2024 (2) TMI 518 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - comparables cannot be excluded on the ground of loss making and the profit margin is low. Not applying the PSM as approved by the TPO to non AE transactions and determining the profit on estimate basis - HELD THAT - Addition has been made purely on estimate basis and, therefore, cannot be sustained. The issue is covered by the decision of Star International Movies Ltd 2019 (10) TMI 1342 - ITAT MUMBAI as considered the similar issue and has deleted the addition made by the Assessing Officer as held that the income from non AE transaction cannot be taxed separately by applying net profit rate of 28%. Taxability of income from transfer of channel as short term capital gains - taxability in India or not? - HELD THAT - From the perusal of the down linking license obtained by the assessee from Ministry of information and Broadcasting of India to operate Star World channel in India, it is also established that the ownership of the Star World channel is outside India. Given this, when the ratio laid down in in the case of Cub Pty Ltd 2016 (7) TMI 1094 - DELHI HIGH COURT case is applied, we see merit in the argument of the ld AR that the impugned asset is not an asset situated in India since it is owned by a person outside India and therefore the situs of the asset is also outside India. Accordingly in our considered view, the income arising out of the transfer of Star World channel, being an asset outside India by the assessee to SIML will not fall within the provisions of section 9(1)(i) and accordingly not taxable in India. Asset as situated in India since there is clear cut nexus and strong business connection of the transferred asset to India due to very nature of the asset and its ability to continually and regularly generate income from India and therefore taxable in India - Though there may be merit in the argument that viewership in India affects the valuation / purchase price of the transaction, we are not in a position to concur with the said contention of the revenue in the absence of any concrete material brought on record to prove the claim that the substantial value of the channel is derived from assets located in India. We further notice that in the case of Asia Satellite Telecommunications Co Ltd 2011 (1) TMI 47 - DELHI HIGH COURT has held that merely because the footprint area includes India and the programmers by ultimate consumers/viewers are watching the programs in India, even when they are uplinked and relayed outside India, would not mean that the assessee is carrying out its business operations in India. We are of the view that the Star World Channel having viewership India generation income cannot be a reason for holding that the channel is an asset situated in India. Therefore on this count also the addition made is not tenable. Taxation of royalty income @42.23% by AO - AR submitted that since the assessee being a foreign company, the applicable tax rate of royalty income is as provided under section 115A of the Act which is at 10.5575% whereas the Assessing Officer has applied the tax rate at 42.23% - HELD THAT - As relying on case of Star International Movies Ltd. 2019 (10) TMI 1342 - ITAT MUMBAI we direct the Assessing Officer to tax the royalty income at the appropriate rate as provided in section 115A of the Act.

Issues Involved:
1. General Grounds
2. Rejection of the comparability analysis carried out by the Appellant
3. Non-application of PSM approved by the TPO for AE transaction to third party transaction
4. Application of certain TP principles
5. Double taxation of India sourced revenue
6. Taxation of Short Term Capital Gain on transfer of Channels
7. Taxation of royalty income at a higher rate
8. Short grant of credit of TDS
9. Non-grant of credit of advance tax and short grant of credit of SA Tax
10. Initiation of penalty proceedings

Summary:

General Grounds:
The appeals were heard together and disposed of by a common order as the issues contended are common for both assessees, Star Television Entertainment Ltd (STEL) and Star Asian Region FZ LLP (SARF).

Rejection of the Comparability Analysis:
The Transfer Pricing Officer (TPO) rejected certain comparables chosen by the assessee, leading to a Transfer Pricing (TP) adjustment. The Tribunal directed the inclusion of Jain Studios Ltd., Television 18 India Ltd., and Raj Television Network Ltd. as comparables, following a precedent in a group company's case.

Non-application of PSM for Non-AE Transactions:
The Assessing Officer (AO) did not apply the Profit Split Method (PSM) for non-AE transactions and estimated the profit at 28%. The Tribunal, following a precedent, held that the income from non-AE transactions cannot be taxed separately by applying a net profit rate of 28% and deleted the addition made by the AO.

Application of Certain TP Principles:
Given the Tribunal's decision on the TP adjustment, the grounds regarding the application of certain TP principles became academic and did not warrant separate adjudication.

Double Taxation of India Sourced Revenue:
The AO's approach of estimating profitability for non-AE transactions was rejected, and the Tribunal directed a re-computation of the Arm's Length Price (ALP) as per the directions given.

Taxation of Short Term Capital Gain on Transfer of Channels:
The Tribunal held that the situs of an intangible asset is where the owner is located. Since the channels were owned by non-residents, the gains from their transfer were not taxable in India. The Tribunal relied on the principle of 'mobilia sequuntur personam' and the decision of the Hon'ble Delhi High Court in the case of Cub Pty Ltd.

Taxation of Royalty Income at a Higher Rate:
The Tribunal directed the AO to tax the royalty income at the rate provided under section 115A of the Act (10.5575%) instead of the higher rate applied by the AO, following a precedent in the assessee's own case.

Short Grant of Credit of TDS:
This issue was not separately adjudicated as it was not raised in the grounds of appeal for STEL.

Non-grant of Credit of Advance Tax and Short Grant of Credit of SA Tax:
This issue was not separately adjudicated as it was not raised in the grounds of appeal for STEL.

Initiation of Penalty Proceedings:
The Tribunal found the issue premature and did not warrant any adjudication.

Conclusion:
The appeals of STEL and SARF were allowed, with directions to re-compute the ALP and tax the royalty income at the appropriate rate. The Tribunal deleted the additions made by the AO regarding the TP adjustments and the taxation of capital gains on the transfer of channels.

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