TMI Blog2015 (4) TMI 949X X X X Extracts X X X X X X X X Extracts X X X X ..... terially affect the price charged etc: the first attempt has to be to eliminate the components which so materially affect the price or cost. In other words, given the data available, if the distorting factor can be severed and the other data used, that course has to be necessarily adopted. The mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from the list of comparables for the purposes of determination of ALP. In such circumstances, an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable. While determining the comparability of transactions, multiple year data can only be included in the manner provided in Rule 10B(4). As a general rule, it is not open to the assessee to rely upon previous year's data. In the present case, this Court holds that once Brescon, Keynote and Khandwala Securities are held to be functionally similar to the assessee, they would be included as comparables, notwithstanding their high profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n “Lead Managing IPOs, Rights Offers, Buybacks and Takeovers. [It] also expanded its reach in Corporate Finance & M&A Advisory.” The services provided by Keynote also include managing public issue of securities, underwriting, project appraisal, equity research, capital restructuring, loan and lease syndication, placement services, portfolio management, debenture trustee, managing/advising on international offerings of debt/equity, private placement of securities, etc. Evidently, the assessee does not provide any of these services enumerated above. Given such functional differences and the mandate of Rule 10B(2)(b), there could be merit in the argument that Keynote cannot be considered a comparable for determining the ALP. The fact that the assessee had included it in the previous assessment years does not have any bearing on its inclusion for the subject assessment year. In this regard, this Court relies on the Supreme Court's decision in Commissioner of Income Tax v. C. Parakh & Co (India) Ltd, [1956 (3) TMI 1 - SUPREME Court] and CIT v. Bharat General Reinsurance, [1970 (12) TMI 5 - DELHI High Court] has also held that there is no estoppel against law under the Act. Thus this Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act ) or the Rules framed thereunder, entitling tax administrators to include high profit making companies‟ data in the list of comparables ? Benches of Income Tax Appellate Tribunal ( ITAT ), appear to be riven in their opinion on this; it is the subject matter of the present appeal. 2. The questions framed for decision in this appeal, under Section 260-A of the Act, arising from an order of the Income Tax Appellate Tribunal ( ITAT ) dated 20.12.2013 in ITA No. 6183/Del/2012 for assessment year (AY) 2008-09, are as follows: 1) Whether the proviso to Rule 10B(4) of the Income Tax Rules, 1962 will be applicable in case of fluctuations in the operating profit margins of comparable companies during the relevant financial year under question as compared to earlier years? 2) Whether comparables can be rejected on the ground that they have exceptionally high profit margins as compared to the assessee in transfer pricing analysis? 3) Whether factors like differential functional and risk profile coupled with high degree of volatility in operating profit margins is sufficient ground to reject comparables for transfer pricing analysis? 4) Whether disallowances can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... multiple year data of the comparables was warranted to remove the effect of year specific aberrations. Against the average Operating Profit Margin ( Operating Margin ) of 4.04% earned by the comparable entities, the assessee earned an Operating Margin of 27.05% and concluded that its transactions with its AEs were at arm‟s length. The assessee relied on Rule 10B(4) of the Income Tax Rules, 1962 (hereafter the Rules ). Rule 10B(4) reads as follows: ―(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction or a specified domestic transaction shall be the data relating to the financial year in which the international transaction or the specified domestic transaction has been entered into: Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared.‖ The assessee argued that using multiple year data is consistent with the OECD Guidelines as well as transfer pricing regulations of several develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing the income of the assessee after sustaining the transfer pricing additions made by the TPO and disallowing the bonus paid to its shareholders. The ITAT dismissed the Assessee‟s appeal by its order dated 20.12.2013 and confirmed the additions made by the Respondent. 7. All the lower authorities included three entities as comparables which had very high profit margins as compared with that of the assessee. These entities namely, Brescon Corporate Advisors Limited ( Brescon ) (Operating Margin of 87.4%), Keynote Corporate Services Limited ( Keynote ) (Operating Margin of 191.58%) and Khandwala Securities Limited ( Khandwala ) (Operating Margin of 80.79%) had exceptional profit margins as compared with the Assessee (Operating Margin of 27.05%) and rejected three other comparables selected by the assessee (i.e. IDFC Investment Advisors Ltd. (17.35%), Sumedha Fiscal Services Limited (9.14%) and Future Capital Holdings Limited (20.56%). Khandwala had been selected as a comparable by the assessee itself based on the multiple year data for the comparability analysis. However, the TPO substituted the same with the data for the concerned financial year, in which Khandwala ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Operating Margins of Keynote for the last 5 years are as follows:- Assessment Year Operating Margin 2004-05 (-)6.87% 2005-06 13.33% 2006-07 94.06% 2007-08 145.83% 2008-09 191.58% 9. The assessee highlights that CIT (Appeals) too had rejected Keynote in a preceding as well as succeeding assessment year i.e. AY 2007-08 and 2009-10. Further, Keynote has been excluded as a comparable by the DRP in a preceding assessment year i.e. AY 2006-07. In that order, dated 04.03.2013, the DRP observed: ―As regards choice of Keynote Corporate services as a comparable by TPO based on single year data, DRP finds no infirmity in principles. However, after analyzing the economic circumstances as highlighted by the assessee and corroborated from the annual report of the year, we do find it may not be a robust comparable. According to the assessee ‗we would like to state that this company has very volatile profit margins and since the Ld. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that bonuses were paid to all its employees during the relevant financial year on the basis of their performance and qualifications. Both the individuals to whom the bonuses paid were disallowed have requisite qualifications, experience and expertise in the field of investment advisory services. Accordingly, keeping in view their experience, expertise and performance, the assessee had compensated them. The assessee submits that bonus under Section 36(1)(ii) of the Act is allowed as deduction if the same amount would not have been payable to the shareholders as profits or dividends if it had not been paid as bonus. The provision requires the sum paid as bonus to be exactly the same as to be payable as dividend in absence of the bonus for there to be a disallowance. The assessee submits that the bonus paid to the shareholder employees is not in the same proportion as their shareholding. It is also submitted that the basis for disallowance of bonus paid - that no dividend was declared by the assessee - is incorrect as it paid interim dividend amounting to ₹ 5,47,47,000/- in the concerned assessment year. Thus, the bonus paid to the two shareholders was not in lieu of divide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chosen method; some potential comparables have extreme results, further examination would be needed to probe such results. This important issue was overlooked by ITAT. Counsel relied on proviso to Rule 10-B (4) and stated that though the mandate of the law is ordinarily to rely upon comparables' data for the current year, in certain circumstances, it is possible for the authorities to rely on previous years' data restricted to two previous years. This is to eliminate any distorted picture which might be the consequence of adherence to the contemporaneous data, like in the present case. 13. It was argued that the DRP's order for AY 2006-07 had accepted the assessee's argument and excluded Keynote from the list of comparables, on the ground that the said concern had earned abnormally high or super profits. On that occasion, as compared with its previous year (AY 2005-06) profit level of 94%, the profit of the enterprise was 145%, registering a 51% increase over the previous year. This was considered to be too high to be allowed as a comparable. During the current year, the profit registered was 191%. In the circumstances, it was illogical and arbitrary for the reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endered in the comparable transaction is relevant in case of CUP and re-sale price method while the cost of production incurred in respect of property transferred or services provided is relevant for cost plus method. However, there is no mention of any property transferred or services provided in case of TNMM. They are provided for other methods. He contended that the relevant Rule thus makes it clear that specific characterization of the property transferred or services is not relevant for TNMM and this position is in conformity with the relevant OECD guidelines which suggest that broad comparability of functions should be done for TNMM. 17. Countering the submissions of the assessee, it was argued that neither the Act, nor the Rule contemplate exclusion of relevant transactions of like enterprises, in any manner other than what is prescribed. It was argued here that a comparable cannot be removed from consideration merely because it suffers loss; likewise, a unit or enterprise which enjoys higher profit (than the assessee or a significantly high profit in the industry) or even one making a so called super profit too cannot be eliminated. Generally, both loss making units an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od; (b) resale price method; (c)cost plus method; (d)profit split method; (e)transactional net margin method; (f)such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: ** ** ** (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a) the price charged or paid in an international transaction [or specified domestic transaction] has not been determined in accordance with sub-sections (1) and (2); or (b)any information and document relating to an international transaction [or specified domestic transaction] have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c)the informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. 22. These provisions prescribe, therefore, that even under the TNMM, importance is given to assets employed or to be employed as relevant factors for consideration. Rule 10B (2), as the second step, requires application of functions, asset, risk test for judging comparability of international transaction with an uncontrolled transaction. It provides: 10B (2). For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely :- (a) the specific characteristics of the property transferred or services provided in either transaction ; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions ; (c) the contractual terms (whether or not such terms are formal or in writing) of the transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the list of comparables. For this purpose, it relied on several rulings of various Benches of the ITAT. These are Adobe Systems India (P) Ltd. v. Additional Commissioner of Income-tax, [2011] 44 SOT 49 (Delhi) Teva India (P) Ltd v. DCIT, [2011] 44 SOT 105 (Mum); Sapient Corporation (P) Ltd. v. Deputy CIT, [2011] 11 Taxmann 69 (Delhi); Asst CIT vs. Maersk Global Services Centre (India) P. Ltd. (133 ITD 543)(Mum.); Symantec Software Solutions (P) Ltd. v. Assistant CIT [2012] 25 Taxmann 163 (Mum); and a Division Bench ruling of this court in CIT v. Agnity India Technologies (P) Ltd. [2013] 36 Taxmann 289 (Del HC). Besides, this court notices that a similar reasoning - of applying what is known as the turnover filter or the exclusion of superprofit making companies reasoning was applied in Continuous Computing India (P) Ltd. vs. ITO (2012) (52 SOT 45)(Bang)(URO); Centillium India P. Ltd vs. DCIT (2012)(20 ITR 69) (Bang)(Tri.) and Addl CIT vs. Frost and Sullivan India (P) Ltd (supra). The revenue has on the other hand, relied on contrary views in Actis Advisers P. Ltd. v. Deputy CIT [2012] 20 ITR (Trib) 138 (Delhi); 24/7 Customer.Com.Pvt.Ltd. v. Deputy CIT [2013] 21 ITR (Trib) 514 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Zenith is predominantly a software product company whereas the assessee is a software development services company and a software product company shows higher margin. 5. Nortel Networks India (P) Ltd. v. Additional CIT, [2013] 36 Taxmann 439 (Delhi) Affirmed the exclusion of M/s Arraycom as a comparable. Further held that the TPO has adequately factored the subjective elements in determining the ALP. A concern will not lose its status merely because it is a loss-making entity. However, TPO has not excluded Arraycom for the sole reason that it is a loss- making entity but because it has been showing persistent losses. Its operation also has a reducing tendency . In the absence of exceptional circumstances, previous year data under the proviso to Rule 10B(4) cannot be used. 6. Carlyle India Advisors (P) Ltd. v. Additional CIT, ITA No. 7901/Mum/2011 dated 04/04/2012. Directed the exclusion of, inter alia, Keynote Corporate Services Ltd. and S.R.E.I Capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not TVs, it has suffered huge losses over a period of several years, had huge unutilized capacity, needs financial restructuring, joint venture of the company stands terminated, etc. Re inclusion of Videocon, there are material differences which cannot be eliminated within the meaning of Rule 10B(3). Thus, Videocon has to be excluded as a comparable. 10. Philips Software Centre v. ACIT, [2008] 26 SOT 226 (Bang.) Companies with supernormal profits should have been excluded from the list of comparables by the TPO. An entity making supernormal profits cannot be a comparable. If at all it were to be considered as a comparable, appropriate adjustments to the material differences would have to be made. However, normalization of the margins of super profit making companies is not envisaged on an ad hoc basis and has to be done as per the law. The assessee was a captive contract service provider and it did not bear any business and operational risks 11. E-gain Communication (P) Ltd. v. ITO, [2008] 23 SOT 385 (Pune) Excluded Thirdware Solutions Ltd. and WTI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables ordered by the TPO. Assessee and the comparables were functionally different and not in the same segment. 16. Advance Power Display Systems Ltd. v. ACIT, [2013] 35 Taxmann 145 (Mum) Directed the exclusion of BCC Fuba India Ltd. as a comparable. Comparables have to be tested for each year independently. The fact that an entity has been chosen as a comparable for one year does not ipso facto mean that it would be chosen the subsequent year. BCC Fuba India Ltd. was a persistently loss making unit and therefore, it cannot be considered to be a good comparable. Further, in respect of another company, the P L A/c had an extraordinary item of income on account of sale of business. Therefore, this makes this company as not a good comparable for the year under consideration. 17. Syscom Corporation Ltd. v. ACIT, [2013] 35 Taxmann 600 (Mum) A company cannot be excluded as a comparable solely because it is a high profit making unit. A persistently loss making unit cannot be considered as a comparable. Comparability of an uncontro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT did not specifically answer the question, in view of its findings that two comparables, i.e eClerx Services Ltd and Mold Tech Technologies Ltd, on account of unusual or peculiar features which were apparent from the materials on record, the Bench did indicate the general approach appropriate in this regard: ―the comparability of an international transaction with an uncontrolled transaction for the purpose of determining the arm's length price of an international transaction by following the transactional net margin method is required to be judged with reference to the functions performed as per sub-rule (2)(b) of rule 10B read with sub-rule (1)(e) thereof and there is no bar in the transfer pricing regulations in India to exclude certain entities selected as potential comparables on a broad functionality test by applying the functional test at narrow or micro level to attain the relatively equal degree of comparability. On the other hand, rule 10B(3) provides that the uncontrolled transaction selected/judged as per rule 10B(2) shall be comparable to an international transaction only if none of the differences, if any, between the transactions being compared, or be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparables unless there are specific reasons for eliminating the same which is other than the general reason that a comparable has incurred loss or has made abnormal profits.‖ This court notices that American Express Services India Ltd v Deputy Commissioner Of Income-Tax, 2013 (57) SOT 22 (ITAT-Del) said, similarly, that: ― If the comparables are performing the same functions then merely on the ground of they being earning super profits, cannot be excluded. Material differences between their business modules, however, are required to be taken care off and duly adjusted. In the case of Sundaram Finance Distribution Ltd., we find that the main objection of assessee is that the said comparable was included because assessee had supplied the same and the second objection is that in the said comparable there was no staff. As far as first objection is concerned, we are in agreement with the assessee's counsel that merely because the said comparable was provided by assessee, the same could not be included without proper examination to account for the differences. The assessee is well within his right to demonstrate that a comparable supplied by it in the transfer prici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they deviate from the normal trend displayed by the data set. Many decisions of different benches of the ITAT indicate a rote repetition (in the words of Felix Frankfurter J, quoted in the beginning of this judgment a lazy repetition ) of this reasoning, without an independent analysis of the provisions of the Act and the rules. (Ref. IQ Information Systems India P. Ltd. [2013] 25 ITR (Trib) 185 (Hyderabad Bench) Symphony Marketing Solutions India P. Ltd. [2013] 27 ITR (Trib) 753 (Bangalore Bench)). 27. An indication of what ought to be the correct approach was given by a Division Bench of this Court in Commissioner of Income Tax v Mentor Graphics (P) Ltd [2013] 259 CTR 1 (Del), where it was held that: ― 21. The sum and substance of the Tribunal's order is that the criteria adopted by the TPO for searching comparables was not correct. Secondly, the TPO had not specifically rejected any of the comparables of the respondent/assessee. The Tribunal was of the view that the comparables of the respondent/assessee ought to have been accepted and, had that been the case, there would have been no need for the TPO to search for comparables. Of course, in passing the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Special Bench and this Court stressed that mere distortion cannot be the basis of exclusion, given the mandate of Section 92C. The assessee had during the hearing, heavily relied on OECD guidelines and another Division Bench ruling in Agnity (supra). This court proposes to take up the latter decision first for discussion. In Agnity (supra), the revenue had questioned, inter alia, the ITAT decision to exclude the data relating to Infosys. One of the reasons was that the said company was a giant corporation and was involved in multifarious activities. After reproducing the comparative chart and noticing the facts, the Court reasoned as follows: ―6. Learned counsel for the Revenue has submitted that the Tribunal after recording the aforesaid table has not affirmed or given any finding on the differences. This is partly correct as the Tribunal has stated that Infosys Technologies Ltd. should be excluded from the list of comparables for the reason latter was a giant company in the area of development of software and it assumed all risks leading to higher profits, whereas the respondent-assessee was a captive unit of the parent company and assumed only a limited risk. It ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able should lead to its rejection in the TP analysis. The relevant provisions of the 2010 OECD Transfer Pricing Guidelines are extracted below: ―A.7.3 - Extreme Results: Comparability Considerations 3.63: Extreme results might consist of losses or unusually high profits. Extreme results can affect the financial indicators that are looked at in the chosen method (e.g. the gross margin when applying a resale price, or a net profit indicator when applying a transactional net margin method). They can also affect other items, e.g. exceptional items which are below the line but nonetheless may reflect exceptional circumstances. Where one or more of the potential comparables have extreme results, further examination would be needed to understand the reasons for such extreme results. The reason might be a defect in comparability, or exceptional conditions met by an otherwise comparable third party. An extreme result may be excluded on the basis that a previously overlooked significant comparability defect has been brought to light, not on the sole basis that the results arising from the proposed ―comparable‖ merely appear to be very different from the results observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l show whether a taxpayer s reported loss on a transaction is part of a history of losses on similar transactions, the result of particular economic conditions in a prior year that increased costs in the subsequent year, or a reflection of the fact that a product is at the end of its life cycle. Such an analysis may be particularly useful where a transaction profit method is applied. See paragraph 1.72 on the usefulness of multiple year data in examining loss situations. Multiple year data can also improve the understanding of long term arrangements. 3.77: Multiple year data will also be useful in providing information about the relevant business and product life cycles of the comparables. Differences in business or product life cycles may have a material effect on transfer pricing conditions that needs to be assessed in determining comparability. The data from earlier years may show whether the independent enterprise engaged in a comparable transaction was affected by comparable economic conditions, or whether different conditions in an earlier year materially affected its price or profit so that it should not be used as a comparable. 3.78: Multiple year data can also improv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by Rule 10B(2)(a)) in either transactions may be secondary, for judging comparability of an international transaction in the TNMM, because the price charged or paid for property transferred or services provided and the direct and indirect cost of production incurred by the enterprise in respect of property transferred or services provided go into reckoning comparability analysis in the transaction methods, i.e the comparable uncontrolled price, resale price and cost plus whereas the profit based method such as transactional net margin method takes into account, the net margin realised. In TNMM, comparability of an international transaction with an uncontrolled transaction is to be seen with reference to functions performed as provided in sub-rule (2)(b) of rule 10B read with sub-rule (1)(e) of that rule after taking into account assets employed or to be employed and the risks assumed by the respective parties to the transaction. As noticed earlier, Rule 10B(3) mandates that a given or select uncontrolled transaction selected in terms of Rule 10B(2) shall be comparable to an international transaction if none of the differences, if any, between the compared transactions, or betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions performed taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; contractual terms of the transactions indicating how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and the Government orders in force; costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. These elements comprehend the similarities and dissimilarities; clause (f) of Rule 10C(2) specifically provides that ―the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions and the nature, extent and reliability of assumptions required to be made in application of a method‖ have to be taken into considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of all comparables is to be adopted. This is to offset the consequence of any extreme margins that comparables may have and arrive at a balanced price. Similarly, the wide fluctuations in profit margins of the same entity on a year-to-year basis would be offset by taking the arithmetic mean of all comparables for the assessment year in question. In any case, in the event that the volatility is on account of a materially different aspect incapable of being accounted for, the analysis under would Rule 10B(3) would exclude such an entity from being considered as a comparable. Secondly, as regards the manner of using previous years‟ data, the assessee has taken the arithmetic mean of the comparables‟ profit margins for the assessment year in question and two previous years. This Court disagrees. The proviso to Rule 10B(4), read with the sub-rule, itself indicates that the purpose for which previous years‟ data may be considered is - analysing the comparability of an uncontrolled transaction with an international transaction. It does not prescribe that once an uncontrolled transaction has been held to be a comparable‟, in order to obviate an apparent volatility ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consider precedents in that regard; however those are only of persuasive value. 38. The aforesaid conclusion is fortified by the Division Bench decision of this Court in Mentor Graphics (supra), where the Court noted: ― We may also make it clear that the reference to the OECD guidelines by the Tribunal in the impugned order are in the context of the reliance placed by the Transfer Pricing Officer on the very same guidelines, in particular, to paragraph 3.27 thereof. In the present case, there are specific provisions of sub-rules (2) and (3) of Rule 10B of the said Rules as also of the first proviso to section 92C(2) of the said Act which apply. Therefore, the question of applying OECD guidelines does not arise at all.‖ This Court also notes that a recent decision in Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT (dated 16.03.2015) relied extensively on the OECD Guidelines. However, the said ruling itself recognized that the provisions of the Act and the Rules are supreme . Therefore, this Court holds that where they (i.e., the Act and the Rules) adequately cover a field, reliance on the OECD Guidelines is not warranted. At this stage, we deem it fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entities with extreme financial results. Similarly, insofar as the use of multiple year data is concerned, Para 3.75 of the OECD Guidelines states that [m]ultiple year data should be used where they add value to the transfer pricing analysis.‖ This is akin to the proviso to Rule 10B(4) which provides for data relating to a period not being more than two years prior to such financial year [to] be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared.‖ Crucially, as noted by the TPO, para 3.79 of the Guidelines states that the use of multiple year data does not necessarily imply the use of multiple year averages . Thus, even if multiple year data is taken into consideration while determining the arm‟s length price, it may only be for the purposes of factoring in material changes in, inter alia, economic conditions, third party variables, etc. 39. This Court proceeds on the basis that there is sufficient guidance and clarity in Rule 10B on the principles applicable for determination of ALP. These include the various factors to be taken into consideration, ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO rejected the first ground relying on the fact that the assessee had used it as a comparable for previous years and in the subject assessment year as well, it qualified as a comparable based on the assessee‟s search process. Further, the TPO held that Keynote was engaged in financial consultancy and would therefore be considered as a comparable. The ITAT, for reasons unknown, did not examine this issue. This Court notes that the assessee is engaged in the business of rendering financial research and advisory services. It is responsible for investigation and advice to some of its group companies on structuring potential investments and exit opportunities; advising the group companies of investment and disposition opportunities; collection and dissemination of financial information of prospective entities; and other related services. On the other hand, Keynote, as per its Directors‟ Report for FY 2007-08, is involved in Lead Managing IPOs, Rights Offers, Buybacks and Takeovers. [It] also expanded its reach in Corporate Finance M A Advisory. The services provided by Keynote also include managing public issue of securities, underwriting, project appraisal, equity re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egally such income did not pertain to that year.‖ For the sake of completion, this Court would also deal with the assessee‟s reliance on the DRP‟s order dated 04.03.2013 (for AY 2006-07) for the exclusion of Keynote as a comparable. The DRP directed such exclusion on two grounds: a) the fact that Keynote was making exceptionally high profits; and b) only single year data could be considered for determining ALP in the present case and the volatility in profit margins of Keynote would distort the ALP. Thus, the DRP did not examine the functional comparability of Keynote with the assessee. In light of the discussion above, this Court remits the matter for consideration to the DRP to properly apply the test indicated in this judgment and analyse the functional similarity of Keynote with the assessee. In the event that the DRP finds them to be functionally comparable, it would proceed to carry out the Rule 10B(3) analysis as in the case of Khandwala Securities and Brescon. 43. The final question that arises for this Court‟s determination in the present appeal is the assessee‟s claim for deduction under Section 36(1)(ii) of the Act in respect of the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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