PRANA STUDIOS P.LTD, MUMBAI V. ITO RG 7(1)(4), MUMBAI

CO 101/MUM/2014

• Counselvise Citation: [2015] 123 COUNSELVISE.COM (IT) 0258 (ITAT-MUMBAI)
• Duration Of Justice: 8 month(s) 1 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 16-01-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2009-2010
• Appeal Filed On: 15-05-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: S D SRIVASTAVA
• Keywords: Transfer pricing; International transaction
• Section: 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH K, MUMBAI BEFORE SHRI R. C. SHARMA, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO. 2077/MUM/2014 ASSESSMENT YEAR: 2009-10 ITO 7(1)(4) AAYAKAR BHAVAN 6 TH FLOOR R.NO. 665 M.K. ROAD MUMBAI VS. M/S. PRANA STUDIOS PVT. LTD. INFINITY PARK, BLDG NO. 4, 9 TH FLOOR DINDOSHI, MALAD(E) MUMBAI- 400 097 PAN:AADCP 2561 K (APPELLANT) (RESPON DENT) C.O. NO. 101/MUM/2014 (ARISING OUT OF ITA NO. 2077/MUM/2014) ASSESSMENT YEAR: 2009-10 M/S. PRANA STUDIOS PVT. LTD. INFINITY PARK, BLDG NO. 4, 9 TH FLOOR DINDOSHI, MALAD(E) MUMBAI- 400 097 PAN:AADCP 2561 K VS. ITO 7(1)(4) AAYAKAR BHAVAN 6 TH FLOOR R.NO. 665 M.K. ROAD MUMBAI (APPELLANT) (RESPONDENT) ASSESSEE BY : MS. KARISHMA R. PHATARPHEKAR, SHRI HARSH SHAH & SHRI PRATIK PODDAR REVENUE BY : SHRI S.D. SRIVASTAVA DATE OF HEARING : 06 . 01 . 201 5 DATE OF ORDER : 16 .01.2015 ITA NO. 2077/MUM/2014 C.O. NO. 101/MUM/2014 M/S. PRANA STUDIOS PVT. LTD. ASSESSMENT YEAR: 2009-10 2 O R D E R PER AMIT SHUKLA, JM: THIS APPEAL HAS BEEN PREFERRED BY THE REVENUE AGA INST ORDER/DIRECTION DATED 01.11.2013, PASSED BY THE DIS PUTE RESOLUTION PANEL (DRP)-II, MUMBAI, U/S 144 C (5) GIVING DIRECT ION TO THE AO. THE SOLE GROUND RAISED BY THE REVENUE IS AS UNDER:- THE LEARNED DRP HAS ERRED ON FACTS AND IN LAW IN DIRECTING THE ASSESSING OFFICER TO EXCLUDE THE CASE OF M/S. K ALS INFORMATION SYSTEMS LTD. FROM THE SET OF COMPARABLE S ADOPTED BY TPO WITHOUT APPRECIATING THE FACTUAL AND LEGAL MATR IX AS BROUGHT OUT BY THE TRANSFER PRICING OFFICER (TPO) IN THE OR DER DATED 19.11.2012 UNDER SECTION 92A(3) OF THE INCOME-TAX A CT, 1961. 2. THE FACTS IN BRIEF ARE THAT, ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF CREATING AND PROVIDING 3D ANIMATION SOF TWARE CONTENTS AS A CAPTIVE SERVICE PROVIDER TO ITS ASSOCIATE ENTERPRIS E (AE), PRANA HOLDINGS INC., USA. DURING THE RELEVANT PREVIOUS YEAR THE AS SESSEE HAS ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTION WITH THE P LI OF 14.49%:- IN THE TP STUDY REPORT, THE ASSESSEE HAS BENCHED MA RK ITS MARGIN ON THE BASIS OF FOLLOWING COMPARABLES:- S.N. NATURE OF TRANSACTION AMOUNT (RS.) AY 2008-09 METHOD USED OP/TC 1 PROVISION OF 3D ANIMATION CONTENT 731,504,989 TNMM 14.49% ITA NO. 2077/MUM/2014 C.O. NO. 101/MUM/2014 M/S. PRANA STUDIOS PVT. LTD. ASSESSMENT YEAR: 2009-10 3 SR. NO. NAME OF THE COMPANY COMPANY AVERAGE 1 SILVERLINE ANIMATION LTD. 8.48% 2 CREST ANIMATION STUDIOS LTD. -13.51% 3 DQ ENTERTAINMENT LTD.(SEG) 27.89% 4 MEDIA MATRIX WORLDWIDE LTD. 0.38% 5 LASER INFOMEDIA LTD. 17.00% 6 SANRAA MEDIA LTD. 19.75% AVERAGE MEAN (COST PLUS MARK UP) 10.00% THUS IT WAS STATED THAT, ASSESSEES MARGIN ARE AT A RMS LENGTH. HOWEVER, THE TPO REJECTED, 3 OF THE COMPARABLES SELECTED BY THE ASSESSEE AND IN THE LIST OF HIS FINAL COMPARABLES OF 16 COMPANIES ( INCLUDING 3 SELECTED BY THE ASSESSEE), THE TPO PROPOSED TO MAKE THE ADJUSTM ENT IN THE ARMS LENGTH PRICE. THE LIST OF FINAL COMPARABLES SELECTE D BY THE TPO WITH AVERAGE PROFIT MARGIN ARE AS UNDER:- SR. NO. NAME OF THE COMPANY NCP FY 2008-09 (%) 1 ARCIENT TECHNOLOGIES HOLDINGS LIMITED 2.42 2 BODHTREE CONSULTING LTD. 67.24 3 E-INFOCHIPS LTD. -18.32 4 IGATE GLOBAL SOLUTIONS LIMITED 21.53 5 INFOSYS TECHNOLOGIES LIMITED 42.04 6 KALS INFORMATION SYSTEMS LTD. (SEG) 41.91 7 LGS GLOBAL LTD. 20.50 8 MINDTREE LTD. 4.30 9 PERSISTENT SYSTEMS LTD. 16.18 10 SASKEN COMMUNICATION TECHNOLOGIES LTD. 15.99 11 TATA ELXSI LTD. 20.29 ITA NO. 2077/MUM/2014 C.O. NO. 101/MUM/2014 M/S. PRANA STUDIOS PVT. LTD. ASSESSMENT YEAR: 2009-10 4 12 THIRDWARE SOLUTIONS LTD. 22.37 13 WIPRO LTD. (SEG) 26.64 14 SILVERLINE ANIMATION 8.48 15 DQ ENTERTAINMENT (SEG) 27.89 16 LASER INFOMEDIA 17.00 ARITHMETIC MEAN 21.03 FINALLY THE ADJUSTMENT OF RS.4,17,85,681/- WAS MADE IN THE FOLLOWING MANNER:- PARTICULARS AMOUNT SALE OF SERVICES AS PER FORM 3CEB (EXPORT SALES) (A ) RS.73,15,04,989/- OPERATING COST (B) [(73,15,04,989/114.49)*100] RS.6 3,89,24,787/- ALP (C=BX1.2103) RS.77,32,90,670/- 105% OF TRANSACTION VALUE RS.76,80,80,238/ - 95% OF TRANSACTION VALUE RS.69,49,29,739/- DIFFERENCE BETWEEN ALP AND TRANSACTION VALUE [C-A] RS.4,17,85,681/- 3. SINCE, THE ONLY ISSUE INVOLVED HEREIN THIS APPEA L IS, WHETHER M/S. KALS INFORMATION SYSTEM LTD. SHOULD BE EXCLUDED FRO M THE SET OF FINAL COMPARABLES SELECTED BY THE TPO OR NOT, THEREFORE, WE ARE CONFINING OUR SELF ON THIS ISSUE ALONE. 4. BEFORE THE DRP, ASSESSEE SUBMITTED THAT THE SAID COMPANY IS FUNCTIONALLY DISSIMILAR, AS IT DOES NOT PROVIDE ANI MATION CONTENT BUT OFFERS VARIETY OF SOFTWARE PRODUCTS IN THE AREA OF WEB SOLUTIONS, E- COMMERCE, SOFTWARE CONSULTANT, CONTENT MANAGEMENT, ERP APPLICATION ETC. IT WAS FURTHER SUBMITTED THAT, IF THE KALS INF ORMATION SYSTEM LTD. IS ITA NO. 2077/MUM/2014 C.O. NO. 101/MUM/2014 M/S. PRANA STUDIOS PVT. LTD. ASSESSMENT YEAR: 2009-10 5 EXCLUDED ON THIS GROUND THAT IT IS PURELY INTO SOFT WARE DEVELOPMENT PRODUCTS, THEN THE AVERAGE PROFIT MARGIN OF ALL THE COMPARABLES WILL COME TO 19.64%, WHICH WILL FALL WITHIN +/- 5% RANGE . IN SUPPORT OF THE CONTENTION THAT THE SAID COMPANY CANNOT BE INCLUDED AS COMPARABLES, VARIOUS TRIBUNAL DECISIONS WERE RELIED UPON, THE LI ST OF SUCH DECISIONS HAS INCORPORATED BY THE DRP IN PARA 6.1 PAGE 13 OF THE ORDER. 5. THE LD. DRP AFTER EXAMINING THE FUNCTIONAL PROFI LE OF KALS INFORMATION SYSTEM LTD. AND ALSO CONSIDERING THE DE CISION OF ITAT IN THE CASE OF TRIOLOGY E-BUSINESS, HELD THAT THE SAID COM PANY CANNOT BE TAKEN AS A COMPARABLE COMPANY AND THEREFORE, SAME SHOULD BE EXCLUDED FROM THE LIST OF FINAL COMPARABLES. THE RELEVANT FINDING AND OBSERVATION OF THE DRP ARE AS UNDER:- WE HAVE CAREFULLY CONSIDERED THE LIST OF SOFTWARE SERVICE COMPANY INCLUDED BY THE LD. TPO INTO THE FINAL SET. IT IS A FACT THAT HON'BLE ITAT HAVE HELD KALS TO BE ENGAGED IN S OFTWARE PRODUCTS AND NOT INTO SOFTWARE SERVICES. HON'BLE IT AT, IN THE CASE OF TRILOGY E-BUSINESS, AT PARA 47 HAVE HELD AS FOLL OWS: 'WE ALSO FIND THAT IN THE DECISION REFERRED TO BY THE LD. CO UNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT TH IS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPA RABLE', 6.3 WITH THESE DIRECTIONS, IT IS APPARENT THAT KALS INFORMATION SYSTEMS LTD. IS NOT A COMPARABLE COMPANY AND THE SA ME NEEDS TO BE EXCLUDED FROM THE SET OF COMPARABLES. IT IS F URTHER SEEN THAT WITH THE EXCLUSION OF KALS, THE ASSESSEE'S MAR GIN COMES WITHIN +/- 5%-OF THE MARGIN OF COMPARABLES IN TERMS OF SECOND PROVISO TO SEC. 92C(2) OF I.T. ACT, 1961. ACCORDING LY, THE AO IS DIRECTED TO DELETE THE PROPOSED ADJUSTMENT. ALL OTH ER ARGUMENTS OF THE LD. AR BECOMES ACADEMIC IN VIEW OF THE SUBST ANTIAL RELIEF GRANTED AND THEREFORE THEY ARE NOT ADJUDICATED UPON . ITA NO. 2077/MUM/2014 C.O. NO. 101/MUM/2014 M/S. PRANA STUDIOS PVT. LTD. ASSESSMENT YEAR: 2009-10 6 SINCE, AFTER EXCLUSION OF KALS, ASSESSEES MARGIN W AS WITHIN THE RANGE OF +/- 5%, THE LD. DRP HELD THAT ALL OTHER ARGUMENTS OF THE ASSESSEE WITH REGARD OTHER COMPARABLES HAVE BECOME PURELY ACADEMI C. 6. BEFORE US THE LD. DR SUBMITTED THAT EVEN THOUGH ASSESSEE IS PRODUCING 3D ANIMATION SOFTWARE, WHICH IS NOTHING B UT DEVELOPMENT OF COMPUTER SOFTWARE AND THE ASSESSEE ITSELF HAS DESCR IBED ITSELF AS BEING ENGAGED IN COMPUTER SOFTWARE INDUSTRY. THE KALS INF ORMATION SYSTEM LTD. IS ALSO ENGAGED IN SOFTWARE DEVELOPMENT AND PR ODUCTS AND HENCE, IT IS FUNCTIONALLY SIMILAR TO THE ASSESSEES PROFILE T HEREFORE, IT HAS RIGHTLY BEEN INCLUDED AS COMPARABLE FOR BENCH MARKING THE A SSESSEES MARGIN. 7. ON THE OTHER HAND LEARNED COUNSEL FOR THE ASSESS EE, MS. KARISHMA R. PHATARPHEKAR, SUBMITTED THAT EXCLUSION OF KALS I NFORMATION SYSTEM LTD. FROM OTHER SOFTWARE COMPANIES DUE TO ITS FUNCT IONAL PECULIARITY WHICH IS PURELY DEVELOPMENT OF SOFTWARE PRODUCTS, H AS BEEN UPHELD BY VARIOUS DECISIONS OF THE TRIBUNAL AS NOTED BY THE D RP. FURTHER IN THE CASE OF PTC SOFTWARE (INDIA) PVT. LTD., ITAT PUNE B ENCH HAS HELD THAT IT CANNOT BE TAKEN AS A COMPARABLE TO THE SOFTWARE SER VICE COMPANIES AS IT IS PURELY ENGAGED IN THE SALE OF SOFTWARE PRODUCTS. SHE THUS, STRONGLY RELIED UPON THE ORDER OF THE DRP. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PER USED THE RELEVANT FINDING OF THE TPO AS WELL AS THE ORDER OF THE DRP ON THIS SCORE. THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER, PROVIDING P URELY SOFTWARE SERVICES IN THE CONTEXT OF 3D ANIMATION TO ITS A.E. THE SOL E DISPUTE BEFORE US IS, WHETHER KALS INFORMATION SYSTEM LTD. SHOULD BE TAKE N AS A COMPARABLE OR NOT FOR THE PURPOSE OF COMPARABILITY ANALYSIS AN D BENCH MAKING OF THE ITA NO. 2077/MUM/2014 C.O. NO. 101/MUM/2014 M/S. PRANA STUDIOS PVT. LTD. ASSESSMENT YEAR: 2009-10 7 MARGIN. FROM THE PERUSAL OF THE OBJECTIONS FILED BY THE ASSESSEE BEFORE THE DRP, AS WELL AS ANNUAL REPORT OF KALS, IT IS SE EN THAT THE SAID COMPANY IS ENGAGED INTO DEVELOPMENT OF SOFTWARE AND SOFTWARE PRODUCTS AND ALSO RUNNING A TRAINING CENTRE FOR TRA INING OF SOFTWARE PROFESSIONALS. THE SAID COMPANY OFFERS VARIETY OF S OFTWARE PRODUCTS IN THE AREA OF WEB SOLUTIONS, E-COMMERCE, SOFTWARE CON SULTANTS, CONTENT MANAGEMENT ERP APPLICATIONS ETC. ITS FUNCTIONAL PR OFILE IS QUITE DIFFERENT FROM THE ASSESSEE COMPANY, WHICH IS PURELY PROVIDIN G SOFTWARE SERVICES IN THE FIELD OF 3D ANIMATION. THUS, IT CANNOT BE HE LD TO BE A COMPARABLE COMPANY FOR THE PURPOSE OF BENCH MARKING THE ASSESS EES MARGIN OR CARING OUT ANY COMPARABILITY ANALYSIS. THE ITAT PUN E BENCH IN THE CASE OF PTC SOFTWARE (I) PVT. LTD. VS. DCIT (2014) 52 TA XMAN.COM 351, HAS HELD THAT THE KALS, WHICH IS ENGAGED IN THE SALE OF SOFTWARE PRODUCTS CANNOT BE HELD TO BE A COMPARABLE CASE WITH THE COM PANIES PROVIDING SOFTWARE SERVICES. SIMILARLY, IN VIEW OF SERIES OF OTHER DECISIONS OF THE TRIBUNAL AS NOTED BY THE DRP, KALS CANNOT BE HELD T O BE COMPARABLE COMPANY FOR BENCH MARKING WITH THE COMPANIES PROVID ING SOFTWARE SERVICES. THUS, THE ORDER OF THE DRP AS NOTED ABOVE IS UPHELD. ACCORDINGLY, THE GROUND RAISED BY THE REVENUE IS DI SMISSED. C.O. NO. 101/MUM/2014 FOR ASSESSMENT YEAR: 2009-10 9. IN THE CROSS OBJECTION THE ASSESSEE HAS RAISED F OLLOWING GROUND:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED ADDITIONAL COMMISSIONER OF INCOME TAX, TRAN SFER PRICING II-(2), (TPO) AND THE LEARNED INCOME TAX OFFICER 7(1)(4) (AO) UNDER DIRECTIONS ISSUED BY THE HONBLE DISPUTE RESO LUTION PANEL (DRP) ERRED IN CONSIDERING FUNCTIONALLY DISSIMILA R COMPANIES AS COMPARABLE COMPANIES FOR DETERMINING ARMS LENGTH P RICE OF INTERNATIONAL TRANSACTIONS OF THE RESPONDENT. ITA NO. 2077/MUM/2014 C.O. NO. 101/MUM/2014 M/S. PRANA STUDIOS PVT. LTD. ASSESSMENT YEAR: 2009-10 8 SINCE, AFTER THE EXCLUSION OF KALS INFORMATION SYST EM LTD., THE AVERAGE PROFIT MARGIN OF THE COMPARABLES CHOSEN BY THE TPO COMES UP 19.64%, WHICH FALLS WITHIN RANGE OF +/- 5% AND THE ASSESSEE S MARGIN BEING 14.49%, THEREFORE, NO TRANSFER PRICING ADJUSTMENT I S REQUIRED TO BE MADE. THUS, THE GROUND RAISED BY THE ASSESSEE IN TH E CROSS OBJECTION BECOMES PURELY ACADEMIC AND THE SAME IS NOT ADJUDIC ATED UPON. ACCORDINGLY, CROSS OBJECTION RAISED BY THE ASSESSE E IS TREATED AS DISMISSED. 10. IN THE RESULT, THE APPEAL FILED BY THE REVENUE AND THE CROSS OBJECTION BY THE ASSESSEE IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 16 TH DAY OF JANUARY, 2015. SD/- SD/- (R.C. SHARMA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 16.01.2015 *SRIVASTAVA COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR K BENCH //TRUE COPY// BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.