M/s Turner Inernational India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 296/DEL/2016

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 5660 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-02-2019
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 21-01-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: H K CHOUDHALRY; SANJY PANDEY
• Keywords: Transfer pricing; International transaction; Working capital adjustments
• Section: 143(3); 234B

Judgement Text

1 ITA NOS.908 & 296/DEL/2016 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-2 NEW DELHI BEFORE SHRI N. K. BILLAIYA, ACCOUNTANT MEMBER AND MS SUCHITRA KAMBLE, JUDI CIAL MEMBER I.T.A. NO. 296/DEL/201 6 (A.Y 2011-12) TURNER INTERNATIONAL P. LTD. 5 TH FLOOR, RADISSION COMMERCIAL PLAZA, NH-8, MAHIPALPUR NEW DELHI AAACT3821H (APPELLANT) VS DCIT CENTRAL CIRCLE-25(2) C.R. BUILDING NEW DELHI (RESPONDENT) I.T.A. NO. 908/DEL/201 6 (A.Y 2011-12) DCIT CENTRAL CIRCLE-25(2) C.R. BUILDING NEW DELHI (APPELLANT) VS TURNER INTERNATIONAL P. LTD. 5 TH FLOOR, RADISSION COMMERCIAL PLAZA, NH-8, MAHIPALPUR NEW DELHI AAACT3821H (RESPONDENT) APPELLANT BY SH. RAVI SHARMA, ADV, SH. RISHAB MALHOTRA, ADV RESPONDENT BY SH. H. K. CHOUDHARY, CIT(A)-DR & SANJY PANDEY, SR. DR ORDER PER SUCHITRA KAMBLE, JM THESE TWO APPEALS ARE FILED BY THE ASSESSEE AS WELL AS THE REVENUE AGAINST THE ORDER DATED 23/12/2015 PASSED BY DCIT, CRICLE-25 (2), NEW DELHI PASSED U/S 143(3) READ WITH SECTION 144C(4) OF THE INCOME TAX ACT, 1961. DATE OF HEARING 29.01.2019 DATE OF PRONOUNCEMENT 04.02.2019 2 ITA NOS.908 & 296/DEL/2016 2. THE GROUNDS OF APPEAL ARE AS UNDER:- I.T.A. NO. 296/DEL/2016 (ASSESSEES APPEAL) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LEARNED ASSESSING OFFICER (AO) HAS ERRED IN PASSING THE ASSESSMENT ORDER UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (THE ACT) AFTER CONSIDERING THE ADJUSTMENTS PROPOSED BY THE LEARNED ADDITIONAL COMMISSIONER OF INCOME TAX, TRANSFER PRICING OFFICE R-3(2), NEW DELHI (TPO) IN HIS ORDER PASSED UNDER SECTION 92CA(3) OF THE AC T AND SUBSEQUENTLY CONFIRMED BY THE HONBLE DISPUTE RESOLUTION PANEL ( DRP). EACH OF THE GROUND IS REFERRED TO SEPARATELY, WHICH MAY KINDLY BE CONSIDERED INDEPENDENT OF EACH OTHER AND WITHOUT PREJUDICE TO EACH OTHER. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, 1. THE LEARNED AO / TPO / DRP HAS ERRED IN MAKING AN ADDITION OF RS. 270,893,220 TO THE TOTAL INCOME OF THE APPELLANT ON ACCOUNT OF A TRANSFER PRICING ADJUSTMENT TO THE DISTRIBUTION SEGMENT OF T HE APPELLANT. 2. THE AO / TPO / DRP HAS ERRED BY NOT ACCEPTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE INCOME TAX RULES, 1962 (THE RULES). 3. THE LEARNED AO / TPO / DRP HAVE ERRED IN CONDUCTING A FRESH COMPARABILITY ANALYSIS BASED ON APPLICATION OF INCO RRECT KEYWORDS AND FILTERS, IN CONTRADICTION OF THE HONBLE ITATS DIRECTION IN APPELLANTS OWN CASE, WITHOUT PROVIDING ANY COGENT REASONS FOR REJECTING APPELLANTS ECONOMIC ANALYSIS. 4. THE LEARNED TPO/ AO/ DRP FAILED TO UNDERSTAND AND A PPRECIATE THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS ASSU MED BY THE APPELLANT AND ITS AES, THEREBY COMPARING COMPANIES WHICH ARE FUNCTIONALLY INCOMPARABLE VIS-A-VIS THE DISTRIBUTION SEGMENT OF THE APPELLANT 5. THE LEARNED TPO/ AO /DRP ERRED IN PASSING ORDER ON INCORRECT FACTUAL ASSUMPTION WHICH IS INCORRECT AS PER THE RECORDS AN D SUBMISSION MADE BY THE APPELLANT. 6. THE LEARNED TPO / AO / DRP HAVE ERRED IN: 3 ITA NOS.908 & 296/DEL/2016 A) NOT ACCEPTING THE USE OF MULTIPLE YEAR DATA, AS AD OPTED BY THE APPELLANT IN ITS TRANSFER PRICING (TP) DOCUMENTAT ION; AND B) DETERMINING THE ARMS LENGTH MARGINS / PRICES USIN G DATA PERTAINING ONLY TO FINANCIAL YEAR (FY) 2010-11 WH ICH WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF COMPLYING WITH THE IND IAN TP DOCUMENTATION REQUIREMENTS. THE LEARNED AO / TPO / DRP HAVE ERRED , IN LAW AND ON FACTS AND CIRCUMSTANCES OF THE CASE, BY REJECTING CERTAIN COMPARABLE COMPANIES USING TURNOVER LESS THAN INR 1 CRORE AS A COMPARA BILITY CRITERION. 7. THE LEARNED AO/ TPO / DRP HAVE ERRED IN REJECTING F UNCTIONALLY COMPARABLE COMPANIES; AND INSTEAD SELECTING FUNCTIO NALLY DISSIMILAR COMPANIES TO DETERMINE THE ALP FOR THE DISTRIBUTION SEGMENT OF THE APPELLANT BASED ON THE FRESH SEARCH UNDERTAKEN BY HIM. 8. THE LEARNED AO / TPO HAVE PASSED AN ORDER UNDER SEC TION 92CA (3) OF THE ACT, WHICH IS IN CONTRADICTION TO THE DIRECTIONS O F THE HONBLE DRP 9. THE LEARNED AO / TPO HAVE PASSED AN ORDER UNDER SEC TION 92CA (3) OF THE ACT WHICH SUFFERS FROM SEVERAL COMPUTATIONAL ERRORS IN DETERMINATION OF ALP AND IN THE COMPUTATION OF ADJUSTMENT TO THE TOTAL I NCOME OF THE APPELLANT AND IGNORING THE RECTIFICATION APPLICATION SUBMITTED BY THE APPELLANT. 10. THE LEARNED AO / TPO / DRP HAVE ERRED IN NOT RESTRI CTING THE ADJUSTMENT MADE TO THE APPELLANTS DISTRIBUTION SEG MENT, TO THE VALUE OF INTERNATIONAL TRANSACTIONS WITH AES, AND INSTEAD MA KING AN ADJUSTMENT TO THE ENTIRE COST BASE OF DISTRIBUTION SEGMENT, WHICH INC LUDES UNCONTROLLED TRANSACTIONS WITH INDEPENDENT THIRD PARTIES AS WELL . 11. THE LEARNED AO ERRED IN NOT ALLOWING COMPLETE CREDI T OF TAXES DEDUCTED AT SOURCE. 12. THE LEARNED AO HAS GROSSLY ERRED IN INITIATING PENA LTY PROCEEDINGS UNDER SECTION 271(1 )(C) OF THE ACT. 13. THE LEARNED AO HAS ERRED IN LEVYING INTEREST UNDER SECTION 234B AND 234D OF THE ACT WHILE COMPLETELY DISREGARDING THE P ROVISIONS OF THE ACT AND THE JUDICIAL PRECEDENCE. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, VARY, OM IT OR SUBSTITUTE ANY OF THE AFORESAID GROUNDS OF APPEAL AT ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL. 4 ITA NOS.908 & 296/DEL/2016 THE APPELLANT PRAYS FOR APPROPRIATE RELIEF BASED O N THE SAID GROUNDS OF APPEAL AND THE FACTS AND CIRCUMSTANCES OF THE CASE. I.T.A. NO. 908/DEL/2016 (REVENUES APPEAL) 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE DRP-2 ERRED IN DIRECTING AO TO COMPLETE THE ASSESSMENT AS PER OBSE RVATIONS MADE BY DRP IN THE ORDER WHICH RESULTING IN REDUCING THE ADDITION TO RS.27,08,93,220/- IN PLACE OF ORIGINAL RECOMMENDED ALP OF RS.54,37,09,85 9/- FOR THE INTERNATIONAL TRANSACTIONS UNDERTAKEN THE ASSESSEE COMPANY WITH I TS ASSOCIATE/PARENT ENTERPRISE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE , THE DRP-II ERRED IN DIRECTING TPO TO INCLUDE BELOW MENTIONED COMPANIES FROM THE FINAL SET OF COMPARABLES : 3. WHETHER IN THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, HONBLE DRP ERRED IN TAKING COMPANIES ENGAGED IN DISTRIBUTION O F SOFTWARE PRODUCTS AS COMPARABLES TO ASSESSEE FOR BENCHMARKING ITS TRANSA CTIONS. 4. WHETHER IN THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, HONBLE DRP ERRED IN NOT FOLLOWING THE ORDER OF HONBLE ITAT IN THE ASSESSEES OWN CASE FOR A.Y. 2007-08 AND A.Y. 2008-09. 3. DURING THE HEARING, THE LD. AR SUBMITTED THAT IF THE DEPARTMENTS APPEAL IS DECIDED IN RESPECT OF GROUND NO. 2 THEN THE ASSE SSEES APPEAL WILL REMAIN ACADEMIC ONLY. THEREFORE, WE ARE TAKING UP THE REV ENUES APPEAL FIRST. 4. TURNER INTERNATIONAL INDIA PRIVATE LIMITED IS A SUBSIDIARY OF TURNER BROADCASTING SYSTEM ASIA PACIFIC, INC. THE COMPANY IS PRIMARILY ENGAGED IN THE BUSINESS OF DISTRIBUTION OF SUBSCRIPTION RIGHTS OF SATELLITE CHANNELS OF CARTOON NETWORK, WB, AND CNN, POGO AND HBO (COLLECT IVELY REFERRED AS TV CHANNELS) AND ADVERTISEMENT INVENTORY TO BE TELECA STED ON TV CHANNELS. A REFERENCE WAS MADE TO THE TPO. THE TPO REJECTED THE SET OF COMPANIES ENGAGED IN DISTRIBUTION OF SOFTWARE SELECTED BY THE COMPANY IN THE TRANSFER PRICING (TP) DOCUMENTATION ALLEGING THAT THE COMPARABLE C OMPANIES IDENTIFIED BY THE COMPANY WERE NOT FUNCTIONALLY SIMILAR TO THE DISTRI BUTION ACTIVITY UNDERTAKEN 5 ITA NOS.908 & 296/DEL/2016 BY THE COMPANY I.E. SEGMENT INVOLVED IN DISTRIBUTIO N OF CHANNEL SUBSCRIPTION/ ADVERTISEMENT INVENTORY. THE LD. TPO THEN PROCEEDED TO CONDUCT A FRESH SEARCH INCLUDING CHANNEL/ CONTENT OWNER COMPANIES. ACCORDINGLY, THE FINAL SET OF COMPARABLES SELECTED IN THE TPO ORDER WERE AS FO LLOWS:- S. NAME OF THE COMPANY OP / OR(%) L INDIA VISION SATELLITE COMMUNICATION 22.91 2 MAA TELEVISION NETWORK LTD. 17.41 3 MALAYALAM COMMUNICATIONS LTD. 36.44 4 RAJ TELEVISION NETWORK LTD. 14.30 5 TV TODAY NETWORK LTD. 505 6 UTV ENTERTAINMENT TELEVISION 30.89 7 ZEE ENTERTAINMENT ENTERPRISES 37-55 8 ZEE MEDIA CORPORATION LTD. 9-36 AVERAGE 21.74 ACCORDINGLY, THE TPO MADE AN ADJUSTMENT OF INR 54,3 7,09,859/-. THE ASSESSING OFFICER PASSED DRAFT ASSESSMENT ORDER DAT ED 13.03.2015. AGGRIEVED BY THE DRAFT ASSESSMENT ORDER, THE ASSESSEE COMPANY FILED ITS OBJECTIONS WITH THE DRP. THE DRP ISSUED THE FOLLOWING DIRECTIONS VI DE DIRECTION/ORDER DATED 29.10.2015: DIRECTED TO INCLUDE THE COMPANIES I.E. SONATA INFO RMATION TECHNOLOGY LTD. AND SOFT CELL TECHNOLOGIES LTD. IN THE FINAL L IST OF COMPARABLES. DIRECTED TO RE-COMPUTE THE MARGINS OF COMPARABLE C OMPANIES BY CONSIDERING PROVISION FOR BAD- DEBTS, FOREIGN EXCHA NGE AS NON-OPERATING AND BANK-CHARGES AS OPERATING. 6 ITA NOS.908 & 296/DEL/2016 DIRECTED TO COMPUTE THE WORKING CAPITAL ADJUSTMENTS ON THE MARGINS OF COMPARABLES. AFTER THE DIRECTIONS OF THE DRP, THE TPO PASSED AN ORDER DATED 04.12.2015 GIVING EFFECT TO THE DIRECTIONS GIVEN BY THE DRP. A CCORDINGLY, THE ASSESSING OFFICER PASSED THE FINAL ASSESSMENT ORDER ON 23.12. 2015 REDUCING THE AMOUNT OF TP ADJUSTMENT FROM INR 54,37,09,859 TO INR 27,08 ,93,220. 5. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE COM PANY AS WELL AS THE REVENUE PREFERRED APPEALS BEFORE US. 6. THE LD. AR SUBMITTED THAT ASSESSEE COMPANY ALSO FILED A RECTIFICATION APPLICATION WITH THE TPO DATED DECEMBER 15, 2015 WH EREIN THE FOLLOWING MISTAKES APPARENT FROM RECORD WERE HIGHLIGHTED: INCORRECT UNADJUSTED MARGIN COMPUTATION OF COMPANI ES IDENTIFIED IN THE FINAL SET OF COMPARABLE; AND INCORRECT MARGIN COMPUTATION OF THE COMPANY. THE TPO AND THE ASSESSING OFFICER PASSED RECTIFICAT ION ORDERS DATED MARCH 28, 2016 AND MAY 04, 2016 RESPECTIVELY IN WHICH THE MAR GIN OF TURNER INTERNATIONAL INDIA PVT. LTD. WAS RECOMPUTED AS 8.1 4%. FURTHER, THE FOLLOWING COMPARABLES AND MARGINS WERE CONSIDERED. S.NO. COMPANY NAME RECTIFIED ADJUSTED OP/OR POST DIRECTIONS OF LD. DRP(%) SOURCE 1 INDIA VISION SATELLITE COMMUNICATION LTD. 17.65 FRESH SEARCH OF THE LD. TPO 2 MAA TELEVISION NETWORK LTD. 10.11 7 ITA NOS.908 & 296/DEL/2016 3 MALYALAM COMMUNICATIONS LTD. 25.54 4 RAJ TELEVISION NETWORK LTD. -34.67 5 TV TODAY NETWORK LTD. 2.09 6 UTV ENTERTAINMENT TELEVISION LTD. 26.06 7 ZEE ENTERTAINMENT ENTERPRISES LTD. 36.95 8 ZEE MEDIA CORPORATION LTD. 4.60 9 SONATA INFORMATION TECHNOLOGY LTD. 1.83 10 SOFT CELL TECHNOLOGY LTD. 3.75 MEAN 9.29 COMPANIES SELECTED BY THE COMPANY IN ITS TP DOCUMENTATION SINCE THE VARIATION BETWEEN THE ARMS LENGTH PRICE (ALP) DETERMINED AFTER CONSIDERING THE CORRECTED ADJUSTED MARGINS OF THE A BOVE MENTIONED COMPANIES AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION OF DISTRIBUTION ACTIVITY HAS ACTUALLY BEEN UNDERTAKEN DID NOT EXCEED 5% OF THE L ATTER, THE SUBJECT INTERNATIONAL TRANSACTION WERE CONSIDERED TO BE AT ARMS LENGTH FROM INDIAN TP REGULATIONS PERSPECTIVE. HOWEVER, THE DEPARTMENT NO T BEING SATISFIED WITH THE RELIEF GIVEN BY THE DRP HAS PREFERRED AN APPEAL BEF ORE THE TRIBUNAL. 8 ITA NOS.908 & 296/DEL/2016 7. THE LD. AR SUBMITTED THAT EXCLUSION OF CHANNEL/ CONTENT OWNERS COMPANIES HELD AS FUNCTIONALLY DISSIMILAR TO THE DISTRIBUTION SEGMENT OF TIIPL BY THE TRIBUNAL IN AY 2006-07 IN THE SECOND ROUND L ITIGATION. THE LD. AR FURTHER SUBMITTED THAT THE TPO HAS WRONGLY SELECTED COMPANIES WHICH WERE PRIMARILY CHANNEL AND CONTENT OWNERS, THUS BEING FU NCTIONALLY DISSIMILAR TO THE ASSESSEE COMPANY. THE LD. AR RELIED UPON THE DECISI ON RENDERED BY THE TRIBUNAL IN THE ASSESSEE COMPANYS CASE FOR AY 2006 -07 BEING I.T.A. N0.1204/DEL/2018) WHEREIN THE TRIBUNAL REJECTED THE DRPS AND THE TPOS ACTION FOR MIXING THE FUNCTIONALITY OF DISTRIBUTION AND PRODUCTION ACTIVITIES AND HELD THAT THE ACTIVITIES ARE INDEPENDENT IN NATURE. THE LD. AR FURTHER SUBMITTED THAT FOR ASSESSMENT YEAR 2012-13 IN ASSES SEES OWN CASE, THE TRIBUNAL RELIED ON THE ORDER FOR ASSESSMENT YEAR 20 06-07 AND DIRECTED THE EXCLUSION OF CHANNEL OWNER COMPANIES FROM THE FINAL LIST OF COMPARABLES TO BENCHMARK THE DISTRIBUTION SEGMENT OF THE ASSESSEE. THE LD. AR SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION I.E. AY 20 11-12, ALL CHANNEL OWNER COMPANIES THAT HAVE BEEN SELECTED BY THE TPO/ DRP I N THE FINAL LIST OF COMPARABLES OUGHT TO BE REJECTED. IN VIEW OF THE AB OVE, THE LD. AR SUBMITTED THAT ALL CHANNEL OWNER COMPANIES BE EXCLUDED FROM T HE FINAL LIST OF COMPARABLE COMPANIES. 8. THE LD. AR FURTHER SUBMITTED THAT IF THE ASSESSE E COMPANYS CONTENTION FOR EXCLUDING ALL CHANNEL/CONTENT OWNER COMPANIES I S ACCEPTED, FOLLOWING WOULD BE THE AVERAGE ADJUSTED OPERATING MARGIN OF T HE COMPARABLE COMPANIES: TABLE 3: REVISED ADJUSTED OPERATING MARGIN AFTER EX CLUDING ALL CHANNEL OWNER COMPANIES S. NO. COMPANY NAME ADJUSTED OP/OR (%) 1 SONATA INFORMATION TECHNOLOGY LTD. 1.83 2 SOFT CELL TECHNOLOGIES LTD. 3.75 9 ITA NOS.908 & 296/DEL/2016 MEAN 2.79 THE WEIGHTED AVERAGE OP/ OR OF THE COMPARABLE COMPA NIES IS 2.79% WHEREAS THE COMPANY HAS EARNED OPERATING MARGIN OF 8.14% WH ICH IS MORE THAN THE AVERAGE OPERATING MARGIN EARNED BY COMPARABLE COMPA NIES. THEREFORE, THE ASSESSEE COMPANY SATISFIES THE ARMS LENGTH STANDAR D. THE LD. AR SUBMITTED THAT EXCLUSION OF CHANNEL OWNER COMPANIES CATEGORIC ALLY REJECTED BY THE TRIBUNAL IN AY 2006-07 IN SECOND ROUND OF LITIGATIO N. 9. THE LD. AR SUBMITTED THAT WITHOUT PREJUDICE TO T HE ABOVE CONTENTION, THE ASSESSEE COMPANY WOULD LIKE TO HIGHLIGHT THAT IN TH E ASSESSEE COMPANYS OWN CASE OF AY 2006-07(SECOND ROUND), THE TRIBUNAL RELI ED ON THE ORDER OF THE TRIBUNAL IN AY 2005-06, 2006-07 (FIRST ROUND), 2007 -08 AND 2008-09, WHEREIN IT WAS HELD THAT CHANNEL/CONTENT OWNER COMPANIES CA NNOT BE TAKEN AS COMPARABLES. CATEGORICALLY, THE TRIBUNAL DIRECTED T HE EXCLUSION OF THE FOLLOWING COMPANIES- MALAYALAM COMMUNICATIONS LTD., RAJ TELEVISION NETWORK LTD., TV TODAY NETWORK LTD., SUN TV NETWORK LTD., ZEE ENTERTAINMENT ENTERPRISES LTD., ZEE MEDIA CORPORATION LTD. AND UTV SOFTWARE COMMUNICATIONS LTD. THE LD. AR SUBMITTED THAT DURING THE YEAR UNDER CON SIDERATION I.E. AY 2011- 12, THE COMPANIES - MALAYALAM COMMUNICATIONS LTD., RAJ TELEVISION NETWORK LTD., TV TODAY NETWORK LTD., ZEE ENTERTAINMENT ENTE RPRISES LIMITED AND ZEE MEDIA CORPORATION LTD. HAVE BEEN SELECTED BY THE TP O/ THE DRP IN THE FINAL LIST OF COMPARABLES BUT OUGHT TO BE REJECTED FOLLOWING T HE AFOREMENTIONED ORDER OF THE TRIBUNAL. IN VIEW OF THE ABOVE, THE LD. AR SUBM ITTED THAT THE COMPANIES BE EXCLUDED FROM THE FINAL LIST OF COMPARABLE COMPANIE S. THE LD. AR SUBMITTED 10 ITA NOS.908 & 296/DEL/2016 THAT IF MALAYALAM COMMUNICATIONS LTD., RAJ TELEVISI ON NETWORK LTD., TV TODAY NETWORK LTD., ZEE ENTERTAINMENT ENTERPRISES LTD. AN D ZEE MEDIA CORPORATION LTD. IS ACCEPTED, FOLLOWING WOULD BE THE AVERAGE AD JUSTED OPERATING MARGIN OF THE COMPARABLE COMPANIES: S. NO. COMPANY NAME ADJUSTED OP/OR POST DIRECTIONS OF LD. DRP (%) SOURCE 1 INDIA VISION SATELLITE COMMUNICATION LTD. 17.65 F RESH SEARCH OF THE LD. TPO 2 MAA TELEVISION NETWORK LTD. 10.11 FRESH SEARCH OF THE LD. TPO 3 UTV ENTERTAINMENT TELEVISION LTD. 26.06 FRESH SEA RCH OF THE LD. TPO 4 SONATA INFORMATION TECHNOLOGY LTD. 1.83 DIRECTION S ISSUED BY THE LD. DRP 5 SOFTCELL TECHNOLOGIES LTD. 3.75 DIRECTIONS ISSUED BY THE LD. DRP MEAN 11.88 11 ITA NOS.908 & 296/DEL/2016 THE LD. AR FURTHER SUBMITTED THAT THE WEIGHTED AVER AGE OP/ OR OF THE COMPARABLE COMPANIES IS 11.88% WHEREAS THE ASSESSEE COMPANY HAS EARNED OPERATING MARGIN OF 8.14%. SINCE THE VARIATION BETW EEN THE ALP DETERMINED AFTER CONSIDERING THE CORRECTED ADJUSTED MARGINS OF THE ABOVE MENTIONED COMPANIES AND PRICE AT WHICH THE INTERNATIONAL TRAN SACTION OF DISTRIBUTION ACTIVITY HAS ACTUALLY BEEN UNDERTAKEN DID NOT EXCEE D 5% OF THE LATTER, THE SAME COMPLIES WITH THE ARMS LENGTH FROM AN INDIAN TP RE GULATIONS PERSPECTIVE. INCLUSION OF COMPANIES INVOLVED IN THE DISTRIBUTION OF SOFTWARE HELD AS FUNCTIONALLY COMPARABLE BY THE TRIBUNAL IN AY 2006- 07 (SECOND ROUND). THE L. AR FURTHER SUBMITTED THAT DURING ITS TP ASSESSMENT PROCEEDING FOR AY 2011- 12, THE TPO REJECTED THE SET OF COMPANIES ENGAGED I N DISTRIBUTION OF SOFTWARE SELECTED BY THE ASSESSEE COMPANY IN THE TP DOCUMENT ATION ALLEGING THAT THE COMPARABLE COMPANIES IDENTIFIED BY THE COMPANY WERE NOT FUNCTIONALLY SIMILAR TO THE DISTRIBUTION AND UNDERTOOK A FRESH COMPARABI LITY ANALYSIS WHEREIN CHANNEL/CONTENT OWNER COMPANIES WERE IDENTIFIED. TH E LD. AR SUBMITTED THAT THE TRIBUNAL IN THE ASSESSEE COMPANYS CASE FOR AY 2006-07 (SECOND ROUND OF APPEAL) (I.T.A. N0.1204/DEL/2018) HAS RULED IN FAVO UR OF INCLUDING SOFTWARES DISTRIBUTION COMPANIES TO BENCHMARK THE DISTRIBUTIO N SEGMENT OF THE ASSESSEE COMPANY. THE LD. AR SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION I.E. AY 2011-12, THE SOFTWARE DISTRIBUTION COMPANIES IDE NTIFIED BY THE ASSESSEE COMPANY IN ITS TP DOCUMENTATION OUGHT TO BE SELECTE D FOR BENCHMARKING THE DISTRIBUTION SEGMENT OF THE COMPANY. THE LD. AR FUR THER SUBMITTED THAT IF THE ASSESSEE COMPANYS CONTENTION FOR EXCLUDING ALL CHA NNEL/CONTENT OWNER COMPANIES AND INCLUDING ALL SOFTWARE DISTRIBUTION C OMPANIES IDENTIFIED BY THE ASSESSEE COMPANY IS ACCEPTED, FOLLOWING WOULD BE TH E AVERAGE ADJUSTED OPERATING MARGIN OF THE COMPARABLE COMPANIES: TABLE 5: REVISED ADJUSTED OPERATING MARGIN AFTER EX CLUDING ALL CHANNEL OWNER COMPANIES AND INCLUDING ALL SOFTWARE DISTRIBUTION C OMPANIES 12 ITA NOS.908 & 296/DEL/2016 S. NO. COMPANY NAME ADJUSTED OP/OR (%) 1 SONATA INFORMATION TECHNOLOGY LTD. 1.83 2 SOFT CELLS TECHNOLOGY LTD. 3.75 3 AVANCE TECHNOLOGIES LTD. 0.55 4 AXON INFOTECH LTD. CONTESTED AS NOT COMPARABLE IN TP ASSESSMENT 5 CRYSTAL SOFTWARE SOLUTION LTD. DATA NOT AVAILABLE 6 EMPOWER INDUSTRIES INDIA LTD. - 3.84 7 SVAM SOFTWARE LTD. - 11.16 8 UNISYS SOFTWARE AND HOLDINGS LTD. 5.57 MEAN - 0.55 THE WEIGHTED AVERAGE OP/ OR OF THE COMPARABLE COMPA NIES IS -0.55% WHEREAS THE COMPANY HAS EARNED OPERATING MARGIN OF 8.14% WH ICH IS MORE THAN THE AVERAGE OPERATING MARGIN EARNED BY COMPARABLE COMPA NIES. THEREFORE, THE ASSESSEE COMPANY SATISFIES THE ARMS LENGTH STANDAR D. AS REGARDS, INCLUSION OF COMPANIES INVOLVED IN THE DISTRIBUTION OF SOFTWARE CATEGORICALLY INCLUDED BY THE HONBLE ITAT IN AY 2006-07 (SECOND ROUND), THE TRIB UNAL IN THE ASSESSEE COMPANYS CASE FOR AY 2006-07 (SECOND ROUND OF APPE AL) (I.T.A. N0.1204/DEL/2018) HAS RULED IN FAVOUR OF ASSESSEE I NCLUDING SOFTWARES DISTRIBUTION COMPANIES TO BENCHMARK THE DISTRIBUTIO N SEGMENT OF THE ASSESSEE COMPANY. THE TRIBUNAL DIRECTED THE DEPARTMENT TO IN CLUDE THE FOLLOWING COMPARABLE COMPANIES IN THE FINAL LIST OF COMPARABL ES: SONATA INFORMATION TECHNOLOGIES LTD. SOFTCELL TECHNOLOGIES LTD. EMPOWER INDUSTRIES INDIA LTD. 13 ITA NOS.908 & 296/DEL/2016 TRIJAL INDUSTRIES LTD. FURTHER, THE LD. AR SUBMITTED THAT IN THE ASSESSEE COMPANYS RECENT CASE FOR A.Y. 2009-10 AND A.Y. 2010-11 ALSO, THE TRIBUNAL RE LIED ON THE FINDINGS OF THE BENCH HELD IN A.Y. 2006-07 AND DIRECTED THE INCLUSI ON OF COMPANIES INVOLVED IN THE DISTRIBUTION OF SOFTWARE IN THE FINAL LIST OF C OMPARABLES TO BENCHMARK THE DISTRIBUTION SEGMENT OF THE ASSESSEE COMPANY. THERE FORE, THE LD. AR SUBMITTED THAT THE DRP HAS BEEN CORRECT IN ITS APPROACH OF IN CLUDING SOFT CELL TECHNOLOGIES LTD. AND SONATA INFORMATION TECHNOLOGY LTD. IN THE FINAL LIST OF COMPARABLES PROPOSED BY THE TPO. THE LD. AR SUBMITT ED THAT ANY MODIFICATION TO THE APPROACH OF THE DRP WOULD BE VIOLATION OF TH E STAND TAKEN BY THE TRIBUNAL IN VARIOUS YEARS. THEREFORE, THE DIRECTION OF THE DRP TO INCLUDE SONATA INFORMATION TECHNOLOGIES LTD. AND SOFT CELL TECHNOL OGIES LTD. SHOULD BE SUSTAINED. FURTHER, IN THE PRESENT CASE, WHILE THE DRP HAD DIRECTED THE TPO TO INCLUDE THE COMPARABLE COMPANIES - SONATA INFORMATI ON TECHNOLOGIES LTD. AND SOFTCELL TECHNOLOGIES LTD. IN THE FINAL LIST OF COM PARABLES COMPANIES. THE COMPARABLE COMPANY- EMPOWER INDUSTRIES INDIA LTD. I S STILL NOT CONSIDERED IN THE LIST. THUS, FOLLOWING THE DECISION OF THE TRIBU NAL AND THE DRP TO TAKE THE WORKING CAPITAL ADJUSTED MARGINS OF FOUR COMPANIES NAMELY SONATA INFORMATION TECHNOLOGIES LTD., SOFTCELL TECHNOLOGIE S LTD., EMPOWER INDUSTRIES INDIA LTD. AND AVANCE TECHNOLOGIES LIMITED AND EXCL UDE CHANNEL/ CONTENT OWNER COMPANIES, THE FINAL SET OF COMPARABLES SHALL BE:- SR. NO. NAME OF COMPARABLE COMPANY ADJUSTED OP/ OR (%) 1 SONATA INFORMATION TECHNOLOGY LTD. 1.83 2 SOFT CELL TECHNOLOGIES LTD. 3.75 3 EMPOWER INDUSTRIES INDIA LTD. - 3.84 4 AVANCE TECHNOLOGIES 0.55 14 ITA NOS.908 & 296/DEL/2016 LTD. MEAN 0.57 THE LD. AR SUBMITTED THAT THE WEIGHTED AVERAGE ADJU STED OP/ OR OF THE ABOVE THREE COMPARABLES IS 0.57% WHEREAS THE COMPANY HAS EARNED OP/OR MARGIN OF 8.14% WHICH IS MORE THAN THE AVERAGE OPERATING M ARGIN EARNED BY COMPARABLE COMPANIES. THEREFORE, THE ASSESSEE COMPA NY SATISFIES THE ARMS LENGTH STANDARD. 5. THE LD. DR SUBMITTED THAT THE TRANSFER PRICING O FFICER HAS RIGHTLY EXCLUDED THESE TWO COMPARABLES AS THE TPO POINTED O UT IN PARA 21, 22 & 23 OF THE HIS ORDER THAT THE ASSESSEE IS NOT A DISTRIBUTO R OF SOFTWARE PRODUCTS AND HAS FAR MORE COMPLEX FUNCTIONS AND IS ENGAGED IN DI STRIBUTION OF CHANNEL CONTAINED LIKE HBO, CNN, CARTOON NETWORK, POGO ETC. BUT THE LD. DR COULD NOT CONTROVERT THE DECISION OF THE TRIBUNAL IN ASSE SSEES OWN CASE FOR ASSESSMENT YEAR 2006-07. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL AVAILABLE ON RECORD. IT IS PERTINENT TO NOTE HERE THAT THE FA CTS OF THE PRESENT ASSESSMENT YEAR ARE IDENTICAL TO THAT OF THE ASSESSMENT YEAR 2 006-07 AND THE BUSINESS PROFILE OF THE ASSESSEE HAS NOT BEEN DIFFERENT IN T HE PRESENT YEAR AS WELL. THE TRIBUNAL FOR AY 2006-07 HELD AS UNDER: 11. THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSM ENT YEAR 2007-08 AND 2008-09 AND ALSO IN ASSESSMENT YEAR 2006-07 HAV E HELD THAT SATELLITE TV CHANNELS AND CABLE NETWORK OPERATORS HAVE / SIGNIFICANTLY DIFFERENT OPERATING MODELS AND PROVIDE EARNING MODEL AND ONCE THE TRIBUNAL HAS HELD THAT SUCH CHANNEL/CONTENT OWNER COMPANIES SHOULD NO T BE INCLUDED FOR THE PURPOSE OF COMPARABILITY ANALYSIS, THEN THERE IS NO REASON WHY THE TPO IS 15 ITA NOS.908 & 296/DEL/2016 AGAIN SELECTING SUCH COMPANIES FOR THE PURPOSE OF B ENCHMARKING THE ALP OF THE ASSESSEES DISTRIBUTION SEGMENT. BEFORE US, THE LEARNED COUNSEL HAS ALREADY CLARIFIED ON THE BASIS OF MATERIAL AVAILABL E ON RECORD THAT DISTRIBUTION ACTIVITY AND ANCILLARY/PRODUCTION ACTIVITY OF THE A SSESSEE ARE TWO DISTINCT SET OF TRANSACTIONS FOR WHICH, NOT ONLY SEPARATE BENCHM ARKING HAS BEEN DONE BUT ALSO SEPARATE REMUNERATION HAS BEEN EARNED FOR EACH OF THE SAID ACTIVITIES. SO FAR AS PRODUCTION ACTIVITY IS CONCERN, THE SAME HAS BEEN FOUND AT ARMS LENGTH BY THE TPO AND ONCE THESE ARE TWO DIFFERENT SEGMENT S THEN THERE IS NO JUSTIFICATION TO MIX UP THE FUNCTIONS OF SUCH ANCIL LARY ACTIVITIES WITH THAT OF DISTRIBUTION ACTIVITY SO AS TO JUSTIFY SELECTION OF SUCH CHANNEL/CONTENT OWNER COMPANIES, ESPECIALLY WHEN TRANSACTION FROM SUCH AN CILLARY SERVICES CONSTITUTES ONLY 4% OF THE VALUE OF THE INTERNATION AL TRANSACTION OF THE ASSESSEE. APART FROM THAT, THE ASSESSEE IS PROVIDIN G THESE SERVICES AS A CAPTIVE SERVICE PROVIDER FOR WHICH IT IS REMUNERATE D SEPARATELY AND ALP OF SUCH TRANSACTION IS NOT IN DISPUTE. ACCORDINGLY, WE REJECT THE DRPS AND TPO ACTION FOR MIXING THE FUNCTIONALITY OF DISTRIBUTION AND PRODUCTION ACTIVITIES WHICH ARE IN FACT INDEPENDENT AND ALSO SEPARATELY B ENCHMARKED. WE ARE IN TANDEM WITH THE CONTENTION OF THE LEARNED COUNSEL T HAT THESE TWO ACTIVITIES CANNOT BE MIXED UP FOR DISTORTING THE FUNCTIONALITY AND JUSTIFYING THE SELECTION OF CHANNEL OWNER COMPANIES. . 13. IN SO FAR AS THE AFORESAID CONTENTION OF THE LEARNED C OUNSEL THAT SOFTWARE DISTRIBUTION COMPANY BE ACCEPTED, WE AGREE IN PRINCIPLE THAT SUCH COMPANIES CAN BE TAKEN FOR COMPARABILITY ANALYSIS, WHEN THERE ARE NO DIRECT COMPARABLE DEALING WITH DISTRIBUTION OF SATELLITE C HANNELS ARE AVAILABLE. SUCH AN ACCEPTABILITY OF SOFTWARE DISTRIBUTION COMPANIES IN THE CASE OF DISTRIBUTION OF TV CHANNELS HAS FOUND FAVOUR BY THE CO-ORDINATE BENCH IN THE CASE OF NGC INDIA PVT. LTD. (SUPRA). THUS, WE HOLD THAT SOFTWARE COMPANIES CAN ALSO BE INCLUDED FOR THE PURPOSE OF COMPARABILITY ANALYSIS, BECAUSE IN ASSESSEES OWN CASE FOR THE SUBSEQUENT YEARS SUCH COMPANIES HA VE BEEN ACCEPTED TO BE GOOD COMPARABLES AND TRIJAL INDUSTRIES LTD. TOO HAS BEEN ACCEPTED AS A VALID 16 ITA NOS.908 & 296/DEL/2016 COMPARABLE BY THE TPO IN THE ASSESSMENT YEAR 2013-1 4. THEREFORE, THE DRP HAS RIGHTLY INCLUDED THESE COMPA RABLES. THEREFORE, APPEAL OF THE REVENUE IS DISMISSED. 7. AS REGARDS ASSEESSEES APPEAL IS CONCERNED, THE SAME BECOMES INFRUCTUOUS AS THE ISSUE CONTESTED THEREIN ARE MERE LY OF ACADEMIC IN NATURE. THEREFORE, THE APPEAL OF THE ASSESSEE IS ALSO DISMI SSED. 8. IN RESULT, APPEAL OF THE REVENUE AND THE ASSESSE E ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 04 TH FEBRUARY, 2019 . SD/- SD/- (N. K. BILLAIYA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEM BER DATED: 04/02/2019 R. NAHEED * COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI 17 ITA NOS.908 & 296/DEL/2016 DATE OF DICTATION 29.01.2019 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 30.01.2019 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/PS 0 5 .0 2 .2019 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 0 5 .0 2 .2019 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 0 5 .0 2 .2019 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK