Pass Through Cost directly  relatable to Advertisement & Publicity, Business Promotion and participation in trade events are excluded from cost base :ITAT Grants relief to BBC World (India) [Read Order]

The Income Tax Appellate Tribunal (ITAT),Delhi Bench while granting relief to BBC World (India) held that pass-through cost directly relatable to advertisement & publicity, business promotion and participation in trade events  are  excluded from the cost base.

Assessee , BBC World (India) Private Limited ('BWIPL’) formerly known as BBC Worldwide (India) Private Limited. During the year, 75% of the shareholding is with BBC World Limited and 25% with Worldwide Channel Investments Limited.

The ultimate holding company is BBC Commercial Holding Company. BBC group is engaged in broadcasting international TV Channels throughout the world, production and distribution of TV & Radio programs and other related activities including publication and mercantile.

During the assessment proceedings , it was noted that assessee has entered various international transactions. It was observed by the TPO that   during the financial year relevant to the assessment year 2004-05, the assessee renegotiated its agreement with BBC World Ltd. and BBC World Distribution Ltd.

Moreover the TPO noted that An amount of Rs.7,03,70,841/- under various heads of accounts  were expended by the assessee and they were  reimbursed by the contracting parties. Hence the  TPO examined whether reimbursement of expenses without any mark-up is  justified in this case.

TPO opined that the agreement between the assessee and its associated enterprises (AEs) covers all the activities on which the assessee is expected to provide the services to its AEs . TPO has concluded that the assessee has no independent business interest in India other than promoting the interest of its AEs

Further the central activity of the assessee is to market advertisements and sponsorships on BBC World Channel, to carry out research in respect of performance and viewership of BBC and to carry out distribution and marketing activities of BBC.Thus the TPO held that the business activity in service sector necessarily incurs such kind of expenses which are so thickly related to core business activity that they cannot be taken on pure reimbursement.

Aggrieved by the order the assessee filed appeal before the CIT(A) .

The CIT(A) after considering the appeal observed that The assessee engaged in the activities related to business promotion and marketing of BBC Enterprises. The core activity of the assessee  is sale of airtime in the form of advertisement, marketing of BBC Channel amongst cable operators and promotion of viewership of the channel.

So the expenses relating to advertising on buying advertising space in the newspapers involved is too high and the effort required to buy such space is not much. Therefore, they should be treated as pass through cost. Other than these three items all other items such as   1) advertisement and publicity, 2) business promotion and 3) participation in trade events only should be excluded from the cost base of the appellant.”

Aggrieved by the oder revenue filed appeal before the tribunal

Darpan Kirpalani , Counsel for assessee submitted that As per the agreement between the appellant and BBC World and BBC WDL, all cost incurred by the assessee on payment to third party vendor for marketing and research for the channel were reimbursed at cost, as these costs were incurred by the assessee on behalf of the channel and its principals

Manu Chaurasia, Counsel for Revenue, supported the decision of TPO.

The tribunal during the appeal proceedings  observed that the AE. The expenses relating to advertisement were on buying advertising space in the newspapers; that in such activities, the cost involved is too high and the effort required to buy such space is not much; they should be treated as pass through cost.

After reviewing the facts and records, the two-member bench of   Shamim Yahya (Accountant Member) and  Astha Chandra, (Judicial Member) held that pass-through cost directly relatable to advertisement & publicity, business  promotion and participation in trade events  are  excluded from the cost base. Thus other than these three items, all other items should be  considered as part of the cost base of the appellant and should be marked up.

To Read the full text of the Order CLICK HERE

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