|CORAM:||G. S. Pannu (AM), Ravish Sood (JM)|
|SECTION(S):||92C, Rule 10B(1)(b)|
|CATCH WORDS:||ALP, Arms length price, corporate guarantee, Resale Price Method, RPM|
|DATE:||May 5, 2017 (Date of pronouncement)|
|DATE:||May 11, 2017 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|Transfer Pricing: Law explained as to when the “Resale Price Method” (RPM) can be used with respect to related parties under Rule 10B (1)(b) + Law on determining arm’s length rate of the corporate guarantee commission/fee explained|
(i) The assessee purchases as well as carries out an inhouse production of general entertainment programmes, current affairs and film rights for telecasting on its channels in India. Subsequent to such exploitation on Indian channels, assessee company exports/sells limited telecasting rights of such programme and films to its associated enterprise, ATL Mauritius for enabling the telecast of such products on the channels of its associated enterprise in the territories of UK, USA, Africa, Middle East, etc. The said transaction has been entered in terms of a Memorandum of Understanding dated 01/10/2005, copy of which has been placed in the Paper Book at pages 63 to 66. Thus, assessee has entered into an ‘international transaction’ within the meaning of section 92B of the Act with the its associated enterprise ATL Mauritius, for sale of rights of TV programmes and films, which were already exhibited on its TV channels in India. During the year under consideration, assessee has received a sum of Rs.79,35,25,132/- as proceeds against the export/sale of TV programmes and films to ATL Mauritius. At this stage, we may also refer to the associated enterprise (ATL) and as per the material on record it transpires that the said concern is operating TV channels in various countries like, UK, USA, Middle East, South Africa, etc. The channels are managed and distributed by its subsidiaries in UK and USA. It is also emerging from record that ATL Mauritius had entered into a distribution agreement with its subsidiaries, namely Zee, TV –USA and Asia TV-UK. The programmes and films acquired from assessee are supplied by ATL, Mauritius to the subsidiaries, who are the channel operators in the respective territories. At the time of hearing, it was explained that the associated enterprise supplies the programmes and films acquired from assessee to the actual channel operating subsidiaries in a telecast mode in FPC format through its transmission systems.
(ii) The Transfer Pricing Officer has selected RPM as most appropriate method for determining the arm’s length price of the transaction of sale of programmes and film rights to ATL in contrast to the TNM method selected by the assessee. The first controversy is as to whether the Transfer Pricing Officer was justified in selecting the RPM as most appropriate method. Section 92(1) of the Act provides that the arm’s length price in relation to the international transaction shall be determined by any of the methods prescribed therein, being the most appropriate method. Notably, the phraseology of section 92C(1) of the Act makes it clear that the selection of the most appropriate method is to be made “having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors………………..”. Further, Rule 10B of the Rules enumerates the various methods to determine the arm’s length price of an international transaction and for the present purpose, what is relevant is clause(b) of Rule 10B(1) of the Rules, which prescribes the manner in which the RPM is to be effectuated.
(iii) The first attack set-up by the appellant against the selection of RPM is that the same has been inappropriately applied by the Transfer Pricing Officer inasmuch as the transactions of ATL with Zee TV-USA and Asia TV-UK are not between unrelated entities. The said proposition is being supported by the phraseology of Sub-clause(i) of clause (b) of Rule 10B (1) of the Rules.
(iv) Quite clearly, the RPM, at the threshold, refers to the price at which the property purchased by the enterprise from an associated enterprise is re-sold or provided to an ‘unrelated enterprise’ or in other words an independent entity. In the present case, it is undeniable that Zee TV- USA and Asia TV-UK are entities which are 100% owned by ATL-Mauritius and, therefore, the transactions amongst them cannot be considered as between unrelated entities, and the same are not uncontrolled transactions. Therefore, on this singular aspect the action of the Transfer Pricing Officer in selecting RPM as the most appropriate method is wholly inappropriate and wrong. So however, we find that the Transfer Pricing Officer was conscious of such a situation and has sought to counter the aforesaid by observing as under:-
“Further even OECD guidelines, in similar situation permits, looking at the controlled transactions as a guide to determining ALP of the transactions if the said tested transactions appear to be of dubious nature with an intention to shift profit…….”
(v) The aforesaid reveals the mind of the Transfer Pricing Officer, as according to him, even controlled transactions can be a good data to determine the arm’s length price, if the tested transactions appears to be of ‘dubious nature’ carried out with an intention to ‘shift profit’. Though we are unable to find any statutory backing for the aforesaid stand of the Transfer Pricing Officer, but even going by the factual matrix of the present case, there is no material to say that the transaction in question is of ‘dubious nature’, as our subsequent discussion would show.
(vi) Firstly, it is to be noted that the impugned international transaction of sale of TV programme and films is not specific to the year under consideration and rather, it has been entered in terms of an Memorandum of Understanding dated 01/10/2005, which shows that similar transactions have been entered by the assessee in the past years also. In fact, at the time of hearing, it has been emphasized that such transactions have been entered in the past as well as in the subsequent years and in none of the years upto assessment year 2012-13, the transactions have been viewed as dubious by the assessing authority. Therefore, in this background, the stand of the Transfer Pricing Officer in the instant year becomes suspect, and, in any case, it lends a heavy burden on the Transfer Pricing Officer to demonstrate the ‘dubious’ nature of the transactions. The moot point is whether such a burden has been discharged by the Transfer Pricing Officer? The discussion in the order of Transfer Pricing Officer reveals two reasons which have weighed with him to conclude that the transactions are dubious. Firstly, according to him, the programmes have been sold at ‘throwaway prices’ to the associated enterprise as compared to the actual cost of production. For this purpose, he has tabulated the Sale Price of certain T.V. Programmes in para 6.4 of his order. At the time of hearing, Ld. Representative for the assessee pointed out that the reference to such values was a misnomer, because they are prices at which TV programmes and films have been sold to non-associated enterprises. In support, he has referred to page 119 of the Paper Book which brings out that the sale rates are for sales made to non-associated enterprises. It is seen that such a point was raised by the assessee even before the CIT(A) but the same has been merely brushed aside; and, even before us there is no repudiation to the same. Thus, it becomes quite clear that the stand of the Transfer Pricing Officer is based on a misconception, and is devoid of any factual support. The second reason advanced by the Transfer Pricing Officer is that the Sale Prices determined by the assessee in consultation with ATL is in “disregard of the actual cost incurred by the assessee.” On this point, reference has been made to a communication dated 14/10/2011 addressed to the Transfer Pricing Officer, a copy of which is placed at pages 115 to 126 of the Paper Book. In this communication, assessee explained the basis on which the prices have been charged from the associated enterprises. Assessee has explained the policy of amortization of cost of programmes and the manner in which the prices have been determined for sale to ATL. As per the assessee, it was following the policy of amortization of its cost of programmes over three years, whereby its writes-off 80% of programme’s acquired cost in the first year of telecast, and 10% each in the subsequent two years. Further, if on evaluation, it is found that the realizable value of the programme at the year end is less than unamortized cost, then there is an additional write-off or full write-off of the programme cost. It has been emphasized that such amortization policy of writing-off the cost in 3 years is being consistently followed, and has not been disputed by the Revenue in any of the assessment years. It was explained that in terms of the said policy, the major cost of the programme is written-off once it is telecast in India and the balance 20% is written-off in the subsequent two years. In this background, assessee explained that in terms of its Memorandum of understanding with associate enterprises, the pricing formula is based on grading the programmes on acquisition cost and the price charged is more than 20% of the average programme cost. From the pricing policy canvassed by the assessee it is quite evident that the programmes are sold to the associate enterprises only after it is commercially exploited/telecast in India. The policy also shows that the revenues generated from the sale to associated enterprise would result in profits, since almost 80% or more of the cost stands written-off in the first year itself against the revenues generated from the telecast in India. Thus, in our considered opinion, the Transfer Pricing Officer has not discharged his burden to demonstrate how the transaction with associate enterprise be considered as dubious.
(vii) The unsustainability of the approach of the Transfer Pricing Officer in selecting the RPM can also be gauged if one takes into consideration the provisions of Rule 10C of the Rules. As noted earlier, the computation of arm’s length price under section 92C(1) of the Act is required to be made in terms of the most appropriate method prescribed therein. Sub-section (1) of section 92C of the Act also enumerates the methods prescribed and Rule 10C(1) of the Rules postulates that the most appropriate method shall be the method which is “best suited to the facts and circumstances of each particular international transaction”, and which provides the “most reliable measure” of an arm’s length price in relation to the international transaction . Sub-rule(2) of Rule 10C provides the factors which shall be taken into consideration while selecting the most appropriate method. Quite clearly, the entire discussion in the order of the Transfer Pricing Officer does not reflect any justifiable factors for selecting the RPM method in preference to the TNM method selected by the assessee as the most appropriate method. Moreover, it is factually evident that assessee has undertaken similar international transactions of sale of television programmes and film rights to its associated enterprises in the past as well as in subsequent years and the same were benchmarked by considering the TNM method as most appropriate method; and, such position has been accepted by the assessing authority in the respective years. No doubt, the principles of res judicata are not strictly applicable to the incometax proceedings, so however, if a qualitatively comparable situation exists in more than one assessment year, then the rules of consistency cannot be given a go by. In the instant case, we find that the impugned international transaction of sale to the associated enterprise, ATL Mauritius is effected in terms of Memorandum of Understanding dated 01/10/2005, which clearly shows that qualitatively similar transactions have been undertaken by the assessee in the past year, wherein benchmarking done by selecting the TNM method as the most appropriate method stands accepted. In the course of hearing, the Ld. Representative for the assessee had asserted that similar fact situation prevails in the subsequent assessment years also, and such assertion has not been controverted by the Revenue before us. Even otherwise, we find that the Transfer Pricing Officer has not brought out any justifiable reasons to depart from adopting the TNM method, which has otherwise been found to be applicable in the assessments of past as well as subsequent assessment years upto to the assessment year 2012-13, as stated before us by the Ld. Representative for the assessee before us. Therefore, on the principle of consistency also, we are unable to uphold the selection of RPM method as the most appropriate method by the Transfer Pricing Officer in preference to the TNM method selected by the assessee.
(viii) Before parting, we may now refer to the point raised by the Ld. Departmental Representative to the effect that assessee had failed to show before the Transfer Pricing Officer that it had kept and maintained the information and documents required in terms of Rule 10D(1) of the Rules. Therefore, according to Ld. Departmental Representative, the Transfer Pricing Officer was justified in rejecting the TNM method selected by the assessee. On this count, the Ld. Representative for the assessee pointed out that the observations of the Transfer Pricing Officer in this regard are contrary to the fact-situation. It is pointed out that assessee has maintained its documentation contemporaneously before the due date of filing of return of income as required as per Rule 10D(2) of the Rules and the prescribed report has also been certified by the Accountant in form No.3CEB. The Ld. Representative for the assessee explained that in the course of proceedings before the Transfer Pricing Officer there was certain delay in furnishing the requisite information, including the documentation and information required to be maintained as per Rule 10D(1) of the Rules, but the delay by itself cannot be interpreted to mean that the requisite information or documentation was not contemporaneously maintained. In this context, the Ld. Representative for the assessee has also referred to the Paper Book filed, wherein the requisite information, material and documentation required under Rule 10D(1) of the Rules has been placed. We find that the said material was very much before the Transfer Pricing Officer and, therefore, in our considered opinion, the stand of the Revenue is quite misplaced.
(ix) Another aspect argued by the Ld. Departmental Representative was to the effect that in case the action of the Transfer Pricing Officer in selecting the RPM is not upheld, then the matter be remanded back to the Transfer Pricing Officer for appropriately verifying the comparability analysis undertaken by the assessee by applying the TNM method. On this point, the Ld. Representative for the assessee referred to the Paper Book to point out that the following workings/explanations were furnished in the course of proceedings before the Transfer Pricing Officer with regard to the application of TNM:- (i) submission of Form No.3CEB and FAR analysis vide communication dated 25/10/2011, copies of which are placed in the Paper Book at pages 136 and 153; (ii) explanation regarding accept/reject matrix of comparables and analysis of the Profit Level Indicator(PLI) of the assessee vis-à-vis comparable concerns vide communication dated 27/05/2011, copies of which have been placed at pages 95, 98 to 105 of the Paper Book; (iii) working of methodology adopted for searching comparables furnished to the Transfer Pricing Officer, copy of which has been placed in the Paper Book at pages 106 and 107; (iv) TNM method working for the last three years submitted to the Transfer Pricing Officer vide letter dated 07/10/2011, placed at pages 110 of the Paper Book. The Ld. Representative for the assessee pointed out that the above information was submitted at the instance of the Transfer Pricing Officer himself, which clearly demonstrates that the TNM method workings have been examined by the Transfer Pricing Officer and no adverse inference has been drawn by him. For the said reasons, he has opposed the plea of the Ld. DR to remand the matter back to the file of the Assessing Officer/Transfer Pricing Officer. On this aspect, we find that it would be inappropriate to factually conclude that the Transfer Pricing Officer has not verified the TNM method applied by the assessee company. In fact, in terms of page 108 of the Paper Book, wherein is placed a copy of assessee’s communication to Transfer Pricing Officer dated 07/10/2011, the assessee had submitted a working to demonstrate that even if the concerns which were selected by the Transfer Pricing Officer for assessment year 2007-08 are taken as comparables for the instant year also, the transactions with ATL-Mauritius would still to be at arm’s length price. All this goes to show that the Transfer Pricing Officer was fully aware of the manner in which the TNM method was applied by the assessee company and there are no adverse observations in this regard. The material on record, in our view, clearly belies the averment of the Revenue that the matter be restored back to the file of Transfer Pricing Officer for verifying the application of TNMM method. Rather, in our view, the fact-situation clearly points to the contrary inasmuch as the assessee had fully explained its position in the course of proceedings before the Transfer Pricing Officer and no justifiable fault has been pointed out by the Transfer Pricing Officer; and, even before us the same position continues on behalf of the Revenue. Under these circumstances, in our view, the plea of the Ld. Departmental Representative is untenable and is hereby rejected.
(x) Notably, as the orders of the lower authorities reveal, the principal plea of the assessee was that furnishing of a corporate guarantee on behalf of the associated enterprise is not to be construed as an ‘international transaction’ within the meaning of section 92B of the Act. Before us, the Ld. Representative for the assessee has not laid any emphasis on the aforesaid primary plea, but has assailed the rate of 3% adopted by the income tax authorities to determine arm’s length rate of the impugned international transaction of providing corporate guarantee to the bank on behalf of the associated enterprise. Therefore, we are confining our discussion to the efficacy of the rate of 3%, which has been considered to be arm’s length rate for corporate guarantee fee/commission. In this context, the Ld. Representative for the assessee referred to the judgement of the Hon’ble Bombay High Court in the case of CIT vs. Everest Kanto Cylinders Ltd., 378 ITR 57 (Bom), wherein the arm’s length rate of 0.50% has been approved in respect of corporate guarantee fee/commission. According to him, the rate of 0.50% was approved in the case of Everest Kanto Cylinders Ltd. (supra) because the same was suo-moto applied by the assessee , whereas in the present case, the facts and circumstances are such that the arm’s length rate of corporate guarantee fee/commission ought to be determined at a lower rate. In order to justify the lower rate, the Ld. Representative for the assessee pointed out that the loan raised by the associated enterprise was fully secured by the assets owned by the associated enterprise and it was pointed out that net worth of the associated enterprise as on 31/03/2008 was around Rs.800 crores and profit after tax for the year ending 31/03/2008 is to the tune of Rs.48 crores. It was sought to be pointed out that the associated enterprise was in a good financial health to borrow monies from bank on its own account; that the loan was only to the extent of 30 million US dollars, which was quite insignificant considering the net worth of the associated enterprise. Secondly, it was also explained that assessee was in possession of about Rs.183.30 crores of interest-free funds belonging to the associated enterprise as on 31/3/2008 and considering all these aspects, there was no risk of the guarantee devolving on the assessee for payment. For all the said reasons, it is sought to be pointed out that the adjustment, if any, be restricted to a rate even lower than 0.50%.
(xi) We have carefully considered the rival submissions. As observed by us earlier, the limited issue before us relates to the efficacy of the arm’s length rate of 3% determined by income tax authorities on account of fee/commission for corporate guarantee provided on behalf of the associated enterprise. Factually speaking, in the present case, assessee company has issued corporate guarantee on behalf of its associated enterprise for the loan facility availed by it from the bank. The determination of arm’s length commission/corporate guarantee fee @ 3% by the Transfer Pricing Officer is based on the fees charged by the banks. Quite clearly, the aforesaid approach of the income-tax authorities is inconsistent with the judgment of the Hon’ble Bombay High Court in the case of Everest Kanto Cylinders Ltd.(supra). As per Hon’ble Bombay High Court, the instance of a commercial bank issuing bank guarantee is incomparable to a situation where a corporate entity issues guarantee to the bank that if the subsidiary/associated enterprise does not repay a loan, the same would be made good by such corporate entity. Therefore, following the ratio of the judgment of the Hon’ble Bombay High Court in the case of Everest Kanto Cylinders Ltd.(supra), the rate of 3% deserves to be rejected. So however, the addition is required to be sustained on the basis of an arm’s length rate and in this regard a reference has also been made to the decision of the Mumbai Tribunal in the case Thomas Cook (India) Limited in ITA No.859/Mum/2014 dated 29/04/2016, wherein a rate of 0.5% has been adopted for the purposes of determining the arm’s length rate of corporate guarantee/fee. The Ld. Representative for the assessee has canvassed for adoption of a lower rate, whereas the Ld. Departmental Representative appearing for the Revenue has referred to the alternate plea of the assessee itself, which was raised before the CIT(A) that such rate be taken as 1%. In our view, the arguments of the Ld. Departmental Representative appearing for the Revenue with reference to the rate of 1% canvassed by the assessee before the CIT(A) cannot be accepted because such a rate was canvassed based on the rate charged by the Barclays Bank from the associated enterprise. Ostensibly, the adoption of such a rate would militate against the ratio laid down by the Hon’ble Bombay High Court in the case of Everest Kanto Cylinders Ltd.(supra). At the same time, the plea of the Ld. Representative for the assessee that a rate lower than 0.5% be adopted is also not justified. In sum and substance, the plea of the assessee is that the loan raised by the associated enterprise has adequate primary security in the shape of the net worth of the associated enterprise itself and, therefore, the risk of devolvement of the guarantee given by the assessee is minimal. In our considered opinion, the said feature cannot be considered as a peculiar situation so as to warrant a rate lower than 0.50%, which has been approved in a number of decisions of the Mumbai bench of Tribunal, namely:-
(1) M/s.Everest Kanto Cylinders Ltd. vs. DCIT, ITA No.542/Mum/2012 order dated 23/11/2012.
(2) Aditya Birla Minacs Worldwide Ltd. vs. DCIT, 56 taxman.com 317 (Mum-Trib)
(3) M/s. Godrej Household Products Ltd. vs. Addl. CIT, ITA No.7369/Mum/2010 order dated 22/11/2013
(4) ACIT vs. Nimbus Communications Ltd., ITA No.3664/Mum/2010 dated 12/06/2013.
(xii) Therefore, considering the entirety of facts and circumstances, we are inclined to uphold the rate of 0.5% for the purposes of determining arm’s length rate of the corporate guarantee commission/fee. Thus, on this aspect, we set-aside the order of CIT(A) and direct the Assessing Officer to recompute the addition as per our aforesaid direction.
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