ACIT 11 (1), MUMBAI V. ZEE ENTERTAINMENT ENTERPRISES LTD, MUMBAI

ITA 2414/MUM/2013

• Counselvise Citation: 241419914 RSA 2013
• Duration Of Justice: 1 year(s) 4 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-08-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 28-07-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 28-03-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MANJUNATH SWAMY
• Assessee Lawyers: VIJAY MEHTA
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction; Earning of tax free income; Additional evidence; Bad and doubtful debts
• Section: 92C; 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES K MUMBAI . . , / BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER /AND . , SHRI D.KARUNAKARA RAO, ACCOUNTANT MEMBER . / ITA NO.2414/MUM/2013 / ASSESSMENT YEAR 2007-08 THE ACIT 11(1), ROOM NO.439, AAYKAR BHAVAN, M.K.ROAD, MUMBAI 400020 / VS. M/S. ZEE ENTERTAINMENT ENTERPRISES LTD., CONTINENTAL BLDG., 135,DR.A.B.ROAD, WORLI, MUMBAI 400 018 ! ./ '# ./ PAN/GIR NO. : AAACZ0243 ( !$ / APPELLANT ) .. ( %&!$ / RESPONDENT ) . / ITA NO.2474/MUM/2013 / ASSESSMENT YEAR 2007-08 M/S. ZEE ENTERTAINMENT ENTERPRISES LTD., CONTINENTAL BLDG., 135,DR.A.B.ROAD, WORLI, MUMBAI 400 018 / VS. THE ACIT 11(1), ROOM NO.439, AAYKAR BHAVAN, M.K.ROAD, MUMBAI 400020 ! ./ '# ./ PAN/GIR NO. : AAACZ0243 ( !$ / APPELLANT ) .. ( %&!$ / RESPONDENT ) REVENUE BY: SHRI. MANJUNATH SWAMY ASSESSEE BY : SHRI VIJAY MEHTA ' ( / DATE OF HEARING : 28/07/2014 )* ' ( / DATE OF PRONOUNCEMENT : /08/2014 . / ITA NO.2414& 2474/MUM/2013 / ASSESSMENT YEAR 2007-08 2 + / O R D E R PER I.P.BANSAL, J.M: THESE ARE CROSS APPEALS AND ARE DIRECTED AGAINST OR DER PASSED BY LD. CIT(A)-15, DATED 15/1/2013 FOR ASSESSMENT YEAR 2007 -08. GROUNDS OF APPEAL IN BOTH THE APPEAL READ AS UNDER: GROUNDS OF REVENUES APPEAL IN ITA NO.2414/MUM/2013 : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, WHETHER THE LD.CIT(A) WAS JUSTIFIED IN ACCEPTING THE ADDITIONAL EVIDENCE FILED BY THE ASSESSEE AS FRESH EVIDENCE UNDER RULE 46A OF THE I.T.RULES, 196 2 WHEN IT CAN BE SEEN FROM THE ORDER OF THE TPO THAT THE PROFIT LEVEL INDICATORS ( PLIS) CONSIDERED BY THE TPO FOR COMPARABLE COMPANIES ARE AS SUBMITTED BY THE ASSESS EE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, WHETHER THE LD.CIT(A) WAS JUSTIFIED IN ACCEPTING THE ADDITIONAL EVIDENCE FILED BY THE ASSESSEE AS FRESH EVIDENCE UNDER RULE 46A OF THE I.T.RULES, 196 2 WHEN NO PREJUDICE IS CAUSED TO THE ASSESSEE AS THE TPO CONSIDERED ONLY THOSE PLIS AS COMPUTED BY THE ASSESSEE. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, WHETHER THE LD.CIT(A) WAS JUSTIFIED IN ACCEPTING THE ADDITIONAL EVIDENCE FILED BY THE ASSESSEE AS FRESH EVIDENCE UNDER RULE 46A OF THE I.T.RULES, 196 2 WHEN THE ASSESSEE HAD BEEN GIVEN SUFFICIENT TIME TO SUBMIT THE COMPUTATION OF PLIS OF COMPARABLE COMPANIES. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, WHETHER THE LD.CIT(A) WAS JUSTIFIED IN CONSIDERING SUNDRY BALAN CES WRITTEN BACK AS OPERATING REVENUES WHEN THE SE IS ON ACCOUNT OF EXPENSES INCU RRED IN EARLIER YEARS AND DOES NOT SPRING OUT OF THE OPERATIONS CARRIED OUT BY THE \ ASSESSEE FOR THE F.Y.2006-07. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, WHETHER THE LD.CIT(A) WAS JUSTIFIED IN CONSIDERING EXCESS PROVI SIONS WRITTEN BACK WHEN THE SAME IS ON ACCOUNT OF PROVISIONS MADE IN EARLIER YEARS A ND DOES NOT SPRING OUT OF THE OPERATIONS CARRIED OUT BY THE ASSESSEE FOR THE F.Y. 2006-07. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, WHETHER THE LD. CIT(A) WAS JUSTIFIED IN CONSIDERING GAIN ON FOREIGN EXCHANGE FLUCTUATION AS OPERATING REVENUES WHEN THE SAME IS ARISING OUT OF FOREIGN EX CHANGE FLUCTUATIONS BEYOND THE SCOPE OF OPERATIONS OF THE ASSESSEE AND DOES NOT SP RING OUT OF THE OPERATIONS CARRIED OUT BY THE ASSESSES FOR THE F.Y.2006-07. 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, WHETHER THE LD.CIT(A) WAS JUSTIFIED IN REJECTING THE DEPRECIATI ON ADJUSTMENT CARRIED OUT BY THE TPO IN HIS REMAND REPORT DUE TO THE DIFFERENCES IN DEPRECIATION RATES FOLLOWED BY THE . / ITA NO.2414& 2474/MUM/2013 / ASSESSMENT YEAR 2007-08 3 ASSESSEE AND COMPARABLE COMPANIES UNDER STRAIGHT LI NE METHOD MATERIALLY IMPACTING THE PROFIT MARGIN. 8. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, WHETHER THE LD.CIT(A) WAS JUSTIFIED IN REJECTING THE DEPRECIATI ON ADJUSTMENT CARRIED OUT BY THE TPO IN HIS REMAND REPORT EVEN WHEN COMPARABLE COMPA NIES ARE FOLLOWING MORE ACCELERATED DEPRECIATION RATES THAN THAT OF THE ASS ESSEE, UNDER STRAIGHT LINE METHOD, MATERIALLY IMPACTING THE PROFIT MARGIN. GROUNDS OF ASSESSEES APPEAL IN ITA NO.2474/MUM/201 3: 1) THE LD. CIT (A) I TPO ERRED IN LAW AND FACTS IN: 1.1 ARBITRARILY APPLYING RELATED PARTY TRANSACTION (RPT) FILTER OF 15% INSTEAD OF 20% ONLY TO REJECT TWO MOST FUNCTIONALLY APPROPRIATE AN D SUITABLE COMPARABLES (NDTV & UTV). 1.2 ARBITRARILY APPLYING TURNOVER (TO) FILTER OF RS . 10 CR. (1.2%) AGAINST TESTED PARTYS TURNOVER OF 868 TO REJECT ONE COMPARABLE (A ASTHA) AND SELECT TWO COMPARABLES WITH TO OF RS.20 CRS & 38.56 CR. (LESS THAN 2% TO) (RAJ TV & CINEVISTA). THE CIT (A) / TPO OUGHT TO HAVE TAKEN A JUDICIOUS DECISION AND FIXED THE FILTER AT REASONABLE PERCENTAGE OF TO OF TESTED PAR TY TO BE COMPARABLE. 1.3 SELECTING A COMPARABLE CINEVISTA WHICH IS FUNCT IONALLY DIFFERENT AS WAS BAG FILMS A COMPARABLE REJECTED BY THE LD. TPO. 1.4 SELECTING THE COMPARABLE (RAJ TV) WHICH IS FUNC TIONALLY DIFFERENT AND WITH ONE CHANNEL, EXTRAORDINARY HIGH PROFITABILITY, LOW PROD UCTION COST, HUGE DEBTORS AND OTHER ABNORMALITIES. 1 .5 TAKING BOTH INCOME & EXPENSES OF RELATED PARTY AS RPT AND WORKING OUT RPT PERCENTAGE WITH REFERENCE TO TURNOVER INSTEAD OF WI TH REFERENCE TO TURNOVER PLUS TOTAL COST TO HAVE SIMILAR COMPOSITION OF DENOMINAT OR AND NUMERATOR. 1.6 UPHOLDING SHARE FROM TECHNICAL SERVICES AND FEES FROM TRAINING TREATED AS OPERATING REVENUE AND REJECTION OF JAIN TV AS COMPA RABLE IN THE REMAND REPORT FOR THE FIRST TIME WITHOUT THE JURISDICTION OF THE TPO TO MAKE SUCH CHANGES AT THE REMAND REPORT STAGE AND LD. CIT (A) UPHOLDING THE R EDOING OF THE TP ASST. IN REMAND REPORT. 1.7 NOT APPLYING THE PLI OF SONY / STAR WHICH ARE M OST APPROPRIATE COMPARABLES AND HAS FUNCTIONAL SIMILARITY AND COMPARABLE TURNOV ER WHICH ARE AVAILABLE WITH THE DEPTT. THE LD. CIT (A) FAILED TO APPRECIATE THAT IN THOSE CASES DEPTT. TAKING ASSESSEES COMPARABLE IN APPEAL AND ASSESSMENT OR B Y ISSUE OF NOTICE U/S.133 (6) OF THE ACT. 2. REJECTING SEGMENT ACCOUNTS SHOWING MARGIN OF 60% IN EXPORT DIVISION ON THE GROUND THAT THE SEGMENTAL INFORMATION IS NOT AUDITE D AND APPEARS THAT EXPENSES ARE ALLOCATED ON AD HOC AND ARBITRARY MANNER. . / ITA NO.2414& 2474/MUM/2013 / ASSESSMENT YEAR 2007-08 4 3. THE LD. CIT / TPO ERRED IN LAW AND FACTS IN APPL YING DIFFERENTIAL MARGIN TO ENTIRE SALES IN PLACE OF ONLY TO EXPORT SALES TO AES. THE REASONS GIVEN BY HIM FOR DOING SO ARE WRONG AND CONTRARY TO THE FACTS OF THE CASE & P ROVISIONS OF LAW. 4.1 THE LD. TPO FAILED TO GIVE PROPER OPPORTUNITY T O THE ASSESSEE AT THE TIME OF ORIGINAL ASSESSMENT AND REMAND PROCEEDINGS BY WAY O F SHOW CAUSE NOTICE FOR PROPOSED ADJUSTMENTS AND HON. CIT (A) REJECTING SUC H CONTENTION ON THE GROUND THAT HE HAS GIVEN OPPORTUNITY TO THE APPELLANT AT APPEAL STAGE. 4.2 THE LD. TPO DID NOT GIVE PROPER OPPORTUNITY OF HEARING TO THE ASSESSEE BY SHOW CAUSE OF HIS INTENTION TO MAKE ADJUSTMENTS OR CHANG ING THE METHOD OF COMPUTING PLI WHICH HAS BEEN ACCEPTED IN EARLIER YEARS. 5. THE LD. CIT (A) ERRED IN LAW AND FACTS IN NOT AD JUDICATING ASSESSEES CLAIM FOR ALLOWING 5% DEDUCTION FROM DIFFERENCE BETWEEN THE A RMS LENGTH PRICE DETERMINED (PLI OF COMPARABLES) AND PRICE AT WHICH THE INTERNA TIONAL TRANSACTION ACTUALLY UNDERTAKEN (PLI OF THE ASSESSEE) AS PER PROVISO TO SUB. SEC. (2) OF SEC. 92C OF THE ACT. 6. THE LD. CIT (A) TPO OUGHT TO HAVE EXCLUDED THE L OSSES OF THE NEW CHANNELS, NEW BUSINESS AND OTHER ABNORMALITIES FOR COMPUTING PLI OF THE ASSESSEE TO HAVE BETTER COMPARABILITY. DISALLOWANCE U/S 14A: 7.1 THE LD. CIT (A) ERRED IN LAW AND FACTS IN UPHOL DING THE DISALLOWANCE OF RS 6,80,401/- U/S 14A OUT OF INTEREST BY CONSIDERING I NTEREST OF RS 52,84,750/- & RS.2,69,88,393/- ON WORKING CAPITAL LOANS AS INDIRE CT INTEREST AND APPLYING FORMULA PRESCRIBED UNDER RULE 8D AND FAILED TO CONSIDER THE SE INTEREST RELATED TO BUSINESS AND DEDUCT FROM TOTAL INTEREST FOR CALCULATING DISA LLOWANCE AS PER RULE 8D. 7.2 THE LD. CIT (A) ERRED IN LAW AND FACTS IN UPHOL DING THE INTEREST OF RS. 52,84,750/- ON FCCB IS NOT DIRECTLY ATTRIBUTABLE TO BUSINESS AND DID NOT DEDUCT FROM TOTAL INTEREST AS PER RULE 8D (2) (II). HE FAI LED TO APPRECIATE THAT FCCB PROCEEDS CANNOT BE USED FOR THE PURPOSES OTHER THAN THOSE SP ECIFIED IN THE PROSPECTUS / ISSUED DOCUMENT AND DOES NOT PERMIT USE IN INVESTME NTS. 7.3 THE LD. CIT (A) ERRED IN LAW AND FACTS IN UPHOD ING THAT INTEREST OF RS. 2,69,88,393/- PAID TO BANKS ON WORKING CAPITAL IS N OT ATTRIBUTABLE TO BUSINESS AND DID NOT DEDUCT FROM TOTAL INTEREST AS PER RULE 8D ( 2) (II). HE FAILED TO APPRECIATE THAT WORKING CAPITAL FINANCE CANNOT BE USED OR DIVERTED TO INVESTMENTS AS PER THE TERMS OF SANCTION. 7.4 THE LD. CIT (A) ERRED IN LAW AND FACTS IN NOT F OLLOWING THE JUDGEMENT OF THE JURISDICTIONAL HC (BOMBAY HC) IN THE CASE OF RELIAN CE POWER & UTILITIES LTD., 313 ITR 340 AND FAILED TO DELETE THE DISALLOWANCE OF INTER EST U/S 14A OF THE ACT EVEN WHEN APPELLANTS NETWORTH FAR EXCEEDS SUCH INVESTMENTS. 7.5 THE LD. CIT (A) ERRED IN LAW AND FACTS IN UPHOL DING THE DISALLOWANCE OF RS. 26,71,000/- U/S 14A OUT OF EXPENSES AS PER RULE 8D WITHOUT GIVING ANY SPECIFIC . / ITA NO.2414& 2474/MUM/2013 / ASSESSMENT YEAR 2007-08 5 FINDING OF INCURRING EXPENSES TO EARN EXEMPT INCOME AS HELD BY DELHI HO IN THE CASE OF HERO CYCLES 7.6 THE LD. CIT (A) ERRED IN LAW AND FACTS IN UPHOL DING COMPUTATION OF DISALLOWANCE U/S 14A OF THE ACT AS PER RULE 8D EVEN WHEN RULE IS NOT APPLICABLE TO THE YEAR UNDER APPEAL AS HELD BY BOMBAY HIGH COURT IN THE CA SE OF GODREJ. 2. THE SOLE ISSUE RAISED BY THE REVENUE IN ITS APPE AL IS REGARDING TRANSFER PRICING(T.P) ADJUSTMENT OF RS. 137,46,33,244/-. T HE ASSESSEE ALSO IN ITS APPEAL IS AGGRIEVED BY THE T.P ADJUSTMENT, PART OF WHICH H AS BEEN UPHELD BY LD. CIT(A). 3. THE ASSESSEE HAD REPORTED FOLLOWING INTERNATIONA L TRANSACTIONS WITH ITS A.ES. S.NO. NATURE OF TRANSACTION F.Y.2006-07 METHOD USED BY THE ASSESSEE. F.Y. 2005-06 1. SALE OF TV PROGRAMS AND FILMS 837,860,756 TNMM 749,671,866 2. PERFORMANCE FEE (RECEIVED) 932,200 CUP - 3. AGENT FOR SPACE SELLING(RECEIVED) 54,011,514 CUP 27,272,550 4. PLAYOUT FACILITY CHARGES(RECEIVED) 21,375,37 9 CUM - 5. DISTRIBUTION OF PAY TV(RECEIVED) 143,241,930 C UP 140,303,636 6. DISTRIBUTION OF PAY TV(PAID) 28,648,386 28,060,727 7. INTEREST RECEIVED 16,361,769 CUP 21, 203,872 8. INTEREST PAID ON INSTALLMENTS - C UP 972,307 9. TRANSMISSION SERVICES PAID 49,824,563 CUP 67,190.905 10. REIMBURSEMENTS RECEIVED 71,759,644 ACTUAL S 34,012,372 11. PURCHASE OF ASSETS/RIGHTS - CPM 1,123,750 TOTAL 122,40,16,141 106,86,88,235 THE T.P ADJUSTMENT HAS BEEN MADE ONLY WITH RESPECT TO TRANSACTION MENTIONED AT SL.NO.1 I.E. FOR A SUM OF 83.78 CRORES. THE ASSESS EE HAD PURCHASED TELEVISION PROGRAMS AND HAS SOLD THESE PROGRAMS (WHICH ARE ALR EADY EXPLOITED BY THE ASSESSEE ON ITS INDIAN CHANNELS) TO ITS BROADCASTE RS OVERSEAS AT A PRE-DETERMINED PRICE. WHILE DETERMINING THE ALPS OF THE ABOVE TRA NSACTION THE ASSESSEE ADOPTED TNMM METHOD AND PROFIT LEVEL INDICATOR(PLI) IS THE OPERATING PROFIT TO SALES. THE ASSESSEE IS THE TESTED PARTY AND 12 COMPANIES WERE IDENTIFIED AS COMPARABLES BY THE ASSESSEE. ACCORDING TO DATA FOR FINANCIAL YEA R 2006-07 THE ARITHMETICAL MEAN OF 12 COMPARABLES WERE COMPUTED AT 31.31% AS AGAINS T PLI OF THE ASSESSEE AT 32.25% AND THUS, THE TRANSACTION WAS SHOWN AT ARMS LENGTH. . / ITA NO.2414& 2474/MUM/2013 / ASSESSMENT YEAR 2007-08 6 3.1 DURING THE TP PROCEEDINGS IT CAME TO THE NOTIC E OF TPO THAT PLI TAKEN BY THE ASSESSEE WAS NOT CORRECT AND ACCORDINGLY THE SA ME WAS RECALCULATED AND THE POSITION OF THE COMPARABLE COMPANIES ARITHMETICAL M EAN AND ASSESSEES PLI ARE STATED IN THE FOLLOWING TABLE WHICH ALSO APPEARS AT PAGE THREE OF THE ORDER OF THE TPO. S.NO. NAME OF THE COMPARABLE COMPANY TOTAL COST (FOR FY 2006-07 ONLY) OPERATING PROFIT (FOR F.Y 2006-07 ONLY) % UPDATED PLI (OP/TC) (FOR FY 2006-07 ONLY) % 1. NEW DELHI TELEVISION LTD. 275.94 6.51 2 .36 2. BAG FILMS LTD. 35.29 9.48 26.86 3. CINEVISTAAS LIMITED 11.31 7.14 63.13 4. SRI ADHIKARI BROTHERS LTD. 17.27 18.64 107 .93 5. UTV NETWORK LIMITED 156.58 -4.13 -2.64 6. IBN18 BROADCAST LTD. 94.13 -17.27 -18.35 7. AASTHA BROADCASTING LTD. 9.82 0.1 1.02 8. JAIN STUDIOS LIMITED 18.28 3.85 21 .06 9. RAJ TELEVISION NETWORK LTD. 21.28 17.28 81.20 10. TV TODAY LIMITED 133.58 55.33 41.42 11. ETC NETWORKS LIMITED 28.86 2.09 7.24 12. TV 18 INDIA LIMITED 134.3 59.66 44.42 ARITHMETIC MEAN 31.31 ASSESSEE 655.58 273.54 41.72 3.2 FROM THE ABOVE COMPARABLES IT WAS NOTICED BY TH E TPO THAT SOME OF THE ABOVE COMPARABLES WERE HAVING SIGNIFICANT RELATED P ARTY TRANSACTIONS(RPT), THEREFORE, HE PROPOSED THE ASSESSEE TO EXCLUDE SEVE N COMPARABLES ( I.E. COMPARABLES ON THE GROUND THAT THEY WERE HAVING RPT OF MORE THAN 20% SL.NO.2,4,5,6,11,12) AND ONE COMPARABLE HAVING SALE TURNOVER LESS THAN RS.10.00 CRORES (I.E. SL.NO.7). IN RESPONSE TO SUCH QUERY O F THE TPO REVISED CALCULATION WAS FILED BY THE ASSESSEE TO SHOW THAT ARITHMETIC MEAN OF COMPARABLES IS 33.49% AND ASSESSEES PLI IS 41.72%. THIS TABLE IS ALSO A PPEARING AT PAGE 3 & 4 OF ORDER OF TPO. S.NO. NAME OF THE COMPARABLE COMPANY PLI% T/O RPT RPT(%) 1. RAJ TELEVISION METWORK LTD. 69.38 40.37 0 0.00 2. NEW DELHI TELEVISION LTD. -0.23 282.45 2.91 1.03 3. B A G FILMS & MEDIA LTD. 27.14 44.14 0.38 0. 86 4. CINEVISTAAS LTD. 58.02 20.02 0 0.00 5. SRI ADHIKARI BROTHERS TELEVISION 76.42 39.94 16.29 40.79 . / ITA NO.2414& 2474/MUM/2013 / ASSESSMENT YEAR 2007-08 7 NETWORK LTD. 6. AASTHA BROADCASTING NETWORK LTD. 3.46 9.52 - 0.00 7. IBN 18 BROADCAST LTD. -18.02 78.88 24.88 31.54 8. TTV TODAY NETWORK LTD. 47.56 188.91 1.36 0 .72 9. E T.C NETWORK LIMITED 32.12 46.30 0.08 0. 17 10. JAIN STUDIOS LTD. 41.27 21.54 2.4 11.14 11. TV 18 INDIA LTD. 40.29 193.95 7 3.61 12. UTV SOFTWARE COMMUNICATIONS LTD. 24.48 174.91 31.82 18.19 ARITHMETIC MEAN 33.49 ASSESSEE 41.72 3.3 THAT THE COMPARABLES WHICH ARE HAVING RPT ABOVE 15% ARE EXCLUDED BY THE TPO FROM THE LIST OF COMPARABLES. FINALLY, TPO TOOK THE FINAL SET OF FIVE COMPARABLES AND COMPUTED THEIR ARITHMETICAL MEAN AT 51.30% AS PER FOLLOWING TABLE. S.NO. NAME OF THE COMPARABLE COMPANY PLI% T/O RPT (RS. IN CRORES) RPT(%) 1 RAJ TELEVISION METWORK LTD. 69.38 40.37 0 0.00 4 CINEVISTAAS LTD. 58.02 20.27 0 0.00 8 TV TODAY NETWORK LTD. 47.56 188.91 1.36 0.72 10 JAIN STUDIOS LTD 41.27 21.54 2.4 11.14 11 TV 18 INDIA LTD. 40.29 193.95 7 3.61 ARITHMETIC MEAN 51.30 ASSESSEE 41.72* 3.4 THE TPO ALSO RECALCULATED PLI OF THE ASSESSEE A T 30.61% AND AN ADDITION OF RS.137,46,33,244/- WAS MADE ACCORDING TO FOLLOWING TABLE. S.NO. PARTICULARS AS PER ASSESSEE (FORM 3CEB) ALP DETERMINED BY DEPARTMENT 1. SALES: 86,76,786 100,51,419 (A) TO AES 837,861 22,12,494 (B) TO NON-AES 78,38,925 78,38,925 2. OPERATING COSTS (OC) 66,43,370 66,43,370 3. OPERATING PROFIT (OP) 20,33,416 34,08,049 4. OP/OC 30.61% 51.30% 5. DIFFERENCE BETWEEN ALP OF SALES AND VALUE OF INTERNATION TRANSACTION (RS.22,12,494 RS.837,861) 13,74,633 6 APPLICATION OF +/- 5% RANGE: (95% * RS.22,12,494) + 21,01,869 DOES NOT FALL WITHIN 5% RANGE . / ITA NO.2414& 2474/MUM/2013 / ASSESSMENT YEAR 2007-08 8 4. THE AFOREMENTIONED ADDITION WAS CHALLENGED IN AN APPEAL FILED BEFORE LD. CIT(A). CERTAIN ADDITIONAL EVIDENCES WERE FILED IN THE SHAPE OF AUDITED ACCOUNTS OF THE COMPARABLES WHICH WAS ADMITTED BY LD. CIT(A) AND REMAND REPORTS WERE CALLED FOR. ACCORDING TO ASSESSEE THE FIGURES O N THE BASIS OF WHICH PLI WAS COMPUTED IN RESPECT OF COMPARABLES WERE NOT CORRECT AS THE SAME WERE BASED ON DATA TAKEN FROM DATA BASE. HOWEVER, FULL DETAILS W ERE MENTIONED IN ANNUAL AUDITED ACCOUNTS WHICH WERE NOT TAKEN INTO ACCOUNT. THIS ISSUE IS DISCUSSED BY LD. CIT(A) IN PARA 4.3 OF HIS ORDER. THE ASSESSEE OBJECTED TO THE REJECTION OF COMPARABLES ON THE GROUND THAT TPO WAS NOT RIGHT IN EXCLUDING THE COMPARABLES HAVING MORE THAN 15% OF RPT FOLLOWING T HE DECISION OF ITAT IN THE CASE OF SONY INDIA PVT. LTD . AFTER RECEIVING THE COMMENTS OF THE TPO AND THE SUBMISSIONS OF THE ASSESSEE LD. CIT(A) HAS COME TO A CONCLUSION THAT RPT FILTER APPLIED BY THE TPO EXCLUDING COMPARABLES OF MORE TH AN 15% RPT TRANSACTIONS IS IN ORDER. HOWEVER, LD. CIT(A) ACCEPTED THE CONTENT ION OF THE ASSESSEE THAT ADJUSTMENT ON ACCOUNT OF DEPRECIATION CANNOT BE DON E AS SUGGESTED BY TPO IN THE REMAND REPORT. 5. THE ASSESSEE IN ITS APPEAL IS AGGRIEVED BY THE O RDER OF LD. CIT(A) ON SEVERAL COUNTS WHICH INTER-ALIA INCLUDE EXCLUSION OF UTV SO FTWARE COMMUNICATIONS LTD. AS ONE OF THE COMPARABLE PARTY. IT IS THE MAIN CAS E OF THE ASSESSEE THAT SINCE RPT TRANSACTION IN THE CASE OF UTV SOFTWARE COMMUNICATI ONS ARE LESS THAN 25%, THEREFORE, THE SAME CANNOT BE EXCLUDED FROM THE LIS T OF COMPARABLES AND IF THE SAID PARTY IS INCLUDED IN THE LIST OF COMPARABLES, THEN THE PLI OF THE ASSESSEE WILL BE WITHIN THE SAFE HARBOUR OF +/- 5% AND OTHER ISS UE ON WHICH TP ADJUSTMENT HAS BEEN ASSAILED WILL BECOME ACADEMIC. 6. ON THE OTHER HAND, IT IS THE CASE OF THE REVENUE THAT LD. CIT(A) HAS COMMITTED AN ERROR IN ADMITTING THE ADDITIONAL EVID ENCES IN THE SHAPE OF FINAL AUDITED ACCOUNTS OF THE COMPARABLES. IT IS ALSO TH E CASE OF THE REVENUE THAT LD. CIT(A) HAS COMMITTED AN ERROR IN HOLDING THAT THE M ARGIN OF THE COMPARABLES CANNOT BE ADJUSTED AS PER DEPRECIATION CLAIM OF THE ASSESSEE. . / ITA NO.2414& 2474/MUM/2013 / ASSESSMENT YEAR 2007-08 9 7. IT IS ON THE BASIS OF THESE SUBMISSIONS AND ARGU MENTS BOTH THE PARTIES HAD ARGUED THE ISSUE RELATING TO TP ADJUSTMENT. 8. IT WAS SUBMITTED BY LD. AR THAT DURING THE COURS E OF HEARING BEFORE LD. CIT(A) TPO SUBMITTED TWO REMAND REPORTS DATED 16/3/ 2012 AND 19/6/2012, COPIES OF WHICH ARE PLACED AT PAGES 164 TO 176 AND 240 TO 247 RESPECTIVELY. LD. AR SUBMITTED THAT FINALLY THE TPO HAS ACCEPTED FOUR COMPARABLES AND THEIR ARITHMETIC MEAN HAS BEEN COMPUTED BY HIM AT 42.75%. HE IN THIS REGARD REFERRED TO THE OBSERVATIONS OF TPO IN REMAND REPOR T DATED 19/6/2012. THE RELEVANT PORTION OF WHICH READ AS UNDER.: 5. FINAL COMPARABLES: BASED ON THE ABOVE DEPRECIATION ADJUSTMENT, THE FOL LOWING ARE THE ADJUSTED MARGINS OF THE FINAL COMPARABLE COMPANIES THAT MAY BE CONS IDERED BY THE CIT(A). (PLEASE REFER TO ANNEXURE C) (RS. IN CRORES) S.NO. NAME OF THE COMPANY OPERATING REVENUES ADJUSTED OPERATING COST ADJUSTED OPERATING PROFIT ADJUSTED PLI (OP/TC%) 1. RAJ TELEVISION NETWORK LTD. 38.56 24.25 14.31 58.22% 2. CINEVISTAAS LTD. 20.06 13.71 6.35 46.29 % 3. TV TODAY NETWORK LTD. 194.51 145.79 48.72 3 3.42% 4. TV 18 INDIA LTD. 194.58 146.22 48.36 33.08% ARITHMETIC AL MEAN 42.75% THUS THE ARITHMETICAL MEAN MARGIN MAY HAVE TO BE RE VISED TO 42.75% ON COST FROM 51.30% AS COMPUTED BY THE TPO. EVEN UNDER THESE CI RCUMSTANCES, THERE WOULD AN ADJUSTMENT TO THE PRICE CHARGED IN ITS ASSOCIATED E NTERPRISES IN RESPECT OF SALE OF TV PROGRAMS AND FILMS. 8.1 IN THE SECOND REMAND REPORT LD. TPO HAS WORKED OUT FINAL TP ADJUSTMENT OF RS.76,28,53,000 IN PLACE OF ADDITION CALCULATED IN THE ASSESSMENT ORDER OF RS.137,46,33,244/-. IT WAS THE SUBMISSION OF LD. AR THAT AFOREMENTIONED FOUR COMPARABLES ARE FINALLY SELECTED BY THE TPO AFTER E XCLUDING UTV SOFTWARE COMMUNICATIONS LTD. FROM THE LIST OF COMPARABLES ON THE GROUND THAT RPT IN THAT CASE HAD EXCEEDED BENCH MARK OF 15% AS THE RPT TRA NSACTION IN THAT CASE WERE . / ITA NO.2414& 2474/MUM/2013 / ASSESSMENT YEAR 2007-08 10 TO THE TUNE OF 18.19%. HE IN THIS REGARD REFERRED TO TPOS ORDER IN WHICH IN PARA-7 THE TABLE SHOWING RPT TRANSACTION OF COMPARA BLES IS MENTIONED AND THE SAID TABLE IS ALSO REPRODUCED IN THE ABOVE PART OF THIS ORDER IN PARA-3.2. IT WAS THE SUBMISSION OF LD. AR THAT BENCH MARK OF 15% IN RELATION TO RPT HAS BEEN FIXED BY TPO ON THE BASIS OF DECISION OF TRIBUNAL IN THE CASE OF SONY INDIA (P) LTD., 114 ITD 448(DEL). IT WAS SUBMITTED BY HIM TH AT IN SEVERAL DECISIONS ITAT AFTER CONSIDERING THE DECISION OF SONY INDIA (P) LT D. (SUPRA) HAS COME TO THE CONCLUSION THAT BENCH MARK FOR RPT FILTER SHOULD BE APPLIED AT 25% INSTEAD OF 15%. LD. AR REFERRED TO THE FOLLOWING DECISIONS O F TRIBUNAL FOR TAKING THIS VIEW AND COPIES OF THESE DECISIONS ARE ALSO ENCLOSED. (A) ACTIS ADVISERS PVT. LTD. V. DCIT AND VICE VERSA FOR A.YS. 2006-07 AND 2007-08 IN ITA NOS.958/DEL/2012 AND 5277/DEL/2011 D ATED 12.10.2012 (AFTER CONSIDERING SONY INDIA PVT. LTD). (B) DSM ANTI INFECTIVES INDIA LTD. V. DCIT AND VICE VERSA FOR A.YS. 2005- 06 AND 2006-07 IN ITA NOS. 1395/CHD/2010 AND 1455/CHD/ 2010 DATED 08.08.2013 (AFTER CONSIDERING SONY INDIA PVT. LTD). (C) GLOBAL LOGIC INDIA PVT. LTD. V. DCIT FOR A.Y. 2 006-07 IN ITA NO. 5110/DEL/2010 DATED 1.12.2012 (AFTER CONSIDERING SO NY INDIA PVT. LTD.). 8.2 FROM THE DECISION IN THE CASE OF ACTIS ADVISERS PVT. LTD.(SUPRA) OUR ATTENTION WAS DRAWN TO THE FOLLOWING OBSERVATIONS O F THE TRIBUNAL: 29. WE HAVE HEARD THE RIVAL CONTENTIONS. THE EXPRE SSION RELATED PARTY TRANSACTION (RPT) HAS NOT BEEN DEFINED IN THE ACT. THE ITAT IN THE CASE OF SONY INDIA HAD EXAMINED THE FACTS OF THAT CASE FOR VERIFYING THE ARMS LENGTH PRICE OF THE ASSESSEE. THE ITAT HAS NOT INTERPRETED ANY PROV ISIONS OF LAW WHICH CAN BE PROPOUNDED AS LAYING DOWN THE RATIO OF LAW. THE ITA T HAS JUST MADE A REFERENCE TO A FIGURE WHICH MAY BE RELEVANT WHILE ADJUDICATING T HE ISSUE IN THE FACTS OF THAT CASE. IT MAY BE A GUIDING FACTOR WHILE CONSIDERING THE CA SES OF THE ASSESSEE IN OTHER APPEALS. BUT NEITHER IT IS A RATIO OF LAW NOR IT CA N BE GIVEN STATUS OF A STATUTE, WHICH HAS A BINDING EFFECT ON ALL OTHER ADJUDICATING AUTH ORITIES. THE ACT DOES NOT PROVIDE DIRECTLY AS TO WHAT PERCENTAGE OF A RELATED PARTY T RANSACTION HAS TO CONSIDERED FOR EXCLUSION. HOWEVER, IF WE LOOK TO THE SCHEME OF INC OME-TAX ACT, THEN IT WOULD BE REVEAL THAT EXPRESSION ASSOCIATE ENTERPRISES WHIC H IS SOMEWHAT SIMILAR TO THAT OF RELATED PARTY, HAS BEEN DEFINED IN SECTION 91A(2) (A) OF THE ACT. ACCORDING TO THIS . / ITA NO.2414& 2474/MUM/2013 / ASSESSMENT YEAR 2007-08 11 DEFINITION, IF AN ENTERPRISES HOLDS 26% SHARE IN TH E OTHER ENTERPRISES THEN IT CAN BE CONSIDERED AS AN ASSOCIATE ENTERPRISES. SIMILARLY, UNDER SEC. 40A(2)(B) OF THE ACT, INTERESTED PERSONS HAVE BEEN EXPLAINED, IF A PERSON IS HAVING NOT LESS THAN 20% OF VOTING POWER IN A COMPANY THEN SUCH PERSON WOULD BE CONSIDERED AS SUBSTANTIAL INTEREST IN THE COMPANY. THIS SECTION RELATES TO EX AMINATION OF THE CASES WHERE SOME UNDUE BENEFIT IS BEING EXTENDED BY A COMPANY. THESE TWO PROVISIONS GIVE AN INDICATOR THAT WHENEVER ANY ISSUE REGARDING AN INTE REST CREATED IN ANY COMPANY IS BEING EXAMINED WHICH HAS INFLUENCED OVER THE RESULT S OF THE COMPANY THEN THESE ASPECTS CAN BE TAKEN AS GUIDANCE. ON THE BASIS OF T HE SCHEME, ONE CAN SAFELY SAY THAT AN ENTITY CAN BE TAKEN AS UNCONTROLLED, IF ITS RELATED PARTY TRANSACTION DO NOT EXCEED 25% OF THE TOTAL REVENUE. THUS, WE DO NOT FI ND ANY FAULT IN THE CONCLUSION OF THE LEARNED TPO FOR APPLYING THIS FILTER TO THE EXT ENT OF 25% TRANSACTION WITH RELATED PARTY OF THE TOTAL REVENUE. THE CONTENTIONS RAISED BY THE LEARNED COUNSEL FOR THE ASSESSEE IN THIS REGARD ARE REJECTED. 8.3 FROM THE DECISION IN THE CASE OF DSM ANTI INFEC TIVES INDIA LTD. VS. DCIT(SUPRA) OUR ATTENTION WAS DRAWN TO THE FOLLOWI NG OBSERVATIONS OF THE TRIBUNAL: 60. SIMILAR VIEW HAS BEEN LAID DOWN BY OTHER BENCH ES OF THE TRIBUNAL. THE LEARNED AR, FAR THE ASSESSEE PLACED STRONG RELIANCE ON THE ISSUE LAID DOWN IN SONY INDIA (P) LTD. AND CRM SERVICES INDIA (P) LTD (SUPRA) BUT W E FIND NO MERIT IN THE STAND OF THE ASSESSEE. APPLYING THE RATIO LAID DOWN BY DELHI BE NCH OF THE TRIBUNAL IN ACTIS ADVISERS PVT. LTD. VS. DCIT (SUPRA) WE HOLD THAT TH E AN ENTITY WITH WHOM RELATED PARTY TRANSACTION DO NOT EXCEED 25% OF THE TOTAL RE VENUE, IS AN UNCONTROLLED ENTITY. APPLYING THE ABOVE SAID FILTER TO THE FACTS OF THE PRESENT CASE WE ARE IN CONFORMITY WITH THE REPORT OF THE TPO IN ASSESSMENT YEAR 2006- 07 IN SELECTING AUTOMBINDO PHARMA LTD. AS ONE OF THE COMPARABLES WHICH ADMITTE DLY HAD RPT OF 21.77% TO THE SALES. THE SAID RESULTS AS DO NOT EXCEED THRESHOLD OF RELATED PARTY TRANSACTION TO BE APPLIED FOR BENCHMARKING THE COMPARABLES AND HENCE THE RESULTS OF SUCH COMPANIES WERE TO BE APPLIED IN ORDER TO DETERMINE ARMS LENGT H PRICE OF INTERNATIONAL TRANSACTION ENTERED UPON BY THE ASSESSEE. THE SAID COMPANIES SHOULD ALSO BE USED AS FILTER IN THE PRECEDING YEAR IN CASE THE RELATED PARTY TRANSACTIONS WERE NOT MORE THAN 25% OF THE TOTAL REVENUE. 8.4 FROM THE DECISION IN THE CASE OF GLOBAL LOGIC I NDIA PVT. LTD. V. DCIT OUR ATTENTION WAS DRAWN TO THE FOLLOWING OBSERVATIONS: 5.17 IN THE BACKGROUND OF THE AFORESAID DISCUSSION AND PRECEDENTS, WE HOLD THAT AN ENTERPRISE IS TO BE CONSIDERED AS UNCONTROLLED F OR THE PURPOSE OF BENCHMARKING ANALYSIS OF THE RATIO OF RELATED PARTY TRANSACTION TO THE RELEVANT BASE I.E. SALES OR COST DOES NOT EXCEED THE LIMIT OF 25%. THE RELATED PARTY TRANSACTION REFERRED HERE ARE THOSE WHICH HAVE A BEARING ON THE NET PROFIT OF THE ENTERPRISE. . / ITA NO.2414& 2474/MUM/2013 / ASSESSMENT YEAR 2007-08 12 IT WAS SUBMITTED BY LD. AR THAT IF UTV SOFTWARE IS INCLUDED IN THE LIST OF COMPARABLES THEN EVEN AFTER GIVING EFFECT TO DEPREC IATION ADJUSTMENT THE PLI OF THE ASSESSEE WILL BE WITHIN SAFE HARBOUR OF +/- 5% AND, THEREFORE, NO ADDITION WOULD SURVIVE. LD. AR REFERRED TO THE FOLLOWING C ALCULATION TO CONTEND THAT ARITHMETIC MEAN OF FIVE COMPARABLES WHICH INCLUDE U TV SOFTWARE WILL BE AS UNDER: S.NO. NAME OF THE COMPANY OPERATING MARGIN 1. RAJ TELEVISION 58.22% 2. CINEVISTAAS 46.29% 3. TV TODAY NETWORK LTD. 33.42% 4. TV 18 33.08% 5. UTV SOFTWARE (3.81%) TOTAL 167.20% AVERAGE 33.44% THUS IT WAS PLEADED BY LD. AR THAT THE ADDITION REL ATING TO TP ADJUSTMENT SHOULD BE DELETED. 8.5 IT WAS FURTHER SUBMITTED BY LD. AR THAT IN GROU ND NO.5 ASSESSEE HAS RAISED THE ISSUE REGARDING GRANT OF BENEFIT OF SAFE HARBOU R OF +/- 5% WHICH TPO HIMSELF HAS COMPUTED IN THE ORIGINAL AS WELL AS REMAND PRO CEEDINGS AND, THEREFORE, AFTER ALLOWING SAID BENEFIT NO ADDITION ON ACCOUNT OF TP ADJUSTMENT WILL REMAIN AND THE OTHER GROUNDS RAISED BY THE REVENUE ON THIS ACCOUNT AS WELL AS BY THE ASSESSEE ON THIS ACCOUNT WILL BE RENDERED ACADEMIC IN ABSENC E OF ANY ADDITION. 8.6 ON THE OTHER HAND, RELYING UPON THE GROUND OF A PPEAL AS WELL AS ORDER PASSED BY TPO IT WAS SUBMITTED LD. DR THAT LD. CI T(A) HAS COMMITTED AN ERROR IN ADMITTING THE ADDITIONAL EVIDENCES. THEREFORE, HE SUBMITTED THAT ON THE BASIS OF GROUND NO.1,2&3 OF THE REVENUES APPEAL THE ADJU STMENT MADE BY TPO SHOULD BE UPHELD. . / ITA NO.2414& 2474/MUM/2013 / ASSESSMENT YEAR 2007-08 13 8.7 IT WAS FURTHER SUBMITTED BY LD. DR THAT GROUND NO7 & 8 RAISED IN THE REVENUES APPEAL SHOULD BE ALLOWED AS LD. CIT(A) I S NOT CORRECT IN DELETING THE ACTION OF TPO REGARDING ADJUSTMENT OF DEPRECIATION WHILE CALCULATING ALP. IT WAS SUBMITTED THAT TPO WAS VERY MUCH RIGHT IN MAKING SU CH ADJUSTMENT AND LD. CIT(A) HAS COMMITTED AN ERROR IN HOLDING THAT SUCH ADJUSTMENT WAS NOT PERMISSIBLE AS PER RULE 10B(1)(E)(III) OF INCOME TA X RULES, 1962. HE SUBMITTED THAT THE SAID RULE DULY SUPPORT THE CASE OF TPO AND , THEREFORE, ORDER OF LD. CIT(A) ON THIS ACCOUNT SHOULD BE SET ASIDE AND THAT OF TPO SHOULD BE RESTORED. 8.8 WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTEN TIONS HAVE CAREFULLY BEEN CONSIDERED. IT IS THE MAIN ARGUMENTS OF LD. AR THA T UTV SOFTWARE COMMUNICATIONS HAVING RPT TRANSACTION OF 18.19% SH OULD BE INCLUDED IN THE LIST OF COMPARABLE. THIS ARGUMENT OF LD. AR IS BA SED ON DECISIONS OF ITAT IN THE CASE OF ACTIS ADVISORY PVT. LTD.; DSM ANTI INFECTI VES INDIA LTD. (SUPRA) AND GLOBAL LOGIC INDIA VS. DCIT (SUPRA). THE MAIN CASE OF THE TPO APPLYING BENCH MARK OF 15% OF RPT IS BASED ON THE DECISION IN THE CASE OF SONY INDIA PVT. LTD.(SUPRA). IN ALL THE ABOVE THREE DECISIONS THE TRIBUNAL HAS LATER ON CONSIDERED THIS PROPOSITION AND EVEN AFTER CONSIDERING THE DEC ISION IN THE CASE OF SONY INDIA PVT. LTD. (SUPRA) IT HAS COME TO A CONCLUSION THAT BENCH MARK OF RPT TRANSACTION SHOULD BE AT 25%. THE RELEVANT PORTION OF THE OBSE RVATIONS OF TRIBUNAL IN ALL THE THREE DECISIONS HAVE ALREADY REPRODUCED IN THE ABOV E PART OF THIS ORDER. NO CONTRARY DECISION WAS BROUGHT TO OUR NOTICE. IN T HIS VIEW OF THE SITUATION, WE ARE OF THE OPINION THAT UTV SOFTWARE COMMUNICATION SHOU LD BE INCLUDED IN THE LIST OF COMPARABLES. HOWEVER, WE FIND THAT IN THE ORDER O F TPO, AS PER SUBMISSION OF THE ASSESSEE UTV SOFTWARE COMMUNICATION WAS HAVING PLI OF (-) 2.64%. HOWEVER, IN THE SUBMISSIONS MADE BEFORE US SUCH MAR GIN HAS BEEN TAKEN AS (-) 3.81%. THUS, THERE IS A VARIATION IN COMPUTING THE PLI OF UTV SOFTWARE COMMUNICATION. THOUGH THIS WOULD ALSO NOT MAKE MU CH DIFFERENCE AS THE DIFFERENCE BETWEEN THE PLI OF THE ASSESSEE AND ARI THMETIC MEAN OF FINAL . / ITA NO.2414& 2474/MUM/2013 / ASSESSMENT YEAR 2007-08 14 COMPARABLE EVEN AFTER THIS DIFFERENCE & OTHER MINO R ADJUSTMENT WITH REGARD TO DEPRECIATION ETC. WHICH IS DEALT ELSEWHERE IN THIS ORDER WILL BE WITHIN THE SAFE HARBOUR OF +/- 5%, HOWEVER, FOR THE PURPOSE OF V ERIFICATION OF THE PLI OF UTV SOFTWARE COMMUNICATION WE RESTORE THIS ISSUE TO THE FILE OF TPO AND WE DIRECT THAT IF AFTER INCLUDING UTV SOFTWARE COMMUNICATION IN THE LIST OF COMPARABLES AND AFTER ADJUSTMENT ON ACCOUNT OF DEPRECIATION, WHICH IS DEALT ELSEWHERE IN THE ORDER, DIFFERENCE BETWEEN THE PLI OF THE ASSESS EE AND ARITHMETIC MEAN OF THE COMPARABLE PARTIES IS WITHIN THE SAFE HARBOUR OF + /-5%, THEN NO ADDITION ON ACCOUNT OF TP ADJUSTMENT SHOULD BE MADE. 8.9 SO FAR AS IT RELATES TO CONTENTION OF THE REVEN UE IN GROUND NO.7 & 8 THAT RULE 10B(1)(E)(III) SUPPORT THE CONTENTION OF THE T PO THAT ADJUSTMENT ON ACCOUNT OF DEPRECIATION HAS TO BE DONE, WE ARE OF THE OPINI ON THAT SUCH CONTENTION OF REVENUE HAS A FORCE. PROVISIONS OF RULE 10B(1)(E)( III) READ AS UNDER: DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 9 2C: 10B(1) FOR THE PURPOSE OF SUB-SECTION(2) OF SECTION 92, THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE D ETERMINED BY ANY OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY:- (E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH,- .. (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INT O ACCOUNT THE DIFFERENCE, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANS ACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; 8.10 LD. CIT(A) WHILE DECIDING THE ISSUE IN FAVOUR OF ASSESSEE HAS OBSERVED THAT SUCH ADJUSTMENT CAN BE MADE ONLY IN A CASE WHERE SU CH ADJUSTMENT MATERIALLY EFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET. ADJUSTMENT OF DEPRECIATION IF TAKEN AS PER STRAIGHT LINE METHOD AND AS PER INCOME-TAX RULES WOULD MAKE MATERIAL IMPACT ON THE NET PROFIT MARGIN OF THE CONCERN. THE TPO IN HIS SECOND REMAND REPORT HAS CLEARLY BROUGHT THE CASE OF THE ASSESSEE AS WELL AS COMPARABLES AT PAR SO FAR AS IT RELATES TO CLAIM OF DEPRECIATION. THERE HAS TO BE SIMILARITY IN RESPECT OF DEPRECIATION CLAIM WHILE COMPUTING THE PROFIT MARGIN OF . / ITA NO.2414& 2474/MUM/2013 / ASSESSMENT YEAR 2007-08 15 THE COMPARABLES AS WELL AS THE TESTED PARTY. THERE FORE, WE ARE OF THE VIEW THAT LD. CIT(A)HAS COMMITTED AN ERROR IN ADMITTING SUCH CLAIM OF THE ASSESSEE. 8.11 IN VIEW OF ABOVE DISCUSSION, WE DIRECT THE TPO TO ADOPT THE ADJUSTED PROFIT MARGIN OF THE COMPARABLES AS WELL AS ASSESSEE AFT ER BRINING AT PAR THE TREATMENT OF THE CLAIM OF DEPRECIATION. THIS EXERCISE HAS BE EN DONE BY TPO IN THE REMAND PROCEEDINGS AND THOSE FIGURES SHOULD BE ADOPTED FOR THE PURPOSE OF COMPUTING ARITHMETIC MEAN OF THE MARGIN OF THE COMPARABLES AN D THE PROFIT MARGIN OF THE ASSESSEE. WE DIRECT ACCORDINGLY. THEREFORE, GRO UND NO. 7 & 8 ARE ALLOWED IN THE MANNER AFORESAID. 9. NOW COMING TO THE ISSUE REGARDING GRIEVANCE OF THE REVENUE EXPRESSED IN GROUND NO.1,2 & 3 FOR ADMISSION OF ADDITIONAL E VIDENCES, WE FOUND THAT THE ADDITIONAL EVIDENCES WHICH HAVE BEEN FILED BY THE A SSESSEE IS IN THE SHAPE OF AUDITED ACCOUNTS AS PER WHICH CORRECT CALCULATIONS OF PLI WAS MADE. THE TPO HAS NEVER OBJECTED TO SUCH EVIDENCE FILED BY THE AS SESSEE AND HAS EVEN RECOMPUTED THE MARGINS ACCORDING TO THE SAID EVIDEN CES. THOSE AUDITED ACCOUNTS WERE NOT AVAILABLE EARLIER AND THEY WERE PRODUCED B Y THE ASSESSEE BEFORE LD. CIT(A) AND THOSE WERE ALSO REMANDED TO THE TPO. TH EREFORE, WE FIND NO ERROR IN THE ORDER OF LD. CIT(A) VIDE WHICH THESE EVIDENCES HAVE BEEN ADMITTED. THEREFORE, GROUND NO.1 TO 3 OF REVENUES APPEAL OBJECTING THE ADMISSION OF ADDITIONAL EVIDENCE ARE DISMISSED. 10. APROPOS GROUND NO.4,5 & 6 RAISED BY THE REVENUE , THEY EXPRESS GRIEVANCE OF THE REVENUE REGARDING COMPUTATION OF PLI WHICH W AS COMPUTED AS PER THE NORMS DESCRIBED IN PARA-2 AT PAGE-15 TO 16 OF ORDER OF LD. CIT(A). FOR THE SAKE OF CONVENIENCE THE SAME IS REPRODUCED BELOW: 2.PROFIT LEVEL INDICATOR AND COMPARABLE COMPANIES CONSIDERED BY THE TPO : . / ITA NO.2414& 2474/MUM/2013 / ASSESSMENT YEAR 2007-08 16 X . IT WAS SUBMITTED THAT AS THE TPO CONSIDERED OPER ATING PROFIT TO OPERATING REVENUES AS THE APPROPRIATE PROFIT LEVEL INDICATOR (PLI) FOR COMPARABILITY ANALYSIS UNDER TNMM, HE EXCLUDED NON-OPERATING EXPENSES LIKE LOSS ON SALE OF FIXED ASSETS, INTEREST EXPENSES AND OTHER INCOME 9WHICH WAS NOT S PECIFIED BY THE COMPANY) XI. OPERATING PROFIT IS THE PROFIT BEFORE INTEREST AND TAX FOR COMPUTING THE OPERATING MARGINS. AS THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE TAXPAYER WITH ITS ASSOCIATED ENTERPRISES ARE MAINLY ON THE SALES SIDE , THE APPROPRIATE BASE WOULD BE COST IN THE CASE OF TAXPAYER WHICH IS WITH UNRELATE D PARTIES. PROFIT LEVEL INDICATOR = OPERATING PROFIT/O PERATING EXPENSES OPERATING PROFIT = OPERATING REVENUE S OPERATING EXPENSES XII. OPERATING REVENUES MEANS THE AMOUNT OF THE TOT AL RECEIPTS FROM THE PROVISION OF SERVICES. BUT, IT DOES NOT INCLUDE RE VENUES WHICH ARE NON-OPERATING IN NATURE AND NOT RELATED TO THE BUSINESS OPERATIONS O F THE RELEVANT FINANCIAL YEAR. FOR EXAMPLE, THE FOLLOWING INCOMES WHICH ARE NON-OPERAT ING IN NATURE AND NOTHING TO DO WITH THE BUSINESS OPERATIONS OF THE COMPANY FOR THE RELEVANT FINANCIAL YEAR ARE EXCLUDED FROM OPERATING REVENUES. I. INTEREST II. DIVIDENDS III. GAIN ON SALE OF ASSETS /INVESTMENTS IV. INCOME FROM INVESTMENTS V. GAIN O REVALUATION OF ASSETS. VI. OTHER INCOMES NOT PERTAINING TO THE BUSINESS OPERAT IONS OF THE RELEVANT FINANCIAL YEAR. XIII. OPERATING EXPENSES INCLUDES ALL EXPENSES EXC EPT FOR INTEREST EXPENSES NOT RELATED TO THE OPERATION OF THE RELEVANT BUSINESS A CTIVITY. OPERATING EXPENSES ORDINARILY INCLUDE EXPENSES ASSOCIATED WITH ADVERTI SING, PROMOTION, SALES, MARKETING, WAREHOUSING AND DISTRIBUTION, ADMINISTRA TION, AND DEPRECIATION. BUT, IT DOES NOT INCLUDE EXPENSES NOT RELATED TO THE BUSINE SS OPERATIONS OF THE RELEVANT FINANCIAL YEAR. FOR EXAMPLE, THE FOLLOWING EXPENSE S WHICH ARE NON-OPERATING AND PROVISIONS ARE EXCLUDED FROM OPERATING EXPENSES. I. PROVISIONS OTHER THAN PROVISIONS FOR BAD DEBTS. II.LOSS ON SALE OF ASSETS / INVESTMENTS III. FOREIGN EXCHANGE LOSS IV.LOSS ON REVALUATION OF ASSETS V. OTHER EXPENSES NOT PERTAINING TO THE BUSINESS OP ERATIONS OF THE RELEVANT FINANCIAL YEAR. SIMILARLY EXTRA ORDINARY EXPENSES, WHICH DO NOT REC UR EVERY YEAR LIKE DONATIONS, PRELIMINARY EXPENSES WRITTEN OFF ARE NOT CONSIDERED AS OPERATING EXPENSES AS THE COMPARISON OF THE PROFITS SHOULD BE AT SAME LEVEL F OR THE COMPARABLE WITH THAT OF THE TAXPAYER. . / ITA NO.2414& 2474/MUM/2013 / ASSESSMENT YEAR 2007-08 17 BASED ON THE ABOVE DEFINITION OF PLI, THE PLI OF TH E COMPARABLE COMPANIES CONSIDERED BY THE TPO WERE COMPUTED BY THE TPO BASE D ON THE AUDITED FINANCIAL STATEMENTS OF THESE COMPANIES. 10.1 REFERRING TO THE ABOVE BASIS TAKEN FOR CALCULA TING PROFIT MARGIN OF THE ASSESSEE AS WELL AS COMPARABLES, IT IS THE GRIEVANCE OF THE RE VENUE THAT SUNDRY BALANCES WRITTEN BACK CANNOT BE CONSIDERED AS OPERATING REVENUE; EXC ESS PROVISION WRITTEN BACK ALSO CANNOT BE SAID TO BE OPERATING REVENUE AND SIMILARL Y GAIN ON FOREIGN EXCHANGE FLUCTUATION CANNOT BE CONSIDERED AS OPERATING REVEN UE. 10.2 WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. A UNIFORM APPROACH HAS BEEN ADOPTED BY THE TPO IN RESPECT OF COMPUTATION OF PL I IN THE CASE OF ASSESSEE AS WELL AS IN THE CASE OF COMPARABLES. IF THE UNIFORM APPROACH IS ADOPTED, UNLESS ANY CONTRARY MATERIAL HAS BEEN BROUGHT ON RECORD, WE SEE NO INFI RMITY IN SUCH BASIS OF THE CALCULATION. THEREFORE, WE DECLINE TO INTERFERE IN THE CALCULATI ON MADE BY TPO REGARDING COMPUTATION OF PLI IN RESPECT OF THE FACTORS POINTED OUT IN THE GROUNDS OF APPEAL NO.4,5 & 6. THEREFORE, WE FIND NO MERIT IN THE CASE OF REVENUE AND GROUND NO.4,5 & 6 OF REVENUES APPEAL ARE DISMISSED. 11. IN VIEW OF ABOVE DISCUSSIONS WE DISPOSE OF THE GRIEVANCE OF BOTH THE PARTIES RELATING TO TP ADJUSTMENT AND SINCE IT WAS THE CASE OF LD. AR THAT IF M/S. UTV SOFTWARE COMMUNICATIONS IS INCLUDED IN THE LIST OF COMPARABLES THEN NO OTHER GRIEVANCE OF THE ASSESSEE WILL REMAIN EFFECTIVE FOR THE REASON THAT THE DIFFERENCE BETWEEN THE PROFIT MARGIN OF THE ASSESSEE AND ARITH METIC MEAN OF COMPARABLES WILL FALL WITHIN THE SAFE HARBOUR OF +/-5%. AS WE HAVE ALREADY HELD THAT M/S. UTV SOFTWARE COMMUNICATIONS IS REQUIRED TO BE INCLUDED IN THE LIST OF COMPARABLES, WE DO NOT GO INTO OTHER ISSUES RAISED IN THE GROU NDS OF APPEAL FILED BY THE ASSESSEE AND WHICH WERE ALSO NOT ARGUED BEFORE US. THEREFORE, THE OTHER GRIEVANCES OF THE ASSESSEE RELATING TO TP ADJUSTMEN T HAVE BECOME ACADEMIC AND ARE TREATED AS INFRUCTUOUS. 12. THE OTHER ISSUE REMAIN IN THE ASSESSEES APPEAL IS REGARDING DISALLOWANCE UNDER SECTION 14A OF THE ACT. DURING THE YEAR UNDE R CONSIDERATION THE ASSESSEE . / ITA NO.2414& 2474/MUM/2013 / ASSESSMENT YEAR 2007-08 18 HAS EARNED TAX FREE DIVIDEND OF RS.1,93,47,596/-. AS PER ASSESSMENT ORDER THE INVESTMENT OF THE ASSESSEE IN STOCKS OF SUBSIDIARY COMPANY WAS RS.1345,88,95,000/-. THE ASSESSEE ALSO HAD INTERES T EXPENSES OF RS.14,71,94,156/-. THEREFORE, AO WHILE COMPUTING T HE DISALLOWANCE UNDER SECTION 14A WITH REFERENCE TO RULE 8D HAS DISALLOWE D A SUM OF RS.57,74,561/-. WHILE CONSIDERING THE GRIEVANCE OF THE ASSESSEE LD. CIT(A) THOUGH HAS HELD THAT RULE 8D COULD NOT BE APPLIED BUT HE HAS WORKED OUT THE DISALLOWANCE AFTER REFERRING TO THE FORMULA DESCRIBED IN RULE 8D AND RESTRICTED THE ADDITION TO A TOTAL SUM OF RS.33,51,401/-. 12.1 IT IS THE CASE OF LD. AR THAT ACCORDING TO TH E DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. COMPA NY LTD.VS. DCIT, 328 ITR 81 (BOM) RULE 8D CANNOT BE APPLIED IN RESPECT OF AS SESSMENT YEARS PRIOR TO A.Y 2008-09. IT WAS SUBMITTED THAT SINCE THE IMPUGNED ASSESSMENT YEAR IS 2007-08, DISALLOWANCE CANNOT BE MADE WITH REFERENCE TO RULE 8D. IT WAS SUBMITTED THAT TRIBUNAL IN SERIES OF CASES HAS ADOPTED A VIEW THA T PRIOR TO APPLICATION OF RULE 8D DISALLOWANCE OF SOME PERCENTAGE OF DIVIDEND EA RNED WILL BE SUFFICIENT TO COMPLY WITH THE PROVISIONS OF SECTION 14A AND IT WA S THE ARGUMENT OF LD. AR THAT THE DISALLOWANCE ON ACCOUNT OF SECTION 14A SHOULD B E RESTRICTED TO 2% OF THE EXEMPTED INCOME. LD. AR REFERRED TO THE DECISION O F ITAT MUMBAI DATED 10/04/2013 IN THE CASE OF SHRI DEEPAK AGARWAL & OTH ERS VS. ACIT I.E. ITA NO.8912/M/2010 (COPY PLACED ON RECORD), WHEREIN THI S ISSUE WAS DECIDED AS UNDER: 33. THE ONLY ISSUE EMANATING FROM THE ABOVE GROUND NO. III AND IV IS THE DISALLOWANCE OF RS. 64,330/- FOR THE AY 2006-07 AND RS. 4,609/- FOR THE AY 2007- 08 U/S 14A MADE BY THE AO. DURING THE FIRST APPELLA TE PROCEEDINGS, CIT (A) DIRECTED THE AO TO RE-COMPUTE THE DISALLOWANCE MADE BY THE A O. AT THE OUTSET, SHRI DEVENDAR MEHTA, LD COUNSEL FOR THE ASSESSEE BROUGHT OUR ATTENTION TO THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. M/S. GODREJ AGROVET LTD VIDE INCOME TAX APPEAL NO. 934 OF 2011, DATED 8.1.2 013 AND MENTIONED THAT THE IN VIEW OF THE ABOVE MENTIONED JUDGMENT, THE ITAT HAS TAKEN THE VIEW THAT THE DISALLOWANCE U/S 14A SHOULD BE RESTRICTED TO 2% OF THE DIVIDEND INCOME. LD COUNSEL . / ITA NO.2414& 2474/MUM/2013 / ASSESSMENT YEAR 2007-08 19 ALSO RELIED ON VARIOUS DECISIONS OF THE ITAT, KOLKA TA BENCHES IN SUPPORT OF HIS CONTENTION. 34. ON THE OTHER HAND, LD DR RELIED ON THE ORDERS OF THE REVENUE AUTHORITIES. 35. WE HEARD BOTH THE PARTIES AND PERUSED THE ORDER S OF THE REVENUE. IT IS A FACT THAT THE RELEVANT ASSESSMENT YEARS I.E., 2006-07 AN D 2007-08 UNDER CONSIDERATION ARE OUTSIDE THE SCOPE OF PROVISIONS OF RULE 8D. THE SAID PROVISIONS CANNOT BE TREATED AS APPLICABLE TO THE A.Y.2006-07 & 2007-08 UNDER CO NSIDERATION WHEN THE SAME IS PRECLUDED BY THE HONBLE BOMBAY HIGH COURT IN THE C ASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT, REPORTED IN (2010) 328 ITR 81(BOM). THE HONBLE BOMBAY HIGH COURT ALSO IN THE CASE OF CIT VS. M/S. GODREJ AGROVET LTD VIDE INCOME TAX APPEAL NO. 934 OF 2011, DATED 8.1.2013, HAS HELD THAT PERCENTAGE O F THE EXEMPT INCOME CAN CONSTITUTE A REASONABLE ESTIMATE FOR MAKING DISALLO WANCE IN THE YEARS EARLIER TO THE ASSESSMENT YEAR 2008-09. THE RELEVANT PORTION OF TH E SAID JUDGMENT OF THE BOMBAY HIGH COURT (SUPRA) READS AS UNDER: 4. SO FAR AS QUESTION (B) IS CONCERNED, THE TRIBUN AL IN ITS IMPUGNED ORDER DATED 179.2010 WHILE APPLYING THE DECISION OF THIS COURT IN THE MATTER OF GODREJ (SUPRA) HAS DISALLOWED THE EXPENDITURE ONLY TO THE EXTENT OF 2% OF THE TOTAL EXEMPT INCOME EARNED BY THE RESPONDENT-ASSESS EE ON THE BASIS ITS ORDER DATED 272.2009 FOR THE ASSESSMENT YEAR 2002-2003 AN D ORDER DATED 10.9.2009 FOR THE ASSESSMENT YEARS 2003-2004 AND 20 04-2005 WHEREIN DISALLOWANCE WAS RESTRICTED TO 2%OF THE EXEMPT INCO ME. FURTHER; THE TRIBUNAL HAS REMANDED THE MATTER TO THE AC T VERIFY THE DISA LLOWANCE CLAIMED AND RESTRICT THE DISALLOWANCE ONLY TO THE EXTENT TO 2% OF THE TOTAL EXEMPT INCOME. WE FIND NO FAULT WITH THE ORDER OF THE TRIBUNAL. 36. CONSIDERING THE BINDING NATURE OF THE JUDGMENT AND THE OVERALL FACTUAL MATRIX OF THE PRESENT CASE, WE RESTRICT THE DISALLOWANCE TO 5 % OF THE TOTAL EXEMPT INCOME. ACCORDINGLY, GROUND NOS.III AND IV RAISED BY THE R EVENUE ARE PARTLY ALLOWED. 13. ON THE OTHER HAND, LD. DR RELIED UPON THE ORDER PASSED BY LD. CIT(A). HE PLEADED THAT DISALLOWANCE SUSTAINED BY LD. CIT(A) S HOULD BE UPHELD. 14. WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTEN TIONS HAVE CAREFULLY BEEN CONSIDERED. AFTER CAREFUL CONSIDERATION, ADOPTING THE VIEW TAKEN BY THE TRIBUNAL IN THE CASE OF DEEPAK AGARWAL VS. ACIT (SUPRA), IN WHICH ONE OF US (ACCOUNTANT MEMBER) IS A PARTY WE RESTRICT THE DISALLOWANCE TO 5% OF THE EXEMPTED INCOME. THE DISALLOWANCE WILL ACCORDINGLY BE WORKED OUT BY THE AO. GROUND RELATING TO SECTION 14A RAISED BY THE ASSESSEE IS PARTLY ALLOWE D IN THE MANNER AFORESAID. . / ITA NO.2414& 2474/MUM/2013 / ASSESSMENT YEAR 2007-08 20 15. IN THE RESULT, BOTH THE APPEALS ARE CONSIDERED TO BE PARTLY ALLOWED IN THE MANNER AFORESAID. ORDER PRONOUNCED IN THE OPEN COURT ON 06/08/2014 + ' )* , -. 06/08/2014 * ' / 0 SD/- SD /- ( . / D.KARUNAKARA RAO ) ( . . / I.P. BANSAL ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; - DATED 06 /08/2014 + + + + ' '' ' %(1 %(1 %(1 %(1 21 ( 21 ( 21 ( 21 ( / COPY OF THE ORDER FORWARDED TO : 1. !$ / THE APPELLANT 2. %&!$ / THE RESPONDENT. 3. 3 ( ) / THE CIT(A)- 4. 3 / CIT 5. 14/ %( , , / DR, ITAT, MUMBAI 6. / 5 / GUARD FILE. + + + + / BY ORDER, &1( %( //TRUE COPY// 6 66 6 / 7 7 7 7 ' ' ' ' (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI . . ./ VM , SR. PS