applied a 10% markup on the cost of international rights, resulting in an adjustment of INR 9,31,15,914. The Tribunal restored this issue back to the AO/TPO for proper benchmarking and comparability analysis. 4. Determination of ALP for International Transactions: - Notional Interest on Loans and Advances: The TPO made an adjustment of INR 37,31,567 for notional interest on loans and advances given to AEs. The Tribunal restored this issue back to the TPO for verification and examination. - Notional Guarantee Commission Charges: The TPO made an adjustment of INR 83,47,173 for notional guarantee commission charges for guarantees extended to AEs. The Tribunal directed the AO/TPO to restrict the TP adjustment by re-computing the commission at 0.5% as the basis for ALP. - Consultancy Revenue: The TPO made an adjustment of INR 45,97,345 towards determining the ALP on consultancy revenue received from the AE. The Tribunal restored this issue back to the AO/TPO to verify the assessee's calculation and allocation of expenditure. 5. Disallowance of Deduction under Section 35-D: The assessee did not press this ground, so it was dismissed without adjudication. 6. Addition of Expenditure on Food, Equipment Hire, etc.: The assessee did not press this ground, so it was dismissed without adjudication. 7. Addition of Advances Written Off: The AO disallowed an amount of INR 12,82,404 claimed as advances written off. The Tribunal restored this issue back to the AO to decide afresh after considering the assessee's explanation. 8. Addition Related to Payment to BCCI for Sports Rights: The AO apportioned the expenditure of INR 82,01,20,000 paid to BCCI for sports rights over three years. The Tribunal directed the AO to allow the entire claim in the current year as it is a revenue expenditure. 9. Addition of Website Development Expenses: The AO treated the website development expenditure of INR 23,39,082 as capital expenditure. The Tribunal held that the expenditure for updating the website is revenue in nature and allowable under section 37(1). 10. Addition under Section 14A: The AO made an addition of INR 6,88,43,281 under section 14A. The Tribunal directed the AO to re-work the disallowance after removing the interest component as the assessee had sufficient interest-free funds. Conclusion: The Tribunal restored several issues back to the AO/TPO for re-examination and verification, directed the AO to allow certain claims in the current year, and provided specific instructions for recalculating disallowances. The appeal was treated as partly allowed for statistical purposes.
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