2020 (3) TMI 781 - AT - Income Tax

Characterization of distribution fee i.e. Royalty or not? - HELD THAT - The assessee only acts as an intermediary between the Broadcaster and the ultimate customer who views the channel. The assessee neither any right in the content that is broadcasted over the channel nor any right to make any changes in the content to be broadcasted on the channel. The assessee simply acts as a distributor and distributes the channel to various LCOs/MSOs/DTH operators in the chain who in turn distribute it further to the ultimate viewer. The distribution fees paid by the assessee cannot be termed as Royalty within the meaning of section 9(1)(vi) by making the payment it does not acquire any right to use any copyright or rights relating to the content that is broadcasted on the channel. TP Adjustment - comparable selection - HELD THAT - Considering the nature and activities carried out by all 4 comparable company which are primarily engaged in distribution of software product as noted above. The software distribution company are held to be good comparable to distributor satellite channels in Turner International India (P.) Ltd. vs. ACIT 2018 (8) TMI 259 - ITAT DELHI . Therefore, we accept the submission of ld. AR of the assessee to accept these comparable as comparable with assessee and direct the AO/TPO to work out the T.P. Adjustment afresh. 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. Considering the fact that we have allowed the functional comparability, therefore, discussions on alternative adjustment held by DRP have become academic. Short deduction of TDS - MAT Credit - interest u/s 234B - HELD THAT - AO is directed to verify the TDS details and grant appropriate relief to the assessee as per law. Similarly on MAT Credit, the AO is directed to verify the fact and grant relief to the assessee in accordance with law. So far as levy of interest u/s 234B is concerned, this interest is consequential, thus, the AO is directed to work out the interest as per law.

Issues Involved:

1. Characterization of distribution fees as Royalty.
2. Transfer Pricing adjustment and benchmarking analysis.
3. Rejection of economic analysis undertaken by the assessee.
4. Selection of comparables for benchmarking.
5. Allocation of expenses between AE and non-AE segments.
6. Short grant of tax deducted at source (TDS).
7. Grant of MAT credit.
8. Levy of interest under Section 234B.
9. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Characterization of Distribution Fees as Royalty:

The primary issue was whether the distribution fees paid by the assessee to its Associate Enterprises (AEs) should be characterized as Royalty. The Tribunal held that the distribution fees cannot be termed as Royalty. This conclusion was supported by previous decisions of the Hon’ble Bombay High Court, which held that distribution fees paid by the assessee are not in the nature of Royalty. The Tribunal emphasized that the assessee acts merely as an intermediary between the broadcaster and the ultimate customers, without acquiring any rights to the content broadcasted. Therefore, the payment of distribution fees does not constitute Royalty under section 9(1)(vi).

2. Transfer Pricing Adjustment and Benchmarking Analysis:

The Transfer Pricing Officer (TPO) had made a significant adjustment to the assessee's income by recharacterizing the distribution fees as Royalty and using Royalty agreements to benchmark the transaction. The Tribunal rejected this approach, noting that the distribution fees were not Royalty. The Tribunal also criticized the TPO's reliance on the Royalty-stat database, which was deemed inappropriate for benchmarking the distribution fees.

3. Rejection of Economic Analysis Undertaken by the Assessee:

The Tribunal found that the TPO had improperly rejected the assessee's economic analysis, which used the Transaction Net Margin Method (TNMM) and selected software distributors as comparables. The Tribunal noted that the assessee's approach was consistent with the method accepted in the previous assessment year (AY 2010-11) and upheld by the Dispute Resolution Panel (DRP).

4. Selection of Comparables for Benchmarking:

The Tribunal addressed the rejection of certain comparables by the TPO. The assessee had selected eight comparables, but the TPO rejected four of them. The Tribunal reviewed the financials of these companies and found that they were indeed engaged primarily in the distribution of software products, making them appropriate comparables. The Tribunal directed the TPO to reconsider these comparables and recalculate the Transfer Pricing adjustment accordingly.

5. Allocation of Expenses Between AE and Non-AE Segments:

The Tribunal noted issues related to the allocation of expenses between AE and non-AE segments. The DRP had benchmarked the allocation of expenses and made an alternative adjustment. However, since the Tribunal allowed the functional comparability of the selected comparables, the discussions on the alternative adjustment became academic.

6. Short Grant of Tax Deducted at Source (TDS):

The assessee claimed that there was a short grant of TDS credit amounting to ?1.61 Crore. The Tribunal directed the Assessing Officer (AO) to verify the TDS details and grant appropriate relief to the assessee as per law.

7. Grant of MAT Credit:

The assessee also claimed that there was an error in granting MAT credit. The Tribunal directed the AO to verify the facts and grant relief to the assessee in accordance with the law.

8. Levy of Interest Under Section 234B:

The Tribunal noted that the levy of interest under Section 234B is consequential. Therefore, the AO was directed to work out the interest as per law, based on the revised assessment.

9. Initiation of Penalty Proceedings Under Section 271(1)(c):

The Tribunal found that the initiation of penalty proceedings under Section 271(1)(c) was premature and did not require specific direction at this stage.

Conclusion:

The appeal of the assessee was partly allowed. The Tribunal directed the AO/TPO to reconsider the selected comparables, verify the TDS and MAT credit claims, and recalculate the Transfer Pricing adjustment and interest under Section 234B accordingly. The initiation of penalty proceedings was deemed premature. The Tribunal's decision emphasized adherence to established legal principles and the importance of appropriate benchmarking in Transfer Pricing cases.

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