ITAT Delhi Rules Out Channel Owners As Comparables For TV Content Distributor, Deletes Interest-On-Receivables TP Adjustment

Background And Context

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) in the case of Turner International India Pvt. Ltd. Vs ACIT examined transfer pricing adjustments for Assessment Year 2013-14 relating to:

  1. The assessee’s distribution segment, and
  2. A separate adjustment on account of alleged interest on outstanding receivables from Associated Enterprises (AEs).

Turner International India Pvt. Ltd. (TIIPL), a subsidiary of Historic TBS Asia LLC and part of the Time Warner Group, operates in India as a distributor of foreign-owned television networks and media products, and also renders production-related support services for television programmes.

The Assessing Officer (AO) referred the assessee’s international transactions to the Transfer Pricing Officer (TPO) under Section 92CA of the Income Tax Act 1961 for determining the arm’s length price (ALP). The Dispute Resolution Panel (DRP) subsequently issued directions under Section 144C.

The Tribunal was called upon to adjudicate multiple grounds, primarily focusing on:

  • Rejection and selection of comparables for the distribution segment;
  • Denial of working capital adjustment; and
  • Separate transfer pricing adjustment for interest on alleged overdue receivables from AEs.

International Transactions And TP Proceedings

Nature and Methodology of International Transactions

During F.Y. 2012-13, the assessee reported various international and specified domestic transactions, inter alia:

  • Purchase of distribution and advertising rights (benchmarked using TNMM with OP/OR as the Profit Level Indicator);
  • Availing intra-group services;
  • Provision of support services;
  • Receipt of distribution incentives;
  • Specified domestic transactions (payment of distribution commission and director’s remuneration);
  • Payment for product and promotional licensing (benchmarked under CUP); and
  • Provision of production services (TNMM, PLI as OP/OC).

The total value of international and specified domestic transactions exceeded Rs. 3,400 crore.

The TPO also reviewed the assessee’s profitability trend over F.Y. 2010-11 to F.Y. 2012-13, observing variations in net profit margins (4.59%, 1.05%, and 7.55% respectively).

TPO’s Approach To Comparables For The Distribution Segment

For the distribution segment, the assessee had originally selected certain comparables, including:

  • Sonata Information Technology Ltd.
  • Trijal Industries Ltd.

The TPO retained these two companies, but carried out a fresh search and added five more comparables, ultimately finalizing the following set with unadjusted OP/OR margins:

  • Sonata Information Technology Ltd. – 2.48%
  • Trijal Industries Ltd. – 0.54%
  • India Vision Satellite Communications Ltd. – -8.04%
  • Maa Television Network Ltd. – 25.99%
  • Malayalam Communications Ltd. – 23.30%
  • Raj Television Network Ltd. – 18.79%
  • TV Today Network Ltd. – 5.77%

The average margin of this basket was 9.82%. The TPO did not grant working capital adjustment, and proposed a TP adjustment of Rs. 19,14,88,077 in the distribution segment.

TP Adjustment On Alleged Interest On Receivables

The TPO further identified substantial receivables from AEs and treated the delay in realization as a separate international transaction. For key AEs such as:

  • Turner Broadcasting System Asia Pacific Inc.
  • CNN Inc.
  • HBO Pacific Partners, V.O.F.

the TPO imputed notional interest using an assumed delay of six months (182 days), applying an interest rate of 4.4569% (six months LIBOR + 400 bps).

Despite having asked for invoice-wise ageing details, the TPO noted non-compliance and, due to limitation constraints, computed the adjustment based on averages of opening and closing receivables. This resulted in a proposed TP adjustment of Rs. 61,56,007 towards interest on alleged overdue receivables.

Collectively, the TPO recommended a total upward adjustment of Rs. 20,06,44,084.

DRP Directions

The assessee approached the DRP under Section 144C. The DRP:

  • Directed the inclusion of three more comparables in the distribution segment:

    • Avance Technologies Ltd.
    • Empower Industries India Ltd.
    • Integra Telecommunication and Software Ltd.

  • Consequently, the TP adjustment for the distribution segment was reduced from Rs. 19,14,88,077 to Rs. 9,83,63,207.

  • For interest on receivables, the DRP instructed the AO/TPO to recompute interest at 2.950% (six months LIBOR + 250 bps), thereby reducing the adjustment on receivables from Rs. 61,56,007 to Rs. 40,84,256.

Still aggrieved, the assessee carried the matter to the ITAT.

Assessee’s Core Contentions Before ITAT

The assessee, represented through counsel, challenged:

  1. Selection of channel-owner companies as comparables, and
  2. Separate TP adjustment for interest on receivables, especially where working capital adjustment is to be granted.

Objection To Inclusion Of Channel/Content Owner Companies