Weatherford Drilling & Production Services (India) Pvt.Ltd., Baroda V. The ACIT.,Circle-4(TPO), Baroda

ITA 2592/AHD/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0912 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 8 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-07-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 17-12-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 09-11-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing; International transaction; Avoidance of tax
• Section: 92C; 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH BEFORE: S H RI ANIL CHATURVEDI , ACCOUNTANT MEMBER SHR I S. S. GODARA , JUDICIAL MEMBER WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD., BLOCK NO. 74, MUKU TNAGAR, SOKHADA ROAD, MAN J USAR, SAVLI, VADODARA - 391775 PAN: AAACW4068M (APPELLANT) VS THE ACIT, CIRCLE - 4, BARODA (RESPONDENT) REVENUE BY : S H RI SANJAY AGRAWAL, CIT - D . R. ASSESSEE BY: S H RI DHANESH BAFNA , A.R. DATE OF HEARING : 06 - 05 - 2 016 DATE OF PRONOUNCEMENT : 29 - 07 - 2 016 / ORDER P ER : S. S. GODARA , JUDICIAL MEMBER : - THIS ASSESSEE S APPEAL FOR A.Y. 2008 - 09 , AR IS ES FROM ASSESSMENT ORDER PASSED BY THE ASSISTANT COMMISSION OF INCOME I T A NO . 2592 / A HD/ 20 12 A SSESSMENT YEAR 200 8 - 0 9 I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 2 TAX , BARODA DATED 24 - 09 - 2012 , IN PROCEEDINGS UNDER SECTION 143(3) R.W.S. 92CA (3) AND 14 4C OF THE INCOME TAX ACT, 1961; IN SHORT THE ACT . 2. THE ASSESSEE RAISES TWO SUBSTANTIVE GROUNDS IN THE INSTANT APPEA L. THE FIRST ONE CHALLENGES ASSESSING OFFICER S ACTION IN MAKING THE IMPUGNED TRANSFER PRICING ADJUSTMENT OF RS. 80,83,4 21/ - IN RELATIO N TO PROVIDING SOFTWARE DEVELOPMENT SE RVICES TO ITS ASSOCIATE ENTERPRISES AES HEREAFTER BY REJECTING ITS TRANSFER PRICING DOCUMENT ATION . LAT TER SUBSTANTIVE GROUND SEEKS 5% MARGIN RANGE U/S. 92C( 2) OF THE ACT TO BE A STANDARD DEDUCTION. TH E ASSESSEE DOES NOT PRESS FOR ITS LATTER GROUND. THIS LEAVES US WITH THE ISSUE CORRECTNESS OF THE ABOVE STATED TRANSFER PRICING ADJUSTMENT ONLY. 3. THE ASSESSEE COMPANY IS ENGAGED IN MANUFACTURING AND SERVICING OF OIL FIELD EQUIPMENTS. IT FILED RETURN ON 31 - 03 - 2009 STATING INCOME OF RS. 1,69,51,140/ - . THE SAME WAS SUMMARILY PROCESSED . THE ASSESSING OFFICER TOOK UP SCRUTINY THEREAFTER. HE NOTICED ASSESSEE S INTERNATIONAL TRANSACTIONS WITH ITS OVERSEAS AES. HE MADE A REFERENCE DATED 14 - 07 - 2010 T O THE TRANSFER PRICING OFFICER TPO HEREAFTER FOR ASCERTAINING ARMS LENGTH PRICE THEREOF. 4. THE ASSESSEE COMPANY IS ADMITTEDLY A SUBSIDIARY OF M/S. WEATHERFORD GROUP OF ENTITIES HOLDING 99% OF ITS SHARE HOLDINGS. IT OPERATES IN MANUFACTURING AND ENGINEERING SYSTEM S SUPPORT DIVISIONS. THE INSTANT APPEAL PERTAINS TO LATTER DIVISION ONLY. THE I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 3 ABOVE STATED ENGINEERING SYSTEMS SUPPORT DIVISION WAS ESTABLISHED IN NOV, 20 06 IN ORDER TO SUPPORT MAINTENANCE AND DEVELOPMENT OF SOFTWARE BY THE WEATHERFORD GROUP FOR ITS USE I N VARIOUS SEGMENTS OF OIL AND GAS. THE ASSE SSEE S REVENUE RECEIPTS IN PROVIDING ENGINEERING, DEVELOPMENT AND RELATED SERVICES TO ITS AES READ A FIGURE OF RS. 2,90,55,055/ - . IT USED TRANSACTION NET MARGIN METHOD (TNMM) TO BE THE MOST APPROPRIA TE METHOD . THIS METHOD ADOPTED PROFIT LEVEL INDICATOR PLI @ 6.47% ON THE COST INCU RRED. THE TPO ISSUED FURTHER NOTICED IN CONSEQUENTIAL PROCEEDINGS THAT ASSESSEE S PL I ADOPTED TOOK INTO ACCOUNT WAIT ED AVERAGE MARG IN OF THREE YEARS DATA FOR FINAN C I AL YEARS 2005 - 0 6 TO 2007 - 08. 5. THE ASSESSEE S TRANSFER PRICING DOCUMENT ATION HAD SELECTED 16 COMPARABLE ENTITIES FROM PUBLIC DATA BASE SEARCH IN THE FIELD OF SOFTWARE SERVICES. ITS SELECTION MATRIX INCLUDE S COMPANIES WITH SALES EXCEEDING NIL AMOUNT AND THOSE ENGAGE D IN THE ABOVE STATED SERVICES. THE ASSESSEE ADOPTED 8 FILTERS INTER ALIA OF COMPANIES WITH RATIO OF OTHER OPERATING INCOME TO SALES AS GREATER THAN 50%, THOSE WITH RESEARCH AND DEVELOPMENT TO SALES GREATER THAN 3% INDICATING POSSIBLE OWNERSHIP OF INTANGI BLE THEREBY REJECTING THOSE ENTITIES HAVING PURE SERVICE PROVISIONING SEGMENT, EXCLUDED ENTITY WITH RATIO OF NET FIXED ASSET TO SALES GREATER THAN 200%, COMPANIES HAVING AVERAGE SALES OF RS. 1 CRORE IN THE RELEVANT PREVIOUS YEARS, ELIMINATING ENTITIES HAVI NG LESS THAN 0 NET WORTH, CHOSE COMPANIES HAVING RATIO OF EXPENSES INCURRED ON ADVERTISING, MARKETING AND DISTRIBUTION EXPENSES TO SALES LESS THAN OR EQUAL 3%, COMPANIES I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 4 PROVING THE VERY SERVICES IN QUESTION AS IN ASSESSEE S CASE THEREBY ZEROING ON THE ENT ITIES DUPLICATED IN THE DATE BASE. THE TPO WAS OF THE VIEW THAT THIRD FILTER HEREINABOVE HAD TO BE SEEN ON CASE TO CASE BASIS . F ORTH ONE WAS TAKEN AS AN APPROPRIATE ONE. HE HOWEVER CONSIDERED DATA FOR FY 2007 - 08 ONLY SO AS TO ELIMINATE THOSE COMPANIES H AVING OPERATING REVENUES OF LESS THAN RS. 1 CRORES IN FY 2007 - 08. THE TPO FURTHER TOOK NOTE OF THE FACT ASSESSEE S SEVENTH FILTER HAD ELIMINATED 443 COMPANIES. HE THEREAFTER AGREE D TO ALL OTHER FILTERS. 6. THIS CASE FILE REVEALS THAT THE TPO FURTHER SOU GHT TO APPLY ADDITIONAL FILTER S . THE FIRST ONE WAS USE OF RELEVANT FINANCIAL YEAR DATA ONLY AS PER RULE 10B(4) OF THE INCOME TAX RULES WITH A OBSERVATION THAT PRECEDING TWO FINANCIAL YEAR DATA WOULD ALSO BE TAKEN INTO CONSIDERATION ON BEING SHOWN THAT THE SAME INFLUENCED DETERMINATION OF THE RELE VANT PRICE. THIS FOLLOWED HIS FURTHER OBSERVATION THAT ASSESSEE S MULTIPLE YEAR DATA OF FY 2005 - 06 TO 2007 - 08 HAD NOT STATED ANY REASONS REQUIRED UNDER RULE 10B(4). HE THEREAFTER REJECTED THO SE COMPANIES HAVING D IFFERENT FINANCIAL YEARS DATA OR THOSE NOT FALLING WITHIN THE RELEVANT PREVIOUS YEAR FROM 01 - 04 - 2007 TO 31 - 03 - 2008 ON THE LOGIC THAT A TESTED PARTY ENDING ITS FINANCIAL YEAR BY MARCH AS HAVING APPROPRIATE FILTER LEADING TO A BETTER COMPARABILITY. THE TP O THEN TOOK COMPANIES HAVING INCOME FROM COMPUTER SOFTWARE. HE PROCEEDED TO INCLUDE ENTITIES HAVING 75% OF REVENUE FROM EXPORT TURNOVER UNDER RULE 10B(2). HIS NEXT FOUR FILTERS WOULD INTER ALIA SEEK TO EXCLUDE ENTITIES HAVING EMPLOYEES COST LESS I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 5 THAN 20% , THOSE HAVING RELATED PARTY TRANSACTION S OF LESS THAN 25% OF THEIR REVENUE AS WELL AS THOSE HAVING PECULIAR ECONOMIC CIRCUMSTANCES. ALL THIS INCREASED RELEVANT FILTER S COUNT TO 13 . 7. THIS CASE FILE DEMONSTRATES THAT THE ASSESSEE HAD DERIVED ITS INCO ME FROM SOFTWARE DEVELOPMENT SERVICES AMOUNTING TO RS. 2,90,55,055/ - . ITS OPERATING EXPENDITURE WAS OF RS. 3,29,05,272/ - . THIS LEFT BEHIND A NEGATIVE FIGURE OF RS. 38,50,217/ - BRINGING PLI TO - 11.7%. THE ASSESSEE INCLU DED 16 ENTITIES AS COM PARABLES NAMELY M/S AKHSHAYA SOFTWARE TECHNOLOGIES, FCS SOFTWARE SOLUTIONS, GOLDSTONE TECHNOLOGIES, ICRA TECHNOANATICS, INDUS NETWORD LTD., L & T INFOTECH, MELSTAR INFORMATION TECHNOLOGIES LTD, MINDTREE CONSULTING LTD, PSI DATA SYSTEM LTD, POWERSOFT GLOBAL SOLUTIONS, SIP TECHNOLOGIES AND EXPORTS, SYNELAIROS TECHNOLOGIES LTD, BODHTREE CONSULTING LTD. , LANCO GLOBAL SYSTEMS LTD, COMPUTECH INTERNATIONAL LTD AND KREE TURI NETWORKS LTD; RESPECTIVELY. THE TPO AGREED WITH FIRST AND SECOND ONE OF THEM. HE WOULD SEE K TO EXCLUDE REST 14 ENTITIES FORM THE ARRAY OF COMPARABLES BY CITING REASONS OF FAILURE IN SATISFYING EXPORT CRITERIA , TURNOVER LIMITS, RELATED PARTY TRANSACTION PARAMETERS AND EMPLOYEES COST FILTER. 8. THE TPO S NEXT STEP REJECTED ASSESSEE S TRANSFER PRICING DOCUMENT ATION INTER ALIA ON THE GROUND THAT NONE OF THE COMPARABLES CONSIDERED CURRENT YEARS DATA UNDER RULE 10B(4), IT HAD USED PRECEDING THREE YEARS DATA WITHOUT STATING ANY INFLUENCE O N RELEVANT PRICING OF THE OTHE R ENTITIES, IT HAD INCLUDED COM PARABLES HAVING I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 6 SIGNIFICANT CONTROLLED OR RELATED PARTY TRANSACTIONS, THE SAME DID NOT FULFI LL FAR ANALYSIS, ENTITIES IN QUES T I ON WERE INVOLVED IN DOMESTIC TRANSACTIONS AS AGAINST EXPORT ORIENTED SERVICE PROVIDER AND THEIR TURNOVER WAS EITHER VERY LESS OR A HUGE ONE. THE TPO THEREAFTER REDID THE ENTIRE EXERCISE OF FINDING APPROPRIATE COMPARABLES. HIS SEARCH PROCESS WAS UNDER THE HEAD COMPANY CLASSIFICATION - NON FINANCIAL SERVICES I.E. SERVICES OTHER THAN FINAN CIAL - INFORMATION TECHNOLOGY - COMPUTER SOFTWARE ON 28 - 11 - 2011. THIS STEP INITIALLY ZEROED IN ON 865 COMPANIES IN COMPUTER SOFTWARE. THE TPO S FILTERS OF AVAILABILITY OF DATA OF RELEVANT YEAR 2007 - 08, SERVICE INCOME, R & D EXPENSE LESS THAN 3%, POSITIVE NET WORTH, AMP OF LESS THAN 3%, TURNOVE R BETWEEN 5 TO 150 CRORES, 75% EXPORT REVENUE, RELATED PARTY TRANSACTIONS OF MORE THAN 25%, EMPLOYEES COST AND ABNORMAL ECONOMIC CONDITIONS ELIMINATED 278, 124, 16, 30, 59, 188,113, 24, 10 & 5 COMPANIES LEAVING BEHIND ONLY 18 COMPARABLES. THE SA ME WERE FU RTHER SUBJECTED TO FAR ANALYSIS. THIS RESULTED IN EXCLUSION OF 8 MORE ENTITIES LEAVING BEHIND ONLY M/S AKHSHAYA SOFTWARE TECHNOLOGIES, BODHTREE CONSULTING, COMP - U LEARN TECH INDIA LTD., EXENSYS SOFTWARE SOLUTIONS, FCS SOFTWARE, ICRA TECHNO, KIREETI SOFT TECHNOLOGIES, SOFTSOLE INDIA LTD., THINKSOFT GLOBAL AND M/S VJIL LTD. 9. IT EMERGES THAT THE TPO THEREAFTER CONSIDERED WORKING CAPITAL ADJUSTMENT, RISK ADJUSTMENT, SINGLE CUSTOMER RISK, POLITICAL/COUNTRY RISK ETC. HE TOOK INTO ACCOUNT FINANCIAL YEAR 2 007 - 08 DATA ONLY. ALL THIS EXERCISE LED HIM TO DETERMINE IMPUGNED ARMS LENGTH MARGIN OF 28.4% I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 7 ON OPERATING COST OF RS. 3,29,05,272 / - . THE TPO ACCORDINGLY COMPUTED ASSESSEE S RECEIPTS ON AN ARMS LENGTH TO BE OF RS. 4,23,95,152/ - AS AGAINST THE ACTUAL REC EIPT OF RS. 2,90,55,055/ - THEREBY PROPOSING DIFFERENTIAL ADJUSTMENT OF RS. 1,33,40,097/ - . 10. THE ASSESSEE FILED ITS OBJECTIONS THERETO VIDE REPLY DATED 04 - 10 - 2011 INTER ALIA T AKING VARIOUS PLEAS OF UNDER UTILIZATION OF THE OFFICE ON THE GROUND THAT IT HAD BROUGHT TO USE ONLY 67% OF THE OFFICE TAKEN ON RENT TO PRAY FOR CONSEQUENTIAL ADJUSTMENT, ITS NEXT PLEA WAS THAT THE RELEVA NT YEAR WAS THE YEAR OF ITS COMMENCEMENT MAKING IT ENTITLED FOR NE CESSARY ADJUSTMENT. IT DENIED TO HAVE SHIFTED ANY PROFIT SINC E IT WAS ALREADY LOCATED IN AN STPI ZONE. THE ASSESSEE S FURTHER CASE SUPPORTED USING MULTIPLE YEARS DATA, OPPOSED RELATED PARTY TRANSACTION FILTER OF 25% AS AGAINST 10% OF ITS COMPARABLES. IT SUBMITTED THAT EXPORT SALES OF 75% HAD BEEN WRONGLY USED. TH E ASSESSEE SOUGHT TO MAKE OUT A CASE THAT TNMM METHOD USE D IN ITS TRANSFER PRICING DOCUMENTATION TOOK CARE OF ALL FUNCTIONAL DIFFERENCES IN CONTROLLED AND UN - CONT ROLLED TRANSACTIONS MADE IN DOMESTIC AND EXPORT MARKET. THE ASSESSEE FURTHER CONTESTED TURNOV ER FILTER OF RS. 5 TO 150 IN VIEW OF THE FAC T THAT ITS TRANSACTIONS IN QUES T I ON WERE OF RS. 2.90 CRORES (SUPRA). THE ASSESSEE S NEXT PLEA WAS AGAINST THE TPO S FILTER RELATING TO EMPLOYEES COS T. IT ALSO REITERATES ITS TRANSF ER PRICING DOCUMENTAT ION REPOR T SHOWING COMPARABLES FINANCIAL DATA FOR THE PERIOD OTHER THAN THE RELEVANT PREVIOUS YEAR AS PER RULE 10B(4) OF THE RULES. IT FURTHER SOUGHT WORKI NG CAPITAL ADJUSTMENT AS WELL 5% BENEFIT AS A STANDARD DEDUCTION. I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 8 11. WE FIND THAT TPO S ORDER INTER A LIA UPHELD ASSESSEE S OFFICE SPACE UNDER UTILIZATION PLEA OF 33% AS AGAINST 66% BUT REJECTED EMPL OYEE S FACTOR THEREIN, QUOTED SHALL EXPRESSION USED IN RULE 10B(4) TO BUTTRESS HIS SEARCH FOR RELEVANT FINANCIAL YEAR S DATA ONLY. HE FURTHER REITERATED 25% RELATED PARTY TRANSAC TION S AND 75% OF EXPORT REVENUES AND EMPLOYEE COST FILTER (SUPRA). THE TPO FURTHER OBSERVED THAT THE ASSESSEE HAD NOT PROVIDED HIM THE RELEVANT DETAILS FOR THE PURPOSE OF COMPUTING WORKING CAPITAL ADJ U STM E N T . HE DENIED ASSESSEE S CL AIM OF 5% TOLERANCE MARGIN IN ALP SOUGHT AS A STANDARD DEDUCTION BY QUOTING SECTION 92C OF THE ACT. 12. WE PROCEED TO NOTE THAT THE TPO THEREAFTER ADOPTED 6 COMPARABLES NAMELY M/S AKHSHAYA SOFTWARE TECHNOLOGIES, BODHTREE CONSULTING, COMP U LEARN TECH I NDIA LTD., ICRA TECHNO ANALYTICS LTD, KIREETI SOFT TECHNOLOGIES LTD AND VJIL CONSULTING LTD. HAVING PLI OF 9.21%, 22.86%, 88.83%, 6.03%, 0.82% AND 2.28% ; RESPECTIVELY AVERAGING TO 21.33%. HE ACCORDINGLY CALCULATED ALP ON ASSESSEE S OPERATING COST OF RS. 3,06,09,475/ - COMING TO RS. 3,71,38,476/ - AS AGAINST ITS RECEIPT OF RS. 2,90,55,055/ - RESULTING IN SHORT FALL U/S. 92CA AMOUNTING TO RS. 80,83,421/ - . THIS LATTER AMOUNT ACCORDINGLY STOOD ADJUSTED. 13. THE TPO ACCORDINGLY PROPOSED THE IMPUGNED ADJUSTMEN T. THE ASSESSING OFFICER PAS SED DRAFT ASSESSMENT ORDER ON 17 & 28/10/2011. THE ASSESSEE FILED OBJECTIONS BEFORE DISPUTE RESOLUTION I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 9 PANEL (DRP) ON 16 - 12 - 2011. IT RAISED TWO OBJECTIONS THEREIN INTERALIA ON THE ISSUE OF PROVISION OF SERVICES AND ADJUSTMENT S AND REJECTION OF ITS TP DOCUMENTATION. WE NOTICE THAT THE DRP DECLINED BOTH THESE PLEAS IN ITS ORDER DATED 30 - 08 - 2012. THE ASSESSING OFFICER FINALIZED THE IMPUGNED ASSESSMENT ON 24 - 09 - 2012 MAKING THE TRA NSFER PRICING ADJUSTMENT AMOUNTING TO R S. 80,83,4 21/ - . 14. WE HAVE HEARD BOTH THE PARTIES. CASE FILE PERUSED. THE ASSESSEE RAISES MAINLY THREE ARGUMENTS IN THE COURSE OF HEARI NG. F IRST ONE CHALLENGES INCLUSION OF M/S BODHTREE CONSULTING LTD. AND COMPU LEARN TECH INDIA LTD AS COMPARABLES HAVING RES PECTIVE PL / S OF 20.86% AND 88.83% BY TERMING THEM AS FUNCTIO NALLY DIFFERENT . S ECOND ARGUMENT IS THAT THE AUTHORITIES BELOW OUGHT TO HAVE TAKEN INTO ACCOUNT THE PRECEDING FINANCIAL YEAR S DATA OF THE ABOVE S TATED TWO COMPARABLES INTER ALIA POINTING OUT DR ASTIC FLUCTUATIONS IN MARGINS. NEXT ARGUMENT SEEKS WORKING CA P IT AL ADJUSTMENT AS PRAYED BEFORE THE LOWER PROCEEDING THROUGHOUT BUT NOT GRANTED FOR WANT OF NECESSARY DETAILS. 15. SH RI SANJAY AGRAWAL REPRESENTING R EVENUE AS CIT - DEPARTMENTAL REPRESENTATI VE STRONGLY SUPPORT S THE IMPUGNED ADJUSTMENT ON ALL COUNTS AS MADE BY THE TPO. HIS ONLY AGREEM ENT WITH THE ASSESSEE IS QUA WORKING CAPITAL A DJUSTMENT RELIEF. HE FAIRLY SUBMITS THAT THIS ADJUSTMENT IS ADMISSIBLE IN LAW IF AN ASSESSEE FILES ALL THE RELEVAN T DETAILS. I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 10 16. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATI ONS TO RIVAL CONTENTIONS. F IRST ISSUE BETWEEN THE PARTIES IS QUA INCLUSION OF M/S BODHTREE CONSULTING LTD HAVING PLI OF 22.86% AS COMPARABLES . THE ASSESSEE FILES A CHART OF ITS PLI FROM FINANCIAL YEAR 2005 - 06 TO 2012 - 13 SHOWING THE SAME TO BE @ 13.87%, 80.15%, 19.89%, 62.27%, 33.42%, - 4.46%, 3.29% AND - 11.63% RESPECTIVELY. ITS NEXT SUBMISSIONS SEEKS TO EXCLUDE THIS ENTITY BY QUOTING FUNCTIONAL DIFFERENCE. THE ASSESSEE ADMITTEDLY IS ENGAGED IN THE FIELD OF SOFTWARE DEVELOPMENT. IT FILES BEFORE US TWO TRIBUNAL S DECISIONS A LLSCIPTS INDIA PVT; LTD. VS. DCI T 62 TAXMANN.COM 232 (AHD - TRIBUNAL) AND NETHAWK NETWORKS INDIA PVT. LTD VS. ITO 41 TAXMANN.COM 250 (MUMBAI - TRIBUNAL) HOLDING THAT M/S BODHTREE CON SULTING PROVIDES SOFTWARE PRODUCTS INSTEAD OF BEING ENGAGED IN SOFTWARE DEVELOPMENT SERVICES FORMING SUBJECT MATTER OF INSTANT ADJUDICATION. S HRI AGRAWAL FAILS TO POINT OUT ANY DISTINCTION O N FACTS THEREIN. WE ACCEPT ASSESSEE S ARGUMENTS ON FUNCTIONAL CO MPARABLE S OF M /S BODHTREE CONSULTING LTD. T HE TPO IS DIRECTED TO EXCLUDE THE SAME FROM ARRAY OF COMPARABLES . THIS RENDERS THE ASSESSEE S OTHER ARGUMENTS (SUPRA) AS HAVING BECOME ACADEMIC. 17. TH E ASSESSEE THEREAFTER ARGUES THAT THE AUTHORITIES BELOW H AVE ERRED IN INCLUDING THE LATTER ENTITY COMP U LE ARN TECH INDIA LTD. AS A VALID COMPARABLE. IT STATES THAT THIS ENTITY HAS DRASTIC FLUCTUATING MARGINS IN ASSESSMENT YEARS 2005 - 06 TO 2010 - 11 @ 6.06%, - 47.83%, 88.83%, 27.19%, 18.05% AND 8.85% RESPECTIVELY. ITS NEXT SUBMISSION IS THAT THIS E NTITY IS FUNCTIONALLY DIFFERENT SINCE ENGAGED IN I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 11 SOFTWARE SERVICES AS WELL AS SALE OF SOFTWARE PRODUCTS WITHOUT HAVING THE RELEVANT SEGMENTAL AVAILABLE. IT IS POINTED OUT THAT ITS NET WORTH AS PER ANNUAL REPORT FOR FINA NCIAL YEAR ENDED ON MARCH, 2007 CONSIDERABLY ERODED. 18. THE REVENUE FILES COMPREHENSIVE DETAILED WRITTEN SUBMISSIONS IN SUPPORT OF THE TPO S ACTION INCLUDING THE LATTER ENTITY IN THE ARRAY OF COMPARABLES. 19. WE HAVE HEARD RIVAL CONTENTIONS. FIRST WE COME TO FUNCTIONAL ASPECT OF M/S COMPU LEARN INDIA TECH. THE ASSESSEE ITSELF IS FAIR ENOUGH IN PAGE 7 OF ITS WRITTEN SUBMISSION THAT THIS ENTITY IS ENGAGED IN BOTH SOFTWARE DEVELOPMENT SERVICES AS WELL AS S ALE OF SOFTWARE PRODUCTS. F ORMER FUNCTIONAL S IMILAR ITY IS NOT DISPUTED. WE NOW PROCEED TO DEAL WITH AVAILABILITY OF ITS RELEVANT FINANCIAL S. C ASE FILE REVEALS THAT M/S COMPU LEARN INDIA TECH HAS SHOWN TOTAL INCOME OF RS. 7,13,57,070/ - COMPRISING OF SOF TWARE DEVELOPMENT INCOME AS RS. 7,10,16,270/ - L EAVING BEHIND OTHER INCOME OF RS. 3,40,800/ - ONLY AS PER SCHEDULE 10 OF ITS BALANCE SHEET . IT FURTHER TRANSPIRES THAT THIS ENTI TY DID NOT DERIVE ANY INCOME IN SOFTWARE DEVELOPMENT SERVICES IN THE PRECEDING FINANCIAL YEAR ENDING ON 31 - 03 - 2007. WE OBSERVE THAT ASSESSEE S LATTER TWO ARGUMENTS SEEKING EXCLUSION OF THIS LATTER ENTITY ON THE BASIS OF FUNCTIONAL SIMILARITY AND NON - AVAILABILITY OF SEGMENTAL DATA ARE ACCORDINGLY DEVOID OF MERITS. WE HOLD THAT THIS LATTER ENTITY SATISFIES BOTH THE TWO TESTS RAISE D AT ASSESSEE S BEHEST. I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 12 20. THIS LEAVES US WITH ASSESSEE S REMAINING ARGUMENT THAT M/S COMPU LEARN INDIA TECH HAS SEEN DRASTIC FLUCTUATING MARGINS. THE ASSESSEE QUOTES CASE LAW OF ALLSCRIPTS (SUPRA) IN SUPPORT OF THIS CONTENTION. WE HAD HEARD THE INSTANT APPEAL ON 17 - 12 - 2015. WE NOTICE D THEREAFTER THAT HON BLE DELHI HIGH COURT IN ITS RECENT DECISION CHRYSCAPITAL INVESTMENT ADVISORS INDIA P. LTD VS. DCIT (2015) 56 TAXMAN.COM 417 (DELHI) HAS CONSIDERED ALL TRIBUNAL S DECISION ON THIS ISSUE OF USING MULTIP LE FINANCIAL YEAR DATA TO BE SUFFERING FROM ROTE REPETITION. WE ACCORDINGLY RE - FIXED THIS CASE FOR HEARING. THE ASSESSEE STRONGLY CONTESTED IN THE COURSES OF REHEARI NG THAT THE ABOVE STATED CASE LAW DO ES NOT APPLY IN ITS CASE SINCE IT DOES NOT CONSIDER M ULTIPLE YEARS DATA INDICATING WIDE FLUCTUATING MARGINS. SHRI AGRAWAL VEHEMENTLY ARGUED IN SUPPORT OF THE ABOVE STATED DECISION TO BE APPLICABLE IN FACTS OF THE INSTANT CASE. 21 . WE PROCEED FURTHER AND DEEM IT APPROPRIATE TO DEAL WITH THE RELEVANT FACTS IN HON BLE DELHI HIGH COURT DECISION FIRST. THE SAID ASSESSEE ADOPTED AVERAGE OF MULTIPLE FINANCIAL YEAR S PLI OF ITS COMPARABLE ENTITIES. IT QUOTED RULE 10B(4) PROVISO IN SUPPORT OF ITS ACTION. THE TPO THEREIN CONSIDERED PLI OF THE COMPARABLE S IN QUEST ION PERTAINING TO THE RELEVANT FINANCIAL YEAR ONLY THEREBY EXCLUDING EARLIER YEARS DATA ON THE GROUND THAT THERE WAS NO EVIDENCE AS TO HOW THE SAME HAD IMPACTED UPON THE IMPUGNED ASSESSMENT YEAR S PLI. WE REVERT BACK TO THE FACTS OF THE INSTANT CASE TO M AKE IT CLEAR THAT M/S. COMPU LEARN STARTED SOFTWARE I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 13 DEVELOPMENT SERVICES ONLY IN THE RELEVANT PREVIOUS YEAR. THE ASSESS EE ALSO NOWHERE POINTS OUT ABOUT ANY IMPACT O N ITS PROFITS. 22 . WE STAY BACK ON HON BLE DELHI HIGH COURT DECISION. THE TPO THEREIN I NCLUDED SOME COMPARABLE S HAVING HIGH PROFIT S @ 87.4% TO 191.58% AS AGAINST THE ONE DECLARED @ 27.4%. ALL AUTHORITIES UP TO THIS TRIBUNAL UPHELD THE SAID ACTION. THE ASSESSEE PREFERRED APPEAL RAISING FOLLOWING SUBSTANTIAL QUESTIONS OF LAW: - 1) WHETHER T HE 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 COMPARABL ES 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 OPERATIN G 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 SHAREHOLDERS AND THERE IS N O AVOIDANCE OF TAXES? 23 . THEIR LORDSHIPS PROCEEDED TO EXAMINE THESE SUBSTANTIAL QUESTIONS. WE FIND THAT THIS JUDICIAL PRECEDENT CONSIDERED A CATENA OF TRIBUNAL S DECISIONS TO HAVE GIVEN RIVEN OPINION ON THIS ISSUE. THEIR LORDSHIPS THEREAFTER ANALYZE D DICHOTOMY O F SECTION 92C R.W.S 10B (1), (2), AND ( 3 ) OBLIGING A TPO TO TAKE A COMPARABLE UN - CONTROLLED I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 14 TRANSACTION AS A COMPARABLE FOLLOWED BY RULE 10B(4) INCLUDING A PROVISO ENABLING INCLUSION OF DATA PERTAINING TWO PREVIOUS FINANCIAL YEAR OF INF LUENC ING THE ALP IN QUESTION. HON BLE HIGH COURT ADJUDICATED THE ISSUES FRAMED AS UNDER: - 31. ARM'S LENGTH PRICE DETERMINATION, IN RESPECT OF AN INTERNATIONAL TRANSACTION HAS NECESSARILY TO CONFIRM TO THE MANDATE OF RULE 10B. IN THIS CASE, THE METHOD FOLLOWE D FOR DETERMINING THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION ADOPTED BY THE ASSESSEE AND THE REVENUE IS THE TNMM. THE COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION HAS, IN SUCH CASES, TO BE SEEN WITH REFERENCE TO THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT THE ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED BY THE RESPECTIVE PARTIES TO THE TRANSACTION AS PER RULE 10B(2)(B). THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED (C ONTEMPLATED BY RULE 10B(2)(A)) IN EITHER TRANSACTIONS MAY BE SECONDARY, FOR JUDGING COMPARABILITY OF AN INTERNATIONAL TRANSACTION IN THE TNMM, BECAUSE THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICES PROVIDED AND THE DIRECT AND INDIRECT COST OF PRODUCTION INCURRED BY THE ENTERPRISE IN RESPECT OF PROPERTY TRANSFERRED OR SERVICES PROVIDED GO INTO RECKONING COMPARABILITY ANALYSIS IN THE TRANSACTION METHODS, I.E THE COMPARABLE UNCONTROLLED PRICE, RESALE PRICE AND COST PLUS WHEREAS THE PROFIT ITA 4 17/2014 PAGE 39 BASED METHOD SUCH AS TRANSACTIONAL NET MARGIN METHOD TAKES INTO ACCOUNT, THE NET MARGIN REALISED. IN TNMM, COMPARABILITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION IS TO BE SEEN WITH REFERENCE TO FUNCTIONS PERFORMED AS PROVIDED IN SUB - RULE (2)(B) OF RULE 10B READ WITH SUB - RULE (1)(E) OF THAT RULE AFTER TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED BY THE RESPECTIVE PARTIES TO THE TRANSACTION. AS NOTICED EARLIER, RULE 10B(3) MANDATES THAT A GIVEN OR SELECT UNCONTROLLED TRANSACTION SELECTED IN TERMS OF RULE 10B(2) 'SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION' IF NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE COMPARED TRANSACTIONS, OR BETWEEN ENTERPRISES ENTERING INTO SUCH TRANSACTIONS A RE 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. I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 15 32. NOW, THE SEQUITUR OF RULE 10B (2 ) AND (3) IS THAT IF THE COMPARABLE ENTITY OR ENTITY S TRANSACTIONS BROADLY CONFORM TO THE ASSESSEE S FUNCTIONING, IT HAS TO ENTER INTO THE MATRIX AND BE APPROPRIATELY CONSIDERED. THE CRUCIAL EXPRESSION GIVING INSIGHT INTO WHAT WAS INTENDED BY THE PROVISIO N CAN BE SEEN BY THE USE OF THE EXPRESSION: 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, .. SUCH TRANSACTIONS IN THE OPEN MARKET . THE OTHER EXERCISE WHICH THE TPO HAS TO NECESSARILY PERFORM IS THAT IF THERE ARE SOME DIFFERENCES, AN ATTEMPT TO 'ADJUST' THEM TO 'ELIMINATE THE MATERIAL EFFECTS' SHOULD BE MADE: (II) REASONABLY ACCURATE ADJUSTMENTS CAN B E MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. ITA 417/2014 PAGE 40 33. SUCH BEING THE CASE, IT IS CLEAR THAT EXCLUSION OF SOME COMPANIES WHOSE FUNCTIONS ARE BROADLY SIMILAR AND WHOSE PROFILE - IN RESPECT OF THE ACTIVITY IN QUESTION CAN BE VIEWED INDEPENDENTLY FROM OTHER ACTIVITIES - CANNOT BE SUBJECT TO A PER SE STANDARD OF LOSS MAKING COMPANY OR AN 'ABNORMAL' PROFIT MAKING CONCERN OR HUGE OR 'MEGA' TURNOVER COMPANY. AS EXPLAINED EARLIER, RULE 10B (2) GUIDES THE SIX METHODS OUTLINED IN CLAUS ES (A) TO (F) OF RULE 10B(1), WHILE JUDGING COMPARABILITY. RULE 10B (3) ON THE OTHER HAND, INDICATES THE APPROACH TO BE ADOPTED WHERE DIFFERENCES AND DISSIMILARITIES ARE APPARENT. THEREFORE, THE MERE CIRCUMSTANCE OF A COMPANY - OTHERWISE CONFORMING TO THE S TIPULATIONS IN RULE 10B (2) IN ALL DETAILS, PRESENTING A PECULIAR FEATURE - SUCH AS A HUGE PROFIT OR A HUGE TURNOVER, IPSO FACTO DOES NOT LEAD TO ITS EXCLUSION. THE TPO, FIRST, HAS TO BE SATISFIED THAT SUCH DIFFERENCES DO NOT MATERIALLY AFFECT THE PRICE.. .OR COST ; SECONDLY, AN ATTEMPT TO MAKE REASONABLE ADJUSTMENT TO ELIMINATE THE MATERIAL EFFECT OF SUCH DIFFERENCES HAS TO BE MADE. 34. THE COURT IS ALSO AWARE OF THE FACTORS MENTIONED IN RULE 10B (2), I.E CHARACTERISTICS OF THE SERVICE PROVIDED, FUNCTIONS PERFORMED TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS; CONTRACTUAL TERMS OF THE TRANSACTIONS INDICATING HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN TH E RESPECTIVE PARTIES TO THE I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 16 TRANSACTIONS; CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND THE GOVERNMENT ORDERS IN FORCE; COSTS OF L ABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. THESE ELEMENTS COMPREHEND THE SIMILARITIES ITA 417/2014 PAGE 41 AND DISSIMILARITIES; CLAUSE (F) OF RULE 10C(2) SPECIFIC ALLY PROVIDES THAT THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJUSTMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION OR THE SPECIFIED DOMESTIC TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS AND THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTIONS REQUIRED TO BE MADE IN APPLICATION OF A METHOD HAVE TO BE TAKEN INTO CONSIDERATION BY THE TPO. 35. AS REGARDS THE RELEVANCE OF MULTIPLE YEAR DATA FOR TRANSF ER PRICING DETERMINATION, THIS COURT IS OF THE OPINION THAT THE GENERAL RULE AS PRESCRIBED IN RULE 10B(4) MANDATES THE TAX AUTHORITIES TO TAKE INTO ACCOUNT ONLY THE RELEVANT ASSESSMENT YEAR S DATA. THE PROVISO TO RULE 10B(4) PERMITS DATA RELATING TO TWO YE ARS PRIOR TO THE RELEVANT ASSESSMENT YEAR TO BE TAKEN INTO ACCOUNT IN THE EVENT THAT THEY HAVE AN INFLUENCE ON THE DETERMINATION OF PRICE. HOWEVER, IN SUCH INSTANCES, THE ONUS LIES UPON THE ASSESSEE TO ESTABLISH THE RELEVANCE OF SUCH DATA. THE 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 354 ITR 638 BUT DELI BERATELY LEFT MOOT, BECAUSE THE ASSESSEE HAD GIVEN IT UP BEFORE THE TRIBUNAL. THE TPO IN HIS ORDER DATED 03.10.2011 HAS COMPREHENSIVELY EXAMINED THE AUTHORITIES ON THIS ISSUE AND RIGHTLY HELD THAT ORDINARILY, THE REVENUE HAS TO CONSIDER ONLY THE RELEVANT A SSESSMENT YEAR S DATA UNDER RULE 10B(4) AND THAT DATA FROM EARLIER PERIOD MAY ALSO BE CONSIDERED IF 'IT REVEALS CERTAIN FACTS WHICH HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTION BEING CONSIDERED'. THE ASSESSEE HAS PLACED SIGNIFICANT RELIANCE ON THE OECD ITA 417/2014 PAGE 42 GUIDELINES TO CONTEND THE ADMISSIBILITY OF PREVIOUS YEA S DATA FOR TRANSFER PRICING DETERMINATION. HOWEVER, FOR REASONS GIVEN IN THE PARAGRAPHS BELOW, THIS COURT IS OF THE OPINION THAT THE OECD GUIDELINES HAVE NO BEARING ON THIS ISSUE. I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 17 36. THIS COURT HOLDS THAT IN THE FACTS OF THE PRESENT CASE, THE ASSESSEE WAS INCORRECT, BOTH IN ITS RELIANCE PLACED UPON PREVIOUS YEARS DATA AS WELL AS THE MANNER OF SUCH RELIANCE. FIRST, THE ASSESSE S JUSTIFICATION FOR RELYING ON SUCH DATA IS THE VOLATIL ITY IN THE COMPARABLES PROFIT MARGINS AND THE CONSEQUENT INABILITY TO TRANSACT AT A CONSISTENT ALP. HOWEVER, THIS IS NOT WARRANTED HEREIN. WHILST THERE MAY BE A WIDE FLUCTUATION IN THE PROFIT MARGINS OF COMPARABLES FROM YEAR - TO - YEAR, THIS BY ITSELF DOES N OT JUSTIFY THE NEED TO TAKE INTO ACCOUNT PREVIOUS YEARS PROFIT MARGINS. THE TRANSFER PRICING MECHANISM PROVIDED IN THE ACT AND THE RULES PRESCRIBES THAT WHILE DETERMINING THE ALP, THE ARITHMETIC MEAN OF ALL COMPARABLES IS TO BE ADOPTED. THIS IS TO OFFSET THE CONSEQUENCE OF ANY EXTREME MARGINS THAT COMPARABLES MAY HAVE AND ARRIVE AT A BALANCED PRICE. SIMILARLY, THE WIDE FLUCTUATIONS IN PROFIT MARGINS OF THE SAME ENTITY ON A YEAR - TO - YEAR BASIS WOULD BE OFFSET BY TAKING THE ARITHMETIC MEAN OF ALL COMPARABLES FOR THE ASSESSMENT YEAR IN QUESTION. IN ANY CASE, IN THE EVENT THAT THE VOLATILITY IS ON ACCOUNT OF A MATERIALLY DIFFERENT ASPECT INCAPABLE OF BEING ACCOUNTED FOR, THE ANALYSIS UNDER WOULD RULE 10B(3) WOULD EXCLUDE SUCH AN ENTITY FROM BEING CONSIDERED AS A COMPARABLE. SECONDLY, AS REGARDS THE MANNER OF USING PREVIOUS YEARS DATA, THE ASSESSEE HAS TAKEN THE ARITHMETIC MEAN OF THE COMPARABLES PROFIT MARGINS FOR THE ASSESSMENT YEAR IN QUESTION AND TWO PREVIOUS YEARS. THIS COURT DISAGREES. THE PROVISO TO RULE 10B(4), READ WITH THE SUB - RULE, ITSELF INDICATES THAT THE PURPOSE FOR WHICH PREVIOUS YEARS DATA ITA 417/2014 PAGE 43 MAY BE CONSIDERED IS - ANALYSING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION. IT DOES NOT PRESCRIBE THAT ONCE AN UNCONTROLLED TRANSACTION HAS BEEN HELD TO BE A COMPARABLE , IN ORDER TO OBVIATE AN APPARENT VOLATILITY IN THE DATA, THE 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 THE DATA FOR EACH OF THE THREE YEARS, WHICH IS AGAINST THE MANDATE OF RULE 10B(4). THE USE OF THE WORD SHALL IN RULE 10B(4) AND, NOTICEABLY, MAY IN THE PROVISO, IMPLIES THAT THE RELEVANT ASSESSMENT YEAR S DATA IS OF PRIMARY CONSIDERATION, AS OPPOSED TO PREVIOUS YEARS DATA. 37. THE CONTENTION THAT OECD GUIDELINES HAVE TO BE TAKEN INTO CONSIDERATION REQUIRES A CLOSER SCRUTINY. THE ORGANISATION FOR ECONOMIC CO - OPERATION AND DEVELOPMENT (OECD) IS AN INTERNATIONAL ECONOMIC ORGAN ISATION OF 34 COUNTRIES FOUNDED IN 1961 TO STIMULATE ECONOMIC PROGRESS AND WORLD TRADE. INDIA IS NOT A I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 18 MEMBER OF THIS GROUPING; IT HAS AN OBSERVER STATUS. SHE HAS, HOWEVER, OF LATE BEEN ACTIVELY CO - OPERATING WITH THE ORGANIZATION. THE GUIDELINES OF OECD TH EREFORE, 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 THE COMPULSION OF PROVISIONS OF TH E INCOME TAX ACT . SECONDLY - AND MORE IMPORTANTLY - THE PROVISIONS OF THE CONSTITUTION COMPEL A NATIONAL LEGISLATION, TO EMBODY THE TERMS OF A TREATY, FOR IT TO BE ENFORCEABLE IN COURTS IN INDIA. THIS IS BECAUSE OF ARTICLE 253 OF THE CONSTITUTION AND THE DUALIST TRADITION (OF INTERNATIONAL LAW) FOLLOWED BY INDIA, WHEREBY TREATIES BY THEMSELVES ARE LEGALLY UNENFORCEABLE IN COURTS, BUT ARE TO BE ASSIMILATE D THROUGH MUNICIPAL (OR ITA 417/2014 PAGE 44 NATIONAL) LEGISLATION. OUR SUPREME COURT HAS, IN THE AREA OF HUMAN RIGHTS - PARTICULARLY IN PERSONAL LIBERTY, BEEN EMPHASIZING THAT TO THE EXTENT THE PROVISION OF ANY TREATY IS IN CONSONANCE WITH PROVISION OF TH E CONSTITUTION (SUCH AS ARTICLE 21 ) IT WOULD BE READ ALONG WITH SUCH PROVISION OR RIGHT ( JOLLY GEORGE VARGHESE AND ANR. V. THE BANK OF COCHIN , AIR 1 980 SC 470, APPAREL EXPORT PROMOTION COUNCIL V. A.K. CHOPRA , AIR 1999 SC 625; KUBIC DARIUSZ V UNION OF INDIA AIR 1990 SC 605). THUS, THE COURTS ARE PRIMARILY BOUND BY THE LAW ON THE SUBJECT IN INDIA; IF THE LAW IS CLEAR AND UNAMBIGUOUS, THERE IS NO QUESTION OF RESORTING TO EXTRINSIC SOURCES. THE ONLY RIDER IS THAT IF THE TERMS OF SUCH CONVENTIONS OR TREATIES ARE SIMILAR TO THE LAW APPLICABLE IN INDIA, COURTS MAY CONSIDER PRECEDENTS IN THAT REGARD; HOWEVER THOSE ARE ONLY OF PERSUASIVE VALUE. 38. THE AFORESAID CONCLUSION IS FORTIFIED BY THE DIVISION BENCH DECISION OF THIS COURT IN MENTOR GRAPHICS (SUPRA), WHERE THE COURT NOTED: WE MAY ALSO MAKE IT CLEAR THAT THE REFERENCE TO THE OECD GUIDELINES BY THE TRIB UNAL IN THE IMPUGNED ORDER ARE IN THE CONTEXT OF THE RELIANCE PLACED BY THE TRANSFER PRICING OFFICER ON THE VERY SAME GUIDELINES, IN PARTICULAR, TO PARAGRAPH 3.27 THEREOF. IN THE PRESENT CASE, THERE ARE SPECIFIC PROVISIONS OF SUB - RULES (2) AND (3) OF RULE 10B OF THE SAID RULES AS ALSO OF THE FIRST PROVISO TO SECTION 92C(2) OF THE SAID ACT WHICH APPLY. THEREFORE, THE QUESTION OF APPLYING OECD GUIDELINES DOES NOT ARISE AT ALL. I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 19 THIS COURT ALSO NOTES THAT A RECENT DECISION IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. V. CIT (DATED 16.03.2015) RELIED EXTENSIVELY ON THE OECD GUIDELINES. HOWEVER, THE SAID RULING ITSELF RECOGNIZED THAT THE PROVIS IONS OF THE ACT AND THE RULES 'ARE SUPREME'. THEREFORE, THIS COURT HOLDS THAT WHERE THEY (I.E., THE ACT AND THE RULES) ADEQUATELY COVER A FIELD, RELIANCE ON THE OECD GUIDELINES IS NOT WARRANTED. AT THIS STAGE, WE DEEM IT ITA 417/2014 PAGE 45 FIT TO QUOTE T HE FOLLOWING OBSERVATIONS OF THE SUPREME COURT IN ENTERTAINMENT NETWORK (INDIA) LTD. V. SUPER CASSETTE INDUSTRIES LTD ., (2008) 13 SCC 30: HOWEVER, APPLICABILITY OF THE INTERNATIONAL CONVENTIONS AND C OVENANTS, AS ALSO THE RESOLUTIONS, ETC. FOR THE PURPOSE OF INTERPRETING DOMESTIC STATUTE WILL DEPEND UPON THE ACCEPTABILITY OF THE CONVENTIONS IN QUESTION. IF THE COUNTRY IS A SIGNATORY THERETO SUBJECT OF COURSE TO THE PROVISIONS OF THE DOMESTIC LAW, THE I NTERNATIONAL COVENANTS CAN BE UTILIZED. WHERE INTERNATIONAL CONVENTIONS ARE FRAMED UPON UNDERTAKING A GREAT DEAL OF EXERCISE UPON GIVING AN OPPORTUNITY OF HEARING TO BOTH THE PARTIES AND FILTERED AT SEVERAL LEVELS AS ALSO UPON TAKING INTO CONSIDERATION THE DIFFERENT SOCIETAL CONDITIONS IN DIFFERENT COUNTRIES BY LAYING DOWN THE MINIMUM NORM, AS FOR EXAMPLE, THE ILO CONVENTIONS, THE COURT WOULD FREELY AVAIL THE BENEFITS THEREOF. THOSE CONVENTIONS TO WHICH INDIA MAY NOT BE A SIGNATORY BUT HAVE BEEN FOLLOWED BY WAY OF ENACTMENT OF NEW PARLIAMENTARY STATUTE OR AMENDMENT TO THE EXISTING ENACTMENT, RECOURSE TO INTERNATIONAL CONVENTION IS PERMISSIBLE. (EMPHASIS SUPPLIED) THE ABOVE EXCERPT INDICATES THAT COURTS MUST BE CAUTIOUS OF RELYING UPON INTERNATIONAL CONVEN TIONS TO WHICH INDIA IS NOT A SIGNATORY AND WITH RESPECT TO WHICH THERE IS NO LEGISLATIVE MANDATE WHATSOEVER. IN ANY EVENT, THE OECD GUIDELINES RELEVANT HEREIN ARE IN CONSONANCE WITH THE RULES. PARA 3.63 OF THE GUIDELINES STATES THAT AN EXTREME COMPARABLE CANNOT BE EXCLUDED 'ON THE SOLE BASIS THAT THE RESULTS ARISING FROM THE PROP OSED COMPARABLE' MERELY APPEAR TO BE VERY DIFFERENT FROM THE RESULTS OBSERVED IN OTHER PROPOSED COMPARABLES' AND THAT 'FURTHER EXAMINATION WOULD BE NEEDED TO UNDERSTAND THE REASONS FOR SUCH EXTREME RESULTS . I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 20 SIMILARLY, PARA 3.65 STATES THAT 'LOSS - MAKIN G COMPARABLES THAT SATISFY THE COMPARABILITY ANALYSIS SHOULD NOT HOWEVER BE REJECTED ON THE SOLE BASIS THAT THEY SUFFER LOSSES . FURTHER, PARA 3.64 STATES THAT 'IT IS THE FACTS AND CIRCUMSTANCES SURROUNDING THE COMPANY IN QUESTION THAT SHOULD DETERMINE ITS STATUS AS A COMPARABLE, NOT ITS FINANCIAL RESULT . THE SAME APPROACH IS PRESCRIBED IN PARA 3.66 FOR ENTITIES MAKING SUPERNORMAL PROFITS. THEREFORE, BOTH THE OECD GUIDELINES AS WELL AS RULE 10B (2) AND 10B (3) DO NOT, IN ANY MANNER, PRE SCRIBE AUTOMATIC EXCLUSION OF ENTITIES WITH EXTREME FINANCIAL RESULTS. SIMILARLY, INSOFAR AS THE USE OF MULTIPLE YEAR DATA IS CONCERNED, PARA 3.75 OF THE OECD GUIDELINES STATES THAT '[M]ULTIPLE YEAR DATA SHOULD BE USED WHERE THEY ADD VALUE TO THE TRANSFER PRICING ANALYSIS. THIS IS AKIN TO THE PROVISO TO RULE 10B(4) WHICH PROVIDES FOR 'DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR [TO] BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERM INATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPARED. CRUCIALLY, AS NOTED BY THE TPO, PARA 3.79 OF THE GUIDELINES STATES THAT THE 'USE OF MULTIPLE YEAR DATA DOES NOT NECESSARILY IMPLY THE USE OF MULTIPLE YEAR AVERAGES'. THUS, EVEN IF MULTIPLE YEAR DATA IS TAKEN INTO CONSIDER ATION WHILE DETERMINING THE ARM S LENGTH PRICE, IT MAY ONLY BE FOR THE PURPOSES OF FACTORING IN MATERIAL CHANGES IN, INTER ALIA, ECONOMIC CONDITIONS, THIRD PARTY VARIABLES, ETC. 39. THIS COURT PROCEEDS ON THE BASIS THAT THERE IS SUFFICIENT GUIDANCE AND CLARITY IN RULE 10B ON THE PRINCIPLES APPLICABLE FOR DETERMINATION OF ALP. THESE INCLUDE THE VARIOUS FACTORS TO BE TAKEN INTO CONSIDERATION, APPROACH TO BE ADOPTED (FUNCTIONS PERFORMED, TAKING INTO ACCOUNT RISKS BORNE AND ASSETS EMPLOYED, SIZE OF THE MARKET, THE NATURE OF COMPETITION, TERMS OF LABOUR, ITA 417/2014 PAGE 47 EMPLOYMENT AND COST OF CAPITAL, GEOGRAPHICAL LOCATION ETC). THE EXTENT OF ACCURATE ADJUSTMENTS POSSIBLE, TOO, IS A FACTOR TO BE CONSIDERED. RULE 10B ( 3) THEN UNDERLINES WHAT THE ALP DETERMINING EXERCISE ENTAILS, IF THERE ARE DISSIMILARITIES WHICH MATERIALLY AFFECT THE PRICE CHARGED ETC: THE FIRST ATTEMPT HAS TO BE TO ELIMINATE THE COMPONENTS WHICH SO MATERIALLY AFFECT THE PRICE OR COST. IN OTHER WORDS, GIVEN THE DATA AVAILABLE, IF THE DISTORTING FACTOR CAN BE SEVERED AND THE OTHER DATA USED, THAT COURSE HAS TO BE NECESSARILY ADOPTED. I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 21 40. IN THE PRESENT CASE, THIS COURT HOLDS THAT ONCE BRESCON, KEYNOTE AND KHANDWALA SECURITIES ARE HELD TO BE FUNCTIONALLY SIMILAR TO THE ASSESSEE, THEY WOULD BE INCLUDED AS COMPARABLES, NOTWITHSTANDING THEIR HIGH PROFIT MARGINS, PROVIDED THAT THE MATERIAL DIFFERENCE ON ACCOUNT OF SUCH HIGH PROFIT MARGINS CAN BE ELIMINATED UNDER THE RULE 10B(3) ANALYSIS. 41. THIS COURT, ON A PERUSAL OF THE ORDERS OF THE LOWER AUTHORITIES AND THE ASSESSEE S SUBMISSIONS BEFORE THEM WHICH HAVE BEEN PLACED ON RECORD IN THIS APPEAL, FINDS THAT THE ASSESSEE S CONTENTIONS WITH RESPECT TO THE EXCLUSION OF BRESCON AND KHANDWALA SECURITIES WERE BASED ON LY ON THEIR EXCEPTIONALLY HIGH PROFIT MARGINS FOR THE ASSESSMENT YEAR IN QUESTION AND NOT ON THE GROUNDS OF FUNCTIONAL DISSIMILARITIES. INDEED, THE ASSESSEE DID NOT CONTEND THE LATTER BEFORE THE LOWER AUTHORITIES. THE ASSESSEE HAS SOUGHT TO HIGHLIGHT DIFFE RENCES IN THE RISK PROFILES OF THE ASSESSEE AND BRESCON IN THE PRESENT APPEAL. HOWEVER, THIS COURT HOLDS THAT SUCH A CONTENTION CANNOT BE RAISED FOR THE FIRST TIME AT THIS STAGE. THEREFORE, BRESCON AND KHANDWALA SECURITIES ARE HELD TO BE FUNCTIONALLY SIMIL AR, AND THE MATTER IS REMITTED TO THE DRP FOR THE PURPOSES OF EXAMINATION UNDER RULE 10B(3) OF THE RULES. IN THE EVENT THAT THE MATERIAL DIFFERENCES ARISING OUT OF THE EXTREMELY HIGH ITA 417/2014 PAGE 48 PROFITS CANNOT BE ELIMINATED AS PER RULE 10B(3), THE SE TWO ENTITIES WILL HAVE TO BE DISCARDED AS COMPARABLES. IT IS THEREFORE CLEAR THAT THEIR LORDSHIPS HAVE DIRECTED THE DRP TO CARRY OUT RULE 10B(3) THAT IN THE EVENT MATERIAL DIFFERENCES ARISING OUT OF THE EXTREMELY HIGH PROFITS CANNOT BE ELIMINATED U N DER THE ABOVE RULE, THE COMPARABLE ENTITIES WOULD STAND DISCARDED AS COMPARABLES SINCE HAVING SAID ABNORMAL PLIS. THEIR LORDSHIPS ACCORDINGLY ANSWER THE THREE SUBSTANTIAL QUESTIONS INTER ALIA TO THE EFFECT THAT THE MERE FACT AN ENTITY IS HAVING EXTREMELY HIGH PROFITS WOULD IPSO FACTO NOT LEAD TO ITS EXCLUSION SINCE THE SAME IS TO BE FOLLOWED BY RULE 10B(3) I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 22 EXERCISE AS TO WHETHER THE MATERIAL DIFFERENCE BETWEEN SUCH ENTITY AND THE ASSESSEE CONCERNED COULD BE ELIMINATED, MULTIPLE YEARS DATA ARE TO BE USED ONLY IN THE MANNER PROVIDED FOR AND NOT AS A GENERAL RULE. 24 . WE KEEP IN M IND THE ABOVE DECISION TO GET BACK TO THE FACTS OF THE INSTANT CASE. THE ASSESSEE ADMITTEDLY RELIES UPON SO CALLED DRASTIC FLUCTUATIONS IN THE PLIS OF M/S COMPU LEARN INDIA TECH LTD. WE HAVE ALREADY HELD THAT THIS ENTITY WAS NOT ENGAGED IN SOFTWARE DEVELOPMENT SERVICES BEFORE THE IMPUGNED ASSESSMENT YEAR. THE RELEVANT DATA THEREFORE DOES NOT PROVE OUT TO BE OF ANY SIGNIFICANCE. SO IS THE CASE WITH THE ASSESSEE S NEXT SUBMISSIO NS POINTING OUT EROSI ON OF NET WORTH AS ON 31 - 03 - 2007 . WE FURTHER QUOTE RULE 10B(4) PROVISO TO OBSERVE THAT IT IS ONLY THE DATA OF TWO YEA RS PRIOR TO SUCH FINANCIAL YEAR TO THE RELEVANT PREVIOUS YEAR WHICH CAN BE HELD A RELEVANT IF ONLY IT IS PROVED THAT THE SAME HAD ANY INFLUENCE ON TRANSFER PRICING DETERMINATION. THIS IS NOT THE CASE IN HAND BEFORE US. WE REJECT ALL ASSESSEE S CONTENTIONS AGAINST INCLUSION OF THIS LATTER ENTITY PLI OF 88.83% IN QUESTION. WE HOWEVER DRAW SUPPORT FROM HON BLE DELHI HIGH COURT DECISION AND DIRECT THE TPO TO CONDUCT ALL NECESSARY INQUIRY UNDER RULE 10B(3) AS PER LAW FOR FURTHER PROCEEDINGS. THE ASSESSEE SHALL BE AFFORDED ADEQUATE OPPORTUNITY OF HEARING. THE TPO SHALL ALSO CONSIDER ITS CASE SEEKING WORKING CAPITAL ADJUSTM ENT AS AGREED BETWEEN THE PARTIES. I.T.A NO. 2592 /AHD/20 12 A.Y. 2008 - 09 PAGE NO WEATHERFORD DRILLING & PRODUCTION SERVICES (INDIA) PVT. LTD VS. ACIT 23 25 . THIS ASSESSEE S APPEAL IS PARTLY ACCEPTED FOR STATISTICAL PURPOSE S IN ABOVE TERMS. ORDER PR ONOUNCED IN THE OPEN C OURT ON 29 - 07 - 201 6 SD/ - SD/ - ( ANIL CHATURVEDI ) ( S. S. GODARA ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD : DATED 29 /07 /2016 AK / COPY OF ORDER FORWARDED TO: - 1. ASSESSEE 2. REVENUE 3. CONCERNED CIT 4. CIT (A) 5. DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER/ , / ,