Shilpa Shetty gets ITAT breather in Rajasthan Royals promo case

In a major relief to Bollywood actress Shilpa Shetty, the Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has sided with the actress in her appeal against the commissioner of Income Tax (Appeals), regarding addition of Rs 3.42 crore in her income for year 2009-10.

ITAT observed that brand promotions done by Shetty for Rajasthan Royals, the Jaipur franchise of the Indian Premier League (IPL), in 2009-10 (AY 2010-11), would not constitute an international transaction, in the absence of a pre-requisite agreement.

The case dates back to 2012, when Shetty had filed return of income for AY 2010-11 declaring a total income of Rs 82,73,481. However, after scrutiny, the assessing officer passed an order on March 31, 2012, assessing the total income at Rs 4,25,59,195.

The addition was based on a transfer pricing adjustment of Rs 3,42,85,714 as the I-T department found that during the period under consideration Shetty was a party to a Share Purchase Agreement (SPA) signed by the existing shareholders of Rajasthan Royals’ Mauritius based holding company EM Sporting Holding (EMSHL) and Kuki Investments, represented by Shetty’s husband, Raj Kundra.

While Shetty herself was neither a buyer nor a seller of shares of EMSHL in the SPA, she had to provide brand ambassadorship services to Jaipur IPL Cricket, owner of Rajasthan Royals and a 100% subsidiary of EMSHL.

The SPA provided that such services were to be provided by the assessee (Shetty) without a fee. The AO in the assessment order treated the assessee and EMSHL as associated enterprises (AEs) and held that the services rendered constituted an international transaction and therefore the Arms Length Price (ALP) had to be computed for such services rendered by the assessee.

The AO thereafter, based on another contemporaneous brand ambassadorship agreement of the assessee with Hindustan Unilever (HUL), computed an amount of Rs 3,42,85,714 as the ALP in respect of the services.

As the assessee had not charged anything for the services provided, the entire quantum of the ALP so computed was adopted by the AO as the transfer pricing adjustment to the returned income of the assessee.

Aggrieved by such modification to the return income by the AO, Shetty filed appeal before the Commissioner of Income Tax (Appeals), who dismissed the appeal. Later the first appellate authority denied relief to the assessee by applying section 92B(2) and held that there was a deemed ‘international transaction’ between assessee and Jaipur IPL Cricket due to prior agreement, However, on second appeal, the tribunal accepted the contention of the assessee that the section 92 is not an independent charging section to bring in a new head of income or to charge tax on income which is otherwise not chargeable under the Act.

Transfer pricing provisions have always been a subject matter of dispute between tax department and taxpayers, opined Rakesh Bhargava, director at Taxmann, a publisher on taxation and corporate laws.

“The pre-condition to subject a transaction to transfer pricing provision is existence of an ‘International Transaction’. There are certain circumstances when a transaction is deemed as international transaction. These circumstances pre-requisites an agreement between the associated enterprises. In the instant case, there was no prior agreement between Mauritian Co. and AE of Shilpa Shetty for brand promotion activity,” said Bhargava.