IN HIGH COURT OF DELHI AT NEW DELHI Date of Decision: 07.11.2017 ITA 882/2017 COMMISSIONER OF INCOME TAX (LTU) ..... Appellant versus M/S ESPN SOFTWARE INDIA LTD. ..... Respondent ITA 890/2017 & CM No.37958/2017 COMMISSIONER OF INCOME TAX (LTU) ..... Appellant versus M/S ESPN SOFTWARE INDIA LTD. ..... Respondent ITA 891/2017 COMMISSIONER OF INCOME TAX (LTU) ..... Appellant versus ESPN SOFTWARE INDIA LTD. ..... Respondent Present: Mr. Rahul Chaudhary, Sr. Standing Counsel with Mr. Sanjay Kumar, Jr. Standing Counsel for appellant. Mr. Porus Kaka, Sr. Adv. with Mr. Divesh Chawla & Mr. Prakash Kumar, Advs. for respondent. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE SANJEEV SACHDEVA ITA No.882/2017 & conn. matters Page 1 S. RAVINDRA BHAT, J. (ORAL) 1. question of law urged by Revenue is that ITAT fell into error in clubbing of two distinct revenue streams i.e. sale of air time with distribution business, advertisements, sale business, etc. TPO was of opinion that both sets of businesses were separate and distinct and could not have been clubbed. assessee had urged that clubbing of these transactions for Arm s Length Price (ALP) determination had been permitted in past. It relied upon common features to contend that whereas in sale of airtime, it was bulk sale of product/service to concerned customer, i.e. air time user, distribution too involves sale through network. TPO s rejection of aggregation, for ALP determination was appealed against. 2. CIT (A) was of opinion that both segments were appropriately clubbed for purposes of benchmarking international transactions and cited two reasons. Firstly, that were closely related and that popularity of channel had bearing on subscription as well as sale of airtime for advertisement. It was felt that both businesses mutually reinforced each other. If channel fails to air popular sporting activities, advertisement sale would correspondingly be impacted adversely. second element which persuaded CIT (A) to accept assessee s contention was that both segments employed same set of assets and that separately benchmarking them would take it away from reality. Furthermore, ITAT felt that it was not possible to merge comparables for profits having regard to these practical considerations, CIT upheld ITA No.882/2017 & conn. matters Page 2 assessee s decision to aggregation of sets of transactions for purpose of ALP determination and worked out operating profit margin of 7.82%. 3. In appeal, Revenue emphasized that in earlier years advertisement sales segment had reflected profit but that in year under consideration assessee had recorded losses. This was used as evidence to say that clubbing of two transactions or rather their aggregation, distorted picture. other argument made was that assessee overstated purchase price of advertisement inventory which had been clearly added by AO as assessee had adjusted losses incurred against profit distribution. Thus apparently, deliberately merging two audited separate business segment, i.e., distribution business segment and sale of air time advertisement sale segment. ITAT rejected Revenue s submissions. findings of ITAT pertinently are as follows: 20. In present case, it is noticed that activities of distribution of channels and advertisement air time inventory allotment are inter-related because higher subscriber base of channel, greater are chances of aired advertisement being viewed by large target audience because advertisers want widest possible coverage to their messages and both activities i.e. subscription and advertisement air time drive towards same end of promotion of channels. As regards to objection of TPO/AO that there was loss in advertisement air time inventory business in year under consideration while in earlier year there was profit, ld. Counsel for assessee explained that in earlier years assessee was acting only as commission agent for its AE and ITA No.882/2017 & conn. matters Page 3 solicited advertisements in Indian market for its AE for that purpose assessee was getting fixed percentage of commission while for year under consideration and in succeeding years, assessee shifted to distribution model in pursuant to change in foreign exchange regulations of RBI vide Circular No. 76 which relaxed condition of export earnings by advertisers in Foreign Television Channels and assessee, without prior approval from RBI, could have brought air time on bulk basis and allot same directly to third parties i.e. advertisement agencies etc. It is also noticed that Ministry of Information and Broadcasting formulated several guidelines vide Downlinking Guidelines Number 13/2/2002-BP&L/BC-IV dated 11.11.2005. said guidelines were as under: 1.3 applicant company must either own channel it wants downlinked for public viewing, or must enjoy, for territory of India, exclusive marketing/distribution rights for same, inclusive of rights to advertising and subscription revenues for channel and must submit adequate proof at time of application. 1.4 In case applicant company has exclusive marketing / distribution rights, it should also have authority to conclude contracts on behalf of channel for advertisements, subscription and programme content. 21. In view of aforesaid guidelines, if assessee decided to relinquish advertisement air time inventory rights on account of losses, it would also have to relinquish subscription rights to channel which have resulted in profits. Therefore, assessee was required to aggregate both activities i.e. channel subscription and air time sale segment. Accordingly, assessee aggregated both activities for purpose of ITA No.882/2017 & conn. matters Page 4 arm s length analysis. It is also noticed that advertisement air time revenue earned by assessee has direct correlation with number of cricket events which is evident from chart furnished by assessee, reproduced in former part of this order. On perusal of said chart, it would be clear that when cricket events were more in FYs 2007-08 and 2009-10. OP/sales ratio jumped to 9.18% and 6.85% respectively from negative ratio of 0.78% in FY 2004-05 when cricket events were less. In present case, by changing business model, assessee was getting more control over distribution of function and it was part of business strategy of assessee. It is also noticed that OECD guidelines clearly states that closely linked transaction should have been aggregated and evaluated together in this regard. It is relevant to refer OECD guidelines which read as under: Ideally, in order to arrive at most precise approximation of arm s length conditions, arm s length principle should be applied on transaction-by-transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on separate basis. 4. On basis of above observations and after taking due note of OECD Transfer Pricing Guidelines as well as US Transfer Pricing Regulations, ITAT upheld Appellate Commissioner s findings that transactions in question ought to be analyzed in conjunction i.e. after aggregation for arm s length purposes. ITAT also found that assessee had structured itself in manner that its profit was maximized as whole rather than independently as regards these two activities. ITA No.882/2017 & conn. matters Page 5 5. This Court has considered submissions of Revenue which largely reiterated what was urged before Tribunal. 6. Court is of opinion that ITAT s decision cannot be faulted. rejection of RBI guidelines and TPO s omission given due weight to down linking guidelines were relevant factor, which in our opinion, CIT(A) and ITAT correctly noted to reverse original findings. It is settled proposition that whether to segregate or not segregate two transactions, is entirely fact dependent exercise that cannot per se be treated as question of law. In present case, reasons which impelled lower authorities i.e. CIT (A) and ITAT to uphold assessee s plea with regard to aggregation for ALP purposes, are reasonable and cannot be interfered with. appeals are therefore dismissed. S. RAVINDRA BHAT, J SANJEEV SACHDEVA, J NOVEMBER 07, 2017 kks ITA No.882/2017 & conn. matters Page 6 Commissioner of Income-tax (LTU) v. ESPN Software India Ltd