Star India Private Limited Vs ACIT (ITAT Mumbai Special Bench)
The landmark case of Star India Pvt. Ltd. Vs ACIT-16(1), Mumbai delves into complexities surrounding transfer pricing adjustments and the selection of the Most Appropriate Method (MAM) in international transactions. The Special Bench was convened to assess the validity of the Assessing Officer’s (AO) adjustment to the transaction of acquiring Bundle of Sport Broadcasting Rights (BSB Rights), based on deficiencies identified in the valuation report provided by the assessee, Star India Pvt. Ltd.
Star India entered into a transaction with ESPN Star Sports Ltd. (ESS), its US-based Associated Enterprise, to acquire the BSB Rights for 1211 USD million. The value was determined by an independent valuer using the ‘other method’ (Discounted Cash Flow method). The assessee claimed a deduction of Rs.1013.26 crore for the immediately preceding assessment year, 2014-15, using the Comparable Uncontrolled Price (CUP) method.
The rights acquired by the assessee were via two different means: sub-licensing by ESS and novation of agreements. However, the Transfer Pricing Officer (TPO) found that the valuer had inflated the cash flow amount by 38% during the finite period valuation of the BSB Rights, leading to a proposed transfer pricing adjustment of Rs.669.36 crore.
On appeal, the Tribunal concluded that the assessee could deviate from the earlier selected Most Appropriate Method if the new method was more in line with the applicable provisions.
The Tribunal found that since the contracted liabilities by ESS with third parties were under materially different conditions, the agreed prices paid by the assessee would not represent an uncontrolled price/transaction. Thus, the Most Appropriate Method for benchmarking international transactions in this case was identified as the ‘Other Method’, not the ‘CUP Method’.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The Hon’ble President has constituted this Special Bench u/s.255(3) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) for the captioned assessment year, on a reference made by the Division Bench, which found itself unable to concur with the view adopted by the predecessor Bench in the assessee’ s own case for the immediately preceding assessment year 2014-15 on the benchmarking of the international transaction of `Purchase of Bundle of Sport Broadcasting Rights’. Albeit, no question has been referred for consideration, the Special Bench, after taking into consideration the factual matrix of the case, proposed the following question and sought comments of the parties to the same: –
“Whether on facts and in law, the Assessing Officer was justified in making transfer pricing adjustment anent to the international transaction of acquiring Bundle of Sport Broadcasting Rights, on the basis of deficiencies found by him in the valuation report submitted by the assessee?”
2. The assessee, who is the appellant, did not raise any objection to the question. However, the ld DR was not convinced. It will be seen infra that the question represents correct controversy between the parties as the transfer pricing adjustment in the international transaction under consideration has been made solely on the basis of deficiencies found in the valuation report submitted by the assessee.
3. Succinctly, the factual panorama of the case is that the assessee furnished revised return declaring total loss of Rs.1334.14 crore. It also filed Form No.3CEB containing a list of international transactions, including, payment of Rs .3075,24,15,714/- for acquiring Bundle of Sport Broadcasting Rights (BSB Rights) hitherto held by its US based Associated Enterprise (AE), namely, ESPN Star Sports Ltd. (ESS). The transaction of acquiring the BSB Rights (rights to broadcast through television/internet/mobile various sports events like ICC Tournaments including Cricket World cup, Champions League T20 cricket, Formula-1 GP2 and Wimbledon Championships etc.) from ESS was concluded for 1211 USD million by means of Master Rights Agreement (MRA) entered on 31-10-2013 in the financial year relevant to the immediately preceding assessment year. To substantiate the agreed price of 1211 USD million, the assessee furnished a report of an independent valuer determining the total value of BSB Rights at this level by considering the finite period value at 663 USD million and the terminal value at 548 USD million. Such value was determined by adopting Discounted Cash Flow (DCF) method.
4. The assessee claimed deduction of Rs.1013.26 crore on this score for the immediately preceding assessment year, 2014-15. It applied the Comparable Uncontrolled Price (CUP) method for demonstrating that the international transaction of acquiring the BSB Rights was at Arm’s Length Price (ALP). For doing so, the assessee adopted the comparable uncontrolled transaction of ESS acquiring such BSB Rights for a total sum of 1388 USD million. Since the overall purchase price of 1211 USD million agreed between ESS and the assessee was 9.5% less than the agreed price between ESS and third parties [International Sport Bodies (ISBs)], the assessee claimed that the international transaction was at ALP.
5. During the course of transfer pricing proceedings for the immediately preceding year, being, the first year when the assessee acquired the BSB Rights, the Transfer Pricing Officer (TPO) observed that the rights acquired by the assessee were by two different means viz., one set of rights was sub-licensed by ESS to the assessee in which the latter was to pay its 90.5% (after discount of 9.5%) share to its AE, who, in turn, was to make full payment to ISBs; and second set of rights was by means of novation of the agreements under which the assessee was substituted in place of ESS, becoming liable to make full direct payment to ISBs and recovering 9.5% from ESS. Out of 1338 USD million agreed to be paid by ESS to ISBs, the agreements worth 326,557,549 USD were sub-licensed and agreements worth 1,011,630,729 USD were novated. The TPO observed that the Valuer had inflated the amount of cash flows during the `Finite period’ valuation of the BSB Rights by 38%. He further found that the `Terminal Value’ of the Rights ought to have been taken at Nil because, firstly, the agreements were for Finite period and secondly, during the Finite period also, the assessee was incurring losses. He, therefore, determined ALP of the international transaction at 411 USD million by taking ALP of Terminal Value at Nil; and ALP of Finite period at 411 USD million. This resulted into variation between actual consideration (1211 USD million) and ALP consideration (411 USD million) at 800 USD million, being, 66.06% [800(1211-411)/1211*100] of the actual consideration. The assessee had reported value of this international transaction for the A.Y. 2014-15 at Rs.1013.26 crore. By applying 66.06% to the value of the transaction, the TPO proposed transfer pricing adjustment of Rs.669.36 crore for the immediately preceding year. No succor was provided by the Dispute Resolution Panel (DRP), which culminated into making transfer pricing addition of the equal amount in the final assessment order passed by the AO for the A.Y. 2014-15. The Tribunal took note of the fact that the assessee submitted an expert’s opinion as well as another valuation report before the DRP for the first time supporting its earlier valuation, which was again contradicted by the TPO during the remand proceedings. On consideration of the entire conspectus of the case, the Tribunal held that valuation of the BSB Rights was a highly technical matter, which could be done only by a person having expertise in the field. It, therefore, set-aside the assessment order and remitted the matter with a direction to the Revenue to ascertain the correctness of the assessee’ s valuation reports by getting the valuation done through an expert in the field.
6. For the year under consideration, the assessee claimed deduction towards the value of international transaction of `Purchase of the BSB Rights’ at Rs.3075,24,15,714/-. The TPO extensively discussed and reproduced his order for the immediately preceding assessment year in his order for the instant year, eventually, determining excess payment on overall basis at 66.06% towards Full terminal value and the Part finite period value. Finding the facts of this year identical to the preceding year, the ALP of the transaction for the year under consideration was determined at Rs. 1043,73,69,893/-, thereby recommending transfer pricing adjustment at Rs.2031,50,45,821/-. The AO notified the draft order with transfer pricing adjustment in this transaction at Rs.2031.50 crore. No reprieve was provided by the DRP, which also relied on its own order for the A.Y. 2014-15. This is how, the final assessment order came to be passed by making transfer pricing adjustment on this international transaction at Rs.203 1.50 crore. It is apparent from the above factual panorama that the transfer pricing adjustment has been made by reducing the full terminal value and the part finite period value from the valuation report submitted by the assessee. This is the reason for our drafting the question to be decided in the manner as set out above. Assailing the final assessment order, the assessee has come up in appeal before the Tribunal.
7. We have heard the rival submissions in extenso and gone through the relevant material on record. The short question for our decision is determination of the ALP of the international transaction of Purchase of BSB Rights. Before delving into the merits of the controversy raised by the parties before the Special bench, it would be apposite to see the background and factual landscape of the transaction in a little more elaborate manner. ESS, a US based entity having a branch office and headquarters in Singapore, has been engaged in the business of owning and operating sports channels in certain territories in Asia including India. The assessee and ESS (both related parties) entered into the Master Rights Agreement (MRA) dated 31.10.2013, under which the assessee agreed to purchase from ESS a bundle of broadcasting rights of sports events, such as, Cricket World cup, Championship league, T20 cricket, Formula-1 GP2 and Wimbledon etc. Prior to this, ESS was holding broadcasting rights for such sports events for certain number of years with a well defined year-wise consideration payable each year on the happening of the sports events and the assessee’s sister concern, namely, Star Sports India Pvt. Ltd. (SSIPL) was involved in the sale of advertisement airtime and subscription of sports Channels in India when the broadcasting was done by the ESS. Almost simultaneous with the assessee entering into the MRA with ESS for purchase of bundle of rights on 3 1-10-2013, SSIPL got merged with the assessee w.e.f. 04-11-2013 vide High Court order dated 22-08-20 14. With such acquisition of bundle of broadcasting rights from ESS and merger of SSIPL, the assessee became a full-fledged broadcasting owner of sports Channels run by Star group in India. By virtue of the MRA, the assessee stepped into the shoes of ESS qua the broadcasting rights purchased earlier by ESS from third parties and thus acquired all the rights and obligations that ESS had with the ISBs. This was done by two modes, viz., the first in which there was Novation of roughly 75% of the agreements under which ESS went out and the assessee came in assuming all the rights and obligations of ESS with third parties; and the second in which there was sub-licensing of remaining around 25% of the agreements by which ESS sub-licensed their agreements with the third parties to the assessee. A chart has been provided linking the original agreements between ESS and third parties with the Novated and Sub-licensed agreements, as the case may be, pursuant to the MRA. There is no dispute between the Revenue and the assessee about the arrangement of the assessee acquiring all the rights from ESS and paying net 90.5% of the price that ESS would have paid for the year under consideration had there been no sale of BSB rights to it.
8. To satisfy ourselves as to the mechanism under the MRA agreement, we randomly examined novation of the largest agreement, being, with Cricket Australia. ESS entered into Asian Broadcast Agreement with Cricket Australia, a copy of which has been placed at page 595 onwards of the paper book. This Agreement dt. 04-11-2011 granted license to ESS by Cricket Australia for broadcasting the events and to exercise any other rights granted within the territory. The licence period, as per clause 3 of the agreement, commenced on 01-05-2012 and was to expire on 30-06-2017. Clause 2 of the Agreement, dealing with the consideration aspect, provides that the licensee shall pay the licence fee set forth in clause 7 of Schedule 1 with all obligations and withholdings in accordance with the payment Schedule set forth in clause 9 of Schedule 1 irrespective of whether or not the licensee had inhibited the programmes as of such date. Page 614 of the paper book, containing clause 7, talks of Licence Fee. Para 7.1.2 provides that the licence fee will be calculated on the basis of the events as set out in item 1 of Schedule 3. A copy of Schedule 3 item 1 is available at page 636 of the paper book. This gives copious details of season; touring teams; total scheduled matches; and scheduled tour dates. For example, for the season 2012-13, 2013- 14 and 2014-15, the relevant part is reproduced as under :
