DQ Entertainment (International) Ltd., Hyderabad, Hyderabad V. ACIT, Circle-17(1), Hyderabad, Hyderabad

ITA 151/HYD/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 6491 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 4 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-06-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 22-04-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 16-02-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M SITARAM
• Keywords: Capital asset; Transfer pricing; Double taxation relief; International transaction; Permanent establishment; Corroborative evidences; Valuation report
• Section: 143(3); 92B; 142(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 151/HYD/2015 ASSESSMENT YEAR: 2010-11 DQ ENTERTAINMENT (INTERNATIONAL) LTD., HYDERABAD PAN AACCD VS. ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 17(1), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI P.V.S.S. PRASAD REVENUE BY : SHRI M. SITARAM DATE OF HEARING 22-04-2016 DATE OF PRONOUNCEMENT 22-06-2016 O R D E R PER S. RIFAUR RAHMAN, A.M.: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ASSESSMENT ORDER PASSED U/S 143(3) READ WITH SECTION 144C OF T HE INCOME-TAX ACT IN PURSUANCE TO THE DIRECTIONS OF THE DISPUTE RESOL UTION PANEL (DRP IN SHORT), HYDERABAD PERTAINING TO THE ASSESSMENT Y EAR 2010-11. 2. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSE SSEE, DQ ENTERTAINMENT (INTERNATIONAL) LTD. IS ONE OF THE LE ADING PRODUCERS OF ANIMATION VISUAL EFFECTS, GAME ART AND ENTERTAINMEN T CONTENT FOR THE INDIAN AS WELL AS GLOBAL MEDIA AND ENTERTAINMENT IN DUSTRY. THE COMPANY HAS PRODUCED/CO-PRODUCED AND DISTRIBUTED CA RTOON TV SERIES, DIRECT-TO-HOME VIDEOS AND FEATURE FILMS, CR EATED REAL TIME GAME ANIMATION FOR ONLINE MOBILE AND NEXT-GEN CONSO LE GAMES AND NOW DIVERSIFIED INTO PRODUCTION AND DISTRIBUTION OF 3D STEREOSCOPIC ANIMATED FEATURE FILMS. THE ASSESSEE-COMPANY FILED ITS RETURN OF 2 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. INCOME ON 12.10.2010 AND THE SAME WAS PROCESSED U/S 143(1) OF THE ACT. THE CASE WAS SELECTED FOR SCRUTINY UNDER CASS AND NOTICE U/S 143(2) DATED 07.09.2011 WAS ISSUED AND SERVED ON TH E ASSESSEE. SUBSEQUENTLY NOTICES U/S 143(2) & 142(1) CALLING FO R INFORMATION WERE ISSUED. PROFILE OF THE AE: 2.1 THE COMPANY, DQE PLC., ISLE OF MANN, IS THE HOL DING COMPANY OF DQE (MAURITIUS) LTD., MAURITIUS. THE DQE (MAURIT IUS) LTD. IS THE HOLDING COMPANY OF DQE (INTERNATIONAL) LTD., (ASSES SEE). THE DQE (INTERNATIONAL) LTD., IS THE HOLDING COMPANY OF DQE (IRELAND) LTD. 2.2 AS PER THE AUDITED STATEMENT OF ACCOUNTS, THE F INANCIALS OF THE ASSESSEE ARE AS UNDER: DESCRIPTION AMOUNT (IN RS.) OPERATING REVENUE 1,48,52,58,323 OPERATING COST 1,17,85,17,865 OPERATING PROFIT 30,67,40,458 OP/OR (%) 20.65 OP/OC (%) 26.03 2.3 AFTER VERIFYING THE INFORMATION SUBMITTED/AVAIL ABLE AND AFTER TAKING INTO CONSIDERATION THE ORDER OF THE TPO, TH E ASSESSMENT WAS COMPLETED AS UNDER: 2.4 SINCE THE INTERNATIONAL TRANSACTION WITH ASSOCI ATE ENTERPRISES EXCEEDS THE LIMITS FIXED BY THE CBDT, IN ACCORDANCE WITH PROVISIONS U/S. 92CA OF IT ACT, 1961, THE CASE WAS REFERRED TO THE TRANSFER PRICING OFFICER (TPO), HYDERABAD WITH THE PRIOR APP ROVAL OF COMMISSIONER OF INCOME TAX, HYDERABAD-I. THE TRANSF ER PRICING OFFICER PASSED AN ORDER U/S, 92CA(3) OF IT ACT, 196 1 ON 27.01.2014. THE TPO IN HIS ORDER HAS RECOMMENDED FOLLOWING ADJU STMENTS U/S.92CA OF THE ACT. S.NO. INTERNATIONAL TRANSACTION ADJUSTMENT 1 SALE OF INTANGIBLE ASSET 6,98,98,271 2 PROFIT ATTRIBUTABLE 6,74,17,416 3 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. 3 PAYMENT OF MANAGEMENT CHARGES 3,70,53,448 4 REIMBURSEMENT OF EXPENSES RECEIVED 7,73,699 TOTAL ADJUSTMENT 17,51,42,834 2.5 IN ACCORDANCE WITH THE ORDER OF THE TPO DATED 2 7.01.2014, THE ADJUSTMENTS OF RS.17,51,42,834/- AS PROPOSED WAS AD DED TO THE INCOME OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERA TION. 3. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL AND RAISED OBJECTIONS BEFORE THE DRP. THE DRP REJECTED THE OBJ ECTIONS OF THE ASSESSEE. 4. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US A ND HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE LEARNED DISPUTE RESOLUTION PANEL (DRP) / ASS ESSING OFFICER (AO) ARE ERRONEOUS IN LAW AND ON THE FACTS OF THE CASE. 2. THE LD DRP/AO ARE LEGALLY NOT JUSTIFIED IN LAW I N ARRIVING AT THE PRICE OF RS 12,35,18,271/- TOWARDS SALE OF INTA NGIBLE ASSET AS AGAINST THE PRICE OF RS 5,36,20,000/- DETERMINED BY THE APPELLANT THEREBY MAKING AN ADJUSTMENT OF RS. 6,98,98,271/-. 3. THE LD DRP/AO OUGHT TO HAVE ACCEPTED THE FACT TH AT THE SALE OF INTANGIBLE ASSET OF RS 5,36,20,000/- ARRIVED AT BY THE APPELLANT WAS AT ARMS LENGTH WHEN THE SAME HAD BEEN VALUED BY 2 INDEPENDENT VALUERS. 4. THE LD DRP/AO OUGHT NOT TO HAVE SUBSTITUTED THE PROJECTIONS MADE AS PER DCF ON WHICH THE VALUATION REPORTS WERE BASED WITH THE ACTUAL FIGURES AND USE OF LATEST INFORMATION AV AILABLE . 5. THE LD. DRP/AO ARE NOT LEGALLY JUSTIFIED IN MAKI NG AN ADDITIONAL ADJUSTMENT OF RS 6,74,17,416/- AS PROFIT ATTRIBUTABLE TO THE APPELLANT COMPANY UNDER THE PROFIT SPLIT METHOD IN CONNECTION WITH THE ABSOLUTE SALE OF INTANGIBLE ASS ET TO AE WHEN SUCH REVENUE IS GENERATED BY AE OF THE APPELLANT CO MPANY I.E., DQ IRELAND AS ABSOLUTE OWNER OF SUCH INTANGIBLE ASS ET. 6. WITHOUT PREJUDICE TO GROUND NOS. THE LD. DRP/AO ARE ERRONEOUS IN ALLOCATING 80 PERCENT OF THE TOTAL PRO FITS OF DQ IRELAND TO DQ INDIA, WHEN THE PROFITS OF DQ IRELAND INCLUDE 4 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. REVENUE GENERATED FROM SEVERAL INTANGIBLE ASSETS WH ILE THE APPELLANT HAS SOLD ONLY ONE INTANGIBLE ASSET I.E., JUNGLE BOOK. 7. WITHOUT PREJUDICE TO GROUND NO.5 THE LD. DRP/AO IS ERRONEOUS IN ALLOCATING 80% OF PROFIT ON SALE OF IP TO DQ IND IA WHEN THE TAX ON SALE OF SUCH CAPITAL ASSET WAS ALREADY PAID IN I NDIA BY DQ INDIA. 8. THE LD. DRP/AO ARE NOT JUSTIFIED IN QUESTIONING THE COMMERCIAL WISDOM OF THE APPELLANT' DECISION TO INC UR THE EXPENDITURE TOWARDS MANAGEMENT CONSULTANCY FEES OF RS 3,70,53,448/-.THE LD DRP/AO OUGHT TO HAVE CONSIDERE D THE TANGIBLE AND DIRECT BENEFIT DERIVED BY THE APPELLAN T BY INCURRING THE MANAGEMENT CONSULTANCY FEES AND OUGHT TO HAVE A LLOWED THE SAME AS COMPLYING WITH ARMS LENGTH PRINCIPLE. 9. THE LD. DRP/AO LEGALLY ERRED IN MAKING AN ADJUST MENT OF RS 7,73,699/- ON REIMBURSEMENT OF EXPENSES RECEIVED OF RS 77,36,985/- WHICH WAS ARRIVED AT BY APPLYING THE MA RK UP @ 10 PERCENT. THE LD DRP/AO OUGHT TO HAVE APPRECIATED TH E FACT THAT EXPENSE INCURRED ON BEHALF OF DQ ENTERTAINMENT IREL AND OUR ASSOCIATED ENTERPRISE TOWARDS EXPENSES WERE PURELY AT COST AND IS NOT A SERVICE. 10. THE LD DRP ERRED IN NOT ADJUDICATING THE GROUND OF OBJECTION WHICH IS AS UNDER: 'THE LD AO/TPO IS LEGALLY AND FACTUALLY INCORRECT I N MAKING AN ADJUSTMENT OF RS 751,83,46,202/- IN RESPECT OF BONU S SHARES ISSUED BY THE APPELLANT TO ITS AE. THE LD AO/TPO ER RED IN BY HOLDING THAT THERE WAS EXCESS BENEFIT IN THE HANDS OF THE AE AND THE SAME WAS DIVIDEND WHEN IN FACT SHARE PREMIUM AC COUNT IS UTILISED FOR ISSUING BONUS SHARES AS PER COMPANY LA W PROVISIONS.' 11. THE LD ORP ERRED IN NOT ADJUDICATING THE GROUND OF OBJECTION WHICH IS AS UNDER: 'THE LD AO/TPO ERRED IN MAKING A REFERENCE TO THE J URISDICTIONAL AO OF INTERNATIONAL TAXATION FOR TAKING UP PROCEEDI NGS U/S 195 OF THE IT ACT WHEN THE ISSUE OF BONUS SHARES BY THE AS SESSEE WAS AT ARM'S LENGTH AND CANNOT LEGALLY BE TREATED AS DI VIDEND OR OTHERWISE. 5. AS REGARDS GROUND NOS. 2 TO 4, IT IS OBSERVED TH AT DURING THE YEAR, DQE INDIA SOLD THE INTELLECTUAL PROPERTY (IP ) RIGHTS OF THE JUNGLE BOOK ANIMATION SERIES TO DQE IRELAND, FOR AN AMOUNT OF RS. 5,36,20,000/- WHICH WAS BASED ON AVERAGE OF THE VAL UE'S ARRIVED AT BY 2 INDEPENDENT VALUERS. THE DETAILED VALUATION CONDU CTED BY INDEPENDENT VALUER, GRANT THORNTON USING RELIEF FRO M ROYALTY METHOD 5 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. IS PART OF THE PAPER BOOK IN PAGES,170 TO 187 AND T HE VALUATION CARRIED OUT BY INDEPENDENT VALUER, AMERICAN APPRAIS AL USING DISCOUNTED CASH FLOW ANALYSIS IS PART OF THE PAPER BOOK IN PG.188 TO 216. THE CONSIDERATION FOR PURCHASE OF JUNGLE BOOK ANIMATION WAS ARRIVED AT THE AVERAGE VALUES DETERMINED BY INDEPEN DENT VALUERS AT RS. 536.20 LAKHS. IN ORDER TO ARRIVE AT THE ALP, T HE LD. TPO HAS REPLACED THE PROJECTED CASH FLOWS WITH THE ACTUAL T OTAL REVENUES OF DQE IRELAND FOR THE YEAR 2009-10 AND 2010-11 AND AR RIVED AT VALUE OF RS.12,35,18,271/- AS COMPARED TO RS. 5,36,20,000 A S DETERMINED BY THE ASSESSEE AND PROPOSED THE ALP ADJUSTMENT TO THE AO. AO HAD ACCEPTED THE ALP ADJUSTMENT AND ADDED THE SAME TO T HE TOTAL INCOME OF THE ASSESSEE. 6. BEFORE THE DRP, THE ASSESSEE SUBMITTED THAT THE VALUATION BY APPLYING DCF METHOD OR ANY OTHER METHOD IS ALWAYS A PPLIED BY CONSIDERING PROJECTIONS OF REVENUES (WHICH WERE BAS ED ON THE DETAILED MARKET EXPECTATION ON THAT PARTICULAR DATE ) WHICH CANNOT BE TINKERED AT A LATER POINT OF TIME BY SUBSTITUTING W ITH ACTUALS. NOWHERE SUCH AN APPROACH IS TECHNICALLY ACCEPTED. ACTUAL RE VENUES MAY BE HIGHER OR LOWER AND THE SAME CANNOT BE SUBSTITUTED FOR CHANGING VALUATION. VALUATION SHOULD ALWAYS BE APPRECIATED A ND ACCEPTED AS A REASONABLE EXERCISE AT THE TIME WHEN IT WAS MADE. I T IS NOT SUPPOSED TO BE ANALYZED 3 TO 4 YEARS DOWN THE LINE. IF ACTUA L REVENUES ARE HIGHER BY SUBSTITUTING THE SAME, THE VALUATION WILL GO UP. IN THE CONVERSE IF ACTUALS ARE LOWER, THE VALUATION WILL G O DOWN. ACCORDING TO ASSESSEE, THIS SORT OF VALUATION OF SUBSTITUTING AC TUAL VALUES AGAINST PROJECTED VALUES IS NOWHERE ACCEPTED IN THE WORLD. ASSESSEE SUBMITTED THAT IT IS WELL AWARE ABOUT THE HUGE FLUC TUATION IN THE GLOBAL MARKET PLACE. THE PROJECTION IS BASED ON THE ASSUMP TIONS BASED ON NORMAL MARKET SCENARIO AND IT IS BASED ON WHICH ANY VALUATION EXERCISE IS COMPLETED AND ACCEPTED WORLD-WIDE. THE SITUATION WOULD HAVE HAD BEEN SAME EVEN IF THE TRANSACTION WAS DONE WITH A THIRD PARTY (AS AGAINST RELATED PARTY), GLOBAL MARKET SCE NARIO HAS ALWAYS BEEN VOLATILE AND WILL ALWAYS BE VOLATILE IN THE FU TURE, THIS WAS THE 6 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. REASON FOR WHICH PROJECTIONS OF 15 YEARS HAS BEEN C ONSIDERED, WHICH PERHAPS ENABLES UPS AND DOWNS OVER A PERIOD OF TIME , IT WILL BE NORMALIZED. THE ASSESSEE RELIED ON THE DECISION OF THE JURISDICTIONAL TRIBUNAL IN THE CASE OF SOCIAL MEDIA INDIA LTD. VS. ACIT CIRCLE 3(2) HYDERABAD ITA NO.1711/HYD/2012 WHEREIN IT WAS HELD THAT THE ASSESSEE'S VALUATION HAS TO BE ACCEPTED AS IT WAS S UPPORTED BY AN INDEPENDENT VALUER. 7. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSE E AND THE ORDER OF TPO, THE DRP HELD THAT THERE IS NO MERIT I N THE SUBMISSIONS OF THE ASSESSEE AND THERE IS NO INFIRMITY IN THE AC TION OF THE TPO IN DETERMINING THE ARMS LENGTH PRICE. DRP ACCORDINGLY REJECTED THE OBJECTION RAISED BY THE ASSESSEE ON THIS ISSUE. 8. LD. AR SUBMITTED BEFORE US THAT DURING THE YEAR, DQE INDIA SOLD THE INTELLECTUAL PROPERTY ('IP') RIGHTS OF THE JUNG LE BOOK ANIMATION SERIES TO DQE IRELAND. THE INTANGIBLE ASSET WAS SOL D WHEN THE INTELLECTUAL PROPERTY RIGHT WAS UNDER DEVELOPMENT P HASE. IT IS SUBMITTED THAT THE ASSESSEE COMPANY SOLD IP RIGHTS TO ITS AE DQ IRELAND FOR AN AMOUNT OF RS. 5,36,20,000/- WHICH WA S BASED ON AVERAGE OF THE VALUE'S ARRIVED AT BY 2 INDEPENDENT VALUERS. THE DETAILED VALUATION CONDUCTED BY INDEPENDENT VALUER AMERICAN APPRAISAL USING DISCOUNTED CASH FLOW ANALYSIS IS GI VEN IN PG. TO 207 TO 235 OF THE PAPER BOOK AND THE VALUATION CARRIED OUT BY INDEPENDENT VALUER GRANT THORNTON USING RELIEF FROM ROYALTY MET HOD IS GIVEN IN PG.236 TO 253 OF PAPER BOOK. IT IS SUBMITTED THAT T HE CONSIDERATION FOR PURCHASE OF JUNGLE BOOK ANIMATION WAS ARRIVED AT TH E AVERAGE VALUES DETERMINED BY INDEPENDENT VALUER 536.20 LAKHS ((510 +562.3)/2) 8.1. THE LD. AR SUBMITTED THAT THE TPO HAS REPLACE D THE PROJECTED CASH FLOWS WITH THE ACTUAL TOTAL REVENUES OF DQE IR ELAND FOR THE YEAR 2009-10 AND 2010-11 AND ARRIVED AT VALUE OF RS.12,3 5,18,271/- INSTEAD OF RS. 5,36,20,000 AS DETERMINED BY TAX PAY ER AND MADE AN ADJUSTMENT OF RS.6,98,98,271/-AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. FURTHER THE LD. TPO WHILE R EPLACING 7 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. PROJECTIONS WITH ACTUALS HAVE CONSIDERED THE TOTAL REVENUE GENERATED BY DQ IRELAND WHEREAS THE INTANGIBLE ASSET SOLD BY DQ INDIA TO DQ IRELAND WAS JUNGLE BOOK ONLY. 8.2 THE LD. AR CONTENDED THAT THE LD. TPO OUGHT TO HAVE CONSIDERED THE FACT THAT THE APPELLANT COMPANY MADE AN OUTRIGHT SALE TO DQE IRELAND. THE COST INCURRED ON JUNGLE BOOK BY THE APPELLANT COMPANY IS RS. 4,94,03,810 (BREAKUP AT PG. 362 OF P APER BOOK) AND THE APPELLANT COMPANY HAS SOLD THE SAID INTANGIBLE ASSET FOR RS. 5,36,20,000 BASED ON VALUATION BY 2 INDEPENDENT VAL UERS. THE BALANCE AMOUNT OF RS. 42,16,190/- WAS OFFERED AS SH ORT TERM CAPITAL GAINS. FURTHER THE LD. TPO/AO ERRED IN ALLOCATING 8 0% OF CAPITAL GAINS TO DQ INDIA WHEN TAX ON SALE OF SUCH CAPITAL ASSET WAS ALREADY PAID BY DQ INDIA. 8.3 THE LD. AR SUBMITTED THAT THE VALUATION BY APPL YING DCF METHOD OR ANY OTHER METHOD IS ALWAYS APPLIED BY CON SIDERING PROJECTIONS OF REVENUES (WHICH WERE BASED ON THE DE TAILED MARKET EXPECTATION ON THAT PARTICULAR DATE) WHICH CANNOT B E TINKERED AT A LATER POINT OF TIME BY SUBSTITUTING ACTUALS. NOWHER E SUCH AN APPROACH IS TECHNICALLY ACCEPTED.. 8.4 LD. AR REFERRED TO THE DECISION OF THE ITAT, BA NGALORE IN THE CASE OF IN TALLY SOLUTIONS (P.) LTD. V. DCIT [2011 } 14 TAXMANN.COM 19 (BANG.) WHEREIN THE HON'BLE BANGALORE TRIBUNAL H ELD AS UNDER: THE EXCESS EARNING METHOD IS THE METHOD THAT IS AD OPTED BY THE TPO. WE SEE NO INFIRMITY IN ADOPTION OF THIS METHOD FOR THE SIMPLE REASON THAT THE RELEVANT DATA IS AVAILABLE W ITH REASONABLE ACCURACY, CLOSING IN ON REAL VALUATION OF A SOFTWAR E PRODUCT. THIS VALUATION IS UPHELD BY THE US COURTS WHILE ARRIVING AT THE SALE VALUE OF A SOFTWARE PRODUCT. FURTHER, THE VALUATION UNDER THE METHOD MAINLY REVOLVES AROUND DISCOUNTED CASH FLOW DCF ANALYSIS WHICH IS KNOWN TO ECONOMISTS FOR THE TIMES IMMEMORIAL. THUS, THE TPO USED A REASONABLE WELL ACCEPTED METHO D OF VALUATION OF IN TANGIBLES INCLUDING SOFTWARE PRODUC TS AND ACCEPTED BY COURTS IN THE COUNTRIES LIKE IN USA, WH ERE THE TP REGIME IS WELL DEVELOPED. 8 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. FURTHER, THE ASSESSEE'S CONTENTION TO ADOPT THE ACT UAL REVENUES FOR THE FUTURE YEARS WHICH ARE AVAILABLE NOW CANNO T BE ACCEPTED NOW FOR A SIMPLE REASON THAT THE ALP WAS CALCULATED ON THE DATE OF SALE WHICH WAS IN JANUARY, 2006 ITSELF AND ALSO UNDER EEM FUTURE REVENUES WILL BE PROJECTED BASED ON THE PRE VIOUS YEAR DATA KEEPING THE CURRENT YEAR'S DATA AS THE BASE WH ICH HAS GOT NO RELEVANCE ON THE ACTUAL REVENUES DURING THE FUTU RE YEARS. WE ALSO MAKE IT CLEAR THAT THE ACTUAL CAGR SHALL BE AD OPTED BY THE TPO WITHOUT ANY DISCOUNT. 8.5 FINALLY LD. AR SUBMITTED THAT TPO'S CONTENTIONS OF REPLACING THE PROJECTIONS WITH ACTUALS ARE LEGALLY UNSUSTAINABLE AND TECHNICALLY INCORRECT. 9. LD. DR SUBMITTED THAT THE TPO WITH A VIEW TO DET ERMINE THE FAIR PRICE REPLACED THE PROJECTED FIGURES IN THE DCF WIT H THE ACTUAL FIGURES FROM THE AUDITED FINANCIAL STATEMENTS. IN THIS REGA RD, THE TPO OBSERVED THAT THERE WAS A WIDE DIFFERENCE IN THE VA LUATION OF THE INTANGIBLE AND THEREFORE THE TPO IS WELL WITHIN HIS POWERS TO EXAMINE AND ANALYZE THE TRANSACTION AND ARRIVED AT THE ARM' S LENGTH PRICE WITH THE INFORMATION AVAILABLE. 9.1 LD. DR SUBMITTED THAT THE TPO REQUESTED THE TAX PAYER COMPANY TO PROVIDE JUSTIFICATION FOR THE REVENUES PROJECTED AS HE FOUND FROM THE VALUATION REPORT THAT THE PROJECTIONS HAVE BEEN PROVIDED BY THE MANAGEMENT THEMSELVES. THE TPO OBTAINED THAT FINANC IAL STATEMENT OF DQ IRELAND AND REPLACED PROJECTED FIGURES IN VAL UATION REPORT BY GRANT THORNTON AND RETAINED ALL OTHER VALUES AND MA RGINS PROVIDED BY THE VALUER. THE RESULT OF SUCH EXERCISE RESULTED IN THE VALUE OF IP OF JUNGLE BOOK AT A RELATIVELY HIGHER AMOUNT. THE TPO COULD NOT ARRIVE AT THE FIGURES OF 'VALUE TILL PATENT IP EXPIRY' OF RS.2.70 LAKHS AND 'TAB' OF RS.1.21 CRORES AS ADOPTED BY THE VALUER. I F SUCH FIGURES ARE KNOWN THEN THE VALUE OF THE IP WILL FURTHER INCREAS E. SINCE THE DIFFERENCE IN THE VALUATION WAS SO FUNDAMENTAL, THA T IN AN UNCONTROLLED CIRCUMSTANCES INDEPENDENT PARTIES' WOU LD HAVE ENTERED INTO A RENEGOTIATION OR AN ADJUSTMENT TO THE NEGOTI ATED PRICE. LD. DR SUBMITTED THAT IN SUCH A CASE OF WIDE VARIATION IN THE PRICE, THE TPO 9 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. IS JUSTIFIED IN CONCLUDING THAT THE TRANSACTION IS NOT AT ARM'S LENGTH. THE TPO IS WELL WITHIN HIS POWERS AS PROVIDED IN PA RA 9.87 & 9.88 OF QECD TRANSFER PRICING GUIDELINES AND SUBSTITUTED HI S OWN PRICES FOR THE ACTUAL TRANSACTION UNDERTAKEN AS THE DIFFERENCE IN VALUATION WAS SUBSTANTIAL. 10. CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL FACTS ON RECORD AS WELL AS THE ORDERS OF R EVENUE AUTHORITIES. THE ASSESSEE HAD SOLD IP TO ITS AE AFTER CONSID ERING THE INDEPENDENT VALUATION FROM TWO VALUERS AND ARRIVED AT THE SALE CONSIDERATION. NO DOUBT THE PROJECTIONS WERE SUBMIT TED BY ASSESSEE FOR SUCH VALUATION. NOW, THE REVENUE HAS NO PROBLE M WITH THE VALUATION BUT THEY ARE REPLACING THE PROJECTED VALU ES WITH ACTUAL VALUES. THE QUESTION ARISES, WHETHER THE ACTION OF THE REVENUE WAS JUSTIFIED FOR REPLACING THE PROJECTION WITH ACTUALS AFTER THREE YEARS DOWN THE LINE ? LD. AR SUBMITTED TWO CASE LAWS BEFO RE US. THE FIRST BEING THE VALUATION SUBMITTED BY THE INDEPENDENT V ALUERS HAS TO BE ADOPTED WITHOUT ANY MODIFICATION AS HELD IN SOCIAL MEDIA INDIA LTD. VS. ACIT (ITA NO. 1711/HYD/2012). THE COORDINATE BE NCH OF THIS TRIBUNAL HELD THAT THE ASSESSEES VALUATION HAS TO BE ACCEPTED AS IT WAS SUPPORTED BY AN INDEPENDENT VALUER. WE ARE IN AGREEMENT WITH THE ABOVE DECISION. BUT NOW THE QUESTION BEFORE US IS, WHETHER THE ACTUAL RESULT CAN BE ADOPTED IN THE VALUATION OF I P. THE LD. AR HAS ALSO BROUGHT TO OUR KNOWLEDGE THE DECISION OF ITAT, BANGALORE IN THE CASE OF TALLY SOLUTIONS (P) LTD. VS. DCIT (SUPRA). IN THE ABOVE CASE, THE ASSESSEE ATTEMPTED TO ADOPT THE ACTUAL REVENUES FOR THE FUTURE YEARS WHICH WERE AVAILABLE THEN, WHICH WAS RIGHTLY DECLINED BY THE BANGALORE BENCH. WE ARE IN AGREEMENT WITH THE ABOV E FINDINGS OF THE BANGALORE BENCH THAT THE VALUATION METHOD ADOPTED F OR DETERMINING THE FUTURE YEARS CANNOT BE REPLACED WITH ACTUALS DO WN THE LINE, THE VALUATION WILL GO EITHER WAY. WHEN IT GOES TO NORTH , THE REVENUE MAY ADOPT THE SAME TIME, WHEN IT GOES TO SOUTH, THE AS SESSEE MAY ADOPT, THERE WONT BE ANY CONSISTENCY. WHAT IS IMPORTANT I S THE VALUE 10 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. AVAILABLE AT THE TIME OF MAKING BUSINESS DECISION. IT SHOULD BE LEFT TO THE WISDOM OF THE BUSINESSMAN, HE KNOWS WHAT IS GOO D FOR THE ORGANIZATION. NO DOUBT, IP WAS SOLD TO AE. THE METHOD ADOPTED SHOULD BE CONSISTENT AND SHOULD BE DOCUMENTED TO REVIEW IN THE FUTURE. THE REVIEW DOES NOT MEAN REPLACING THE PRO JECTION WITH ACTUALS. IT IS THE RATIONAL OF ADOPTING THE VALUES FOR MAKING DECISION AT THE POINT OF TIME OF MAKING DECISION. WHEN THE VALU ES ARE REPLACED SUBSEQUENTLY, IT IS NOT VALUATION BUT EVALUATION I. E. MOVING THE POST OF RESULT DETERMINED OUT OF PROJECTIONS. THE REVENUE I S DOUBTING THE VALUATION BECAUSE THE ACTUAL REVENUES WERE FAVOURAB LE. IN RATIONAL DECISION MAKING, THE ACTUAL RESULTS ARE IRRELEVANT. IN THE PRESENT CASE, THE VALUATION WAS DONE BY TWO INDEPENDENT VAL UERS NOT BY THE ASSESSEE. THE OTHER ISSUE WITH THIS ARE THAT THE R EVENUE ADOPTED THE ACTUALS OF AE WITHOUT CONSIDERING WHETHER THEY ARE REVENUES GENERATED OUT OF THE IP OR NOT. THEY SIMPLY ADOPT ED THE REVENUES OF AE WITHOUT GIVING PROPER FINDINGS THAT THE REVENUES OF AE ARE ALL GENERATED ONLY OUT OF THIS IP (JUNGLE BOOK). THE ASSESSEE SUBMITTED THAT THESE REVENUES ARE GENERATED BY AE OUT OF OT HER PROPERTIES(IPS) AS WELL. WE ARE OF THE VIEW THAT TH E REVENUE CANNOT ADOPT SUCH VALUES WITHOUT PROPER VERIFICATION. IN O UR CONSIDERED VIEW, FOR VALUATION OF AN INTANGIBLE ASSET, ONLY THE FUTU RE PROJECTIONS ALONE CAN BE ADOPTED AND SUCH VALUATION CANNOT BE REVIEWE D WITH ACTUALS AFTER 3 OR 4 YEARS DOWN THE LINE. ACCORDINGLY, THE GROUNDS RAISED BY ASSESSEE ARE ALLOWED. 11. AS REGARDS GROUND NOS. 5 TO 7, THE TPO HAS APPO RTIONED THE PROFIT OF THE AE BASED ON THE OWNERSHIP ARISING OUT OF EXPLOITATION OF INTANGIBLES. THE FINDINGS OF TPO ARE EXTRACTED BELO W: 7.3.1 BEFORE CARRYING OUT THE ECONOMIC ANALYSIS TH E FOLLOWING ISSUES HAVE JOINTLY AND SEVERALLY IMPACTED THE INTE RNATIONAL TRANSACTIONS UNDERTAKEN BY THE TAXPAYER. ECONOMIC SUBSTANCE: THE OECD IN ITS DRAFT HANDBOOK ON TRANSFER PRICING RISK ASSESSMENT IN CHAPTER 3 ON ASSESSING WHEN TRANSFER PRICING 11 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. RISK EXISTS AND WHEN IT DOES NOT IN PARA 3.2.1.7 UN DER TRANSFER OR USE OF INTANGIBLES TO/FOR RELATED PARTIES STATED THAT AN INTANGIBLE MAY BE OF GREAT SIGNIFICANCE BECAUSE THE ECONOMIC RETURN ON THE INTANGIBLE CAN BE SUBSTANTIAL. WHEN I NCOME- PRODUCING INTANGIBLES ARE TRANSFERRED, DETERMINING THEIR ARM'S LENGTH VALUE IS CRUCIAL. THERE ARE VARIOUS REPORTS WHICH SUGGEST THAT IMPORT ANCE OF IPRS (INCLUDING TRADEMARKS, PATENTS, COPY RIGHTS) TO BUS INESS HAS INCREASED. THESE ARE USUALLY THE KEY VALUE DRIVERS WITHIN INTERNATIONAL GROUPS. 30% OF WORLD TRADE RELATES GO ODS AND SERVICES ARE ASSOCIATED WITH IPRS AND THAT THE INTA NGIBLE ASSETS ACCOUNT FOR 50-70% OF THE MARKET VALUE OF THE PUBLI C COMPANY. IPRS ARE HIGHLY MOBILE AND PROVIDE AN EXCELLENCE OP PORTUNITY FOR TAX PLANNING. FOR TRANSFER PRICING PROFIT POTENTIA L CAN MORE EASILY REALLOCATED IN THE CASE INTANGIBLES THAN PRODUCTION FACILITIES. THE LEGAL OWNERSHIP OR BEARING OF COSTS ALONE IS NOT SU FFICIENT TO BE ENTITLED TO ALL THE RETURNS RELATED TO THE INTANGIB LES. THE OECD TPG HAS ALSO PROVIDED GUIDELINES ON RECOGN ITION OF ACTUAL TRANSACTIONS UNDERTAKEN IN PARA 1.64 TO 1.68 . THE GUIDELINES PROVIDE THAT THERE ARE TWO PARTICULAR CI RCUMSTANCES IN WHICH IT MAY, EXCEPTIONALLY, BE APPROPRIATE AND LEG ITIMATE FOR A TAX ADMINISTRATION TO CONSIDER DISREGARDING THE STR UCTURE ADOPTED BY A TAXPAYER IN ENTERING INTO A CONTROLLED TRANSAC TION. THE FIRST CIRCUMSTANCE ARISES WHEN THE ECONOMIC SUBSTANCE OF A TRANSACTION DIFFERS FROM ITS FIRM. IN SUCH A CASE T HE TAX ADMINISTRATION MAY DISREGARD THE PARTIES' CHARACTER IZATION OF THE TRANSACTION AND RE-CHARACTERIZE IT IN ACCORDANCE WI TH ITS SUBSTANCE. THE SECOND CIRCUMSTANCE ARISES WHERE, WH ILE THE FORM AND SUBSTANCE OF THE TRANSACTION ARE THE SAME, THE ARRANGEMENTS MADE IN RELATION TO THE TRANSACTIONS, VIEWED IN THEIR TOTALITY, DIFFER FROM THOSE WHICH WOULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISE BEHAVING IN A COMMERCIALLY R ATIONALE MANNER AND THE ACTUAL STRUCTURE PRACTICALLY IMPEDES THE TAX ADMINISTRATION FROM DETERMINING AN APPROPRIATE TRAN SFER PRICE. IN BOTH SETS OF CIRCUMSTANCES DESCRIBED ABOVE THE CHAR ACTER OF THE TRANSACTION MAY DERIVE FROM THE RELATIONSHIP BETWEE N THE PARTIES RATHER THAN BE DETERMINED BY NORMAL COMMERCIAL COND ITIONS AND MAY HAVE BEEN STRUCTURED BY THE TAX PAYER TO AVOID OR MINIMIZE TAX. LEGAL REGISTRATIONS AND CONTRACTUAL ARRANGEMENTS TE ND TO BE THE STARTING POINT FOR DETERMINING THE PARTY ENTITLED T O THE INTANGIBLES RELATED RETURNS. WHERE NO WRITTEN AGREEMENT EXISTS, THE OECD STATES THAT THE CONDUCT OF THE PARTIES INVOLVED SHO ULD BE EXAMINED TO DETERMINE THEIR TACIT AGREEMENT: IT IS THE 'BEST EVIDENCE CONCERNING THE TRUE ALLOCATION OF ENTITLEM ENT TO 12 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. INTANGIBLE RELATED RETURNS'. THE OECD FURTHER STATE S THAT THE PARTY CLAIMING ENTITLEMENT TO INTANGIBLE RELATED RE TURNS WILL PHYSICALLY PERFORM, THROUGH ITS OWN EMPLOYEES, THE MOST IMPORTANT FUNCTIONS RELATED TO THE DEVELOPMENT, ENH ANCEMENT, ''MAINTENANCE AND PROTECTION OF INTANGIBLES'. OF TH E MULTINATIONALS SURVEYED, OVER HALF INDICATED THAT S UCH INTANGIBLES HAVE BEEN RECOGNIZED IN THE BOOKS AND RECORDS WHERE DEVELOPMENT COST IS BORNE WHICH SUGGEST THAT THE LO CATION OF THE PEOPLE PERFORMING THE KEY .FUNCTIONS (DEVELOPMENT, ENHANCEMENT, MAINTENANCE AND PROTECTION) HAVE NOT B EEN USED TO DETERMINE WHERE TO ALLOCATE THE INTANGIBLE RELAT ED RETURNS. THE UN TP MANUAL ALSO RECOMMENDS ESTABLISHING THE E CONOMIC AND LEGAL OWNERSHIP OF THE INTANGIBLE. IT SUGGESTS THAT IN SOME CASES AN ENTERPRISE WHICH DOES NOT HAVE LEGAL OWNER SHIP 0' AN INTANGIBLE MAY NEVERTHELESS BE ENTITLED TO A SHARE OF THE RETURNS FROM ITS EXPLOITATION. SOME COUNTRIES REFER TO THIS NOTION AS 'ECONOMIC OWNERSHIP'. SUBSTANCE OVER FORM : THE ISSUE OF SUBSTANCE-OVER-FORM IS A MUCH DEBATED SUBJECT THE WORLD OVER. REVENUE AUTHORITIES IN SEVERAL JURISDIC TIONS HAVE STRUCK DOWN TAX AVOIDANCE OR PLANNING THAT LACKS CO MMERCIAL SUBSTANCE. THE LEGISLATION THAT HAS BEEN FORMULATED TO DISREGARD THESE TRANSACTIONS IS COLLECTIVELY REFERRED TO AS G ENERAL ANTI- AVOIDANCE RULES (GAAR). SOME COUNTRIES, INCLUDING U K AND USA, HAVE VIGOROUS JUDICIAL ANTI-AVOIDANCE DOCTRINE S AND NO STATUARY GAAR, WHILE OTHER COUNTRIES, SUCH AS AUSTR ALIA, CANADA, GERMANY, SPAIN, NEW ZEALAND ETC. HAVE ENACTED STATU ARY GAAR. ALTHOUGH INDIA DOES NOT HAVE WIDE RANGING ANTI-AVOI DANCE RULES UNDER THE DOMESTIC LAW, THE PRINCIPLE OF 'SUBSTANCE -AVER-FORM' HAS BEEN INVOKED BY INDIAN JUDICIARY IN VARIOUS CAS ES. THERE ARE VARIOUS CASE LAWS WHERE THE INDIAN JUDICIAL AUTHORI TIES HAVE LIFTED THE CORPORATE VEIL AND LOOKED THROUGH THE TR ANSACTIONS THUS HIGHLIGHTING THE SUBSTANCE OVER FORM. IN THE CASE O F SUPER POLY FABRIKS LTD, THE HON'BLE SUPREME COURT HAS SPECIFIC ALLY LAID DOWN THE RATIO AS UNDER: '8. THERE CANNOT BE ANY DOUBT WHATSOEVER THAT A DOC UMENT HAS TO BE READ AS A WHOLE. THE PURPORT AND OBJECT WITH WHICH THE PARTIES THERETO ENTERED INTO A CONTRACT OUGHT TO BE ASCERTAINED ONLY FROM THE TERMS AND CONDITIONS THEREOF: NEITHER THE NOMENCLATURE OF THE DOCUMENTS NOR ANY PARTICULAR AC TIVITY UNDERTAKEN BY THE PARTIES TO THE CONTRACT WOULD BE DECISIVE. ' IN THE CASE OF NILKANTHA NARAYAN SINGH V. CIT 20 IT R 8 AT PAGE 14), THE COURT HELD THAT IF THE TERMS USED IN THE A GREEMENTS ARE NOT CONCLUSIVE AND ONE HAS TO LOOK AT THE SUBSTANCE RATHER THAN THE FORM. IN ADDITION, IT IS EQUALLY WELL SETTLED T HAT A NAME GIVEN 13 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. TO A TRANSACTION BY THE PARTIES DOES NOT NECESSARIL Y DECIDE THE NATURE OF THE TRANSACTION. IN THE CASE OF BHOPAL SUGAR INDUSTRIES LIMITED V S. T.O. (1977) 3 SCC 147, THE COURT HELD AS FOLLOWS: 'IT IS WELL SETTLED THAT WHILE INTERPRETING THE TER MS OF THE AGREEMENT, THE COURT HAS TO LOOK TO THE SUBSTANCE R ATHER THAN THE FORM OF IT. THE MERE FACT THAT THE WORD 'AGENT' OR 'AGENCY' IS USED OR THE WORDS 'BUYER' AND 'SELLER' ARE USED TO DESCRIBE THE STATUS OF THE PARTIES CONCERNED IS NOT SUFFICIENT T O LEAD TO THE IRRESISTIBLE INFERENCE THAT THE PARTIES DID IN FACT INTEND THAT THE SAID STATUS WOULD BE CONFERRED. THUS THE MERE FORMA L DESCRIPTION OF A PERSON AS AN AGENT OR BUYER IS NOT CONCLUSIVE, UNLESS THE CONTEXT SHOWS THAT THE PARTIES CLEARLY INTENDED TO TREAT A BUYER AS A BUYER AND NOT AS AN AGENT' IN THE CASE OF MOPED INDIA LTD. V ASSISTANT COLLECT OR CENTRAL EXCISE 1985 - TMI - 41634 - (SC) THE HON'BLE SUPREM E COURT HELD THAT WHILE INTERPRETING THE TERMS OF AN AGREEM ENT, COURT HAS TO LOOK TO THE SUBSTANCE RATHER THAN THE FORM AND O BSERVED AS FOLLOWS: 'NOW IT IS TRUE THAT THIS AMOUNT ALLOWED TO THE DEA LERS HAS BEEN REFERRED TO IN THE AGREEMENT AS COMMISSION BUT THE LABEL GIVEN BY THE PARTIES CANNOT BE DETERMINATIVE BECAUSE IT I S, FOR THE COURT TO DECIDE WHETHER THE AMOUNT IS TRADE DISCOUNT OR N OT, WHATEVER BE THE NAME GIVEN TO IT. EVEN MORE IMPORTANT IN THIS CONTEXT IS TO REFER TO THE ACCOUNTING STANDARD- 1 ISSUED BY THE INSTITUTE OF CHARTERED AC COUNTANTS OF INDIA AND CENTRAL GOVERNMENT, WHEREIN IT IS MENTION ED THAT THE PRIMARY CONSIDERATION IN PRESENTATION OF FINANCIAL STATEMENTS AND SELECTION OF ACCOUNTING POLICIES BY A BUSINESS ENTE RPRISE IS THAT IT SHOULD REPRESENT A TRUE AND FAIR VIEW OF THE STATE OF AFFAIRS AND PROFIT AND LOSS ACCOUNT OF THE ENTERPRISE. THE MAJO R CONSIDERATIONS GOVERNING THE SELECTION AND APPLICAT ION ARE PRUDENCE, SUBSTANCE OVER FORM AND MATERIALITY. ACCO RDINGLY, THE ACCOUNTING TREATMENT AND PRESENTATION IN FINANCIAL STATEMENTS OF TRANSACTIONS AND EVENTS SHOULD BE GOVERNED BY THEIR SUBSTANCE AND NOT MERELY BY THE LEGAL FORM. THUS, SUBSTANCE SHOULD TAKE PRECEDENCE OVER ITS LEGAL FORM. IN ANY COMMERCIAL T RANSACTION, SUBSTANCE MUST BE RECOGNIZED RATHER THAN ITS FORM. THE DECISION OF STATE OF ANDHRA PRADESH V. KANE ELE VATORS INDIA LTD. (2005) 181 ELT 156 (SUPREME COURT) CAN ALSO BE RELIED UPON WHERE APEX COURT HELD THAT THE SUBSTANCE OF TH E CONTRACT IS DETERMINATIVE AND NOT ITS FORM. THUS, THE ESSENCE O F THE CONTRACT IS CRUCIAL AND IS TO BE SEEN, KEEPING IN MIND THE I NTENTION OF THE PARTIES. 14 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. IN SUNDARAM FINANCE LTD. V STATE OF KERALA AIR 1966 SC 1178 THE SUPREME COURT HAS HELD THAT TRUE EFFECT OF TRAN SACTION MUST BE DETERMINED FROM THE TERMS OF THE AGREEMENT CONSI DERED IN THE LIGHT OF SURROUNDING CIRCUMSTANCE. IN EACH CASE, TH E COURT CAN, UNLESS PROHIBITED BY STATUTE, GO BEHIND THE DOCUMEN TS AND DETERMINE THE NATURE OF TRANSACTION WHATEVER MAY BE FORM OF DOCUMENTS. TO ENSURE NON-DISCRIMINATORY ENFORCEMENT OF LAWS AN D REGULATION, CHOOSING A FORMAL APPROACH IS VERY LOGI CAL. IN OTHER WORDS, THE FORM OF A SITUATION A TRANSACTION, DETER MINES THE LEGAL CONSEQUENCES. IN TAX LAW PARTICULARLY, CHOOSING A F ORM TO SUIT A PARTICULAR TAX BENEFIT IS NOT WARRANTED BUT WHAT MA TTERS IS THE ACTUAL SUBSTANCE. IN THE CASE OF ROLLS ROYCE PLC VS DCIT (2007), GRE ATER EMPHASIS WAS LAID ON THE FACTS THAN THE CONTRACTUAL ARRANGEMENT. ROLLS ROYCE PLC (RRP) WAS INCORPORATED IN UK AND SU PPLIED AERONAUTICAL ENGINES AND SPARE PARTS TO CERTAIN DEF ENSE ESTABLISHMENTS IN INDIA. IT HAD A WHOLLY OWNED SUBS IDIARY IN INDIA, ROLLS ROYCE INDIA LTD (RRIL). IN THIS CASE, THE DELHI ITAT FOUND THAT THE PREMISES IN THE NAME OF RRIL WERE BE ING OCCUPIED BY RRP'S EMPLOYEES WHILE VISITING INDIA FR EQUENTLY FOR THE PURPOSES OF ITS BUSINESS OPERATIONS IN INDIA. R RP REIMBURSED RRIL THE EXPENSES FOR THE OPERATION AND MAINTENANCE OF THE OFFICE IN INDIA AND ALSO COMPENSATED RRIL FOR THE S UPPORT SERVICES IT RENDERED. THE ITAT STATED THAT RRP HAD A PERMANENT ESTABLISHMENT (PE) IN INDIA AND HELD THAT 35% OF IT S PROFITS WERE ATTRIBUTABLE TO MARKETING ACTIVITY THAT WAS CARRIED OUT IN INDIA AND WAS THEREFORE TAXABLE IN INDIA. BUSINESS RESTRUCTURING: WITH THE RECENTLY INSERTED EXPLANATION W.R.E.F. 1.4 .2002, WHICH IS CLARIFICATORY IN NATURE, INTERNATIONAL TRANSACTIONS INCLUDE A TRANSACTION OF BUSINESS RESTRUCTURING. 'EXPLANATION. - FOR THE REMOVAL OF DOUBTS, IT IS HE REBY CLARIFIED THAT- (I) THE EXPRESSION 'INTERNATIONAL TRANSACTION' SHAL L INCLUDE - (A) . (B) . (E) . (D) . 15 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. (E) A TRANSACTION OF BUSINESS RESTRUCTURING OR REOR GANIZATION, ENTERED INTO BY AN ENTERPRISE WITH AN ASSOCIATED EN TERPRISE, IRRESPECTIVE OF THE FACT THAT IT HAS BEARING ON THE PROFIT, INCOME, LOSSES OR ASSETS OF SUCH ENTERPRISES AT THE TIME OF THE TRANSACTION OR AT ANY FUTURE DATE.' THE OECD IN ITS DRAFT HANDBOOK ON TRANSFER PRICING RISK ASSESSMENT IN CHAPTER 3 ON ASSESSING WHEN TRANSFER PRICING RISK EXISTS AND WHEN IT DOES NOT IN PARA 3.2.1.9 UN DER BUSINESS RESTRUCTURINGS HAS STATED THAT THE BUSINESS STRUCTU RES AND TRANSACTIONS FLOWS ADOPTED IN CONNECTION WITH RESTR UCTURING AN MNE'S BUSINESS NEED CAREFUL CONSIDERATION. THERE AR E TWO ASPECTS OF SUCH TRANSACTIONS TO BE CONSIDERED. THE FIRST IS THE RESTRUCTURING TRANSACTION ITSELF. THE TRANSFER OF A SSETS, INCLUDING INTANGIBLES, IN CONNECTION WITH SUCH TRANSACTIONS C AN GIVE RISE TO DIFFICULT VALUATION AND OTHER TRANSFER PRICING ISSU ES. OFTEN THESE TRANSACTIONS INVOLVE EFFORTS TO MOVE VALUABLE ASSET S INTO MORE TAX FAVOURED ENVIRONMENTS. RISK ASSESSMENT SHOULD S EEK TO IDENTIFY SUCH TRANSACTIONS AND EVALUATE THE POTENTI AL EXPOSURES. OECD TPG IN CHAPTER 9 HAS DEALT WITH THE ISSUE OF B USINESS RESTRUCTURING. BUSINESS RESTRUCTURING IS DEFINED AS CROSS BORDER REDEPLOYMENT BY A MNE OF FUNCTIONS, ASSETS AND / OR RISKS AND MAY INVOLVE CROSS BORDER TRANSFER OF VALUABLE INTAN GIBLES. BUSINESS RESTRUCTURING TYPICALLY ACCOMPANIED BY REA LLOCATION OF PROFITS AMONG THE MEMBERS OF THE MNE GROUP, EITHER IMMEDIATELY AFTER THE RESTRUCTURING OR OVER A FEW YEARS AND THE CHAPTER THUS DISCUSSES THE EXTENT TO WHICH SUCH A REALLOCATION O F PROFITS IS CONSISTENT WITH THE ARM'S LENGTH PRINCIPLE AND MORE GENERALLY HOW THE ARM'S LENGTH PRINCIPLE APPLIES TO THE BUSINESS RESTRUCTURING. THE UN TP MANUAL IN CHAPTER 8 ON AUDITS AND RISK A SSESSMENT, IN PARA 8.3.2.3 PROPOSED 8.3.2.3. THE FOLLOWING DESCRIBES SOME OF THE MORE COMPLEX CATEGORIES OF RISK THAT ARE NOT ALWAYS READILY IDEN TIFIABLE. IT IS BY NO MEANS EXHAUSTIVE AND IT IS ACKNOWLEDGED THAT ADD ITIONAL CLASSES AND CATEGORIES OF RISK MAY EXIST: CATEGORY 1: INTENTIONAL PROFIT SHIFTING THROUGH NE W STRUCTURES; CATEGORY 2: INTENTIONAL PROFIT SHIFTING THROUGH RES TRUCTURING; CATEGORY 3: INTENTIONAL PROFIT SHIFTING THROUGH INC ORRECT FUNCTIONAL CLASSIFICATION, THE USE OF INCORRECT METHODS, ALLOC ATION KEYS, ETC; CATEGORY 4: THIN CAPITALIZATION; AND CATEGORY 5: UNINTENTIONAL PROFIT SHIFTING. RE-CHARACTERIZATION: RULE 10B(2)(C) OF THE IT RULES PROVIDE THE TPO WITH NECESSARY POWERS TO RE-CHARACTERIZE THE TRANSACTIONS TAKING I NTO ACCOUNT 16 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. THE CONTRACTUAL TERMS WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING. THE GECD TPG IN PARA 1.64 TO 1.69 HAS PROV IDED GUIDANCE ON RECOGNITION OF THE ACTUAL TRANSACTIONS UNDERTAKEN. TWO CIRCUMSTANCES HAVE BEEN ENUMERATED WHERE IT IS APPROPRIATE TO CONSIDER DISREGARDING THE STRUCTURE ADOPTED BY A TAXPAYER IN ENTERING INTO A CONTROLLED TRANSACTION. 'THE FIRST CIRCUMSTANCE ARISES WHERE THE ECONOMIC SUBSTANCE OF A TRANSACTION DIFFERS FROM ITS FORM. IN SUCH A CASE T HE TAX ADMINISTRATION MAY DISREGARD THE PARTIES CHARACTERI ZATION OF THE TRANSACTION AND RE-CHARACTERIZE IT IN ACCORDANCE WI TH ITS SUBSTANCE.' 'THE SECOND CIRCUMSTANCE ARISES WHERE W HILE THE FORM AND SUBSTANCE OF THE TRANSACTION ARE THE SAME, THE ARRANGEMENTS MADE IN RELATION TO THE TRANSACTION, V IEWED IN THEIR TOTALITY, DIFFER FROM THOSE WHICH WOULD HAVE BEEN A DOPTED BY INDEPENDENT ENTERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MANNER AND THE ACTUAL STRUCTURE PRACTICALLY IMPEDES THE TAX ADMINISTRATION FROM DETERMINING AN APPROPRIATE TRAN SFER PRICE.' IN PARA 1.66 THE MANUAL STATED THAT 'IN BOTH SETS O F CIRCUMSTANCES DESCRIBED ABOVE, THE CHARACTER OF THE TRANSACTION MAY DERIVE FOAM THE RELATIONSHIP BETWEEN THE PARTIE S RATHER THAN DETERMINED BY NORMAL COMMERCIAL CONDITIONS AND MAY HAVE BEEN STRUCTURED BY THE TAXPAYER TO AVOID OR MINIMIZE TAX . IN SUCH CASES, THE TOTALITY OF ITS TERMS WOULD BE THE RESUL T OF A CONDITION THAT WOULD NOT HAVE BEEN MADE IF THE PARTIES HAD BE EN ENGAGED IN ARM'S LENGTH TRANSACTIONS. ARTICLE 9 WOULD THUS ALLOW AN ADJUSTMENT OF CONDITIONS TO REFLECT THOSE WHICH THE PARTIES WOULD HAVE ATTAINED HAD THE TRANSACTION BEEN STRUCTURED I N ACCORDANCE WITH THE ECONOMIC AND COMMERCIAL REALITY OF PARTIES TRANSACTING AT ARM'S LENGTH.' FURTHER IN PARA 1.67 COMMENTING THAT AES MAY AND FR EQUENTLY DO CONCLUDE ARRANGEMENTS OF A SPECIFIC NATURE THAT ARE NOT OR ARE VERY RARELY REENCOUNTERED BETWEEN INDEPENDENT PARTI ES AND THAT IN SUCH CIRCUMSTANCES THE TAX ADMINISTRATION WOULD HAVE TO DETERMINE WHAT UNDERLYING REALITY IS BEHIND A CONTR ACTUAL ARRANGEMENT IN APPLYING THE ARM'S LENGTH PRINCIPLE. BEPS: INTANGIBLES HAVE BEEN HIGHLIGHTED AS A PARTICULAR A REA OF CONCERN IN THE 2013 OECD PUBLICATION ADDRESSING BASE EROSIO N AND PROFIT SHIFTING (BEPS), WHICH STATES THAT THE 'CURR ENT RULES PRODUCE UNDESIRABLE RESULTS FROM A POLICY PERSPECTI VE'. THE OECD DRAFT GUIDANCE IS EXPECTED TO BE FINALIZED IN 2014. THE OECD'S WORK ON INTANGIBLES IS A SPECIFIC ACTION ARE A LISTED IN THE OECD'S BASE EROSION AND PROFIT SHIFTING (BEPS) ACTI ON PLAN AND IS CLOSELY RELATED TO OTHER ACTION AREAS ON TRANSFE R PRICING, INCLUDING WORK ON ALLOCATION OF RISKS AND CAPITAL F OR TRANSFER PRICING PURPOSES, WORK ON RE-CHARACTERIZATION OF TR ANSACTIONS THAT 17 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. MIGHT NOT OCCUR BETWEEN UNRELATED PARTIES, AND WORK ON TRANSFER PRICING METHODS INCLUDING PROFIT SPLITS IN THE CONT EXT OF THE GLOBAL VALUE CHAINS OF MULTINATIONAL ENTERPRISES. SOME OF THE TEXT AND EXAMPLES CONTAINED IN THE REVISED DISCUSSION DRAFT RAISE ISSUES THAT THE OECD EXPECTS TO ADDRESS FURTHER THROUGH TH E VARIOUS ACTIONS CONTAINED IN THE ACTION PLAN. ACCORDINGLY, PORTIONS OF THE REVISED DISCUSSION DRAFT CAN BE EXPECTED TO BE FURT HER REVISED DURING THE COURSE OF THE WORK ON BEPS. NEW OECD GUIDANCE - 1. THE DEFINITION OF INTANGIBLES SUBJECT TO THE GUI DANCE HAS BEEN CLARIFIED, AND IS A FAIRLY COMPREHENSIVE DEFINITION , NOT LIMITED BY REQUIREMENTS OF LEGAL REGISTRATION OR PROTECTION. 2. THE CONCEPT OF ENTITLEMENT TO INTANGIBLE RELATED RETURNS IS THE GUIDING PRINCIPLE THAT DETERMINES WHICH ENTITY SHOU LD RECEIVE THE COMPENSATION ARISING FROM THE INTANGIBLE. LEGAL OWN ERSHIP AND FUNDING THE DEVELOPMENT OF THE ASSET ARE NOW ONLY A 'STARTING POINT'. THE PERFORMANCE OF KEY FUNCTIONS WITH RESPE CT TO THE DEVELOPMENT,. ENHANCEMENT, MAINTENANCE AND PROTECTI ON OF THE INTANGIBLES AND, IN PARTICULAR, CONTROLLING THE RIS KS RELATED TO THESE FUNCTIONS IS THE PRIMARY DETERMINANT. 3. THE REQUIREMENT THAT ALL PARTICIPANTS IN A RESTR UCTURE CONSIDER THE 'OPTIONS REALISTICALLY AVAILABLE' TO THEM TO VA LIDATE WHETHER THE TRANSACTION MAKES COMMERCIAL SENSE. 4. THE ECONOMIC ANALYSIS METHODS USED TO DETERMINE THE ARM'S LENGTH PRICE OF INTANGIBLES NOW INCLUDES VALUATION TECHNIQUES, SUCH AS A DISCOUNTED CASH FLOW ANALYSIS. THIS GUIDANCE CANNOT BE VIEWED AS BUSINESS AS USUAL . THE OECD IN ITS PUBLICATION ADDRESSING 'BASE EROSIO N & PROFIT SHIFTING' IN CHAPTER 1 ON INTRODUCTION OBSERVED THA T THERE IS A GROWING PERCEPTION THAT GOVERNMENT'S USE SUBSTANTIA L CORPORATE TAX REVENUE BECAUSE OF PLANNING AIMED AT SHIFTING P ROFITS IN WAYS THAT ERODE THE TAXABLE BASE TO LOCATIONS WHERE THEY ARE SUBJECT TO MORE FAVOURABLE TAX TREATMENT. BUSINESS LEADERS OFTEN ARGUED THAT THEY HAVE A RESPONSIBILITY TOWARDS THEIR SHARE HOLDERS TO LEGALLY REDUCE THE TAXES THEIR COMPANIES PAY. SOME OF THEM MIGHT CONSIDER MOST OF THE ACQUISITIONS UNJUSTIFIED , IN SOME CASES DEEMING GOVERNMENTS RESPONSIBLE FOR INCOHEREN T TAX POLICIES AND FOR DESIGNING TAX SYSTEMS THAT PROVIDE INCENTIVES FOR BEPS. IN CHAPTER 4, THE REPORT HAS FURTHER HIGHLIGHTED TH E NEED FOR THE DETERMINATION OF THE RELEVANT SHARE OF PROFITS WHIC H WILL BE SUBJECTED TO TAXATION. THE ISSUE OF JURISDICTION TO TAX IS CLOSELY LINKED WITH THE ONE OF MEASUREMENT OF PROFIT: ONCE IT HAS BEEN ESTABLISHED THAT A SHARE OF AN ENTERPRISE'S PROFITS CAN BE 18 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. CONSIDERED TO ORIGINATE FROM A COUNTRY AND THAT THE COUNTRY SHOULD BE ALLOWED TO TAX IT. IN THE SAME CHAPTER TH E REPORT STATES THAT ONE OF THE UNDERLINE ASSUMPTIONS OF THE ARM'S LENGTH PRINCIPLE IS THAT THE MORE EXTENSIVE THE FUNCTIONS/ ASSETS/ RISKS OF ONE PARTY TO THE TRANSACTION, THE GREATER ITS EXPEC TED REMUNERATION WILL BE AND VICE-VERSA. THIS THEREFORE , CREATES AN INCENTIVE TO SHIFT FUNCTIONS/ASSETS/ RISKS TO WHERE THERE RETURNS ARE TAXED MORE FAVORABLY. WHILE IT MAY BE DIFFICULT TO SHIFT UNDERLINE FUNCTIONS, THE RISKS AND OWNERSHIP OF TAN GIBLE AND INTANGIBLE ASSETS MAY, BY THEIR VERY NATURE, BE EAS IER TO SHIFT. MANY CORPORATE TAX STRUCTURES FOCUS ON ALLOCATING S IGNIFICANT RISKS AND HARD-TO-VALUE INTANGIBLES TO LOW-TAX JURI SDICTIONS, WHERE THEIR RETURNS MAY BENEFIT FROM A FAVOURABLE TAX REG IME. SUCH ARRANGEMENTS MAY RESULT IN OR CONTRIBUTE TO THE BEP S. OECD ACTION POINTS ON TRANSFER PRICING THE REPORT NOTES THAT A MAJOR CONCERN IS THE ABILIT Y OF CORPORATES TO MISAPPLY INCOME ALLOCATION RULES BY SEPARATING I NCOME FROM ECONOMIC ACTIVITIES THAT PRODUCE INCOME AND SHIFT T HE SAME TO LOW TAX JURISDICTIONS. IN THIS REGARD, THE REPORT S TATES: THIS MOST OFTEN RESULTS FROM TRANSFERS OF INTANGIB LES AND OTHER MOBILE ASSETS FOR LESS THAN FULL VALUE, THE OVER-CA PITALIZATION OF LOWLY TAXED GROUP COMPANIES AND FROM CONTRACTUAL AL LOCATIONS OF RISK TO LOW-TAX ENVIRONMENTS IN TRANSACTIONS THAT W OULD BE UNLIKELY TO OCCUR BETWEEN UNRELATED PARTIES. THUS, FOLLOWING ARE THE KEY AREAS OF CONCERN: - INTANGIBLE TRANSFERS - OVER CAPITALIZATION - CONTRACTUAL ALLOCATION OF RISK TO LOW TAX JURISDI CTIONS OECD PLANS TO TACKLE ABOVE ISSUES THROUGH ACTION PO INTS 8-10 LISTED IN THE REPORT. OVERALL, THE UNDERLYING THEME OF ACTION POINTS 8-10 IS ACCORDING AN OVERRIDING IMPORTANCE T O 'SUBSTANCE' OVER FORM IN THE CONTEXT OF TRANSFER PRICING. THIS IS NOT AN ENTIRELY NOVEL DIRECTION AS OECD HAS ALWAYS ACCORDE D PRECEDENCE TO CONDUCT OVER CONTRACTUAL AGREEMENTS T O THE EXTENT THERE IS INCONSISTENCY BETWEEN THE TWO (REFER PARA 1.48 TO 1.49 OF OECD TRANSFER PRICING GUIDELINES, 2010). ACTION POINT 8 - 'INTANGIBLES' DEVELOP RULES TO PREVENT HEPS BY MOVING INTANGIBLES AMONG GROUP MEMBERS. THIS WILL INVOLVE: (I) ADOPTING A BR OAD AND CLEARLY DELINEATED DEFINITION OF INTANGIBLES; (II) ENSURING THAT PROFITS ASSOCIATED WITH THE TRANSFER AND USE OF INTANGIBLES ARE APPROPRIATELY ALLOCATED IN ACCORDANCE WITH (RATHER THAN DIVORCED 19 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. FROM) VALUE CREATION; (III) DEVELOPING TRANSFER PRI CING RULES OR SPECIAL MEASURES FOR TRANSFERS OF HARD-TO-VALUE INT ANGIBLES; AND (IV) UPDATING THE GUIDANCE ON COST CONTRIBUTION AR RANGEMENTS. ACTION POINT 9 - 'RISK' AND 'CAPITAL' DEVELOP RULES TO PREVENT BEPS BY TRANSFERRING RISKS AMONG, OR ALLOCATING EXCESSIVE CAPITAL TO, GROUP MEMBERS. THI S WILL INVOLVE ADOPTING TRANSFER PRICING RULES OR SPECIAL MEASURES TO ENSURE THAT INAPPROPRIATE RETURNS WILL NOT ACCRUE TO AN ENTITY SOLELY BECAUSE IT HAS CONTRACTUALLY ASSUMED RISKS OR HAS PROVIDED CAP ITAL. THE RULES TO BE DEVELOPED WILL ALSO REQUIRE ALIGNMENT O F RETURNS WITH VALUE CREATION. THIS WORK WILL BE CO-ORDINATED WITH THE WORK ON INTEREST EXPENSE DEDUCTIONS AND OTHER FINANCIAL PAY MENTS: ACTION POINT 10 - OTHER HIGH RISK TRANSACTIONS DEVELOP RULES TO PREVENT BEPS BY ENGAGING IN TRANSA CTIONS WHICH WOULD NOT, OR WOULD ONLY VERY RARELY, OCCUR B ETWEEN THIRD PARTIES. THIS WILL INVOLVE ADOPTING TRANSFER PRICIN G RULES OR SPECIAL MEASURES TO: (I) CLARIFY THE CIRCUMSTANCES IN WHICH TRANSACTIONS CAN BE RECHARACTERISED; (II) CLARIFY THE APPLICATIO N OF TRANSFER PRICING METHODS, IN PARTICULAR PROFIT SPLITS, IN TH E CONTEXT OF GLOBAL VALUE CHAINS; AND (III) PROVIDE PROTECTION AGAINST COMMON TYPES OF BASE ERODING PAYMENTS, SUCH AS MANAGEMENT FEES A ND HEAD OFFICE EXPENSES. 7.3.2 THEREFORE IN VIEW OF THE ABOVE DISCUSSION WHI CH HAS AN IMPACT OVER THE PROFITS ARISING FROM THE EXPLOITATI ON OF THE INTANGIBLE CONSEQUENT TO THE LEGAL TRANSFER OF THE IP AND ALSO TAKING GUIDANCE FROM PARA 9.190 OF THE OECD TPG, UN DER THE EXAMPLE 'EXAMPLE (B): TRANSFER OF VALUABLE INTANGIB LES TO A SHELL COMPANY', IT WAS FELT THAT THE TAXPAYER ALSO NEEDS TO GET ITS RIGHTFUL SHARE IN THE PROFIT. THIS WILL BE CLEAR AF TER THE FOLLOWING DISCUSSION. AS PER THE TP DOCUMENT, THE TAXPAYER DID NOT CARRY OUT ANY FAR ANALYSIS FOR THE TRANSACTION RELATING TO THE SALE O F IP. HOWEVER FROM THE SUBSEQUENT INFORMATION GATHERED DURING THE COURSE OF HEARING IT IS SEEN THAT THE COST OF DEVELOPMENT OF THE IP IS RS.4,94,03,810/-. DQE INDIA STARTED WORKING ON THE CONCEPT OF JUNGLE BOOK SINCE APRIL, 2008 AND SOLD IT TO DQE IR ELAND FOR RS.5,36,20,000/- IN APRIL, 2009. IT IS STATED THAT THE IPR WAS SOLD IN THE DEVELOPMENT PHASE, AS PER THE DETAILS SUBMIT TED REGARDING DQE IRELAND, IT IS SEEN THAT THE COMPANY IS A WOS O F DQE INDIA WHICH WAS INCORPORATED IN IRELAND ON NOVEMBER, 12 2 008. THE COMPANY IS STATED TO BE ENGAGED IN THE BUSINESS OF CONTENT DEVELOPMENT INCLUDING ALL PRODUCTION ACTIVITIES FOR ANIMATION AND LIVE ACTION FOR TV SERIES, HOME VIDEO AND VARIOUS O THER MEDIA. AS REGARDS THE PURPOSE OF ESTABLISHMENT, IT IS STATED - 20 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. 'ONE OF THE KEY BUSINESS STRATEGIES OF DQE INDIA IS TO STRENGTHEN THE IP CONTENT CREATION AND GLOBAL LP PORTFOLIO. HO WEVER, THE TALENT FOR CREATION OF GLOBAL IPS IN INDIA IS STILL NASCENT WHEN COMPARED TO THE EUROPEAN AND OTHER WESTERN MARKETS. ACCORDINGLY, DQE IRELAND BEING LOCATED IN EUROPE, E NABLES TO EXPAND THE DQE GROUP'S EUROPEAN FOOTPRINT AND PURSU ES GROWTH OPPORTUNITIES IN PRE-PRODUCTION AND POST-PRODUCTION SERVICES OF VARIOUS IPS. DQE IRELAND, BEING A EUROPEAN COMPANY AVAILS THE BENEFITS PROVIDED BY THE GOVERNMENT OF IRELAND TO T HE ANIMATION INDUSTRY,' DQE IRELAND HAS TWO DIRECTORS AND ONE EMPLOYEE - SHRI SANJAY CHOUDHARY, DIRECTOR SHRI DOMINIC POOLE, DIRECTOR LAURENT AMAR WORKING AS MARKETING MANAGER AS PER THE SUBMISSION MADE ON 23.12.2013 DQE IRELA ND HIRES VARIOUS IDENTIFIED TALENTS ACROSS EUROPE & US FOR S CRIPT WRITING, MUSIC. MIXING & COMPOSING, DEVELOPMENT & DESIGN, VO ICE, MUSIC ETC., ON FREELANCE BASIS. MOST OF THESE ARTISTS HAV E HAD MANY YEARS OF EXPERIENCE WORKING WITH THE BIGGEST ANIMAT ION STUDIOS AS A RESULT OF WHICH THEY UNDERSTAND WHAT THE AUDI ENCE EXPECTS FROM THE CARTOONS. DQE IRELAND PRODUCES CONTENT PRE DOMINANTLY FOR EUROPE & NORTH AMERICA AND HENCE HIRING INTERNA TIONAL ARTISTS BECOMES NECESSARY TO CATER TO GLOBAL AUDIENCES NEED S AS ALSO AS PER THE DEMAND OF CO-PRODUCERS, BROADCASTERS & P ARTNERS. DQE HIRES FOREIGN ARTISTS EVEN THEIR EXPERIENCE, CO MMAND OVER THE ENGLISH LANGUAGE & TECHNICAL EXPERTISE WHEN IT COMES TO WRITING FOR ANIMATION AS AGAINST A STARK CONTRAST T O INDIA ARTISTS WHO MOSTLY HAVE EXPERIENCE WRITING FOR LIVE ACTION FEATURE FILMS AND, THEREFORE, DO NOT HAVE THE KNOW-HOW TO ADOPT T HEIR WRITING TO ANIMATION. FOREIGN ARTISTS ALSO HAVE THE TECHNICAL EXPERTISE OF ANIMATION WRITING, WHICH INCLUDES UNDERSTANDING THE STRUCTURE OF EPISODES, DEVELOPMENT OF CHARACTERS, UNDERSTANDING THE CURRENT MARKET FOR ANIMATION, QUICK TURN AROUND ON AN EPISO DE TO EPISODE BASIS AND DEVELOPMENT OF STORIES FROM A LOGLINE TO BEAT OUTLINE TO THE FINAL SCRIPT. ALONGWITH THIS WRITE-UP, THE TAXP AYER PROVIDED THE PROFILES OF FEW ARTISTS SUCH AS JIMMY HIBBERT, CHRI S TRENGROVE AND JAMES MASON. HOWEVER, THE FACTS OF THE CASE AS UNDERSTOOD BY THE TPO APPEAR DIFFERENT. AS PER THE FINANCIAL STATEMENT OF DQE IR ELAND, IN THE NOTES TO THE ACCOUNTS IT IS MENTIONED THAT THERE AR E NO EMPLOYEES DURING THE YEAR APART FROM THE DIRECTORS. THE COMPANY IS THUS FUNCTIONING WITH ONLY TWO OR THREE PERSONS (IF THE MARKETING MANAGER IS ALSO AN EMPLOYEE) AND HAS BEEN ABLE TO 21 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. GENERATE REVENUE OF 4 MILLION EUROS IN ITS FIRST YE AR OF OPERATIONS. THE ONLY ACTIVITY CARRIED OUT BY THE COMPANY IS HIR ING OF ARTISTS. THE COPYRIGHTS VALUED AT EURO 812,182 WERE PURCHASE D BY THE COMPANY FROM DQE INDIA ON 16-04-2009. THE COST OF S ALES OF EURO 2,798,190 IS PAID TO OUTSIDERS AS THERE ARE NO EMPLOYEES OTHER THAN DIRECTORS. DISTRIBUTION COST IS MARKETIN G EXPENSES OF 42,172 EURO, WHICH CONSTITUTES 1% OF THE REVENUE. A DMINISTRATIVE EXPENSES INCLUDE PROFESSIONAL CHARGES PAID TO OUTSI DERS OF 8,000 EUROS, DIRECTORS FEES OF 5,398 EUROS, TRAVELLING EX PENSES 5,000 EUROS, LEGAL AND PROFESSIONAL 446 EUROS, AUDIT 20,0 00 EUROS AND BANK CHARGES 1,235 EUROS. ALL THE ADMINISTRATIVE EX PENSES PUT TOGETHER AT EUROS 40,079 CONSTITUTES ANOTHER 1% OF THE REVENUE. A FURTHER FINANCE COST OF EUROS 46,699 CONSTITUTES 1.15% OF REVENUE. THUS THE BALANCE OF 96.85% OF THE EXPENDIT URE IS TO FREELANCERS. FROM THE EXPENSES IT IS SEEN THAT THER E ARE NO EXPENSES TOWARDS RENT AND FROM THE FA SCHEDULE IT I S SEEN THAT THERE IS NO OWNED BUILDING; ASSETS INCLUDE ONLY INT ANGIBLE ASSET WORTH EURO 1,740,049. THUS THE COMPANY APPEARS TO B E WORKING FROM SOME PLACE OTHER THAN IRELAND. IN THIS DIGITAL AGE THERE IS ALSO NO NEED FOR A PERSON TO BE STATIONED AT A PLAC E TO WORK BUT ALMOST ALL THE WORK SUCH AS HIRING OF PERSONS, EXEC UTION OF CONTRACTS, PAYMENTS, RECEIPT OF SERVICES ARE BEING DONE ONLINE AND WHICH IS MORE SO PREVALENT IN THE DEVELOPED COU NTRIES SUCH AS EUROPE. AS PER THE PROFILE OF THE TAXPAYER CONTAINED IN THE TP DOCUMENT, THE DQE GROUP IS A LEADING ANIMATION PRODUCTION COM PANY ENGAGED IN THE PRODUCTION OF 20, 3D AND FLASH ANIMA TION, WITH A SUBSTANTIAL WORKFORCE AND A GLOBAL CLIENT BASE. THE GROUP CURRENTLY PRODUCES ANIMATION FOR FILMS, TELEVISION SERIES AND CONSOLE BASED GAMES FOR A NUMBER OF INTERNATIONAL P RODUCTION HOUSES. THE GROUP IS EQUIPPED WITH MANPOWER STRENGT H OF CLOSE TO 3,000 WHO OPERATE OUT OF SEVEN FACILITIES IN IND IA. DQE GROUP OPERATES THROUGH THREE MAJOR BUSINESS DIVISIONS VIZ . ANIMATION DIVISION, GAMING DIVISION AND THE DISTRIBUTION DIVI SION. DQ ENTERTAINMENT (INTERNATIONAL) LIMITED (DQE INDIA') WAS FORMERLY KNOWN AS ANIMATIONS AND MULTIMEDIA PRIVATE LIMITED ('AMPL'). AMPL WAS INCORPORATED ON 13TH APRIL 2007 AND THE NA ME WAS SUBSEQUENTLY CHANGED TO THE CURRENT NAME DO ENTERTA INMENT (INTERNATIONAL) PRIVATE LIMITED ON 17 TH JANUARY 2008 BY A FRESH CERTIFICATE OF INCORPORATION ISSUED BY REGISTRAR OF COMPANIES, ANDHRA PRADESH, INDIA. DOE INDIA IS A SUBSIDIARY OF DOE MAURITIUS. THE ANNUAL REPORT IS FLUSH WITH THE ACHIEVEMENTS OF THE COMPANY AND THE DETAILS OF VAST LIBRARY OF IPS. THE ANNUAL REPORT STARTS WITH THE NOTE ON 'CELEBRATING A DECADE OF EXCELLENC E' AND GOES ON TO LIST THE ACHIEVEMENT AND AWARDS WON OVER A PE RIOD OF TIME. IN THE CHAIRMAN'S STATEMENT, SHRI TAPAAS CHAKRAVART I, CHAIRMAN, MD AND CEO OF THE COMPANY STATES THAT- 22 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. 'GLOBAL FOOTPRINT I AM PROUD TO REPORT THAT THE CREDIBILITY OF YOUR C OMPANY HAS BEEN ESTABLISHED AMONGST THE ELITE ENTERTAINMENT FR ATERNITY WORLDWIDE AS RECOGNIZED BY THE ACHIEVEMENT OF THE H IGHEST INTERNATIONAL QUALITY STANDARDS AND TIMELY DELIVERI ES BY ITS PROFESSIONAL, CREATIVE AND HIGHLY MOTIVATED WORKFOR CE. DQE'S REACH AND NETWORKING IS TRULY GLOBAL PARTNERI NG WITH THE BEST IN INDIA, EUROPE, NORTH AMERICA, AUSTRALIA AND NEW ZEALAND, ASIA, THE MIDDLE EAST AND AFRICA AS WELL AS CIS COU NTRIES. LICENSING OF JUNGLE BOOK TV RIGHTS IN OVER 160 COUN TRIES IS FINE PROOF OF DOE'S GLOBAL SALES, DISTRIBUTION AND LICEN SING REACH. THE COMPANY HAS A STRONG PRESENCE FOR HIGH QUALITY DEVE LOPMENT IN THE US, THE UK, FRANCE, THE PHILIPPINES WITH A LARG E WORK FORCE OF OVER 3000+ IN INDIA ALONE. I BELIEVE THAT ONE OF TH E MOST IMPORTANT DIFFERENTIATORS OF THE COMPANY HAS BEEN T HE EXTRAORDINARY TALENT AND COMMITMENT OF OUR ASSOCIAT ES. DOE IS LEVERAGING ON THE BEST TALENTS AVAILABLE FOR PROCRE ATIVE WORK SUCH AS PRIMARY DESIGNING, SCRIPT WRITING, VOICE, MUSIC AND SOME OTHER PREPRODUCTION FROM ITS SUBSIDIARIES IN EUROPE AND O FFICES IN IRELAND, FRANCE, THE UK AND THE PHILIPPINES TO SUPP ORT THE MAIN PRODUCTION IN INDIO. THERE ARE AMPLE OTHER REFERENCES ABOUT THE COMPANY WHICH SHOWS THAT IT IS ONE OF THE GLOBALLY PREMIUM PRODUC ER OF ANIMATION AND VISUAL EFFECTS FOR GLOBAL TV SERIES, FEATURE FILMS, DTH VIDEOS INCLUDING ONLINE, MOBILE AND NEXT GENERA TION CONSOLE GAME ART AND IN-GAME ANIMATION. THE COMPANY WAS ABL E TO PLACE IPS LIKE TWISTED WHISKERS, SANDRA AND RAT MAN WITH DISNEY, CASPER WITH NICKELODEON AND BALKEND & RAVAN WITH TU RNER GROUP AMONG OTHERS. THUS THE COMPANY IS A MULTI FAC ETED COMPANY WITH A VERY LARGE TRAINED AND SKILLED WORK FORCE CAPABLE OF TAKING OF ANY CHALLENGE. THE TAXPAYER, HOWEVER, IS TRYING TO PROJECT DQE INDIA AS INCAPABLE AS COMPARED TO DOE I RELAND, WHICH IS ONLY INTO FIRST YEAR OF ITS OPERATIONS. IT MAY AGAIN BE POINTED OUT THAT THE DIRECTOR SANJAY CHAUDHARY IS A PRODUCT OF THE INDIAN ENTITY. THE REVENUES OF DOE INDIA OVER A PERIOD OF THREE YEARS ARE AS UNDER: FY SALES (IN CRORES) 2007-08 92.21 2008-09 149.81 2009-10 148.12 2010-11 161.70 IT IS, THEREFORE, IMPROBABLE TO IMAGINE THAT SUCH A N ESTABLISHED COMPANY WOULD SELL AN IP AT A RELATIVELY LOW PRICE WHICH WOULD BE 23 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. EARNING SUBSTANTIAL REVENUE IN THE COMING YEARS. TH E REVENUE OF DQE IRELAND HAS INCREASED FROM EUROS 4 MILLION TO E UROS 7.8 MILLION WITHIN A SPAN OF 1 YEAR OF ACQUIRING THE I P. IT IS POSSIBLE THAT THE TAXPAYER HAS PURPOSEFULLY SHIFTED THE REVE NUE EARNING POTENTIAL IP TO A LOW TAX REGIME JURISDICTION WHERE WITHIN A YEAR OF ITS INCORPORATION, IT HAS EARNED SUBSTANTIAL REVENU E, WHICH HAS FURTHER INCREASED SUBSTANTIAL, 10 THE SUBSEQUENT YE ARS. THE TAX RATE FOR CORPORATE IS 12.50% IN IRELAND AS AGAINST THE TAX RATE IN INDIA AT 33.99%. APPARENTLY THE COMPANY IS A SHELL COMPANY. IT IS ALSO NOTICED THAT IN T'L2 FOLLOWING YEARS A FEW MOR E IPRS HAVE BEEN SHIFTED TO IRELAND AE, BUT THE PRODUCTION WORK IS AGAIN ASSIGNED BACK TO THE TAXPAYER. THUS BOTH THE AE AND THE TAXPAYER ARE INVOLVED AT SORE STAGES IN THE EXPLOIT ATION OF THE IP EVEN AFTER THE LEGAL OWNERSHIP OF THE IP IS TRANSFE RRED. TAKING INTO ACCOUNT THE ABOVE FACTS, IT APPEARS APP ROPRIATE THAT THE PROFIT EARNED BY DQE IRELAND OUGHT TO BE RIGHTF ULLY ATTRIBUTED TO DQE INDIA. ALSO REALIZING THAT THE TAXPAYER HAS EARNED A MEAGER PROFIT OF RS.42,17,810/- ON THE SALE OF IP, IT WAS, THEREFORE, PROPOSED TO APPLY PROFIT SPLIT METHOD (P SM) TO BRING THE APPROPRIATE PROFIT EARNED FROM THE USE OF IP TO INDIA. A SHOW CAUSE NOTICE WAS ISSUED TO THE TAXPAYER ON 09.01.20 14 AND THE COMPLIANCE WAS REQUESTED BY 20.01.2014. THE TAXPAYE R SOUGHT A SHORT ADJOURNMENT UPTO 24.01.2014 WHICH WAS GRANTED . THE PSM MAY BE APPLICABLE WHEN THE VARIOUS ENTITIES , INVOLVED IN CONTROLLED TRANSACTIONS IN WHICH THE ASSOCIATED ENTERPRISES ARE ENGAGED, HAVE SIGNIFICANT INTANGIBLE ASSETS AND/OR OPERATIONS OF THE ENTITIES ARE HIGHLY INTEGRATED, SHARING MORE OR LESS PROPORTIONATELY IN THE RISKS ASSOCIATED WITH THE DE SIGN, PRODUCTION AND SALE OF APPLICABLE PRODUCT THAT CANN OT BE EVALUATED ON A SEPARATE BASIS. THE ICAI TPG NOTES I LLUSTRATES THE SITUATION WHERE PSM MAY BE USEFUL- '6.20 TYPICAL TRANSACTIONS WHERE THE PROFIT-SPLIT M ETHOD MAY BE USED ARE TRANSACTIONS INVOLVING: (A) INTEGRATED SERVICES PROVIDED BY MORE THAN ONE E NTERPRISE FOR E.G. IN CASE OF FINANCIAL SERVICE SECTOR. WHERE THE ACTIVITIES PERFORMED BY INDIAN COMPANY AND FOREIGN AES IN RELA TION OF A MERGER AND ACQUISITION TRANSACTION ARE SO INTERRELA TED THAT IT MAY NOT POSSIBLE TO SEGREGATE THEM: (B) TRANSFER OF UNIQUE INTANGIBLES. FOR E.G. TWO AS SOCIATED ENTERPRISES CONTRIBUTE THEIR RESPECTIVE INTANGIBLES TO DEVELOP A NEW PRODUCT OR PROCESS AND EARN INCOME FROM SUCH PR ODUCT OR PROCESS. ' THE CASE OF THE TAXPAYER FALLS IN CATEGORY (B) ABOV E. THE PROFIT IS TO BE DIVIDED SUCH AS IS EXPECTED IN A JOINT VENTUR E RELATIONSHIP. IN THE PRESENT CASE THE CREATION OF AN IP IS A SIGN IFICANT PROCESS 24 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. AND IS THE LIFE OF THE MOVIE / ANIMATED SERIES. ONE WITHOUT THE OTHER DOES NOT EXIST. THE UN PRACTICAL MANUAL ON TP PROVIDES THE METHOD TO ALLOCATE OR SPLIT THE PROFITS PARA 6.3.14 .1 TO 5 ARE EXTRACTED HEREUNDER: '6.3.14. METHODS TO ALLOCATE OR SPLIT THE PROFITS 6.3.14.1. THERE ARE GENERALLY CONSIDERED TO BE TWO SPECIFIC METHODS TO ALLOCATE THE PROFITS BETWEEN THE ASSOCIA TED ENTERPRISES: CONTRIBUTION ANALYSIS AND RESIDUAL ANA LYSIS. 6.3.14.2. UNDER THE CONTRIBUTION ANALYSIS THE COMBI NED PROFITS FROM THE CONTROLLED TRANSACTIONS ARE ALLOCATED BETW EEN THE ASSOCIATED ENTERPRISES ON THE BASIS OF THE RELATIVE VALUE OF FUNCTIONS PERFORMED BY THOSE ASSOCIATED ENTERPRISES ENGAGED IN THE CONTROLLED TRANSACTIONS, EXTERNAL MARKET DATA T HAT REFLECT HOW INDEPENDENT ENTERPRISES ALLOCATE THE PROFITS IN SIM ILAR CIRCUMSTANCES SHOULD COMPLEMENT THE ANALYSIS TO THE EXTENT POSSIBLE. 6.3.14.3. IF THE RELATIVE VALUE OF THE CONTRIBUTION S CAN BE CALCULATED DIRECTLY, THEN DETERMINING THE ACTUAL VA LUE OF THE CONTRIBUTION OF EACH ENTERPRISE MAY NOT BE REQUIRED . THE COMBINED PROFITS FROM THE CONTROLLED TRANSACTIONS S HOULD NORMALLY BE DETERMINED ON THE BASIS OF OPERATING PROFITS. HO WEVER IN SOME CASES IT MIGHT BE PROPER TO DIVIDE GROSS PROFITS FI RST AND SUBSEQUENTLY SUBTRACT THE EXPENSES ATTRIBUTABLE W E ACH ENTERPRISE. 6.3.14.4. UNDER THE RESIDUAL ANALYSIS THE COMBINED PROFITS FROM THE CONTROLLED TRANSACTIONS ARE ALLOCATED BETWEEN T HE ASSOCIATED ENTERPRISES BASED ON A TWO-STEP APPROACH: STEP 1: ALLOCATION OF SUFFICIENT PROFIT TO EACH EN TERPRISE TO PROVIDE BASIC ARM'S LENGTH COMPENSATION FOR ROUTINE CONTRIBUTIONS. THIS BASIC COMPENSATION DOES NOT INC LUDE A RETURN FOR POSSIBLE VALUABLE INTANGIBLE ASSETS OWNED BY TH E ASSOCIATED ENTERPRISES. THE BASIC COMPENSATION IS DETERMINED B ASED ON THE RETURNS EARNED BY COMPARABLE INDEPENDENT ENTERPRISE S FOR COMPARABLE TRANSACTIONS OR, MORE FREQUENTLY, FUNCTI ONS. IN PRACTICE TNMM IS USED TO DETERMINE THE APPROPRIATE RETURN IN STEP 1 OF THE RESIDUAL ANALYSIS; AND STEP 2: ALLOCATION OF RESIDUAL PROFIT (I.E. PROFIT REMAINING AFTER STEP 1) BETWEEN THE ASSOCIATED ENTERPRISES BASED ON THE FACTS AND CIRCUMSTANCES. IF THE RESIDUAL PROFIT IS ATTRIB UTABLE TO INTANGIBLE PROPERTY THEN THE ALLOCATION OF THIS PRO FIT SHOULD BE BASED ON THE RELATIVE VALUE OF EACH ENTERPRISE'S CO NTRIBUTIONS OF INTANGIBLE PROPERTY. 25 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. 6.3.14.5. THE RESIDUAL ANALYSIS IS TYPICALLY APPLIE D TO CASES WHERE BOTH SIDES OF THE CONTROLLED TRANSACTION CONT RIBUTE VALUABLE INTANGIBLE PROPERTY TO THE TRANSACTION. FOR EXAMPLE COMPANY X MANUFACTURES COMPONENTS USING VALUABLE INTANGIBLE P ROPERTY AND SELLS THESE COMPONENTS TO A RELATED COMPANY Y WHICH USES THE COMPONENTS AND ALSO USES VALUABLE INTANGIBLE PROPER TY TO MANUFACTURE FINAL PRODUCTS AND SELLS THEM TO CUSTOM ERS. THE FIRST STEP OF A RESIDUAL ANALYSIS WOULD ALLOCATE 0 BASIC (ARM'S LENGTH) RETURN TO COMPANY X FOR ITS MANUFACTURING FUNCTION AND A BASIC (ARM'S LENGTH) RETURN TO COMPANY Y FOR ITS MANUFACT URING AND DISTRIBUTION FUNCTIONS. THE RESIDUAL PROFIT REMAINI NG AFTER THIS STEP IS ATTRIBUTABLE TO THE INTANGIBLE PROPERTIES OWNED BY THE TWO COMPANIES. THE ALLOCATION OF THE RESIDUAL PROFIT IS BASED ON THE RELATIVE VALUE OF EACH COMPANY'S CONTRIBUTIONS OF I NTANGIBLE PROPERTY. THE OECD GUIDELINES DO NOT REFER TO SPECI FIC ALLOCATION KEYS TO BE USED IN THIS RESPECT. STEP 2 MAY NOT, AN D TYPICALLY DOES NOT, DEPEND ON THE USE OF COMPARABLES.' IN RESPONSE TO THE SHOW CAUSE NOTICE THE TAXPAYER F ILED ITS REPLY ON 24.01.2014. IT IS STATED THAT 'PSM IS APPLICABLE ONLY WHEN THE INTANGIBLES IS JOINTLY OWNED BY BOTH ASSOCIATED ENT ERPRISES UNDER COST CONTRIBUTION ARRANGEMENT WHEREAS IN OUR CASE I T IS THE ABSOLUTE SALE FROM DO INDIA TO DO IRELAND WHICH IS SUPPORTED BY INDEPENDENT VALUATION REPORTS. HENCE APPLICATION OF PSM FOR REVENUES GENERATED BY DQ IRELAND IS LEGALLY UNSUSTA INABLE AND FACTUALLY INCORRECT. HENCE IT IS NOT CORRECT TO ATT RIBUTE 80% OF PROFITS TO DQ INDIA. THE SUBMISSION HAS BEEN CONSIDERED. THE QUESTION HE RE IS NOT WHO THE LEGAL OWNER OF THE IP IS BUT WHO THE ECONOM IC OWNER OF THE IP IS. THE CASE OF TAXPAYER ENCOMPASSES BUSINES S RESTRUCTURING INVOLVING ECONOMIC SUBSTANCE OF THE T RANS ACTION. AS DISCUSSED ABOVE THE LEGAL OWNERSHIP IS NOT IN DI SPUTE. BUT AS SHOWN ABOVE, DQE IRELAND IS ONLY A SHELL COMPANY LO CATED IN LOW TAX JURISDICTION AND BEING RUN BY ONLY 2 PERSONS, T HEREFORE THE ECONOMIC BENEFITS DO NOT LIE THERE. THE AE IN TURN IS ALSO OFFLOADING PRODUCTION WORK TO THE TAXPAYER FOR = D EVELOPMENT OF THE IP. THE PROFITS ARISING BY EXPLOITING THE INTAN GIBLES RIGHTLY LIE WITH DQE INDIA. PARA OF THE OECD TPG SUCCULENTLY AN SWERS THE QUESTION. '9.67 IN THE CONTEXT OF BUSINESS RESTRUCTURINGS, PR OFIT POTENTIAL SHOULD NOT BE INTERPRETED AS SIMPLY THE PROFITS/LOS SES THAT WOULD OCCUR IF THE PRE-RESTRUCTURING ARRANGEMENT WERE TO CONTINUE INDEFINITELY. ON THE ONE HAND, IF AN ENTITY HAS NO DISCERNIBLE RIGHTS AND/OR OTHER ASSETS AT THE TIME OF THE RESTR UCTURING, THEN IT HAS NO COMPENSABLE PROFIT POTENTIAL. ON THE OTHER H AND, AN ENTITY WITH CONSIDERABLE RIGHTS AND/OR OTHER ASSETS AT THE TIME OF THE 26 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. RESTRUCTURING MAY HAVE CONSIDERABLE PROFIT POTENTIA L, WHICH MUST ULTIMATELY BE APPROPRIATELY REMUNERATED IN ORDER TO JUSTIFY THE SACRIFICE OF SUCH PROFIT POTENTIAL.' IN AN ARM'S LENGTH SITUATION, NO INDEPENDENT ENTERP RISE WOULD ALLOW ITS VALUABLE IP TO BE SOLD AT A LOW VALUE WHI CH HAS THE POTENTIAL OF EARNING HUGE REVENUES UNLESS IT IS A D ISTRESS SALE HAVING SAID SO, NO INDEPENDENT ENTERPRISE WOULD ALL OW ITS RIGHTFUL SHARE OF PROFIT TO BE RETAINED BY ANOTHER ENTERPRIS E. ACCORDINGLY THE COMPUTATION IS AS UNDER- PARTICULARS DQE INDIA DQE IRELAND TOTAL (EURO) TOTAL (INR @ RS. 70 PER EURO) OPERATING COST 0 MARKETING EXPENSES 42,172 ADMN. EXPENSES 40,079 TOTAL 128,950 128,950 90,26,500 STEP 1 : ALLOCATION OF PROFIT ON ROUTINE CONTRIBUTI ONS PROFIT ALLOCATION 0 10% OF OC, BEING ROUTINE MARKETING AND ADMINISTRATIVE FUNCTIONS 12,895 12,895 9,02,650 BALANCE PROFIT 0 1,156,523- 12,896 = 1,143,628 1,143,628 8,00,53,960 STEP 2 : ALLOCATION OF PROFIT ON IP CONTRIBUTION PROFIT ON SALE OF IP 42,17,810 0 - 8,42,71,770 FURTHER ALLOCATION BASED ON FAR 80% OF 8,42,71,770 = 6,74,17,416 20% 8,42,71,770 = 1,68,54,340 - 8,42,71,770 JUSTIFICATION FOR 80:20 SPLIT: AS MADE OUT ABOVE, DQE INDIA IS HEADED BY LEADING P ERSONS IN ANIMATION INDUSTRY HAVING AS MANY AS 8 DIRECTORS WI TH A TRAINED AND SKILLED COMBINED WORK FORCE OF 3000+, AS COMPAR ED TO DQE IRELAND WHICH HAS NO OTHER SET UP OTHER THAN THE PR ESENCE OF 2 DIRECTORS. DQE INDIA IS IN EXISTENCE FOR MORE THAN 10 YEARS WITH TIE UPS WITH VARIOUS STUDIOS OVER THE WORLD, WHEREA S DQE IRELAND WHICH IS ONLY 1 YEAR OLD CAN ONLY GET SO MUCH OF BU SINESS ONLY WITH THE ASSOCIATION WITH DQE INDIA. THE TAXPAYER HAS THE PRESENCE AND A BRAND VALUE OF ITSELF WHICH HAS BEEN CAPITALIZED BY THE AE TO TAP THE RIGHT CONTACTS IN THE INDUSTRY . THE HIRED STAFF 27 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. IN IRELAND, IF THEY ARE RENOWNED, WOULD LIKE TO ASS OCIATE WITH SOME ESTABLISHED ENTITY RATHER THAN A START-UP COMP ANY. THEREFORE IT IS ONLY DUE TO THE IDENTITY AND STANDI NG OF DOE INDIA IN GLOBAL ARENA, THE PERSONS GOT HIRED. IN THIS SCE NARIO IT IS ONLY APPROPRIATE TO SHARE THE PROFITS IN THE RATIO OF 80 :20 BETWEEN DQE INDIA AND DQE IRELAND. THUS THE ALP OF THE PROFIT ATTRIBUTABLE TO DQE INDI A IS RS.6,74,17,416/- AND THE PROFIT ATTRIBUTABLE TO DQE IRELAND IS RS.1,68,54,340/-. ACCORDINGLY THE INCOME OF THE TAX PAYER SHALL BE ENHANCED BY RS.6,74,17,416 U/S 92CA(3) OF THE IT AC T. BASED ON THE ABOVE, THE TPO DECIDED THAT EVEN THOUG H THE LEGAL OWNERSHIP IPS OF JUNGLE BOOK SOLD, HAS BEEN TRANSFE RRED TO DQ IRELAND, BUT THE ECONOMIC OWNERSHIP LIES WITH DQ IN DIA. THE TPO, THEREFORE, PROCEEDED TO APPLY PROFIT SPLIT METHOD T O APPORTION THE APPROPRIATE PROFIT TO DQ INDIA WHICH OTHERWISE IS L YING WITH DQ IRELAND, IN THE RATIO OF 80:20 AND ACCORDINGLY DETE RMINED THE PROFIT OF RS.6,74,16,416/- BEING ATTRIBUTABLE TO DQ INDIA AND THE BALANCE PORTION OF RS. 1,68,54,340/ ATTRIBUTABLE TO DQ IRE LAND. 12. WHEN THE ASSESSEE RAISED OBJECTION BEFORE THE D RP, THE DRP EXTRACTED THE TPOS ORDER ON THIS ISSUE IN THEIR OR DER AND CONFIRMED THE ACTION OF THE TPO ON THIS ISSUE REJECTING THE O BJECTION OF THE ASSESSEE. HENCE, ASSESSEE IS IN APPEAL BEFORE US. 13. LD. AR SUBMITTED THAT THE INTANGIBLE ASSET 'JUN GLE BOOK' WAS SOLD TO DQ IRELAND ON 30 TH SEPTEMBER, 2009.(PG.264 OF THE PAPER BOOK). HE SUBMITTED THAT THE LD TPO ALLOCATED 80% O F PROFIT ON IP CONTRIBUTION TO THE APPELLANT COMPANY AND ADOPTED T HE PROFIT SPLIT METHOD (PSM) FOR THIS PURPOSE. IT IS SUBMITTED THAT PSM IS APPLICABLE ONLY WHEN THE INTANGIBLES ARE JOINTLY OWNED BY BOTH THE ASSESSEE AND AE UNDER COST CONTRIBUTION ARRANGEMENT AND WHEREAS IN OUR CASE IT IS AN ABSOLUTE SALE ON SO' SEPTEMBER, 2009 ITSELF. IT IS SUBMITTED THAT WHEN THE INTANGIBLE ASSET IS SOLD AND IS AT ARMS LE NGTH, THERE ARISES NO QUESTION OF JOINT OWNERSHIP. 13.1 LD. AR SUBMITTED THAT LD TPO HAD MADE AN ADJU STMENT OF RS. 6,74,17,416/- TOWARDS PROFIT ATTRIBUTABLE TO APPELL ANT COMPANY IN 28 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. CONNECTION WITH SALE OF INTANGIBLE ASSET. THIS ADDI TION WAS BASED ON THE OVERALL REVENUE GENERATED BY THE ASSOCIATED ENT ERPRISE DQ IRELAND WHICH INCLUDED OTHER INTANGIBLE ASSETS. HE SUBMITTED THAT THE INTANGIBLE ASSET IS SOLD IN SEPTEMBER, 2009 AND NO REVENUE IS GENERATED BETWEEN APRIL 2009 TO SEPTEMBER 2009 EITH ER IN THE HANDS OF DQ INDIA OR IN THE HANDS OF DQ IRELAND, HENCE AP PORTIONING REVENUE TO DQ INDIA IS FACTUALLY INCORRECT AND LEGA LLY UNSUSTAINABLE. IT IS SUBMITTED THAT THE REVENUE FROM THE IP JUNGLE B OOK WAS STARTED GENERATING FROM LAST QUARTER OF FY 2009-10, I.E. DU RING JANUARY 2010 TO MARCH 2010 WHEN THE OWNERSHIP OF THE INTANGIBLE ASSET WAS WITH DQ IRELAND AND THEREFORE REVENUE GENERATED FROM THE INTANGIBLE ASSET WHOLLY BELONGS TO DQ IRELAND. 13.2 LD. AR SUBMITTED THAT TPO CONSIDERING THE FINA NCIALS OF DQ IRELAND APPORTIONED REVENUE TO DQ INDIA, THE BASIS OF ALLOCATION IS AS UNDER: PARTICULARS AMOUNT AMOUNT P.B.T. OF DQ IRELAND FOR YEAR ENDING 31 ST MARCH, 2010 (PG. 91 OF PAPER BOOK) (I) 11,56,523 EUROS DISTRIBUTION COST (PG. 91 OF PAPER BOOK) 42,172 EUROS ADMINISTRATIVE EXPENSES (PG. 91 OF PAPER BOOK) 40,079 EUROS FINANCE COSTS (PG. 91 OF PAPER BOOK) 46,699 EUROS TOTAL 1,28,950 EUROS 10% ROUTINE EXPENSES (II) 12,895 EUROS P.B.T. AFTER DEDUCTION OF ROUTINE EXPENSES (A) = (I-II) 11,43,628 AMOUNT IN INR(A*70) (1 EURO = RS. 70 APPROXIMATELY) E(B) 8,00,53,960 PROFIT ON INTELLECTUAL PROPERTY (CAPITAL GAINS) 29 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. SALE OF INTELLECTUAL PROPERTY 5,36,20,000 LESS: COST OF INTELLECTUAL PROPERTY (PG. 77 & 362 OF PAPER BOOK) 4,94,03,810 CAPITAL GAINS (PG. 6 OF PAPER BOOK) (C) 42,16,190 PROFIT ON MUTUAL FUNDS (PG. 6 OF PAPER BOOK) IT IS ONLY RS. 1090 (D) 1,620 (E = C+D) 42,17,810 F = (B+E) 8,42,71,770 80% OF PROFITS ALLOCATED TO DQ INDIA F* 80% 6,74,17,416 13.3 REFERRING TO THE ABOVE TABLE, LD. AR SUBMITTE D THAT IT IS CLEARLY EVIDENT THAT THE LD TPO HAS TAKEN THE OVERALL PROFI TS BEING GENERATED BY DQ IRELAND. IT IS ALSO EVIDENT THAT THE LD TPO H AS ALSO CONSIDERED RS.42,16,190/- CAPITAL GAINS IN HIS CALCULATION IGN ORING THE FACT THAT THE SAME WAS ALREADY OFFERED TO TAX BY APPELLANT CO MPANY. (PG.3 & 6 OF PAPER BOOK). HE SUBMITTED THAT REVENUE GENERATED BY DQ IRELAND INCLUDES REVENUE FROM VARIOUS PROJECTS LIKE JUNGLE BOOK, MARYOKU YUMMY & PETERPAN (PG. 265 & 286 OF PAPER BOOK). SIN CE THE PROJECTS MARYOKU YUMMY AND PETERPAN ARE NO WAY RELATED TO DQ INDIA AND FURTHER REVENUE FROM PROJECT JUNGLE BOOK STARTED ON LY FROM JANUARY 2010 WHEN DQ IRELAND WAS ABSOLUTE OWNER THERE ARISE S NO QUESTION OF ANY PROFITS BELONGING TO DQ INDIA. 13.4 LD. AR, THEREFORE, SUBMITTED THAT IT IS NOT LEGALLY & FACTUALLY TENABLE TO ATTRIBUTE 80% OF PROFITS OF DQ (IRELAND) TO DQ (INDIA) WHEN SUCH PROFITS SOLELY BELONG TO DQ IRELAND WHO IS THE ABSOLUTE OWNER OF THE INTANGIBLE ASSET. HENCE THE ABOVE MENTIONED CAL CULATION OF ATTRIBUTION OF INCOME TO ASSESSEE COMPANY IS TOTALL Y AGAINST THE FACTS AND HAS NO LEGAL SANCTITY. ACCORDINGLY, HE PRAYED T HE BENCH TO GRANT RELIEF AS PER THE GROUNDS OF APPEAL AND SUBMISSIONS MADE AS ABOVE. 14. LD. DR SUBMITTED THAT IT IS THE SUBMISSION OF T HE TAXPAYER THAT PSM IS ONLY APPLICABLE WHEN THE INTANGIBLE IS JOINT LY OWNED BY BOTH 30 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. THE AES AND THE TAXPAYER. IN THIS REGARD, THE TPO O BSERVED THAT THE SALE OF THE INTANGIBLE ASSET TO AE IS IN THE NATURE OF BUSINESS RESTRUCTURING. UNDER THIS PARTICULAR RESTRUCTURING THERE IS A TRANSFER OF ASSET INCLUDING INTANGIBLE. OFTEN THESE TRANSACTION S INVOLVED EFFORTS TO MOVE VALUABLE ASSETS INTO THE TAX FAVOURED NATION L IKE IRELAND AND THEREFORE, THERE WAS INCENTIVE TO TRANSFER THE INTA NGIBLE ASSET IN THE DEVELOPMENT STAGE ITSELF. THE TPO ALSO HIGHLIGHTED THE ISSUE OF BEPS EXAMINING THE SUBSTANCE, SUBSTANCE OVER FORM AND RE - CHARACTERIZATION TO CONCLUDE THAT THE ARRANGEMENTS OF THE SPECIFIC NATURE SUCH AS TRANSFER OF INTANGIBLES ARE NOT REEN COUNTERED BETWEEN THE INDIAN ENTITY AND IN SUCH CIRCUMSTANCES THE TAX ADMINISTRATION WOULD HAVE TO DETERMINE ALL THE UNDERLYING REALITY IS BEHIND THE CONTRACTUAL ARRANGEMENT IN APPLYING THE ALP PRINCIP LE. THE TPO .OBSERVED THAT THE DQ IRELAND HAS ONLY TWO DIRECTOR S AND ONE EMPLOYEE. THE ONLY ACTIVITY CARRIED OUT BY THE COMP ANY IS HIRING OF ARTISTS. THE COPYRIGHTS VALUED AT EURO 812,182 WERE PURCHASED BY THE COMPANY FROM DQE INDIA ON 16-04-2009. THE COST OF S ALES OF EURO 2,798,190 IS PAID TO OUTSIDERS AS THERE ARE NO EMPL OYEES OTHER THAN DIRECTORS. DISTRIBUTION COST IS MARKETING EXPENSES OF 42,172 EURO, WHICH CONSTITUTES 1% OF THE REVENUE. ADMINISTRATIVE EXPENSES INCLUDE PROFESSIONAL CHARGES PAID TO OUTSIDERS OF 8,000 EUR OS, DIRECTORS FEES OF 5,398 EUROS, TRAVELLING EXPENSES 5,000 EUROS, LE GAL AND PROFESSIONAL 446 EUROS, AUDIT 20,000 EUROS AND BANK CHARGES 1,235 EUROS. ALL THE ADMINISTRATIVE EXPENSES PUT TOGETHER AT EUROS 40,079 CONSTITUTES ANOTHER 1% OF THE REVENUE. A FURTHER FI NANCE COST OF EUROS 46,699 CONSTITUTES 1.15% OF REVENUE. THUS THE BALAN CE OF 96.85% OF THE EXPENDITURE IS TO FREELANCERS. FROM THE EXPENSE S, IT IS SEEN THAT THERE ARE NO EXPENSES TOWARDS RENT AND FROM THE FA SCHEDULE IT IS SEEN THAT THERE IS NO OWNED BUILDING. ASSETS INCLUD E ONLY INTANGIBLE ASSET WORTH EURO 1,740,049. THUS THE COMPANY APPEAR S TO BE WORKING FROM SOME PLACE OTHER THAN IRELAND. IN THIS DIGITAL AGE THERE IS ALSO NO NEED FOR A PERSON TO BE STATIONED AT A PLACE TO WOR K BUT ALMOST ALL THE WORK SUCH AS HIRING OF PERSONS, EXECUTION OF CONTRA CTS, PAYMENTS, 31 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. RECEIPT OF SERVICES ARE BEING DONE ONLINE AND WHICH IS MORE SO PREVALENT IN THE DEVELOPED COUNTRIES SUCH AS EUROPE . 14.1 LD. DR SUBMITTED THAT AS PER THE PROFILE OF TH E TAXPAYER CONTAINED IN THE TP DOCUMENT, THE DQE GROUP IS A LE ADING ANIMATION PRODUCTION COMPANY ENGAGED IN THE PRODUCTION OF 2D, 3D AND FLASH ANIMATION, WITH A SUBSTANTIAL WORKFORCE AND A GLOBA L CLIENT BASE. THE GROUP CURRENTLY PRODUCES ANIMATION FOR FILMS, TELEV ISION SERIES AND CONSOLE BASED GAMES FOR A NUMBER OF INTERNATIONAL P RODUCTION HOUSES. THE GROUP IS EQUIPPED WITH MANPOWER STRENGT H OF CLOSE TO 3,000 WHO OPERATE OUT OF SEVEN FACILITIES IN INDIA. DQE GROUP OPERATES THROUGH THREE MAJOR BUSINESS DIVISIONS VIZ . ANIMATION DIVISION, GAMING DIVISION AND THE DISTRIBUTION DIVI SION. DQ ENTERTAINMENT (INTERNATIONAL) LIMITED ('DQE INDIA') WAS FORMERLY KNOWN AS ANIMATIONS AND MULTIMEDIA PRIVATE LIMITED ('AMPL'). AMPL WAS INCORPORATED ON 13TH APRIL 2007 AND THE NAME WA S SUBSEQUENTLY CHANGED TO THE CURRENT NAME DQ ENTERTAINMENT (INTER NATIONAL) PRIVATE LIMITED ON 17 TH JANUARY 2008 BY A FRESH CERTIFICATE OF INCORPORATI ON ISSUED BY REGISTRAR OF COMPANIES, ANDHRA PRADESH, I NDIA. DQE INDIA IS A SUBSIDIARY OF DQE MAURITIUS. 14.2 LD. DR SUBMITTED THAT THE TPO FURTHER OBSERVE D THAT IT IS THEREFORE, IMPROBABLE TO IMAGINE THAT SUCH AN ESTAB LISHED COMPANY WOULD SELL AN IP AT A RELATIVELY LOW PRICE WHICH WO ULD BE EARNING SUBSTANTIAL REVENUE IN THE COMING YEARS. THE REVENU E OF DQE IRELAND HAS INCREASED FROM EUROS 4 MILLION TO EUROS 7.8 MIL LION WITHIN A SPAN OF 1 YEAR OF ACQUIRING THE IP. IT IS POSSIBLE THAT THE TAXPAYER HAS PURPOSEFULLY SHIFTED THE REVENUE EARNING POTENTIAL IP TO A LOW TAX REGIME JURISDICTION WHERE WITHIN A YEAR OF ITS INCO RPORATION, IT HAS EARNED SUBSTANTIAL REVENUE, WHICH HAS FURTHER INCRE ASED SUBSTANTIALLY IN THE SUBSEQUENT YEARS. THE TAX RATE FOR CORPORATE IS 12.50% IN IRELAND AS AGAINST THE TAX RATE IN INDIA AT 33.99%. APPARENTLY THE COMPANY IS A SHELL COMPANY. IT IS ALSO NOTICED THAT IN THE FOLLOWING YEARS A FEW MORE IPRS HAVE BEEN SHIFTED TO IRELAND AE, BUT THE 32 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. PRODUCTION WORK IS AGAIN ASSIGNED BACK TO THE TAXPA YER. THUS BOTH THE AE AND THE TAXPAYER ARE INVOLVED AT SOME STAGES IN THE EXPLOITATION OF THE IP EVEN AFTER THE LEGAL OWNERSHIP OF THE IP IS TRANSFERRED. THE TPO THEREFORE RIGHTLY APPLIED PSM. 14.3 AS REGARDS THE PROFIT SHARING RATIO OF 80:20, LD. DR SUBMITTED THAT THE REASONS THEREOF ARE THAT DQE INDIA IS HEAD ED BY LEADING PERSONS IN ANIMATION INDUSTRY HAVING AS MANY AS 8 D IRECTORS WITH A TRAINED AND SKILLED COMBINED WORK FORCE OF 3000+, A S COMPARED TO DQE IRELAND WHICH HAS NO OTHER SET UP OTHER THAN TH E PRESENCE OF 2 DIRECTORS. DQE INDIA IS IN EXISTENCE FOR MORE THAN 10 YEARS WITH TIE UPS WITH VARIOUS STUDIOS OVER THE WORLD, WHEREAS DQ E IRELAND WHICH IS ONLY 1 YEAR OLD CAN ONLY GET SO MUCH OF BUSINESS ONLY WITH THE ASSOCIATION WITH DQE INDIA. THE TAXPAYER HAS THE PR ESENCE AND A BRAND VALUE OF ITSELF WHICH HAS BEEN CAPITALIZED BY THE AE TO TAP THE RIGHT CONTACTS IN THE INDUSTRY. THE HIRED STAFF IN IRELAND, IF THEY ARE RENOWNED, WOULD LIKE TO ASSOCIATE WITH SOME ESTABLI SHED ENTITY RATHER THAN A START-UP COMPANY. THEREFORE IT IS ONLY DUE T O THE IDENTITY AND STANDING OF DQE INDIA IN GLOBAL ARENA, THE PERSONS GOT HIRED. IN THIS SCENARIO IT IS ONLY APPROPRIATE TO SHARE THE PROFIT S IN THE RATIO OF 80:20 BETWEEN DQE INDIA AND DQE IRELAND. 15. CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL FACTS ON RECORD AS WELL AS THE ORDERS OF R EVENUE AUTHORITIES. THE FACTS ARE, THE ASSESSEE HAD SOLD IP (JUNGLE B OOK) TO ITS AE ON 30/09/2009 AT THE DEVELOPMENT STAGE. IT WAS NOT FUL LY DEVELOPED TO GENERATE REVENUE IMMEDIATELY. AS PER LD. AR, AE W AS IN A POSITION TO GENERATE REVENUE IN THE LAST QUARTER OF 2009-10 I.E. JAN-MARCH, 2010. BUT TPO ADOPTED THE WHOLE REVENUE GENERATED B Y AE IN THE WHOLE YEAR TO ARRIVE THE PROFIT ARITHMETICALLY TO THE INDIAN ENTITY. THE MAIN ISSUE BEFORE US IS, WHETHER THE TPO JUSTIFIED TO DETERMINE THE PROFIT ATTRIBUTABLE TO INDIAN ENTITY (ASSESSEE) WHE N HE HIMSELF DETERMINED THE SALE CONSIDERATION OF IP (JUNGLE BOO K). WHEN THE TPO 33 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. AGREED THAT THERE IS A OUTRIGHT SALE, THERE ENDS TH E INTERNATIONAL TRANSACTION. NOW, TPO IS TRYING TO GO BEYOND SALES AND MAKING TP ADJUSTMENTS. WE ARE ASKING OURSELVES, WHETHER THERE IS ANY INTERNATIONAL TRANSACTION EXISTS. IN OUR CONSIDERED VIEW, THERE IS NO INTERNATIONAL TRANSACTION AFTER OUTRIGHT SALE. THER E IS NO INTERNATIONAL TRANSACTION EXISTS AS PER SECTION 92B OF THE ACT AS THERE IS NO TRANSACTION EXISTS BETWEEN ASSESSEE AND WITH ITS A E. WE ARE INCLINED TO REJECT THE STAND OF THE TPO. 15.1 MOREOVER, AFTER THE COMPLETION OF THE SALE PRO CESS, THE AE HAS DONE TRANSACTION WITH THE OUTSIDERS OR OUTSIDE THE JURISDICTION OF THE INDIAN TERRITORYBUT THERE IS NO TRANSACTION DON E WITH THE ASSESSEE INVOLVING THE ABOVE IP (JUNGLE BOOK) TO CONSIDER TH AT THERE EXISTS A INTERNATIONAL TRANSACTION. ONCE, THE IP IS SOLD AND ARMS LENGTH PRICE IS DETERMINED, THE IP BECOMES THE PROPERTY OF AE . THE ASSESSEE HAS NO LOCUS STANDI TO CLAIM ANY BENEFIT NEITHER T HE REVENUE. 15.2 THE REVENUE HAS GRIEVANCES ON THE ARRANGEMENT AND EXISTENCES OF GROUP COMPANIES. THERE IS NO DOUBT, THERE EXISTS TAX PLANNING. THERE CAN BE TAX PLANNING WITHIN THE FOUR CORNERS O F THE TAXATION LAWS. THERE IS ENOUGH MECHANISM IN THE EXISTING ACT AND A LSO THERE IS DTAA ARRANGEMENT WITH IRELAND, WHICH WILL TAKE CA RE OF THE SITUATIONS OF TAX AVOIDANCE. THE REVENUE HAS NOT B ROUGHT ANY COGENT EVIDENCE TO PROVE THAT THERE EXISTS ANY TAX AVOIDAN CE. IN OUR CONSIDERED VIEW, THE ACTION OF THE TPO IS NOT JUSTI FIED AND ACCORDINGLY, THE GROUNDS RAISED BY ASSESSEE ARE ALL OWED. 16. AS REGARDS GROUND NO. 8 REGARDING PAYMENT TOWAR DS MANAGEMENT CONSULTANCY SERVICE FEE OF RS. 3,70,53,4 48/-, IT IS OBSERVED THAT THE ASSESSEE HAS PAID MANAGEMENT CONS ULTANCY CHARGES OF RS.3,70,53,448/- TO ITS AE, DQ MAURITIUS FOR AVAILING MANAGEMENT CONSULTANCY SERVICES. IN VIEW OF THE ASS ESSEE'S FAILURE TO SUBSTANTIATE WITH SUPPORTING EVIDENCES SHOWING T HE TANGIBLE BENEFIT HAS BEEN RECEIVED, THE TPO COMPUTED THE ARM'S LENGT H PRICE AT NIL. FOLLOWING THE DECISION OF THE EARLIER DRP FOR THE P RECEDING 34 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. ASSESSMENT YEARS AND GROUND OF OBJECTIONS RAISED B Y THE ASSESSEE WERE REJECTED BY THE TPO. 17. DQE INDIA AVAILED MANAGEMENT CONSULTANCY SERVI CES FROM DQE MAURITIUS, AS PER THE TERMS AND CONDITIONS IN D Q MEMORANDUM OF UNDERSTANDING ('MOU') ENTERED INTO BETWEEN BOTH THE COMPANIES. THE SERVICES PROVIDED BY DQE MAURITIUS TO DQE INDIA AS PER THIS ARRANGEMENT FROM TIME TO TIME, ARE IN THE NATURE OF ADMINISTRATIVE, GENERAL MANAGEMENT AND PROFESSIONAL SERVICES. DURIN G THE ASSESSMENT YEAR 2010-11 THE ASSESSEE PAID AN AMOUNT OF RS. 3,70,53,448/- TO M/S DQ ENTERTAINMENT (MAURITIUS) L TD, MAURITIUS TOWARDS MANAGEMENT CONSULTANCY SERVICES RECEIVED. T HE ASSESSEE COMPANY SUBMITTED TO THE TPO THAT THE PAYMENT OF MA NAGEMENT FEE WAS MADE TO THE BOARD OF DIRECTORS OF THE ASSOCIATE D ENTERPRISE (DQ PLC) AS THEY WERE RENDERING INVALUABLE ADVICE AND G UIDANCE TO THE ASSESSEE COMPANY. THESE BOARD OF DIRECTORS INCLUDED PERSONS FROM THE ANIMATION FIELD, AND HAVING EXPERIENCE IN CHILD REN'S ENTERTAINMENT AND WHO HAD BEEN RENDERING INVALUABLE INPUTS TO THE ASSESSEE COMPANY. THE ASSESSEE ALSO SUBMITTED THAT BOARD OF DQ PLC HAS BEEN INSTRUMENTAL IN BRINGING IN A NUMBER OF PROJEC TS WITH IMPORTANT CUSTOMERS. THESE PROJECTS ARE VALUED AT APPROX. RS. 198 CRORES WHICH HAVE BEEN EXECUTED BY DQ INDIA OVER THE PERIOD 2009 -10 TO 2012-13. BOARD OF DQ PLCS STRATEGIC DECISIONS HAVE HELPED A SSESSEE IN GETTING MAJORITY REVENUE OF RS.124 CRORES FROM METHOD ANIMA TION, FRANCE. FURTHER THE BUSINESS OF DQ INDIA IS GROWING WITH TH E SUPPORT OF BOD OF DQ PIC. IT IS ALSO STATED THAT DQ INDIA WITH THE STRATEGIC & MANAGEMENT SUPPORT OF DQ PLC WERE ABLE TO COMPLETE PUBLIC ISSUE IN INDIO IN FY 2009-10 AND LISTING WITH BSE, NSE WHERE THE ISSUE WAS OVERSUBSCRIBED 86 TIMES. THEIR EXPERIENCE AND CRITI CAL ACTIONS HAVE ENABLED DQ INDIA TO EXPLOIT BUSINESS OPPORTUNITIES WHICH ENABLED GROWTH IN THE COMPANY. ALL SUCH GUIDANCE AND ADVICE WAS BEING RENDERED BY THE BOARD OF DIRECTORS AND HENCE THE PA YMENT OF MANAGEMENT CONSULTANCY FEES WAS MADE. 35 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. 18. THE LEARNED TPO HAS OBSERVED THAT THE TAX PAYE R FAILED TO FURNISH ANY EVIDENCE IN SUPPORT OF RECEIPT OF THE T ANGIBLE BENEFITS FOR WHICH THE PAYMENT WAS MADE TO ITS AE AND HENCE TREA TED THE ARMS LENGTH PRICE AS NIL. 19. WHEN THE ASSESSEE RAISED OBJECTION BEFORE THE D RP, THE DRP FOLLOWING ITS DECISION IN AY 2008-09 AND 2009-10, R EJECTED GROUND OF OBJECTION OF THE ASSESSEE. IN AY 2008-09 AND 2009-1 0, THE DRP HELD AS FOLLOWS: THUS, IT IS SEEN THAT DQE MAURITIUS WILL IDENTIFY THOSE COSTS OF ITS OFFICERS AND CONSULTANTS WHO ARE CHIEFLY INVOLVED I N PROVIDING MANAGEMENT AND SUPPORTING SERVICES TO DQE INDIA. TH EIR COSTS WILL BE ALLOCATED ACROSS DQE MAURITIUS AND DQE INDI A BASED ON SHARES OF AGREED BUDGETED SALES. DQE MAURITIUS WILL PASS THROUGH AT COST ANY MAJOR ITEMS OF THIRD PARTY EXPE NSES TO WHICH IT HAS NOT ADDED VALUE. ALL COSTS WILL BE MARKED UP WITH A PROFIT ELEMENT OF 5%. THUS, DETAILED BUDGETING AND DOCUMENTATION NEEDS TO BE MAINTAINED FOR THE SERVICES BEING RENDERED BY THE A E. THESE RECORDS, IF PRODUCED BEFORE THE TPO WOULD THROW MOR E CLARITY AND PROOF FOR THE ACTUAL RENDERING OF SERVICES. THEREFO RE, THIS PANEL DIRECTS THAT THE TPO SHALL CALL FOR THOSE APPROPRIA TE RECORDS FOR WHICH THE ASSESSEE SHALL EXTEND FULL COOPERATION AN D THEN COME TO A DETERMINATION WHETHER THE SUM PAID OF RS.3,19, 23,085/- TO ITS HOLDING COMPANY, DQ MAURITIUS ON ACCOUNT OF MAN AGEMENT CONSULTANCY SERVICES IS AT ARM'S LENGTH OR IT SHOUL D BE LESS. 20. AGGRIEVED WITH THE ABOVE DECISION, ASSESSEE IS IN APPEAL BEFORE US AND LD. AR SUBMITTED THAT DQE INDIA AVAI LED MANAGEMENT CONSULTANCY SERVICES FROM DQE MAURITIUS, AS PER THE TERMS AND CONDITIONS IN A MEMORANDUM OF UNDERSTANDING ('MOU') ENTERED INTO BETWEEN BOTH THE COMPANIES. THE SERVICES PROVIDED B Y DQE MAURITIUS TO DQE INDIA AS PER THIS ARRANGEMENT FROM TIME TO TIME, ARE IN THE NATURE OF ADMINISTRATIVE, GENERAL MANAGEMENT AND PROFESSIONAL SERVICES. 20.1 LD. AR SUBMITTED THAT DURING THE ASSESSMENT YE AR 2010-11 THE ASSESSEE PAID AN AMOUNT OF RS. 3,70,53,448/- TO M/S DQ ENTERTAINMENT (MAURITIUS) LTD, MAURITIUS TOWARDS MA NAGEMENT 36 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. CONSULTANCY SERVICES RECEIVED. THE ASSESSEE COMPANY SUBMITTED TO THE TPO THAT THE PAYMENT OF MANAGEMENT FEE WAS MADE TO THE BOARD OF DIRECTORS OF THE ASSOCIATED ENTERPRISE (DQ PIC) AS THEY WERE RENDERING INVALUABLE ADVICE AND GUIDANCE TO THE ASS ESSEE COMPANY. THESE BOARD OF DIRECTORS INCLUDED PERSONS FROM THE ANIMATION FIELD, AND HAVING EXPERIENCE IN CHILDREN'S ENTERTAINMENT A ND WHO HAD BEEN RENDERING INVALUABLE INPUTS TO THE ASSESSEE COMPANY . 20.2 LD. AR SUBMITTED THAT BOARD OF DQ PLC HAS BEE N INSTRUMENTAL IN BRINGING IN A NUMBER OF PROJECTS WITH IMPORTANT CUSTOMERS. THESE PROJECTS ARE VALUED AT APPROX. RS. 198 CRORES WHICH HAVE BEEN EXECUTED BY DQ INDIA OVER THE PERIOD 2009-10 TO 201 2-13. BOARD OF DQ PLC'S STRATEGIC DECISIONS HAVE HELPED THE ASSESS EE IN GETTING MAJORITY REVENUE OF RS.124 CRORES FROM METHOD ANIMA TION, FRANCE. FURTHER THE BUSINESS OF DQ INDIA IS GROWING WITH TH E SUPPORT OF BOD OF DQ PLC. IT IS ALSO SUBMITTED THAT DQ INDIA WITH THE STRATEGIC & MANAGEMENT SUPPORT OF DQ PLC., WERE ABLE TO COMPLET E PUBLIC ISSUE IN INDIA IN FY 2009-10 AND LISTING WITH BSE, NSE WH ERE THE ISSUE WAS OVERSUBSCRIBED 86 TIMES. AE EXPERIENCE AND CRITICAL ACTIONS HAVE ENABLED DQ INDIA TO EXPLOIT BUSINESS OPPORTUNITIES WHICH ENABLED GROWTH IN THE COMPANY. ALL SUCH GUIDANCE AND ADVICE WAS BEING RENDERED BY THE BOARD OF DIRECTORS AND HENCE THE PA YMENT OF MANAGEMENT CONSULTANCY FEES WAS MADE BY THE ASSESSE E. 20.3 LD. AR SUBMITTED THAT DESPITE THE SUBMISSIONS MADE, THE LEARNED TPO HAS OBSERVED THAT THE TAX PAYER FAILED TO FURNISH ANY EVIDENCE IN SUPPORT OF RECEIPT OF THE TANGIBLE BENE FITS FOR WHICH THE PAYMENT WAS MADE TO ITS AE AND HENCE TREATED THE AR MS LENGTH PRICE AS NIL. 20.4 LD. AR SUBMITTED THAT THE ASSESSEE HAS PROVIDE D THE DETAILED BREAKUP OF EXPENDITURE ALONG WITH THE INVOICES BY D Q MAURITIUS FOR THE AY 2010-11 AS ASKED FOR BY THE TPO (PG.202 TO 2 06 OF PAPER BOOK) THE BREAKUP OF MANAGEMENT CONSULTANCY FEES IS AS UNDER: 37 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. PARTICULARS AMOUNT (IN USD) ADMINISTRATION CHARGES 12,900 AUDIT FEE 4,600 CONSULTANCY CHARGES 7,32,570 TOTAL 7,50,070 ADD 5% 37,504 GRAND TOTAL 7,87,574 20.5 LD. AR SUBMITTED THAT THE LD TPO DETERMINED TH E ALP AT NIL WITHOUT CONSIDERING THE DETAILS OF EXPENDITURE PROV IDED BY THE ASSESSEE. 20.6 LD. AR SUBMITTED THAT TEST OF COMMERCIAL EXPED IENCY FOR DETERMINING WHETHER THE EXPENDITURE WAS NECESSARY A ND REASONABLE HAS TO BE ADJUDGED FROM THE POINT OF VIEW OF THE BU SINESSMAN AND NOT OF THE REVENUE. EXPENDITURE CAN NEVER BE LINKED TO THE INCOME EARNINGS ABILITY OR THE VALUE ADDITION THE EXPENDIT URE HAS BOUGHT INTO THE BUSINESS AS THE SAME CANNOT BE QUANTIFIED. HENC E, THE LEGITIMACY OF EXPENDITURE CANNOT BE QUESTIONED. FOR THIS PROPO SITION HE RELIED ON THE FOLLOWING DECISIONS: 1. DRESSER-RAND INDIA (P) LTD. VS. ADDL.CIT (2011) 47 SOT 423 (MUM). 2. ERICSSON INDIA PVT. LTD. VS. DCIT (TS-319-ITAT- 2012-(DEL) 3. CIT VS. EKL APPLIANCES (ITA NOS 1068/2011 & 107 0/2011) 20.7 LD. AR SUBMITTED THAT WHETHER OR NOT TO ENTER INTO THE TRANSACTION IS FOR THE TAXPAYER TO DECIDE. THE QUAN TUM OF EXPENDITURE CAN BE EXAMINED BY THE TPO AS PER LAW BUT HE HAS NO AUTHORITY TO DISALLOW THE EXPENDITURE. HE RELIED ON THE FOLLOWIN G DECISIONS: 1. CIT VS WALCHAND & CO PVT LTD (65 ITR 381), 2. J.K. WOOLEN MANUFACTURERS VS CIT (72 ITR 612) 3. ALUMINIUM CORPORATION (86 ITR 11). 4. SASSON J DAVID & CO PVT LTD (1181TR 261) 5. CIT VS. KIRLOSKAR TRACTORS LIMITED (231 ITR 849 MUM) 38 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. 20.8 LD. AR SUBMITTED THAT THE TPO CANNOT DETERMIN E THE ALP OF A TRANSACTION AT RS. NIL. IN THIS CONNECTION, LD. AR RELIED ON THE FOLLOWING CASE LAWS: 1. SOCIAL MEDIA INDIA LTD VS ACIT ITA NO.1711/HYD /2012 2. THYSSEN KRUPP INDUSTRIES INDIA (P) LTD VS. ACIT MUMBAI (2012) 27 TAXMANN.COM 334 (MUM) 3. CASTROLLNDIA LTD V ASST CIT (2013) 29 TAXMANN.C OM 62 (MUM) 4. SC ENVIRO AGRO INDIA LTD VS. DCIT MUMBAI (2013) 34 TAXMANN.COM 127. 5.FESTO CONTROLS (P) LTD. VS. DCIT BANGALORE (2013 ) 30 TAXMANN.COM 16 6. LG POLYMERS (P) LTD. VS. ADDL. CIT (2011) 48 SO T 269/15 TAXMANN.COM 79. 7. QUINTILES RESEARCH (INDIA) PRIVATE LTD VS. THE DEPUTY COMMISSIONER OF INCOME TAX 1605/BANG/2012 8. ATOTECH INDIA LIMITED VS ACIT ITA NO 104/DEL/2 012 9. AWB INDIA PVT. LTD VS. ACIT ITA NO. 4454/DEL/2 011 10. TNS INDIA PVT. LTD. VS. ACIT ITA. NO. 944/HYD /2007 20.9 LD. AR SUBMITTED THAT THE HON'BLE TRIBUNAL IN ASSESSEE'S OWN CASE FOR AY 2008-09 DQ ENTERTAINMENT (INTERNATIONAL ) LTD. V, ACIT (2015J 64 TAXMANN.COM 360 (HYDERABAD - TRIB.) HELD THAT SERVICES IN FACT HAVE BEEN RENDERED BY ASSESSEES HOLDING COMPA NY AND THE TPO CANNOT TAKE THE AMOUNT OF ALP AS NIL AND ALLOWED TH E MANAGEMENT CONSULTANCY FEES PAID TO THE HOLDING COMPANY. THE OPERATIVE PORTION OF THE ORDER OF THE HON'BLE TRIBUNAL IS GIVEN BELOW : 6.2 AS CAN BE SEEN FROM THE ABOVE, THE TPO ANALYS ED THE ACCOUNTS OF DQ ENTERTAINMENT PIC AND DQE MAURITIUS IN ANALYZING THE NATURE OF PAYMENT. OUT OF THE TOTAL A MOUNT OF US$ 39 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. 7,99,000 PAID, THE ACTUAL MANAGEMENT CONSULTATION C HARGES WERE ONLY US$ 4,27,000 ALONG WITH ADMINISTRATIVE AN D AUDIT FEE OF US$ 14,000. AS PER THE AGREEMENT, THERE IS A MAR KUP OF 5%. THIS EXPENDITURE ONLY CAN BE CONSIDERED, IN OUR VIE W, AS THE MANAGEMENT CONSULTANCY SERVICE FEE, WHEREAS THE FOR EIGN EXCHANGE LOSS OF US$ 3,21,000 CANNOT BE CONSIDERED AS INTRA GROUP SERVICE. WE NOTICE FROM THE DOCUMENTS PLACED ON RECORD THAT INSTEAD OF QUARTERLY BILLS BEING RAISED AS PER THE AGREEMENT, DQE MAURITIUS HAS RAISED ONLY ONE BILL FOR THE WHOL E OF THE YEAR, WHICH WAS PLACED AT PAGE 170 OF THE PAPER BOOK. AS CAN BE SEEN FROM THE DETAILS OF PAYMENTS MADE, PLACED AT P AGE 171 OF THE PAPER BOOK, THE AMOUNT OF US$ 799,174 CHARGED O N 31-03- 08 WAS PAID IN THREE INSTALLMENTS OF US$ 3,00,000 O N 14-09- 2010, US $ 1,99,174 ON 25-10-2010 AND US$ 3,00,000 ON 04-01- 2011. IT IS NOTICED THAT EVEN THOUGH INVOICE WAS RA ISED ON 31-03- 2008 FOR WHOLE YEAR INSTEAD OF QUARTERLY BILLING, T HE PAYMENTS WERE MADE FROM SEPTEMBER, 2010 TO JANUARY, 2011 WIT H SUBSTANTIAL DELAY. THE REASONS FOR SUCH DELAYED PAY MENTS WERE NOT EXPLAINED. THEREFORE, WE ARE OF THE VIEW, THAT IN THE GIVEN CIRCUMSTANCES, THE FOREIGN EXCHANGES LOSSES OR GAIN S IN THE HANDS OF DQE MAURITIUS CANNOT BE CONSIDERED AS SERV ICES RENDERED BY THE DQE MAURITIUS TO ASSESSEE WHICH SHO ULD BE ON IT'S OWN ACCOUNT. TO THE EXTENT OF THE ABOVE AMOUNT , WE ARE IN AGREEMENT WITH THE OBSERVATION OF THE TPO IN PARA 8 .3 OF HIS LETTER DT. 08-11-2012, THAT FOREIGN EXCHANGE LOSS D OES NOT PERTAIN TO ANY MANAGEMENT AND CONSULTANCY SERVICES. TO THAT EXTENT HIS ORDER HAS TO BE APPROVED. 6.3 WHAT THE TPO HAS MISSED IS WITH REFERENCE THE A MOUNTS OTHER THAN FOREIGN EXCHANGE LOSS. IN THE ABSENCE OF ANY COMPARABLE FIGURES AND IN THE ABSENCE OF ANY FURTHE R ENQUIRY AND HAVING THE FACT THAT SERVICES HAVE BEEN RENDERED TO ASSESSEE AS ACCEPTED BY DRP ALSO, TPO CANNOT TAKE THE AMOUNT OF ALP AT NIL, IGNORING THE PAYMENT BY ASSESSEE OF US$ 4,27,0 00. AS PER THE AGREEMENT, ALL THE COSTS INCURRED BY THE DQE MA URITIUS WITH 5% MARKUP HAD TO BE CHARGED TO ASSESSEE. THEREFORE, AS PER THE DETAILS FURNISHED BY ASSESSEE BEFORE THE TPO, THE A CTUAL MANAGEMENT FEE OF US$ 4,27,000 WITH ADMINISTRATION CHARGES OF US$ 14000 AND MARKUP OF 5%, AT THE EXCHANGE VALUE A S ON THE DATE OF 31-03-2008, CAN BE CONSIDERED AS 'SERVICE C HARGES' FOR THE INTRA GROUP SERVICES RENDERED. THIS CAN BE TAKE N AS ALP. THEREFORE, MODIFYING THE ORDER OF TPO, WE DETERMINE THE MANAGEMENT CONSULTANCY FEE AS DETAILED ABOVE AND AO IS DIRECTED TO MODIFY THE ORDER ACCORDINGLY. 7. IN ARRIVING AT THE ABOVE, WE HAVE CONSIDERED THE OECD TRANSFER PRICING GUIDELINES 2010, CHAPTER-VII PERTA INING TO 'SPECIAL CONSIDERATIONS FOR INTRA GROUP SERVICES'. CONSIDERING THE ASSESSEE'S AGREEMENT WITH DQE MAURITIUS WHICH IN TU RN HAS AN AGREEMENT WITH DQ ENTERTAINMENT PIC, AND THE REIMBU RSEMENT OF 40 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. COST FROM ONE COMPANY TO ANOTHER, WE AGREE WITH THE TPO'S OBSERVATION THAT FOREIGN EXCHANGE LOSS IN FINANCIAL TRANSACTIONS CANNOT BE CONSIDERED AS 'SERVICE CHARGE' FOR THE IN TRA GROUP AND THEREFORE, WE AFTER CONSIDERING THE FACTS OF THE CA SE, RESTRICT THE AMOUNT TO THE ACTUAL MANAGEMENT FEES CHARGED BY THE DQE MAURITIUS ALONG WITH OTHER COST OF ADMINISTRATION A ND AUDIT AND MARK UP AT 5%. 20.10 SINCE THE SAME ISSUE ARISES FOR THE AY 2010- 11 ALSO, LD. AR PRAYED THE HON'BLE TRIBUNAL TO TREAT THE MANAGEMENT CONSULTANCY SERVICES OF RS. 3,70,53,448/- TO BE AT ARM'S LENGTH AND ALLOW THE SAME AS A DEDUCTIBLE EXPENDITURE. 21. LD. DR SUBMITTED THAT THE PAYMENT OF MANAGEMEN T FEE WAS MADE TO THE BOARD OF DIRECTORS (BOD) OF THE AE (DQ PLC.), THE ULTIMATE HOLDING COMPANY, AS THEY WERE RENDERING IN VALUABLE ADVICE AND GUIDANCE TO THE ASSESSEE COMPANY. THE BOARD OF DIRECTORS OF DQ PLC., HAVE BEEN INSTRUMENTAL IN BRINGING IN A NUMBE R OF PROJECTS WITH IMPORTANT CUSTOMERS. THESE PROJECTS HAVE BEEN EXECU TED BY DQ INDIA OVER THE PERIOD. FURTHER THE BUSINESS OF DQ INDIA I S GROWING WITH THE SUPPORT OF BOD OF DQ PLC. HOWEVER, THE BOD OF DQ PL C., INCLUDES MEMBERS FROM THE ANIMATION FIELD, CHILDREN ENTERTAI NMENT FIELD AND THOSE FROM THE FINANCIAL AND LEGAL BACKGROUND. THEI R EXPERIENCE AND CRITICAL ACTIONS HAVE ENABLED DQ INDIA TO EXPLOIT B USINESS OPPORTUNITIES WHICH ENABLED GROWTH IN THE COMPANY. THE DETAILS OF BOD FROM WHOM IT HAD RECEIVED ADVICE AND GUIDANCE - - TAPAAS CHAKRAVARTI - CHAIRMAN & CEO - K BALASUBRAMANIAN - NON EXECUTIVE DIRECTOR - THERESA PLUMMER ANDREWS - NON EXECUTIVE DIREC - ANTHONY BM GOOD - NON EXECUTIVE DIRECTOR - SANJAY SAXENA - NON EXECUTIVE DIRECTOR IT IS SEEN FROM THE SUBMISSION THAT DOE MAURITIUS H AS THE FOLLOWING KEY MANAGEMENT PERSONAL - 1. TAPAAS CHAKRAVARTI - DIRECTOR 2. MARC YAN FOOK CHEONG - DIRECTOR 3. LI FAP KIEN KAM YOUNG - DIRECTOR 41 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. AS PER THE ANNUAL REPORT OF THE TAXPAYER FOLLOWING ARE THE DIRECTORS - 1. TAPAAS CHAKRAVARTI - CMD & CEO 2. AKULA RAMAKRISHAN - ADDITIONAL DIRECTOR 3. LAKSHMINARAYAN NAGU - ADDITIONAL DIRECTOR 4. RASHMI CHAKRAVARTI - ADDITIONAL DIRECTOR 5. K. BALASUBRAMANIAN - ADDITIONAL DIRECTOR 6. THERESA PLUMMER ANDREWS - ADDITIONAL DIRECTOR 7. GIRISH KULKARNI - ADDITIONAL DIRECTOR 8. SANJAY KULKARNI - ADDITIONAL DIRECTOR (LATER RE SIGNED) THE OWNERSHIP PROFILE OF THE GROUP IS AS UNDER - DQE PLC., DQE (MAURITIUS) LTD., MAURITIUS DQE (INTERNATIONAL), INDIA DQE, IRELAND 21.1 LD. DR SUBMITTED THAT AS CAN BE SEEN THAT THE PERSONS TO WHOM MANAGEMENT SERVICES FEES WERE PAID WERE ALSO ON THE BOARD OF DIRECTORS OF THE TAXPAYER COMPANY. IT IS MENTIONED IN THE TP DOCUMENT THAT THE SERVICES PROVIDED RELATED TO DAY- TO-DAY OPERATIONS. THEREFORE THE SERVICES PROVIDED BY THE BOD OF DQ PL C., ARE NOTHING BUT A PART OF SHAREHOLDER ACTIVITY AND FOR DUPLICAT ION OF SERVICES. IT IS BUT NATURAL THAT ANY HOLDING COMPANY AND ITS DIRECT ORS WILL PROVIDE ADVICE AND GUIDANCE TO ITS STEP DOWN SUBSIDIARY. SU CH SERVICES DO NOT FORM PART OF THE 'INTRA GROUP SERVICES' AS PER THE OECD GUIDELINES. SHAREHOLDER ACTIVITIES, DUPLICATE SERVICES AND INCI DENTAL SERVICES FROM GROUP SERVICES DO NOT GIVE RISE TO INTRA-GROUP SERV ICES REQUIRING ARM'S LENGTH REMUNERATION. 21.2 LD. DR SUBMITTED FURTHER THAT, IN THIS CASE TH E HON'BLE DRP HAS DIRECTED TO PASS THROUGH AT COST ANY MAJOR ITEM OF THIRD PARTY EXPENSES, TO WHICH IT HAS NOT ADDED VALUE. ALL OTHE R COSTS WILL BE MARKED UP WITH A PROFIT ELEMENT OF 5%. ACCORDINGLY, THE TPO OBSERVED THAT THE FOLLOWING ARE THE COSTS: 42 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. PARTICULARS AMOUNT (IN USD) ADMINISTRATION CHARGES 12,900 AUDIT FEES 4,600 CONSULTANCY CHARGES 732,570 TOTAL 750,070 ADD 5% 37,504 GRAND TOTAL 787,574 LD. DR SUBMITTED THAT JUST LIKE THE LAST YEAR THE M AJOR ITEM OF COST IS CONSULTANCY CHARGES OF 732,570 USD. THESE ARE THE C HARGES PAID TO THE DQE PLC., WHICH ARE THE EXPENDITURES MADE BY IT AND WHICH IN TURN HAVE BEEN PROVIDING MANAGEMENT CONSULTANCY TO THE T AXPAYER. THERE IS NO VALUE ADDITION MADE BY THE TAXPAYER COMPANY A ND AS SUCH WERE REQUIRED TO BE PASSED THROUGH AT COST. OTHER ITEMS OF EXPENDITURE HAVE NO BEARING ON THE PROVISION OF THE MANAGEMENT CONSULTANCY SERVICE FEE. HENCE, THE TPO RELYING ON THE DIRECTIO NS OF THE DRP HAS RIGHTLY TREATED THE MANAGEMENT CONSULTANCY FEE AS N IL. 22. CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL FACTS ON RECORD AS WELL AS THE ORDERS OF R EVENUE AUTHORITIES AND CASE LAWS SUBMITTED. AFTER ANALYZING THE CASE L AWS AND ASSESSEES OWN CASE IN THE EARLIER YEAR, THE COORDI NATE BENCH OF THIS TRIBUNAL HAS ADJUDICATED THAT MANAGEMENT CONSULTAN CY CHARGES HAVE TO BE ALLOWED AS PER THE MOU AND OECD GUIDELINES. R ESPECTFULLY FOLLOWING THE EARLIER DECISION, WE ARE INCLINED TO ALLOW THE GROUNDS RAISED BY THE ASSESSEE. ACCORDINGLY, GROUND NO. 8 I S ALLOWED. 23. AS REGARDS GROUND NO. 9 PERTAINING TO MARK UP O N TRAVEL AND OTHER EXPENSES REIMBURSED BY THE AE OF RS. 77,36,98 5/-, IT IS OBSERVED THAT DQE INDIA HAD INCURRED EXPENSES ON BE HALF OF DQE IRELAND IN THE NATURE OF TRAVEL & OTHER EXPENSES. D QE INDIA RECOVERED THE SAME FROM DQE IRELAND ON THE BASIS OF ACTUAL CO STS INCURRED. IT WAS EXPLAINED BY ASSESSEE TO THE LD. TPO THAT, REIM BURSEMENT OF TRAVEL AND OTHER EXPENSES WERE INCURRED SOLELY ON B EHALF OF DQE 43 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. IRELAND, THIS TRANSACTION DID NOT IMPACT THE P&L OF DQ INDIA AND THAT IT WAS AT COST AND DID NOT AMOUNT TO ANY SERVICE RE NDERED. THE ASSESSEE RAISED BILLS AGAINST DQE (IRELAND) AT COST , AND EXPLAINED TO LD. TPO THAT IT IS IN GENERAL PRACTICE AMONG GROUP COMPANIES TO INCUR EXPENSES ON BEHALF OF GROUP COMPANIES AND TO RECOVE R THE SAME AT COST, AND THAT THESE TRANSACTIONS HAVE NO IMPACT ON PROFIT & LOSS ACCOUNT. 24. LD. TPO APPLIED MARK -UP ON REIMBURSEMENT OF TR AVEL AND OTHER EXPENSES @ 10%, STATING THAT THE SAME WAS REASONABL E WHICH ANY INDEPENDENT PARTY WOULD BE WILLING TO PAY. ASSESSEE SUBMITTED THAT IT IS ONLY REIMBURSEMENT OF EXPENSES INCURRED BY THE C OMPANY ON BEHALF OF ITS AE AND THERE IS NO SERVICES RENDERED. THIS R ESULTED IN AN ADJUSTMENT OF RS 7,73,699/- TO THE PROFIT OF THE AS SESSEE COMPANY. 25. WHEN THE ASSESSEE RAISED OBJECTION BEFORE THE D RP, THE DRP OBSERVED THAT THE RECEIPT OF REIMBURSEMENT HAS NOT BEEN ROUTED THROUGH BOOKS OF ACCOUNT. NO INDEPENDENT PARTY WOUL D RENDER SUCH SERVICES WITHOUT ANY MARK UP. EVEN OTHER WISE, RECO VERY OF EXPENSES ALWAYS FORMS PART OF OPERATING COST IN THE CASE OF INDEPENDENT COMPARABLE COMPANIES. THUS THESE EXPENSES INCURRED BY THE TAXPAYER AND SUBSEQUENTLY REIMBURSED BY AES NEED TO BE SUITABLY MARKED UP. THE TPO HELD A MARK-UP OF 10% FOR RENDER ING SERVICES. THE DRP, THEREFORE, HOLD THAT THE TPO WAS JUSTIFIE D AND ACCORDINGLY, DECLINED TO INTERFERE WITH THE ORDER OF THE TPO AND THE GROUND OF OBJECTION WAS REJECTED. 26. LD. AR SUBMITTED THAT DQE INDIA HAD INCURRED E XPENSES ON BEHALF OF DQE IRELAND IN THE NATURE OF TRAVEL & OTH ER EXPENSES. DQE INDIA RECOVERED THE SAME FROM DQE IRELAND ON THE BA SIS OF ACTUAL COSTS INCURRED. DURING THE ASSESSMENT YEAR 2010-11 THE ASSESSEE INCURRED AMOUNT OF RS.77, 36, 985/- ON BEHALF OF IT S AE DQE (IRELAND) TOWARDS TRAVEL EXPENSES AND OTHER EXPENSES. IT WAS SUBMITTED THAT, REIMBURSEMENT OF TRAVEL AND OTHER EXPENSES WERE INC URRED SOLELY ON BEHALF OF DQE IRELAND, THIS TRANSACTION DID NOT IMP ACT THE P&L OF DQ 44 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. INDIA AND THAT IT WAS AT COST AND DID NOT AMOUNT TO ANY SERVICE RENDERED. IT IS SUBMITTED THAT THE ASSESSEE RAISED BILLS AGAINST DQE (IRELAND) AT COST, AND SUBMITTED THAT IT IS IN GENE RAL PRACTICE AMONG GROUP COMPANIES TO INCUR EXPENSES ON BEHALF OF GROU P COMPANIES AND TO RECOVER THE SAME AT COST, AND THAT THESE TRANSAC TIONS HAVE NO IMPACT ON PROFIT & LOSS ACCOUNT. 26.1 LD. AR SUBMITTED THAT DESPITE THE SUBMISSIONS MADE LD TPO APPLIED MARK -UP ON REIMBURSEMENT OF TRAVEL AND OTH ER EXPENSES @ 10%, STATING THAT THE SAME WAS REASONABLE WHICH ANY INDEPENDENT PARTY WOULD BE WILLING TO PAY. IT IS SUBMITTED THA T IT IS ONLY REIMBURSEMENT OF EXPENSES INCURRED BY ASSESSEE ON B EHALF OF AE AND THERE IS NO SERVICES RENDERED THIS RESULTED IN AN ADJUSTMENT OF RS 7,73,699/- TO THE PROFIT OF THE ASSESSEE COMPANY . 26.2 LD. AR SUBMITTED THAT ACCORDING TO BLACK'S LA W 'REIMBURSE MEANS TO PAY BACK, TO MAKE RESTORATION, TO REPAY TH AT EXPENDED, TO INDEMNIFY OR MAKE WHOLE'. AS PER CONCISE OXFORD DIC TIONARY THE TERM REIMBURSE MEANS 'REPAY (A PERSON WHO HAS EXPENDED M ONEY) OR REPAY( A PERSON'S EXPENSES)' IN VIEW OF THE ABOVE D EFINITION BEING REIMBURSEMENT OF ACTUAL COST THERE IS NO INCOME ELE MENT IN EMBEDDED IN SUCH PAYMENT AND IS MERELY IN THE NATUR E OF REIMBURSEMENT. HENCE TO APPLY A MARKUP OF 10% BASED ON THE PROFIT EARNED BY THE ASSESSEE IS FACTUALLY AND LEGALLY INC ORRECT. 26.3 LD. AR SUBMITTED THAT IN M/S. COGNIZANT TECHNO LOGY SOLUTIONS INDIA PVT. LTD V, ACIT ITA NOS.114 & 2100(MDS)/2011 THE BENCH HELD THAT 'THE NEXT ISSUE RAISED BY THE ASSESSEE IS AGAI NST THE ADDITION MADE BY THE TRANSFER PRICING OFFICER ON THE GROUND OF REIMBURSEMENT OF EXPENSES. THE TRANSFER PRICING OFFICER HAS MADE A MARK UP OF 5 PER CENT ON CERTAIN TRAVEL COST INCURRED BY THE ASS ESSEE AND REIMBURSED BY ITS ASSOCIATE ENTERPRISE AND TREATED AS ADDITIONAL INCOME TO BE TAXED AS PART OF TRANSFER PRICING ADJU STMENT. BUT THE FACT IS THAT THE REIMBURSEMENT WAS MADE ON COST TO COST BASIS AND THERE IS NO RENDERING OF ANY SERVICE AND IT DOES NOT INVOLVE SERVICE ELEMENT. 45 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. WHAT IS INCURRED IS REIMBURSED. SO, THEREFORE, THER E IS NO PROFIT ELEMENT IN THE REIMBURSEMENT. IN SUCH SITUATION THE RE IS NO JUSTIFICATION IN MAKING A MARK UP OF 5 PER CENT. TH IS ADDITION IS ACCORDINGLY DELETED. THIS ISSUE IS DECIDED IN FAVOU R OF THE ASSESSEE.' 27. LD. DR SUBMITTED THAT THE TPO CONSIDERED MARKUP OF 10% ON THESE REIMBURSEMENTS AND ACCORDINGLY COMPUTED THE A LP AND ADJUSTMENT OF RS. 7,73,699/- WAS COMPUTED. HE SUBMI TTED THAT THE ASSESSEE SUBMITTED THAT THE MARKUP ADOPTED BY THE T PO OF 10% IS INCORRECT AND THE REIMBURSEMENTS RECEIVED ARE AT AR MS LENGTH. LD. DR SUBMITTED THAT THE TPO HAS CONSIDERED 10% MARKUP AS NO INDEPENDENT PARTY WOULD RENDER SUCH SERVICES WITHOU T ANY MARKUP. HENCE, THE MARK UP MADE IS CORRECT AND ACCORDINGLY, THE ALP ON REIMBURSEMENTS AND THE ADJUSTMENT THEREON IS CORREC T. 28. CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL FACTS ON RECORD AS WELL AS THE ORDERS OF R EVENUE AUTHORITIES. THE ASSESSEE AS A GROUP COMPANY, INCURRED TRAVELLIN G AND OTHER EXPENDITURE ON BEHALF OF DQE, MAURITIUS. ASSESSEE HAD RAISED THE BILL FOR REIMBURSEMENT ON COST TO COST BASIS, IT IS NORMAL IN THE CASE OF GROUP COMPANIES. THERE IS NO ELEMENT OF SERVICE IN THESE TRANSACTIONS. THESE TRANSACTIONS ARE NOT IN ANY WAY CONNECTED TO THE NATURE OF BUSINESS OF ASSESSEE. THESE ARE THE SERVI CES RENDERED BY OUTSIDERS FOR THE AES AND ONLY PAYMENT WAS MADE BY ASSESSEE AND GOT REIMBURSEMENT FROM AE. SINCE THERE IS NO ELEM ENT OF SERVICE BY THE ASSESSEE, ADDING MARKUP ON THESE KIND OF TRANSA CTIONS ARE NOT JUSTIFIED. AS HELD IN THE CASE OF M/S COGNIZANT TEC HNOLOGIES SOLUTION (SPRA), THE ADDITIONS MADE WERE DELETED BY CHENNAI BENCH OF ITAT. ACCORDINGLY, THE GROUNDS RAISED BY THE ASSESSEE ARE ALLOWED. 29. AS REGARDS GROUND NOS. 10 & 11, THE DRP OBSERVE D THAT THEY FIND THAT THERE IS NO GRIEVANCE ARISING OUT OF THIS ISSUE OF BONUS SHARES SINCE NEITHER THE TPO NOR AO MADE ANY ADDITI ON TO THE TOTAL INCOME OF THE ASSESSEE. THE TPO MADE A SUGGESTION I N THE ORDER TO REFER THE MATTER TO THE JURISDICTIONAL AO FOR APPRO PRIATE ACTION UNDER 46 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. THE LAW FOR FAILURE TO DEDUCT DIVIDEND DISTRIBUTION TAX. THE DRP, THEREFORE, HELD THAT THESE GROUNDS BECAME INFRUCTUO US AND DO NOT DESERVE ADJUDICATION, HENCE, REJECTED. 30. LD. AR SUBMITTED THAT THE AO/TPO IS LEGALLY AN D FACTUALLY INCORRECT IN MAKING AN ADJUSTMENT OF RS 751,83,46,2 02/- IN RESPECT OF BONUS SHARES ISSUED BY THE ASSESSEE TO ITS AE. HE S UBMITTED THAT THE AO/TPO ERRED IN BY HOLDING THAT THERE WAS EXCESS BE NEFIT IN THE HANDS OF THE AE AND THE SAME WAS DIVIDEND WHEN IN F ACT SHARE PREMIUM ACCOUNT IS UTILIZED FOR ISSUING BONUS SHARE S AS PER COMPANY LAW PROVISIONS. FURTHER, LD. AR SUBMITTED THAT AO/ TPO ERRED IN MAKING A REFERENCE TO THE JURISDICTIONAL AO OF INTE RNATIONAL TAXATION FOR TAKING UP PROCEEDINGS U/S 195 OF THE IT ACT WHE N THE ISSUE OF BONUS SHARES BY THE ASSESSEE WAS AT ARM'S LENGTH AN D CANNOT LEGALLY BE TREATED AS DIVIDEND OR OTHERWISE. 31. LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF DRP. 32. CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL FACTS ON RECORD AS WELL AS THE ORDERS OF R EVENUE AUTHORITIES. THE TPO MADE A GENERAL OBSERVATION IN HIS REPORT ON THE ISSUE OF BONUS SHARES BUT THE TPO OR THE AO HAD NOT MADE ANY ADDITION. SINCE THERE IS NO DEMAND RAISED, THE GROUND RAISED BY THE ASSESSEE ON THIS ISSUE BECOMES INFRUCTUOUS. HENCE, NEED NO A DJUDICATION. ACCORDINGLY, THE GROUND NOS. 10 & 11 ARE DISMISSED. 33. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 22 ND JUNE, 2016. SD/- SD/- (D. MANMOHAN) (S. RIFAUR RAHMAN) VICE PRESIDENT AC COUNTANT MEMBER HYDERABAD, DATED: 22 ND JUNE, 2016 47 ITA NO. 151 /HYD/2015 D.Q. ENTERTAINMENT (INTERNATIONAL) LTD. KV COPY TO:- 1) D.Q ENTERTAINMENT (INTERNATIONAL) LTD.), C/O PR ASAD & PRASAD, CAS., FLAT NO. 301, MJ TOWERS, 8-2-698, ROAD NO . 12, BANJARA HILLS, HYDERABAD 500 034. 2) ACIT, CIRCLE 17(1), HYD. 3) DRP, HYDERABAD 4. CIT, INTERNATIONAL TAXATION, INCOME TAX TOWERS, 10-2-3, AC GUARDS, HYD 500 004 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER