ITAT deletes Addition since Transaction of Rendering Marketing Services of Channel Placement Rights with Broadcasters was Deductible under Domestic Transfer Pricing provisions [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) in the case of Hathway Cable and Datacom Ltd v DCIT deletes addition on the ground that transaction of rendering marketing services of channel placement rights with broadcasters was deductible under Domestic Transfer pricing provisions

Assessee company operates as a ‘multi-system operator’ in the distribution of television channels through analog and digital cable distribution networks and internet services through cable. The assessee company operates as last-mile cable operator for certain territories of the country. These entities fall within the meaning of related parties (RPs) as defined in Section 40A(2)(b) of the Act. The assessee company has adopted a ‘Pooled Model’ under which it negotiates and settles with the broadcasters for their channels or bouquets of channels. The amount paid by broadcasters for placing their channels at preferred positions is placement charges. Such revenue is shared by the assessee with the RPs on the basis of their subscriber base. However, the assessee company being the principal negotiator is in a position to bargain for a significantly higher amount of placement charges in comparison to what the company and each related party would have got.

The issue in the present case is the decision of DRP for upholding 10% of the ad hoc addition made on account of income distribution for the marketing services rendered for the marketing services of channel placement rights.

During the year under consideration, the assessee got aggregate placement charges from all the broadcasters amounting to Rs.314 crores and after retaining the amount attributable to the direct subscriber base of the company, distributed the balance amount of Rs.69.60 crores among the RPs according to their respective entitlements worked out on the basis of their subscribers.

TPO rejected the system of proportional allocation of the total placement revenue for the reason that the benchmarking is ad-hoc in nature and does not justify the allocation of total revenues proportionately. As per the TPO when 78% of the customer base was of the company itself whereas the customer base of individual RPs is only 5% to 7% of the total base, then the RPs cannot be treated par with the assessee company in the matter of sharing the placement revenue. According to the TPO, since the risk involved is of that of the assessee, the contract executed is with assessee only. He held that the entire revenue shared with RPs on the basis of the subscriber base and the benchmarking does not result in arms-length pricing and determined the said amount.

Addition by TPO was made not in respect of any expenditure having been incurred but with respect to income derived by the assessee (was also distributed to RPs). The DRP directed the TPO to retain the adjustment to the extent of 10% or allocated amount.

The Bench constituting of R.C. Sharma and Vikas Awasthy as Accountant Member and Judicial Member held against the 10% transfer pricing adjustment upheld by the DRP.

The Tribunal observed that the assessee has distributed income on the basis of actual subscribers being commanded by the RPs and the allocation made by the assessee in respect of Total placement Charges is fair and proper. The same is evident by the fact that the assessee has performed more functions that include making efforts to consolidate the RPs presenting their position and negotiating on behalf od RPs