Ita/417/2014 Of Chryscapital Investment Advisors (India) Private Limited v. Deputy Commissioner Of Income Tax

$~ * IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on: 26.03.2015 Pronounced on: 27.04.2015 + ITA 417/2014 CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) PVT. LTD. …………Appellant Through: Sh. Vikas Srivastava, Sh. Parag Mohanty and Ms. Varsha Bhattacharya, Advocates. Versus DEPUTY COMMISSIONER OF INCOME TAX ……………..RespondentThrough: Sh. Rohit Madan, Sh. Ruchir Bhatia and Sh. P. Roy Choudhary, Advocates. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.K. GAUBA MR. JUSTICE S. RAVINDRA BHAT % "A phrase begins life as a literary expression; its felicity leads to its lazy repetition; and repetition soon establishes it as a 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)Co., 318 U.S. 54 (1943) 1.Is there a concept of “super profit” in the arm‟s length price/transfer price determining process under the Income Tax Act, 1961 ("the Act") or the Rules framed thereunder, entitling tax administrators to include high profit 1. 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 made under Section 36(1)(ii) when the bonus paid to shareholders is not in the exact proportion of their shareholding and there is no avoidance of taxes? 3.The assessee is a private limited company incorporated under the Companies Act, 1956 and is engaged in providing investment advisory services, which were reimbursed on a cost-plus mark-up basis. Ashish Dhawan and Kunal Shroff, in the concerned assessment year, were its two shareholders - holding shares in the assessee in the proportion of 2:l; they were also its full time employees. In AY 2008-09, the assessee entered into international transactions with associated enterprises (AEs) relating to advisory services and reimbursement of expenses incurred on behalf of AEs amounting to ` 56,61,99,829/- and ` 4,49,72,912/- respectively. For the purposes of determination of arm‟s length price (ALP), the assessee used the Transactional Net Margin Method (“TNMM”). The assessee treated the transactions relating to reimbursement received by it from its associated enterprises on actual basis (i.e. without mark-up) at ALP as such since no value addition was done by it in relation to the said expenses. The assessee identified four entities which were engaged broadly in the same economic activities as in its case and identified as comparables. The result of the arm‟s length analysis is given below: 4.The assessee‟s position was that because of fluctuation in the margins of the comparable entities, 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% 4.The assessee‟s position was that because of fluctuation in the margins of the comparable entities, 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 developed jurisdictions. The Operating Margin of the assessee was stable in contrast to the comparable companies, described below: 5.On 30.09.2008, the assessee filed its return for AY 2008-09 declaring a total income of ` 12,41,83,160. Its case was scrutinized by the AO who referred the matter to the Transfer Pricing Officer (“TPO”) under Section 92CA (3) of the Act. On 03.10.2011, the TPO passed an order recommending transfer pricing additions of ` 20,93,34,155/- to the income of the Assessee. The TPO computed the Operating Margins of the four comparables above using single year data i.e. for FY 2007-08 and ignoring the data for two prior financial years i.e. 2005-06 and 2006-07 while determining the ALP. The TPO concluded that multiple year data for the assessee‟s comparables could not be used but introduced two new comparables with abnormal business profits. The TPO also retained a comparable inspite of it showing abnormal growth in the assessment year under consideration and considered reimbursable expenses as part of operating expenses and corresponding reimbursement as part of operating revenue of the assessee for the purpose of determining the arm's length price. The TPO held that the assessee had not furnished any detail as to how the data for the earlier years had an impact on the profits in the concerned assessment year of the assessee or the comparables. 6.Based on the TPO‟s report, the AO passed the assessment order on 21.12.2011, confirming the recommendations of the TPO. The AO also –disallowed the bonus paid by the assessee to its shareholder employees –M/s Ashish Dhawan (` 67,91,947) and Kunal Shroff (` 30,19,433) under Section 36(l)(ii) of the Act. The assessee filed its objections against the draft assessment order before the Dispute Resolution Panel (“DRP”). The DRP, by order dated 21.09.2012, confirmed the transfer pricing additions as well as the disallowance of the bonus made by the Respondent. Thereafter, on 19.10.2012, the AO completed the assessment under section 143(3) read with section 144C of the Act assessing 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 had exceptionally high profit margins. The ITAT upheld these findings and held that current year data should be used in the absence of abnormal or exceptional facts/circumstances in existence which could have an influence on the results as well as the determination of the transfer prices for the year under consideration. Further, the ITAT held that Rule 10B does not provide any basis to exclude an entity or eliminate it from the list of companies solely on the basis of high profitability. The authorities - including ITAT, held that the decisive factors for determining inclusion or exclusion of any entity in/from the list of comparables are the specific characteristics of the services provided by the said entities, assets employed, risks assumed, the contractual terms and conditions prevailing including the geographical location and size of the market, cost of labour and capital in the markets, etc. and high or low profit margins could not be criteria for inclusion or exclusion of entities in the list of comparables. Arguments of the assessee 8.The assessee submits that even if the ITAT‟s ruling on the issue is accepted, Brescon and Keynote should be excluded from the 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 the assessee operates on a cost plus model wherein a guaranteed return of 25% on costs is assured to it. The assessee further argues that its functional profile is significantly different from that of Keynote. Unlike the assessee, Keynote is involved in capital market activities, including lead managing IPOs, Rights Offers, Buybacks and Takeovers. Also, Keynote considers its activities to be a Merchant Banker as evidenced by its Director's Report and Notes to Accounts of the concerned financial year. The assessee submits that in the audited financials of Keynote, there is no service-wise break-up of profits and therefore, the profitability of the advisory services segment (which may be considered similar to the services being rendered by the assessee) is not available to be compared with the assessee‟s profitability. The assessee argues that Keynote's profit margins have shown volatility over the years which could be attributed to abnormal business conditions and therefore Keynote should be rejected as a comparable altogether. 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: 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. TPO has computed the ALP on the basis of single year data (data for the FY 2005-06 only) this company should not be included in the final set of comparable as it would lead to distortion of the ALP.‘ The assessee while determining the ALP considered data for three years which mitigated the high volatility in operating margins of this company. However on the basis of single year data the operating margins of this company will substantially inflate the operating margins. ―The volatility in the operating margin of this company is clearly evident from the three year profitability of the comparables submitted before you are the Ld. TPO vide submission dated May 18, 2009 (copy enclosed at page 139 of the paper book dated January 01, 2010 filed before the Hon‘ble Panel). The operating margin of this company during the FY 2003-04 was negative 6.87% and which converted to positive 13.33. In the FY 2004-05, thereby exhibiting the this margin further increased to 94.06% showing an even higher volatility (80 percent points) vis-à-vis previous year.‖ Further we would also like to state that Keynote can also not be considered a comparable to the assessee (on the basis of single year data) for the reason that on the basis of single year data this company is earning exceptionally high profits (i.e. 94%). It is further submitted that on the possible reasons due to which Keynote has derived exceptional profits during the year may be due to some alliances formed by it with some foreign companies during the year. The relevant extract (copy enclosed as Annexure 3) from the annual report of Keynote is given hereunder: The company formed alliances with a Middle East based consulting company and with a Swiss based consulting company to offer its clients cross border transaction ability. Thus, the exceptional profit earned by Keynote during the relevant year may be due to such alliance formed by Keynote with other companies in Middle East and Swiss. The profit earned by it due to such alliance cannot be used for the arm‘s length analysis.‖ 2.3.4 In view of the above reasons, the DRP directs TPO to exclude this comparable as it is not a robust comparable for this year. TP grounds are accordingly disposed off as above.‖ The company formed alliances with a Middle East based consulting company and with a Swiss based consulting company to offer its clients cross border transaction ability. Thus, the exceptional profit earned by Keynote during the relevant year may be due to such alliance formed by Keynote with other companies in Middle East and Swiss. The profit earned by it due to such alliance cannot be used for the arm‘s length analysis.‖ 2.3.4 In view of the above reasons, the DRP directs TPO to exclude this comparable as it is not a robust comparable for this year. TP grounds are accordingly disposed off as above.‖ 10.On the issue of disallowance of bonuses paid by the assessee to its two full-time shareholder employees, it is submitted 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 dividend and therefore, should be allowed as tax deductible expenditure. 11.Learned counsel argued that the ALP of an international transaction has to be determined by applying one of the methods provided in section 92-C (3) of the Act; it should be the most appropriate method and should also take into account prescribed factors. This is, counsel stated, elaborated in Rule 10-B of the 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 the two entities should be compared in order to treat the same as comparables for the purpose of transfer pricing analysis. Counsel also referred to the OECD guidelines and argued that accurate ALP determination is dependent on flexibility and sound exercise of discretion. Chapter III of the OECD guidelines was relied on to say that they recommend that where can it be determined that some uncontrolled transactions have a 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 para 3.56, wherever uncontrolled transactions have a lesser degree of comparability than others, they should be eliminated. Counsel stated that similarly, Para 3.57 states that if the range of comparables includes a sizeable number of observations, statistical tools that take account of central tendency to narrow the range (e.g. the inter-quartile range or other percentiles); Para 3.59 suggests that where the application of the most appropriate method produces a range of figures, a substantial deviation among points in that range may indicate that the data used in establishing some of the points may not be as reliable as the data used to establish the other points in the range or that the deviation may result from features of the comparable data that require adjustments. 12.Learned counsel also relied on A.7.3 of the OECD guidelines dealing with ―extreme results in the context of comparability considerations‖ to point out that extreme results might consist of losses or unusually high profits. These can affect the financial indicators that are looked at in the 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 revenue to have rejected the contention that data in respect of Keynote should have been excluded. It was also similarly argued that the ITAT fell into error in rejecting the assessee's objection with respect to Brescon whose total turnover was over ` 14 crores, of which the comparable business was only `2 crores; the absence of any sectional data with regard to this company, meant that its activities were not comparable, on a fair application of Rule 10-B (2) and (3). 14.Learned counsel relied on the decisions of the Special Bench in the case ofQuark Systems Private Limited v. DCIT(2010 38 SOT 307- Chandigarh Bench) Adobe Systems India Pvt. Ltd. (Del) 2011-(TII)-13-ITAT-DEL); 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 decision of this court, in Commissioner of Income Tax v Agnity India Technologies Pvt. Ltd. (2013) 219 Taxman 26 (Del), 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. 15.Learned counsel for the assessee also argued that the rejection of previous years‟ data, in the facts of the present case, was unwarranted. It was submitted that given that the comparables introduced by the TPO distorted the margins, the AO and DRP erred in determining the ALP on the basis of data for financial year 2007-08 only and ignoring the data for two prior financial years i.e. FY 2005-06 and FY 2006-07. Learned counsel submitted that the TPO had the 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, Paras 3.75 to 3.78 of OECD guidelines, in support of the submission. Revenue‘s contentions 15.Learned counsel for the assessee also argued that the rejection of previous years‟ data, in the facts of the present case, was unwarranted. It was submitted that given that the comparables introduced by the TPO distorted the margins, the AO and DRP erred in determining the ALP on the basis of data for financial year 2007-08 only and ignoring the data for two prior financial years i.e. FY 2005-06 and FY 2006-07. Learned counsel submitted that the TPO had the 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, Paras 3.75 to 3.78 of OECD guidelines, in support of the submission. Revenue‘s contentions 16.Mr. Rohit Madan, learned counsel for the revenue argued that five methods have been prescribed to determine ALP in relation to an international transaction and the comparability analysis requirements are method specific under Rule 10-B (1). Referring to the said Rule it was submitted that price charged or paid for the property transferred or service rendered 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 and high profit making units cannot be removed from the list of comparables unless, such removal is statutorily permitted by Rule 10-B (2) or (3). Counsel also submitted that this is also evident from a reading of Rule 10-C. It was pointed out that Rule 10B (3) (ii) and Rule 10 C (2)(e) permitted adjustment to eliminate material defects of the difference between the assessee and comparables. Counsel argued that only those factors which result in material difference in the comparables of transactions as between the assessee and the unrelated transaction or the third party enterprise, have to be reasonably adjusted to avoid distortions under the said provisions. The step envisioned there had to be necessarily followed keeping in view the mandate "shall". 18.It was also argued that the decision in Commissioner Of Income Tax v Mentor Graphics (Noida) Pvt.Ltd (ITA 1114/2008, decided by this court on 04-04-2013) has held that OECD guidelines cannot be applied because there are specific provisions of Rule 10B (2) & (3) and the first proviso to Section 92C(2) which apply. There, it was held that having held that the comparables given by the assessee were to be accepted and those searched by the TPO were to be rejected, the only option then left to the ITAT was to derive the arithmetical mean of the profit level indicators of the comparables. It was submitted that accepting the theory of "abnormally high profits" as a ground for rejection of a comparable would lead to vagueness and confusion because what constitutes abnormally high has nowhere been spelt out in the Act or rules. On the other hand, the margin of variation permitted is ± 3% (proviso to Section 92C (2), reduced from the 5% margin that existed earlier). Introduction of any other variation not based in law would not be justified. Analysis & Conclusions 19.Section 92-C which is relevant, for the purpose of determining ALP inter alia, reads as follows: "92C. (1) The arm's length price in relation to an international transaction [or specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the 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 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 information or data used in computation of the arm's length price is not reliable or correct; or (d)the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction [or specified domestic transaction] in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him: Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arm's length price should not be so determined on the basis of material or information or document in the possession of the Assessing Officer." 20.Section 92C(1) thus visualizes determination of the “arms-length price” (ALP) by any of five enumerated methods, ―being the most appropriate method‖, having regard to the ―nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the 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) 20. any such other method as may be prescribed by the board. Where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be arithmetical mean of such prices.‖21.Rule 10B of the Rules prescribes the determination of arm's length price under Section 92C. The first step in all methods is evaluation of differences between the international transaction undertaken with the ―unrelated enterprise performing the comparable functions‖ in similar circumstances. Rule 10B of the Income-tax Rules inter alia, provides for various methods for determination of the arm's length price. Rule 10B (1) (e) prescribes the “transactional net margin method” (TNMM) with which the present case is concerned. Rule 10B (1) (e) (i) is as under: 20. any such other method as may be prescribed by the board. Where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be arithmetical mean of such prices.‖21.Rule 10B of the Rules prescribes the determination of arm's length price under Section 92C. The first step in all methods is evaluation of differences between the international transaction undertaken with the ―unrelated enterprise performing the comparable functions‖ in similar circumstances. Rule 10B of the Income-tax Rules inter alia, provides for various methods for determination of the arm's length price. Rule 10B (1) (e) prescribes the “transactional net margin method” (TNMM) with which the present case is concerned. Rule 10B (1) (e) (i) is as under: (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 transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions ; (d) 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. (e) 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; (f) the nature, extent and reliability of assumptions required to be made in application of a method." Rule 10B (3) stipulates the third step, and spells out when the TPO is obliged to hold an uncontrolled transaction as comparable with others. This provision reads as follows: ―(3) An uncontrolled transaction shall be comparable to an international transaction or a specified domestic transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.‖ Rule 10B (4) provides what should be the basis of the calculations in terms of data, its contemporaneity, etc. It stipulates that: ―(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into: international transaction or a specified domestic transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.‖ Rule 10B (4) provides what should be the basis of the calculations in terms of data, its contemporaneity, etc. It stipulates that: ―(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international 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.‖ 23.The assessee's argument is that entities earning “super normal” or “abnormal” profits should be excluded from 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 (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. 24.Before analysing the relative strengths of the rival contentions, a tabular statement containing the reasoning which persuaded various Benches of the ITAT to conclude one way or the other is reproduced below: 25.Maersk Global Centres (India) (P) Ltd (supra) was a Special Bench (3 Member) decision of ITAT which had to address the precise question which arises for consideration in this case, i.e whether in the facts of that case ―companies earning abnormally high profit margin should be included in the list of comparable cases for the purpose of determining the arm's length price of international transactions‖. Although the 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: 25.Maersk Global Centres (India) (P) Ltd (supra) was a Special Bench (3 Member) decision of ITAT which had to address the precise question which arises for consideration in this case, i.e whether in the facts of that case ―companies earning abnormally high profit margin should be included in the list of comparable cases for the purpose of determining the arm's length price of international transactions‖. Although the 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 between enterprises entering into such transactions are likely to materially affect the price or cost charged or paid or the profit arising from such transaction in the open market or reasonably accurate adjustment can be made to eliminate the effects of such difference. In our opinion, sub-rule (3) of rule 10B thus clearly provides for further exclusion of the comparables selected by applying the test/criteria given in sub-rule (2) of rule 10B if there is any difference found between the enterprises entering into the transactions which materially affects the cost charged or the profit arising from such transaction in the open market. 69. Keeping in view the relevant portion of the OECD Transfer Pricing Guidelines discussed above and having regard to the relevant transfer pricing regulations as contained in rule 10B(3) of the Income-tax Rules, 1962, we are of the view that further dissection or classification of information technology enabled services can be done depending on the facts and circumstances of each case so as to select the entities having a relatively equal degree of comparability.‖ In Exxon Mobil Company India P. Ltd. (supra),a Mumbai Bench decision, (cited at Sl. No.13 in the table above), the ITAT held: transactions which materially affects the cost charged or the profit arising from such transaction in the open market. 69. Keeping in view the relevant portion of the OECD Transfer Pricing Guidelines discussed above and having regard to the relevant transfer pricing regulations as contained in rule 10B(3) of the Income-tax Rules, 1962, we are of the view that further dissection or classification of information technology enabled services can be done depending on the facts and circumstances of each case so as to select the entities having a relatively equal degree of comparability.‖ In Exxon Mobil Company India P. Ltd. (supra),a Mumbai Bench decision, (cited at Sl. No.13 in the table above), the ITAT held: "(xi) Now, coming to the alternative arguments of the assessee that abnormal profit making unit is also to be eliminated on the same analogy on which loss making units are excluded, we, in principle, do not dispute this proposition. The various case laws relied upon by the assessee lay down that a comparable cannot be eliminated just because it is a loss making unit. Similarly, a higher profit making unit cannot also be automatically eliminated just because the comparable company earned higher profits than the average. The reason for rejecting the two loss making units is not just because they were loss making units but for the reasons which are already stated in the preceding paragraphs. If similar reasons existed in the higher profit making unit, then, it is for the assessee to bring out those reasons and seek exclusion of the same. A general argument that you have to exclude units which have high profit range, in case you exclude units which have made loss is a general submission which cannot be accepted. In other words, as a general principle, both loss making unit and high profit making unit cannot be eliminated from the comparables 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 pricing analysis was not correct and had to be excluded. This right of the assessee is not curtailed in any manner, whatsoever, in the rules. A similar reasoning was adopted in M/s. Premier Exploration Services Pvt.Ltd., vs. ITO, Ward 14 (3) [2014] 29 ITR (Trib) 427 (ITAT) [Del] Pvt.Ltd., vs. ITO, Ward 14 (3) [2014] 29 ITR (Trib) 427 (ITAT) [Del] A similar reasoning was adopted in M/s. Premier Exploration Services Pvt.Ltd., vs. ITO, Ward 14 (3) [2014] 29 ITR (Trib) 427 (ITAT) [Del] Pvt.Ltd., vs. ITO, Ward 14 (3) [2014] 29 ITR (Trib) 427 (ITAT) [Del] ―Although assessee had taken this company as comparable on the basis of past years data but in our considered view, the Saket Projects Ltd. was not comparable to assessee because the event management was done by sponsorships which is evident from various documents placed in paper book. Further the segment allocation of expenses also appears to be not reliable. We agree with the view of revenue that no comparable can be rejected merely on the basis of high margins if the comparable is functionally comparable to the assessee and also that there is miner variation in functional similarity. However, in the case of Saket Projects Ltd. there is functional dissimilarity. The company is organizing events with various kinds of sponsorships. The 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 the basis of these facts, we hold that Saket Projects Ltd. was not comparable to the extent wherein the various variations could be ruled out or iron out by provisions of law and rules.‖ The assessee‟s position is supported by reasoning in cases like the 26. ITAT‟s decision in Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT [2007] 109 ITD 161 where contentions such as these were accepted: ".....The wide difference in the ratio of operating margins in the final selection of comparable ... is a clear pointer to the fact that the selection made was faulty...The OECD guideline on this point is as under ‗1.47 Where the application of one or more methods produces a range of figures, a substantial deviation among points in that range may indicate that the data used in establishing the some of the points may not be as reliable as the data used to establish the other points in the range or that the deviation may result from features of the comparable data that require adjustments.‘ Inferring from