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TMI Blog2016 (2) TMI 836X X X X Extracts X X X X X X X X Extracts X X X X ..... 50% of total distribution revenues which has been taxed on protective basis under section 44DA and balance 50% has been taxed in the hands of Channel Companies - Held that:- Such an amount cannot be added separately, because it has already been included in the PSM Pool and in the combined rate of 27.18% and accordingly, the same is directed to be deleted, because it will be subject to double taxation when all the revenues has been factored into the combined profit of 27.18%. It is not understood as to why DRP/AO is again taxing part of same revenue again. This is wholly and arbitrary action which cannot be upheld.- Decided in favour of assessee Disallowance of cost on advertisement revenue - non deduction of TDS - Held that:- No separate addition is called for; firstly, the provision of withholding tax cannot be applied on the basis of any amendment which has come subsequently by giving retrospective effect, as held by various Courts, on the reasoning that assessee cannot be expected to withhold tax when there was no such provision under the statute and secondly, prior to such amendment, there was a judgment of Hon'ble Supreme Court in the case of Vodafone International Holdings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. : 8684/Mum/2011, ITA No. : 8685/Mum/2011, ITA No. : 8693/Mum/2011, ITA No. : 8694/Mum/2011, ITA No. : 8695/Mum/2011 - - - Dated:- 2-2-2016 - SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER For The Appellant : Shri Porus Kaka Shri Divesh Chawala For The Respondent : Shri N K Chand ORDER The aforesaid appeals have been filed by the different assessees as mentioned above against separate impugned final assessment order passed by the Deputy Director of Income-tax (International Taxation) Range-2(1), Mumbai, hereinafter referred to as Assessing Officer (AO), under section 144C(13) r.w.s. 143(3) for the assessment year 2007-08, in pursuance of direction given by the Dispute Resolution Panel-II (DRP). 2. Since the issues involved in all the appeals are identical arising out of same set of facts, which are permeating through in all the appeals, therefore, the same were clubbed and heard together and are being disposed off for the sake of convenience by way of this consolidated order. 3. To understand the facts and its implication on the issues involved, we are first discussing the case of Satellite Television Asia Region Ltd. ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of reversal of disallowance of cost of at air-time u/s 40(a)(i) for AY 2005-06 upon the payment of taxes therein in the instant assessment year [Rs. 665,41,36,516/-]; (ix) In ground no. 27, the assessee has challenged denial of set-off of brought forward losses and amounting to ₹ 1004,27,61,307/- for AY 2006-07. 4. In additional grounds, again assessee has raised following grounds:- On the facts and in the circumstances of the case and in law, the learned DRP and the learned AO- Ground number 30: erred in considering the profitability rate of 27.18% [arrived at after consideration of suo motu disallowance under section 40(a)(i) of the Act by the Appellant], instead of profitability rate of 14.04% and 13.14% towards specific tax adjustments under Section 40(a)(i) of the Act as determined by the Additional Commissioner of Income-tax (Transfer Pricing) - 11(4) ('TPO') for computing the Arm's Length Price ('ALP') under Profit Split Method ('PSM'). Ground number 31: without considering the similarity in the facts and return filing positions in case of the Appellant in AY 2007-08 and AY 2008-09, erred in adopting a diver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity control on them to determine whether the content meets aggregate standards and specifications/broadcasting; (iii) Thirdly, there are channel companies, viz,:- (a) Channel International Movies Ltd; (b) Channel V Music Networks Ltd; (c) Star Television Entertainment Ltd; (d) Star Asia Entertainment Ltd; (e) Star Asia Regional FLLLC. These channel companies are primarily engaged in the business of developing channel concept and creating, owning and broadcasting the channels. They decide the genre, the look and the feel of channels i.e. nature of programming, target age of audience etc. They also decide the sequencing of the programme and undertake various activities in relation to the content so that the content can be broadcast in the form of digital signals. Each of the channel companies has granted channel distribution rights to Star Ltd, which distributes these channels in return for subscription revenues. The channel companies also advertise air-time on the channel and received ad revenue's net of any commissions retained by ad agents. All the transactions undertaken for earning of the revenues are amongst these entities only. 6. Given the comple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions on consolidated basis including India and non-India revenues. Such a consolidation of results ensures that all inter-company costs, profits and losses are eliminated and the correct quantum of profit based on correct analysis of third party revenues cost can be arrived at. (ii) Thereafter, the effect of inter-companies double counting of revenue stream is eliminated. This step ensures that correct third party revenue is arrived at. (iii) Based on the aforesaid process/steps combined net profit was arrived at 14.04%, which was accepted by the TPO at Arm's Length. 8. After the determination of the combined net profit of 14.04%, the same was increased to accommodate possible disallowances u/s 40(a)(i) in respect of the payments made to third parties on account of expenditure related to content sourced from foreign suppliers; payments made to third parties for hire of transponders', and payment made to third parties for up-linking/maintenance of equipments. Based on these, uplifted rate of combined net-profit was arrived at 23.98%. This was further increased to 27.18% by disallowing the interest expenses incurred in respect of payment of Indian taxes. Thus, the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... logy adopted by the Star Ltd by considering the Consolidated Global Profitability based on the consolidated global financial statements of all the respective companies of the Star Group is not in accordance with the provisions of the Act and the Rules. The DRP directed the AO that, the profits from non-AE revenues has to be separately computed and will not be covered under PSM and directed the AO to tax the revenue on account of non-AE transactions @ 28%. The relevant portion of the AO following the DRP's order reads as under: Respectfully, following the directions of the DRP, Rule 10(i) is not applied in the case of the assessee for AY 2007-08 on transactions with Associate Enterprises. The assessee's income from distribution and syndication is entirely from the AEs. As regards the advertisement revenue, out of the gross ad revenue of ₹ 10,14,72,78,000/-. Consequently, the revenue in the assessee's hand remains at ₹ 118.59 crores which is taxed at the rate of 28%, as directed by the DRP. Interest income of ₹ 1,85,92,430/-, though partly from AE (ie Star Games) is taxed 100% as the assessee has not claimed any expenses against the same . There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y these additions/disallowances was computed by the AO in the following manner:- Particulars Amount (Rs) Amount(Rs) Advertisement revenue 10,147,277,000 Distribution revenue (Taxable on protective basis) 1,248,240,500 Syndication Revenue 60,534,958 Other Income (As per Return of Income) 18,592,430 Revenues received from India 11,474,644,888 Non-AE Transactions Advertisement Revenue 1,185,930,000 Taxable Income Taxable profits from India operation (as approved by the TPO) 1,720,845,001 (included distribution income) Taxable profits from India operation (Non-AE Transactions) 28% of 1,185,930,000 332,060,400 Other Income (as per Return of In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on on a consolidated basis including India and non-India revenues. Thereafter, the effects of inter-company transactions have been eliminated so that correct third party revenue is arrived at. Based on such analysis and determination, global combined profit was arrived at 14.04% which has been found to be at ALP by the TPO. In the next step, the assessee has made certain suo-motu disallowance and uplifted profit rate to 27.18% which has been apportioned to various companies in the PSM, (the ratio of which has already been incorporated above). He further submitted that, under the PSM, the combined net profit of the group is to be determined at the transactional level of the entities from all the international transactions. Here the combined net profit has been determined on the inter se transaction as there are no other transaction which is evident from the functions performed and revenue generated in such transaction. Thus, all the transactions in respect of distribution stream and advertisement stream cannot be segregated nor can be the expenses. The assessee was not required to make any disallowance in respect of the payment made to third parties in view of settled legal position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istribution revenue is being taxed on protective basis in the hands of the Star Ltd., which in fact is the part of the PSM profit rate of 27.18%. Once, that is so, then again 50% of the distribution cannot be taxed on substantive basis, therefore, it is amounts to double disallowance. Regarding taxation of service fee and up-linking income, he submitted that, the assessee had offered tax @ 10.45% and 20.91%, respectively in the return of income which is in accordance with section 115A and the same has been taxed by the AO at 42.82% which is not correct. As regards, double disallowance of interest expense also of ₹ 30,08,28,766/-, he submitted that, again it amounts to double disallowance, because it already constitute disallowance made by the assessee while arriving at profit rate of 27.18%. On various other disallowances made under section 40(a)(i), he submitted that, firstly, no disallowance can be made on account of retrospective amendment in view of the various judicial precedence; secondly, no disallowance can be made when the recipient has duly discharged its liability to pay the tax on the said income; thirdly, already the disallowance u/s 40(a)(i) has been made while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at under PSM only AE transaction have to considered for the combined profit and not at entity level. Regarding various disallowance made under section 40(a)(i), he submitted that, the same will be applicable retrospectively in view of the amendment brought in by the Finance Act, 2012. 17. So far as the chargeability of interest u/s 234B, he relied upon the decision of Delhi High Court in the case of DIT vs Alcatell Lucent USA, reported in (2014) 264 CTR 240.Once it has been accepted that the assessee has a business connection in India, then interest under section 234B is chargeable. On other disallowances, he strongly relied upon the order of the AO. 18. On the issues raised in the additional grounds, it has been submitted that, it is only a matter of calculation under the PSM and when assessee itself has offered profit rate of 27.14%, then such a profit cannot be lowered now. 19. Mr. Kaka, on the issue of levy of interest under section 234B, submitted that, the decision of Alcatel Lucent USA, Inc. (supra) now has been distinguished by the Delhi High Court itself in the case of DIT vs. GE Packaged Power Inc. reported in 373 ITR 365 wherein this matter of chargeability of 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties and whether such a disallowance has led to multifold or double disallowances. 21. The Profit Split Method (PSM) is applied where operations of the related parties are highly integrated making the evaluation on individual basis is very difficult and all the parties owned valuable non-routine intangible assets for which no comparable data could be available and thereby making it impossible to apply other methods, which are based on establishing high degree of comparability with uncontrolled comparables. PSM is generally applied in cases involving multiple transactions amongst associated enterprises (AEs) which are so inter-related and closely linked or continuous that they cannot be evaluated on separate basis for the purpose of determining Arm's Length Price of any transaction. Rule 10B(1)(d) of the Income-tax Rules prescribes the method to be applied in the following manner:- (d) profit split method, which may be applicable mainly in international transactions involving transfer of unique intangibles or in multiple international transactions which are so interrelated that they cannot be evaluated separately for the purpose of determining the arm's length price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by unrelated enterprise performing functions in similar circumstances; thirdly, the combined net profit is split between the related enterprise on the basis of any proportion to their related contribution which has been evaluated after carrying out FAR analysis and lastly, the profit which has been apportioned to the assessee is taken into account to arrive at Arm's Length Price analysis to the international transactions. The object of detailed functional analysis in such a method is to assess the related contribution and risk taken by each party and thereby assigned income accordingly. 22. Here in this case, so far as FAR analysis of relative contribution made by each of the entities and apportionment of combined net profit based on evaluation of their contribution is concerned, same is not in dispute. First of all, for determination of combined profit, net revenues from all the transaction relating to generation of revenues are to be taken into account. Here in this case, it has been contended that all the revenue streams have been from inter se transactions arising from the functions performed amongst the AEs only. Even the generation of ad revenues is purely from the sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e based on such evaluation by unrelated enterprise performing comparable functions has been benchmarked to arrive at the ALP; and lastly, once the assessee has taken all the revenues and factored all the costs to arrive at combined net profit then it is not permitted to segregate part of the revenue and tax it again by applying profit rate of 28%. Such an exercise will only lead to double disallowance. Thus, action of the AO in pursuance of the direction given by the DRP is rejected. Further, we also do not agree with the revenue that, non-AE transactions needs to be determined under Rule 10, because once such an international transactions are covered under section 92 then there is no need for separate determination of income when all the revenues have been taken for the determination for ALP. Under section 92C(2), the manner prescribed is under Rule 10B and not Rule 10. Otherwise also, Rule 10 is applicable only when the actual amount of the income accrued or arising to a non-resident cannot be definitely ascertained, which here in this case is not the case of the revenue that, the income of the assessee cannot be determined. 23. Here, in this case, the DRP has accepted the PSM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd then divided as per the relevant functions and role of each entity. Last but not the least, the channel companies have been separately assessed and they have discharged their tax liability and, therefore, there is no requirement by the assessee to deduct tax and accordingly, no disallowance can be made. 25. Likewise, various disallowances made under section 40(a)(i) on account of payment made to Asia SAT, payment for foreign content and payment for technical cost, also cannot be made for the reasons given above that, while computing the profit under PSM at 27.18%, there is no requirement for making separate disallowances under section 40(a)(i) and same are directed to be deleted. 26. So far as issue raised vide grounds 7 and 8, the assessee has challenged the taxation of service fee income @ 41.82% on the gross basis as against applicable @ 10.455% on gross basis. We direct the AO to apply the correct tax rate in accordance with section 115A and examine the contention of the assessee that tax rate of 10.45% and 20.91% should be applied. 27. Likewise, disallowance of interest expense as raised vide ground no. 10 should also be deleted, because it stands already disallowe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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