AI Insights
The case involves Friday Storytellers LLP, which appealed against the final assessment order passed by the Income-tax Department concerning the assessment year 2021-22. The primary contention was regarding the upward adjustment of Rs. 2,09,75,436 made on account of Line Production Charges incurred by the assessee. The Tribunal examined several issues, including the rejection of comparables by the TPO, the assertion that no profit was earned by the Associated Enterprise (AE), and the challenge that the relevant expenditure was capitalized and not claimed as a deduction in the profit and loss account for the year under consideration. The Tribunal found merit in the assessee's arguments regarding the reconsideration of benchmarking and the application of the Cost Plus Method for determining the arm's length price.
Appeal Details
Counselvise Citation
[2025] 140 COUNSELVISE.COM (IT) 396913 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
CRN Number
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
30-05-2025
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
K
Assessment Year
2021-2022
Judgement Text
"IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “K” MUMBAI BEFORE SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER) AND SHRI RAHUL CHAUDHARY (JUDICIAL MEMBER) ITA No. 5546/MUM/2024 Assessment Year: 2021-22 Friday Storytellers LLP, 701, Morya Landmark-2, Opp. Infinity Mall, Mumbai-400053. Vs. National Faceless Assessment Centre, ITO-4(2)(1), Aayakar Bhavan, Mumbai. PAN NO. AAGFF 4946 E Appellant Respondent Assessee by : Mr. Karan Thaker a/w Mr. Sandeep Shridhar Revenue by : Mr. Suresh Gaikwad, Sr. DR Date of Hearing : 05/05/2025 Date of pronouncement : 30/05/2025 ORDER PER OM PRAKASH KANT, AM This appeal by the assessee is directed against final assessment order dated 28.08.2024 passed by the Assessment Unit, Income-tax Department ( in short the Assessing Officer or AO) for assessment year 2021-22, pursuant to the direction of the Ld. Dispute Resolution Panel (DRP) dated 22.08.2024. The grounds raised by the assessee are reproduced as under: 1. In the facts and Dispute Resolution Panel (\"DRP\") has erred in confirming the action of the Id. AO, in making upward adjustment of Rs. 2,09,75,436, on account of Line Production Charges incurred by the assessee, during the year und the Id. DRP and Id. AO is illegal, unjustified and arbitrary, being contrary to the facts of the case. It is respectfully submitted that the addition made by the Id. AO, in the final order, may please be deleted in its entir 2. In the facts and circumstances of the case and in law, Id. DRP has erred in confirming the action of the Id. AO/Id. TPO, in making adjustment to the income of the assessee, without duly considering the factual position that, during the year under consideration, all expenses incurred by the assessee firm were reflected as part of the Closing Stock/Work accordingly, no profit or loss was recognized, in this regard, in the Profit and Loss Account, and, therefore, there was no impact on the taxable income of the assessee. 3. In the facts and circumstances of the case and in law, Id. DRP and Id. AO have erred in not considering the factual position that the Associated Enterprise (AE), with whom expenses were incurred did not earn any profit a profits remained with the assessee. 4. In the facts and circumstances of the case and in law, Id. DRP and Id. AO have erred in failing to appreciate the factual position that, in the subsequent year, i.e., Previous Year 2021 22, when the re profit, as reported by the assessee firm, fell within the Arm's Length Range in relation to the comparable entities selected by the assessee. 5. In the facts and circumstances of the case and in law, Id. DRP and Id. AO/Id. TPO have erred in rejecting the comparable companies considered by the assessee, without any cogent basis. It is respectfully submitted that the rejection of the comparable companies is unjustified and contrary to the facts of the 2. Briefly stated, facts of the case are that Liability Partnership (LLP), was constituted on 11.04.2019 by way of conversion of an erstwhile company, namely M/s Friday Movies 1. In the facts and circumstances of the case and in law, Id. Dispute Resolution Panel (\"DRP\") has erred in confirming the action of the Id. AO, in making upward adjustment of Rs. 2,09,75,436, on account of Line Production Charges incurred by the assessee, during the year under consideration. The action of the Id. DRP and Id. AO is illegal, unjustified and arbitrary, being contrary to the facts of the case. It is respectfully submitted that the addition made by the Id. AO, in the final order, may please be deleted in its entirety. 2. In the facts and circumstances of the case and in law, Id. DRP has erred in confirming the action of the Id. AO/Id. TPO, in making adjustment to the income of the assessee, without duly considering the factual position that, during the year under onsideration, all expenses incurred by the assessee firm were reflected as part of the Closing Stock/Work-In accordingly, no profit or loss was recognized, in this regard, in the Profit and Loss Account, and, therefore, there was no impact taxable income of the assessee. 3. In the facts and circumstances of the case and in law, Id. DRP and Id. AO have erred in not considering the factual position that the Associated Enterprise (AE), with whom expenses were incurred did not earn any profit and that all the profits remained with the assessee. 4. In the facts and circumstances of the case and in law, Id. DRP and Id. AO have erred in failing to appreciate the factual position that, in the subsequent year, i.e., Previous Year 2021 22, when the revenue had actually been earned/recognised, profit, as reported by the assessee firm, fell within the Arm's Length Range in relation to the comparable entities selected by the assessee. 5. In the facts and circumstances of the case and in law, Id. d. AO/Id. TPO have erred in rejecting the comparable companies considered by the assessee, without any cogent basis. It is respectfully submitted that the rejection of the comparable companies is unjustified and contrary to the case. y stated, facts of the case are that the assessee, a Limited Liability Partnership (LLP), was constituted on 11.04.2019 by way of conversion of an erstwhile company, namely M/s Friday Movies Friday Storytellers LLP 2 ITA No. 5546/MUM/2024 circumstances of the case and in law, Id. Dispute Resolution Panel (\"DRP\") has erred in confirming the action of the Id. AO, in making upward adjustment of Rs. 2,09,75,436, on account of Line Production Charges incurred by er consideration. The action of the Id. DRP and Id. AO is illegal, unjustified and arbitrary, being contrary to the facts of the case. It is respectfully submitted that the addition made by the Id. AO, in the final order, may please 2. In the facts and circumstances of the case and in law, Id. DRP has erred in confirming the action of the Id. AO/Id. TPO, in making adjustment to the income of the assessee, without duly considering the factual position that, during the year under onsideration, all expenses incurred by the assessee firm were In-Progress, accordingly, no profit or loss was recognized, in this regard, in the Profit and Loss Account, and, therefore, there was no impact 3. In the facts and circumstances of the case and in law, Id. DRP and Id. AO have erred in not considering the factual position that the Associated Enterprise (AE), with whom nd that all the 4. In the facts and circumstances of the case and in law, Id. DRP and Id. AO have erred in failing to appreciate the factual position that, in the subsequent year, i.e., Previous Year 2021- venue had actually been earned/recognised, profit, as reported by the assessee firm, fell within the Arm's Length Range in relation to the comparable entities selected by 5. In the facts and circumstances of the case and in law, Id. d. AO/Id. TPO have erred in rejecting the comparable companies considered by the assessee, without any cogent basis. It is respectfully submitted that the rejection of the comparable companies is unjustified and contrary to the the assessee, a Limited Liability Partnership (LLP), was constituted on 11.04.2019 by way of conversion of an erstwhile company, namely M/s Friday Movies and TV Pvt. Ltd. The assessee is engaged in the business of creat and production of digital content, with a specialization in web series intended for exploitation on Over principal source of revenue comprises proceeds from the sale of digital content, copyrights, and other ancillary right preceding years, the assessee had undertaken the production of various digital works, including the web series “Special Ops Season 1”, “Ancient Warriors of India” (for Discovery Channel), and two short films titled “Wrong Number” and “Ouch 2”.D financial year relevant to the assessment year under consideration, the assessee undertook the production of a sequel web series titled “Special Ops 1.5”. In connection therewith, the assessee entered into an agreement dated 27.07.2020 with M/s Entertainment Pvt. Ltd. (popularly known as 'Hotstar'), for a fixed consideration of ₹35,00,00,000/ to ₹36,00,00,000/- pursuant to a supplemental agreement dated 27.11.2020. In order to avail benefits under the offered by the Government of Mauritius, the assessee caused the incorporation of a separate entity in Mauritius, namely M/s Friday Storytellers Ltd. (hereinafter referred to as “Friday Ltd.”). This entity was engaged for the purpose of unde activities associated with the said web series, particularly for portions of the shoot conducted in Mauritius. Accordingly, Friday Ltd. provided line production services for the shooting of specific scenes of “Special Ops 1.5” under and TV Pvt. Ltd. The assessee is engaged in the business of creat and production of digital content, with a specialization in web series intended for exploitation on Over-The-Top (OTT) platforms. Its principal source of revenue comprises proceeds from the sale of digital content, copyrights, and other ancillary right preceding years, the assessee had undertaken the production of various digital works, including the web series “Special Ops Season 1”, “Ancient Warriors of India” (for Discovery Channel), and two short films titled “Wrong Number” and “Ouch 2”.D financial year relevant to the assessment year under consideration, the assessee undertook the production of a sequel web series titled “Special Ops 1.5”. In connection therewith, the assessee entered into an agreement dated 27.07.2020 with M/s Entertainment Pvt. Ltd. (popularly known as 'Hotstar'), for a fixed 35,00,00,000/-, which was subsequently revised pursuant to a supplemental agreement dated 27.11.2020. In order to avail benefits under the subsidy scheme offered by the Government of Mauritius, the assessee caused the incorporation of a separate entity in Mauritius, namely M/s Friday Storytellers Ltd. (hereinafter referred to as “Friday Ltd.”). This entity was engaged for the purpose of undertaking line production activities associated with the said web series, particularly for portions of the shoot conducted in Mauritius. Accordingly, Friday Ltd. provided line production services for the shooting of specific scenes of “Special Ops 1.5” undertaken in Mauritius. Friday Storytellers LLP 3 ITA No. 5546/MUM/2024 and TV Pvt. Ltd. The assessee is engaged in the business of creation and production of digital content, with a specialization in web series Top (OTT) platforms. Its principal source of revenue comprises proceeds from the sale of digital content, copyrights, and other ancillary rights. In the preceding years, the assessee had undertaken the production of various digital works, including the web series “Special Ops – Season 1”, “Ancient Warriors of India” (for Discovery Channel), and two short films titled “Wrong Number” and “Ouch 2”.During the financial year relevant to the assessment year under consideration, the assessee undertook the production of a sequel web series titled “Special Ops 1.5”. In connection therewith, the assessee entered into an agreement dated 27.07.2020 with M/s Novi Digital Entertainment Pvt. Ltd. (popularly known as 'Hotstar'), for a fixed , which was subsequently revised pursuant to a supplemental agreement dated subsidy scheme offered by the Government of Mauritius, the assessee caused the incorporation of a separate entity in Mauritius, namely M/s Friday Storytellers Ltd. (hereinafter referred to as “Friday Ltd.”). This entity rtaking line production activities associated with the said web series, particularly for portions of the shoot conducted in Mauritius. Accordingly, Friday Ltd. provided line production services for the shooting of specific taken in Mauritius. 2.1 For the assessment year under consideration, the assessee filed its return of income on 30.01.2020, declaring a total income of ₹19,60,570/-. The said return was selected for scrutiny under the provisions of the Income statutory notices were issued. The assessee furnished partial responses thereto. In view of an international transaction involving 'Line Production Services' availed from its Associated Enterprise (AE), namely M/s Friday Stor Assessing Officer made a reference under section 92CA(1) of the Act to the learned Transfer Pricing Officer (TPO) for determination of the arm’s length price of the said transaction. examining the transfer pricing documentation furnished by the assessee and considering the submissions made during the course of proceedings, proposed a downward adjustment of to the value of the international transaction. The Assessing Officer, accordingly, incorporated the said adjustment in the draft assessment order dated 17.11.2023. adjustment, the assessee filed objections before the learned Dispute Resolution Panel (DRP). The learned DRP, after considering the matter, issued directions under section 144C(5) of the Act, upholding the transfer pricing adjustment proposed by the TPO. Pursuant thereto, the Assessing Officer passed the impugned final assessment order. Aggrieved by the said final assessment order, the assessee is in appeal before this Tribunal, raising the grounds as reproduced hereinabove. For the assessment year under consideration, the assessee filed its return of income on 30.01.2020, declaring a total income of . The said return was selected for scrutiny under the provisions of the Income-tax Act, 1961 (“the Act”), and accordingly, statutory notices were issued. The assessee furnished partial In view of an international transaction involving 'Line Production Services' availed from its Associated Enterprise (AE), namely M/s Friday Storytellers Ltd. (“Friday Ltd.”), the Assessing Officer made a reference under section 92CA(1) of the Act to the learned Transfer Pricing Officer (TPO) for determination of the arm’s length price of the said transaction. The learned TPO, after ransfer pricing documentation furnished by the assessee and considering the submissions made during the course of proceedings, proposed a downward adjustment of to the value of the international transaction. The Assessing Officer, y, incorporated the said adjustment in the draft assessment order dated 17.11.2023. Aggrieved by the proposed adjustment, the assessee filed objections before the learned Dispute Resolution Panel (DRP). The learned DRP, after considering the directions under section 144C(5) of the Act, upholding the transfer pricing adjustment proposed by the TPO. Pursuant thereto, the Assessing Officer passed the impugned final Aggrieved by the said final assessment order, the n appeal before this Tribunal, raising the grounds as reproduced hereinabove. Friday Storytellers LLP 4 ITA No. 5546/MUM/2024 For the assessment year under consideration, the assessee filed its return of income on 30.01.2020, declaring a total income of . The said return was selected for scrutiny under the (“the Act”), and accordingly, statutory notices were issued. The assessee furnished partial In view of an international transaction involving 'Line Production Services' availed from its Associated Enterprise ytellers Ltd. (“Friday Ltd.”), the Assessing Officer made a reference under section 92CA(1) of the Act to the learned Transfer Pricing Officer (TPO) for determination of the The learned TPO, after ransfer pricing documentation furnished by the assessee and considering the submissions made during the course of proceedings, proposed a downward adjustment of ₹2,09,75,436/- to the value of the international transaction. The Assessing Officer, y, incorporated the said adjustment in the draft Aggrieved by the proposed adjustment, the assessee filed objections before the learned Dispute Resolution Panel (DRP). The learned DRP, after considering the directions under section 144C(5) of the Act, upholding the transfer pricing adjustment proposed by the TPO. Pursuant thereto, the Assessing Officer passed the impugned final Aggrieved by the said final assessment order, the n appeal before this Tribunal, raising the grounds as 3. Before us, the Ld. counsel for the assessee filed a Paper book containing pages 1 to 240 and 241 to 392. 4. All the grounds raised by the assessee pertain to a singular issue, namely, the transfer pricing adjustment of Ground No. 5 of the appeal relates to the rejection of two comparables by the learned TPO. Grounds No. 2 and 4 concern the assessee’s objection to the adjustment on the ground that the expenditure incurred under the international transaction was not claimed as a deduction, having been capitalized as work under the project titled “Special Ops 1.5”. In Ground No. 3, the assessee challenges the adjustment on the premise that there was no shifting of profits outside India. the issue involved, all grounds are taken up together for adjudication. 4.1 Upon consideration of the submissions made by both parties, the controversy in the present appeal primarily revolve three issues: firstly learned TPO; secondly Enterprise (AE) had charged the assessee on a cost without any mark-up, thereby rendering any transfer pricing adjustment unwarranted transfer pricing adjustment despite the fact that the expenditure incurred for line production was These issues are addressed and adjudicated in seriatim as under. Before us, the Ld. counsel for the assessee filed a Paper book containing pages 1 to 240 and 241 to 392. All the grounds raised by the assessee pertain to a singular , namely, the transfer pricing adjustment of Ground No. 5 of the appeal relates to the rejection of two comparables by the learned TPO. Grounds No. 2 and 4 concern the assessee’s objection to the adjustment on the ground that the e incurred under the international transaction was not claimed as a deduction, having been capitalized as work under the project titled “Special Ops 1.5”. In Ground No. 3, the assessee challenges the adjustment on the premise that there was shifting of profits outside India. In view of the commonality of the issue involved, all grounds are taken up together for Upon consideration of the submissions made by both parties, the controversy in the present appeal primarily revolve firstly, the rejection of two comparables by the secondly, the contention that the Associated Enterprise (AE) had charged the assessee on a cost up, thereby rendering any transfer pricing djustment unwarranted and thirdly, the propriety of making a transfer pricing adjustment despite the fact that the expenditure incurred for line production was capitalized as work These issues are addressed and adjudicated in seriatim as under. Friday Storytellers LLP 5 ITA No. 5546/MUM/2024 Before us, the Ld. counsel for the assessee filed a Paper book All the grounds raised by the assessee pertain to a singular , namely, the transfer pricing adjustment of ₹2,09,75,436/-. Ground No. 5 of the appeal relates to the rejection of two comparables by the learned TPO. Grounds No. 2 and 4 concern the assessee’s objection to the adjustment on the ground that the e incurred under the international transaction was not claimed as a deduction, having been capitalized as work-in-progress under the project titled “Special Ops 1.5”. In Ground No. 3, the assessee challenges the adjustment on the premise that there was In view of the commonality of the issue involved, all grounds are taken up together for Upon consideration of the submissions made by both parties, the controversy in the present appeal primarily revolves around , the rejection of two comparables by the , the contention that the Associated Enterprise (AE) had charged the assessee on a cost-to-cost basis up, thereby rendering any transfer pricing the propriety of making a transfer pricing adjustment despite the fact that the expenditure capitalized as work-in-progress. These issues are addressed and adjudicated in seriatim as under. 5. The first issue arising for consideration pertains to the rejection of two comparables by the learned Transfer Pricing Officer (TPO) in the benchmarking analysis of the international tran involving line production services. 5.1 The brief facts relevant to this issue assessee are that t Storytellers Ltd., Mauritius (“Friday Ltd.”), was incorporated as a Special Purpose Veh production-related costs and availing subsidy benefits under the applicable laws of Mauritius. It is the claim of the assessee that the subsidy so received by the SPV was eventually remitted to India by way of cost reduction, thereby benefiting the assessee in the overall production cost of the web series engaged in procuring content production services from its AE and monetising the completed content through licensing agreeme with digital platforms. 5.2 It is further submitted that the responsibility of controlling, supervising, facilitating, and completing the production activities carried out in Mauritius. In its transfer pricing study, th based on the functions performed, assets employed, and risks assumed (FAR analysis), and determined that the most appropriate method for benchmarking the international transaction was the Cost Plus Method (CPM). U arising for consideration pertains to the rejection of two comparables by the learned Transfer Pricing Officer (TPO) in the benchmarking analysis of the international tran involving line production services. The brief facts relevant to this issue, as submitted by the that the Associated Enterprise (AE), M/s Friday Storytellers Ltd., Mauritius (“Friday Ltd.”), was incorporated as a Special Purpose Vehicle (SPV) with limited objective of incurring related costs and availing subsidy benefits under the applicable laws of Mauritius. It is the claim of the assessee that the subsidy so received by the SPV was eventually remitted to India by cost reduction, thereby benefiting the assessee in the overall production cost of the web series “Special Ops 1.5”. The assessee is engaged in procuring content production services from its AE and monetising the completed content through licensing agreeme with digital platforms. It is further submitted that ‘Friday Ltd’. was entrusted with the responsibility of controlling, supervising, facilitating, and completing the production activities carried out in Mauritius. In its transfer pricing study, the assessee conducted a functional analysis based on the functions performed, assets employed, and risks assumed (FAR analysis), and determined that the most appropriate method for benchmarking the international transaction was the Cost Plus Method (CPM). Under the CPM, the assessee adopted the Friday Storytellers LLP 6 ITA No. 5546/MUM/2024 arising for consideration pertains to the rejection of two comparables by the learned Transfer Pricing Officer (TPO) in the benchmarking analysis of the international transaction , as submitted by the he Associated Enterprise (AE), M/s Friday Storytellers Ltd., Mauritius (“Friday Ltd.”), was incorporated as a icle (SPV) with limited objective of incurring related costs and availing subsidy benefits under the applicable laws of Mauritius. It is the claim of the assessee that the subsidy so received by the SPV was eventually remitted to India by cost reduction, thereby benefiting the assessee in the overall . The assessee is engaged in procuring content production services from its AE and monetising the completed content through licensing agreements . was entrusted with the responsibility of controlling, supervising, facilitating, and completing the production activities carried out in Mauritius. In its e assessee conducted a functional analysis based on the functions performed, assets employed, and risks assumed (FAR analysis), and determined that the most appropriate method for benchmarking the international transaction was the nder the CPM, the assessee adopted the Profit Level Indicator (PLI) identified comparable Indian companies engaged in broadly similar line production activities. 5.3 On this basis, the assessee undertook a three average analysis of gross profit margins earned by such comparables, which yielded a range between 13.40% and 55.47%, with the 35th percentile at 1.05%, the 65th percentile at 26.37%, and a median of 20.86%. The assessee’s margin for the year under consideration was computed at 15.78%, which, according to the assessee, fell within the safe demonstrating that the transaction with the AE was at arm’s length. The computati submitted by the assessee and reproduced by the Ld. TPO is reproduced as under: Particulars Sales (A) Less : Cost of Goods Sold (B) (-) Actual Cost incurred during 2020-21 (-) Estimated Cost (to be incurred in F.Y. 2021-22 till the completion of series Special Ops 1.5) Gross Profit (C=A-B) Gross Profit Ratio (D=C/A) 5.4 The learned TPO, however, observed that two of the comparables relied upon by the assessee, namely Pvt. Ltd. and GV Films Ltd. provisions of Chapter X of the Act. With respect to Profit Level Indicator (PLI) as gross profit to sales (GP/Sales) and identified comparable Indian companies engaged in broadly similar line production activities. On this basis, the assessee undertook a three average analysis of gross profit margins earned by such comparables, which yielded a range between 13.40% and 55.47%, with the 35th percentile at 1.05%, the 65th percentile at 26.37%, of 20.86%. The assessee’s margin for the year under consideration was computed at 15.78%, which, according to the assessee, fell within the safe harbor range of ±5%, thereby demonstrating that the transaction with the AE was at arm’s The computation of gross profit margin of the assessee submitted by the assessee and reproduced by the Ld. TPO is reproduced as under: Amount in INR Amount in INR 36,00,00,000 Less : Cost of Goods Sold (B) ) Actual Cost incurred during F.Y. 10,75,80,436 ) Estimated Cost (to be incurred in F.Y. 22 till the completion of series – 19,55,99,000 30,31,79,436 5,68,20,564 Gross Profit Ratio (D=C/A) 15.78% The learned TPO, however, observed that two of the comparables relied upon by the assessee, namely GV Films Ltd., were not suitable in terms of the provisions of Chapter X of the Act. With respect to Friday Storytellers LLP 7 ITA No. 5546/MUM/2024 gross profit to sales (GP/Sales) and identified comparable Indian companies engaged in broadly similar On this basis, the assessee undertook a three-year weighted average analysis of gross profit margins earned by such comparables, which yielded a range between 13.40% and 55.47%, with the 35th percentile at 1.05%, the 65th percentile at 26.37%, of 20.86%. The assessee’s margin for the year under consideration was computed at 15.78%, which, according to the range of ±5%, thereby demonstrating that the transaction with the AE was at arm’s on of gross profit margin of the assessee submitted by the assessee and reproduced by the Ld. TPO is Amount in INR 36,00,00,000 30,31,79,436 5,68,20,564 15.78% The learned TPO, however, observed that two of the comparables relied upon by the assessee, namely Line Production , were not suitable in terms of the provisions of Chapter X of the Act. With respect to Line Production Pvt. Ltd., it was noted that the company had incurred consistent losses for two preceding years, and financial data for the relevant year was not available. In the case of observed that the company had no sales revenue during the relevant year, and its reported income comprised only of treasury income and prior period receipts. Consequently, a show cause notice was issued to the assessee calling upon it to justify the continued inclusion of these comparables. However, no response was received from the assessee despite issuance of reminders. the absence of any justification from the assessee, the learned TPO proceeded to exclude the two entities and recomputed the median margin of the remaining nine comparables relied upon by the assessee, arriving at a revised median of 21.61%. computation of the median margin of 21.61% of the comparables and computation of the transfer pricing adjustment is reproduced as under: “On rejection of the said two comparable companies, the following 9 companies, selected by you in your TPSR, has been considered as comparable for benchmarking analysis: Sr. No. Name of comparable company 1. Baba Arts Ltd. 2. Film Farm India Pvt. Ltd. 3. Shemaroo Entertainment Ltd. 4. 2D Entertainment Pvt. Ltd. 5. Balaji Telefilms Ltd. 6. Prasad Media Corpn. Pvt. Ltd. 7. V R Films & Studio Ltd. 8. Zee Entertainment Enterprises Ltd. 9. Junglee Pictures Ltd. , it was noted that the company had incurred consistent losses for two preceding years, and financial data for the relevant year was not available. In the case of GV Films Ltd. observed that the company had no sales revenue during the r, and its reported income comprised only of treasury income and prior period receipts. Consequently, a show cause notice was issued to the assessee calling upon it to justify the continued inclusion of these comparables. However, no response from the assessee despite issuance of reminders. the absence of any justification from the assessee, the learned TPO proceeded to exclude the two entities and recomputed the median margin of the remaining nine comparables relied upon by the riving at a revised median of 21.61%. computation of the median margin of 21.61% of the comparables and computation of the transfer pricing adjustment is reproduced On rejection of the said two comparable companies, the following 9 companies, selected by you in your TPSR, has been considered as comparable for benchmarking analysis:- Name of comparable company OP/OC determined by you Baba Arts Ltd. 0.61% Film Farm India Pvt. Ltd. 1.05% Shemaroo Entertainment Ltd. 20.41% 2D Entertainment Pvt. Ltd. 20.86% Balaji Telefilms Ltd. 21.61% Prasad Media Corpn. Pvt. Ltd. 26.37% V R Films & Studio Ltd. 33.67% Zee Entertainment Enterprises Ltd. 38.89% Junglee Pictures Ltd. 55.47% Friday Storytellers LLP 8 ITA No. 5546/MUM/2024 , it was noted that the company had incurred consistent losses for two preceding years, and financial data for the relevant GV Films Ltd., the TPO observed that the company had no sales revenue during the r, and its reported income comprised only of treasury income and prior period receipts. Consequently, a show cause notice was issued to the assessee calling upon it to justify the continued inclusion of these comparables. However, no response from the assessee despite issuance of reminders. In the absence of any justification from the assessee, the learned TPO proceeded to exclude the two entities and recomputed the median margin of the remaining nine comparables relied upon by the riving at a revised median of 21.61%. The relevant computation of the median margin of 21.61% of the comparables and computation of the transfer pricing adjustment is reproduced On rejection of the said two comparable companies, the following 9 companies, selected by you in your TPSR, has been considered as OP/OC determined 20.86% 26.37% The 9 comparables of range 20.86% to 26.37% with median as 21.61%. The OP/OC of the assessee company is 15.78% as given in the Appendix 5 of its submission dated 6.03.2023 said calculation : Particulars Sales Less : COGS Gross Profit GP/Sales Thus, the ALP of the said transaction is determined as follows: A Sales B Gross Profit C=B/A GP/Sales D ALP GP/Sales F=B*A ALP GP G=A-F ALP COGS H Assessee’s COGS I Adjustment on line Production charges 5.5 In proceedings before the learned Dispute Resolution Panel (DRP), the assessee contended that in the case of Pvt. Ltd., although current year data was unavailable, financial data for the two preceding years was accessible and could be relied upon. The learned DRP, however, rejected the contention of the assessee and sustained the exclusion of both comparables detailed order recorded at Paragraphs 7.3 to 7.3.10 of its directions 5.6 Before us, learned counsel for the assessee reiterated the submissions made before the DRP. The learned Departmental The 9 comparables of the assessee have the said inter quartile range 20.86% to 26.37% with median as 21.61%. The OP/OC of the assessee company is 15.78% as given in the Appendix 5 of its submission dated 6.03.2023 said calculation : Amount in Rs. 36,00,00,000 30,31,79,436 5,68,20,564 15.78% Thus, the ALP of the said transaction is determined as follows: Sales 36,00,00,000 Gross Profit 5,68,20,564 GP/Sales 15.78% ALP GP/Sales 21.61% ALP GP 7,77,96,000 ALP COGS 28,22,04,000 Assessee’s COGS 30,31,79,436 Adjustment on line Production charges 2,90,75,436 In proceedings before the learned Dispute Resolution Panel (DRP), the assessee contended that in the case of , although current year data was unavailable, financial data for the two preceding years was accessible and could be relied upon. The learned DRP, however, rejected the contention of the assessee and sustained the exclusion of both comparables detailed order recorded at Paragraphs 7.3 to 7.3.10 of its directions Before us, learned counsel for the assessee reiterated the submissions made before the DRP. The learned Departmental Friday Storytellers LLP 9 ITA No. 5546/MUM/2024 the assessee have the said inter quartile range 20.86% to 26.37% with median as 21.61%. The OP/OC of the assessee company is 15.78% as given in the Appendix Thus, the ALP of the said transaction is determined as follows: 36,00,00,000 5,68,20,564 15.78% 21.61% 7,77,96,000 28,22,04,000 30,31,79,436 2,90,75,436 ” In proceedings before the learned Dispute Resolution Panel (DRP), the assessee contended that in the case of Line Production , although current year data was unavailable, financial data for the two preceding years was accessible and could be relied upon. The learned DRP, however, rejected the contention of the assessee and sustained the exclusion of both comparables by a detailed order recorded at Paragraphs 7.3 to 7.3.10 of its directions. Before us, learned counsel for the assessee reiterated the submissions made before the DRP. The learned Departmental Representative (DR), on the other hand, supported the recorded by the lower authorities. 5.7 We have considered the rival submissions and perused the material available on record. We find that the learned TPO has, in principle, accepted the assessee’s choice of the most appropriate method as well as the set of comparables, save and except the two entities under challenge. The assessee, admittedly, failed to provide current year data in respect of transfer pricing documentation. In our considered view, where the results of the tested party pertain to the relevant financial year, it is necessary, for a meaningful comparison, that data for the same year be available in respect of the comparables. margin may vary significantly over time, and hence, rel data of earlier years Similarly, we find that from operations during the relevant year, and its income was confined to non-operating sources, rendering it function incomparable to the assessee. The lower authorities justified in excluding both comparables from the final set. 5.8 In view of the foregoing, we find no infirmity in the directions issued by the learned DRP in this regard. The findings on this issue are affirmed. , on the other hand, supported the recorded by the lower authorities.. We have considered the rival submissions and perused the material available on record. We find that the learned TPO has, in principle, accepted the assessee’s choice of the most appropriate s the set of comparables, save and except the two entities under challenge. The assessee, admittedly, failed to provide current year data in respect of Line Production Pvt. Ltd. transfer pricing documentation. In our considered view, where the ts of the tested party pertain to the relevant financial year, it is necessary, for a meaningful comparison, that data for the same year be available in respect of the comparables. Gross p vary significantly over time, and hence, rel earlier years would not constitute a reliable benchmark. Similarly, we find that GV Films Ltd. did not report any revenue from operations during the relevant year, and its income was operating sources, rendering it function incomparable to the assessee. The lower authorities justified in excluding both comparables from the final set. In view of the foregoing, we find no infirmity in the directions issued by the learned DRP in this regard. The findings on this issue are affirmed. Friday Storytellers LLP 10 ITA No. 5546/MUM/2024 , on the other hand, supported the findings We have considered the rival submissions and perused the material available on record. We find that the learned TPO has, in principle, accepted the assessee’s choice of the most appropriate s the set of comparables, save and except the two entities under challenge. The assessee, admittedly, failed to provide Line Production Pvt. Ltd. in its transfer pricing documentation. In our considered view, where the ts of the tested party pertain to the relevant financial year, it is necessary, for a meaningful comparison, that data for the same Gross profitability vary significantly over time, and hence, reliance on would not constitute a reliable benchmark. did not report any revenue from operations during the relevant year, and its income was operating sources, rendering it functionally incomparable to the assessee. The lower authorities are therefore, justified in excluding both comparables from the final set. In view of the foregoing, we find no infirmity in the directions issued by the learned DRP in this regard. The findings of the ld DRP 6. The second issue contention that no profit accrued to the Associated Enterprise (AE) and that the entire profit remained with the assessee, thereby negating any allegation of profit shifting. The learned Dispute Resolution Panel (DRP assessee, recorded its observations at paragraph 8.3 of its directions as under: “8.3 Discussion and Directions of the DRP: 8.3.1 The assessee contends that there is no shifting of profit from India to Mauritius and there is no tax avoidance. The assessee further submits that Friday Ltd is only a special purpose vehicle whose endeavour is purely to incur local costs at NIL margin and apply for subsidy as per Film Rebate Scheme in Mauritius which shall reduce the c production. Even the subsidy received by the SPV from Mauritius Government is transferred to FST LLP, which results in reduction in cost of series production. If FST LLP would have produced the series in India, then also the cost of production would incurred by Friday Ltd. for the same which would have ultimately resulted in lower profits. 8.3.2 The panel has considered the submissions of the assessee and the facts of the case. The assessee and the Mauritian entity Friday L associated enterprises which have undertaken international transactions. As per Section 92 of the Income Tax Act Any income arising from international transaction shall be computed having regard to the arm's length price \" 8.3.3 For determination been prescribed as per section 92C of the Act. Also various rules have been prescribed for computation of the arm's length price. 8.3.4 The contention of the assessee that there was no intention to shift any profit has to be proved through rigorous methods prescribed that the transaction was at arm's length. 8.3.5 In view of the above, we do not find any infirmity in the action of the TPO in benchmarking the international transaction second issue raised by the assessee pertains to the contention that no profit accrued to the Associated Enterprise (AE) and that the entire profit remained with the assessee, thereby negating any allegation of profit shifting. The learned Dispute Resolution Panel (DRP), after considering the submissions of the assessee, recorded its observations at paragraph 8.3 of its 8.3 Discussion and Directions of the DRP: 8.3.1 The assessee contends that there is no shifting of profit from India and there is no tax avoidance. The assessee further submits that Friday Ltd is only a special purpose vehicle whose endeavour is purely to incur local costs at NIL margin and apply for subsidy as per Film Rebate Scheme in Mauritius which shall reduce the c production. Even the subsidy received by the SPV from Mauritius Government is transferred to FST LLP, which results in reduction in cost of series production. If FST LLP would have produced the series in India, then also the cost of production would have been higher than that incurred by Friday Ltd. for the same which would have ultimately resulted in lower profits. 8.3.2 The panel has considered the submissions of the assessee and the facts of the case. The assessee and the Mauritian entity Friday L associated enterprises which have undertaken international transactions. As per Section 92 of the Income Tax Act Any income arising from international transaction shall be computed having regard to the arm's length price \" For determination of the arm's length price, various methods have been prescribed as per section 92C of the Act. Also various rules have been prescribed for computation of the arm's length price. The contention of the assessee that there was no intention to shift profit has to be proved through rigorous methods prescribed that the transaction was at arm's length. 8.3.5 In view of the above, we do not find any infirmity in the action of the TPO in benchmarking the international transaction Friday Storytellers LLP 11 ITA No. 5546/MUM/2024 raised by the assessee pertains to the contention that no profit accrued to the Associated Enterprise (AE) and that the entire profit remained with the assessee, thereby negating any allegation of profit shifting. The learned Dispute ), after considering the submissions of the assessee, recorded its observations at paragraph 8.3 of its 8.3.1 The assessee contends that there is no shifting of profit from India and there is no tax avoidance. The assessee further submits that Friday Ltd is only a special purpose vehicle whose endeavour is purely to incur local costs at NIL margin and apply for subsidy as per Film Rebate Scheme in Mauritius which shall reduce the cost of production. Even the subsidy received by the SPV from Mauritius Government is transferred to FST LLP, which results in reduction in cost of series production. If FST LLP would have produced the series in India, have been higher than that incurred by Friday Ltd. for the same which would have ultimately 8.3.2 The panel has considered the submissions of the assessee and the facts of the case. The assessee and the Mauritian entity Friday Ltd. are associated enterprises which have undertaken international transactions. Any income arising from international transaction shall be computed of the arm's length price, various methods have been prescribed as per section 92C of the Act. Also various rules have The contention of the assessee that there was no intention to shift profit has to be proved through rigorous methods prescribed that the 8.3.5 In view of the above, we do not find any infirmity in the action of the TPO in benchmarking the international transaction using Cost Plus Method. assessee is rejected 6.1 Before us, the learned counsel for the assessee reiterated that the AE, namely M/s Friday Ltd., Mauritius, acted solely as a cost pass-through entity. It was submitted that the AE did not re any profits and operated strictly under a cost as per the terms of the Line Production Agreement. In support of this submission, reliance was placed on the remittance of subsidy amounting to ₹2.72 crores, received by the AE under t Film Rebate Scheme subsequent year. According to the assessee, this remittance demonstrated the absence of any profit retention by the AE and substantiated the claim that the AE functioned only as a reimbursement conduit. 6.2 Per contra, the learned Departmental Representative submitted that the assessee’s contention of non by the AE is not relevant for determining the arm’s length price (ALP) under section 92C of the Act. The pri pricing analysis, it was argued, is not the eventual retention or distribution of profits but rather whether the price paid by the assessee to the AE for services availed reflects what would have been paid under similar circumstanc Department further submitted that the claim that the AE operated on a cost-to-cost basis, or earned negligible margin, does not absolve the assessee from the statutory requirement of using Cost Plus Method. Hence, this ground of objection of the rejected.” Before us, the learned counsel for the assessee reiterated that the AE, namely M/s Friday Ltd., Mauritius, acted solely as a cost through entity. It was submitted that the AE did not re any profits and operated strictly under a cost-to-cost arrangement as per the terms of the Line Production Agreement. In support of this submission, reliance was placed on the remittance of subsidy 2.72 crores, received by the AE under t Film Rebate Scheme”, which was transferred to the assessee . According to the assessee, this remittance demonstrated the absence of any profit retention by the AE and substantiated the claim that the AE functioned only as a reimbursement conduit. Per contra, the learned Departmental Representative submitted that the assessee’s contention of non-retention of profits by the AE is not relevant for determining the arm’s length price (ALP) under section 92C of the Act. The principal focus of transfer pricing analysis, it was argued, is not the eventual retention or distribution of profits but rather whether the price paid by the assessee to the AE for services availed reflects what would have been paid under similar circumstances to an unrelated party. The Department further submitted that the claim that the AE operated cost basis, or earned negligible margin, does not absolve the assessee from the statutory requirement of Friday Storytellers LLP 12 ITA No. 5546/MUM/2024 Hence, this ground of objection of the Before us, the learned counsel for the assessee reiterated that the AE, namely M/s Friday Ltd., Mauritius, acted solely as a cost- through entity. It was submitted that the AE did not retain cost arrangement as per the terms of the Line Production Agreement. In support of this submission, reliance was placed on the remittance of subsidy 2.72 crores, received by the AE under the “Mauritius , which was transferred to the assessee in . According to the assessee, this remittance demonstrated the absence of any profit retention by the AE and substantiated the claim that the AE functioned only as a Per contra, the learned Departmental Representative retention of profits by the AE is not relevant for determining the arm’s length price ncipal focus of transfer pricing analysis, it was argued, is not the eventual retention or distribution of profits but rather whether the price paid by the assessee to the AE for services availed reflects what would have es to an unrelated party. The Department further submitted that the claim that the AE operated cost basis, or earned negligible margin, does not absolve the assessee from the statutory requirement of benchmarking the transaction and demonstrat consideration paid did not exceed the arm’s length price. The objective of Chapter X of the Act is to test the reasonableness of the transaction itself, rather than the final outcome of profit distribution between related parties. 6.3 We have considered the rival submissions and perused the material available on record. The arguments advanced by the learned counsel for the assessee, in our considered view, are untenable in law. The computation of transfer pricing adjustments is governed by the framed there under. Once statutory rules are prescribed, the TPO is bound to apply those rules in determining the arm’s length price, without being influenced by the manner in which the parties have chosen to allocate or reimburse costs inter se. The transfer pricing exercise under Chapter X does not turn on whether the AE charged a mark-up or remitted a subsidy back to the assessee. What is relevant is whether the price paid by the assessee for the services availed under the international transaction is consistent with the price that would have been paid to an unrelated party performing comparable functions in similar circumstances. The fact that the AE did not earn any profit, or acted as a mere pass is of no consequence unless the pricing of the transaction itself can be demonstrated to be at arm’s length based on objective comparability analysis. In the present case, the assessee has not benchmarking the transaction and demonstrat consideration paid did not exceed the arm’s length price. The objective of Chapter X of the Act is to test the reasonableness of the transaction itself, rather than the final outcome of profit distribution between related parties. considered the rival submissions and perused the material available on record. The arguments advanced by the learned counsel for the assessee, in our considered view, are untenable in law. The computation of transfer pricing adjustments is governed by the specific provisions of the Act and the Rules under. Once statutory rules are prescribed, the TPO is bound to apply those rules in determining the arm’s length price, without being influenced by the manner in which the parties have locate or reimburse costs inter se. The transfer pricing exercise under Chapter X does not turn on whether the AE charged up or remitted a subsidy back to the assessee. What is relevant is whether the price paid by the assessee for the services led under the international transaction is consistent with the price that would have been paid to an unrelated party performing comparable functions in similar circumstances. The fact that the AE did not earn any profit, or acted as a mere pass is of no consequence unless the pricing of the transaction itself can be demonstrated to be at arm’s length based on objective comparability analysis. In the present case, the assessee has not Friday Storytellers LLP 13 ITA No. 5546/MUM/2024 benchmarking the transaction and demonstrating that the consideration paid did not exceed the arm’s length price. The objective of Chapter X of the Act is to test the reasonableness of the transaction itself, rather than the final outcome of profit considered the rival submissions and perused the material available on record. The arguments advanced by the learned counsel for the assessee, in our considered view, are untenable in law. The computation of transfer pricing adjustments specific provisions of the Act and the Rules under. Once statutory rules are prescribed, the TPO is bound to apply those rules in determining the arm’s length price, without being influenced by the manner in which the parties have locate or reimburse costs inter se. The transfer pricing exercise under Chapter X does not turn on whether the AE charged up or remitted a subsidy back to the assessee. What is relevant is whether the price paid by the assessee for the services led under the international transaction is consistent with the price that would have been paid to an unrelated party performing comparable functions in similar circumstances. The fact that the AE did not earn any profit, or acted as a mere pass-through entity, is of no consequence unless the pricing of the transaction itself can be demonstrated to be at arm’s length based on objective comparability analysis. In the present case, the assessee has not shown, by cogent material, that the consideration paid for production services satisfies the test of arm’s length when measured against comparable uncontrolled transactions. Accordingly, we find no merit in the contention of the assessee, and uphold the findings of the learned DRP and TPO on this issue. 7. The third issue assessee’s challenge to the transfer pricing adjustment on the ground that the relevant expenditure was capitalised as work progress and no deduction was claimed in the year under consideration. 7.1 It was submitted that the adjustment pertained to a transaction which, in effect, had not culminated in the relevant assessment year. According to the assessee, the production of the series “Special Ops 1.5” year corresponding to the assessment year in question. Consequently, no revenue was recognised, and the expenditure incurred was carried as inventory in the balance sheet. further submitted that for the purp tentative margin was computed based on estimated costs, as the actual sale consideration for the series had yet to be received. The assessee contended that, upon completion of the project in the subsequent year, the gross profit mar was within the arm’s length range as per the Transfer Pricing Officer’s own benchmarking. Therefore, it was argued that no shown, by cogent material, that the consideration paid for production services satisfies the test of arm’s length when measured against comparable uncontrolled transactions. Accordingly, we find no merit in the contention of the assessee, and uphold the findings of the learned DRP and TPO on this issue. third issue raised for our consideration pertains to the assessee’s challenge to the transfer pricing adjustment on the ground that the relevant expenditure was capitalised as work progress and no deduction was claimed in the year under It was submitted that the adjustment pertained to a transaction which, in effect, had not culminated in the relevant assessment year. According to the assessee, the production of the “Special Ops 1.5” remained incomplete during the financial year corresponding to the assessment year in question. Consequently, no revenue was recognised, and the expenditure incurred was carried as inventory in the balance sheet. further submitted that for the purposes of benchmarking, a tentative margin was computed based on estimated costs, as the actual sale consideration for the series had yet to be received. The assessee contended that, upon completion of the project in the subsequent year, the gross profit margin stood at 21.46%, which was within the arm’s length range as per the Transfer Pricing Officer’s own benchmarking. Therefore, it was argued that no Friday Storytellers LLP 14 ITA No. 5546/MUM/2024 shown, by cogent material, that the consideration paid for line production services satisfies the test of arm’s length when measured against comparable uncontrolled transactions. Accordingly, we find no merit in the contention of the assessee, and uphold the findings of the learned DRP and TPO on this issue. raised for our consideration pertains to the assessee’s challenge to the transfer pricing adjustment on the ground that the relevant expenditure was capitalised as work-in- progress and no deduction was claimed in the year under It was submitted that the adjustment pertained to a transaction which, in effect, had not culminated in the relevant assessment year. According to the assessee, the production of the remained incomplete during the financial year corresponding to the assessment year in question. Consequently, no revenue was recognised, and the expenditure incurred was carried as inventory in the balance sheet. It was oses of benchmarking, a tentative margin was computed based on estimated costs, as the actual sale consideration for the series had yet to be received. The assessee contended that, upon completion of the project in the gin stood at 21.46%, which was within the arm’s length range as per the Transfer Pricing Officer’s own benchmarking. Therefore, it was argued that no adjustment was warranted in the year under consideration and that any comparison should be made based on a completion of the project. before the Ld. DRP is reproduced as under: “10.2. Arguments of the Applicant Assessee: The relevant portion of assessee's submission is reproduced as under: The assessee would like to bring it to the notice of the Ld. TPO that the calculation of margin earned by assessee in the transaction of production of series during FY 2020 basis. The production was not completed at the time and preparation of TP Study Report but it has been completed now. The actual profitability of transaction under consideration can be calculated as follows: (Refer Annexure 1 below for financials of FST LLP of FY 2021-22) Particulars Sales (A) (Refer Note 16 of Financial Statements) Less : Cost of Goods Sold (B) (Refer Note 18 of Financial Statements) (-) Actual Cost incurred for the project Gross Profit (C=A-B) Gross Profit Ratio (D=C/A) In the Order u/s 92CA(3) of Income Tax Act 1961 dated 28/10/2023 having DIN & Order No: ITBA/TPO/F/92CA3/2023 the Ld. TPO has rejected the following two companies from the dataset of comparable companies: o Lyca Productions Pvt. Ltd o GV Films After removing the above two companies, the Ld. TPO determined the ALP as follows: o 35th percentile: 20.86% o 65th percentile: 26.37% o Median (50th percentile): 21.61% adjustment was warranted in the year under consideration and that any comparison should be made based on actual outcomes post completion of the project. The relevant submission of the assessee before the Ld. DRP is reproduced as under: “10.2. Arguments of the Applicant Assessee: The relevant portion of assessee's submission is reproduced as under: assessee would like to bring it to the notice of the Ld. TPO that the calculation of margin earned by assessee in the transaction of production of series during FY 2020-21 was calculated on an estimation basis. The production was not completed at the time of filing Form 3CEB and preparation of TP Study Report but it has been completed now. The actual profitability of transaction under consideration can be calculated as follows: (Refer Annexure 1 below for financials of FST LLP of FY Amount in INR Amount in INR Sales (A) (Refer Note 16 of Financial Statements) 36,00,00,000 Less : Cost of Goods Sold (B) (Refer Note 18 of Financial ) Actual Cost incurred for the 28,27,31,060 28,27,31,060 B) 7,72,68,940 Gross Profit Ratio (D=C/A) 21.46% In the Order u/s 92CA(3) of Income Tax Act 1961 dated 28/10/2023 having DIN & Order No: ITBA/TPO/F/92CA3/2023-24/1057475177(1), the Ld. TPO has rejected the following two companies from the dataset able companies: Lyca Productions Pvt. Ltd After removing the above two companies, the Ld. TPO determined the 35th percentile: 20.86% 65th percentile: 26.37% Median (50th percentile): 21.61% Friday Storytellers LLP 15 ITA No. 5546/MUM/2024 adjustment was warranted in the year under consideration and that ctual outcomes post- The relevant submission of the assessee The relevant portion of assessee's submission is reproduced as under: assessee would like to bring it to the notice of the Ld. TPO that the calculation of margin earned by assessee in the transaction of 21 was calculated on an estimation of filing Form 3CEB and preparation of TP Study Report but it has been completed now. The actual profitability of transaction under consideration can be calculated as follows: (Refer Annexure 1 below for financials of FST LLP of FY Amount in INR 36,00,00,000 28,27,31,060 7,72,68,940 21.46% In the Order u/s 92CA(3) of Income Tax Act 1961 dated 28/10/2023 24/1057475177(1), the Ld. TPO has rejected the following two companies from the dataset After removing the above two companies, the Ld. TPO determined the Without prejudice to anything stated in assessee considers the dataset of comparable companies and the margin calculation of comparables suggested by the Ld. TPO, the gross margin on sales of 21.46% earned by FST LLP lies between the arm's length range of 35th perc 26.37% which is well within the arm's length range as suggested by the Ld. TPO. Hence, it can be said that the TP Adjustment of Rs. 2,09,75,436/ warranted in the case of the assessee. 7.2 The Ld. DRP after considering the objection of the assessee rejected such observation as under: “10.3.1 The panel has considered the submissions of the assessee and the facts of the case. The panel does not find any merit in the argument that the benchmarking and con unless the entire production process of the web series is complete. The assessee contends that since the production of the web series was completed in the following year, benchmarking should be done by taking all the transactions of the two years. 10.3.2 This argument of the assessee is flawed. Suppose in a case, a series takes 5 years to complete, then will the benchmarking of the international transaction be done after 5 years and by combining the transactions of all the 5 years ?! There is no such provision in the transfer pricing law. 10.3.4 Moreover, the assessee itself has undertaken transfer pricing study and benchmarked the transaction. Only when the TPO has scrutinized and made some corrections in the TP analysi is taking such an argument. 7.3 Before us, learned counsel for the assessee submitted that the entire expenditure of was capitalised in accordance with standard accounting principles, and no deduction was claimed in the profit and loss account for the relevant year. It was submitted that the obi Without prejudice to anything stated in the above grounds, even if the assessee considers the dataset of comparable companies and the margin calculation of comparables suggested by the Ld. TPO, the gross margin on sales of 21.46% earned by FST LLP lies between the arm's length range of 35th percentile i.e. 20.86% and the 65th percentile i.e. 26.37% which is well within the arm's length range as suggested by the Hence, it can be said that the TP Adjustment of Rs. 2,09,75,436/ warranted in the case of the assessee.” after considering the objection of the assessee rejected such observation as under: 10.3.1 The panel has considered the submissions of the assessee and the facts of the case. The panel does not find any merit in the argument that the benchmarking and consequent adjustment cannot be done for unless the entire production process of the web series is complete. The assessee contends that since the production of the web series was completed in the following year, benchmarking should be done by ransactions of the two years. 10.3.2 This argument of the assessee is flawed. Suppose in a case, a series takes 5 years to complete, then will the benchmarking of the international transaction be done after 5 years and by combining the the 5 years ?! There is no such provision in the 10.3.4 Moreover, the assessee itself has undertaken transfer pricing study and benchmarked the transaction. Only when the TPO has scrutinized and made some corrections in the TP analysis, the assessee argument.” Before us, learned counsel for the assessee submitted that the entire expenditure of ₹9.43 crores incurred towards line production was capitalised in accordance with standard accounting principles, duction was claimed in the profit and loss account for the . It was submitted that the obivious facts like AE Friday Storytellers LLP 16 ITA No. 5546/MUM/2024 the above grounds, even if the assessee considers the dataset of comparable companies and the margin calculation of comparables suggested by the Ld. TPO, the gross margin on sales of 21.46% earned by FST LLP lies between the arm's entile i.e. 20.86% and the 65th percentile i.e. 26.37% which is well within the arm's length range as suggested by the Hence, it can be said that the TP Adjustment of Rs. 2,09,75,436/- is not after considering the objection of the assessee 10.3.1 The panel has considered the submissions of the assessee and the facts of the case. The panel does not find any merit in the argument sequent adjustment cannot be done for unless the entire production process of the web series is complete. The assessee contends that since the production of the web series was completed in the following year, benchmarking should be done by 10.3.2 This argument of the assessee is flawed. Suppose in a case, a series takes 5 years to complete, then will the benchmarking of the international transaction be done after 5 years and by combining the the 5 years ?! There is no such provision in the 10.3.4 Moreover, the assessee itself has undertaken transfer pricing study and benchmarked the transaction. Only when the TPO has s, the assessee Before us, learned counsel for the assessee submitted that the 9.43 crores incurred towards line production was capitalised in accordance with standard accounting principles, duction was claimed in the profit and loss account for the vious facts like AE operated at Nil margin, and no deduction was claimed the department, resulted in taxing hypothetical income, in violation of well-settled legal principles. assessee submitted that Department overlooked the assessee’s profitability analysis for financial year 2021 submitted that upon completion of the project margin was of 21.46% therefore, the Department’s adjustment based solely on financial year 2020-21 and incomplete incorrect as profitability analysis must reflect completed transaction. 7.4 On the other hand, the learned Departmental Representative contended that the arguments advanced by the assessee were misplaced in the context of transfer pricing law. The enquiry under Chapter X of the Act, it was submitted, is whether the international transaction with the associated enterprise was conducted at arm’s length, independent of the assessee’s method of accounting or revenue recognition. The DR transfer pricing is transactional in nature and cannot be rendered inapplicable merely because the assessee followed the project completion method or deferred revenue recognition. Moreover, it was argued that benchmarking must be carried out with r to the year in which the transaction occurred and cannot await the argin, the expenses capitalized by the assessee was claimed for such expenses, were ignored by resulted in taxing hypothetical income, in violation settled legal principles. Further, the Ld. counsel for the assessee submitted that Department overlooked the assessee’s profitability analysis for financial year 2021-22. submitted that upon completion of the project, the gross profit of 21.46%, which is within the TPO’s benchmark range, herefore, the Department’s adjustment based solely on financial incomplete data stands legally and fa as profitability analysis must reflect completed On the other hand, the learned Departmental Representative contended that the arguments advanced by the assessee were misplaced in the context of transfer pricing law. The enquiry under Chapter X of the Act, it was submitted, is whether the international transaction with the associated enterprise was conducted at arm’s length, independent of the assessee’s method of accounting or revenue recognition. The DR emphasiz transfer pricing is transactional in nature and cannot be rendered inapplicable merely because the assessee followed the project completion method or deferred revenue recognition. Moreover, it was argued that benchmarking must be carried out with r to the year in which the transaction occurred and cannot await the Friday Storytellers LLP 17 ITA No. 5546/MUM/2024 the expenses capitalized by the assessee for such expenses, were ignored by resulted in taxing hypothetical income, in violation Further, the Ld. counsel for the assessee submitted that Department overlooked the assessee’s It was further the gross profit ithin the TPO’s benchmark range, herefore, the Department’s adjustment based solely on financial stands legally and factually as profitability analysis must reflect completed On the other hand, the learned Departmental Representative contended that the arguments advanced by the assessee were misplaced in the context of transfer pricing law. The primary enquiry under Chapter X of the Act, it was submitted, is whether the international transaction with the associated enterprise was conducted at arm’s length, independent of the assessee’s method of emphasized that transfer pricing is transactional in nature and cannot be rendered inapplicable merely because the assessee followed the project completion method or deferred revenue recognition. Moreover, it was argued that benchmarking must be carried out with reference to the year in which the transaction occurred and cannot await the financial outcome of subsequent years. international transaction must be examined in the year, in which transaction occurred i.e. AY 2021 7.5 The DR further submitted that a detailed verification of the expenses incurred by the AE revealed serious deficiencies, including lack of proper supporting documentation such as invoice dates and bill numbers, especially in relation to hotel, food, and jun expenses. These, according to the Department, cast doubt on the verifiability and genuineness of the underlying transactions. 7.6 In rejoinder, learned counsel for the assessee submitted that all relevant supporting documentation and other evidence— transfer pricing proceedings. It was contended that the Department’s objections were based on identify any specific unverifiable expenditure. It was emphasized that the nature of the expenses accommodation, food, and artist fees production operations and formed a necessary component of the services rendered by the AE. 7.7 We have considered the rival submissions and carefully perused the record. Insofar as the objection raised by the learned DR regarding the alleged lack of verification of expenses is concerned, we find that this aspect has not been examined or financial outcome of subsequent years. The arm’s length of international transaction must be examined in the year, in which transaction occurred i.e. AY 2021-22 in the case. The DR further submitted that a detailed verification of the expenses incurred by the AE revealed serious deficiencies, including lack of proper supporting documentation such as invoice dates and bill numbers, especially in relation to hotel, food, and jun expenses. These, according to the Department, cast doubt on the verifiability and genuineness of the underlying transactions. In rejoinder, learned counsel for the assessee submitted that all relevant supporting documentation—including invoi —was furnished both during the assessment and transfer pricing proceedings. It was contended that the Department’s objections were based on generalizations identify any specific unverifiable expenditure. It was that the nature of the expenses—being for hotel accommodation, food, and artist fees—was typical of line production operations and formed a necessary component of the services rendered by the AE. We have considered the rival submissions and carefully perused the record. Insofar as the objection raised by the learned DR regarding the alleged lack of verification of expenses is concerned, we find that this aspect has not been examined or Friday Storytellers LLP 18 ITA No. 5546/MUM/2024 The arm’s length of international transaction must be examined in the year, in which The DR further submitted that a detailed verification of the expenses incurred by the AE revealed serious deficiencies, including lack of proper supporting documentation such as invoice dates and bill numbers, especially in relation to hotel, food, and junior artist expenses. These, according to the Department, cast doubt on the verifiability and genuineness of the underlying transactions. In rejoinder, learned counsel for the assessee submitted that including invoices, ledgers, was furnished both during the assessment and transfer pricing proceedings. It was contended that the generalizations and failed to identify any specific unverifiable expenditure. It was further being for hotel was typical of line production operations and formed a necessary component of the We have considered the rival submissions and carefully perused the record. Insofar as the objection raised by the learned DR regarding the alleged lack of verification of expenses is concerned, we find that this aspect has not been examined or commented upon by the Assessing Officer during the assessment proceedings. Under the statutory scheme, the role of the Transfer Pricing Officer is confined to the determination of the arm’s length price of international transactions. The question of the genuineness or allowability of expenses falls outside the domain of the TPO and is to be considered by the Assessing Officer during assessment. In the present case, no such adverse finding has been recorded by the Assessing Officer. Consequently, we find no merit in the the learned DR in this regard, and the same is rejected. 7.8 As regards the primary contention of the assessee that the expenditure was capitalized deduction, we are of the considered view that the applicability transfer pricing provisions does not hinge upon the assessee’s method of accounting method or the percentage completion method. What is relevant is that international transactions occurred in the year under consideration, and once so established, such transactions are subject to benchmarking as per the mandate of Chapter X. 7.9 In cases where the assessee follows the project completion method, any transfer pricing adjustment would typically result in a corresponding increase or decrease in the value of work progress, which would ultimately impact the computation of profits in the year in which the project is completed. Conversely, under the percentage completion method, profits are recognised in proportion on by the Assessing Officer during the assessment proceedings. Under the statutory scheme, the role of the Transfer Pricing Officer is confined to the determination of the arm’s length price of international transactions. The question of the genuineness allowability of expenses falls outside the domain of the TPO and is to be considered by the Assessing Officer during assessment. In the present case, no such adverse finding has been recorded by the Assessing Officer. Consequently, we find no merit in the the learned DR in this regard, and the same is rejected. As regards the primary contention of the assessee that the capitalized and therefore not claimed as a deduction, we are of the considered view that the applicability transfer pricing provisions does not hinge upon the assessee’s method of accounting—whether it adopts the project completion method or the percentage completion method. What is relevant is that international transactions occurred in the year under ideration, and once so established, such transactions are subject to benchmarking as per the mandate of Chapter X. In cases where the assessee follows the project completion method, any transfer pricing adjustment would typically result in a ing increase or decrease in the value of work progress, which would ultimately impact the computation of profits the project is completed. Conversely, under the percentage completion method, profits are recognised in proportion Friday Storytellers LLP 19 ITA No. 5546/MUM/2024 on by the Assessing Officer during the assessment proceedings. Under the statutory scheme, the role of the Transfer Pricing Officer is confined to the determination of the arm’s length price of international transactions. The question of the genuineness allowability of expenses falls outside the domain of the TPO and is to be considered by the Assessing Officer during assessment. In the present case, no such adverse finding has been recorded by the Assessing Officer. Consequently, we find no merit in the objection of the learned DR in this regard, and the same is rejected. As regards the primary contention of the assessee that the and therefore not claimed as a deduction, we are of the considered view that the applicability of transfer pricing provisions does not hinge upon the assessee’s whether it adopts the project completion method or the percentage completion method. What is relevant is that international transactions occurred in the year under ideration, and once so established, such transactions are subject to benchmarking as per the mandate of Chapter X. In cases where the assessee follows the project completion method, any transfer pricing adjustment would typically result in a ing increase or decrease in the value of work-in- progress, which would ultimately impact the computation of profits the project is completed. Conversely, under the percentage completion method, profits are recognised in proportion to the stage of completion, and adjustments are applied accordingly in each year based on the extent of revenue and expenses recognised. In the present case, the assessee appears to have recognised neither revenue nor profit for the year under consideration. However, having entered into a contractual arrangement for sale of the project and transferred the attendant risks and rewards, the assessee was under an obligation to compute profits based on the percentage of completion. This is consistent with the accoun Institute of Chartered Accountants of India and harmonises with the principles laid down under section 5 of the Act regarding accrual of income. The transfer pricing adjustment has to be made after comparison of true profit margin of comparable 7.10 We are further of the view that the assessee’s benchmarking of the international transaction requires reconsideration. assessee has applied cost plus method for benchmarking. Plus Method calculates an arm’s length price by adding an appropriate gross profit mark supplier in a controlled transaction. This mark functions performed, risks assumed, and assets used by the supplier. The gross profit margin of party who supply or exports the products or services are compared with gross profit margin of other comparables, but in the case, gross profit margin of the assessee he stage of completion, and adjustments are applied accordingly in each year based on the extent of revenue and expenses In the present case, the assessee appears to have recognised neither revenue nor profit for the year under owever, having entered into a contractual arrangement for sale of the project and transferred the attendant risks and rewards, the assessee was under an obligation to compute profits based on the percentage of completion. This is consistent with the accounting standards prescribed by the Institute of Chartered Accountants of India and harmonises with the principles laid down under section 5 of the Act regarding accrual of income. The transfer pricing adjustment has to be made after comparison of true profit margin of the assessee with median margin of comparables. We are further of the view that the assessee’s benchmarking of the international transaction requires reconsideration. assessee has applied cost plus method for benchmarking. s Method calculates an arm’s length price by adding an profit mark-up to the costs incurred by the supplier in a controlled transaction. This mark-up should reflect the functions performed, risks assumed, and assets used by the . The gross profit margin of party who supply or exports the products or services are compared with gross profit margin of other comparables, but in the case, gross profit margin of the assessee Friday Storytellers LLP 20 ITA No. 5546/MUM/2024 he stage of completion, and adjustments are applied accordingly in each year based on the extent of revenue and expenses In the present case, the assessee appears to have recognised neither revenue nor profit for the year under owever, having entered into a contractual arrangement for sale of the project and transferred the attendant risks and rewards, the assessee was under an obligation to compute profits based on the percentage of completion. This is ting standards prescribed by the Institute of Chartered Accountants of India and harmonises with the principles laid down under section 5 of the Act regarding accrual of income. The transfer pricing adjustment has to be made margin of the assessee with median We are further of the view that the assessee’s benchmarking of the international transaction requires reconsideration. The assessee has applied cost plus method for benchmarking. The Cost s Method calculates an arm’s length price by adding an up to the costs incurred by the up should reflect the functions performed, risks assumed, and assets used by the . The gross profit margin of party who supply or exports the products or services are compared with gross profit margin of other comparables, but in the case, gross profit margin of the assessee who is importer of services has been compared with parties en in providing similar services. Thus, w appropriately reflected into by the assessee with its AE vis reconsideration. 7.11 In light of the foregoing discussi incomplete evaluation by the lower authorities, we deem it appropriate to set aside the transfer pricing adjustment made by the Assessing Officer/TPO. The matter is remanded to the file of the TPO for de novo consideration in ac light of the observations contained herein. 7.12 The ground no. 3 of the appeal is accordingly allowed for statistical purposes. Since, we allowed the ground no. 3 for statistical purposes, our findings on other grounds is ren merely academic. 8. In the result, the appeal of the assessee is allowed statistical purposes. Order pronounced under Rule 34(4) of the ITAT Rules, 1963 by way of placing result on notice board on Sd/ (RAHUL CHAUDHARY JUDICIAL MEMBER Mumbai; who is importer of services has been compared with parties en in providing similar services. Thus, whether this method appropriately reflected the comparability of the transaction entered into by the assessee with its AE vis-à-vis other methods, need In light of the foregoing discussion and having regard to the incomplete evaluation by the lower authorities, we deem it appropriate to set aside the transfer pricing adjustment made by the Assessing Officer/TPO. The matter is remanded to the file of the TPO for de novo consideration in accordance with law and in the light of the observations contained herein. The ground no. 3 of the appeal is accordingly allowed for statistical purposes. Since, we allowed the ground no. 3 for statistical purposes, our findings on other grounds is ren In the result, the appeal of the assessee is allowed Order pronounced under Rule 34(4) of the ITAT Rules, 1963 by way of placing result on notice board on Sd/- Sd/ (RAHUL CHAUDHARY) (OM PRAKASH JUDICIAL MEMBER ACCOUNTANT MEMBER Friday Storytellers LLP 21 ITA No. 5546/MUM/2024 who is importer of services has been compared with parties engaged hether this method has the comparability of the transaction entered vis other methods, need on and having regard to the incomplete evaluation by the lower authorities, we deem it appropriate to set aside the transfer pricing adjustment made by the Assessing Officer/TPO. The matter is remanded to the file of the cordance with law and in the The ground no. 3 of the appeal is accordingly allowed for statistical purposes. Since, we allowed the ground no. 3 for statistical purposes, our findings on other grounds is rendered In the result, the appeal of the assessee is allowed for Order pronounced under Rule 34(4) of the ITAT Rules, 1963 by way of placing result on notice board on 30.05.2025. Sd/- OM PRAKASH KANT) ACCOUNTANT MEMBER Dated: 30/05/2025 Rahul Sharma, Sr. P.S. Copy of the Order forwarded to 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// Copy of the Order forwarded to : BY ORDER, (Assistant Registrar) ITAT, Mumbai Friday Storytellers LLP 22 ITA No. 5546/MUM/2024 BY ORDER, (Assistant Registrar) ITAT, Mumbai "
Other Referred Cases
-
Laws Referred To
Income Tax Act, 1961
1:1 Consultation on Startup Compliance
₹1
1:1 Consultation on Business Valuations
₹1
1:1 Consultation on Salary Structuring
₹1
Social Media Brand Kit
₹100
Rectification Letter - Application for rectification of mistake under Section 154 of I.T. Act
Mehul₹0
Minimum Alternate Tax (MAT): Comprehensive Overview and Key Changes under Finance Bill, 2026
Team Counselvise - February 06, 2026
Residency Rules: Income Tax Act, 1961 vs Income Tax Bill, 2025 — A Subtle Yet Significant Shift!
Team Counselvise - February 18, 2026
Budget 2026: 5 Major Personal Tax Changes Every Taxpayer Must Know
Team Counselvise - February 05, 2026