JUDGMENT judgment of court was delivered by S. Ravindra Bhat J.- "A phrase begins life as literary expression; its felicity leads to its lazy repetition; and repetition soon establishes it as legal formula, undiscriminatingly used to express different and sometimes contradictory ideas." -Justice Felix Frankfurter in Tiller v. Atlantic Coast Line Railroad Co. (318 U. S. 54 (1943)) Is there concept of "super profit" in arm's length price/transfer price determining process under Income-tax Act, 1961 ("the Act") or Rules framed thereunder, entitling tax administrators to include high profit-making companies' data in list of "comparables"? Benches of Income-tax Appellate Tribunal ("ITAT"), appear to be riven in their opinion on this; it is subject matter of present appeal. questions framed for decision in this appeal, under section 260A of Act, arising from order of Income-tax Appellate Tribunal ("the ITAT") dated December 20, 2013, in I. T. A. No. 6183/Del/2012 for assessment year (AY) 2008-09, are as follows: "(1) Whether proviso to rule 10B(4) of Income-tax Rules, 1962, will be applicable in case of fluctuations in operating profit margins of comparable companies during relevant financial year under question as compared to earlier years? (2) Whether comparables can be rejected on ground that they have exceptionally high profit margins as compared to 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 made under section 36(1)(ii) when bonus paid to shareholders is not in exact proportion of their shareholding and there is no avoidance of taxes?" assessee is private limited company incorporated under Companies Act, 1956, and is engaged in providing investment advisory services, which were reimbursed on cost-plus mark-up basis. Ashish Dhawan and Kunal Shroff, in concerned assessment year, were its two shareholders- holding shares in assessee in proportion of 2: 1; they were also its full time employees. In assessment year 2008-09, assessee entered into international transactions with associated enterprises (AEs) relating to advisory services and reimbursement of expenses incurred on behalf of associated enterprises amounting to Rs. 56,61,99,829 and Rs. 4,49,72,912, respectively. For purposes of determination of arm's length price (ALP), assessee used transactional net margin method ("TNMM"). assessee treated transactions relating to reimbursement received by it from its associated enterprises on actual basis (i.e., without mark-up) at arm's length price as such since no value addition was done by it in relation to said expenses. assessee identified four entities which were engaged broadly in same economic activities as in its case and identified as comparables. result of arm's length analysis is given below: Operating profit margins Sl. Comparable No. entity 2005- 2006- 2007- Average 06 07 08 IDFC - 1. Investment 17.30% -19.10% 55.50% Advisors Limited Future 2. Capital Holdings 0.88% 20.53% 10.71% Limited Khandwala 3. 43.35% 42.62% 42.99% Securities Limited Sumedha - - 4. Fiscal Services -18.42% 16.47% 20.36% Limited Final average 4.04% assessee's position was that because of fluctuation in margins of comparable entities, multiple year data of comparables was warranted to remove effect of year specific aberrations. Against average operating profit margin ("operating margin") of 4.04 per cent. earned by comparable entities, assessee earned operating margin of 27.05 per cent. and concluded that its transactions with its associated enterprises were at arm's length. assessee relied on rule 10B(4) of Incometax Rules, 1962 (hereafter "the Rules"). Rule 10B(4) reads as follows: "(4) data to be used in analysing comparability of uncontrolled transaction with international transaction or specified domestic transaction shall be data relating to financial year in which international transaction or specified domestic transaction has been entered into: Provided that data relating to period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have influence on determination of transfer prices in relation to transactions being compared." assessee argued that using multiple year data is consistent with OECD Guidelines as well as transfer pricing regulations of several developed jurisdictions. operating margin of assessee was stable in contrast to comparable companies, described below: Financial year Operating margin 2005-06 24.15% 2006-07 21.14% 2007-08 27.05% Average 24.11% On September 30, 2008, assessee filed its return for assessment year 2008-09 declaring total income of Rs. 12,41,83,160. Its case was scrutinised by Assessing Officer who referred matter to Transfer Pricing Officer ("the TPO") under section 92CA(3) of Act. On October 3, 2011, Transfer Pricing Officer passed order recommending transfer pricing additions of Rs. 20,93,34,155 to income of assessee. Transfer Pricing Officer computed operating margins of four comparables above using single year data, i.e., for financial year 2007-08 and ignoring data for two prior financial years, i.e., 2005-06 and 200607 while determining arm's length price. Transfer Pricing Officer concluded that multiple year data for assessee's comparables could not be used but introduced two new comparables with abnormal business profits. Transfer Pricing Officer also retained comparable in spite of it showing abnormal growth in assessment year under consideration and considered reimbursable expenses as part of operating expenses and corresponding reimbursement as part of operating revenue of assessee for purpose of determining arm's length price. Transfer Pricing Officer held that assessee had not furnished any detail as to how data for earlier years had impact on profits in concerned assessment year of assessee or comparables. Based on Transfer Pricing Officer's report, Assessing Officer passed assessment order on December 21, 2011, confirming recommendations of Transfer Pricing Officer. Assessing Officer also disallowed bonus paid by assessee to its shareholder employees-M/s. Ashish Dhawan (Rs. 67,91,947) and Kunal Shroff (Rs. 30,19,433)-under section 36(1)(ii) of Act. assessee filed its objections against draft assessment order before Dispute Resolution Panel ("DRP"). Dispute Resolution Panel, by order dated September 21, 2012, confirmed transfer pricing additions as well as disallowance of bonus made by respondent. Thereafter, on October 19, 2012, Assessing Officer completed assessment under section 143(3) read with section 144C of Act assessing income of assessee after sustaining transfer pricing additions made by Transfer Pricing Officer and disallowing bonus paid to its shareholders. Income-tax Appellate Tribunal dismissed assessee's appeal by its order dated December 20, 2013, and confirmed additions made by respondent. All lower authorities included three entities as comparables which had very high profit margins as compared with that of assessee. These entities, namely, Brescon Corporate Advisors Ltd. ("Brescon") (operating margin of 87.4 per cent.), Keynote Corporate Services Ltd. ("Keynote") (operating margin of 191.58 per cent.) and Khandwala Securities Ltd. ("Khandwala") (operating margin of 80.79 per cent.) had exceptional profit margins as compared with assessee (operating margin of 27.05 per cent.) and rejected three other comparables selected by assessee (i.e., IDFC Investment Advisors Ltd. (17.35 per cent.), Sumedha Fiscal Services Ltd. (9.14 per cent.) and Future Capital Holdings Ltd. (20.56 per cent.) Khandwala had been selected as comparable by assessee itself based on multiple year data for comparability analysis. However, Transfer Pricing Officer substituted same with data for concerned financial year, in which Khandwala had exceptionally high profit margins. Income-tax Appellate Tribunal upheld these findings and held that current year data should be used in absence of abnormal or exceptional facts/circumstances in existence which could have influence on results as well as determination of transfer prices for year under consideration. Further, Income-tax Appellate Tribunal held that rule 10B does not provide any basis to exclude entity or eliminate it from list of companies solely on basis of high profitability. authorities-including Income-tax Appellate Tribunal, held that decisive factors for determining inclusion or exclusion of any entity in/ from list of comparables are specific characteristics of services provided by said entities, assets employed, risks assumed, contractual terms and conditions prevailing including geographical location and size of market, cost of labour and capital in markets, etc., and high or low profit margins could not be criteria for inclusion or exclusion of entities in list of comparables. Arguments of assessee assessee submits that even if Income-tax Appellate Tribunal's ruling on issue is accepted, Brescon and Keynote should be excluded from list of comparables as its (the assessee's) risk profile is not similar to that of those two companies. They are risk-taking entities whereas assessee operates on cost plus model wherein guaranteed return of 25 per cent. on costs is assured to it. assessee further argues that its functional profile is significantly different from that of Keynote. Unlike assessee, Keynote is involved in capital market activities, including lead managing IPOs, rights offers, buybacks and takeovers. Also, Keynote considers its activities to be merchant banker as evidenced by its director's report and notes to accounts of concerned financial year. assessee submits that in audited financials of Keynote, there is no service-wise break-up of profits and, therefore, profitability of advisory services segment (which may be considered similar to services being rendered by assessee) is not available to be compared with assessee's profitability. assessee argues that Keynote's profit margins have shown volatility over years which could be attributed to abnormal business conditions and, therefore, Keynote should be rejected as comparable altogether. operating margins of keynote for 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% assessee highlights that Commissioner of Income-tax (Appeals) too had rejected Keynote in preceding as well as succeeding assessment year, i.e., assessment years 2007-08 and 2009-10. Further, Keynote has been excluded as comparable by Dispute Resolution Panel in preceding assessment year, i.e., assessment year 2006-07. In that order, dated March 4, 2013, Dispute Resolution Panel observed: "As regards choice of Keynote Corporate services as comparable by Transfer Pricing Officer based on single year data, Dispute Resolution Panel finds no infirmity in principles. However, after analysing economic circumstances as highlighted by assessee and corroborated from annual report of year, we do find it may not be robust comparable. According to assessee,'we would like to state that this company has very volatile profit margins and since learned Transfer Pricing Officer has computed arm's length price on basis of single year data (data for financial year 2005-06 only) this company should not be included in final set of comparable as it would lead to distortion of arm's length price'. assessee, while determining arm's length price, considered data for three years which mitigated high volatility in operating margins of this company. However on basis of single year data operating margins of this company will substantially inflate operating margins. 'The volatility in operating margin of this company is clearly evident from three-year profitability of comparables submitted before you are Transfer Pricing Officer, vide submission dated May 18, 2009 (copy enclosed at page 139 of paper book dated January 1, 2010, filed before hon'ble Panel). operating margin of this company during financial year 2003-04 was negative 6.87 per cent. and which converted to positive 13.33. In financial year 2004-05, thereby exhibiting this margin further increased to 94.06 per cent. showing even higher volatility (80 per cent. points) vis-a-vis previous year.' Further, we would also like to state that Keynote can also not be considered comparable to assessee (on basis of single year data) for reason that on basis of single year data this company is earning exceptionally high profits (i.e., 94 per cent.). It is further submitted that on possible reasons due to which Keynote has derived exceptional profits during year may be due to some alliances formed by it with some foreign companies during year. relevant extract (copy enclosed as annexure 3) from annual report of Keynote is given hereunder: 'The company formed alliances with Middle East based consulting company and with Swiss based consulting company to offer its clients cross border transaction ability. Thus, exceptional profit earned by Keynote during relevant year may be due to such alliance formed by Keynote with other companies in Middle East and Swiss. profit earned by it due to such alliance cannot be used for arm's length analysis. 2.3.4 In view of above reasons, Dispute Resolution Panel directs Transfer Pricing Officer to exclude this comparable as it is not robust comparable for this year. transfer pricing grounds are, accordingly, disposed of as above." On issue of disallowance of bonuses paid by assessee to its two full-time shareholder employees, it is submitted that bonuses were paid to all its employees during relevant financial year on basis of their performance and qualifications. Both individuals to whom bonuses paid were disallowed have requisite qualifications, experience and expertise in field of investment advisory services. Accordingly, keeping in view their experience, expertise and performance, assessee had compensated them. assessee submits that bonus under section 36(1)(ii) of Act is allowed as deduction if same amount would not have been payable to shareholders as profits or dividends if it had not been paid as bonus. provision requires sum paid as bonus to be exactly same as to be payable as dividend in absence of bonus for there to be disallowance. assessee submits that bonus paid to shareholder employees is not in same proportion as their shareholding. It is also submitted that basis for disallowance of bonus paid-that no dividend was declared by assessee-is incorrect as it paid interim dividend amounting to Rs. 5,47,47,000 in concerned assessment year. Thus, bonus paid to two shareholders was not in lieu of dividend and, therefore, should be allowed as tax deductible expenditure. Learned counsel argued that arm's length price of international transaction has to be determined by applying one of methods provided in section 92C(3) of Act; it should be most appropriate method and should also take into account prescribed factors. This is, counsel stated, elaborated in rule 10B of Rules, which contemplates adjustment on account of functional and other differences. He contended that adopting of any method ultimately envisages comparison of like functions, transactions and enterprises. Rule 10B(2)(a) provides that specific characteristic of services rendered by two entities should be compared in order to treat same as comparables for purpose of transfer pricing analysis. Counsel also referred to OECD guidelines and argued that accurate arm's length price determination is dependent on flexibility and sound exercise of discretion. Chapter III of OECD guidelines was relied on to say that they recommend that where can it be determined that some uncontrolled transactions have lesser degree of comparability than others, they should be eliminated. He also referred to section A-5 of OECD guidelines on "selecting and rejecting potential comparables" and pointed out that as per paragraph 3.56, wherever uncontrolled transactions have lesser degree of comparability than others, they should be eliminated. Counsel stated that similarly, paragraph 3.57 states that if range of comparables includes sizeable number of observations, statistical tools that take account of central tendency to narrow range (e.g., inter-quartile range or other percentiles); paragraph 3.59 suggests that where application of most appropriate method produces range of figures, substantial deviation among points in that range may indicate that data used in establishing some of points may not be as reliable as data used to establish other points in range or that deviation may result from features of comparable data that require adjustments. Learned counsel also relied on A.7.3 of OECD guidelines dealing with "extreme results in context of comparability considerations" to point out that extreme results might consist of losses or unusually high profits. These can affect financial indicators that are looked at in chosen method; some potential comparables have extreme results, further examination would be needed to probe such results. This important issue was overlooked by Income-tax Appellate Tribunal. Counsel relied on proviso to rule 10B(4) and stated that though mandate of law is ordinarily to rely upon comparables' data for current year, in certain circumstances, it is possible for authorities to rely on previous years' data restricted to two previous years. This is to eliminate any distorted picture which might be consequence of adherence to contemporaneous data, like in present case. It was argued that Dispute Resolution Panel's order for assessment year 2006-07 had accepted assessee's argument and excluded Keynote from list of comparables on ground that said concern had earned abnormally high or super profits. On that occasion, as compared with its previous year (assessment year 2005-06) profit level of 94 per cent., profit of enterprise was 145 per cent., registering 51 per cent. increase over previous year. This was considered to be too high to be allowed as comparable. During current year, profit registered was 191 per cent. In circumstances, it was illogical and arbitrary for Revenue to have rejected contention that data in respect of Keynote should have been excluded. It was also similarly argued that Incometax Appellate Tribunal fell into error in rejecting assessee's objection with respect to Brescon whose total turnover was over Rs. 14 crores of which comparable business was only Rs. 2 crores; absence of any sectional data with regard to this company, meant that its activities were not comparable, on fair application of rule 10B(2) and (3). Learned counsel relied on decisions of Special Bench in case of Deputy CIT v. Quark Systems P. Ltd. [2010] 4 ITR (Trib) 606 (Chandigarh) [SB]; [2010] 38 SOT 307 Chandigarh), Adobe Systems India P. Ltd. v. Addl. CIT [2012] 14 ITR (Trib) 84 (Delhi); 2011-(TII)-13-ITAT-DEL); Teva India P. Ltd. v. Deputy CIT [2011] 44 SOT 105 (Mum) (URO); Sapient Corporation P. Ltd. v. Deputy CIT [2012] 15 ITR (Trib) 285 (Delhi); [2011] 11 Taxmann.com 69 (Delhi); Asst. CIT v. Maersk Global Service Centre (India) P. Ltd. [2011] 133 ITD 543 (Mum); [2012] 14 ITR (Trib) 541 (Mumbai); Symantec Software Solutions P. Ltd. v. Asst. CIT [2012] 25 Taxmann.com 163 (Mum) and Division Bench decision of this court, in CIT v. Agnity India Technologies P. Ltd. [2013] 219 Taxman 26 (Delhi), were relied on. In Agnity India (supra) it was held that huge turnover companies like Infosys and Wipro cannot be considered as comparable to smaller companies like assessee. Learned counsel for assessee also argued that rejection of previous years' data, in facts of present case, was unwarranted. It was submitted that given that comparables introduced by Transfer Pricing Officer distorted margins, Assessing Officer and Dispute Resolution Panel erred in determining arm's length price on basis of data for financial year 2007-08 only and ignoring data for two prior financial years, i.e., financial year 2005-06 and financial year 200607. Learned counsel submitted that Transfer Pricing Officer had option of reaching back to previous years' data, since such power exists by virtue of proviso to rule 10B(4). Learned counsel also relied on Part B.3, paragraphs 3.75 to 3.78 of OECD guidelines, in support of submission. Revenue's contentions Revenue's contentions Mr. Rohit Madan, learned counsel for Revenue, argued that five methods have been prescribed to determine arm's length price in relation to international transaction and comparability analysis requirements are method specific under rule 10B(1). Referring to said rule it was submitted that price charged or paid for property transferred or service rendered in comparable transaction is relevant in case of CUP and re-sale price method while 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 transactional net margin method. They are provided for other methods. He contended that relevant rule thus makes it clear that specific characterisation of property transferred or services is not relevant for transactional net margin method and this position is in conformity with relevant OECD guidelines which suggest that broad comparability of functions should be done for transactional net margin method. Countering submissions of assessee, it was argued that neither Act nor rule contemplate exclusion of relevant transactions of like enterprises, in any manner other than what is prescribed. It was argued here that comparable cannot be removed from consideration merely because it suffers loss; likewise, unit or enterprise which enjoys higher profit (than assessee or significantly high profit in industry) or even one making so- called "super profit" too cannot be eliminated. Generally, both loss-making units and high profit-making units cannot be removed from list of comparables unless such removal is statutorily permitted by rule 10B(2) or (3). Counsel also submitted that this is also evident from reading of rule 10C. It was pointed out that rule 10B(3)(ii) and rule 10C(2)(e) permitted adjustment to eliminate material defects of difference between assessee and comparables. Counsel argued that only those factors which result in material difference in comparables of transactions as between assessee and unrelated transaction or third party enterprise, have to be reasonably adjusted to avoid distortions under said provisions. step envisioned there had to be necessarily followed keeping in view mandate "shall". It was also argued that decision in CIT v. Mentor Graphics (Noida) P. Ltd.-(I. T. A. No. 1114 of 2008, decided by this court on April 4, 2013) [2013] 354 ITR 586 (Delhi), has held that OECD guidelines cannot be applied because there are specific provisions of rule 10B(2) and (3) and first proviso to section 92C(2) which apply. There, it was held that having held that comparables given by assessee were to be accepted and those searched by Transfer Pricing Officer were to be rejected, only option then left to Income-tax Appellate Tribunal was to derive arithmetical mean of profit level indicators of comparables. It was submitted that accepting theory of "abnormally high profits" as ground for rejection of comparable would lead to vagueness and confusion because what constitutes abnormally high has nowhere been spelt out in Act or rules. On other hand, margin of variation permitted is + 3 per cent. (proviso to section 92C(2), reduced from 5 per cent. margin that existed earlier). Introduction of any other variation not based in law would not be justified. Analysis and conclusions Section 92C which is relevant, for purpose of determining arm's length price, inter alia, reads as follows: "92C. (1) arm's length price in relation to international transaction or specified domestic transaction shall be determined by any of following methods, being most appropriate method, having regard to nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as Board may prescribe, namely:- (a) comparable uncontrolled price method; (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 Board. (2) most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in manner as may be prescribed: Provided that where more than one price is determined by most appropriate method, arm's length price shall be taken to be arithmetical mean of such prices:... (3) Where during course of any proceeding for assessment of income, Assessing Officer is, on basis of material or information or document in his possession, of opinion that- (a) price charged or paid in 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 international transaction or specified domestic transaction have not been kept and maintained by assessee in accordance with provisions contained in sub-section (1) of section 92D and rules made in this behalf; or (c) information or data used in computation of arm's length price is not reliable or correct; or (d) assessee has failed to furnish, within specified time, any information or document which he was required to furnish by notice issued under sub-section (3) of section 92D, Assessing Officer may proceed to determine arm's length price in relation to said international transaction or specified domestic transaction in accordance with sub-sections (1) and (2), on basis of such material or information or document available with him: Provided that opportunity shall be given by Assessing Officer by serving notice calling upon assessee to show cause, on date and time to be specified in notice, why arm's length price should not be so determined on basis of material or information or document in possession of Assessing Officer." Section 92C(1) thus visualises determination of "arm's length price" (ALP) by any of five enumerated methods, "being most appropriate method", having regard to "nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as Board may prescribe, namely, (a) comparable uncontrolled price method, (b) resale price method, (c) cost + method, (d) profit split method, (e) transactional net margin method, (f) any such other method as may be prescribed by Board. Where more than one price is determined by most appropriate method, arm's length price shall be taken to be arithmetical mean of such prices." Rule 10B of Rules prescribes determination of arm's length price under section 92C. first step in all methods is evaluation of differences between international transaction undertaken with "unrelated enterprise performing comparable functions" in similar circumstances. Rule 10B of Income-tax Rules, inter alia, provides for various methods for determination of arm's length price. Rule 10B(1)(e) prescribes "transactional net margin method" (TNMM) with which present case is concerned. Rule 10B(1)(e)(i) is as under: "10B. (1) Determination of arm's length price under section 92C.... (e) transactional net margin method, by which,- (i) net profit margin realised by enterprise from international transaction entered into with associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by enterprise or having regard to any other relevant base." These provisions prescribe, therefore, that even under transactional net margin method, importance is given to "assets employed or to be employed" as relevant factors for consideration. Rule 10B(2), as second step, requires application of functions, asset, risk test for judging comparability of international transaction with uncontrolled transaction. It provides: "10B.(2) For purposes of sub-rule (1), comparability of international transaction with uncontrolled transaction shall be judged with reference to following, namely:- (a) specific characteristics of property transferred or services provided in either transaction; (b) functions performed, taking into account assets employed or to be employed and risks assumed, by respective parties to transactions; (c) contractual terms (whether or not such terms are formal or in writing) of transactions which lay down explicitly or implicitly how responsibilities, risks and benefits are to be divided between respective parties to transactions; (d) conditions prevailing in markets in which respective parties to transactions operate, including geographical location and size of markets, laws and Government orders in force, costs of labour and capital in markets, overall economic development and level of competition and whether markets are wholesale or retail. (e) extent to which reliable and accurate adjustments can be made to account for differences, if any, between international transaction or specified domestic transaction and comparable uncontrolled transaction or between enterprises entering into such transactions; (f) nature, extent and reliability of assumptions required to be made in application of method." Rule 10B(3) stipulates third step, and spells out when Transfer Pricing Officer is obliged to hold uncontrolled transaction as comparable with others. This provision reads as follows: "(3) uncontrolled transaction shall be comparable to international transaction or specified domestic transaction if- (i) none of differences, if any, between transactions being compared, or between enterprises entering into such transactions are likely to materially affect price or cost charged or paid in, or profit arising from, such transactions in open market; or (ii) reasonably accurate adjustments can be made to eliminate material effects of such differences." Rule 10B(4) provides what should be basis of calculations in terms of data, its contemporaneity, etc. It stipulates that: "(4) data to be used in analysing comparability of uncontrolled transaction with international transaction shall be data relating to financial year in which international transaction has been entered into: Provided that data relating to period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have influence on determination of transfer prices in relation to transactions being compared." assessee's argument is that entities earning "supernormal" or "abnormal" profits should be excluded from list of comparables. For this purpose, it relied on several rulings of various Benches of Incometax Appellate Tribunal. These are Adobe Systems India P. Ltd. v. Addl. CIT [2012] 14 ITR (Trib) 84 (Delhi); [2011] 44 SOT 49 (Delhi); Teva India P. Ltd. v. Deputy CIT [2011] 44 SOT 105 (Mum) (URO); Sapient Corporation P. Ltd. v. Deputy CIT [2012] 15 ITR (Trib) 285 (Delhi); [2011] 11 Taxmann.com 69 (Delhi); Asst. CIT v. Maersk Global Service Centre (India) P. Ltd. [2011] 133 ITD 543 (Mum); [2012] 14 ITR (Trib) 541 (Mumbai); Symantec Software Solutions P. Ltd. v. Asst. CIT [2012] 25 Taxmann.com 163 (Mum) and Division Bench decision ruling of this court, in CIT v. Agnity India Technologies P. Ltd. [2013] 219 Taxman 26 (Delhi). Besides, this court notices that similar reasoning of applying what is known as "turnover" filter or exclusion of "superprofit" making companies reasoning was applied in Continuous Computing India P. Ltd. v. ITO [2012] 52 SOT 45 (Bang); Centillium India Ltd. v. Deputy CIT [2012] 20 ITR (Trib) 69 (Bang) and Asst. CIT v. Frost and Sullivan India (P.) Ltd. [2012] 50 SOT 517 (Mumbai). Revenue has on other hand, relied on contrary views in Actis Advisers P. Ltd. v. Deputy CIT [2012] 20 ITR (Trib) 138 (Delhi); 24/7 Customer.Com P. Ltd. v. Deputy CIT [2013] 21 ITR (Trib) 514 (Bang) and Willis Processing Services (I) P. Ltd. v. Deputy CIT [2014] 30 ITR (Trib) 39 (Mum). Such views are echoed in Trilogy E-Business Software India P. Ltd. v. Deputy CIT [2013] 23 ITR (Trib) 464 (Bang) and Stream International Services P. Ltd. v. Asst. DIT (International Taxation) [2013] 23 ITR (Trib) 70 (Mum) too. Before analysing relative strengths of rival contentions, tabular statement containing reasoning which persuaded various Benches of Income-tax Appellate Tribunal to conclude one way or other is reproduced below: Sl. Judgment Finding Rationale No. 1. One of four comparables chosen by Transfer Pricing Officer (Sovereign Diamonds Ltd.) excluded ITO v. should be excluded. comparable had gross Saunay Jewels 1. 2. Simple arithmetic profit margin of 53.81 per (P.) Ltd. [2010] 42 average of gross cent. which was abnormal SOT 4 (Mum). profit margin cannot profits. be adopted as there is wide variation in parameters. Weighted average should be taken. said entities had shown supernormal profits. By excluding these three companies, Adobe arithmetic mean of OP/TC Systems India (P.) comes to 17.15 per cent., 1. Directed Ltd. v. Addl. CIT which falls within 5 exclusion of three 2. [2011] 44 SOT 49 per cent. range as entities as (Delhi); [2012] 14 permitted by section comparables. ITR (Trib) 84 92C(2). Further, (Delhi) Dispute Resolution Panel has passed cursory order without examining submissions of assessee. M/s. Vimta Labs had earned supernormal Remitted profits. Income-tax Teva India matter to Appellate Tribunal noted (P.) Ltd. v. Deputy Assessing Officer to decision in Adobe 3. CIT [2011] 44 decide issue of Systems and directed SOT 105 (Mum) inclusion of M/s. matter to be decided in (URO). Vimta Labs as light of that decision and comparable taking into account submissions of assessee. Transfer Pricing Officer cannot exclude all loss making comparables Sapient and include entity Directed Corporation (P.) (Zenith) making exclusion of one of Ltd. v. Deputy CIT supernormal profits at comparables [2011] 11 same time. Zenith is 4. considered by Taxmann.com 69 predominantly software Transfer Pricing (Delhi); [2012] 15 product company whereas Officer (Zenith ITR (Trib) 285 assessee is Infotech Ltd.) (Delhi). software deve-lopment services company and software product company shows higher margin. concern will not lose its status merely because it is loss- Affirmed making entity. However, exclusion of M/s. Transfer Pricing Officer Arraycom as has not excluded Nortel comparable. Further Arraycom for sole Networks India (P.) held that reason that it is loss- Ltd. v. Addl. CIT Transfer Pricing making entity but because 5. [2013] 36 Officer has it has been showing Taxmann.com 439 adequately factored persistent losses. Its (Delhi). subjective operation also has elements in reducing tendency. In determining absence of exceptional arm s length price. circumstances, previous year data under proviso to rule 10B(4) cannot be used. Keynote was into merchant banking whereas assessee provided investment advisory and related Carlyle India support services. SREI Directed Advisors (P.) Ltd. v. Caps core business was exclusion of, inter Asst. CIT [2012] 17 merchant banking and alia, Keynote ITR (Trib) 24 consultancy income 6. Corporate Services (Mumbai) I. T. A. accounted for only 0.27 Ltd. and S. R. E. I No. per cent. of total Capital Markets Ltd. 7901/Mum/2011, income. Absence of as comparable dated April 4, 2012. segmental data in so far as investment advisory service provided by assessee is concerned led to exclusion of comparables. Assessee derived its income from software development and IT enabled services. Assessee itself argued before Transfer Inclusion of Pricing Officer that VTIL is Vishal Information Deputy CIT v. comparable company Technology Limited Deloitte Consulting offering IT enabled as comparable India Pvt. Ltd. services. intangibles was not incorrect. [2012] 15 ITR (Trib) will not materially affect Wipro cannot be 7. 573 (Hyd) I. T. A. price or profit-earning comparable. No. (within meaning of rule Previous year data 1082/Hyd/2010, 10B(3)). No two can be used for dated July 22, comparable companies comparables only 2011. can be replicas of each under exceptional other. Rule 10B should be circumstances. applied on broader perspective and not with technical rigour. Wipro cannot be comparable as its turnover is 20 times that of assessee. These entities were required to be excluded on account of significantly higher Two entities Symantec operating margins (82.92 (ICC International Software per cent. and 78.29 per Agricultural Ltd. and Solutions (P.) Ltd. cent.) whereas next 8. TSR Darashaw Ltd.) v. Asst. CIT [2012] highest was 26.67 per were directed to be 25 Taxmann.com cent. Thus, unless it was excluded as 163 (Mum). demonstrated that these comparables. super normal profits were earned in normal routine of activities, they could not be included. Exclusion may not be justified on mere ground of loss and competition. However, on facts of case, number of factors have cumulative effect of justifying Godrej s exclusion. These are: Godrej makes Upheld refrigerators and not TVs, Sony India Revenue s decision to it has suffered huge (P.) Ltd. v. Deputy exclude Godrej as losses over period of CIT [2008] 114 comparable. 9. several years, had huge ITD 448 (Delhi); Reversed unutilised capacity, [2009] 315 ITR Revenue s finding on needs financial (AT) 150 (Delhi). inclusion on Videocon restructuring, joint as comparable. venture of company stands terminated, etc. Re inclusion of Videocon, there are material differences which cannot be eliminated within meaning of rule 10B(3). Thus, Videocon has to be excluded as comparable. entity making supernormal profits cannot be comparable. If at all it were to be considered as comparable, appropriate adjustments to Companies with material differences Philips supernormal profits would have to be made. Software Centre should have been However, normalisation 10. P. Ltd. v. Asst. excluded from list of margins of super- CIT [2008] 26 of comparables by profit making companies SOT 226 (Bang). Transfer Pricing is not envisaged on Officer. ad hoc basis and has to be done as per law. assessee was captive contract service provider and it did not bear any business and operational risks margin of profit shown by these two entities was Excluded E-gain extraordinary. All factors Thirdware Solutions Communication materially affecting Ltd. and WTI 11. (P.) Ltd. v. ITO comparability of Advanced [2008] 23 SOT assessee with other Technology as 385 (Pune). entities need to be comparables. scrutinised and adjusted, including operative profit. These two entities SAP Labs Directed were earning India (P.) Ltd. v. exclusion of M/s. supernormal profits. Asst. CIT [2010] 6 12. Hinduja TMT and Extreme cases should be ITR (Trib) 81 ITR (Trib) 81 M/s. Aftek Infosys avoided while making (Bang); [2011] 44 Ltd. as comparables. comparative study of SOT 156 (Bang). analogous cases. As regards exclusion of entities Rejected earning abnormal profits, Exxon Mobil assessee s general submission Co. India P. Ltd. v. contention that two cannot be accepted; 13. Deputy CIT [2012] loss making assessee should bring 15 ITR (Trib) 353 concerns had to be out peculiar features (Mum). included among why such exclusion is comparables. necessary in circumstances of case. inclusion of entities with supernormal profits would depend upon facts and circumstances of each case. It should trigger further investigation to establish whether it can be taken as comparable Entities with or not this would abnormally high Maersk depend upon whether profit margins cannot Global Centres high profits reflect be rejected outright (India) (P.) Ltd. v. normal business condition as comparables. In Asst. CIT [2014] or whether they are given facts of 31 ITR (Trib) 1 result of some abnormal 14. case, two (Mumbai) [SB]; conditions prevailing in comparables sought [2014] 43 relevant year. to be included Taxmann 100 profit margin earned by indicated unusual (Mumbai Special such entity in features for year, Bench). immediately preceding which qualified for year may also be taken their exclusion. into account to determine this issue. If high profit margin does not reflect normal business condition, it should be rejected. entity cannot be rejected solely on basis of abnormally high profit margin. Goldman Sachs (India) Directed Securities Pvt. Ltd. exclusion of Assessee and V. Asst. CIT I. T. A. comparables comparables were 15. No. ordered by functionally different and 7724/Mum/2011, Transfer Pricing not in same segment. dated January 23, Officer. 2013. BCC Fuba India Directed Ltd. was persistently exclusion of BCC loss making unit and, Fuba India Ltd. as therefore, it cannot be comparable. considered to be good Comparables have Advance comparable. Further, in to be tested for each Power Display respect of another year independently. Systems Ltd. v. company, profit and 16. fact that Asst. CIT [2013] 35 loss account had entity has been Taxmann.com 145 extraordinary item of chosen as (Mum). income on account of comparable for one sale of business. year does not ipso Therefore, this makes this facto mean that it company as not good would be chosen comparable for year subsequent year. under consideration. company cannot be excluded as comparable solely because it is high profit making unit. persistently loss making unit cannot be consi- If profit not dered as com- supernormal, mere parable. fact that it is high does Syscom Comparability of not justify exclusion. Corporation Ltd. v. uncontrolled Unless and until there are 17. Asst. CIT [2013] 35 transaction with specific reasons and Taxmann 600 international factors as provided under (Mum). transaction has to rule 10B, entity cannot be measured by be excluded or eliminated using current year from list of data and only when comparables. current year data does not give true picture due to abnormal circumstances that multiple year data is used. Aztec Software and Technology Services Ltd. v. criteria Asst. CIT [2007] prescribed under There should be 294 ITR (AT) 32 Act and Rules is proper analysis of 18. (Bang) [SB] I. T. A. primary basis for transactions. FAR No. testing analysis. 584/Bang/2006, comparability. dated July 12, 2007 (Bang- Special Bench). Tribunal had excluded Infosys as it was giant company in area of software CIT v. development and it Agnity India Upheld assumed all risks leading Technologies (P.) exclusion of Infosys to higher profits whereas 19. Ltd. [2013] 36 Technologies Ltd. as assessee was Taxmann.com comparable. captive unit of parent 289 (Delhi). company and assumed only small risk. High Court upheld reasons given by Tribunal for exclusion. Companies with Cummins supernormal profits and Turbo companies which are loss- Technologies Ltd. making cannot straight 20. v. Deputy DIT away be rejected as [2013] 35 comparables unless Taxmann.com abnormal loss is 350 (Pune). projected. Tribunal has Google India consistently held that (P.) Ltd. v. Deputy Exclusion of super profit making CIT [2013] 28 ITR two companies companies have to 21. (Trib) 403 (Bang); making supernormal excluded from list of [2013] 29 Taxman profits. comparables before 412. making transfer pricing adjustment. Maersk Global Centres (India) (P.) Ltd. (supra) was Special Bench (three Member) decision of Income-tax Appellate Tribunal which had to address precise question which arises for consideration in this case, i.e., whether in facts of that case "companies earning abnormally high profit margin should be included in list of comparable cases for purpose of determining arm's length price of international transactions". Although Income-tax Appellate Tribunal did not specifically answer 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 materials on record Bench did indicate general approach appropriate in this regard (page 62 of 31 ITR (Trib)): "... comparability of international transaction with uncontrolled transaction for purpose of determining arm's length price of international transaction by following transactional net margin method is international transaction by following transactional net margin method is required to be judged with reference to functions performed as per sub-rule (2)(b) of rule 10B read with sub-rule (1)(e) thereof and there is no bar in transfer pricing regulations in India to exclude certain entities selected as potential comparables on broad functionality test by applying functional test at narrow or micro level to attain relatively equal degree of comparability. On other hand, rule 10B(3) provides that uncontrolled transaction selected/judged as per rule 10B(2) shall be comparable to international transaction only if none of differences, if any, between transactions being compared, or between enterprises entering into such transactions are likely to materially affect price or cost charged or paid or profit arising from such transaction in open market or reasonably accurate adjustment can be made to eliminate effects of such difference. In our opinion, sub-rule (3) of rule 10B thus clearly provides for further exclusion of comparables selected by applying test/criteria given in subrule (2) of rule 10B if there is any difference found between enterprises entering into transactions which materially affects cost charged or profit arising from such transaction in open market. 69. Keeping in view relevant portion of OECD Transfer Pricing Guidelines discussed above and having regard to relevant transfer pricing regulations as contained in rule 10B(3) of Incometax Rules, 1962, we are of view that further dissection or classification of information technology enabled services can be done depending on facts and circumstances of each case so as to select entities having relatively equal degree of comparability." In Exxon Mobil Co. India P. Ltd. (supra), Mumbai Bench decision, (cited at Sl. No. 13 in table above), Income-tax Appellate Tribunal held (page 390 of 15 ITR (Trib)): "(xi) Now, coming to alternative arguments of assessee that abnormal profit making unit is also to be eliminated on same analogy on which loss making units are excluded, we, in principle, do not dispute this proposition. various case laws relied upon by assessee lay down that comparable cannot be eliminated just because it is loss making unit. Similarly, higher profit making unit cannot also be automatically eliminated just because comparable company earned higher profits than average. reason for rejecting two loss making units is not just because they were loss making units but for reasons which are already stated in preceding paragraphs. If similar reasons existed in higher profit making unit, then, it is for assessee to bring out those reasons and seek exclusion of same. general argument that you have to exclude units which have high profit range, in case you exclude units which have made loss is general submission which cannot be accepted. In other words, as general principle, both loss making unit and high profit making unit cannot be eliminated from comparables unless there are specific reasons for eliminating same which is other than general reason that comparable has incurred loss or has made abnormal profits." This court notices that American Express Services India Ltd. v. Deputy CIT [2013] 57 SOT 22 (Delhi) said, similarly, that: "If comparables are performing same functions then merely on 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 case of Sundaram Finance Distribution Ltd., we find that main objection of assessee is that said comparable was included because assessee had supplied same and second objection is that in said comparable there was no staff. As far as first objection is concerned, we are in agreement with assessee's counsel that merely because said comparable was provided by assessee, same could not be included without proper examination to account for differences. assessee is well within his right to demonstrate that comparable supplied by it in transfer pricing analysis was not correct and had to be excluded. This right of assessee is not curtailed in any manner, whatsoever, in rules." similar reasoning was adopted in Premier Exploration Services P. Ltd. v. ITO [2014] 29 ITR (Trib) 427 (Delhi) (page 438): "Although assessee had taken this company as comparable on basis of past years data but in our considered view, Saket Projects Ltd. was not comparable to assessee because event management was done by sponsorships which is evident from various documents placed in paper book. Further, segment allocation of expenses also appears to be not reliable. We agree with view of Revenue that no comparable can be rejected merely on basis of high margins if comparable is functionally comparable to assessee and also that there is miner variation in functional similarity. However, in case of Saket Projects Ltd. there is functional dissimilarity. company is organising events with various kinds of sponsorships. facts also suggest that segmental allocation of expenses were not reliable. We also hold that when direct comparables are available then segmental results of companies engaged in other business should not be taken as comparable. On basis of these facts, we hold that Saket Projects Ltd. was not comparable to extent wherein various variations could be ruled out or iron out by provisions of law and rules." assessee's position is supported by reasoning in cases like Income-tax Appellate Tribunal's decision in Mentor Graphics (Noida) P. Ltd. v. Deputy CIT [2007] 109 ITD 101 (Delhi) where contentions such as these were accepted: "The wide difference in ratio of operating margins... in final selection of comparable... is clear pointer to fact that selection made was faulty... OECD guideline on this point is as under: '1.47 Where application of one or more methods produces range of figures, substantial deviation among points in that range may indicate that data used in establishing some of points may not be as reliable as data used to establish other points in range or that deviation may result from features of comparable data that require adjustments.' Inferring from above ruling, we requests your goodself to not consider companies displaying abnormal profits since they deviate from normal trend displayed by data set." Many decisions of different Benches of Income-tax Appellate Tribunal indicate rote repetition (in words of Felix Frankfurter J. quoted in beginning of this judgment "lazy repetition") of this reasoning, without independent analysis of provisions of Act and rules. (Ref. Capital IQ Information Systems (India) P. Ltd. v. Deputy CIT (International Taxation) [2013] 25 ITR (Trib) 185 (Hyd), Symphony Marketing Solutions India P. Ltd. v. ITO [2013] 27 ITR (Trib) 753 (Bang). indication of what ought to be correct approach was given by Division Bench of this court in CIT v. Mentor Graphics (Noida) P. Ltd. [2013] 259 CTR 1 (Delhi); [2013] 354 ITR 586 (Delhi) where it was held that (page 600 of 354 ITR): "The sum and substance of Tribunal's order is that criteria adopted by Transfer Pricing Officer for searching comparables was not correct. Secondly, Transfer Pricing Officer had not specifically rejected any of comparables of respondent-assessee. Tribunal was of view that comparables of respondent-assessee ought to have been accepted and, had that been case, there would have been no need for Transfer Pricing Officer to search for comparables. Of course, in passing order, Tribunal made certain general observations that unless and until comparables drawn by taxpayer were rejected, fresh search by Transfer Pricing Officer could not be conducted. However, this has to be tempered with relevant statutory provisions which are clearly set out in subsection (3) of section 92C of said Act which stipulates four situations whereunder Assessing Officer/Transfer Pricing Officer may proceed to determine arm's length price in relation to international transaction. If any one of those four conditions is satisfied, it would be open to Assessing Officer/Transfer Pricing Officer to proceed to determine arm's length price. This clarification of observation of Tribunal was necessary and that is why we have done so. We also note that Tribunal had gone further and reduced list of comparables to merely four as indicated in paragraph 46 of impugned order. We do not think that it was right approach to be adopted by Tribunal. Tribunal should have stopped at point where it decided on facts that comparables given by respondent-assessee were to be accepted and those searched by Transfer Pricing Officer were to be rejected. only option then left to Tribunal was to derive arithmetical mean of profit level indicators of comparables which were accepted by it. In this case such comparables happen to be those of respondent- assessee. Tribunal, in selecting only one profit level indicator out of set of profit level indicators had clearly erred in law. However, in facts of present case that would not make any difference to respondent/assessee's case in as much as even if arithmetical mean of comparables as accepted by Tribunal are taken into account, profit level indicator would, whether seven companies are taken into consideration or all eight companies are taken into consideration, be less than 6.99 per cent which is profit level indicator of respondent-assessee for relevant year, that is, financial year ending March 31, 2002. We may also make it clear that reference to OECD Guidelines by Tribunal in impugned order are in context of reliance placed by Transfer Pricing Officer on very same guidelines, in particular, to para 3.27 thereof. In present case, there are specific provisions of sub-rules (2) and (3) of rule 10B of said Rules as also of first proviso to section 92C(2) of said Act which apply. Therefore, question of applying OECD Guidelines does not arise at all." It is, therefore, evident that Special Bench and this court stressed that mere distortion cannot be basis of exclusion, given mandate of section 92C. assessee had during hearing, heavily relied on OECD guidelines and another Division Bench ruling in Agnity (supra). This court proposes to take up latter decision first for discussion. In Agnity (supra), Revenue had questioned, inter alia, Income-tax Appellate Tribunal decision to exclude data relating to Infosys. One of reasons was that said company was "giant" corporation and was involved in multifarious activities. After reproducing comparative chart and noticing facts, court reasoned as follows: "6. Learned counsel for Revenue has submitted that Tribunal after recording aforesaid table has not affirmed or given any finding on differences. This is partly correct as Tribunal has stated that Infosys Technologies Ltd. should be excluded from list of comparables for reason latter was giant company in area of development of software and it assumed all risks leading to higher profits, whereas respondent-assessee was captive unit of parent company and assumed only limited risk. It has also stated that Infosys Technologies Ltd. cannot be compared with respondent-assessee as seen from financial data etc. to two companies mentioned earlier in order i.e. chart. In grounds of appeal Revenue has not been able to controvert or deny data and differences mentioned in tabulated form. chart has not been controverted. 7. Learned counsel for appellant Revenue during course of hearing, drew our attention to order passed by Transfer Pricing Officer and it is pointed out that based upon figures and data made available, Transfer Pricing Officer had treated third company as comparable when wage and sale ratio was between 30 per cent. to 60 per cent. By applying this filter, several companies were excluded. This is correct as it is recorded in paragraph 3.1.2 of order passed by Transfer Pricing Officer. Transfer Pricing Officer, as noted above, however had taken three companies, namely, Satyam Computer Service Ltd., L&T Infotech Ltd. and Infosys Technologies as comparable to work out mean. 8. It is common case that Satyam Computer Services Ltd. should not be taken into consideration. Tribunal for valid and good reasons has pointed out that Infosys Technologies Ltd. cannot be taken as comparable in present case. This leaves L&T Infotech Ltd. which gives us figure of 11.11 per cent., which is less than figure of 17 per cent. margin as declared by respondent-assessee. This is finding recorded by Tribunal. Tribunal in impugned order has also observed that assessee had furnished details of workables in respect of 23 companies and mean of comparables worked out to 10 per cent., as against margin of 17 per cent. shown by assessee. Details of these companies are mentioned in paragraph 5 of impugned order. 9. In view of aforesaid position, we do not think that any substantial question of law arises for consideration. appeal is dismissed." Quite evidently, court accepted assessee's contentions with respect to dissimilarity of comparables; given facts, equally, there was sufficient material to favour that view, in facts of case. court, unlike in Mentor Graphics (supra) did not undertake analysis of provisions involved it was not also necessary, given admitted state of facts. Considerable inspiration was drawn from OECD guidelines to say that extraordinary facts in relation to comparable should lead to its rejection in transfer pricing analysis. relevant provisions of 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 financial indicators that are looked at in chosen method (e.g., gross margin when applying resale price, or net profit indicator when applying transactional net margin method). They can also affect other items, e.g. exceptional items which are below line but nonetheless may reflect exceptional circumstances. Where one or more of potential comparables have extreme results, further examination would be needed to understand reasons for such extreme results. reason might be defect in comparability, or exceptional conditions met by otherwise comparable third party. extreme result may be excluded on basis that previously overlooked significant comparability defect has been brought to light, not on sole basis that results arising from proposed'comparable' merely appear to be very different from results observed in other proposed'comparables'. 3.64 independent enterprise would not continue loss-generating activities unless it had reasonable expectations of future profits. See paragraphs 1.70 to 1.72. Simple or low risk functions in particular are not expected to generate losses for long period of time. This does not mean however that loss-making transactions can never be comparable. In general, all relevant information should be used and there should not be any overriding rule on inclusion or exclusion of loss-making comparables. Indeed, it is facts and circumstances surrounding company in question that should determine its status as comparable, not its financial result. 3.65 Generally speaking, loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be comparable. Circumstances in which loss-making transactions/enterprises should be excluded from list of comparables include cases where losses do not reflect normal business conditions, and where losses incurred by third parties reflect level of risks that is not comparable to one assumed by taxpayer in controlled transactions. Loss-making comparables that satisfy comparability analysis should not however be rejected on sole basis that they suffer losses. 3.66 similar investigation should be undertaken for potential comparables returning abnormally large profits relative to other potential comparables." On use of multiple year data, this is what said guidelines provide: "B.5 Multiple year data 3.75 In practice, examining multiple year data is often useful in comparability analysis, but it is not systematic requirement. Multiple year data should be used where they add value to transfer pricing analysis. It would not be appropriate to set prescriptive guidance as to number of years to be covered by multiple year analyses. 3.76 In order to obtain complete understanding of facts and circumstances surrounding controlled transaction, it generally might be useful to examine data from both year under examination and prior years. analysis of such information might disclose facts that may have influenced (or should have influenced) determination of transfer price. For example, use of data from past years will show whether taxpayer's reported loss on transaction is part of history of losses on similar transactions, result of particular economic conditions in prior year that increased costs in subsequent year, or reflection of fact that product is at end of its life cycle. Such analysis may be particularly useful where transaction profit method is applied. See paragraph 1.72 on usefulness of multiple year data in examining loss situations. Multiple year data can also improve understanding of long-term arrangements. 3.77 Multiple year data will also be useful in providing information about relevant business and product life cycles of comparables. Differences in business or product life cycles may have material effect on transfer pricing conditions that needs to be assessed in determining comparability. data from earlier years may show whether independent enterprise engaged in comparable transaction was affected by comparable economic conditions, in comparable manner, or whether different conditions in earlier year materially affected its price or profit so that it should not be used as comparable. 3.78 Multiple year data can also improve process of selecting third party comparables, e.g. by identifying results that may indicate significant variance from underlying comparability characteristics of controlled transaction being reviewed, in some cases leading to rejection of comparable, or to detect anomalies in third party information. 3.79: use of multiple year data does not necessarily imply use of multiple year averages. Multiple year data and averages can however be used in some circumstances to improve reliability of range. See paragraphs 3.57- 3.62 for discussion of statistical tools." reasoning adopted in various judgments noticed above, shows that functional analysis seeks to identify and compare economically significant activities and responsibilities undertaken, assets used and risks assumed by parties to transaction. Quantitative and qualitative filters/criteria have been used in different cases to include or exclude comparables. intuitive logic for excluding big companies from list of comparables while undertaking FAR analysis of smaller company is attractive, given that such big companies provide services to diverse clientele, perform multifarious functions, often assume risks and employ intangible assets which are specially designed, unlike in case of smaller companies. bigger companies have established reputation in segment, are well known and employ economies of scale to telling end. On other hand, these obvious-and apparent features should not blind Transfer Pricing Officer from obligation to carry out transfer pricing exercise within strict mandate of section 92C and rules 10A to 10E. arm's length price determination, in respect of international transaction has necessarily to confirm to mandate of rule 10B. In this case, method followed for determining arm's length price of international transaction adopted by assessee and Revenue is transactional net margin method. comparability of international transaction with uncontrolled transaction has, in such cases, to be seen with reference to functions performed, taking into account assets employed or to be employed and risks assumed by respective parties to transaction as per rule 10B(2)(b). specific characteristics of property transferred or services provided (contemplated by rule 10B(2)(a)) in either transactions may be secondary, for judging comparability of international transaction in transactional net margin method because price charged or paid for property transferred or services provided and direct and indirect cost of production incurred by enterprise in respect of property transferred or services provided go into reckoning comparability analysis in transaction methods, i.e., comparable uncontrolled price, resale price and cost plus whereas profit based method such as transactional net margin method takes into account, net margin realised. In transactional net margin method, comparability of international transaction with 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 risks assumed by respective parties to transaction. As noticed earlier, rule 10B(3) mandates that given or select uncontrolled transaction selected in terms of rule 10B(2) "shall be comparable to international transaction" if none of differences, if any, between compared transactions, or between enterprises entering into such transactions "are likely to materially affect price or cost charged or paid or profit arising from such transaction in open market or reasonably accurate adjustment can be made to eliminate effects of such difference". Now, sequitur of rule 10B(2) and (3) is that if comparable entity or entity's transactions broadly conform to assessee's functioning, it has to enter into matrix and be appropriately considered. crucial expression giving insight into what was intended by provision can be seen by use of expression: "none of differences, if any, between transactions being compared, or between enterprises entering into such transactions are likely to materially affect price or cost charged or paid in,... such transactions in open market". other exercise which Transfer Pricing Officer has to necessarily perform is that if there are some differences, attempt to "adjust" them to "eliminate material effects" should be made: "(ii) reasonably accurate adjustments can be made to eliminate material effects of such differences." Such being case, it is clear that exclusion of some companies whose functions are broadly similar and whose profile-in respect of activity in question can be viewed independently from other activities cannot be subject to per se standard of loss-making company or "abnormal" profit making concern or huge or "mega" turnover company. As explained earlier, rule 10B(2) guides six methods outlined in clauses (a) to (f) of rule 10B(1), while judging comparability. Rule 10B(3), on other hand, indicates approach to be adopted where differences and dissimilarities are apparent. Therefore, mere circumstance of company-otherwise conforming to stipulations in rule 10B(2) in all details, presenting peculiar feature- such as huge profit or huge turnover, ipso facto does not lead to its exclusion. Transfer Pricing Officer, first, has to be satisfied that such differences do not "materially affect price... or cost"; secondly, attempt to make reasonable adjustment to eliminate material effect of such differences has to be made. court is also aware of factors mentioned in rule 10B(2), i.e., characteristics of service provided, functions performed taking into account assets employed or to be employed and risks assumed, by respective parties to transactions; contractual terms of transactions indicating how responsibilities, risks and benefits are to be divided between respective parties to transactions; conditions prevailing in markets in which respective parties to transactions operate, including geographical location and size of markets, laws and Government orders in force; costs of labour and capital in markets, overall economic development and level of competition and whether markets are wholesale or retail. These elements comprehend 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 international transaction or specified domestic transaction and comparable uncontrolled transaction or between enterprises entering into such transactions and nature, extent and reliability of assumptions required to be made in application of method" have to be taken into consideration by Transfer Pricing Officer. As regards relevance of multiple year data for transfer pricing determination, this court is of opinion that general rule as prescribed in rule 10B(4) mandates tax authorities to take into account only relevant assessment year's data. proviso to rule 10B(4) permits data relating to two years prior to relevant assessment year to be taken into account in event that they have influence on determination of price. However, in such instances, onus lies upon assessee to establish relevance of such data. language of rule 10B(4) does not leave any scope for ambiguity on this issue. This court notices that this very ground, i.e., applicability of previous years' data for reaching out comparables, was sought to be urged in Marubeni India (P.) Ltd. v. DIT [2013] 354 ITR 638 (Delhi) but deliberately left moot because assessee had given it up before Tribunal. Transfer Pricing Officer in his order dated October 3, 2011 has comprehensively examined authorities on this issue and rightly held that ordinarily, Revenue has to consider only relevant assessment year's data under rule 10B(4) and that data from earlier period may also be considered if "it reveals certain facts which have influence on determination of transfer prices in relation to transaction being considered". assessee has placed significant reliance on OECD guidelines to contend admissibility of previous year's data for transfer pricing determination. However, for reasons given in paragraphs below, this court is of opinion that OECD guidelines have no bearing on this issue. This court holds that in facts of present case, assessee was incorrect, both in its reliance placed upon previous years' data as well as manner of such reliance. First, assessee's justification for relying on such data is volatility in comparables' profit margins and consequent inability to transact at consistent arm's length price. However, this is not warranted herein. Whilst there may be wide fluctuation in profit margins of comparables from year-to-year, this by itself does not justify need to take into comparables from year-to-year, this by itself does not justify need to take into account previous years' profit margins. transfer pricing mechanism provided in Act and Rules prescribes that while determining arm's length price, arithmetic mean of all comparables is to be adopted. This is to offset consequence of any extreme margins that comparables may have and arrive at balanced price. Similarly, wide fluctuations in profit margins of same entity on year-to-year basis would be offset by taking arithmetic mean of all comparables for assessment year in question. In any case, in event that volatility is on account of materially different aspect incapable of being accounted for, analysis under rule 10B(3) would exclude such entity from being considered as comparable. Secondly, as regards manner of using previous years' data, assessee has taken arithmetic mean of comparables' profit margins for assessment year in question and two previous years. This court disagrees. proviso to rule 10B(4), read with sub-rule, itself indicates that purpose for which previous years' data may be considered is-analysing comparability of uncontrolled transaction with international transaction. It does not prescribe that once uncontrolled transaction has been held to be "comparable", in order to obviate apparent volatility in data, arithmetic mean of three years (the assessment year in question and two previous years') may be taken. That would amount to assigning equal weight to data for each of three years, which is against mandate of rule 10B(4). use of word "shall" in rule 10B(4) and, noticeably, "may" in proviso, implies that relevant assessment year's data is of primary consideration, as opposed to previous years' data. contention that OECD guidelines have to be taken into consideration requires closer scrutiny. Organisation for Economic Co- operation and Development (OECD) is international economic organisation of 34 countries founded in 1961 to stimulate economic progress and world trade. India is not member of this grouping; it has observer status. She has, however, of late been actively co-operating with organisation. Guidelines of OECD, therefore, have only persuasive status; they do not have any legal sanction unlike, for instance, double taxation avoidance agreements which courts are duty bound to interpret and implement, in terms of municipal law, given compulsion of provisions of Income-tax Act. Secondly-and more importantly-the provisions of Constitution compel national legislation, to embody terms of treaty, for it to be enforceable in courts in India. This is because of article 253 of Constitution and dualist tradition (of International law) followed by India, whereby treaties by themselves are legally unenforceable in courts but are to be assimilated through municipal (or national) legislation. Our Supreme Court has, in area of human rights- particularly in personal liberty, been emphasising that to extent provision of any treaty is in consonance with provision of Constitution (such as article 21) it would be read along with such provision or right (Jolly George Varghese v. Bank of Cochin, AIR 1980 SC 470, Apparel Export Promotion Council v. A. K. Chopra [1999] AIR 1999 SC 625; Kubic Dariusz v. Union of India [1990] AIR 1990 SC 605. Thus, courts are primarily bound by law on subject in India; if law is clear and unambiguous, there is no question of resorting to extrinsic sources. only rider is that if terms of such conventions or treaties are similar to law applicable in India, courts may consider precedents in that regard; however, those are only of persuasive value. aforesaid conclusion is fortified by Division Bench decision of this court in Mentor Graphics (supra), where court noted (page 600 of 354 ITR): "We may also make it clear that reference to OECD guidelines by Tribunal in impugned order are in context of reliance placed by Transfer Pricing Officer on very same guidelines, in particular, to paragraph 3.27 thereof. In present case, there are specific provisions of sub-rules (2) and (3) of rule 10B of said Rules as also of first proviso to section 92C(2) of said Act which apply. Therefore, question of applying OECD guidelines does not arise at all." This court also notes that recent decision in Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT [2015] 374 ITR 118 (Delhi) (dated March 16, 2015) relied extensively on OECD Guidelines. However, said ruling itself recognised that provisions of Act and Rules "are supreme". Therefore, this court holds that where they (i.e., Act and Rules) adequately cover field, reliance on OECD Guidelines is not warranted. At this stage, we deem it fit to quote following observations of Supreme Court in Entertainment Network (India) Ltd. v. Super Cassette Industries Ltd. [2008] 13 SCC 30: "However, applicability of international conventions and covenants, as also resolutions, etc., for purpose of interpreting domestic statute will depend upon acceptability of Conventions in question. If country is signatory thereto subject of course to provisions of domestic law, international covenants can be utilised. Where International Conventions are framed upon undertaking great deal of exercise upon giving opportunity of hearing to both parties and filtered at several levels as also upon taking into consideration different societal conditions in different countries by laying down minimum norm, as for example, ILO Conventions, court would freely avail of benefits thereof. Those conventions to which India may not be signatory but have been followed by way of enactment of new Parliamentary statute or amendment to existing enactment, recourse to International convention is permissible." (emphasis supplied) above excerpt indicates that courts must be cautious of relying upon international conventions to which India is not signatory and with respect to which there is no legislative mandate whatsoever. In any event, OECD Guidelines relevant herein are in consonance with Rules. Paragraph 3.63 of Guidelines states that extreme comparable cannot be excluded "on sole basis that results arising from proposed'comparable' merely appear to be very different from results observed in other proposed'comparables' and that "further examination would be needed to understand reasons for such extreme results". Similarly, paragraph 3.65 states that "loss-making comparables that satisfy comparability analysis should not, however, be rejected on sole basis that they suffer losses". Further, paragraph 3.64 states that "it is facts and circumstances surrounding company in question that should determine its status as comparable, not its financial result". same approach is prescribed in paragraph 3.66 for entities making supernormal profits. Therefore, both OECD Guidelines as well as rule 10B(2) and 10B(3) do not, in any manner, prescribe automatic exclusion of entities with extreme financial results. Similarly, in so far as use of multiple year data is concerned, paragraph 3.75 of OECD Guidelines states that "[m]ultiple year data should be used where they add value to transfer pricing analysis". This is akin to proviso to rule 10B(4) which provides for "data relating to period not being more than two years prior to such financial year [to] be considered if such data reveals facts which could have influence on determination of transfer prices in relation to transactions being compared". Crucially, as noted by Transfer Pricing Officer, paragraph 3.79 of Guidelines states that "use of multiple year data does not necessarily imply use of multiple year averages". Thus, even if multiple year data is taken into consideration while determining arm's length price, it may only be for purposes of factoring in material changes in, inter alia, economic conditions, third party variables, etc. This court proceeds on basis that there is sufficient guidance and clarity in rule 10B on principles applicable for determination of arm's length price. These include various factors to be taken into consideration, approach to be adopted (functions performed, taking into account risks borne and assets employed, size of market, nature of competition, terms of labour, employment and cost of capital, geographical location, etc.) extent of accurate adjustments possible, too, is factor to be considered. Rule 10B(3) then underlines what arm's length price determining exercise entails, if there are dissimilarities which materially affect price charged, etc: first attempt has to be to eliminate components which so materially affect price or cost. In other words, given data available, if distorting factor can be severed and other data used, that course has to be necessarily adopted. In present case, this court holds that once Brescon, Keynote and Khandwala Securities are held to be functionally similar to assessee, they would be included as comparables, notwithstanding their high profit margins, provided that material difference on account of such high profit margins can be eliminated under rule 10B(3) analysis. This court, on perusal of orders of lower authorities and assessee's submissions before them which have been placed on record in this appeal, finds that assessee's contentions with respect to exclusion of Brescon and Khandwala Securities were based only on their exceptionally high profit margins for assessment year in question and not on grounds of functional dissimilarities. Indeed, assessee did not contend latter before lower authorities. assessee has sought to highlight differences in risk profiles of assessee and Brescon in present appeal. However, this court holds that such contention cannot be raised for first time at this stage. Therefore, Brescon and Khandwala Securities are held to be functionally similar and matter is remitted to Dispute Resolution Panel for purposes of examination under rule 10B(3) of Rules. In event that material differences arising out of extremely high profits cannot be eliminated as per rule 10B(3), these two entities will have to be discarded as comparables. As far as Keynote is concerned, this court notices that assessee had challenged its inclusion as comparable on two grounds: (a) differences in activities of Keynote and assessee; and (b) exceptionally high profit margins. Transfer Pricing Officer rejected first ground relying on fact that assessee had used it as comparable for previous years and in subject assessment year as well, it qualified as comparable based on assessee's search process. Further, Transfer Pricing Officer held that Keynote was engaged in financial consultancy and would, therefore, be considered as comparable. Income-tax Appellate Tribunal, for reasons unknown, did not examine this issue. This court notes that assessee is engaged in 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 group companies of investment and disposition opportunities; collection and dissemination of financial information of prospective entities; and other related services. On other hand, Keynote, as per its directors' report for financial year 2007-08, is involved in "lead managing IPOs, rights offers, buybacks and takeovers. [It] also expanded its reach in Corporate Finance & M&A Advisory". 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, assessee does not provide any of these services enumerated above. Given such functional differences and mandate of rule 10B(2)(b), there could be merit in argument that Keynote cannot be considered comparable for determining arm's length price. fact that assessee had included it in previous assessment years does not have any bearing on its inclusion for subject assessment year. In this regard, this court relies on Supreme Court's decision in CIT v. C. Parakh and Co. (India) Ltd. [1956] 29 ITR 661 (SC), where court noted (page 665): "Whether respondent is entitled to particular deduction or not will depend on provision of law relating thereto, and not on view which it might take of its rights, and consequently, if whole of commission is under law liable to be deducted against Indian profits, respondent cannot be estopped from claiming benefit of such deduction, by reason of fact that it erroneously allocated part of it towards profits earned in Karachi. What has therefore to be determined is whether, notwithstanding apportionment made by respondent in profit and loss statements, deduction is admissible under law." Further, Division Bench of this court in CIT v. Bharat General Reinsurance Co. Ltd. [1971] 81 ITR 303 (Delhi) has also held that there is no estoppel against law under Act. court therein held as follows (page 307): "It is true that assessee itself had included that dividend income in its return for year in question but there is no estoppel in Income-tax Act and assessee having itself challenged validity of taxing dividend during year of assessment in question, it must be taken that it had resiled from position which it had wrongly taken while filing return. Quite apart from it, it is incumbent on Income-tax Department to find out whether particular income was assessable in particular year or not. Merely because assessee wrongly included income in its return for particular year, it cannot confer jurisdiction on department to tax that income in that year even though legally such income did not pertain to that year." For sake of completion, this court would also deal with assessee's reliance on Dispute Resolution Panel's order dated March 4, 2013 (for assessment year 2006-07) for exclusion of Keynote as comparable. Dispute Resolution Panel directed such exclusion on two grounds: (a) fact that Keynote was making exceptionally high profits; and (b) only single year data could be considered for determining arm's length price in present case and volatility in profit margins of Keynote would distort arm's length price. Thus, Dispute Resolution Panel did not examine functional comparability of Keynote with assessee. In light of discussion above, this court remits matter for consideration to Dispute Resolution Panel to properly apply test indicated in this judgment and analyse functional similarity of Keynote with assessee. In event that Dispute Resolution Panel finds them to be functionally comparable, it would proceed to carry out rule 10B(3) analysis as in case of Khandwala Securities and Brescon. final question that arises for this court's determination in present appeal is assessee's claim for deduction under section 36(1)(ii) of Act in respect of bonus paid by it to its two shareholdersAshish Dhawan and Kunal Shroff. lower authorities denied such claim, holding that bonus was paid to shareholders in lieu of dividend with objective of avoiding tax. Such inference was drawn from two facts: (a) bonus paid was in proportion of their shareholding in assessee-company, i.e., 2: 1; and (b) no dividend had been declared by assessee. However, perusal of excerpt from Dispute Resolution Panel's order dated September 21, 2012, quoted by Assessing Officer in his order dated October 19, 2012, contradicts both these facts: (a) bonus was not paid in ratio of 2: 1 and (b) assessee had declared interim dividend of Rs. 5,47,47,000. Further, bonuses paid to two shareholder- directors in preceding two financial years were in ratio of 60-65 per cent.: 40-35 per cent., even though their shareholding was 1: 1. balance-sheet of assessee placed on record also indicates that two shareholders also hold directorial positions in assessee. Therefore, assessee's contention that bonus was paid to shareholders in their managerial capacity, like in case of other managers, cannot be questioned merely on basis of speculation by Revenue that such payment was to avoid tax. In such circumstances, deduction under section 36(1)(ii) in respect of payment of bonus to two shareholderdirectors is allowed. assessee has relied upon number of judicial pronouncements to support its contention. However, we do not consider it necessary to discuss those decisions for ruling in its favour. Therefore, this question is answered in favour of assessee. In light of above findings, this court concludes as follows: (a) mere fact that entity makes high/extremely high profits/ losses does not, ipso facto, lead to its exclusion from list of comparables for purposes of determination of arm's length price. In such circumstances, enquiry under rule 10B(3) ought to be carried out, to determine as to whether material differences between assessee and said entity can be eliminated. Unless such differences cannot be eliminated, entity should be included as comparable. (b) While determining comparability of transactions, multiple year data can only be included in manner provided in rule 10B(4). As general rule, it is not open to assessee to rely upon previous year's data. (c) As regards Khandwala Securities and Brescon, matter is remitted to Dispute Resolution Panel to carry out analysis under rule 10B(3) and determine whether material differences arising out of their exceptionally high profits can be eliminated. If not, said entities cannot be included as comparables. For Keynote, firstly, enquiry is to be carried out by Dispute Resolution Panel, preceding analysis under rule 10B(3), as to its functional similarity with assessee; thereafter, exercise of determining if there are material differences on account of exceptionally high profits which are capable of elimination has to be carried out. (d) deduction claimed by assessee under section 36(1)(ii) of Act, in respect of bonuses paid to its shareholder-employees is allowed. appeal is accordingly partly allowed, in above terms. No costs. *** Chryscapital Investment Advisors (India) P. Ltd. v. Deputy Commissioner of Income-tax