M/S. ACIT 11(1), MUMBAI v. THE NGC NETWORK A(INDIA) PVT. LTD, MUMBAI

1 IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH MUMBAI BEFORE SHRI R.S.PADVEKAR (JM) AND SHRI RAJENDRA SI NGH(AM) ITA NO.5307/M/2008 ASSESSMENT YEAR 2003-04 THE ACIT 11(1) ROOM NO.439 M/S.NGC NETWORK (INDI A) PVT. LTD. AAYAKAR BHAVAN M.K.MARG 6 TH FLOOR B WING LITOLIER CHAMBERS MUMBAI 400 020. ANDHERI KURLA ROAD MAROL NAKA ANDHERI (E) MUMBAI 400 053. PAN : AABCN 1401 A APPELLANT RESPONDENT REVENUE BY : SHRI NARENDER SINGH ASSESSEE BY : SHRI PORUS KAKA & SHRI DIVESH CHAWLA O R D E R PER RAJENDRA SINGH (AM) THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 31.3.2008 OF CIT(A) FOR THE ASSESSMENT YEAR 2003-04. THE ONLY DISPUTE RAISED IS IN RELATION TO TRANSFER PRICING ADJUSTMENTS MADE BY TH E AO WHICH HAS BEEN DELETED BY THE CIT(A). 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT TH E ASSESSEE WHO WAS MAINLY ENGAGED IN DISTRIBUTION AND MARKETING OF NATIONAL G EOGRAPHIC CHANNEL AND THE ADVENTURE ONE CHANNEL AND RENDERING OF POST PRODUCT ION SERVICES TO MEDIA COMPANIES HAD INTERNATIONAL TRANSACTIONS TOTALING RS.13 75 27 281/- WITH ITS ASSOCIATED ENTERPRISES I.E. M/S. NGC ASIA LLC. THE DETAILS OF TRANSACTIONS WERE AS UNDER : 2 SR NO NAME AND ADDRESS OF ASSOCIATED ENTERPRISE (AE) COUNTRY OF TAX RESIDENCE OF AES DESCRIPTION OF TRANSACTION WITH AES AMOUNT RECEIVED/ RECEIVABLE AMOUNT PAID/ PAYABLE AS PER BOOKS OF ACCOUNT 1 NGC NETWORK ASIA LLC 1145 SEVENTEENTH STREET N.W. WASHINGTON DC 200361 USA USA (I) DUBBING SERVICES RENDERED BY THE COMPANY (II) PRODUCTION AND POST PRODUCTION SERVICE (III) DISTRIBUTION RIGHTS ACQUIRED FOR NATIONAL GEOGRAPHIC AND ADVENTURE ONE CHANNELS 2 40 11 107 76 70 111 10 58 46 063 3. THE AO WITH THE APPROVAL OF CONCERNED CIT HAD RE FERRED THE MATTER FOR DETERMINATION OF ARMS LENGTH PRICE TO THE TRANSFER PRICING OFFICER (TPO) BUT THE REFERENCE WAS NOT ACCEPTED BY THE TPO DUE TO PAUCIT Y OF TIME. 4. AO THEREFORE ASKED THE ASSESSEE TO SUBMIT DETAIL S REGARDING COMPUTATION OF ARMS LENGTH PRICE ALONG WITH SUPPORTING DOCUMENT S. FROM THE DETAILS FILED THE AO NOTED THAT THE ASSESSEE HAD DETERMINED THE A RMS LENGTH PRICE ON THE BASIS OF FINANCIAL ANALYSIS OF THE COMPANIES AS PER DETAILS GIVEN BELOW: NAME OF THE COMPANY OPERATING MARGIN ON OPERATING C OSTS (% ) - 2003 ENGINEERS INDIA LTD 31.26% GILCON PROJECT SERVICES LTD. 8.11% KITCO LTD. -9.73% NIS SPARTA LTD. 11.83% PRIYA INTERNATIONAL LTD. 11.18% RITES LTD. 20.94% UJJWAL LTD. 3.21% WATER & POWER CONSULTANCY SERVICES LTD 1.05% ARITHMETIC MEAN 9.73% 3 5. THE AO FROM ANALYSIS OF THE NATURE OF ACTIVITIES OF THE ABOVE COMPARABLE CASES NOTED THAT THOSE COMPANIES WERE ENGAGED MAINL Y IN PROVIDING TECHNICAL CONSULTANCIES AND PROFESSIONAL SERVICES AND THEY WE RE TOTALLY DIFFERENT FROM THE ASSESSEE BOTH FROM FUNCTIONAL AND OPERATIONAL POINT OF VIEW. THE AO THEREFORE ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE COMPARA BLES USED BY IT SHOULD NOT BE REJECTED. THE AO ALSO GAVE A LIST OF COMPARABLES COLLECTED BY HIM AS PER DETAILS GIVEN BELOW: MAR-03 MAR-03 MAR-03 COMPANY NAME PBIT NNRT NOI PBIT NNRT NOI/SALES SALES ECONOMIC ACTIVITY NIC CODE AASTHA BROADCASTING NETWORK LTD. 0.17 0.02 7.04 TELEVISION BROADCASTING MEDIA 92 ASIANET COMMUNICATIONS LTD. 12.44 0.25 49.11 -DO- E T C NETWORKS LTD. [MERGED] 16.17 0.37 43.79 -DO- INNETWORK ENTERTAINMENT LTD. 3.08 0.11 27.86 -DO- NEW DELHI TELEVISION LTD 24.09 0.23 103.03 -DO- RPG NETCOM LTD. 1.24 0.03 39.86 CABLE TELEVISION BR OADCASTING MEDIA RAJ TELEVISION NETWORK LTD. 5.01 0.16 30.48 TELEVISION BROADCASTING MEDIA SAHARA ONE MEDIA & ENTERTAINMENT LTD. 0.96 0.02 63.42 -DO- T V TODAY NETWORK LTD. 49.12 0.45 108.49 -DO- ZEE TELEFILMS LTD. 132.75 0.28 479.56 -DO- ZEE TURNER LTD. 1.56 0.09 17.94 -DO- 6. THE ASSESSEE VIDE LETTER DATED 22.2.2006 SUBMITT ED THAT IT HAD CONDUCTED A SEARCH IN RESPECT OF LOCAL CHANNEL COMP ANIES BUT THESE COMPANIES WERE NOT ACCEPTABLE AS A COMPARATIVE CASE DUE TO UN AVAILABILITY OF INFORMATION OR SUBSTANTIAL RELATED PARTY TRANSACTIONS. A SEARCH WAS ALSO CONDUCTED USING THE KEY WORDS DISTRIBUTION DISTRIBUTORS IN PROW ESS BUT FUNCTIONS PERFORMED BY THOSE COMPANIES AND RISK PROFILE WERE FOUND TO B E DIFFERENT. A SEARCH HAD ALSO BEEN CONDUCTED FOR THE INDUSTRY TYPE DISTRIB UTION OF SATELLITE TELEVISION CHANNELS; DISTRIBUTION; DISTRIBUTORS UNDER CAP ITALLINE BUT IT WAS FOUND THAT THERE WERE NO HEADS FOR THE DISTRIBUTION OF SATELL ITE TELEVISION CHANNELS. THE ASSESSEE THEREAFTER ATTEMPTED TO IDENTIFY THE COMPA NIES UNDERTAKING SIMILAR FUNCTIONS. IT WAS NOTED THAT THE ACTIVITY OF THE AS SESSEE OF DISTRIBUTION OF RIGHTS 4 IN RESPECT OF SATELLITE TELEVISION CHANNELS WAS SIM ILAR TO TRADING FUNCTION AND THE ASSESSEE THEREFORE WENT FOR THE TRADING IN COMPUTER SOFTWARE WHICH WERE INTANGIBLE PRODUCTS AS THE RIGHT OF DISTRIBUTION OF TELEVISION CHANNELS WAS ALSO INTANGIBLE. THE ASSESSEE THUS EXPLAINED THAT CONSID ERING THE CIRCUMSTANCES OF THE CASE COMPANIES TRADING IN SOFTWARE WERE THE ONL Y COMPANIES WHICH COULD BE USED AS COMPARABLES FOR THE BUSINESS OF DISTRIBU TION OF CHANNELS. AS REGARDS THE COMPARABLE SELECTED BY THE AO THE ASSESSEE SUBM ITTED THAT THE COMPARABLES SELECTED BY THE AO WERE ENGAGED IN BROA DCASTING IN TELEVISION CHANNELS WHICH WAS DIFFERENT FROM THE BUSINESS OF D ISTRIBUTION OF CHANNELS IN WHICH THE ASSESSEE WAS ENGAGED. IT WAS ACCORDINGLY URGED THAT THE COMPARABLES SELECTED BY THE ASSESSEE SHOULD BE ACCE PTED. 7. THE AO AFTER CONSIDERING THE EXPLANATION OF THE ASSESSEE CAME TO THE CONCLUSION THAT NEITHER THE COMPARABLES SELECTED BY THE ASSESSEE NOR THOSE BY THE AO WERE PROPER COMPARABLE CASES. HE THEREFORE OBSERVED THAT IN A SITUATION LIKE THAT WHEN NO COMPARABLES WERE AVAILA BLE THE ASSESSEES OWN CASE SHOULD BE THE BEST COMPARABLE. IT WAS NOTED BY HIM THAT IN THE LAST YEAR THE ASSESSEE HAD PAID THE LICENSE FEE @ US$ 1 LAC P ER YEAR I.E. US$ 12 LACS FOR THE WHOLE YEAR AND CLAIMED THAT THE RATE OF LICENSE FEES WAS AT ARMS LENGTH. DURING YEAR THE ASSESSEE HAD PAID A FIXED FEE OF US $ 22 LACS FOR THE PERIOD FROM 1.4.2002 TO 31.3.2003 WHICH CAME TO US$ 183333 . THE AO NOTED THAT THE ASSESSEE HAD DISTRIBUTION AGREEMENT DATED 21.2. 2001 WITH NGC ASIA. VIDE ADDENDUM DATED 1.1.2002 TO THE SAID AGREEMENT IT W AS AGREED THAT NGC INDIA WOULD PAY NGC ASIA LICENSE FEES OF US$ 10 LACS FOR THE PERIOD 1.3.2001 TO 31.12.2002 AND THEREAFTER US$ 1 LAC PM FROM 1.1.200 2 TO 30.6.2003 AGAIN VIDE ADDENDUM DATED 27.1.2003 THE LICENSE FEES WAS INCREASED FROM US$ 1 LAC PER MONTH TO US$ 22 LACS FOR THE WHOLE YEAR WHICH W ORKED OUT TO US$ 183333 5 PER MONTH. THE AO ASKED THE ASSESSEE TO EXPLAIN THE ENHANCED LICENSE FEE. THE ASSESSEE EXPLAINED THE POSITION VIDE LETTER DATED 1 4.03.2006: 4. IN THE YEAR 2001 WHEN NGC ASIA FIRST DECIDED TO MA KE A FORAY INTO INDIA THE LICENSE FEE WAS DECIDED AS USD 1 00 000 PER MONTH THIS WAS GIVING COGNIZANCE TO THE FACT THAT IT WOULD TAKE SOME TIME FOR A NEW AND NOVEL CHANNEL SUCH AS NATIO NAL GEOGRAPHIC CHANNEL TO ESTABLISH A SUBSCRIBER BASE I N THE INITIAL PERIODS ACCORDINGLY NGC INDIA MADE A LICENSE FEE PAYMENT OF USD 12 00 000 TO NGC ASIA FOR ASSESSMENT YEAR 2002- 03 HOWEVER OVER A PERIOD OF TIME NATIONAL GEOGRAPHIC CHANNEL STARTED BECOMING POPULAR AND ENLARGED ITS SUBSCRIBE R BASE IN INDIA. BY JUNE 2003 THE SUBSCRIBER BASE OF NATIONA L GEOGRAPHIC CHANNEL ALMOST DOUBLED TO 1 01 94 191. GIVEN THE IN CREASE IN THE SUB SCRIBER BASE WHICH WAS BEING MONITORED BY NGC ASIA NGC ASIA RE-NEGOTIATED THE LICENSE FEE FROM USD 12 00 0 00 TO USD 22 00 000. FURTHER THE SUBSCRIPTION REVENUE EARNED BY NGC INDIA HAVE PROGRESSIVELY INCREASED FROM RS.19 69 90 262/- IN A.Y.2002- 03 TO RS.26 05 44 496/- IN A.Y.2003-04 THE ABOVE C LEARLY DEMONSTRATES THAT THE INCREASE IN LICENSE FEE IS JU STIFIABLE GIVEN THE SUBSTANTIAL INCREASE IN SUBSCRIBER BASE FOR NGC AND THE INCREASE IN SUBSCRIPTION REVENUES. 8. THE AO ON ANALYSIS OF THE REPLY GIVEN BY THE ASS ESSEE ABOVE NOTED THAT THE CLAIM THAT LICENSE FEES HAD INCREASED BECAUSE O F INCREASE IN REVENUE WAS NOT CORRECT. HE NOTED THAT INCREASE IN REVENUE IN A .Y.2003-04 OVER THE PREVIOUS YEAR WAS ONLY 32.26% WHEREAS THE INCREASE IN LICENSE FEES WAS BY 6 84.66%. THE ASSESSEE EXPLAINED THE RETROSPECTIVE IN CREASE IN LICENSE FEES ON THE GROUND THAT NEGOTIATIONS REGARDING THE INCREASE IN LICENSE FEES WERE TAKING PLACE FOR THE LAST TWO FINANCIAL YEARS I.E. F.Y.200 2-03 AND 2003-04 AND THE AGREEMENT WAS REACHED ONLY IN JANUARY 2003. AO HOWE VER DID NOT ACCEPT THE EXPLANATION. IT WAS OBSERVED BY HIM THE RATE OF HIR ING TRANSPONDERS OR HIRING SATELLITE HAD GONE DOWN OVER THE YEAR AND AFTER DIG ITALIZATION CAPACITY OF TRANSPONDERS HAD ALSO INCREASED MANY FOLDS. FURTHER AVAILABILITY OF HIGHER CAPACITY DIGITAL TRANSPONDERS HAD LED TO HIGHER COM PETITION AMONGST VARIOUS TRANSPONDERS AND THEREFORE INCREASE IN LICENSE FEES COULD NOT BE BECAUSE OF INCREASE IN TRANSPONDER FEES/ SATELLITE HIRE CHARGE S. IT WAS ALSO OBSERVED BY HIM THE SUBSCRIPTION BASE OF THE ASSESSEE HAD ALMOS T STABILIZED AND THERE WERE NO BASIS FOR INCREASE IN LICENSE FEES WITH RETROSPE CTIVE EFFECT. HE THEREFORE REJECTED THE EXPLANATION OF THE ASSESSEE AND ADOPTE D THE LICENSE FEES PAID BY THE ASSESSEE IN THE IMMEDIATE PRECEDING YEARS @ USD 1 LAC PER MONTH AS THE ARMS LENGTH PRICE FOR THE PERIOD FROM 1.4.2002 TO 3 11.2003. HOWEVER FOR THE MONTHS OF FEBRUARY 2003 AND MARCH 2003 HE ACCEPTE D THE LICENSE FEES DECLARED BY THE ASSESSEE AT USD 183333 PER MONTH TO BE AT ARMS LENGTH. HE THUS DISALLOWED A SUM OF USD 833330 (RS.3 04 70 868 /-) FOR THE PERIOD FROM APRIL 2002 TO JANUARY 2003 AND ADDED TO THE TOTAL INCOME. 9. THE ASSESSEE DISPUTED THE DECISION OF AO AND SU BMITTED BEFORE CIT(A) THAT THE SELECTION OF COMPARABLES CITED BY THE ASSE SSEE WHICH WERE ENGAGED IN THE BUSINESS OF TRADING/ DISTRIBUTION OF SOFTWARE W AS JUSTIFIED. IT WAS ALSO SUBMITTED THAT THE AO HAD REJECTED THE TNMM METHOD APPLIED BY THE ASSESSEE AND FOLLOWED COMPARABLE UNCONTROLLED PRICE (CUP) ME THOD BUT USED ASSESSEES OWN DATA IN THE PREVIOUS YEAR WHICH WAS NOT AN UNCO NTROLLED TRANSACTION. IT WAS ALSO POINTED OUT THAT THE ASSESSEE HAD UNDERTAK EN PROPER DUE DILIGENCE IN 7 DETERMINING THE ARMS LENGTH PRICE AND THEREFORE ANA LYSIS/COMPARABLES COULD NOT BE ARBITRARILY REJECTED BY THE AO. RELIANCE WAS PLACED ON THE DECISION OF THE TRIBUNAL IN CASE OF MENTOR GRAPHICS (INDIA) PVT. LT D. (109 ITD 101). THE ASSESSEE ALSO SUBMITTED THAT THE OBSERVATION OF THE AO THAT THE SUBSCRIBER BASE HAD STABILIZED WAS NOT CORRECT BECAUSE THE SUB SCRIBER BASE HAD ALMOST DOUBLED FROM FIVE MILLION IN THE MID 2001 TO TEN MI LLION IN MID 2003. CIT(A) WAS CONVINCED BY THE ARGUMENTS ADVANCED BY THE ASSE SSEE. IT WAS OBSERVED BY HIM THAT THE AO AFTER REJECTING THE TNMM METHOD APPLIED BY THE ASSESSEE HAD NOT GIVEN ANY FINDING AS TO WHICH ONE OF THE FI VE METHODS PRESCRIBED UNDER RULE 10B WAS TO BE APPLIED. HE APPEARED TO HAVE APP LIED THE CUP METHOD BUT USED ASSESSEES OWN DATA IN THE PREVIOUS YEAR WHICH COULD NOT BE CALLED AS UNCONTROLLED TRANSACTION. CIT(A) ALSO OBSERVED THAT THE TPO IN A.Y.2004-05 I.E. IN THE SUBSEQUENT YEAR ACCEPTED THE METHODOLOGY USE D BY THE ASSESSEE REGARDING SELECTION OF COMPARABLES AND METHOD OF DE TERMINATION OF ARMS LENGTH PRICE. IT WAS ALSO OBSERVED BY HIM THAT THE AO HAD ACCEPTED THE LICENSE FEES PAID BY THE ASSESSEE FOR THE LAST TWO MONTHS TO BE AT ARMS LENGTH AND HAD NOT ACCEPTED THE REVISION OF RATE WITH RETROSPECTIVE EF FECT. THE DECISION TO INCREASE THE LICENSE FEES AND THE DATE FROM WHICH IT WOULD B E EFFECTIVE WAS A COMMERCIAL DECISION WHICH HAD NOT BEEN EXAMINED BY THE AO PROP ERLY. CIT(A) THEREFORE HELD THAT THE TRANSFER PRICING STUDY MADE BY THE AS SESSEE HAD TO BE ACCEPTED AS PER WHICH THERE WAS NO ADJUSTMENTS REQUIRED. HE THEREFORE DIRECTED THE AO TO DELETE THE ADDITION OF RS.3 04 70 868/-. AGGRIEV ED BY THE SAID DECISION THE REVENUE IS IN APPEAL. 10. BEFORE US THE LEARNED DR APPEARING FOR THE REVE NUE ASSAILED THE ORDER OF CIT(A). IT WAS ARGUED THAT THE COMPARABLES SELECTED BY THE ASSESSEE WERE NOT REALLY COMPARABLES AS THE CASES SELECTED WERE DIFFE RENT BOTH FROM OPERATIONAL 8 AND FUNCTIONAL POINT OF VIEW. THEREFORE THE COMPUTA TION MADE BY THE ASSESSEE REGARDING TRANSFER PRICING ADJUSTMENTS WAS NOT CORR ECT. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAD USED ENTERPRISE LEVEL PROFIT FOR COMPARISON WHICH WAS NOT CORRECT AS IT WAS THE TRANSACTIONAL PROFIT WHICH SH OULD BE CONSIDERED. IT WAS THUS SUBMITTED THAT ON THE FACTS AND IN THE CIRCUMS TANCES OF THE CASE THE ASSESSEES OWN TRANSACTIONS IN THE PREVIOUS YEAR WH ICH WERE ACCEPTED AS AT ARMS LENGTH PRICE HAD BEEN RIGHTLY APPLIED. 11. THE LEARNED AR ON THE OTHER HAND ARGUED THAT TH E ASSESSEE HAD CARRIED OUT DUE DILIGENCE IN SELECTION OF COMPARABLES AND T HE LATEST DATA AVAILABLE ON THE DATE OF DUE DILIGENCE HAD BEEN APPLIED. IT WAS ALSO SUBMITTED THAT THOUGH THE COMPANIES SELECTED OPERATED IN DIFFERENT FIELDS THE ASSESSEE HAD USED DATA RELATING TO SOFTWARE SEGMENTS ONLY FOR THE PURPOSE OF COMPARISON WHICH WAS THE INTANGIBLE SEGMENT COMPARABLE TO THE ASSESSEE. IT WAS ALSO SUBMITTED THAT THE AO HAD HIMSELF NOT ACCEPTED THE COMPARABLES SEL ECTED BY HIM AND IT WAS NOT PROPER FOR HIM TO REJECT THE CASES SELECTED BY THE ASSESSEE. THE LEARNED AR ALSO POINTED OUT THAT IN THE SUBSEQUENT YEAR THE TPO HAD ACCEPTED THE SAME COMPARABLES AND THE TNMM METHOD USED BY THE AS SESSEE AS IN THIS YEAR AND THEREFORE THE METHOD FOLLOWED BY THE ASSESSEE H AD TO BE ACCEPTED. IT WAS FURTHER POINTED OUT THAT THE AO HAVING ACCEPTED THE LICENSE FEES FOR THE LAST TWO MONTHS OF THE YEAR AS AT ARMS LENGTH PRICE HE WAS NOT CORRECT IN REJECTING THE LICENSE FEES PAID FOR THE PREVIOUS 10 MONTHS OF THE YEAR. IT WAS ACCORDINGLY URGED THAT ORDER OF CIT(A) SHOULD BE CONFIRMED. 12. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING TRANSFER PRICIN G ADJUSTMENTS MADE BY THE AO ON ACCOUNT OF LICENSE FEES PAID TO M/S. NGC ASIA LL C AN ASSOCIATED ENTERPRISE 9 OF THE ASSESSEE. THE ASSESSEE IS ENGAGED IN THE BUS INESS OF MARKETING AND DISTRIBUTION OF SATELLITE TELEVISION CHANNELS. DURI NG THE YEAR A SUM OF RS.13.75 CRORES BECAME PAYABLE TO THE ASSOCIATED ENTERPRISE MENTIONED ABOVE FOR VARIOUS SERVICES AS MENTIONED IN PARA 2 EARLIER. TH E INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES ARE REGULATED BY SECTIO N 92 AS PER WHICH THE TRANSACTIONS HAVE TO BE AT ARMS LENGTH PRICE AND IN CASE OF ANY DIFFERENCE ADJUSTMENTS IS REQUIRED TO THE TOTAL INCOME ON ACCO UNT OF ANY PAYMENT TO ASSOCIATED ENTERPRISE. THERE ARE VARIOUS METHOD PRE SCRIBED UNDER THE PROVISIONS OF SECTION 92C READ WITH RULE 10B TO DET ERMINE ARMS LENGTH PRICE. THESE METHODS ARE TRANSACTIONAL NET MARGIN METHOD ( TNMM); COMPARABLE UNCONTROLLED PRICE (CUP) METHOD; RESALE PRICE METHO D (RPM); COST PLUS METHOD (CPM); AND PROFIT SPLIT METHOD (PSM). THE ASSESSEE IN THIS CASE APPLIED TNMM METHOD AND FOR THIS PURPOSE HAD CONDUCTED DUE DILIG ENCE TO FIND OUT THE COMPARABLES. HOWEVER NO DIRECT COMPARABLES DEALING WITH DISTRIBUTION OF SATELLITE CHANNELS WERE FOUND DUE TO NON AVAILABILI TY OF INFORMATION OR DUE TO SUBSTANTIAL RELATED PARTY TRANSACTIONS IN THOSE CAS ES. THE ASSESSEE THEREFORE SELECTED THE BUSINESS SEGMENT OF TRADING IN COMPUTE R SOFTWARE WHICH ACCORDING TO IT WAS CLOSE TO ITS BUSINESS OF DISTRIBUTION OF CHANNELS AS IN BOTH THE CASES PRODUCTS DEALT WITH WERE INTANGIBLE. THE VARIOUS CO MPANIES SELECTED BY THE ASSESSEE ARE MENTIONED IN PARA 4 ABOVE. HOWEVER FOR THE PURPOSE OF COMPARISON THE ASSESSEE CONFINED ONLY TO COMPUTER S OFTWARE SEGMENT OF THOSE COMPANIES AND ON THAT BASIS THE ASSESSEE FOUND THAT THE PAYMENT MADE BY IT TO THE ASSOCIATED ENTERPRISES WAS AT ARMS LENGTH A ND NO ADJUSTMENT WAS REQUIRED TO MAKE. THE AO IN THIS CASE HAD MADE REFE RENCE TO THE TPO. HOWEVER THE REFERENCE DUE TO SOME ADMINISTRATIVE DIFFICULTI ES WAS NOT ACCEPTED. THE AO HAD THEREFORE MADE ITS OWN SELECTION OF COMPARABLE AS LISTED IN PARA 5 EARLIER. HOWEVER THE AO AGREED THAT BOTH THE COMPARABLES SE LECTED BY THE ASSESSEE 10 AND THOSE BY HIM WERE NOT SUITABLE FOR COMPARISON D UE TO DIFFERENCE IN NATURE OF BUSINESS. THE AO THEREFORE COMPARED THE ASSESSEE S OWN PAYMENT TO ITS ASSOCIATED ENTERPRISES IN THE IMMEDIATE PRECEDING Y EAR FOR THE PURPOSE OF COMPARISON ON THE GROUND THAT IN THAT YEAR THE SAID PAYMENT WAS FOUND TO BE AT ARMS LENGTH AS NO ADJUSTMENTS WERE MADE. 13. THE ASSESSEE IN THE IMMEDIATE PRECEDING YEAR I. E. A.Y.2001-02 HAD PAID LICENSE FEES @ USD 1 LAC PER MONTH. HOWEVER THE ASS ESSEE VIDE AGREEMENT DATED 27.1.2003 REVISED THE LICENSE FEE TO USD 1833 33 PER MONTH WITH RETROSPECTIVE EFFECT FROM 1.4.2002. THE AO HAS HELD THAT SUCH STEEP INCREASE IN LICENSE FEES BY 84.66% WITH RESPECT TO LAST YEAR WA S NOT JUSTIFIED AS CORRESPONDING INCREASE IN REVENUE WAS ONLY 32.26%. THE AO HAD THEREFORE MADE THE ADJUSTMENTS ON THE BASIS OF LICENSE FEES P AID IN THE IMMEDIATE PRECEDING YEAR. 14. THE CASE OF THE ASSESSEE IS THAT THE ENHANCED L ICENSE FEES @ USD 183333 PER MONTH FOR THE LAST TWO MONTHS FOR THE AS SESSMENT YEAR I.E. FEBRUARY AND MARCH 2003 HAD ALREADY BEEN ACCEPTED B Y THE AO AND THEREFORE THERE WAS NO REASON FOR NOT ACCEPTING THE ENHANCED FEES FOR THE EARLIER PERIOD OF THE YEAR. THE ASSESSEE HAS ALSO SUBMITTED THAT S UBSCRIBER BASE HAD ALMOST DOUBLED FROM MID 2001 TO MID 2003 AND THE NEGOTIATI ON REGARDING INCREASE IN LICENSE FEES WAS IN PROGRESS FOR QUITE SOME TIME AN D THE AGREEMENT HAD ARRIVED AT ONLY IN JANUARY 2003 WHICH WAS THE REAS ON FOR INCREASE WITH RETROSPECTIVE EFFECT. IT HAS ALSO BEEN SUBMITTED TH AT THE ASSESSEES OWN TRANSACTIONS IN THE EARLIER YEAR COULD NOT BE ADOPT ED FOR COMPARISON AS THESE WERE CONTROLLED TRANSACTIONS WITH ASSOCIATED ENTERP RISE. ANOTHER ARGUMENT ADVANCED BY THE ASSESSEE IS THAT THE COMPARABLES SE LECTED BY THE ASSESSEE AS 11 WELL AS METHOD OF COMPUTATION OF TP ADJUSTMENTS HAD ACCEPTED BY THE AO IN THE SUBSEQUENT YEAR I.E. A.Y.2004-05 AND THEREFORE THERE WAS NO REASON FOR NOT USING THESE COMPARABLES IN THE PRESENT YEAR. 15. WE HAVE CONSIDERED THE VARIOUS ASPECTS. THE AO HAD ACCEPTED THE LICENSE FEES FOR THE MONTH OF FEBRUARY AND MARCH 20 03 TO BE AT ARMS LENGTH. HOWEVER THE STEEP INCREASE GIVEN FROM THE BEGINNING OF THE YEAR WITH RETROSPECTIVE EFFECT HAS NOT BEE ACCEPTED. THE REAS ONS GIVEN BY THE AO IS THAT OVER THE YEAR THERE HAS BEEN DECLINE IN RATE OF HIR ING TRANSPONDERS/ SATELLITE DUE TO AVAILABILITY OF HIGHER CAPACITY DIGITAL TRAN SPONDERS AND HIGHER COMPETITION AMONGST VARIOUS TRANSPORTERS. THERE WOU LD HAVE BEEN NO DIFFICULTY IF RETROSPECTIVE INCREASE WAS WITH RESPECT TO AN UN RELATED PARTY BECAUSE THESE ARE COMMERCIAL DECISIONS WHICH THE ASSESSEE MAY TAK E ACCORDING TO ITS BUSINESS NEEDS AND CANNOT BE QUESTIONED UNLESS THEY ARE FOUND NOT GENUINE. THE POSITION IS HOWEVER DIFFERENT IN CASE OF TRANSA CTIONS WITH A RELATED PARTY AS IN THE PRESENT CASE WHICH HAS TO BE COMPARED TO UN RELATED PARTY TRANSACTIONS TO FIND OUT THE ARMS LENGTH PRICE. IN THIS CASE AR MS LENGTH PRICE HAS BEEN COMPUTED BY THE ASSESSEE WITH RESPECT TO CERTAIN CO MPARABLES AS MENTIONED IN PARA 4 USING TNMM. THESE COMPARABLES AND THE METHOD OF COMPUTATION OF ARMS LENGTH PRICE HAS BEEN ACCEPTED BY THE DEPARTM ENT IN THE SUBSEQUENT ASSESSMENT YEAR I.E 2004-05. THEREFORE IN OUR VIEW COMPARABLES SELECTED BY THE ASSESSEE HAVE TO BE ADOPTED FOR THE PURPOSE OF COMPUTATION OF TRANSFER PRICING ADJUSTMENTS THIS YEAR ALSO. HOWEVER IT IS NOTED THAT THE ASSESSEE HAS WORKED OUT THE ARMS LENGTH PRICE ON THE BASIS OF T RANSACTIONS RELATING TO THE COMPARABLE FOR A.Y.2002-03 AS AT THE RELEVANT POINT OF TIME COMPLETE DETAILS IN RESPECT OF A.Y.2003-04 WERE NOT AVAILABLE. IN OUR V IEW WHEN THE FACTS AND FIGURES IN RELATION TO THE RELEVANT ASSESSMENT YEAR I.E. A.Y.2003-04 ARE NOW 12 AVAILABLE THEN THE TRANSFER PRICING ADJUSTMENTS HAV E TO BE COMPUTED BASED ON THE SAID FACTS AND FIGURES. IN CASE WORKING IS TO B E MADE ON THE BASIS OF FIGURES FOR ASSESSMENT YEAR 2002-03 THEN IN OUR VIEW THE T RANSACTIONS IN ASSESSEES OWN CASE FOR THE SAID YEAR WHICH HAVE BEEN FOUND TO BE AT ARMS LENGTH IN THAT YEAR SHOULD BE ADOPTED AS BASIS AS THE BUSINESS BEI NG SAME IT WILL GIVE BETTER RESULTS. MERELY BECAUSE THE TRANSACTION IS WITH AN ASSOCIATE ENTERPRISE CANNOT BE THE GROUND TO REJECT IT AS A COMPARABLE WHEN THE TRANSACTION IS AT ARMS LENGTH. HOWEVER AS WE HAVE HELD EARLIER IN OUR VIE W IT WILL BE MOST APPROPRIATE TO COMPARE THE TRANSACTIONS FOR THE SAME YEAR I.E. A.Y.2003-04 FOR WHICH THE FIGURES ARE AVAILABLE IN RESPECT OF COMPARABLES WHI CH HAVE ALREADY BEEN ACCEPTED BY THE DEPARTMENT. WE THEREFORE SET ASIDE THE ORDER OF CIT(A) AND RESTORE THE MATTER TO THE FILE OF AO FOR RE-WORKING OF THE TRANSFER PRICING ADJUSTMENTS USING TNMM ON THE BASIS OF FACTS AND FI GURES AVAILABLE FOR ASSESSMENT YEAR 2003-04 IN RESPECT OF THE COMPARABL E SELECTED BY THE ASSESSEE AND PASS FRESH ORDER AFTER ALLOWING OPPORT UNITY OF HEARING TO THE ASSESSEE. 16. IN THE RESULT THE APPEAL OF THE REVENUE IS PART LY ALLOWED FOR STATISTICAL PURPOSE. 17. THE ORDER WAS PRONOUNCED IN OPEN COURT ON 23.02 .2011. SD/- SD/- ( R. S. PADVEKAR) (RAJEN DRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE : 23.02.2011 AT :MUMBAI COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 13 3. THE CIT(A) MUMBAI CONCERNED 4. THE CIT MUMBAI CITY CONCERNED 5. THE DR L BENCH ITAT MUMBAI // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI ALK