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Case Law Details

Case Name : DCIT Vs Cheil Communications India Private Limited (ITAT Delhi)
Appeal Number : I.T.A. No 712/Del/2010
Date of Judgement/Order :
Related Assessment Year :

The ITAT Delhi held  where a taxpayer engaged in rendering advertising and related services to its Associated Enterprises (AEs) is also acting as an intermediary between the AEs and the third party vendor to rent advertisement space from the vendor, costs recovered by the taxpayer from the AEs for such renting and then passed on to the vendors (pass-through costs) would not be value adding costs for the taxpayer and would, therefore, not be taken into account for computing net profit margin (Operating Profit / Total Cost) of the taxpayer for applying the Transactional Net Margin Method (TNMM).

Facts of the case

• The taxpayer, a wholly owned subsidiary of Cheil Communications Inc. (Cheil Korea) is engaged in rendering advertising and related services to its customers/ AEs.

• The taxpayer charges its customers/ AEs a fixed commission or a charge based on different types of services rendered.

• As a part of business operations, the taxpayer facilitates placement of advertisements for its customers/AEs in the print/ electronic media of third party vendors. The taxpayer recovers the cost of such placements from the customers/ AEs and passes on the same to third party vendors like advertisement agencies, printing presses, etc. on behalf of its customers/AEs.

• The revenue of the taxpayer comprising of advertising commission and service fee from jobs completed on behalf of its customers/AEs, as also the corresponding costs were disclosed ‘net’ of pass-through costs in the books of account and taxpayer computed its net profit margin accordingly for applying Transactional Net Margin Method (TNMM).

• The TPO, rejecting the approach of the taxpayer held that the gross revenue and gross costs (including the pass-through costs) should have been taken into account to compute the taxpayer’s net profit margin.

• Aggrieved by the TPO’s order, the taxpayer filed an appeal with CIT(A) who upheld the view of the taxpayer. The Revenue filed an appeal against the order of CIT(A).

Tribunal’s Ruling:- The Tribunal also ruled in favor of the taxpayer. The key aspects of Tribunal’s order are summarised as under:

• The Tribunal observed that the taxpayer’s business is not sale of advertising slots to its customers/ AEs. The taxpayer simply acts as an intermediary between the customers/AEs and the third party vendor in order to facilitate placement of advertisement. Such third party payments do not represent any value-added function undertaken by the taxpayer.

• The payment is made by the taxpayer to vendors of such advertisement slots after recovery of the same from respective customers/ AEs on cost-to-cost basis and the bad debt risk is borne by the vendors and not by the taxpayer.

• Relying on the OECD Transfer Pricing guidelines, the Tribunal affirmed that it will be appropriate to pass on the cost of renting advertising space, etc. to the customer/ AE without a mark-up as the taxpayer has not performed any activity which added value to such costs, and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function.

• The Tribunal further mentioned that the comparable companies had also recognised revenues and costs on a net basis and that the method adopted by the taxpayer had been accepted by the Department in earlier years and there was no reason to depart from the same.

Our Comments

The decision of the Tribunal would support all those cases where similar pass-through costs are excluded for computing net profit margins of comparables and where the bad debt risk for such costs is not incurred by the taxpayer.

It seems that the decision of the Tribunal was also influenced by the fact that the quantum of commission charged by the taxpayer to its customers/ AEs for rendering advertising services was fixed and had no linkage with the quantum of pass-through costs paid for the renting of advertisement space.

DCIT Vs Cheil Communications India Private Limited

(I.T.A. No 712/Del/2010)

Delhi bench of the Income Tax Appellate Tribunal

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  1. Abhay says:

    Hi !!
    Would really appreciate on a quick response to my below query.

    I own two flats on my name and planning to sell one of the flats which is currently let out (not self occupied).

    The question is –
    1. If I sell this flat now (July 2009), will it be Long term capital gain? Date of Agreement/Registration is June 2006 and Date of possession is March 2008.

    2. If I invest the money gained by selling one of these two flats and purchase another one with that money, would I get exemption in tax?

    3. To save tax, do I need to sell self occupied house only or even sell of non-self-occupied flat is also ok (provided I invest money in buying another flat within 2 years)

    Thanks & Rgds

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