In a relief to BBC India, the Delhi Income Tax Appellate Tribunal upheld the treatment of expenses related to advertisements as pass-through costs.
An Appellate Tribunal on Friday (November 10) upheld a verdict passed by the Commissioner of Income-tax (Appeals) in a two-decade old assessment matter involving BBC India where CIT (A) had held that the treatment of expenses relating to advertisement is treated as a pass-through cost.
Experts clarified that this was a separate case from the controversial tax-evasion case where BBC reportedly sent an email to the Central Board of Direct Taxes (CBDT) confessing that it had underreported some ₹40 crore of income in its tax returns. In midFebruary this year, teams from the Income-Tax department were at the BBC office in New Delhi and Mumbai conducting “survey” for alleged tax evasion.
To summarise the case, BBC India is a subsidiary of BBC Group companies, engaged in providing marketing support services and other miscellaneous services. It was remunerated on a cost-plus basis, wherein the cost included any expenses incurred in relation to the provision of services.
During the Assessment Year (AY) 2004-05, BBC India incurred certain expenses related to advertisements for purchasing ad space in newspapers. The cost involved was high, and the effort required to buy such space was not significant.
Additionally, the budget for these expenses was controlled by overseas group entities/associated enterprises, and the risk and reward of these expenses were borne by the associated enterprises.
As a result, BBC India did not include these costs in its cost base for charging a markup to its associated enterprises but only sought cost reimbursement for such expenses, as they were not incurred in relation to the provision of services.
However, the Income Tax Department considered these costs as part of the expenses for the provision of services and included them for markup. This led to a Transfer Pricing adjustment proposed by the Tax Department, which BBC India challenged at the appeal wing of the Income Tax Department.
The appeal wing ruled in favor of BBC India, stating that expenses related to advertisements for buying ad space in newspapers were not incurred for providing services. Thus, reimbursement of such costs without any markup met the arm’s length criteria.
Despite this, the Tax Department disagreed with the appeal wing and challenged the order at the Appellate Tribunal. The Tribunal, in its ruling, accepted the findings of the appeal wing and BBC India’s contention, ruling in favor of BBC India.
The Tribunal considered expenses related to advertisements as pass-through costs, not to be considered part of the cost base for charging a markup. It noted that the intercompany agreement was clear about the activities for which the Indian entity was expected to provide services to its associated enterprises.
The Tribunal emphasised that expenses related to advertisements involved high costs and minimal effort to buy ad space, treating these costs as pass-through, while all other costs were considered part of the cost base and subject to markup.
It’s important to note that this matter is unrelated to the search operation conducted at BBC India in February.
Experts suggest that BBC’s victory may set a precedent for several other multinationals following a similar pattern for advertisements.
One of the Expert commented, “The Delhi Tribunal’s recent ruling in the case of BBC World (India) Pvt Ltd for AY 2004-05 agrees to consider expenses related to advertisements as pass-through costs, not to be considered part of the cost base for charging a markup. The issue of pass-through costs has been vexed, leading to protracted litigation. The order pertains to AY 20004-05, and the Tribunal highlights the importance of robust documentation supporting inter-company transactions.”