India: Shilpa Shetty Vs ACIT - Free Brand Ambassadorship Service Provided Outside Transfer Pricing Ambit

Last Updated: 24 September 2018
Article by SKP  

Brief Facts

The taxpayer is a resident in India and is mainly engaged in the profession of acting in films, and also acts as a brand ambassador for various products. The taxpayer undertook to provide brand ambassadorship service to an Indian company namely, Jaipur IPL Cricket Private Limited (JICPL) concerning promotional activities of Rajasthan Royals an IPL cricket team owned by JICPL. JICPL is a 100% subsidiary of EM Sporting Holding Limited (EMSHL).

During the year under consideration shareholders of EMSHL, through a Share Purchase Agreement (SPA), transferred part of its holding to M/s Kuki Investments Ltd (Kuki) - a Bahamas based company represented by the taxpayer's husband, Raj Kundra. The SPA stated that the taxpayer should provide brand ambassadorship service to JICPL without any fee/charges. The diagram below explains the relationship between the parties discussed in the above lines:

Contention of the tax officer and First Appellate Authority

The Assessing Officer (AO) treated taxpayer and EMSHL as Associated Enterprise (AE) and considered transaction between taxpayer and JICPL as an international transaction by virtue of SPA involving shareholder of EMSHL. Consequently, since the taxpayer provided services to JICPL free of charge, the AO, based on another brand ambassadorship agreement between the taxpayer and Hindustan Unilever, computed an arm's length price for the said services and made transfer pricing adjustments.

The taxpayer challenged the said order of the AO before first appellate authority, i.e. Commissioner of Income Tax-Appeal (CIT(A)). The CIT(A) held that the taxpayer and Kuki were AE's as Raj Kundra controlled both Kuki and the profession of taxpayer. The CIT(A) held that the profession of the taxpayer is controlled by Raj Kundra, being relative of the taxpayer.

Furthermore, CIT(A) held that services provided by the taxpayer to JICPL are deemed as international transaction due to prior SPA between Kuki and shareholders of EMSHL.

Aggrieved by order of the First Appellate Authority, the taxpayer filed an appeal before the Income Tax Appellate Tribunal (ITAT). The taxpayer raised various grounds on legal as well as factual aspects of the case. We have briefly summarized the ITAT's observations and judgment on each of the critical grounds raised by the taxpayer:

  1. Whether CIT(A) has the power to cure a jurisdictional defect, by substituting the AE of the taxpayer as Kuki instead of EMSHL as originally recorded by the AO?

    Taxpayer's contentions

    The taxpayer relied on Instruction No. 15 of 2015, dated 16 October 2015 and judgment in case of Vodafone India Services Private Limited vs Union of India and others2 and argued that it is a jurisdictional requirement to record a satisfaction by the AO in case where taxpayer had not filed Accountant's report under Section 92E of the Income Tax Act, 1961 (Act), and where AO suspects there is an income or a potential of income. AO had recorded his satisfaction for AE relationship between taxpayer and EMSHL.

    Furthermore, the taxpayer argued that recording of satisfaction was only within the jurisdiction of the AO and CIT(A) cannot substitute his satisfaction for that of the AO and consider Kuki as AE instead of EMSHL as initially identified by AO.

    Accordingly, CIT(A) cannot substitute the reasons recorded by AO for its own reasons.

    Judgment of the Tribunal

    Although the powers of CIT(A) are wider than any other appellate authorities or court, it cannot cure a jurisdictional defect, which the AO derives only by recording a satisfaction.

  2. Whether the profession of the Assessee can be considered as a person within the meaning of Section 2(31) separate from the Assessee? If yes, whether the taxpayer and Kuki be considered as AE as per Section 92A of Income Tax Act, 1961 as both professions of the taxpayer and Kuki are controlled by Raj Kundra?

    CIT(A) observed that the taxpayer's professional activities, which were controlled by the taxpayer constituted an enterprise (distinct from taxpayer) and thus, the taxpayer and Kuki were AE's in view of Section 92A(2)(j) of the Act.

    Taxpayer's contentions

    Taxpayer also relying on the definition of the term "enterprise" and "person" in the Act, submitted that the taxpayer's profession cannot be considered as a person within the meaning of Section 2(31) of the Act, separate from her, as the taxpayer's profession is not assessable separately from her.

    Therefore, the question of the taxpayer being an AE of Kuki, by holding that Raj Kundra controlled Kuki and Raj Kundra's relative, i.e. the taxpayer controlled the enterprise of taxpayer's profession, does not arise as taxpayer's profession is not a separate enterprise from the taxpayer.

    Furthermore, the taxpayer argued that 92A(2)(J) could not be applied, as neither Raj Kundra nor Kuki can be said to have controlled the taxpayer.

    Judgment of the Tribunal

    The ITAT observed that the AE relationship as established by the CIT(A) is only based on one limb of the Section 92A(2)(J) i.e., an individual controls an enterprise (i.e., Raj Kundra controlling Kuki) without satisfying the second limb i.e., the individual or his relative controlled the other enterprise (i.e., Raj Kundra or his relative controlled profession of the taxpayer).

    Furthermore, revenue did not submit anything to prove how Raj Kundra or his relative controlled the taxpayer's profession. Also, the revenue did not submit anything against the stand taken by the taxpayer that the profession of taxpayer cannot be considered as a separate enterprise. Accordingly, the taxpayer and Kuki cannot be regarded as AEs regarding Section 92A.

  3. Whether the transaction between taxpayer and JICPL can be regarded as 'deemed international transaction'?

    Judgment of the Tribunal

    The Tribunal, agreeing to the contentions of the taxpayer, held that the transaction between taxpayer and JICPL cannot be considered as deemed international transaction since neither of the parties to SPA (i.e., Kuki and EMSHL) were AE of taxpayer nor JICPL had a prior agreement with the AE of the taxpayer, and as such the prerequisite of a previous agreement between non-AE with AE is not fulfilled for invoking deemed international transaction provisions.

  4. Whether the existence of transaction a pre-requisite for invoking transfer pricing related provisions, since, in this case, taxpayer did not receive any consideration?

    Judgment of the Tribunal

    The ITAT placing reliance on various judicial precedents held that Chapter X of the Act pre-supposes existence of income and lays down machinery provisions to compute the arm's length price of such income. Section 92 is not an independent charging section to bring in a new head of income. Accordingly, as no income is accrued or received by the taxpayer under Section 5 of the Act, no notional income can be brought to tax under Section 92 of the Act.

    Considering all the above findings, the ITAT allowed the grounds of the taxpayer and deleted the adjustment.

SKP's Comments

The Tribunal has answered quite a few principle level questions in this judgment, which may carry a lot of persuasive value for other cases on the similar issue. Especially, non-applicability of transfer pricing provisions to Nil value (free of cost) transactions, in view of Section 92 not being a charging section will immensely help taxpayers, who are grappling with issues such as Advertising, Marketing and Promotion (AMP), interest-free loans, location savings, etc.


1 ITA No. 2445/Mum/2014

2 [2014] 361 ITR 531 (Born HC)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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