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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 ..... 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 No. 8683/Mum/2011, which is the main appeal and has a bearing in all the other appeals of the aforementioned assessees. In the grounds of appeal as many as 29 grounds have been raised and besides this, three additional grounds have also been raised vide separate petition. Since grounds are very argumentative in nature and not specific as is required under the rules therefore, we are proceeding on the basis of issues raised in various grounds, which are summarized as under: (i) Ground no. 1 is general in nature; (ii) In ground nos. 2 to 5, the assessee has challenged that, the Ld. DRP as well as AO has erred in law and on facts in not applying the Profits Split Method (PSM) which was approved by the TPO, on non-AE transactions and thereby holding that revenue of Rs. 118,59,30,000/- from sale of advertisement airtime from non-AE needs to be separately computed and on such revenue applying 28% of profit; (iii) In ground no. 6, the assessee has challenged that, there is an error ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 divergent position with respect to adjustments prescribed under section 40(a)(i) of the Act, while considering the profitability rate. Ground number 32: erred in not specifying that after accepting in case of the Appellant (along with its AEs1), the profitability of 27.18% (equivalent to Rs. 3,452,612,000) of the India Revenues comprising of 14.04% (Rs. 1,783,683,000) being the ALP and 13.14% (Rs. 1,668,929,000) being adjustment under section 40(a)(i) of the Act". 5. Before us, the Ld. Senior Counsel, Shri Porus Kaka submitted that, the whole controversy in all the appeals is that, Profits Split Method (PSM) has not been properly applied and has not been appreciated by the AO and the DRP in a proper perspective, which has led to various disallowances and double disallowances. After referring to the material placed before us and the impugned orders, he briefly explained the relevant facts and the background of the case, which are discussed hereinafter. M/s Satellite Television Asia Region Ltd. (Star Ltd.) and Star Channel Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by ad agents. All the transactions undertaken for earning of the revenues are amongst these entities only. 6. Given the complex and inter-related functions, the risks and assets of these companies, PSM was selected as most appropriate method (MAM) to determine the reasonable allocation of deemed taxable profit in India. The Profit Split was calculated on the basis of detail analysis undertaken and allocation of deemed taxable income between the said companies and the resultant net profit as worked out to 14.04%. The percentage of allocation of taxable income was made in the following manner: Sr. No. Name of the Company Percentagewise allocation of taxable income i Star Ltd. 49% ii SGL 1% iii STEL 33% iv SIML 4% v SAML 4% vi SARF 6% vii Channel V 3% So far as allocation of proportionate taxable income in above ratio, same is not in dispute. One very important fact in all these cases is that in the Transfer Pricing proceedings, the TPO has accepted the net profit of 14.04% at arm's length. No adjustment whatsoever was made or suggested. The transfer pricing orders in case of all these entities have been placed in the paper book from pages 234 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oup entities, i.e. Advertising revenues earned from Indian advertising; Distribution/subscription revenues earned from India; and Syndication/Licensing revenues earned from India. Before us, Mr. Porus Kaka pointed out that, though, such disallowances were no longer required to be made in view of the judgment of the Supreme Court in the case of Vodafone International BV vs. UOI, reported in 341 ITR 1 and even after the retrospective amendment brought by the Finance Act, 2012, (subsequent to Vodafone decision) various Courts have held that, it is impossible for the assessee to comply with the provisions for withholding of tax prior to the introduction of such provisions. Despite this, the assessee had offered higher combined profit over and above accepted by TPO. Thus, the profit on receipts in India offered for taxation was in the following manner: Particulars -year ending 31st March, 2007 (Amount in Rs. lakhs) Advertising revenue from India A 1,01,472.78 Distribution revenue from India B 24,964.81 Syndication revenues from India C 605.35 Total revenues from India D = A + B + C 1,27,042.94 Profit percentage as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid disallowances, the AO further proceeded to tax the subscription revenues amounting to Rs. 124,82,45,000/- (50% of the gross turnover of Rs. 249,64,90,000/- as the same was payable to the channel companies). The said amount was taxed on the ground that the same was taxable in the hands of the assessee as profits and gains from business or profession under section 44DA as "royalty". Thereafter, he also proceeded to make various disallowance under section 40(a)(i) on the payment made by the assessee to various different entities, the details of which are as under: Sr. No. Nature of payment made to the Parties Quantum of disallowance in (Rs.) 1 Payment made to Asia SAT for transponder hire charges 37,74,29,655 2 Payment for foreign content 69,91,76,571 3 Payment for technical cost 10,89,68,117 11. Besides this, the Ld. AO had taxed the service fee income and up-linking income @ 41.82% on the gross basis which as per the assessee should be applicable @ 10.45% and 20.91% and further disallowed interest expenses of Rs. 30,08,28,766/-. The total income after making by these additions/disallowances was computed by the AO in the following manner:- Particul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rst of all, all the income and expenses of the Star Group were consolidated to arrive at net results of the entities' operation 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated. 13. Regarding double taxation of distribution revenue of Rs. 124,82,45,000, he submitted that the 50% of total distribution 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 Rs. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -AE advertisement revenues from the PSM Pool, he strongly relied upon the order of the DRP and submitted that 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 cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee or were part of combined profit determined on account of transactions of the entities 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tity and based on that, it is seen how such contribution should be evaluated 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 amon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 for 80% of the ad-revenue in PSM Pool, therefore, it would not be proper that for the balance, a separate determination of profit is required and that to be at a higher profit rate of 28%. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, 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 disallowed by the assessee while computing PSM profit. Thus, such disallowance made by the AO in the computation of income, as incorporated above stands deleted on the reasons stated herein above. 28. On the issue of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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