The Income Tax Appellate Tribunal, New Delhi has reiterated that for the purpose of transfer pricing analysis, a company can be considered a valid comparable only when it is functionally similar to the tested party, and mere broad similarity in business activities is not sufficient for reliable benchmarking under the Transactional Net Margin Method (TNMM). The Tribunal partly allowed relief to New Delhi Television Ltd. (NDTV) by affirming the exclusion of certain companies from the final set of comparables on account of functional dissimilarity. The Bench comprising Madhumita Roy (Judicial Member) and Manish Agarwal (Accountant Member) observed that significant differences in functions, business profile and operational characteristics could render a company unsuitable as a comparable in transfer pricing analysis.
NDTV, engaged in television news broadcasting through its channels NDTV 24x7, NDTV India and NDTV Profit, had filed its return of income for the assessment year 2010–11 declaring a loss of ₹20.18 crore. During scrutiny, the Assessing Officer referred the international transactions undertaken by the company with its Associated Enterprises (AEs) to the Transfer Pricing Officer (TPO) for determination of the Arm’s Length Price (ALP). The TPO proposed transfer pricing adjustments of ₹3.29 crore in respect of international transactions, including adjustments relating to business support services and corporate guarantee.
Subsequently, the Assessing Officer passed a draft assessment order proposing total assessed income of ₹29.59 crore by making several additions and disallowances, including disallowance of ESOP expenses, software expenses, disallowance under Section 14A, and disallowance under Section 40(a)(ia) relating to commission and transmission charges. The assessee raised objections before the Dispute Resolution Panel (DRP), which accepted certain objections and rejected others. Following the directions of the DRP, the Assessing Officer passed the final assessment order determining total income at ₹17.06 crore, including a transfer pricing adjustment of ₹3.11 crore.
One of the principal disputes before the Tribunal related to the selection of comparable companies for determining the arm’s length price of business support services rendered by NDTV to its associated enterprises. The assessee had adopted the Transactional Net Margin Method and reported its profit level indicator at 12 percent on cost, which was comparable to the average margin of comparable companies selected by it. However, the TPO rejected several comparables selected by the assessee and introduced new comparables, thereby increasing the average margin and resulting in a transfer pricing adjustment.
The Revenue challenged the exclusion of certain companies from the final set of comparables, including Global Procurement Consultants Ltd. and TSR Darashaw Ltd., which had been excluded by the DRP on the ground that they were functionally dissimilar.
With regard to Global Procurement Consultants Ltd., the Tribunal examined the functional profile of the company and noted that it was primarily engaged in providing procurement consultancy services for projects financed by international organisations such as the World Bank. The Tribunal observed that the company provided specialised technical consultancy services and procurement management services, which were significantly different from the routine business support services provided by the assessee to its associated enterprises.
The Bench further noted that Global Procurement Consultants Ltd. had been established to provide professional procurement and management services to government departments and project execution agencies. In view of this specialised nature of activities and the scale of its operations, the Tribunal held that the company’s business model was materially different from that of NDTV and therefore it could not be considered a valid comparable.
Similarly, the Tribunal upheld the exclusion of TSR Darashaw Ltd. from the list of comparables. The Tribunal observed that the company operated in distinct segments such as registrar and transfer agent services, records management and payroll and trust fund activities. These activities were substantially different from the support services rendered by the assessee to its associated enterprises.
Referring to earlier judicial precedents, the Tribunal noted that TSR Darashaw Ltd. had consistently been held to be not comparable with companies providing routine support services, particularly in cases where the functional profile involved specialised activities such as share registry and payroll management. The Tribunal also observed that the absence of segmental financial information further supported the conclusion that the company could not be considered comparable.
The Tribunal also addressed the question of including APITCO Ltd. as a comparable. The assessee argued that APITCO Ltd. was engaged in providing technical consultancy and high-end advisory services, and being a government-backed enterprise, it enjoyed operational advantages not available to private entities. Accepting this contention, the Tribunal observed that APITCO’s activities involved specialised consultancy services and government-related projects, which were materially different from the limited risk business support services rendered by the assessee.
The Bench emphasised that for transfer pricing analysis, comparability must be examined on the basis of functions performed, assets employed and risks assumed. It observed that mere superficial similarity in activities cannot justify inclusion of a company as a comparable when there are substantial differences in functional profile and business operations.
Apart from transfer pricing issues, the Tribunal also examined the disallowance relating to Employee Stock Option Plan (ESOP) expenses. The Tribunal held that the discount on shares issued to employees under an ESOP, calculated as the difference between the market price and the exercise price, represents an ascertained liability incurred by the company as part of employee compensation. Relying on judicial precedents including the decision of the Special Bench in Biocon Ltd., the Tribunal held that such discount constitutes a legitimate business expenditure allowable under Section 37(1) of the Income Tax Act.
The Tribunal further considered the treatment of software expenditure incurred by the assessee. It observed that software used in the broadcasting industry often requires frequent upgrades and has a relatively short useful life. Since such software does not provide an enduring benefit and needs regular replacement or upgradation, the Tribunal held that the expenditure should be treated as revenue expenditure rather than capital expenditure.
Another issue related to the disallowance made under Section 40(a)(ia) for non-deduction of tax at source on transmission and uplinking charges paid to a non-resident entity. The Tribunal observed that where the payment received by a non-resident is not taxable in India, the payer cannot be treated as liable to deduct tax at source under Section 195. Consequently, no disallowance could be sustained under Section 40(a)(ia) in such circumstances.
After examining the issues raised in both the Revenue’s appeal and the assessee’s appeal, the Tribunal concluded that the DRP had correctly excluded certain companies from the list of comparables due to functional dissimilarity. The Tribunal emphasised that accurate comparability analysis is essential for determining the arm’s length price of international transactions and that inclusion of functionally dissimilar entities could lead to distorted results.
Accordingly, the Tribunal dismissed the appeal filed by the Revenue and partly allowed the appeal of the assessee, thereby granting NDTV partial relief from the transfer pricing adjustment and upholding the principles governing functional comparability in transfer pricing analysis.
Cause Title: DCIT vs New Delhi Television Ltd
Case No: ITA No.1564/Del/2016
Coram: Madhumita Roy (Judicial Member) and Manish Agarwal (Accountant Member)
