FRIDAY STORYTELLERS LLP,MUMBAI vs. ITO, WARD, 4(2)(1), MUMBAI

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:

3. In the facts and circumstances of the case and in law, Id. 3. In the facts and circumstances of the case and in law, Id. 3. In the facts and circumstances of the case and in law, Id. DRP and Id. AO have erred in not considering the factual DRP and Id. AO have erred in not considering the factual DRP and Id. AO have erred in not considering the factual position that the Associated Enterprise (AE), with whom position that the Associated Enterprise (AE), with whom position that the Associated Enterprise (AE), with whom expenses were incurred did not earn any profit a expenses were incurred did not earn any profit and that all the nd that all the profits remained with the assessee. profits remained with the assessee. 4. In the facts and circumstances of the case and in law, Id. 4. In the facts and circumstances of the case and in law, Id. 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 DRP and Id. AO have erred in failing to appreciate the factual DRP and Id. AO have erred in failing to appreciate the factual position that, in the subsequent year, i.e., Previous Year 2021 position that, in the subsequent year, i.e., Previous Year 2021 position that, in the subsequent year, i.e., Previous Year 2021- 22, when the re 22, when the revenue had actually been earned/recognised, venue had actually been earned/recognised, profit, as reported by the assessee firm, fell within the Arm's profit, as reported by the assessee firm, fell within the Arm's profit, as reported by the assessee firm, fell within the Arm's Length Range in relation to the comparable entities selected by Length Range in relation to the comparable entities selected by Length Range in relation to the comparable entities selected by the assessee. the assessee. 5. In the facts and circumstances of the case and in law, Id. 5. In the facts and circumstances of the case and in law, Id. 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 d. AO/Id. TPO have erred in rejecting the comparable d. AO/Id. TPO have erred in rejecting the comparable companies considered by the assessee, without any cogent companies considered by the assessee, without any cogent companies considered by the assessee, without any cogent basis. It is respectfully submitted that the rejection of the basis. It is respectfully submitted that the rejection of the basis. It is respectfully submitted that the rejection of the comparable companies is unjustified and contrary to the comparable companies is unjustified and contrary to the comparable companies is unjustified and contrary to the facts of the case. 2. Briefly stated, facts of the case are that y stated, facts of the case are that the assessee, a Limited the assessee, a Limited Liability Partnership (LLP), was constituted on 11.04.2019 by way Liability Partnership (LLP), was constituted on 11.04.2019 by way Liability Partnership (LLP), was constituted on 11.04.2019 by way of conversion of an erstwhile company, namely M/s Friday Movies of conversion of an erstwhile company, namely M/s Friday Movies of conversion of an erstwhile company, namely M/s Friday Movies and TV Pvt. Ltd. The assessee is engaged in the business of creation and TV Pvt. Ltd. The assessee is engaged in the business of creat and TV Pvt. Ltd. The assessee is engaged in the business of creat and production of digital content, with a specialization in web series and production of digital content, with a specialization in web series and production of digital content, with a specialization in web series intended for exploitation on Over intended for exploitation on Over-The-Top (OTT) platforms. Its Top (OTT) platforms. Its principal source of revenue comprises proceeds from the sale of principal source of revenue comprises proceeds from the sale of principal source of revenue comprises proceeds from the sale of digital content, copyrights, and other ancillary rights. In the digital content, copyrights, and other ancillary right digital content, copyrights, and other ancillary right preceding years, the assessee had undertaken the production of preceding years, the assessee had undertaken the production of preceding years, the assessee had undertaken the production of various digital works, including the web series “Special Ops – various digital works, including the web series “Special Ops various digital works, including the web series “Special Ops Season 1”, “Ancient Warriors of India” (for Discovery Channel), and Season 1”, “Ancient Warriors of India” (for Discovery Channel), and Season 1”, “Ancient Warriors of India” (for Discovery Channel), and two short films titled “Wrong Number” and “Ouch 2”.During the two short films titled “Wrong Number” and “Ouch 2”.D two short films titled “Wrong Number” and “Ouch 2”.D financial year relevant to the assessment year under consideration, financial year relevant to the assessment year under consideration, financial year relevant to the assessment year under consideration, the assessee undertook the production of a sequel web series titled the assessee undertook the production of a sequel web series titled the assessee undertook the production of a sequel web series titled “Special Ops 1.5”. In connection therewith, the assessee entered “Special Ops 1.5”. In connection therewith, the assessee entered “Special Ops 1.5”. In connection therewith, the assessee entered into an agreement dated 27.07.2020 with M/s Novi Digital into an agreement dated 27.07.2020 with M/s into an agreement dated 27.07.2020 with M/s Entertainment Pvt. Ltd. (popularly known as 'Hotstar'), for a fixed Entertainment Pvt. Ltd. (popularly known as 'Hotstar'), for a fixed Entertainment Pvt. Ltd. (popularly known as 'Hotstar'), for a fixed consideration of ₹35,00,00,000/ 35,00,00,000/-, which was subsequently revised , which was subsequently revised to ₹36,00,00,000/- pursuant to a supplemental agreement dated pursuant to a supplemental agreement dated pursuant to a supplemental agreement dated 27.11.2020. In order to avail benefits under the 27.11.2020. In order to avail benefits under the subsidy scheme subsidy scheme offered by the Government of Mauritius, the assessee caused the offered by the Government of Mauritius, the assessee caused the offered by the Government of Mauritius, the assessee caused the incorporation of a separate entity in Mauritius, namely M/s Friday incorporation of a separate entity in Mauritius, namely M/s Friday incorporation of a separate entity in Mauritius, namely M/s Friday Storytellers Ltd. (hereinafter referred to as “Friday Ltd.”). This entity Storytellers Ltd. (hereinafter referred to as “Friday Ltd.”). This entity Storytellers Ltd. (hereinafter referred to as “Friday Ltd.”). This entity was engaged for the purpose of unde was engaged for the purpose of undertaking line production rtaking line production activities associated with the said web series, particularly for activities associated with the said web series, particularly for activities associated with the said web series, particularly for portions of the shoot conducted in Mauritius. Accordingly, Friday portions of the shoot conducted in Mauritius. Accordingly, Friday portions of the shoot conducted in Mauritius. Accordingly, Friday Ltd. provided line production services for the shooting of specific Ltd. provided line production services for the shooting of specific Ltd. provided line production services for the shooting of specific scenes of “Special Ops 1.5” under scenes of “Special Ops 1.5” undertaken in Mauritius. taken in Mauritius.

2.1 For the assessment year under consideration, the assessee For the assessment year under consideration, the assessee For the assessment year under consideration, the assessee filed its return of income on 30.01.2020, declaring a total income of filed its return of income on 30.01.2020, declaring a total income of 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 . The said return was selected for scrutiny under the . The said return was selected for scrutiny under the provisions of the Income provisions of the Income-tax Act, 1961 (“the Act”), and accordingly, (“the Act”), and accordingly, statutory notices were issued. The assessee furnished partial statutory notices were issued. The assessee furnished partial statutory notices were issued. The assessee furnished partial responses thereto. In view of an international transaction involving In view of an international transaction involving In view of an international transaction involving 'Line Production Services' availed from its Associated Enterprise 'Line Production Services' availed from its Associated Enterprise 'Line Production Services' availed from its Associated Enterprise (AE), namely M/s Friday Stor (AE), namely M/s Friday Storytellers Ltd. (“Friday Ltd.”), the ytellers Ltd. (“Friday Ltd.”), the Assessing Officer made a reference under section 92CA(1) of the Act Assessing Officer made a reference under section 92CA(1) of the Act Assessing Officer made a reference under section 92CA(1) of the Act to the learned Transfer Pricing Officer (TPO) for determination of the to the learned Transfer Pricing Officer (TPO) for determination of the to the learned Transfer Pricing Officer (TPO) for determination of the arm’s length price of the said transaction. The learned TPO, after arm’s length price of the said transaction. The learned TPO, after examining the transfer pricing documentation furnished by the ransfer pricing documentation furnished by the ransfer pricing documentation furnished by the assessee and considering the submissions made during the course assessee and considering the submissions made during the course assessee and considering the submissions made during the course of proceedings, proposed a downward adjustment of ₹2,09,75,436/- of proceedings, proposed a downward adjustment of of proceedings, proposed a downward adjustment of to the value of the international transaction. The Assessing Officer, to the value of the international transaction. The Assessing Officer, to the value of the international transaction. The Assessing Officer, accordingly, incorporated the said adjustment in the draft y, incorporated the said adjustment in the draft y, incorporated the said adjustment in the draft assessment order dated 17.11.2023. Aggrieved by the proposed assessment order dated 17.11.2023. Aggrieved by the proposed adjustment, the assessee filed objections before the learned Dispute adjustment, the assessee filed objections before the learned Dispute adjustment, the assessee filed objections before the learned Dispute Resolution Panel (DRP). The learned DRP, after considering the Resolution Panel (DRP). The learned DRP, after considering the Resolution Panel (DRP). The learned DRP, after considering the matter, issued directions under section 144C(5) of the Act, directions under section 144C(5) of the Act, directions under section 144C(5) of the Act, upholding the transfer pricing adjustment proposed by the TPO. upholding the transfer pricing adjustment proposed by the TPO. upholding the transfer pricing adjustment proposed by the TPO. Pursuant thereto, the Assessing Officer passed the impugned final Pursuant thereto, the Assessing Officer passed the impugned final Pursuant thereto, the Assessing Officer passed the impugned final assessment order. Aggrieved by the said final assessment order, the Aggrieved by the said final assessment order, the Aggrieved by the said final assessment order, the assessee is in appeal before this Tribunal, raising the grounds as n appeal before this Tribunal, raising the grounds as n appeal before this Tribunal, raising the grounds as reproduced hereinabove. reproduced hereinabove.

4.1 Upon consideration of the submissions made by both parties, Upon consideration of the submissions made by both parties, Upon consideration of the submissions made by both parties, the controversy in the present appeal primarily revolves around the controversy in the present appeal primarily revolve the controversy in the present appeal primarily revolve three issues: firstly firstly, the rejection of two comparables by the , the rejection of two comparables by the learned TPO; secondly secondly, the contention that the Associated , the contention that the Associated Enterprise (AE) had charged the assessee on a cost-to-cost basis Enterprise (AE) had charged the assessee on a cost Enterprise (AE) had charged the assessee on a cost without any mark-up, thereby rendering any transfer pricing up, thereby rendering any transfer pricing up, thereby rendering any transfer pricing djustment unwarranted and thirdly, the propriety of making a adjustment unwarranted the propriety of making a transfer pricing adjustment despite the fact that the expenditure transfer pricing adjustment despite the fact that the expenditure transfer pricing adjustment despite the fact that the expenditure incurred for line production was incurred for line production was capitalized as work capitalized as work-in-progress. These issues are addressed and adjudicated in seriatim as under. These issues are addressed and adjudicated in seriatim as under. These issues are addressed and adjudicated in seriatim as under.

5.1 The brief facts relevant to this issue The brief facts relevant to this issue, as submitted by the , as submitted by the assessee are that t that the Associated Enterprise (AE), M/s Friday he Associated Enterprise (AE), M/s Friday Storytellers Ltd., Mauritius (“Friday Ltd.”), was incorporated as a Storytellers Ltd., Mauritius (“Friday Ltd.”), was incorporated as a Storytellers Ltd., Mauritius (“Friday Ltd.”), was incorporated as a Special Purpose Veh Special Purpose Vehicle (SPV) with limited objective of incurring icle (SPV) with limited objective of incurring production-related costs and availing subsidy benefits under the related costs and availing subsidy benefits under the related costs and availing subsidy benefits under the applicable laws of Mauritius. It is the claim of the assessee that the applicable laws of Mauritius. It is the claim of the assessee that 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 subsidy so received by the SPV was eventually remitted to India by subsidy so received by the SPV was eventually remitted to India by way of cost reduction, thereby benefiting the assessee in the overall cost reduction, thereby benefiting the assessee in the overall cost reduction, thereby benefiting the assessee in the overall production cost of the web series production cost of the web series “Special Ops 1.5”. The assessee is . The assessee is engaged in procuring content production services from its AE and engaged in procuring content production services from its AE and engaged in procuring content production services from its AE and monetising the completed content through licensing agreements monetising the completed content through licensing agreeme monetising the completed content through licensing agreeme with digital platforms. with digital platforms.

5.2 It is further submitted that It is further submitted that ‘Friday Ltd’. was entrusted with . was entrusted with the responsibility of controlling, supervising, facilitating, and the responsibility of controlling, supervising, facilitating, and the responsibility of controlling, supervising, facilitating, and completing the production activities carried out in Mauritius. In its completing the production activities carried out in Mauritius. In its completing the production activities carried out in Mauritius. In its transfer pricing study, th transfer pricing study, the assessee conducted a functional analysis e assessee conducted a functional analysis based on the functions performed, assets employed, and risks based on the functions performed, assets employed, and risks based on the functions performed, assets employed, and risks assumed (FAR analysis), and determined that the most appropriate assumed (FAR analysis), and determined that the most appropriate assumed (FAR analysis), and determined that the most appropriate method for benchmarking the international transaction was the method for benchmarking the international transaction was the method for benchmarking the international transaction was the Cost Plus Method (CPM). U Cost Plus Method (CPM). Under the CPM, the assessee adopted the nder the CPM, the assessee adopted the Profit Level Indicator (PLI) Profit Level Indicator (PLI) as gross profit to sales (GP/Sales) and gross profit to sales (GP/Sales) and identified comparable Indian companies engaged in broadly similar identified comparable Indian companies engaged in broadly similar identified comparable Indian companies engaged in broadly similar line production activities. line production activities.

5.3 On this basis, the assessee undertook a three On this basis, the assessee undertook a three On this basis, the assessee undertook a three-year weighted average analysis of gross profit margins earned by such average analysis of gross profit margins earned by such average analysis of gross profit margins earned by such comparables, which yielded a range between 13.40% and 55.47%, comparables, which yielded a range between 13.40% and 55.47%, comparables, which yielded a range between 13.40% and 55.47%, with the 35th percentile at 1.05%, the 65th percentile at 26.37%, with the 35th percentile at 1.05%, the 65th percentile at 26.37%, 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 of 20.86%. The assessee’s margin for the year under of 20.86%. The assessee’s margin for the year under consideration was computed at 15.78%, which, according to the consideration was computed at 15.78%, which, according to the consideration was computed at 15.78%, which, according to the assessee, fell within the safe assessee, fell within the safe harbor range of ±5%, thereby range of ±5%, thereby demonstrating that the transaction with the AE was at arm’s demonstrating that the transaction with the AE was at arm’s demonstrating that the transaction with the AE was at arm’s length. The computati The computation of gross profit margin of the assessee on of gross profit margin of the assessee submitted by the assessee and reproduced by the Ld. TPO is submitted by the assessee and reproduced by the Ld. TPO is submitted by the assessee and reproduced by the Ld. TPO is reproduced as under: reproduced as under:

Particulars Amount in INR Amount in INR Amount in INR Sales (A) 36,00,00,000 36,00,00,000 Less : Cost of Goods Sold (B) Less : Cost of Goods Sold (B) (-) Actual Cost incurred during ) Actual Cost incurred during F.Y. 10,75,80,436 2020-21 (-) Estimated Cost (to be incurred in F.Y. ) Estimated Cost (to be incurred in F.Y. 19,55,99,000 30,31,79,436 30,31,79,436 2021-22 till the completion of series 22 till the completion of series – Special Ops 1.5) Gross Profit (C=A-B) 5,68,20,564 5,68,20,564 Gross Profit Ratio (D=C/A) Gross Profit Ratio (D=C/A) 15.78% 15.78% 5.4 The learned TPO, however, observed that two of the The learned TPO, however, observed that two of the The learned TPO, however, observed that two of the comparables relied upon by the assessee, namely Line Production comparables relied upon by the assessee, namely comparables relied upon by the assessee, namely Pvt. Ltd. and GV Films Ltd. GV Films Ltd., were not suitable in terms of the , were not suitable in terms of the provisions of Chapter X of the Act. With respect to Line Production provisions of Chapter X of the Act. With respect to provisions of Chapter X of the Act. With respect to Pvt. Ltd., it was noted that the company had incurred consistent , it was noted that the company had incurred consistent , it was noted that the company had incurred consistent losses for two preceding years, and financial data for the relevant losses for two preceding years, and financial data for the relevant losses for two preceding years, and financial data for the relevant year was not available. In the case of year was not available. In the case of GV Films Ltd. GV Films Ltd., the TPO observed that the company had no sales revenue during the observed that the company had no sales revenue during the observed that the company had no sales revenue during the relevant year, and its reported income comprised only of treasury r, and its reported income comprised only of treasury r, and its reported income comprised only of treasury income and prior period receipts. Consequently, a show cause income and prior period receipts. Consequently, a show cause income and prior period receipts. Consequently, a show cause notice was issued to the assessee calling upon it to justify the notice was issued to the assessee calling upon it to justify the notice was issued to the assessee calling upon it to justify the continued inclusion of these comparables. However, no response continued inclusion of these comparables. However, no response continued inclusion of these comparables. However, no response was received from the assessee despite issuance of reminders. from the assessee despite issuance of reminders. from the assessee despite issuance of reminders. In the absence of any justification from the assessee, the learned TPO the absence of any justification from the assessee, the learned TPO the absence of any justification from the assessee, the learned TPO proceeded to exclude the two entities and recomputed the median proceeded to exclude the two entities and recomputed the median proceeded to exclude the two entities and recomputed the median margin of the remaining nine comparables relied upon by the margin of the remaining nine comparables relied upon by the margin of the remaining nine comparables relied upon by the assessee, arriving at a revised median of 21.61%. riving at a revised median of 21.61%. riving at a revised median of 21.61%. The relevant computation of the median margin of 21.61% of the comparables computation of the median margin of 21.61% of the comparables computation of the median margin of 21.61% of the comparables and computation of the transfer pricing adjustment is reproduced and computation of the transfer pricing adjustment is reproduced and computation of the transfer pricing adjustment is reproduced as under:

“On rejection of the said two comparable companies, the following 9 On rejection of the said two comparable companies, the following 9 On rejection of the said two comparable companies, the following 9 companies, selected by you in your TPSR, has been considered as companies, selected by you in your TPSR, has been considered as companies, selected by you in your TPSR, has been considered as comparable for benchmarking analysis: comparable for benchmarking analysis:- Sr. No. Name of comparable company Name of comparable company OP/OC determined OP/OC determined by you 1. Baba Arts Ltd. Baba Arts Ltd. 0.61% 2. Film Farm India Pvt. Ltd. Film Farm India Pvt. Ltd. 1.05% 3. Shemaroo Entertainment Ltd. Shemaroo Entertainment Ltd. 20.41% 4. 2D Entertainment Pvt. Ltd. 2D Entertainment Pvt. Ltd. 20.86% 20.86% 5. Balaji Telefilms Ltd. Balaji Telefilms Ltd. 21.61% 26.37% 26.37% 6. Prasad Media Corpn. Pvt. Ltd. Prasad Media Corpn. Pvt. Ltd.

7. V R Films & Studio Ltd. V R Films & Studio Ltd. 33.67% 8. Zee Entertainment Enterprises Ltd. Zee Entertainment Enterprises Ltd. 38.89% 9. Junglee Pictures Ltd. Junglee Pictures Ltd. 55.47%

The 9 comparables of The 9 comparables of the assessee have the said inter quartile the assessee have the said inter quartile range 20.86% to 26.37% with median as 21.61%. range 20.86% to 26.37% with median as 21.61%. 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 The OP/OC of the assessee company is 15.78% as given in the Appendix 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 : 5 of its submission dated 6.03.2023 said calculation : Particulars Amount in Rs. Sales 36,00,00,000 Less : COGS 30,31,79,436 Gross Profit 5,68,20,564 GP/Sales 15.78% Thus, the ALP of the said transaction is determined as follows: Thus, the ALP of the said transaction is determined as follows: Thus, the ALP of the said transaction is determined as follows: A Sales Sales 36,00,00,000 36,00,00,000 B Gross Profit Gross Profit 5,68,20,564 5,68,20,564 C=B/A GP/Sales GP/Sales 15.78% 15.78% D ALP GP/Sales ALP GP/Sales 21.61% 21.61% F=B*A ALP GP ALP GP 7,77,96,000 7,77,96,000 G=A-F ALP COGS ALP COGS 28,22,04,000 28,22,04,000 H Assessee’s COGS Assessee’s COGS 30,31,79,436 30,31,79,436 I Adjustment on line Production charges Adjustment on line Production charges 2,90,75,436 2,90,75,436 ”

5.5 In proceedings before the learned Dispute Resolution Panel In proceedings before the learned Dispute Resolution Panel In proceedings before the learned Dispute Resolution Panel (DRP), the assessee contended that in the case of Line Production (DRP), the assessee contended that in the case of (DRP), the assessee contended that in the case of Pvt. Ltd., although current year data was unavailable, financial data , although current year data was unavailable, financial data , although current year data was unavailable, financial data for the two preceding years was accessible and could be relied for the two preceding years was accessible and could be relied for the two preceding years was accessible and could be relied upon. The learned DRP, however, rejected the contention of the upon. The learned DRP, however, rejected the contention of the upon. The learned DRP, however, rejected the contention of the assessee and sustained the exclusion of both comparables by a assessee and sustained the exclusion of both comparables assessee and sustained the exclusion of both comparables detailed order recorded at Paragraphs 7.3 to 7.3.10 of its directions. detailed order recorded at Paragraphs 7.3 to 7.3.10 of its directions 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 Before us, learned counsel for the assessee reiterated the Before us, learned counsel for the assessee reiterated the submissions made before the DRP. The learned Departmental submissions made before the DRP. The learned Departmental submissions made before the DRP. The learned Departmental Representative (DR), on the other hand, supported the , on the other hand, supported the findings , on the other hand, supported the recorded by the lower authorities. recorded by the lower authorities..

5.7 We have considered the rival submissions and perused the We have considered the rival submissions and perused the We have considered the rival submissions and perused the material available on record. We find that the learned TPO has, in material available on record. We find that the learned TPO has, in material available on record. We find that the learned TPO has, in principle, accepted the assessee’s choice of the most appropriate principle, accepted the assessee’s choice of the most appropriate principle, accepted the assessee’s choice of the most appropriate method as well as the set of comparables, save and except the two s the set of comparables, save and except the two s the set of comparables, save and except the two entities under challenge. The assessee, admittedly, failed to provide entities under challenge. The assessee, admittedly, failed to provide entities under challenge. The assessee, admittedly, failed to provide current year data in respect of current year data in respect of Line Production Pvt. Ltd. Line Production Pvt. Ltd. in its transfer pricing documentation. In our considered view, where the transfer pricing documentation. In our considered view, where the transfer pricing documentation. In our considered view, where the results of the tested party pertain to the relevant financial year, it is ts of the tested party pertain to the relevant financial year, it is ts of the tested party pertain to the relevant financial year, it is necessary, for a meaningful comparison, that data for the same necessary, for a meaningful comparison, that data for the same necessary, for a meaningful comparison, that data for the same year be available in respect of the comparables. year be available in respect of the comparables. Gross p Gross profitability margin may vary significantly over time, and hence, rel vary significantly over time, and hence, rel vary significantly over time, and hence, reliance on data of earlier years earlier years would not constitute a reliable benchmark. would not constitute a reliable benchmark. Similarly, we find that Similarly, we find that GV Films Ltd. did not report any revenue did not report any revenue from operations during the relevant year, and its income was from operations during the relevant year, and its income was from operations during the relevant year, and its income was confined to non-operating sources, rendering it function operating sources, rendering it functionally operating sources, rendering it function incomparable to the assessee. The lower authorities are therefore, incomparable to the assessee. The lower authorities incomparable to the assessee. The lower authorities justified in excluding both comparables from the final set. justified in excluding both comparables from the final set. justified in excluding both comparables from the final set.

5.8 In view of the foregoing, we find no infirmity in the directions In view of the foregoing, we find no infirmity in the directions 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 issued by the learned DRP in this regard. The findings issued by the learned DRP in this regard. The findings on this issue are affirmed. on this issue are affirmed.

“8.3 Discussion and Directions of the DRP: 8.3 Discussion and Directions of the DRP: 8.3.1 The assessee contends that there is no shifting of profit from India 8.3.1 The assessee contends that there is no shifting of profit from India 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 and there is no tax avoidance. The assessee further submits and there is no tax avoidance. The assessee further submits that Friday Ltd is only a special purpose vehicle whose endeavour is that Friday Ltd is only a special purpose vehicle whose endeavour is 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 purely to incur local costs at NIL margin and apply for subsidy as per 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 Film Rebate Scheme in Mauritius which shall reduce the c Film Rebate Scheme in Mauritius which shall reduce the c production. Even the subsidy received by the SPV from Mauritius production. Even the subsidy received by the SPV from Mauritius production. Even the subsidy received by the SPV from Mauritius Government is transferred to FST LLP, which results in reduction in cost Government is transferred to FST LLP, which results in reduction in cost 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, of series production. If FST LLP would have produced the series in India, of series production. If FST LLP would have produced the series in India, then also the cost of production would then also the cost of production would have been higher than that have been higher than that incurred by Friday Ltd. for the same which would have ultimately incurred by Friday Ltd. for the same which would have ultimately incurred by Friday Ltd. for the same which would have ultimately resulted in lower profits. resulted in lower profits. 8.3.2 The panel has considered the submissions of the assessee and the 8.3.2 The panel has considered the submissions of the assessee and the 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 facts of the case. The assessee and the Mauritian entity Friday L facts of the case. The assessee and the Mauritian entity Friday L associated enterprises which have undertaken international transactions. associated enterprises which have undertaken international transactions. associated enterprises which have undertaken international transactions. As per Section 92 of the Income Tax Act As per Section 92 of the Income Tax Act Any income arising from international transaction shall be computed Any income arising from international transaction shall be computed Any income arising from international transaction shall be computed having regard to the arm's length price " having regard to the arm's length price " 8.3.3 For determination For determination of the arm's length price, various methods have of the arm's length price, various methods have been prescribed as per section 92C of the Act. Also various rules have been prescribed as per section 92C of the Act. Also various rules have been prescribed as per section 92C of the Act. Also various rules have been prescribed for computation of the arm's length price. 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 The contention of the assessee that there was no intention to shift The contention of the assessee that there was no intention to shift any profit has to be proved through rigorous methods prescribed that the profit has to be proved through rigorous methods prescribed that the profit has to be proved through rigorous methods prescribed that the transaction was at arm's length. transaction was at arm's length. 8.3.5 In view of the above, we do not find any infirmity in the 8.3.5 In view of the above, we do not find any infirmity in 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 action of the TPO in benchmarking the international transaction action of the TPO in benchmarking the international transaction using Cost Plus Method. using Cost Plus Method. Hence, this ground of objection of the Hence, this ground of objection of the assessee is rejected rejected.” 6.1 Before us, the learned counsel for the assessee reiterated that Before us, the learned counsel for the assessee reiterated that Before us, the learned counsel for the assessee reiterated that the AE, namely M/s Friday Ltd., Mauritius, acted solely as a cost- the AE, namely M/s Friday Ltd., Mauritius, acted solely as a cost 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 through entity. It was submitted that the AE did not re through entity. It was submitted that the AE did not retain any profits and operated strictly under a cost any profits and operated strictly under a cost-to-cost arrangement cost arrangement as per the terms of the Line Production Agreement. In support of as per the terms of the Line Production Agreement. In support of as per the terms of the Line Production Agreement. In support of this submission, reliance was placed on the remittance of subsidy this submission, reliance was placed on the remittance of subsidy this submission, reliance was placed on the remittance of subsidy amounting to ₹2.72 crores, received by the AE under t 2.72 crores, received by the AE under t 2.72 crores, received by the AE under the “Mauritius Film Rebate Scheme Film Rebate Scheme”, which was transferred to the assessee , which was transferred to the assessee in subsequent year. According to the assessee, this remittance . According to the assessee, this remittance . According to the assessee, this remittance demonstrated the absence of any profit retention by the AE and demonstrated the absence of any profit retention by the AE and demonstrated the absence of any profit retention by the AE and substantiated the claim that the AE functioned only as a substantiated the claim that the AE functioned only as a substantiated the claim that the AE functioned only as a reimbursement conduit. reimbursement conduit.

6.2 Per Per Per contra, contra, contra, the the the learned learned learned Departmental Departmental Departmental Representative Representative Representative submitted that the assessee’s contention of non submitted that the assessee’s contention of non-retention of profits retention of profits by the AE is not relevant for determining the arm’s length price by the AE is not relevant for determining the arm’s length price by the AE is not relevant for determining the arm’s length price (ALP) under section 92C of the Act. The pri (ALP) under section 92C of the Act. The principal focus of transfer ncipal focus of transfer pricing analysis, it was argued, is not the eventual retention or pricing analysis, it was argued, is not the eventual retention or pricing analysis, it was argued, is not the eventual retention or distribution of profits but rather whether the price paid by the distribution of profits but rather whether the price paid by the distribution of profits but rather whether the price paid by the assessee to the AE for services availed reflects what would have assessee to the AE for services availed reflects what would have assessee to the AE for services availed reflects what would have been paid under similar circumstanc been paid under similar circumstances to an unrelated party. The es to an unrelated party. The Department further submitted that the claim that the AE operated Department further submitted that the claim that the AE operated Department further submitted that the claim that the AE operated on a cost-to-cost basis, or earned negligible margin, does not cost basis, or earned negligible margin, does not cost basis, or earned negligible margin, does not absolve absolve absolve the the the assessee assessee assessee from from from the the the statutory statutory statutory requirement requirement requirement of of of benchmarking the benchmarking benchmarking the the transaction transaction and transaction and and demonstrat demonstrating demonstrat that the consideration paid did not exceed the arm’s length price. The consideration paid did not exceed the arm’s length price. 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 objective of Chapter X of the Act is to test the reasonableness of the objective of Chapter X of the Act is to test the reasonableness of the transaction itself, rather than the final outcome of profit transaction itself, rather than the final outcome of profit transaction itself, rather than the final outcome of profit distribution between related parties. distribution between related parties.

6.3 We have considered the rival submissions and perused the considered the rival submissions and perused the considered the rival submissions and perused the material available on record. The arguments advanced by the material available on record. The arguments advanced by the material available on record. The arguments advanced by the learned counsel for the assessee, in our considered view, are learned counsel for the assessee, in our considered view, are learned counsel for the assessee, in our considered view, are untenable in law. The computation of transfer pricing adjustments untenable in law. The computation of transfer pricing adjustments untenable in law. The computation of transfer pricing adjustments is governed by the is governed by the specific provisions of the Act and the Rules specific provisions of the Act and the Rules framed there under. Once statutory rules are prescribed, the TPO is under. Once statutory rules are prescribed, the TPO is under. Once statutory rules are prescribed, the TPO is bound to apply those rules in determining the arm’s length price, bound to apply those rules in determining the arm’s length price, bound to apply those rules in determining the arm’s length price, without being influenced by the manner in which the parties have without being influenced by the manner in which the parties have without being influenced by the manner in which the parties have chosen to allocate or reimburse costs inter se. The transfer pricing locate or reimburse costs inter se. The transfer pricing locate or reimburse costs inter se. The transfer pricing exercise under Chapter X does not turn on whether the AE charged exercise under Chapter X does not turn on whether the AE charged 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 up or remitted a subsidy back to the assessee. What is up or remitted a subsidy back to the assessee. What is relevant is whether the price paid by the assessee for the services relevant is whether the price paid by the assessee for the services relevant is whether the price paid by the assessee for the services availed under the international transaction is consistent with the led under the international transaction is consistent with the led under the international transaction is consistent with the price that would have been paid to an unrelated party performing price that would have been paid to an unrelated party performing price that would have been paid to an unrelated party performing comparable functions in similar circumstances. The fact that the comparable functions in similar circumstances. The fact that the comparable functions in similar circumstances. The fact that the AE did not earn any profit, or acted as a mere pass-through entity, AE did not earn any profit, or acted as a mere pass AE did not earn any profit, or acted as a mere pass is of no consequence unless the pricing of the transaction itself can is of no consequence unless the pricing of the transaction itself can is of no consequence unless the pricing of the transaction itself can be demonstrated to be at arm’s length based on objective be demonstrated to be at arm’s length based on objective be demonstrated to be at arm’s length based on objective comparability analysis. In the present case, the assessee has not comparability analysis. In the present case, the assessee has not comparability analysis. In the present case, the assessee has not shown, by cogent material, that the consideration paid for line shown, by cogent material, that the consideration paid for shown, by cogent material, that the consideration paid for production services satisfies the test of arm’s length when production services satisfies the test of arm’s length when production services satisfies the test of arm’s length when measured measured measured against against against comparable comparable comparable uncontrolled uncontrolled uncontrolled transactions. transactions. transactions. Accordingly, we find no merit in the contention of the assessee, and Accordingly, we find no merit in the contention of the assessee, and Accordingly, we find no merit in the contention of the assessee, and uphold the findings of the learned DRP and TPO on this issue. uphold the findings of the learned DRP and TPO on this issue. uphold the findings of the learned DRP and TPO on this issue.

7.1 It was submitted that the adjustment pertained to a It was submitted that the adjustment pertained to a It was submitted that the adjustment pertained to a transaction which, in effect, had not culminated in the relevant transaction which, in effect, had not culminated in the relevant transaction which, in effect, had not culminated in the relevant assessment year. According to the assessee, the production of the assessment year. According to the assessee, the production of the assessment year. According to the assessee, the production of the series “Special Ops 1.5” “Special Ops 1.5” remained incomplete during the financial remained incomplete during the financial year year year corresponding corresponding corresponding to to to the the the assessment assessment assessment year year year in in in question. question. question. Consequently, no revenue was recognised, and the expenditure Consequently, no revenue was recognised, and the expenditure Consequently, no revenue was recognised, and the expenditure incurred was carried as inventory in the balance sheet. It was incurred was carried as inventory in the balance sheet. incurred was carried as inventory in the balance sheet. further submitted that for the purp further submitted that for the purposes of benchmarking, a oses of benchmarking, a tentative margin was computed based on estimated costs, as the tentative margin was computed based on estimated costs, as the tentative margin was computed based on estimated costs, as the actual sale consideration for the series had yet to be received. The actual sale consideration for the series had yet to be received. The actual sale consideration for the series had yet to be received. The assessee contended that, upon completion of the project in the assessee contended that, upon completion of the project in the assessee contended that, upon completion of the project in the subsequent year, the gross profit mar subsequent year, the gross profit margin stood at 21.46%, which gin stood at 21.46%, which was within the arm’s length range as per the Transfer Pricing was within the arm’s length range as per the Transfer Pricing was within the arm’s length range as per the Transfer Pricing Officer’s own benchmarking. Therefore, it was argued that no Officer’s own benchmarking. Therefore, it was argued that no Officer’s own benchmarking. Therefore, it was argued that no adjustment was warranted in the year under consideration and that adjustment was warranted in the year under consideration and that adjustment was warranted in the year under consideration and that any comparison should be made based on a any comparison should be made based on actual outcomes post ctual outcomes post- completion of the project. completion of the project. The relevant submission of the assessee The relevant submission of the assessee before the Ld. DRP is reproduced as under: before the Ld. DRP is reproduced as under:

“10.2. Arguments of the Applicant Assessee: “10.2. Arguments of the Applicant Assessee: The relevant portion of assessee's submission is reproduced as under: The relevant portion of assessee's submission is reproduced as under: 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 assessee would like to bring it to the notice of the Ld. TPO that 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 calculation of margin earned by assessee in the transaction of calculation of margin earned by assessee in the transaction of production of series during FY 2020 production of series during FY 2020-21 was calculated on an estimation 21 was calculated on an estimation basis. The production was not completed at the time basis. The production was not completed at the time of filing Form 3CEB of filing Form 3CEB and preparation of TP Study Report but it has been completed now. The and preparation of TP Study Report but it has been completed now. The and preparation of TP Study Report but it has been completed now. The actual profitability of transaction under consideration can be calculated actual profitability of transaction under consideration can be calculated actual profitability of transaction under consideration can be calculated as follows: (Refer Annexure 1 below for financials of FST LLP of FY as follows: (Refer Annexure 1 below for financials of FST LLP of FY as follows: (Refer Annexure 1 below for financials of FST LLP of FY 2021-22) Particulars Amount in INR Amount in INR Amount in INR Sales (A) (Refer Note 16 of Sales (A) (Refer Note 16 of 36,00,00,000 36,00,00,000 Financial Statements) Financial Statements) Less : Cost of Goods Sold (B) Less : Cost of Goods Sold (B) (Refer (Refer Note 18 Note 18 of Financial of Financial Statements) (-) Actual Cost incurred for the ) Actual Cost incurred for the 28,27,31,060 28,27,31,060 28,27,31,060 project Gross Profit (C=A-B) B) 7,72,68,940 7,72,68,940 Gross Profit Ratio (D=C/A) Gross Profit Ratio (D=C/A) 21.46% 21.46% In the Order u/s 92CA(3) of Income Tax Act 1961 dated 28/10/2023 In the Order u/s 92CA(3) of Income Tax Act 1961 dated 28/10/2023 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 having DIN & Order No: ITBA/TPO/F/92CA3/2023-24/1057475177(1), 24/1057475177(1), the Ld. TPO has rejected the following two companies from the dataset the Ld. TPO has rejected the following two companies from the dataset the Ld. TPO has rejected the following two companies from the dataset of comparable companies: able companies: o Lyca Productions Pvt. Ltd Lyca Productions Pvt. Ltd o GV Films After removing the above two companies, the Ld. TPO determined the After removing the above two companies, the Ld. TPO determined the After removing the above two companies, the Ld. TPO determined the ALP as follows: o 35th percentile: 20.86% 35th percentile: 20.86% o 65th percentile: 26.37% 65th percentile: 26.37% o Median (50th percentile): 21.61% Median (50th percentile): 21.61%

Without prejudice to anything stated in Without prejudice to anything stated in the above grounds, even if the the above grounds, even if the assessee considers the dataset of comparable companies and the assessee considers the dataset of comparable companies and the assessee considers the dataset of comparable companies and the margin calculation of comparables suggested by the Ld. TPO, the gross margin calculation of comparables suggested by the Ld. TPO, the gross 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 margin on sales of 21.46% earned by FST LLP lies between the arm's margin on sales of 21.46% earned by FST LLP lies between the arm's length range of 35th perc length range of 35th percentile i.e. 20.86% and the 65th percentile i.e. 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 26.37% which is well within the arm's length range as suggested by the 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/- is not Hence, it can be said that the TP Adjustment of Rs. 2,09,75,436/ Hence, it can be said that the TP Adjustment of Rs. 2,09,75,436/ warranted in the case of the assessee. warranted in the case of the assessee.” 7.2 The Ld. DRP after considering the objection of the assessee after considering the objection of the assessee after considering the objection of the assessee rejected such observation as under: rejected such observation as under:

“10.3.1 The panel has considered the submissions of the assessee and 10.3.1 The panel has considered the submissions of the assessee and 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 the facts of the case. The panel does not find any merit in the argument the facts of the case. The panel does not find any merit in the argument that the benchmarking and con that the benchmarking and consequent adjustment cannot be done for sequent adjustment cannot be done for unless the entire production process of the web series is complete. The unless the entire production process of the web series is complete. The unless the entire production process of the web series is complete. The assessee contends that since the production of the web series was assessee contends that since the production of the web series was assessee contends that since the production of the web series was completed in the following year, benchmarking should be done by completed in the following year, benchmarking should be done by completed in the following year, benchmarking should be done by taking all the transactions of the two years. ransactions of the two years. 10.3.2 This argument of the assessee is flawed. Suppose in a case, a 10.3.2 This argument of the assessee is flawed. Suppose in a case, a 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 series takes 5 years to complete, then will the benchmarking of the series takes 5 years to complete, then will the benchmarking of the international transaction be done after 5 years and by combining the international transaction be done after 5 years and by combining 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 the 5 years ?! There is no such provision in the the 5 years ?! There is no such provision in the transfer pricing law. 10.3.4 Moreover, the assessee itself has undertaken transfer pricing 10.3.4 Moreover, the assessee itself has undertaken transfer pricing 10.3.4 Moreover, the assessee itself has undertaken transfer pricing study and benchmarked the transaction. Only when the TPO has study and benchmarked the transaction. Only when the TPO has study and benchmarked the transaction. Only when the TPO has scrutinized and made some corrections in the TP analysi scrutinized and made some corrections in the TP analysis, the assessee s, the assessee is taking such an argument. argument.” 7.3 Before us, learned counsel for the assessee submitted that the Before us, learned counsel for the assessee submitted that the Before us, learned counsel for the assessee submitted that the entire expenditure of ₹9.43 crores incurred towards line production entire expenditure of 9.43 crores incurred towards line production was capitalised in accordance with standard accounting principles, was capitalised in accordance with standard accounting principles, was capitalised in accordance with standard accounting principles, and no deduction was claimed in the profit and loss account for the duction was claimed in the profit and loss account for the duction was claimed in the profit and loss account for the relevant year. It was submitted that the obi . It was submitted that the obivious facts like AE vious facts like AE operated at Nil margin, argin, the expenses capitalized by the assessee the expenses capitalized by the assessee and no deduction was claimed was claimed for such expenses, were ignored by for such expenses, were ignored by the department, resulted in taxing hypothetical income, in violation resulted in taxing hypothetical income, in violation resulted in taxing hypothetical income, in violation of well-settled legal principles. settled legal principles. Further, the Ld. counsel for the Further, the Ld. counsel for the assessee submitted that Department overlooked the assessee’s assessee submitted that Department overlooked the assessee’s assessee submitted that Department overlooked the assessee’s profitability analysis for financial year 2021 profitability analysis for financial year 2021-22. It was further submitted that upon completion of the project submitted that upon completion of the project, the gross profit the gross profit margin was of 21.46% of 21.46%, which is within the TPO’s benchmark range, ithin the TPO’s benchmark range, therefore, the Department’s adjustment based solely on financial herefore, the Department’s adjustment based solely on financial herefore, the Department’s adjustment based solely on financial year 2020-21 and incomplete incomplete data stands legally and fa stands legally and factually incorrect as as as profitability profitability profitability analysis analysis analysis must must must reflect reflect reflect completed completed completed transaction.

7.4 On the other hand, the learned Departmental Representative On the other hand, the learned Departmental Representative On the other hand, the learned Departmental Representative contended that the arguments advanced by the assessee were contended that the arguments advanced by the assessee were contended that the arguments advanced by the assessee were misplaced in the context of transfer pricing law. The primary misplaced in the context of transfer pricing law. The misplaced in the context of transfer pricing law. The enquiry under Chapter X of the Act, it was submitted, is whether enquiry under Chapter X of the Act, it was submitted, is whether enquiry under Chapter X of the Act, it was submitted, is whether the international transaction with the associated enterprise was the international transaction with the associated enterprise was the international transaction with the associated enterprise was conducted at arm’s length, independent of the assessee’s method of conducted at arm’s length, independent of the assessee’s method of conducted at arm’s length, independent of the assessee’s method of accounting or revenue recognition. The DR accounting or revenue recognition. The DR emphasiz emphasized that transfer pricing is transactional in nature and cannot be rendered transfer pricing is transactional in nature and cannot be rendered transfer pricing is transactional in nature and cannot be rendered inapplicable merely because the assessee followed the project inapplicable merely because the assessee followed the project inapplicable merely because the assessee followed the project completion method or deferred revenue recognition. Moreover, it completion method or deferred revenue recognition. Moreover, it completion method or deferred revenue recognition. Moreover, it was argued that benchmarking must be carried out with reference was argued that benchmarking must be carried out with r was argued that benchmarking must be carried out with r to the year in which the transaction occurred and cannot await the to the year in which the transaction occurred and cannot await the to the year in which the transaction occurred and cannot await the financial outcome of subsequent years. financial outcome of subsequent years. The arm’s length of The arm’s length of international transaction must be examined in the year, in which international transaction must be examined in the year, in which international transaction must be examined in the year, in which transaction occurred i.e. AY 2021 transaction occurred i.e. AY 2021-22 in the case.

7.5 The DR further submitted that a detailed verification of the The DR further submitted that a detailed verification of the The DR further submitted that a detailed verification of the expenses incurred by the AE revealed serious deficiencies, including expenses incurred by the AE revealed serious deficiencies, including expenses incurred by the AE revealed serious deficiencies, including lack of proper supporting documentation such as invoice dates and lack of proper supporting documentation such as invoice dates and lack of proper supporting documentation such as invoice dates and bill numbers, especially in relation to hotel, food, and junior artist bill numbers, especially in relation to hotel, food, and jun bill numbers, especially in relation to hotel, food, and jun expenses. These, according to the Department, cast doubt on the expenses. These, according to the Department, cast doubt on the expenses. These, according to the Department, cast doubt on the verifiability and genuineness of the underlying transactions. verifiability and genuineness of the underlying transactions. verifiability and genuineness of the underlying transactions.

7.6 In rejoinder, learned counsel for the assessee submitted that In rejoinder, learned counsel for the assessee submitted that In rejoinder, learned counsel for the assessee submitted that all relevant supporting documentation all relevant supporting documentation—including invoi including invoices, ledgers, and other evidence— —was furnished both during the assessment and was furnished both during the assessment and transfer transfer transfer pricing pricing pricing proceedings. proceedings. proceedings. It It It was was was contended contended contended that that that the the the Department’s objections were based on Department’s objections were based on generalizations generalizations and failed to identify any specific unverifiable expenditure. It was further identify any specific unverifiable expenditure. It was identify any specific unverifiable expenditure. It was emphasized that the nature of the expenses that the nature of the expenses—being for hotel being for hotel accommodation, accommodation, food, food, and and artist artist fees—was typical fees was typical of of line line production operations and formed a necessary component of the production operations and formed a necessary component of the production operations and formed a necessary component of the services rendered by the AE. services rendered by the AE.

7.7 We have considered the rival submissions and carefully We have considered the rival submissions and carefully We have considered the rival submissions and carefully perused the record. Insofar as the objection raised by the learned perused the record. Insofar as the objection raised by the learned perused the record. Insofar as the objection raised by the learned DR regarding the alleged lack of verification of expenses is DR regarding the alleged lack of verification of expenses is DR regarding the alleged lack of verification of expenses is concerned, we find that this aspect has not been examined or concerned, we find that this aspect has not been examined or concerned, we find that this aspect has not been examined or commented upon by the Assessing Officer during the assessment on by the Assessing Officer during the assessment on by the Assessing Officer during the assessment proceedings. Under the statutory scheme, the role of the Transfer proceedings. Under the statutory scheme, the role of the Transfer proceedings. Under the statutory scheme, the role of the Transfer Pricing Officer is confined to the determination of the arm’s length Pricing Officer is confined to the determination of the arm’s length Pricing Officer is confined to the determination of the arm’s length price of international transactions. The question of the genuineness price of international transactions. The question of the genuineness price of international transactions. The question of the genuineness or allowability of expenses falls outside the domain of the TPO and allowability of expenses falls outside the domain of the TPO and allowability of expenses falls outside the domain of the TPO and is to be considered by the Assessing Officer during assessment. In is to be considered by the Assessing Officer during assessment. In is to be considered by the Assessing Officer during assessment. In the present case, no such adverse finding has been recorded by the the present case, no such adverse finding has been recorded by the the present case, no such adverse finding has been recorded by the Assessing Officer. Consequently, we find no merit in the objection of Assessing Officer. Consequently, we find no merit in the Assessing Officer. Consequently, we find no merit in the the learned DR in this regard, and the same is rejected. the learned DR in this regard, and the same is rejected. the learned DR in this regard, and the same is rejected.

7.8 As regards the primary contention of the assessee that the As regards the primary contention of the assessee that the As regards the primary contention of the assessee that the expenditure was capitalized capitalized and therefore not claimed as a and therefore not claimed as a deduction, we are of the considered view that the applicability of deduction, we are of the considered view that the applicability deduction, we are of the considered view that the applicability transfer pricing provisions does not hinge upon the assessee’s transfer pricing provisions does not hinge upon the assessee’s transfer pricing provisions does not hinge upon the assessee’s method of accounting method of accounting—whether it adopts the project completion whether it adopts the project completion method or the percentage completion method. What is relevant is method or the percentage completion method. What is relevant is method or the percentage completion method. What is relevant is that international transactions occurred in the year under that international transactions occurred in the year under that international transactions occurred in the year under consideration, and once so established, such transactions are ideration, and once so established, such transactions are ideration, and once so established, such transactions are subject to benchmarking as per the mandate of Chapter X. subject to benchmarking as per the mandate of Chapter X. subject to benchmarking as per the mandate of Chapter X.

7.9 In cases where the assessee follows the project completion In cases where the assessee follows the project completion In cases where the assessee follows the project completion method, any transfer pricing adjustment would typically result in a method, any transfer pricing adjustment would typically result in a method, any transfer pricing adjustment would typically result in a corresponding increase or decrease in the value of work ing increase or decrease in the value of work ing increase or decrease in the value of work-in- progress, which would ultimately impact the computation of profits progress, which would ultimately impact the computation of profits progress, which would ultimately impact the computation of profits in the year in which the project is completed. Conversely, under the the project is completed. Conversely, under the the project is completed. Conversely, under the percentage completion method, profits are recognised in proportion percentage completion method, profits are recognised in proportion percentage completion method, profits are recognised in proportion to the stage of completion, and adjustments are applied accordingly he stage of completion, and adjustments are applied accordingly he stage of completion, and adjustments are applied accordingly in each year based on the extent of revenue and expenses in each year based on the extent of revenue and expenses in each year based on the extent of revenue and expenses recognised. In the present case, the assessee appears to have In the present case, the assessee appears to have In the present case, the assessee appears to have recognised neither revenue nor profit for the year under recognised neither revenue nor profit for the year under recognised neither revenue nor profit for the year under consideration. However, owever, owever, having having having entered entered entered into into into a a a contractual contractual contractual arrangement for sale of the project and transferred the attendant arrangement for sale of the project and transferred the attendant arrangement for sale of the project and transferred the attendant risks and rewards, the assessee was under an obligation to risks and rewards, the assessee was under an obligation to risks and rewards, the assessee was under an obligation to compute profits based on the percentage of completion. This is compute profits based on the percentage of completion. This is compute profits based on the percentage of completion. This is consistent with the accoun consistent with the accounting standards prescribed by the ting standards prescribed by the Institute of Chartered Accountants of India and harmonises with Institute of Chartered Accountants of India and harmonises with Institute of Chartered Accountants of India and harmonises with the principles laid down under section 5 of the Act regarding the principles laid down under section 5 of the Act regarding the principles laid down under section 5 of the Act regarding accrual of income. The transfer pricing adjustment has to be made accrual of income. The transfer pricing adjustment has to be made accrual of income. The transfer pricing adjustment has to be made after comparison of true profit after comparison of true profit margin of the assessee with median margin of the assessee with median margin of comparable margin of comparables.

7.10 We are further of the view that the assessee’s benchmarking of We are further of the view that the assessee’s benchmarking of We are further of the view that the assessee’s benchmarking of the international transaction requires reconsideration. The the international transaction requires reconsideration. the international transaction requires reconsideration. assessee has applied cost plus method for benchmarking. The Cost assessee has applied cost plus method for benchmarking. assessee has applied cost plus method for benchmarking. Plus Method calculates an arm’s length price by adding an s Method calculates an arm’s length price by adding an s Method calculates an arm’s length price by adding an appropriate gross profit mark profit mark-up to the costs incurred by the up to the costs incurred by the supplier in a controlled transaction. This mark supplier in a controlled transaction. This mark-up should reflect the up should reflect the functions performed, risks assumed, and assets used by the functions performed, risks assumed, and assets used by the functions performed, risks assumed, and assets used by the supplier. The gross profit margin of party who supply or exports the . The gross profit margin of party who supply or exports the . The gross profit margin of party who supply or exports the products or services are compared with gross profit margin of other products or services are compared with gross profit margin of other products or services are compared with gross profit margin of other comparables, but in the case, gross profit margin of the assessee comparables, but in the case, gross profit margin of the assessee comparables, but in the case, gross profit margin of the assessee who is importer of services has been compared with parties engaged who is importer of services has been compared with parties en who is importer of services has been compared with parties en in providing similar services. Thus, w in providing similar services. Thus, whether this method hether this method has appropriately reflected appropriately reflected the comparability of the transaction entered the comparability of the transaction entered into by the assessee with its AE vis into by the assessee with its AE vis-à-vis other methods, need vis other methods, need reconsideration.

7.11 In light of the foregoing discussi In light of the foregoing discussion and having regard to the on and having regard to the incomplete evaluation by the lower authorities, we deem it incomplete evaluation by the lower authorities, we deem it incomplete evaluation by the lower authorities, we deem it appropriate to set aside the transfer pricing adjustment made by appropriate to set aside the transfer pricing adjustment made by appropriate to set aside the transfer pricing adjustment made by the Assessing Officer/TPO. The matter is remanded to the file of the the Assessing Officer/TPO. The matter is remanded to the file of the the Assessing Officer/TPO. The matter is remanded to the file of the TPO for de novo consideration in ac TPO for de novo consideration in accordance with law and in the cordance with law and in the light of the observations contained herein. light of the observations contained herein.

7.12 The ground no. 3 of the appeal is accordingly allowed for The ground no. 3 of the appeal is accordingly allowed for The ground no. 3 of the appeal is accordingly allowed for statistical purposes. Since, we allowed the ground no. 3 for statistical purposes. Since, we allowed the ground no. 3 for statistical purposes. Since, we allowed the ground no. 3 for statistical purposes, our findings on other grounds is rendered statistical purposes, our findings on other grounds is ren statistical purposes, our findings on other grounds is ren merely academic.

Order pronounced under Rule 34(4) of the ITAT Rules, Order pronounced under Rule 34(4) of the ITAT Rules, Order pronounced under Rule 34(4) of the ITAT Rules, 1963 by way of placing result on notice board on 30.05.2025. 1963 by way of placing result on notice board on 1963 by way of placing result on notice board on Sd/ Sd/- Sd/- Sd/ (RAHUL CHAUDHARY) (RAHUL CHAUDHARY (OM PRAKASH OM PRAKASH KANT) JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER Mumbai;