ACIT Vs BBC World (India) Pvt. Ltd. (ITAT Delhi)
ITAT Delhi held that the pass through cost to the extent which are directly relatable to third parties, namely, advertisement and publicity; business promotion and participation in trade events are to be excluded from the cost base.
Facts-
The 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 financial year relevant to the assessment year 2004-05, the assessee renegotiated its agreement with BBC World Ltd. and BBC World Distribution Ltd. 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. 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. In addition, the TPO has concluded that the assessee has no independent business interest in India other than promoting the interest of its AEs. 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. TPO concluded that ‘the argument of pure reimbursement of the expenses on “purely reimbursement basis” is misplaced. 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.
Conclusion-
CIT(A) has held that the pass through cost to the extent which are directly relatable to third parties, namely, 1) advertisement and publicity, 2) business promotion and 3) participation in trade events only should be excluded from the cost base of the appellant.
Held that we find ourselves in agreement with the view and reasoning adopted by the ld. CIT (A). As found by the ld. CIT, there were certain expenses like advertisement & publicity, business promotion and participation in trade events which were undertaken by the assessee at the request of the overseas entity. The budget in this regard is also controlled by the AE. The risk and outcome of these expenses were borne or attributed to the AE. The expenses relating to advertisement were on buying of advertisement 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. On these reasoning, ld. CIT (A) held that they should be treated as pass through cost. From the above, we are of the opinion that ld. CIT (A) rightly held that 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.
FULL TEXT OF THE ORDER OF ITAT DELHI
This is an appeal by the Revenue and the cross objection by the assessee arising out of the order of ld. CIT (Appeals)-XX, New Delhi dated 31.10.2011 for the assessment year 2004-05.
2. Earlier this appeal was disposed off by a common order dated 10.2019 along with several other cases of the same group. Subsequently, vide order dated 24.03.2023 in Misc. Application Nos. 176 & 213/Del/2020, the aforesaid order was recalled for fresh adjudication. Pursuant to the above recall, we have heard both the parties and perused the records.
3. The grounds of appeal taken by the Revenue read as under :-
“1.(a) The Ld. CIT (A) has erred on facts and in law in deleting addition of Rs. 1,09,56542/- made on account of transfer pricing adjustment as :
(b) The Ld. CIT (A) has inter-alia erred in law in accepting the assessee’ s contention that it is only intermediary between third party and AE.
(c) The Ld. CIT (A) inter-alia erred in not appreciating that the soul of the Market Support Services functions is present in India as the assessee company is responsible for discharging such functions as an independent organization and a lot of effort is required to be put into by it for providing business promotion and research services and, therefore, it needs to be adequately compensated for such efforts. Therefore, such cost cannot be ignored and excluded for the purpose of computation of Arm’s Length Price of Market support service fee.”
4. At the outset, ld. DR for the Revenue submitted that the order of the Tribunal in other years of the same assessee’s case should be followed for this year as facts are identical.
5. Per contra, ld. Counsel of the assessee strongly objected to the same and submitted that the matter may be decided on its own merits as the facts of the present year are different.
6. Upon careful consideration, we are inclined to decide the issue afresh pursuant the recall of the Tribunal order to decide the issue afresh.
7. Brief facts of the case are that the 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. The following international transaction was undertaken by the assessee :-
