2018 (10) TMI 1169 - AT - Income Tax

Addition on account of ALP adjustment - Comparable selection - functional comparability - Held that - The Assessee Company is primarily engaged in the business of distribution of subscription rights of satellite channels of Cartoon Network, WB, CNN POGO and HBO (collectively referred as V Channels ) and advertisement inventory to be telecasted on TV Channels. The activities of the assessee are primarily driven towards promoting the channels and associated proprietary intangible assets on the return of income, thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Summary

Issues Involved:
1. Inclusion of comparable companies Softcell Technologies Ltd. and Sonata Information Technology Ltd.
2. Inclusion of other software distribution companies Empower Industries India Ltd. and Trijal Industries Ltd.
3. Working capital adjustment.

Issue-wise Detailed Analysis:

1. Inclusion of Comparable Companies Softcell Technologies Ltd. and Sonata Information Technology Ltd.:
The primary issue revolves around the inclusion of Softcell Technologies Ltd. and Sonata Information Technology Ltd. as comparables by the Transfer Pricing Officer (TPO). The Dispute Resolution Panel (DRP) upheld the inclusion of these companies, stating, "Softcell Technologies Ltd. and Sonata Information Technology Ltd. are in the area of distribution of software products and computer software packages. These two companies can be taken as comparables for the distribution segment of the assessee." The Tribunal, in its previous judgment for the assessment year 2006-07, accepted these companies as valid comparables and directed the TPO to include them after appropriate working capital adjustments.

2. Inclusion of Other Software Distribution Companies Empower Industries India Ltd. and Trijal Industries Ltd.:
The assessee proposed the inclusion of Empower Industries India Ltd. and Trijal Industries Ltd. as comparables. The Tribunal had previously accepted these companies as valid comparables for the distribution segment of the assessee. The Tribunal observed, "In so far as the inclusion of four comparable companies namely, Empower Industries India Ltd., Sonata Information Technology Ltd., Softcell Technologies Ltd., and Trijal Industries Ltd., the same has been accepted by the Tribunal after giving direction to give working capital adjustments." The Tribunal emphasized that software distribution companies could be considered good comparables for benchmarking the distribution of TV channels, as seen in the case of NGC India Pvt. Ltd.

3. Working Capital Adjustment:
The DRP allowed working capital adjustment, relying on various judgments, and directed the assessee to produce the calculation of working capital adjustment before the TPO for examination. The Tribunal upheld this decision, noting that "while computing the margin upon by the comparable companies vis-a-vis assessee, difference on account of working capital employee should also be effected into and therefore working capital adjustment has to be given." The Tribunal directed the TPO to include the four comparables after the working capital adjustment, thus aligning with the earlier orders and ensuring consistency in the assessment process.

Conclusion:
The Tribunal dismissed the revenue's appeal and the assessee's cross-objection, noting that the inclusion of the four comparables (Empower Industries India Ltd., Sonata Information Technology Ltd., Softcell Technologies Ltd., and Trijal Industries Ltd.) and the working capital adjustment addressed the primary issues. The Tribunal's decision emphasized consistency with previous judgments, ensuring a fair and comprehensive assessment of the assessee's international transactions. The order was pronounced in the Open Court on 8th October 2018.