30 April 2012 Draft report –Direct and Indirect taxes India/Project... · Project Rainbow II 30 April 2012 Reliance restricted Draft report –Direct and Indirect taxes Atul Mehta

Project Rainbow II

30 April 2012Reliance restrictedDraft report – Direct and Indirect taxes

Atul MehtaPartner

Transaction Advisory Services Tax and Regulatory Services T +91 22 6192 0210 TM +91 9820 396010 MF +91 22 6192 1000 FE [email protected] E

Sitaram PeddibhotlaAssociate Vice President

Transaction Advisory ServicesT +91 40 6736 2067 TM +91 9177 000317 MF +91 40 6736 2200 FE [email protected] E

Narendra RohiraPartner

Tax and Regulatory Services – Direct tax+91 22 6665 5000+91 98926 00677+91 22 6192 1000

[email protected]

Tr SivakumarAssociate Vice President

Transaction Advisory Services+91 22 6192 1496+91 98207 56638+91 22 6192 1000

[email protected]

Divyesh LapsiwalaDirector

Tax and Regulatory Services – Indirect taxT +91 22 6192 0000M +91-98204 42913F +91 22 6192 1000E [email protected]

mailto:[email protected]





June 5, 20122

Reliance Restricted

Dear Sir:

� This note has been prepared in accordance with the instructions ofSouth Asian Regional Investment Inc. and as per our engagementletter in connection with the proposed investment in MAA TelevisionNetwork Limited (the “Transaction”). As our draft engagement letterhas not yet been signed by you, we are prepared to provide a copy ofthe summary of the due diligence observations to you only on thebasis that you agree that:

� Ernst & Young Private Limited (including its partners, employees,agents, subcontractors and employees of its wholly owned company,Ernst & Young Services Limited) accepts no responsibility and shallhave no liability to you or any other third party in relation to thecontents of the summary of observations;

� Any use you make of the summary of observations is entirely at yourown risk; and

� Save as set out in the section headed “Confidentiality waiver inrelation to tax” in section 12 of Appendix C, General Terms ofBusiness you will not provide copies of the status report to any party(i) other than your professional advisers acting in that capacityprovided that they accept the same terms as set out herein or (ii)unless required by court order or a regulatory authority, without ourprior written consent.

Draft

� Any use you make of the summary of observations is entirely at yourown risk; and

� Save as set out in the section headed “Confidentiality waiver inrelation to tax” in section 12 of Appendix C, General Terms ofBusiness you will not provide copies of the status report to any party(i) other than your professional advisers acting in that capacityprovided that they accept the same terms as set out herein or (ii)unless required by court order or a regulatory authority, without ourprior written consent.

June 5, 20123

AbbreviationAct Income-tax Act ,1961Ad AdvertisementAP Andhra PradeshAPALYA Apalya Technologies Private Limited APVAT Andhra Pradesh Value Added Tax BS Balance sheetc. / approx. ApproximatelyCapex Capital expenditureCEO Chief Executive OfficerCF Cash flowCOO Chief Operating OfficerCPRP Cost per rating pointCr CroreCS / C&S Cable & SatelliteCTC Cost to companyDNM Digital and new mediaDT Direct taxDTH Direct to homeE&Y / EY / 'we' / 'us' Ernst & Young Private LimitedEBITDA Earnings/Profit before Interest, Tax, ESI Employee State InsuranceESOPs Employee Stock OptionsFCT Free commercial timeFY Financial YearFYxx Financial Year for the year ended March 31, GEC General Entertainment ChannelGRPs Gross rating pointsHR Human ResourcesHUL Hindustan Unilever LimitedIDT Indirect taxIPTV Internet Protocol TelevisionIRD Integrated receiver and decoderIT Information technologyITA Income Tax AuthoritiesITR Income Tax ReturnITV Internet Television K Thousand

AbbreviationsDraft

AbbreviationLCO Local cable operatorm Million MAA / MAA TV / Company / Target MAA Television Network LimitedMIB Ministry of Information and BroadcastingMIS Management Information SystemMn / m MillionMOU Memorandum of understandingMSO Multi system operatorNA Not applicableNPT Non prime timeNQ Not quantifiablep.a. Per annumPAT Profit after taxPBT Profit before taxPF Provident fundPL / P&L Profit and lossPLI Performance linked incentivePM Per monthPT Prime timepts Per ten secondsRODP Rest of the day partRs Rupees SAFE South Asian Family EntertainmentSARI South Asian Regional Investment Inc.SMS Short messaging serviceTAR Tax Audit Report Target Maa Television Network LimitedTDS Tax Deducted at Source TG Target groupThe Management Management of MAA TVTRP Television rating pointTV Television u/s under section VAS Value added servicesWDV Written Down ValueYTD Year to date

Summary of key findings – Direct Tax

Subject FindingsShort withholding of taxon programmeproduction contracts

► Target has made payments during periodtelevision programmes and has deducted taxpayments to contractors for the purposes of

► However, ITA may argue that such paymentsas royalty under the Act and hence withholdingto withhold tax @ 10% on such paymentsshort deduction of TDS on the said payments

► Based on judicial precedents, a position canbelief, there may be no disallowance ofHowever, in a worst case scenario such expensetax on such payments thereby leading to potential

► Exposure Level – Low for withholding tax(if production contracts are considered as purchase

► Exposure Amount – Rs 3464.83.48 lakhs

Potential withholding tax - (Rs 648.46 lakhs

Tax - Rs 303.29 lakhs

Interest – Rs 41.88 lakhs

Penalty – Rs 303.29 lakhs

Potential tax on disallowance of expense -




► Deal Advice: Advisable to obtain a vettinglegal side in order to evaluate whether a aforesaidoutsourcing under a production contractwithholding tax and tax, interest and penalty

Draft

period under review with various production companies for production oftax @ 2% thereon on the ground that these payments would qualify as

of withholding under the Act.

payments are essentially for purchase of programme rights and would qualifywithholding should have been done @ 10%. Accordingly, Target may be liable

payments. Hence, Target may be liable to interest and penalty exposure on suchpayments.

can be adopted that in case of short deduction of tax under bonafideof corresponding expenditure on which such tax has been deducted.expense may be disallowed on account of short deduction of withholdingpotential interest and penalty exposure thereon

amount and High for interest and penalty and Medium for disallowancepurchase of programme rights)

(For FY09 , FY10 , FY11 and FY12)

lakhs)

(Rs 2816.37 lakhs)

vetting of the production contracts (where withholding is done @ 2%) from aaforesaid contracts could be regarded as purchase of rights instead of

contract and to obtain appropriate indemnity for interest and penalty onpenalty for disallowance of expenses.

Summary of key findings – Direct Tax

Subject FindingsShort withholding of taxon payments forsubscription fees

► Target has made payments to Tam Softwarethat these payments would qualify as payments

► However, ITA may argue that such servicesbeen done @ 10% as fees for technical servicespayments. Hence, Target may be liable topayments.

► Based on judicial precedents, a position canmay be no disallowance of corresponding expenditurescenario such expense may be disallowed onleading to potential interest and penalty exposure

► Exposure Level – Low for withholding tax amount,

► Exposure Amount – Rs 73.13 lakhs

Potential withholding tax - (Rs 12.87 lakhs)

Tax – Rs 5.94 lakhs



Potential tax on disallowance of expense - (Rs

Tax – Rs 27.12 lakhs



► Deal Advice: Advisable to obtain appropriatepenalty for disallowance of expenses./ valuation

Related partytransactions

► If Target is unable to demonstrate the consummationpayments made to related parties

► Exposure Level – Low

► Exposure Amount – Not quantifiable

► Deal Advice – Advisable to obtain appropriate

Draft

towards subscription fees and has deducted tax @ 2% thereon on the groundpayments to contractors for the purposes of withholding under the Act.

by Tam Software are technical in nature and hence withholding should haveservices Accordingly, Target may be liable to withhold tax @ 10% on such

interest and penalty exposure on such short deduction of TDS on the said

be adopted that in case of short deduction of tax under bonafide belief, thereexpenditure on which such tax has been deducted. However, in a worst case

on account of short deduction of withholding tax on such payments therebyexposure

amount, High for interest and penalty and Medium for disallowance

(Rs 60.26 lakhs)

appropriate indemnity for interest and penalty on withholding tax and tax, interest andvaluation adjustment in this regardconsummation of transactions at fair value, the ITA may disallow unreasonable part of

appropriate indemnity in this regard

Summary of key findings – Indirect Tax

Subject Findings

Payment of APVAT onassignment of non-exclusive license forusing the content

► Maa TV has entered into an agreement with Apalyaalso entitled to adapt / digitize / modify / copy the

► Presently, Maa TV is discharging only Service

► Since the License Agreement entitles Apalya toview that the right to use the Content has beenApalya.

► Exposure level: High► Exposure Amount – Rs 5.48 lakhs (For FY11

Tax - Rs 2.51 lakhs



Payment of Service Taxon non-refundabledeposits receivedtowards de-coders fromMSOs

► We understand that Maa enters into agreementchannels in the specified territories.

► For the purpose of decoding signals, MSO’srecovers non-refundable deposit. Property in the

► Presently, Maa TV is not paying Service Tax /the value of taxable service for the purpose ofprovided in relation to broadcasting.

► Exposure level: High► Exposure Amount – Rs 32.46 lakhs (For FY09




Draft

Apalya for dissemination of content over various media under which Apalya isthe content.

Tax on the consideration received from Apalya.

to edit and copy the content as well, the Commercial Tax Authorities may take abeen transferred to Apalya and levy APVAT on the consideration received from

11 and FY12)

agreement with MSO’s, under which MSOs are granted the right to distribute Maa TV’s

MSO’s are provided with IRD (i.e. signal decoders) by Maa, towards which Maathe IRD’s so provided continue to remain vested with Maa.

VAT on the non-refundable deposits. Such deposits are likely to be included inof Service Tax since the definition of ‘Broadcasting service’ covers all services

09, FY10, FY11 and FY12)


Subject Findings

VAT exposure onProcurement of serial /programme rights

► Maa TV has entered into an agreement withprogramme rights / commercial exploitation of such

► We understand that the content providers areexception of few providers such as Viacom. Inuse copyright is being transferred by the content

► We understand that as per the agreements entered2012, the price is exclusive of VAT. Therefore the

► Exposure level - High► Tax Exposure Amount – Rs 285.21 lakhs (For

VAT exposure onagreement with Airteland other telecomoperators

► We understand that Maa TV has entered intoValue Added Services such as ring tones, caller

► Based on the agreement with the telecom operators,

► the software (which would include thedirectly to the customers of Airtel and Airtel

► licensed/ copyrighted articles like ringtonesas hence, ‘goods’ as the same satisfies

► However, there is a favorable ruling in the case

► Exposure level: medium to low► Exposure Amount – Rs 9. 73 lakhs (For FY09

Tax - Rs 4.02 lakhs



Draft

with various serial / programme production companies for sale of serial orsuch content.

are presently charging only Service Tax and no VAT is being charged with theIn such event, the Commercial Tax Authorities may take a view that the right to

content providers and levy VAT on the consideration charged to Maa TV.

entered into between Maa TV and the production companies for the year 2011-the risk of VAT liability on such procurement is High.

(For FY09, FY10, FY11 and FY12)

into agreement with telecom operators such as Airtel, pertaining to provision ofcaller tunes etc.

operators, the Commercial tax Authorities could contend that

the licensed/ copyrighted article like ringtones) is being provided by Maa TVAirtel is only an intermediary between the customers and Maa TV;

ringtones which are provided Maa TV under the agreement are movable propertysatisfies all the traits of being classified as goods

case of BSNL by the AP High Court.

09, FY10, FY11 and FY12)


Subject Findings

VAT exposure onCopyright charges

► Maa TV has entered into an agreement withrecordings, musical and literary works for incorporation

► We understand that the content providers areTax Authorities may take a view that the righttransferred by the content providers and levy VAT

► We understand that as per the agreements entered2012, the price is exclusive of VAT.

► Exposure level: High► Tax Exposure Amount – Rs 5.02 lakhs (For

Draft

with various content providers for usage of licensed content such as soundincorporation in the programmes / performance on the TV channels.

not charging any VAT on provision of the right. In such event, the Commercialright to use copyright in the sound recordings, musical works etc is beingVAT on the consideration charged to Maa TV.

entered into between Maa TV and the production companies for the year 2011-

FY09, FY10, FY11 and FY12)

Summary of tax issuesCurrency: Rs lakhs Tax Interest* Penalty TotalDirect taxShort withholding of tax on programme production contractsWithholding tax 303 42 303 648

Disallowance of expenses 1,301 214 1,301 2,816

Short withholding of tax on payments for subscription feesWithholding tax 6 1 6 13 Disallowance of expenses 27 6 27 60 Related party transactions NQ NQ NQ Direct tax total 1,637 263 1,637 3,538

Indirect taxVAT / CSTPayment of APVAT on assignment of non-exclusive license for using the content

2.5 0 2.5 5

VAT exposure on Procurement of serial / programme rights

285 0 0 285

VAT exposure on agreement with telecom operators

4 2 4 10

VAT exposure on Copyright charges 5 0 0 5

Service TaxPayment of ST on non-refundable deposits received towards de-coders from MSOs

14 5 14 33

Indirect tax total 311 7 21 338

Grand total 1,948 270 1,658 3,876*Interest is computed till the date of report ie. April 30, 2012

Draft

Indemnity Exposure Level

345 Low for Withholding tax amount, High for interest and penalty if production contracts are considered as purchase of programme rights

2,816 Medium if production contracts are considered as purchase of programme rights

7 Low for Withholding tax amount, High for interest and penalty60 Medium

Low3,229

5 High

285 High in respect of tax amount. Interest and penalty exposure is not applicable given that the same would be production company’s liability.

10 Medium to Low

5 High in respect of tax amount. Interest and penalty exposure is not applicable given that the same would be content provider’s liability.

33 High

338

3,567

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Direct taxes___________________________________________

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Short withholding of tax on programme production contracts

� Based on review of financial statements of Target for the period underrights from third parties. Further, the management has represented thatwhereas had withheld tax @2% on payments made to various productionwithholding was justified by Target management as payment to contractorsa) Target management has represented that such programmes wouldb) Target owns the copyright/has developed the concept in respect

programme/serial to such production companiesc) Production companies/houses are to produce the programme for

� However, while the above conditions are present in the sample productioncontracts also mention vesting of ‘all right(s)’ in such television programme

� In view of the above, ITA may argue that such payment should constituteprogrammes by Target on completion of production and consequentlyto royalty

� Under such circumstances ITA may deem Target as an assesseeassessee along with interest @1% and penalty which may be equal

� Per the provisions of the Act, no such order can be passed after expirytaxes withheld is filed. Accordingly, no such order may be passed bywhich have been filed before March 2010.

Draft


under review we understand that Target has acquired certain movie / serialthat Target had withheld tax @10% on purchase of movie / serial rights,

production companies for production of television programmes. The 2%contractors for carrying out contractual work (production) following grounds:would be produced by the production companies on behalf of Target

of the programme and has only outsourced activity of production of the

Target under the supervision/ control of Targetproduction contracts reviewed by us, it is observed that the said sample

programme in favour of Target post completion of productionconstitute royalty to production houses for purchase of rights in television

consequently subject the same to withholding at a higher rate of 10% as applicable

assessee in default and try to recover short fall in withholding tax from theto short fall in withholding tax.

expiry of two years from the end of the FY in which quarterly statement forby ITA for FY09 and first three quarters of FY10 quarterly statements for

DraftPage 12


1. For the purpose of our computation, we have assumed interest @ 1% per month from 1 April 2010, 1 April 2011 and 1 April 2012 till date

2. Penalty for such non-compliance may be levied @ 100% of the entire amount of tax in default3. Interest has been calculated from 1 April immediately after the end of relevant financial year till the date of completion

of regular assessment.4. Penalty may be levied by ITA @ 100% - 300% on the amount of tax chargeable on such disallowance. For the

purpose of our computation, we have assumed potential penalty levy @ 100%5. Exposure for FY10 has been computed considering that entire contract payments have been made in last quarter of

FY10

Currency: Rs lakhs Notes FY09 FY10 FY11 FY12 TotalAmount of payment made to production houses

1,073.68 1,451.20 1,143.90 1,196.00 4,864.78

Potential withholding tax exposureTax deducted @ 2% 21.47 29.02 22.88 23.92 97.30 Tax deductible @ 10% 107.37 145.12 114.39 119.60 486.48 Short deduction of withholding tax 85.89 116.10 91.51 95.68 583.77

Potential withholding tax exposure (Refer Note 5 for FY10)

116.10 91.51 95.68 303.29

Potential interest exposure @ 1% (Refer Note 5 for FY10) 1

29.02 11.90 0.96 41.88

Potential penalty exposure (Refer Note 5 for FY10) 2

116.10 91.51 95.68 303.29

Potential tax exposure on account of disallowancePotential disallowance of subscription fee (on account of aforesaid short deduction)

858.94 1,160.96 915.12 956.80

MMR 33.99% 33.99% 33.22% 32.45%

Potential Tax exposure on disallowance

291.96 394.61 304.00 310.48 1301.05

Potential interest exposure @ 1% 3 72.99 98.65 39.52 3.10 214.27 Potential penalty exposure @ 100% 4 291.96 394.61 304.00 310.48 1,301.05 Source: Management information and representations for FY12Ref: Short deduction of TDS on payment towards programme and serial production payments - Section DT - Direct Tax

Draft


� Accordingly, in a case where such payment is deemed aspayment for purchase of rights, and hence as royalty , the samemay be subject to higher withholding @ 10%

� It may be advisable to obtain a vetting of the productioncontracts (where withholding is done @ 2%) from a legal side inorder to evaluate whether a aforesaid contracts could beregarded as purchase of rights instead of outsourcing under aproduction contract

� Based on the decision of Supreme Court in case of HindustanCoca Cola Beverage (P) Limited ,the Target, after satisfying theITA that the production companies / payees have offeredaforesaid amounts to tax / paid tax on aforesaid amounts, maycontend that the short fall in withholding tax may not berecovered from Target. It may be noted that there is anamendment proposed by Finance Bill 2012 (although proposedto be prospective in nature) in the Act, whereby withholding taxmay not be recovered from payer should payee has paid tax.

� Further, under the Act, any expense on which tax has either notbeen deducted / paid or has been short deducted / short paid,shall be disallowed while computing taxable income.

� Accordingly, in case ITA challenge during assessments that thatthere was short deduction of tax on such programme productioncontracts, there may be a consequential disallowance of suchexpenditure while computing taxable income of the said years.

1 April 2010, 1 April 2011 and

Interest has been calculated from 1 April immediately after the end of relevant financial year till the date of completion

Exposure for FY10 has been computed considering that entire contract payments have been made in last quarter of

Total4,864.78

97.30 486.48 583.77

303.29

41.88

303.29

1301.05

214.27 1,301.05

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� Based on decisionscase of short deductioncorresponding expenditure

� However, in a worstsuch disallowance

� It is pertinent to noteno such disallowances

Point of view

Target may be liable to interest and penalty on such short deduction of TDS on contract payments where such payments are regarded as purchase of may be interest and penalty exposure on account of disallowance of expenses in the year of short deduction.

Exposure Level – Low for withholding tax amount, High for interest and penalty and Medium for disallowance (if production contracts are considered as purchase of programme rights)Exposure Amount – A+BA) Withholding tax - (Rs 648.46 Tax – Rs 303.29 lakhsInterest – Rs 41.88 lakhsPenalty – Rs 303.29 lakhsB) Disallowance of expense Tax – Rs 1301.05 lakhsInterest – Rs 214.27 lakhsPenalty – Rs 1301.05 lakhsDeal Advice: Advisable to obtain a vetting of the production contracts (where withholding is done @ 2%) from a legal side in order to evaluate whether a aforesaid contracts could be regarded as purchase of rights instead of outsourcing under a production contract and and penalty on withholding tax and tax, interest and penalty for disallowance of expenses.

Draft


decisions of ITAT and Bombay High Court, a position may be adopted that indeduction of tax under bonafide belief, there may be no disallowance ofexpenditure on which such tax has been deducted

worst case scenario, tax, penalty and interest exposure on the amount ofdisallowance would be as calculated in the table in the preceding slide

note that tax assessments of Target have been concluded till FY09 anddisallowances have been made by the ITA in the past

Target may be liable to interest and penalty on such short deduction of TDS on programme production contract payments where such payments are regarded as purchase of programme rights. Further, there may be interest and penalty exposure on account of disallowance of expenses in the year of short

Low for withholding tax amount, High for interest and penalty and Medium for if production contracts are considered as purchase of programme rights)

= Rs 3464.83 lakhs (FY09, FY10, FY11 and FY12)(Rs 648.46 lakhs)

B) Disallowance of expense - (Rs 2816.37lakhs)

lakhsAdvisable to obtain a vetting of the production contracts (where withholding is done @ 2%)

from a legal side in order to evaluate whether a aforesaid contracts could be regarded as purchase of rights instead of outsourcing under a production contract and to obtain appropriate indemnity for interest and penalty on withholding tax and tax, interest and penalty for disallowance of expenses.

DraftPage 14

Short withholding of tax on payments for subscription fees

� Based on the review of financial statements of Target for the periodpayments towards subscription fee to Tam Software for obtaining TRPhas deducted tax at source on such payments @ 2% as applicable to

� Based on our discussions with the Target management, we understandto serials / movies broadcast across India on various channelssubscription received from Target, Tam Software provides such TRPchannel.

� Given the fact that such services by Tam Software are specialized intechnical services and not pure contractual work and hence Targettechnical services as against 2%, thereby leading to short withholding

� Under such circumstances ITA may deem Target as an assesseeassessee along with interest @1% and penalty which may be equal

� Per the provisions of the Act, no such order can be passed after expirytaxes withheld is filed. Accordingly, no such order may be passed bywhich have been filed before March 2010.

� Based on the decision of Supreme Court in case of Hindustan CocaSoftware has offered aforesaid amounts to tax / paid tax on aforesaidbe recovered from Target. It may be noted that there is an amendmentprospective in nature) in the Act, whereby withholding tax may not be

� Further, under the Act, any expense on which tax has either not beendisallowed while computing taxable income.

� Accordingly, in case ITA challenge during assessments that that therebe a consequential disallowance of such expenditure while computing

� Based on decisions of ITAT and Bombay High Court, a position maybelief, there may be no disallowance of corresponding expenditure on

Draft


period under review, we understand that the company has made certainTRP ratings for broadcast of serials / movies on the channel. The Targetto contractual payments under the Act.

understand that Tam Software maintains a database of TRP ratings in relation(including programmes broadcast on channel of Target). Based on

TRP ratings to Target in respect of programmes broadcast on Target’s

in its own field, the ITA may argue that such services should constituteTarget was liable to withhold tax @ 10% as payment for professional or

withholding of tax

assessee in default and try to recover short fall in withholding tax from theto short fall in withholding tax.

expiry of two years from the end of the FY in which quarterly statement forby ITA for FY09 and first three quarters of FY10 quarterly statements for

Coca Cola Beverage (P) Limited the Target, after satisfying the ITA that Tamaforesaid amounts, may contend that the short fall in withholding tax may not

amendment proposed by Finance Bill 2012 (although proposed to bebe recovered from payer should payee has paid tax.

been deducted / paid or has been short deducted / short paid, shall be

there was short deduction of tax on such subscription charges, there maycomputing taxable income of the said years.

may be adopted that in case of short deduction of tax under bonafideon which such tax has been deducted

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� However,the amounttable

� It is pertinenttill FY

1. For the purpose of our computation, we have assumed interest @ 1% per month from 1 April 2010 and 1 April 2011 respectively till date.

2. Penalty for such non-compliance may be levied @ 100% of the entire amount of tax in default3. Interest has been calculated from 1 April immediately after the end of relevant financial year till

the date of completion of regular assessment.4. Penalty may be levied by ITA @ 100% - 300% on the amount of tax chargeable on such

disallowance. For the purpose of our computation, we have assumed potential penalty levy @ 100%

5. Exposure for FY10 has been computed considering that entire subscription payments have been made in last quarter of FY10

Point of view

Target may be liable to interest and penalty on such short deduction of TDS on Tam Software payments. Further, there may be interest and penalty exposure on account of disallowance of expenses in the year of short deduction.

Exposure Level and Medium for disallowance Exposure Amount A) Withholding tax Tax – Rs 5.94 InterestPenaltyB) Disallowance of expense Tax – Rs 27.12 InterestPenaltyDeal Advice:withholding tax and tax, interest and penalty for disallowance of expenses valuation adjustment in this regard

Currency: Rs lakhs Notes FY09 FY10 FY11 TotalSubscription fee paid to Tam Software 26.70 22.90 51.30 100.90 Potential withholding tax exposureTax deducted @ 2% 0.53 0.46 1.03 2.02 Tax deductible @ 10% 2.67 2.29 5.13 10.09 Short deduction of withholding tax 2.14 1.83 4.10 12.11

Potential withholding tax exposure (Refer Note 5 for FY10)

1.83 4.10 5.94

Potential interest exposure @ 1% (Refer Note 5 for FY10) 1

0.46 0.53 0.99

Potential penalty exposure (Refer Note 5 for FY10) 2

1.83 4.10 5.94

Potential tax exposure on account of disallowancePotential disallowance of subscription fee (on account of aforesaid short deduction)

21.36 18.32 41.04

MMR 33.99% 33.99% 33.22%

Potential Tax exposure on disallowance

7.26 6.23 13.63 27.12

Potential interest exposure @ 1% 3 2.69 1.56 1.77 6.02 Potential penalty exposure @ 100% 4 7.26 6.23 13.63 27.12 Source: Financial statements for FY09, FY10 and FY11Ref: Short deduction on payment towards subscription expenses - Section DT - Direct Tax

Draft


However, in a worst case scenario, tax, penalty and interest exposure onamount of such disallowance would be as calculated in the adjacent

table

pertinent to note that tax assessments of Target have been concludedFY09 and no such disallowances have been made by the ITA in the past

Point of view

Target may be liable to interest and penalty on such short deduction of TDS on Tam Software payments. Further, there may be interest and penalty exposure on account of disallowance of expenses in the year of short deduction.

Exposure Level – Low for withholding tax amount, High for interest and penalty and Medium for disallowance Exposure Amount – A+B = Rs 73.13 lakhsA) Withholding tax - (Rs 12.87 lakhs)

Rs 5.94 lakhsInterest – Rs 0.99 lakhsPenalty – Rs 5.94 lakhsB) Disallowance of expense - (Rs 60.26 lakhs)

Rs 27.12 lakhsInterest – Rs 6.02 lakhsPenalty – Rs 27.12 lakhsDeal Advice: Advisable to obtain appropriate indemnity for interest and penalty on withholding tax and tax, interest and penalty for disallowance of expenses / valuation adjustment in this regard

DraftPage 16

Related Party Transactions

� Under the Act,should not be excessivesame.

� Based on the reviewto related partiesadjacent table.

� The ITA could seekexcess of the fairdemonstrate otherwise

� The issue is factualwhether Target isbeen entered into,

� It is pertinent to noteassessments of Target

Currency: Rs m Nature of payment FY09 FY10 FY11P Murali Krishnam Raju Salaries 3.60Sharrath Marar CEO Salaries 4.60Sharrath Marar Director's Remuneration 0.80 9.16Annapurna Studios Private Limited Rent

3.69 1.89 2.05

Annapurna Studios Private Limited Serial Rights

9.50

Annapurna Productions Private Limited Serial Rights

9.28 34.67 2.98

K Ram Charan Teja Movie Rights 42.50Geetha Arta Movie Rights 22.50 55.00 85.00A Naga Chaitanya Movie Rights 35.00Anjana Productions Movie Rights 52.00Neelima S Marar Rent 2.40Source: Tax Audit Report for FY09, FY10 and FY11Ref: Related Party Transactions - Section DT - Direct Tax

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Point of view

If Target is unable to demonstrate the consummation of transactions at fair value, the ITA may disallow unreasonable part of payments made to related parties

Exposure Level – Not Ascertainable

Exposure Amount – Not quantifiable

Deal Advice – Advisable to obtain appropriate indemnity in this regard

expenditure comprising of payments made to certain related partiesexcessive or unreasonable having regard to the fair market value of the

review of TAR, we understand that Target have made various paymentsparties in the period under review, the details of which are given in the

seek to disallow portion of such expenditure on the grounds that it is infair market value of such expenditure, unless management is able to

otherwise.

factual in nature and the quantum of disallowance would depend onis able to substantiate / justify the price at which such transactions have

into, in case the ITA question the same.

note that no such disallowances have been made by the ITA in the pastTarget.

DraftPage 17

Assessment Status – direct tax

Currency: Rs mReturned

IncomeAssessed

IncomeTax as per

ITRAssessed

TaxProvision

for tax

(Short) / Excess provision for

A B C DFY05FY06FY07FY08FY09FY10 160.91 NA 55.48 NA 55.00

FY11 216.06 NA 71.96 NA 71.90

Ref: Assessment Status - Section DT - Direct TaxNA - Not ApplicableNa - Not Av ailable

Assessed u/s 143(3) read with section 147Assessed u/s 143(3)Assessed u/s 143(3)Assessed u/s 143(3)Assessed u/s 143(3)

Source: Assessment orders for FY05 to FY09 and financial statements for FY09, FY10 and FY11

Draft

(Short) / Excess provision for

tax Prepaid tax

Tax Payable / (Refund

Receivable) RemarksD E F = A or B less C

(0.48) 55.48 - As represented by the Target management, no notice has been served till date. Limitation period for serving the notice for regular assessment was 30 September 2011

(0.06) 71.96 - As represented by the Target management, no notice has been served till date. Limitation period for serving the notice for regular assessment is 30 September 2012. The time limit for completion of assessment is 31 December 2013

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Indirect taxes___________________________________________

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Payment of APVAT on assignment of non-exclusive license for using the content


� Maa TV has entered intousing the content to disseminate

� Stream the contentMyplex Now;

� Video on demandmobiles, notebooks,

� To edit the content

� To copy the content

� To make available,

� In consideration for thegenerated from subscription

� Also, Maa TV has enteredexclusive license for disseminating

� Maa TV and MaaCellular services

� Video on demandmobiles, notebooks,

� As per the agreement,guarantee or 50% of the

� Since the License AgreementCommercial Tax Authoritiestransferred to Apalya. Accordingly,

� In this regard, we understandreceived from Apalya and

Currency: Rs lakhs FY11 FY12 TotalRevenue from Apalya 17.6 36.1 53.7VAT 0.7 1.8 2.5Interest 0.2 0.3 0.5Penalty 0.7 1.8 2.5

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exclusive license for using the content

into an agreement with Apalya for granting a non-exclusive license fordisseminate in the following manner:

content on various devices and through any medium related to ITV, Myplex,

demand service through broadband services on wireless devices such asnotebooks, laptops;

content to introduce advertisements and promotional material;

content to Apalya's computer servers; and

available, disseminate or transmit the content to the end users.

the above license, Apalya has agreed to pay 55% of the net revenuesubscription and advertisements and a minimum guarantee of Rs 50 Lakhs

entered into a similar agreement as above with Apalya for granting a non-disseminating and adapting / editing / copying the following content:

Maa music live stream on mobile phone instruments through Mobileservices; and

demand service through broadband services on wireless devices such asnotebooks, laptops.

agreement, Apalya has agreed to pay Rs 1.65 Lakhs a month as minimumthe license fee (royalty), whichever is higher.

Agreement entitles Apalya to edit and copy the content as well, theAuthorities may take a view that the right to use the Content has been

Accordingly, the Authorities may levy APVAT on the said consideration.

understand that Maa TV is discharging Service Tax liability on the amountsand no VAT/ CST is being paid on the same.

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� As per the APVAT law,it is pertinent to noteconsidered as goods for/ incorporeal items would

� Goods of intangible orof Schedule IV to the APVAT5%.

� Accordingly, there is aas a sale transaction and

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exclusive license for using the content

Point of viewEstimated Tax Exposure: Rs 2.51 lakhs

Estimated Interest Exposure: Rs 0.46 lakhs

Estimated Penalty Exposure: Rs 2.51 lakhs

Level of Risk: High

law, the definition of ‘Sale’ includes transfer of right to use goods. Further,note that even intangibles like copyrights, patents and trade marks are

for the purpose of sales tax. Therefore, transfer of right to use intangiblewould qualify as a taxable sale transaction under the APVAT Act, 2005.

incorporeal nature including Copyright are classified under Entry 2 (ix)APVAT Act, 2005 , which subjects goods falling there under to VAT @

high exposure that licensing of specified content to Apalya could qualifyand Maa TV would be liable to pay APVAT on the same.

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Payment of Service Tax on non-refundable deposits received towards deMSOs

Payment of Service Tax on non-refundable deposits received towards de-coders from MSOs

� We understand that Maagranted the right to distribute

� Further, we understandIRDs (signal decoders)

� Property in IRD’s so provided

� The taxable service definition(zk) of the Finance Act,any manner would be subject

� The phrase ‘in relationDoypack Systems Privateservice directly or indirectlyof ‘Broadcasting service’

� In view of the above,connection with providingthe purposes of Service

� Maa TV has received anfrom MSOs towards depositsenclosed table.

� We have been representedsame. In view of the above,to the tune of Rs 13.93

� Also, the Service Tax Authoritiespercent per annum till March

Currency: Rs Lakhs FY09 FY10 FY11 FY12 TotalIRD advance/sale 25.6 7.8 31.6 65.2 130.2 Service Tax 3.2 0.8 3.3 6.7 13.9Interest 1.9 0.4 1.1 1.3 4.6Penalty 3.2 0.8 3.3 6.7 13.9

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refundable deposits received towards de-coders from

Maa TV enters into agreement with MSOs, under which MSOs aredistribute Maa TV’s channels in the specified territories.

understand that for the purpose of decoding signals, MSO’s are provided withdecoders) by Maa TV, towards which Maa recovers non-refundable deposit.

provided continue to remain vested with Maa TV.

definition of ‘Broadcasting services’ as defined under Section 65 (105)Act, 1994 provides that any service provided in relation to broadcasting in

subject to Service Tax.

relation to’ has been given a wide meaning by the Supreme Court in case ofPrivate Limited v Union of India 1988 (36) ELT 201 (SC) and thus, any

indirectly related to broadcasting service would be covered within the ambitservice’.

above, the non-refundable deposits recovered by Maa TV from MSOs inproviding de-coders are likely to be included in the value of taxable service forService Tax under the category of ‘Broadcasting Service’.

an amount of Rs 130.15 Lakhs during the period FY 2008-09 to 2011-12deposits. Details of the amounts received year wise are provided in the

represented that Maa TV has not discharged service tax in respect of theabove, there persist high exposure on Maa TV in respect of service tax

93 Lakhs for FY 2008-09 to 2011-12.

Authorities could demand interest for late payment of service tax @ 13March 31, 2011 and @ 18% per annum from April 01, 2011 onwards.

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� Further, penalty coulddefault or at the rate ofif the authorities allegean additional penalty couldnot paid.

� However, if it could beduty and there was a reasonablepenalty should be levied

� Additionally, there is alsocase though the propertyIRD’s to MSO’s and accordingly,use.

� However, it could be arguedbroadcasting service andto render service and there

Payment of Service Tax on non-refundable deposits received towards deMSOs

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Level of Risk: High

be imposed on Maa TV which could extend up to Rs 200 per day ofof two percent of such tax per month, which ever is higher. Additionally,

allege that there was suppression of fact or mala fide intention to evade taxcould also be levied which could exceed up to twice the amount of tax

be substantiated that there was no mala fide intent to evade payment ofreasonable cause for the said failure to make payment of duty, then no

levied under the service tax law.

also an exposure that VAT authorities could contend that in the instantproperty in IRD’s remain vested with Maa TV, there is transfer of right to use

accordingly, there could be VAT implications on such transfer of right to

argued that the essential character of the arrangement is provision ofand in pursuance of that IRD’s are provided to MSO’s to enable Maa TVthere is no intention to transfer the right to use in IRD’s to MSO’s.

refundable deposits received towards de-coders from

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VAT exposure on Procurement of serial / programme

VAT exposure on Procurement of serial or programme rights

� Maa TV has entered intofor sale of serial or programme

� We understand that suchof serial rights and programmesproviders such as Viacom

� The expenditure incurredcommercially exploit serials6620.13 Lakhs. Detailsenclosed table.

� It may be noted that forprocuring the rights toexcluded since bothprogrammes produced

� Transfer of right to use‘sale’ and VAT would beapplicable on sale of copyrights

� The Commercial Tax Authoritiescommercially exploit the

� Although the liability toburden of the same canagreement.

� Based on the reviewcompanies for the yearprocuring the right toresult, the risk of VAT liability

Currency: Rs Lakhs FY09 FY10 FY11 FY12 Total

Expenditure 1,295 1,681 1,604 2,041 6,620 VAT 52 67 64 102 285 Interest 0 0 0 0 0Penalty 0 0 0 0 0

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programme rights

into an agreement with various serial / programme production companiesprogramme rights / commercial exploitation of such content.

such content providers are presently charging Service Tax on assignmentprogrammes and no VAT is being charged with the exception of few

Viacom.

incurred by Maa TV in relation to obtaining the right to telecast /serials / programmes / events during FY 2008-09 to FY 2011-12 is Rs

Details of year wise expenditure incurred by Maa TV are provided in the

for the purposes of computing the expenditure, costs associated withtelecast Hindi serials / programmes from Viacom and others have beenService Tax and VAT is being charged on the same. Also, the

produced by Maa TV in-house have been excluded.

use goods including intangible goods such as copyrights is treated as abe payable on the same under the APVAT Act, 2005. The rate of VAT

copyrights is 5% as per Schedule IV.

Authorities may take a view that granting the right to telecast and / orthe content amounts to transferring the right to use copyright.

to discharge VAT is imposed upon the content provider, the financialcan contractually be passed down to Maa TV in terms of the license

of agreements entered into between Maa TV and the productionyear 2011-2012, we understand that the price payable by Maa TV towards

telecast / commercially exploit the content is exclusive of VAT. As aliability on the amounts received by the content provider is high.

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VAT exposure on Procurement of serial / programme rights (Contd..)

� On the basis of the abovefor FY 2008-09 and FYinto between FY 2008-the exposure exists in such

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VAT exposure on Procurement of serial / programme rights (Contd..)

above review, we have provided a preliminary quantification of VAT liabilityFY 2010-11 as well. However, a detailed review of agreements entered-09 and FY 2010-11 is required in order to accurately determine whethersuch years or not.


Level of Risk: High

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VAT exposure on agreement with Airtel and other telecom operators


� We understand that MaaAirtel, pertaining to provision

� Relevant clauses of thebelow:

� The term ‘services’information availablefor offering to its

� Airtel would useproviding the samethird party;

� Further as persubscribers for anyagreement; and

� The agreementmarketing by Airtel

� As regards the consideration,percent of share in theDetails of the revenueFY 2011-12 i.e. SMS Revenue

� Further, we have alsorevenue after deducting

� Based on above key aspectssoftware (which wouldprovided by Maa TVintermediary between the

Currency: Rs Lakhs FY09 FY10 FY11 FY12 TotalSMS Revenue 56.8 18.5 19.5 4.5 99.3 APVAT 2.3 0.7 0.8 0.2 4.02Interest 1.2 0.3 0.2 0.0 1.69Penalty 2.3 0.7 0.8 0.2 4.02

Draft


Maa TV has entered into agreement with telecom operators such asprovision of Value Added Services such as ring tones, caller tunes etc.

the agreement executed between Maa TV and Airtel are reproduced

‘services’ have been defined to mean all software, services, products andavailable with Maa TV that have been agreed upon by Airtel to be utilised

its customers.

use the software and services received from Maa TV for the purpose ofsame to its subscribers and shall not use deal with or sell the same to any

the agreement, it would be the responsibility of Maa TV to Airtel'sany deficiency in service including failure to deliver as agreed under this

also mentions that the services and products are offered by Maa TV forAirtel.

consideration, the agreement provides that Maa TV would be entitled to 25the revenues after deducting statutory dues and PPL’s share of royalty.

generated by Maa TV from the telecom operators during FY 2008-09 toRevenue of Rs 99.31 Lakhs are provided in the enclosed table.

been represented that Maa TV discharges service tax on its share ofdeducting statutory dues and share of PPL.

aspects specified in the agreement, authorities could contend that thewould include the licensed/ copyrighted article like ringtones) is being

directly to the customers of Airtel. Whereas Airtel acts only as anthe customers and Maa TV.

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VAT exposure on agreement with Airtel and other telecom operators (Contd..)

� In this regard, it is also pertinentServices v. State of Andhrawhether software loadedfor an ‘item’ to be classified

� It should be movable

� It should be capable

� It should be capable

� Accordingly, there is a possibilityarticles like ringtones whichas hence ‘goods’ as theenumerated by the Supreme

� In view of above there isMaa TV to customersPradesh.

� In this connection it is2(29) of the AP VAT, inter

if there is noconsiderationthrough another,consideration

� From the perusal of thenot raise any invoice directlymade by Airtel, still therelicensed articles would bein the hands of Maa TV.

Draft


pertinent to note that Supreme Court has in case of Tata ConsultancyAndhra Pradesh 2004-(137)-STC-0620-SC, Apex Court while deciding

loaded on a compact diskette are goods or not have laid down the principleclassified as good. The same are enumerated below:

movable and capable of being bought and sold;

capable of being abstracted, consumed and used and

capable of being transmitted, transported, stored and possessed.

possibility that the Authorities could contend that licensed/ copyrightedwhich are provided Maa TV under the agreement are movable property

the same satisfies all the traits of being classified as goods asSupreme Court in Tata Consultancy Service’s case (discussed supra).

is a possibility that transaction for providing of copyrighted content byof Airtel could be subject to applicable VAT in the state of Andhra

pertinent to note that the term ‘sale price’ as defined under Sectioninter alia, provides that

no tax invoice or bill of sale, the total amount charged as theconsideration for the sale or purchase of goods by a VAT dealer either directly or

another, on his own account or on account of others, whether suchconsideration be cash, deferred payment or any other thing of value.

above statutory definition, it can be construed that even if Maa TV dodirectly on customers of Airtel and all recoveries from customers are

there is an exposure that the amount paid by the customers for thebe construed to form part of sale price and could accordingly be taxed

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� Further the rate of tax forlight of the above there exists

� Additionally, under thepayment of @ 12 percent

� In this context, it wouldBSNL (2011-VIL-49-AP)loads, wall papers etcsubjected to value added

� The aforesaid case wouldhas appealed against this

� Also, this is an industryconsideration so received

Draft


for provision of such licensed goods would be 5% under APVAT law. Inexists an exposure on Maa TV from a VAT perspective.

APVAT Act the VAT authorities could also demand interest for latepercent per annum along with penalty.

be relevant to note that the Andhra Pradesh High Court in the case ofAP) has held that “value added services such as ring tones, music downetc., and proceeds received on sharing of infrastructure cannot be

added tax “.

would help mitigate the risk. However, we understand that the Revenuethis ruling at the Supreme Court

industry issue and the entire industry discharges only service tax on thereceived for provision of licensed content.




Level of Risk: Medium to low

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VAT exposure on Copyright charges

VAT exposure on Copyright Charges � Maa TV has entered intofor usage of licensed content

� Incorporation in

� Performance of

� In this regard, Maa TVand FY 2011-12. Detailsenclosed table.

� We understand that theright to use the content

� The Commercial Tax Authoritiescontent and / or commerciallycopyright.

� As discussed above,subject to APVAT @ 5%

� Although the liability toburden of the same canagreement.

� Based on the review ofprovided to us on sampleusing the licensed contentrespect of the agreementsreview of agreementsaccurately determine whether

Currency: Rs Lakhs FY09 FY10 FY11 FY12 TotalCopyright charges 8.3 23.9 19.8 58.8 110.78 VAT 0.3 1.0 0.8 2.9 5.02 Interest 0 0 0 0 0Penalty 0 0 0 0 0

Draft

into an agreement with various parties (Super Cassettes, Select Media)content such as sound recordings, musical and literary works for

the serials / programmes and broadcasting of such programmes; and

the licensed content on the television channels of Maa TV.

TV has incurred an expenditure of Rs 110.77 Lakhs between FY 2008-09Details of year wise expenditure incurred by Maa TV are provided in the

the content providers are presently charging Service Tax on providing thecontent and no VAT is being charged on the same.

Authorities may take a view that granting the right to use the licensedcommercially exploiting such content amounts to transferring the right to use

transfer of right to use goods including intangible goods would be% as per Schedule IV of the APVAT Act.

to discharge VAT is imposed upon the content provider, the financialcan contractually be passed down to Maa TV in terms of the license

of agreements entered into between Maa TV and the content providerssample basis, we understand that the price payable by Maa TV towardscontent is exclusive of VAT. As a result, similar exposure may exist in

agreements entered into with other content providers. However, a detailedentered into between Maa TV and the content providers is required to

whether the exposure exists in respect of all such agreements.

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VAT exposure on Copyright charges (Contd..)

� In view of the above, theis high.

Draft

VAT exposure on Copyright charges (Contd..)

the risk of VAT liability on the amounts received by the content provider


Level of Risk: High

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Scope limitations

� This report is based on the completeness and accuracy of facts/ information aboutaccurate, it is imperative that we be informed immediately, as the inaccuracy or incompleteness

� We have restricted the scope of the review only to issues which equal or exceed the

� We have relied upon the documents and information / explanations made availablethe veracity or correctness of such documents / information / explanations.

� The comments herein are not binding on any regulators and there can be no assurance

� We have not considered the issues that may arise as a result of tax returns filed,other than those primarily reflected in our report.

� Our note is intended solely for the use of the Client only. It may not be relied upon byin part or otherwise referred to in any document, or copied or delivered to any person

� In this report, we have provided our comments and examined the implications onlycommercial implications, under any Indian or overseas legislation.

� We have not considered the issues that may arise as a result of revision, rectification,reflected in our report.

� We have examined only potential key / material issues that have not yet been contested

� A misstatement or omission of any fact or a change or an amendment in anymodification of all or a part of the comments given above.

� Our comments are as of April 30, 2012 and are based on the law and practice asinformed of subsequent modifications to the law or practice.

� We have not specifically examined the TDS compliances by target. We have reliedrespect of the payments of TDS into the government treasury.

� We have not examined the possible income tax implications which may arise under

� The possible additions / disallowances under the following sections have not been identified,

� Unexplained credit entries in the books of account (Section 68 of Act).

� Unexplained expenditure outside the books of accounts (Sections 69, 69A and

� Expenditure incurred for any purpose which is an offence or prohibited by law

Draft

about Target made available to us. If any of the foregoing is not entirely complete orincompleteness could have a material effect on our comments/ inferences herein.

the threshold of Rs 50 lakhs per issue per year

available to us by Target till date i.e. April 30, 2012. We have not audited or otherwise checked

assurance that the regulators will not take a position contrary to our comments.

assessment, revision, rectification, reassessment etc or during appellate proceedings

by any third party. Without our prior express approval, it may not be quoted in whole orperson or entity.

only under the provisions of the Act. We have not commented on any other regulatory or

rectification, reassessment etc or during appellate proceedings other than those primarily

contested by the Revenue Authorities.

of the facts, assumptions, or representations we have relied upon, may require a

as on that date. Unless specifically requested, we are under no obligation to keep you

on the disclosures made in the TAR and representations made by the management in

under the provisions of GAAR (Chapter X-A of the Act) on account of their inherent nature.

identified, on account of their inherent nature:

and 69B of Act)

law (Explanation to Section 37(1) of Act).

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Disclaimer

This presentation pack necessarily represents only part of the informationwhich we considered to be most relevant to our understanding of your needs,

The information in this presentation pack will have been supplementedshould be considered in the light of this additional information.

If you require any further information or explanations of our underlying work,

The information in this presentation pack is confidential and contains proprietaryprovided to anyone other than the intended recipients without our written

Anyone who receives a copy of this presentation pack other than in thethe first two points above, and that we shall not have any responsibilitycontained in this document.

Draft

information which we considered in carrying out our work, being thatneeds, in the light of this engagement.

supplemented by matters arising from any oral presentation by us, and

work, you should contact us.

proprietary information of Ernst & Young. It should not bewritten consent.

the context of our oral presentation of its contents should noteto anyone other than our client in respect of the information

Thank youThank you

Documents

30 April 2012 Draft report –Direct and Indirect taxes India/Project... · Project Rainbow II 30 April 2012 Reliance restricted Draft report –Direct and Indirect taxes Atul Mehta