Prana Studios P.Ltd, Mumbai vs Assessee

Assessee by Ms. Karishma R. Phatarphekar, Shri Harsh : Shah & Shri Pratik Poddar Revenue by : Shri S.D. Srivastava Date of hearing : 06.01.2015 Date of Order : 16 .01.2015 ITA No. 2077/Mum/2014 2 C.O. No. 101/Mum/2014 M/s. Prana Studios Pvt. Ltd. Assessment Year: 2009-10

ORDER

PER AMIT SHUKLA, JM:

This appeal has been preferred by the Revenue against order/direction dated 01.11.2013, passed by the Dispute Resolution Panel (DRP)-II, Mumbai, U/S 144 C (5) giving direction 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. KALS Information Systems Ltd. from the set of comparables adopted by TPO without appreciating the factual and legal matrix as brought out by the Transfer Pricing Officer (TPO) in the order dated 19.11.2012 under section 92A(3) of the Income-tax Act, 1961."

2. The facts in brief are that, assessee company is engaged in the business of creating and providing 3D animation software contents as a captive service provider to its associate enterprise (AE), Prana Holdings Inc., USA. During the relevant previous year the assessee has entered into following international transaction with the PLI of 14.49%:-

S.N. Nature of Amount (Rs.) AY Method used OP/TC Transaction 2008-09 1 Provision of 3D 731,504,989 TNMM 14.49% animation content

In the TP study report, the assessee has benched mark its margin on the basis of following comparables:-

ITA No. 2077/Mum/2014 3 C.O. No. 101/Mum/2014 M/s. Prana Studios Pvt. Ltd.

Assessment Year: 2009-10

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 10.00% Mark Up)

Thus it was stated that, assessee's margin are at arm's 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 adjustment in the arm's length price. The list of final comparables selected 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 4 C.O. No. 101/Mum/2014 M/s. Prana Studios Pvt. Ltd.

Assessment Year: 2009-10

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.63,89,24,787/- 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 appeal is, whether M/s. Kals Information System Ltd. should be excluded from 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 animation 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 Information System Ltd. is ITA No. 2077/Mum/2014 5 C.O. No. 101/Mum/2014 M/s. Prana Studios Pvt. Ltd.

Assessment Year: 2009-10

excluded on this ground that it is purely into software 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 list 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 profile of Kals Information System Ltd. and also considering the decision of ITAT in the case of Triology E-business, held that the said company 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 software products and not into software services. Hon'ble ITAT, in the case of Trilogy E-business, at para 47 have held as follows: "we also find that in the decision referred to by the Ld. Counsel for the assessee, the Mumbai bench of ITAT has held that this 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 comparable",

6.3 With these directions, it is apparent that KALS Information Systems Ltd. is not a comparable company and the same needs to be excluded from the set of comparables. It is further seen that with the exclusion of KALS, the assessee's margin comes within +/- 5%-of the margin of comparables in terms of second proviso to Sec. 92C(2) of I.T. Act, 1961. Accordingly, the AO is directed to delete the proposed adjustment. All other arguments of the Ld. AR becomes academic in view of the substantial relief granted and therefore they are not adjudicated upon.

ITA No. 2077/Mum/2014 6 C.O. No. 101/Mum/2014 M/s. Prana Studios Pvt. Ltd.

Assessment Year: 2009-10

Since, after exclusion of Kals, assessee's margin was within the range of +/- 5%, the Ld. DRP held that all other arguments of the assessee with regard other comparables have become purely academic.

6. Before us the Ld. DR submitted that even though assessee is producing 3D animation software, which is nothing but development of computer software and the assessee itself has described itself as being engaged in computer software industry. The Kals Information System Ltd. is also engaged in software development and products and hence, it is functionally similar to the assessee's profile therefore, it has rightly been included as comparable for bench marking the assessee's margin.

7. On the other hand learned counsel for the assessee, Ms. Karishma R. Phatarphekar, submitted that exclusion of Kals Information System Ltd. from other software companies due to its functional peculiarity which is purely development of software products, has been upheld by various decisions of the Tribunal as noted by the DRP. Further in the case of PTC Software (India) Pvt. Ltd., ITAT Pune Bench has held that it cannot be taken as a comparable to the software service 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 perused 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 purely software services in the context of 3D animation to it's A.E. The sole dispute before us is, whether Kals Information System Ltd. should be taken as a comparable or not for the purpose of comparability analysis and bench making of the ITA No. 2077/Mum/2014 7 C.O. No. 101/Mum/2014 M/s. Prana Studios Pvt. Ltd.

Assessment Year: 2009-10

margin. From the perusal of the objections filed by the assessee before the DRP, as well as annual report of Kals, it is seen that the said company is engaged into development of software and software products and also running a training centre for training of software professionals. The said company offers variety of software products in the area of web solutions, e-commerce, software consultants, content management ERP applications etc. It's functional profile is quite different from the assessee company, which is purely providing software services in the field of 3D animation. Thus, it cannot be held to be a comparable company for the purpose of bench marking the assessee's margin or caring out any comparability analysis. The ITAT Pune Bench in the case of PTC Software (I) Pvt. Ltd. Vs. DCIT (2014) 52 Taxman.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 companies providing software services. Similarly, in view of series of other decisions of the Tribunal as noted by the DRP, Kals cannot be held to be comparable company for bench marking with the companies providing software services. Thus, the order of the DRP as noted above is upheld. Accordingly, the ground raised by the Revenue is dismissed.

C.O. No. 101/Mum/2014 for Assessment Year: 2009-10

9. In the Cross Objection the assessee has raised following ground:-

"On the facts and in the circumstances of the case and in law, the learned Additional Commissioner of Income Tax, Transfer Pricing II-(2), ("TPO") and the learned Income Tax Officer 7(1)(4) ("AO") under directions issued by the Hon'ble Dispute Resolution Panel ("DRP") erred in considering functionally dissimilar companies as comparable companies for determining arm's length price of international transactions of the Respondent."

ITA No. 2077/Mum/2014 8 C.O. No. 101/Mum/2014 M/s. Prana Studios Pvt. Ltd.

Assessment Year: 2009-10

Since, after the exclusion of Kals Information System 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 is required to be made. Thus, the ground raised by the assessee in the cross objection becomes purely academic and the same is not adjudicated upon. Accordingly, Cross Objection raised by the assessee 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 16th 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.