Sony Pictures Networks India Pvt. Ltd. Vs DCIT (ITAT Mumbai)
The Income Tax Appellate Tribunal (ITAT), Mumbai, partly allowed the appeal of the assessee for Assessment Year 2013-14 concerning transfer pricing adjustments relating to distribution fees paid to Associated Enterprises (AEs), selection of comparables, and a claim for deduction of education cess and secondary and higher education cess. The assessee was engaged in the business of distributing television channels to Local Cable Operators (LCOs), Multi System Operators (MSOs), and Direct-to-Home (DTH) operators and had reported international transactions, including payment of distribution fees to its AEs.
The assessee benchmarked the distribution fee transaction using the Transactional Net Margin Method (TNMM) and selected four software distribution companies as comparables. The Transfer Pricing Officer (TPO) rejected all the selected comparables and held that the distribution fee paid by the assessee was in the nature of royalty. The TPO then benchmarked the transaction using royalty agreements sourced from a royalty database and determined an arm’s length royalty rate of 40%, resulting in a transfer pricing adjustment exceeding ₹513.79 crore. The Dispute Resolution Panel (DRP) upheld the TPO’s approach, and the final assessment order incorporated the adjustment.
Before the Tribunal, the assessee contended that the issue was covered by decisions in its own earlier assessment years. The Tribunal noted that in the assessee’s own case for Assessment Year 2011-12, it had already held that distribution fees paid by the assessee to its AEs could not be characterized as royalty. The Tribunal observed that the assessee merely acted as an intermediary between broadcasters and ultimate customers and paid distribution fees under distribution arrangements. It further noted that the view that distribution fees are not royalty had been upheld in earlier Tribunal decisions and affirmed by the Bombay High Court in related cases. Following those precedents, the Tribunal held that the distribution fee paid by the assessee could not be treated as royalty. Consequently, the discussion regarding royalty agreements selected as comparables became academic.
