FICCI-KPMG-Report-13-FRAMES

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196 The power of a billion: Realizing the Indian dream © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Conclusion Given the overall set-up of the industry, it would be ideal for the Government to consider the difficulties of the industry players and issue guidelines that enable taxpayers to adopt the newly introduced ‘Other method’ properly to support their TP policies as well as enable them to explain the economic dynamics of their industries that in many cases would help explain the pricing and the results of transactions entered into between related parties. Separately, it is incumbent upon taxpayers to proactively undertake planning analysis of their complex international transactions and maintain robust documentation to support the arm’s length price of their international transactions. The introduction of APAs is a positive step for the taxpayers and can be explored as an option in case of companies having complex/high value transactions after conducting a proper cost benefit analysis, as it would provide them with certainty and would help such taxpayers to plan their strategies in a better manner. • Judicial decision —— Transfer Pricing adjustment in relation to advertisement, marketing and sales promotion (AMP) expenditure is permissible Recently, the Delhi Special Bench of the Income-tax Appellate Tribunal (the Tribunal or Special Bench) in the case of LG Electronics India Private Limited 9 (LG India) held that Transfer Pricing adjustment in relation to advertisement, marketing and sales promotion (AMP) expenditure incurred by LG India for creating or improving the marketing intangible for and on behalf of the foreign Associated Enterprise (AE) is permissible. It also held that the said function can be construed as provision of service by LG India to the AE for which, earning a mark-up in respect of AMP expenditure incurred for and on behalf of the AE, is appropriate. While arriving at the cost of the service, the Transfer Pricing Officer (TPO) relied on AMP ratio of certain comparable companies (Bright Line Test). The TPO proposed to disallow the excess expenditure incurred by the taxpayer over and above the bright-line. The Dispute Resolution Panel (DRP) not only confirmed the action of the TPO and also directed the Assessing Officer (AO) to impute a mark-up on the costs disallowed by the TPO. The Special Bench of the Tribunal observed that – • In the display of brand in the advertisements coupled with proportionately higher AMP spend by the taxpayer indicated an oral or tacit understanding between LG India and its foreign AE regarding brand promotion and therefore, the same was in the nature of an ‘international transaction’. • It further observed that by incurring excess expenditure, LG India had provided services to its AE which owned the brand, requiring justification of arm’s length price thereof. • The Tribunal also approved the use of mark-up on the costs incurred for providing services by LG India. In this regard, the Special Bench observed that the Bright Line Test is simply a tool to ascertain the cost of the international transaction of provision of service and approved the use thereof. • While dealing with the issue of the constituents of the Bright Line, the Special Bench observed that the 09. LG Electronics India Private Limited vs. ACIT (ITA No. 5140/ Del/2011) expenditure incurred directly ‘in connection with’ and not ‘for promotion of’ sales, should not be put in the same basket as AMP expenditure. Therefore, bonus/ commission paid to dealers/ sales agent does not constitute AMP expenditure. KPMG in India’s comments The Special Bench ruling has laid down certain guiding principles on the vexed issue of AMP expenditure, though in view of dissenting order of one of the Members of the Three Member Special Bench, the scope for further litigation does not seem to have reduced. It would be worthwhile for the foreign broadcasting companies operating through Indian AEs incurring AMP expenses to have proper contractual arrangements in place with detailed analysis and proper segregation of the rights and obligations of parties concerned. Further, it shall also be necessary to demonstrate the consonance of the functions carried out and the risks undertaken by the counterparties with the contractual terms. While the litigation on the matter of AMP spend and consequent creation of marketing intangible will most certainly continue, in light of the Special Bench decision it would be advisable for the Indian entities to proactively analyze not only the quantum but also the nature of AMP expenses and maintain details and documents in this regard. Tax incentives and Tax planning: —— Special Economic Zones (‘SEZ’) The SEZ regime in the country allows tax breaks to eligible entities on export earnings for a period of 15 years (in a phased manner). Hence, entities engaged in content development, animation, etc. for exports abroad, may explore setting up units in a SEZ to claim tax holiday benefits. It is pertinent to note that with effect from 1 April 2011, SEZ units are liable to pay Minimum Alternate Tax at the rate of 18.5 percent (excluding surcharge and education cess) on book profits. Nonetheless, the income tax saving (the difference between normal tax liability and MAT liability), concessions in other indirect taxes, lower cost of operations in SEZs, etc make the SEZ route an ideal mode of doing business for export oriented entities. —— Intellectual Property Rights The possibility of tax planning by separating production and distribution rights in films may be explored in certain cases. An offshore special purpose vehicle may retain and exploit the distribution rights (including satellite broadcasting rights, audio and music rights, video rights, etc.) overseas, in a tax effective manner. Such planning would need to be carefully evaluated depending upon the business model and in compliance with the Transfer Pricing provisions as also the Controlled Foreign Company (CFC) rules proposed to be introduced in the Direct Taxes Code.
The power of a billion: Realizing the Indian dream 197 Key regulatory updates —— FDI in the broadcasting sector As per Press Note 7 (2012 series) issued on 10 April 2012, the Government raised the existing foreign investment limits / liberalized the FDI norms in various key activities in broadcasting sector. Previous and the revised FDI limits in relation to broadcasting sector are tabulated below: Particulars Previous FDI (%) Revised FDI (%) Means of Entry Broadcast Content Services Terrestrial broadcasting (FM Radio) 26% 26% Government approval Uplinking of ‘news and current affairs’ TV channels 26% 26% Government approval Uplinking of non ‘news and current affairs’ TV channels / down linking of TV channels 100% 100% Government approval Broadcast Carriage Services • Teleports (setting up of uplinking HUBs / teleports) • Direct-to-home (DTH) • Cable networks (Multi-System Operators(MSOs) operating at national or state or district level and undertaking upgradation of networks towards digitalization and addressability) Mobile TV Cable Networks (MSOs not undertaking upgradation of networks towards digitalization and addressability and local cable operators (LCOs) Upto 49 percent -Government approval No specific policy Upto 49 percent -Government approval 74% Upto 49 percent- Automatic route 49 percent to 74 percent- Government approval 49% Automatic route Source: Consolidated FDI Policy - Circilar 1 of 2012 issued by Department of Industrial Policy and Promotion • FDI for uplinking and downlinking TV channels will be subject to compliance with the relevant up-linking or down-linking policy notified by the Ministry of Information & Broadcasting from time to time. • The Foreign Investment limit in companies engaged in the aforesaid activities shall include, in addition to FDI, investment by Foreign Institutional Investors (FIIs), Non- Resident Indians (NRIs), Foreign Currency Convertible Bonds (FCCBs), American Depository Receipts (ADRs), Global Depository Receipts (GDRs) and convertible preference shares held by foreign entities. • In view of national security concerns, the Press Note has also detailed out multiple security conditions which have to be fulfilled by the companies in addition to the respective sectoral conditions. Primarily, these conditions involve mandatory requirement of key executives of the Company to be Indian citizens, security clearance of foreign personnel and observance of certain provisions relating to Infrastructure/ Network/ Software related equipment and monitoring/ inspection/ submission of information by the broadcasting companies. KPMG in India’s comments The increased FDI limits / liberalization in FDI norms in respect of broadcasting sector would improve accessibility of broadcasting services, up-gradation of networks towards digitalization and addressability across the country, and also bring in international best practices in this key sector. Conclusion The M&E sector has tremendous growth potential and prudent fiscal legislation would help it to perform at its full potential. While the Government has taken certain steps to address some of the issues affecting the industry, it may help the cause of the industry if the Government can take further steps to resolve the issues highlighted in this Report so as to enable the Indian M&E sector to reach new heights and become truly global. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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01 The power of a billion: Realizin
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FICCI 2013 143 “ The Amendments t
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FICCI-KPMG-Report-13-FRAMES

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