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Judgment
PER S.RIFAURRAHMAN,AM:
This appeal filed by the assessee is directed against the assessment order dated 31.07.2024 passed by the ACIT, Central Circle 8, Delhi under section 143(3) read with section 144(C)(13) of the Income-tax Act, 1961 (for short ‘the Act”) for Assessment Year 2020-21 pursuant to the directions of the Dispute Resolution Panel u/s 144C (5) of the Act raising the following grounds of appeal :-
“1.On the facts and in the circumstances of the case and in law, the assessment order dated 31 July 2024 passed by the Ld. AO under section 143(3) read with section 144C(13) of the Act is barred by limitation, void-ab-initio and therefore, ought to be quashed and set aside in toto,
General
2.On the facts and in the circumstances of the case and in law, the ld. AO erred in making an addition of Rs.1,78,97,264 and assessing the total income of the Appellant at Rs.5,39,85,000 as against returned income of Rs.3,60,87,730 and consequently raising a tax demand of Rs. 45,99,680 based on the order passed by the TPO and the directions issued by the Hon'ble DRP.
Transfer Pricing Grounds
(a)Incorrect addition of Rs.1,07,65,480 by applying a mark-up of 20% on reimbursement of expenses received by the Appellant
3.On the facts and circumstances of the case and in law, the ld. AO/TPO/DRP erred in not accepting that reimbursement of expenses received by Appellant are third party costs incurred by it on behalf of its associated enterprises (AEs) / group companies which were recovered on a cost-to-cost basis and thus, a mark-up of 20% cannot be applied to these costs.
4.On the facts and circumstances of the case and in law, the ld. AO/TPO/DRP have erred in not considering the order passed by the Hon'ble Tribunal, Delhi Bench, in the Appellant's own case for AY 2004-05 wherein the Hon'ble Tribunal, in the context of mark-up on reimbursement of expenses received, has upheld that no-mark up is required to be charged on the reimbursements received by the Appellant on cost to cost basis from its AEs.
5.On a without prejudice basis, on the facts and circumstances of the case and in law, the Ld. Assessing Officer/TPO/DRP have erred in applying a mark-up of 20% on reimbursement of expenses, being domestic transactions entered by the Appellant with its Indian group companies which do not get covered under the Indian Transfer Pricing Regulations.
(b)Rejecting the benchmarking analysis related to payment of the license fee conducted by the Appellant, resulting in an addition of Rs.71,31,784.
6.On the facts and in circumstances of the case and in law, Ld. Assessing Officer/TPO/DRP erred in rejecting the benchmarking analysis carried out by the Appellant, using Transaction Net Margin Method (TNMM') as the most appropriate method, for determination of the arm's length price of its international transaction related to payment of the license fee.
7.Without prejudice, on the facts and circumstances of the case and in law, the Ld. AO/TPO/DRP erred in arbitrarily rejecting few com parables from the supplementary benchmarking analysis undertaken and submitted by the Appellant under Comparable Uncontrolled Price ('CUP') method.
8.Without prejudice, on the facts and circumstances of the case and in law, the Ld. AO and the TPO have erred in exceeding their jurisdiction in rejecting a comparable suo moto, without any direction from the Hon'ble DRP, which was initially accepted in the impugned draft assessment order /TPO's order.
9.Without prejudice, on the facts and circumstances of the case and in law, the Ld. AO/TPO/DRP erred in not considering the effective license fee rate paid to the AE as computed and submitted by the Appellant for the purpose of the benchmarking analysis.
The Appellant prays that the Ld. AO be directed to delete the above Transfer pricing additions.
Corporate Tax Grounds
(a)Non allowability of additional claim for deduction of Rs.4,56,189 under section 37 of the Act
10.On the facts and in the circumstances of the case and in law, the Ld. AO I DRP has erred in not allowing the additional claim made by the Appellant for deduction of taxes paid outside India amounting to Rs.4,56,189 under section 37 of the Act (credit of which is not available under section 90 of the Act) on the basis that the same has not been claimed in the Return of Income.
The Appellant prays that the Ld. AO be directed to allow the deduction of Rs.4,56,189 under section 37 of the Act.
Levy of interest under section 234D of the Act
11.On the facts and in the circumstances of the case and in law, Ld. AO erred in levying interest under section 234D of the Act amounting to Rs.332,145.
Short grant of interest under section 244A of the Act
12.On the facts and in the circumstances of the case and in law, Ld. AO erred in computing the interest to be granted under section 244A of the Act.
Initiation of penalty proceedings under section 271AA
13.On the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 271 AAA of the Act.
The Appellant prays that the Ld. AO be directed to drop the penalty proceedings initiated under section 271 AA of the Act.”
Ground No.1 is not pressed at the time of hearing, hence dismissed as not pressed. Ground No.2 is general in nature.
At the time of hearing, ld. AR of the assessee brought to our notice relevant nature of business carried on by the assessee and relevant facts on the issues raised by the assessee. He submitted that during AY 2020-21, BBC Global News India Private Limited (the assessee) was engaged in providing advertising sales and marketing support services in relation of Airtime Sales (ATS) on BBC News Channel and advertisement space sale on BBC.Com website to its associated enterprise (‘AE’). He submitted that assessee was also engaged in the business of distribution of BBC Word News Channel. Accordingly, the business operations of the assesseeare classified into the following two activities:
Providing advertising sales and marketing support services ('MSS segment')
Assessee entered into agreements with the BBC Global News Limited' ('BGNL' or 'AE') being appointed as exclusive representative for marketing and selling advertising airtime and sponsorships on BBC News Channel and sale of advertisement space on BBC.Com website respectively in specified territories. Compensated at cost plus 20%. Actual operating margin earned by the assessee (BGNIPL) during AY 2020-21 is 28.25%which was accepted by Ld. TPO to be at arm's length.
Distribution of BBC News Channel in the specified territories (Distribution Segment')
Assessee entered into an agreement with BBC World Distribution Limited, UK (BBCWD' or 'AE') - assessee has been granted rights to distribute BBC News Channel in the specified territory. In consideration, the assessee pays a distribution fee (also referred as ‘license fee') at 25% of net distribution revenue to its AE.
With regard to Transfer Pricing Issue relating toReimbursement of expenses received /Transfer Pricing adjustment of Rs.1,07,65, 480) raised vide Grounds No.3, 4 and 5, ld. AR of the assessee submitted that the assessee incurred certain expenses on behalf of both domestic group companies and foreign AEs and recovered the same on cost-to-cost basis. A break-up with respect to reimbursement of expenses received has been provided as below:
| Sr. No. | Name of the Group Company | Name of the expense | Amount (in INR) |
| 1 | BBC Studios India Private Limited | Salaries, wages and bonus | 23,04,908 |
| 2 | BBC Studios Distribution Ltd, U.K. | Salaries, wages and bonus | 18,03,431 |
| 3 | BBC World Service India Private Limited | Salaries, wages and bonus | 2,85,70,877 |
| 4 | BBC Global Singapore Pte. Ltd. | Salaries, wages and bonus | 85,39,679 |
| 5 | BBC Studios India Private Limited | Other Expenses | 3,75,000 |
| 6 | BBC Global News Limited, U.K. | Business promotion expenses | 1,05,83,536 |
| 7 | BBC World Service India Private Limited | Other Expense | 16,49,972 |
| Total | 5,38,27,403 | ||
Further, he submitted that the TPO vide order dated 31.07.2023 held that the assesseehas failed to establish how the employees of assesseeprovided services to the domestic AEs and group companies and thereafter applied a 20% mark-up on the entire amount (Rs.5,38,27,403), treating all reimbursements as being relating to MSS provided by the assesseeto its foreign AEs.
He further submitted that transactions with domestic group entities (Sr. No. 1, 3, 5 & 7 aggregating to Rs.3,29,00,757 as given in the above chart fall outside transfer pricing provisions. It is submitted that costs recouped from domestic group companies are outside the purview of transfer pricing. In this regard, he placed reliance on the decision of coordinate bench in AT&T Communication Services (India) P. Ltd. v. DCIT, ITA No. 354/Del/2017(Delhi ITAT) affirmed by the Hon’ble Delhi High Court in PCIT v AT&T Communication Services (India) P. Ltd. ITA No. 915/2019 (Delhi HC) wherein it has been held that cost allocation between domestic companies cannot be subject to upward addition on the ground that no profit was charged from the domestic group company.
He further submitted that recovery towards business promotion expenses (Sr. No.6 amounting to Rs.1,05,83,536 mentioned in the above chart) represents the third-party marketing expenses paid on behalf of the AE and recovered on cost-to-cost basis, therefore, no value addition undertaken by the assessee. Further, the copy of third party and inter-company invoices on sample basis has been submitted by the assessee.
With regard to other expenses (Sr. No. 5 and 7 aggregating to Rs.20,24,972 as shown in the above chart), he submitted that the same isrecharged to the Group companies represent the proportionate cost of expenses paid to third parties such as BARC (Broadcast Audience Research Council) and the travelling and conveyance expenses on actual basis and a copy of invoices raised by BARC have been placed on record.
Accordingly, he placed reliance on the ruling of the jurisdictional Hon'ble Delhi High Court in CPA Global Services Private Limited in ITA 266/2017 (Delhi High Court), wherein the Hon’ble Court upheld the order of the ITAT, Delhi in ITA No.6814/Del/2015. He submitted that in the aforesaid matter, the ITAT held that such reimbursement of costs received from AEs should be excluded from operating costs base as they do not involve any functions to be performed so as to be considered for profitability purposes.
In respect of reimbursements received from overseas AEs towards salary and wages (Sr.2 and 4 shown in the above chart), it is submitted that this is the cross charge for some common employees utilized by more than one group company. He submitted that if the allegation of the TPO that no services could have been provided by the employees of assessee to its group companies is taken to its logical end, then the corresponding reimbursement received should be considered at Nil rather than enhancing it by applying a 20% mark-up. He submitted that the TPO could not have applied the cost+20% model to reimbursements on the ground that the employees of assessee were incapable of providing services to its AEs.
On the other hand, ld. DR of the Revenue relied on the orders of the authorities below.
Considered the rival submissions and material placed on record. We observed that the assessee had incurred certain expenses on behalf of group entities and its foreign AEs and recovered the same as reimbursement on cost to cost basis. On careful consideration, we observed that the assessee had incurred and recovered the expenses relating to salaries, wages, bonus and other expenses like business promotion and other related expenses to the extent of Rs. 538,27,403/-. The TPO considered the same as provision of services to the AEs and made TP adjustments on the above recovery at the rate of 20% as mark up. Before us, the assessee had brought to our attention that the above reimbursement was made from the domestic group entities to the extent of Rs. 329,00,757/-, towards promotions expenses of Rs. 105,83,536/-and towards other expenses of Rs. 20,24,972/- (which represents proportionate recovery of third parties such as BARC, travelling and conveyance). It was submitted that the recovery of reimbursement expenses from the domestic group entities are concern, which is outside the provisions of international transactions and transfer pricing by relying on the decision of AT&T Communication Services (India) P. Ltd. (supra), both the ITAT and Hon’ble High Court of Delhi held that cost allocation between domestic companies cannot be subject to upward addition on the ground that no profit was charged from the domestic group company. We observed that in the present case also, the TPO had proposed upward revision on the basis of no profit was charged from the other domestic companies. Since, the issue involved is exactly similar, we direct the AO/TPO to verify the claims of the assessee and allow the same as per law.
Coming to the issue of reimbursement of marketing and promotion expenses based on the third-party invoices and the same was recovered on cost-to-cost basis. The assessee also submitted the relevant copy of the third party and inter company invoices on sample basis, since the services were rendered by the third party and the assessee had not provided any value addition on the above third party services, it only made the payment to them and recovered the same from its AE. Therefore, the same cannot be treated as provision of services by the assessee to its AE. Therefore, this also cannot be part of TP adjustments.
With regard to reimbursement of other expenses, which includes the proportionate cost of expenses to BARC and travelling expenses, the assessee had submitted the relevant third party bill and recovery of travelling expenses, there is not involvement of any provision of services to its AE. Therefore this issue also falls outside the ambit of TP adjustments as held in the case of CPA Global Services Private Limited (supra).
With regard to reimbursement of salary and wages from its foreign AEs, it is submitted that this is only the cross charge for some common employees utilised by more than one group entity. Since, the assessee is in the business of providing advertising sales and marketing support services in relation to ATS on BBC.Com website, this involves input from various group entities and the assessee also not provided clear services provided or received cross services from other employees of the group AEs, in absence of such detailed information like service or log sheet of sharing the services or obtaining services, it is not possible to determine the exact nature of transactions. Therefore, we inclined to sustain the above issue alone. In the result, grounds raised by the assessee is partly allowed.
With regard to Grounds No.6 to 9 regarding Transfer Pricing issue relating to payment of license fee transaction (Transfer Pricing Adjustment of Rs.71,31,784/-), ld. AR submitted that in consideration of the distribution rights obtained by the assessee from its AE (i.e. BBCWD), the assessee paid a distribution/license fee of 25% of net distribution revenues(total: Rs.2,58,77,299). He submitted that in TP Study, the assessee benchmarked this transaction under Transactional Net Margin Method (TNMM) with software/IT product distributors as comparables.
He further submitted that as per the TNMM benchmarking analysis, assessee's operating profit to operating revenue (OP/OR) of 4.26% was higher than the arm's length range of comparable companies ranging from 13.9% to 2.03% with a median of 1.76%, therefore, the transaction is considered to be at arm's length. However, the ld. TPO rejected the TNMM benchmarking analysis.
Without prejudice, the ld. AR also submitted supplementary benchmarking under Comparable Uncontrolled Price (CUP)) method by using eight license agreements and the TPO ultimately accepted only two, arriving at an arm's length rate of 18.11%.
With regard to TNMM benchmarking analysis, ld. AR submitted that similar benchmarking approach was followed by the assessee in previous years (AYs 2010-11 to AY 2019-20) and was accepted by the Revenue, therefore, rule of consistency to be followed and TNMM maybe be upheld. In this regard, he referred to the decision of Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SC) and PCIT-4, Pune v. Vishay Components India (P.) Ltd. [ITA No. 1643 OF 2016) (Bombay HC)].
He submitted that TNMM is the most appropriate method and further, the finding of the TPO that software/IT product distributors are not functionally comparable to the companies engaged in distribution of TV channels stands rejected by coordinate bench of the ITAT in the following cases Sony Pictures Networks India Pvt Ltd v. DCIT (ITA No. 971/MUM/2016) (Mumbai ITAT) and Turner International India Pvt Ltd v. ACIT (ITA No.1204/DEL2018) (Delhi ITAT)) and relevant extract of the said decision is reproduced below :
“73.In so far as the aforesaid contention of the learned counsel that Software Distribution Company should be accepted, we agree in principle that such companies can be taken for comparability analysis, when there are no direct comparable dealing with distribution of satellite channels are available. Such an acceptability of software distribution companies in the case of distribution of TV channels has found favour by the co-ordinate bench in the case of NGC India P. Ltd. (supra). Thus, we hold that software companies can also be included for the purpose of comparability analysis, because in assessee's own case for the subsequent years such companies have been accepted to be good comparables.... "
Accordingly, he prayed that the the Tribunal may be pleased to accept the software/IT distributor companies as valid comparables, uphold the benchmarking analysis undertaken by the assessee in its TP Study, and may please direct the AO/Ld. TPO to delete the entire TP adjustment considering the aforesaid comparables.
With regard to arbitrary modification of supplementary benchmarking, without prejudice, he submitted that if the Bench does not accept software /IT product distribution companies for benchmarking the license fee payment, the assessee is submitted as under :-
All eight comparable agreements should be accepted. Since the assessee’s license fee falls within the arm's length range, the transaction should be accepted as being at arm's length.
Without prejudice to the contention that all eight agreements should be considered, the assessee had submitted before the Ld. DRP that Peak Entertainment Ltd. is similar to Warner Home Video Inc., which was accepted by the Ld. TPO in the TP Order dated 31 July 2023. However, in the Order Giving Effect dated 29.07.2024, the Ld. TPO did not include Peak Entertainment Ltd. and rather excluded Warner Home Video Inc. without any direction from the DRP. Such exclusion is arbitrary and unsustainable.
Accordingly, the following four comparable agreements should be accepted:
Televisa SA de CVV Univision Communications Inc.
CorTech Communications Inc., Wombat Productions Home Box Office Inc.
Warner Home Video Inc. Warner Home Video, Time Warner Entertainment Co LP Genius Products Inc.: and
Peak Entertainment Ltd/ The Silly Goose Co. LLC.
In view of the above, he submitted that the arithmetic mean of these agreements is 29.06% which is higher than the assessee’s license fee rate and accordingly, the transaction should be considered at arm's length.
On the other hand, ld. DR of the Revenue relied on the orders of the authorities below.
Considered the rival submissions and material placed on record. We observed that the assessee had bench marked the transaction of payment of license fee by following TNMM by considering the software/IT product distributors as comparables. After considering the nature of the business of the assessee, we are of the view that the software/It product distributors nature of functionality are not similar to the functions or nature of services provided by the assessee, are different. It was submitted that the coordinate bench in the case of Turner International India Pvt Ltd (supra) held that software/IT product distributors are functionally comparable to the companies engaged in distribution of TV channels. However, we noticed that the above proposition was made on the basis, when there is no direct comparable dealing with distribution of satellite channels are available. We observed that there are comparables available for the purpose of bench marking under CUP method, that being the case, the above proposition cannot be accepted. Therefore, we are inclined to reject the contentions of the assessee in this regard.
Coming to the issue of adopting the CUP as the MAM selected by the TPO to bench mark the transactions carried on by the assessee, we observed that the TPO had only accepted two license agreements out of 8 agreements to determine the ALP at 18.11%. It is brought to our notice that four comparables which are similar to the functions of the assessee are not considered by the TPO even though the Ld DRP had accepted that the Peak Entertainment and Warner Home Video Inc are similar, which was rejected by the TPO while passing the OGE. After considering the detailed submissions, we are inclined to remit the issue back to the file of AO/TPO to consider the above four comparables namely, a) Televisa SA de CVV Univision Communications Inc. b) Cor Tech Communications Inc., c) Warner Home Video Inc. and d) Peak Entertainment Ltd/ The Silly Goose Co. LLC, to bench mark the ALP under CUP method after giving proper opportunity of being heard to the assessee. In the result, the grounds raised by the assessee are allowed for statistical purposes.
With regard to Ground No.10 relating to corporate tax - claim of taxes paid outside India under section 37 of the Act of Rs.4,56,189/-, ld. AR submitted that the assessee earned foreign sourced income from Sri Lanka on which taxes amounting to Rs.7,14,013/- paid. Relief claimed u/s 90/91 amounting to Rs.2,57,824 and vide submission dated 14.09.2023 an additional claim for deduction of balance tax amounting to Rs.4,56,189/- under section 37 of the Act made. He submitted that details of FTC, Form No.67 and withholding tax certificates is placed at pages 914-963 of the paper book. He further submitted that foreign taxes ineligible for credit u/s 90/91 of the Act can be claimed as deduction u/s 37(1) of the Act and such claim is not debarred by virtue of provisions of section 40(a)(ii) of the Act. In this regard, he relief on the following decisions :-
Reliance Infrastructure Ltd. vs. CIT (2017) 300 ITR 271 (Bombay High Court)
Tata Consultancy Services Ltd. vs. Addl.CIT (2020) 121 taxmann.com 190 (Mumbai-ITAT)
Bank of India vs. ACIT (2021) 125 taxmann.com 155 (Mumbai ITAT)
Tata Consultancy Services Ltd. vs. ACTI (2022) 141 taxmann.com 518 (Mumbai ITAT)
Virmati Software & Telecommunications Ltd. vs. DCIT ITA No.1135/AHM/2017.
On the other hand, ld. DR of the Revenue relied on the orders of the authorities below.
Considered the rival submissions and material placed on record. We observed that the claim of the assessee was rejected by the lower authorities on the basis of the decision Hon’ble Apex Court in Goetze (India) Ltd. vs. CIT 284 ITR 323 (SC). In our view, the fresh claim made by the assessee cannot be entertained by the AO, however, the appellate authorities can entertain the same. In our view, the same has to be verified by the AO on the basis of additional evidence submitted by the assessee to claim the additional tax paid outside India. Whether the assessee can claim the additional tax u/s 37 of the Act. Therefore, we direct AO to verify the claim of the assessee as per law after giving proper opportunity of being heard to the assessee. Accordingly, ground no.10 is allowed for statistical purposes.
In the result, the appeal filed by the assessee is allowed for statistical purposes.