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TMI Blog2014 (2) TMI 233X X X X Extracts X X X X X X X X Extracts X X X X ..... al transactions and, therefore, made a reference to Transfer Pricing Officer (TPO) to determine the arm's length price: S.No. International Transaction Method Value (in Rs.) 1. Sale of television content TNMM 249,155,107 2. Agency arrangement for marketing of sponsorship time on the CNBC channel by the assessee CUP 80,73,785 3. Revenue sharing arrangement for distribution of CNBC channel in India CUP 2,49,90,000 4. Interest on unsecured loan CUP 9,262,582 The TPO noted that assessee is fastest growing media companies in India and has, over the years, built a formidable reputation as a leading content provider to almost every channel and network in India. He observed that TV 18 had set up a wholly owned subsidiary in Mauritius by the name of Television Eighteen Mauritius. This subsidiary owns 49% equity of CNBC India Ltd., a Mauritius based joint venture between TV 18 group and CNBC group. CNBC India operates the popular information and news channel 'CNBC'. 4. TPO noted that as regards marketing agent arrangement, the assessee has been appointed as the sole marketing agent of CNBC channel. For this it gets 15% of the gross revenues collected from the advertiser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; 4.6 Most significantly, the contract between the assessee and TV 18 Mauritius stipulates that in the event of any expenditure by TV 18 on advertisement, the same shall be reimbursed by the AE. Para 7.14 of the TP report states: "With a view to solicit more advertisements as well as to increase subscriber base, TV 18 incurs marketing and distribution expenses which is entitled to get reimbursed from TV 18 Mauritius under the Marketing Agent Arrangement." 4.6 The clause in the agreement casts an obligation on the AE to reimburse the assessee for the expenditure on advertising and marketing. This obligation has not been discharged by the AE as no such reimbursement has been received. 4.7 Even in the absence of this clause in the agreement, it can be reasonably argued that the assessee was entitled to reimbursement of the ad expenditure. Furthermore, the arm's length principle demands that over and above the reimbursement, a service fee should be paid for carrying out the additional function which is beyond the traditional role of a marketing agent. No unrelated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9/-. 7. The AO further noted that assessee had received dividend income of Rs. 20,83,632/- which was claimed as exempt income u/s 10(33). However, assessee had not disallowed any expense related to this income u/s 14A of the Act. He attributed 5% of dividend income towards expenses incurred thereon for earning the same on account of expenditure on managerial and accounting skill. He, therefore, made a disallowance of Rs. 1,04,182/-. 8. Being aggrieved with the order of AO, the assessee preferred appeal before ld. CIT(A) who confirmed the addition of Rs. 54,00,469/- on account of TP adjustments. As regards disallowance u/s 14A, following the decision of Spl. Bench in the case of ITO v. Daga Capital Management (P.) Ltd. [2009] 117 ITD 169 (Mum.). Ld. CIT(A) applying the Rule 8D computed the disallowance at Rs. 50,89,404/- against the disallowance of Rs. 1,04,182/- made by AO. 8.1 Being aggrieved with the order of ld. CIT(A), the assessee is in appeal before us and has taken following grounds of appeal: 1. "That on facts and in law the order's passed by the AO/Commissioner of Income Tax (Appeals) [hereinafter referred as "CIT(A)"]/Transfer Pricing Officer [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 007 to AY 2002-03 i.e. the Assessment Year under consideration. 6.2That on facts and in law the CIT(A) erred in applying the provisions of Rule 8D(2) of the Income Tax Rules, 1962 inserted by IT (fifth amendment) Rules 2008 w.e.f. 24th March, 2008. 6.3 That on facts and in law the CIT(A) erred in assuming jurisdiction u/s 14A read with Rule 8D(2). 6.4 That on facts and in law the CIT(A) erred in not appreciating that no disallowance u/s 14A is called for." 9. As regards the TP adjustment, ld. Counsel for the assessee fairly conceded that as far as the reimbursement of expenses is concerned, in view of the decision in the case of CIT v. L.G. Electronics India (P.) Ltd. [2009] 309 ITR 265 (Delhi), the same is to be decided against assessee. However, he submitted that the mark up of 8.53% on reimbursement of advertisement expenditure is unwarranted. He submitted that assessee has received commission separately and, therefore, mark up should not be added. As regards the TP adjustment issue, ld. Counsel relied on the decision of Hon'ble SC in the case of CIT v. B.M. Kharwar [1969] 72 ITR 603, wherein it has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... criterion to judge the allowability of an expense. So long as the expenditure or payment had been demonstrated to have been incurred or laid down for the purposes of business, it was no concern of the Transfer Pricing Officer to disallow it or any extraneous reason. The TPO was expected to examine the international transaction as he actually found them and then make suitable adjustment but a total disallowance of the expenditure was not warranted. He submitted that this decision is not applicable to the facts of the case. Ld. DR, in order to justify the markup added by TPO, submitted that for activities covered by reimbursement there is an element of service. He further submitted that markup also covers cost of funds employed by assessee in incurring the advertisement expenses. 10.1 We have considered the rival submissions and have perused the record of the case. An agency agreement had been entered into on 1st October, 2001 between TV-18 Mauritius Ltd. (TEML) and TV-18 India Ltd., (TEIL) whereby TEML engaged the service of TEIL for following services: "a. TEIL will canvass and solicit sponsorship/endorsement of programs/segments in programs telecast on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee of cost and without any markup. Therefore, 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. Further, as rightly pointed out by ld. DR, cost of funds had to be separately charged over and above the reimbursement which was also covered under the markup. We, therefore, uphold the order of ld. CIT(A) in holding that TPO was right in adding a markup as not independent and prudent entrepreneur will provide any service free of cost. 11. In the result, the grounds relating to TP adjustment is decided against the assessee. 12. As regards, the second issue relating to disallowance of expenses incurred in connection with earning of dividend income, we find that Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. v. CIT 347 ITR 272 has held that the Rule 8D is applicable w.e.f. 1st April, 2007 and, therefore, the computation made by ld. CIT(A) by applying Rule 8D for AY 2002-03 was not justified. We, therefore, set aside the order of ld. CIT(A) and uphold the order of AO in making a disallowance of Rs. 1,04,182/-. 13. In the result, the ground nos. 6.1 to 6.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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