30 April 2012 Draft report –Direct and Indirect taxes India/Project... · Project Rainbow II 30...
Transcript of 30 April 2012 Draft report –Direct and Indirect taxes India/Project... · Project Rainbow II 30...
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
Tr SivakumarAssociate Vice President
Transaction Advisory Services+91 22 6192 1496+91 98207 56638+91 22 6192 1000
Divyesh LapsiwalaDirector
Tax and Regulatory Services – Indirect taxT +91 22 6192 0000M +91-98204 42913F +91 22 6192 1000E [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 -
Tax - Rs 1301.05 lakhs
Interest – Rs 214.27 lakhs
Penalty – Rs 1301.05 lakhs
► 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
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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
Interest – Rs 0.99 lakhs
Penalty – Rs 5.94 lakhs
Potential tax on disallowance of expense - (Rs
Tax – Rs 27.12 lakhs
Interest – Rs 6.02 lakhs
Penalty – 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
Interest – Rs 0.46 lakhs
Penalty – 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
Tax - Rs 13.93 lakhs
Interest – Rs 4.6 lakhs
Penalty – Rs 13.93 lakhs
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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)
Summary of key findings – Indirect Tax
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
Interest – Rs 1.69 lakhs
Penalty – 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)
Summary of key findings – Indirect Tax
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.
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Short withholding of tax on programme production contracts
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
Short withholding of tax on programme production contracts
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
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Short withholding of tax on programme production contracts
� 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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Short withholding of tax on programme production contracts
� 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
Short withholding of tax on programme production contracts
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
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Short withholding of tax on payments for subscription fees
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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Short withholding of tax on payments for subscription fees
� 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
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Short withholding of tax on payments for subscription fees
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
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(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
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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Payment of APVAT on assignment of non-exclusive license for using the content
� 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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Point of viewEstimated Tax Exposure: Rs 13.93 lakhs
Estimated Interest Exposure: Rs 4.6 lakhs
Estimated Penalty Exposure: Rs 13.93 lakhs
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.
Point of viewEstimated Tax Exposure: Rs 285.21 lakhs
Level of Risk: High
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VAT exposure on agreement with Airtel and other telecom operators
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
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VAT exposure on agreement with Airtel and other telecom operators
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.
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VAT exposure on agreement with Airtel and other telecom operators (Contd..)
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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VAT exposure on agreement with Airtel and other telecom operators (Contd..)
� 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
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VAT exposure on agreement with Airtel and other telecom operators (Contd..)
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.
Point of viewEstimated Tax Exposure: Rs 4.02 lakhs
Estimated Interest Exposure: Rs 1.69 lakhs
Estimated Penalty Exposure: Rs 4.02 lakhs
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
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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.
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VAT exposure on Copyright charges (Contd..)
the risk of VAT liability on the amounts received by the content provider
Point of viewEstimated Tax Exposure: Rs 5.02 lakhs
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
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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
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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.
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